Q1 2023 Invesco Ltd Earnings Call
Welcome to exert goes first quarter earnings conference call, all participants will be in a listen only mode into the question and answer session at that time to ask a question Press Star. One this call will last one hour to allow more participants to ask questions. One question and a follow up can be submitted per participant as a reminder, today's call.
It was broad based with net inflows this quarter, both equity and fixed income strategies.
I'm confident in that.
Your appetite turns to risk assets, we will see significant growth in this area.
Net flows into active equities.
Improved meaningfully compared to our experience in 2022 net long term outflows in global equities were $2 $5 billion in the first quarter, including $1 $2 billion from all three markets.
I'll still challenging environment.
The fourth quarter.
And the asset class since 2021.
Those will be less than half.
The fourth quarter.
As we discussed at our last.
On our last earnings call, China Chinese markets continue.
Steady for several months as the countries in the midst of the transition.
Because I would imagine policies higher interest rate spread to it uptick.
Industry wide consistent interest for direction.
Greater China business experienced $2 $9 million net outflows in the first quarter apparently.
Please.
Despite near term challenges, we remain extremely bullish on the opportunity in China over the long term.
12, <unk> hundred 60 <unk> companies.
Operating in China, and we remain the largest port passive matrix in the past.
Hey, Mark.
Yes.
We expect to be in the market with new product launches from the second quarter and we are optimistic.
The balance of 2023.
Briefly touched on the private or private market capabilities, which experienced net long term inflows of $600 million in the first quarter.
Very active in the CLO market.
Billions of dollars from <unk>, Washington REIT.
Real estate transactions slowed across the industry as markets absorb the turmoil sector higher refinancing market.
Our direct policy.
Well responding.
Across geographies sectors and investment styles, Alison will get it right.
Go on in just a few minutes.
While we expect to close maybe more challenging real estate market conditions.
Marriage.
To source new opportunities.
And are having constructive conversations with our clients investing in growing our business, maintaining a strong balance sheet and provide a steady return capital to our shareholders is a top priority I'm pleased to announce our board approved a 7% increase quarterly comment too.
Sure.
Quarter.
Which reflects our strong cash position stable cash flows despite the uncertain markets.
Long term continuous drug lowest levels in over a decade.
And we've recently renewed and increased the size of our credit facility from one $5 billion to $2 billion.
Providing us flexibility.
Flexibility with this quarter.
Lastly, as you are aware.
In February .
Andrew <unk> will take over as president and CEO when I retire on June 30.
This is more than 20 year career at Invesco address.
We will have several large businesses respective clients.
The board of directors and executive leadership team Andrew are highly experienced leadership team are well placed to invesco.
I'm excited for the future of the firm as we build on our market leading position and further accelerate growth.
And during my 22 years at Invesco and working closely with Marty during his tenure as CEO I've seen and been a part of the evolution of our firm and during this time, we have routinely updated our strategic priorities ahead of changing client needs evolve the leadership and develop the talent of the firm and I'm looking forward to the opportunity to build on this strong foundation.
Asian, and the legacy that Marty and our team have developed over many years of hard work and dedication for our clients our shareholders and everyone at Invesco I.
I know that we have the REIT capabilities, we have deep client relationships strong talent and an experienced executive leadership team in place to be a force in the asset management industry for years to come.
I'm also looking forward to assuming the CEO role at a time when once again, our industry is going through meaningful change with new technological developments enhanced client delivery capabilities and a high bar for investment quality.
As an organization, we're committed to our growth strategy and the key capabilities that we've been discussing with all of you, including Etfs Greater China private markets active fixed income and active global equities and our solutions offering.
Our executive leadership team is focused on further enhancing these capabilities and evolving these strategic priorities, both at pace and with conviction.
And as Marty noted, we're very well positioned to capture demand and develop even deeper relationships with our clients over time.
I am also committed to driving high a high level of profitable growth and financial performance continuing to further strengthen our balance sheet and return capital to shareholders.
And finally I'm excited to engage more deeply with the investment community and I look forward to spending time in working with all of you in the quarters and years to come and with that I'm going to turn it over to Alison to provide a more detailed look into our results.
Thank you Andrew and good morning, everyone I'll start with slide four.
Investment performance improved in the first quarter was 64% lean mass.
<unk> on the top half of peers are beating benchmark on a three year to five year basis.
Up from 61% and 63% in the fourth quarter, we have strong performance strength in fixed income and balanced strategy, where there are solid clients mass.
Performance lagged benchmark and certain U S equity strategy performance is trending positively in a number of global equity and alternative strategies.
Turning to slide five we ended the first quarter with 148 trillion dollars in AUR and.
An increase of 74 billion as compared to last quarter as most market indices posted gains despite continued volatility.
It increases foreign exchange movements and reinvest the dividends increased assets under management I think $5 billion.
It'll net inflows were $9 billion inclusive of $8 billion into money market products.
I'm pleased to note a return to organic growth as we generated $2 9 billion net long term inflows in the first quarter.
Improvement in net flows given the ongoing uncertainty in financial markets further demonstrates the diverse nature of our business and should once again placed invesco among the best performing asset managers in terms of organic growth.
Passive capabilities generated net inflows of $5 $4 billion, while net redemptions in active strategies moderated, but net long term outflows of $2 5 billion in the first quarter as compared to $10 $5 million in the fourth quarter of last year.
Key capability areas, including ETF fixed income and the institutional channel all contributed to our growth this quarter.
Invesco Etfs generated $2 $8 billion of net long term inflows in the first quarter equivalent to a 4% annualized organic growth rate.
Volumes have been down across the industry from the record highs experienced in the first quarter of 2021 during the first quarter of 2022, but as Marty noted our ETF business has now been in net inflows for 10 out of the past 11 quarters.
The NASDAQ100, <unk> M with one of our top selling Etfs corner and has now grown to over $8 billion in AUM since its launch in late 2020.
We also saw strong flows into our S&P 500 equal weight and bullet shares corporate bond Etfs.
Partially offsetting growth in equity and fixed income Etfs for two and a half a billion dollars of net outflows in currency and commodity Etfs, which are included in our alternatives asset class.
We experienced net outflows of $3 $7 billion in the retail channel during the first quarter.
Net flows were roughly breakeven in EMEA, while Asia Pacific and the Americas for boats and net outflows.
As Marty highlighted at the top of the call the institutional channel Garner net inflows for the 14th straight quarter of $6 $6 billion.
We were net inflows in all three of our global regions and growth accelerated to 7% on an annualized basis.
After several quarters of strength in institutional fixed income equity mandate are responsible for our largest fundings in the first quarter.
And then to slide six net flows by geography improved as compared to last quarter and turn positive.
Quarter in both Americas and EMEA.
This was mainly due to slower redemptions on the retail channel as well as the funding of several institutional mandates.
Flows were breakeven in Asia Pacific and net outflows in our China joint venture were offset by growth in Japan, and our Hong Kong institutional.
Looking at flows by asset class net outflows and active equity strategies improved in the first quarter led by moderating of redemptions and our global equity capabilities.
Net outflows and global equity strategies were $2 $5 billion in the first quarter, including $1 $2 billion from our developing markets.
This compares to $6 billion of net long term outflows in the fourth quarter, which included $3 $1 billion of outflows from developing markets.
Fixed income capabilities garnered two and $5 billion in net long term inflows despite higher redemptions in Chinese fixed income products that Marty earlier.
Growth in fixed income this quarter spans both taxable and tax exempt offerings as well as the full range of vehicle types, including mutual funds Etfs and SMA.
This reflects the breadth and depth of our global fixed income franchise, and we see opportunity in this asset class over the remainder of this year.
Alternatives experienced net outflows of $3 billion in the first quarter.
That market's net inflows were $600 million driven by the launch of Threep yellows that raised $1 $5 billion in aggregate and direct real estate net inflows of $600 million.
Offsetting growth in these areas of private markets, our net outflows in bank loan strategies.
Currency and commodity ETF net outflows as I mentioned earlier were the primary driver of alternatives that outlet.
Yeah.
I'd like to take a moment to highlight our direct real estate portfolio, which had $73 billion of assets under management as of March 31.
For our real estate business, we offer the full range of investment style across the risk return spectrum, and we invest primarily in real estate equity.
Also invest in real estate debt, which comprises less than 10% of our global real estate portfolio.
Our direct real estate holdings are well diversified by property type.
Commercial office properties comprise about one third of our assets under management.
Another residential property account for nearly one quarter.
And industrial property about one fifth.
The remaining 20% of our property span retail and specialty sectors, including mixed use development self storage and medical.
Finally, we are diversified by geography with any women each property type.
By total asset value of 40% of our office holdings are in EMEA, and Asia Pacific, where the market dynamics affecting demand for office space are significantly different than those in the United States.
The adoption of remote working model is much lower outside the U S.
Several of our direct real estate funds used leverage were measured in our approach and the average loan to value across our direct real estate funds was approximately 30% as of December 31st.
These figures may fluctuate over time and they vary across specific funds.
As Marty mentioned earlier real estate transaction activity slowed during the first quarter and we would expect activity to be muted over the balance of the year until.
Market find more stable funding.
Longer term, we expect private markets and more specifically direct real estate and private credit to be a driver of growth and we are in a strong position to capture that demand.
And now moving to slide seven.
Our institutional pipeline was $22 $1 billion at quarter end, a decrease from $30 billion last quarter we.
We had good pull through from our pipeline in the first quarter, which contributed to $6 $6 billion of net long term inflows.
Our pipeline has been running in the mid 20 to mid $30 billion range dating back to late 2019, but this is on the lower end of that range, but we view. This pipeline is strong given the market environment and the significant fundings that took place in the first quarter.
As we've noted previously market volatility is causing some mandates to take longer to fund and we would estimate the funding cycle of our pipeline is running in the three to four quarter range versus the two to three quarters prior to the market downturn.
Our solutions capability enabled 14% of the global institutional pipeline as of the first quarter as well as several of the mandate funded recently.
We embedded solutions into our client interactions and we have ongoing engagements about new opportunities.
I find reflect the diverse business mix. It has helped invesco sustained organic growth in institutional for more than three years now.
Turning to slide eight net revenue of $1.08 billion in the first quarter was $32 million or 3% lower than the fourth quarter and $176 million or 14% lower than the first quarter of last year.
Declined from last quarter was mainly attributable to a seasonal decrease in performance fees, which were $50 million lower and two fewer days in the first quarter, which accounted for nearly $25 million and lower net revenue.
This was partially offset by higher investment management fees of $25 million.
The decline from the first quarter of last year was due largely to lower investment management fees driven by lower AUR level.
Total adjusted operating expenses in the first quarter were $749 million $20 million lower than the prior quarter and $9 million lower than the first quarter of 2022.
Compensation expense increased by $12 million as compared to the fourth quarter as seasonally higher payroll taxes and benefits were largely offset by the lower incentive compensation paid on performance fees.
Included in compensation expense, this quarter and $13 million of costs related to executive retirements and other organizational changes.
We expect to recognize approximately $20 million of additional costs related to executive retirement in the second quarter.
As we've discussed we manage variable compensation to a full year outcome in line with company performance and competitive industry practices.
Historically, our compensation to net revenue ratio has been in the 38% to 42% range.
Lending towards the upper end of that range in periods of revenue decline.
Our current AUM levels, we would expect the ratio to continue to trend towards the higher end of that range for 2023, when excluding the costs pertaining to executive retirements.
Marketing expenses of $28 million or $6 million lower than the prior quarter coming off the seasonal highs, we typically see in fourth quarter.
Marketing expenses were modestly higher than the same quarter last year by $2 million.
Property office and technology expenses were $5 million lower than last quarter, primarily due to lower software costs and $2 million of property decommissioning associated with our Atlanta move that did not recur.
On that note I'm happy to share that we are speaking to you from our new global headquarters in Midtown Atlanta, and we completed our move earlier this month.
G&A expenses of $95 million or $21 million lower than the prior quarter, partly due to lower third party spend on technology projects.
As we've discussed previously we continue to invest in foundational technology programs that will enable future scale. These expenses spanned G&A and property office and technology expenses and spend may fluctuate from period to period.
The first quarter, we also benefited from $10 million and indirect tax credits, we do not anticipate these tax credits will recur at these levels going forward.
We maintain an extremely disciplined approach to expense management and are focusing hiring and investment in the key capability areas that are driving our growth as.
As Marty and I have discussed previously optimizing resource allocation to efficiently drive crest has and will continue to be a top priority for the organization.
Now moving to slide nine.
Adjusted operating income was $327 million in the first quarter $12 million lower than the prior quarter due to lower net revenue, partially offset by lower operating expenses.
Adjusted operating margin was 34% broadly in line with 36% in the fourth quarter, but lower than the 39, 5% a year ago prior to significant market declines.
Excluding $13 million of costs related to retirement and other organizational changes first quarter operating margin would have been 31, 6% an increase of 100 basis points as compared to last quarter.
Earnings per share of 38 tonnes was one set lower than prior quarter and 18 cents lower than the first quarter of 'twenty two.
Excluding these expenses related to executive retirement, and other organizational changes in the first quarter would add two cents to earnings per share.
Yeah.
The effective tax rate was 24, 1% in the first quarter lower than 26, 9% in the prior quarter, primarily due to nonoperating gains on seed money investments and lower tax jurisdictions.
We estimate our non-GAAP effective tax rate to be between 23 and 25% for the second quarter of this year.
The actual effective rate may vary from this estimate due to the impact of nonrecurring items on pre tax income and discreet tax items.
I'll wrap up on slide 10.
As you heard earlier from Marty and Andrew building balance sheet strength remains a critical priority.
We're making steady progress and total debt of one $5 billion is at its lowest level in more than a decade.
We ended the quarter with $889 million cash and cash equivalents and zero Barbara borrowing on our credit facility. The first quarter is typically a period of seasonally higher caffeine and we anticipate building cash in the coming quarters.
Our leverage ratio as defined under our credit facility agreement with 0.8 times at the end of the first quarter in line with both last quarter and the first quarter of 2022.
A preferred stock is included in our fourth quarter leverage ratio was three four times.
As highlighted earlier, we're pleased to note that our board approved a 7% increase in our quarterly common dividends of <unk> 20 per share effective this quarter.
This reflects the strength of our balance sheet cash position and stable cash flows. Despite the uncertain markets we have been facing.
We also renewed our credit facility for another five years with favorable terms as well as increasing the capacity of the facility from $1 $5 billion to $2 billion.
This built additional flexibility for managing our balance sheet as we prepare to redeem the $600 million senior note maturing in January of 2024.
Markets have remained volatile thus far in 'twenty three there have also been signs that a modest recovery could be on the horizon overall.
Overall I'm pleased with the progress we made this quarter returning to organic growth tightly managing expenses and methodically building balance street balance sheet strength.
Our firm has successfully navigated market volatility in the past, we're poised to emerge stronger in a market recovery and capitalize on future growth opportunities where they emerge.
A lot of hard work ahead of us and I'm excited to partner with Marty Andrew and the executive team as we laid invesco into a new era.
And with that we'll ask the operator to open up the line to Q&A.
Thank you is another quick reminder, if you'd like to ask a question. Please press Star then one remember to on mute your phone a record. Your name clearly were prompted if you'd like to withdraw. Your question you May press star two.
Our first question comes from Craig Siegenthaler with Bank of America. Your line is open.
Thanks, Good morning, everyone.
Thank God.
So my question is on China.
So you're seeing bond flows improve really throughout much of the world, but not in China.
And I'm guessing the comparatively low interest rate backdrop in China versus the U S could be one factor, but can you talk about what's driving the net redemptions in China not just in your great wall JV, but across the industry.
And also any perspective, you have on a rebound, especially given a pretty strong long term dynamics, including aging populations in retirement.
Yeah, Let me I'll make a couple comments from Allison and Andrew can chime in so.
As I said, our view has not changed it's the single greatest opportunity to your asset management.
We have a very very strong position there are your REIT or what's really happening is really talking about it was COVID-19 driven.
Andrew and I.
But leadership Richardson.
China two weeks ago.
Thank you.
We're absolutely focused on economic growth.
You can actually feel it caused the energy is very very high I anticipate.
The markets will start to follow that.
Investor behavior behind that.
Oh for sure by the second half of the year before.
And we do look at this first quarter.
So in the summer of last year is really a transitional period and the redemptions that you saw in fixed income are there, but again, we're starting to see.
A behavioral change from frankly, starting to work towards a more balanced equity products to China. So continue to be bullish corn.
Cork.
Yeah, I would just say specifically crag I mean, what you saw as the yields really increased in the fourth quarter.
And that obviously drove prices lower and that caused a bit of a dip and it really fat investors to redeem them and drive redemptions higher industry wide. So I think to your point around what are we seeing in the industry, but that was really an industry phenomenon that drove that behavior and it was very pronounced coming in.
Into the first corner, we've definitely seen it begin to moderate as the first quarter unfolded and.
Feel better as we're starting the second quarter for sure as we see what's happening there.
That also drove product launches lower and as you know product launches drive a lot of the slow activity in China and so in.
In the first quarter, we only watched for products and they were relatively low in terms of the flow capture there and again that was consistent with a lot of the industry dynamics and we're optimistic to see more in the second quarter, we have a pretty strong pipeline of product launches and we're optimistic that the market sentiment is.
Breathing modestly and a lot of the dynamics in that phenomenon and I should've played itself out.
Great. Thank you Alison and just as a follow up.
Really appreciate those details behind the real estate.
Our business.
But you know as you take a step back how.
How much of that 73 billion of AUM is in vehicles that can be redeemed versus vehicles that are more permanent or long term and can't be redeemed and then is there any high level data you can give us to give us some comfort around especially the office portfolio I'm thinking loan to value interest coverage.
Ratios like that.
Sure Let me, let me take a stab at you know I'm not sure if I could to answer exactly what percentage could be redeemed I think what I would say is.
In general through cycles, we see on average about <unk>.
5% to 6% of our AUM and a redemption Gilles you would expect it to be a little bit higher than that in times of market stress you'd expect it to be a little bit lower in better markets.
And I'd say, you know, we're probably running a little bit higher than that 5% to 6% at the moment, but it's not.
Not in a disconcerting way.
It usually takes a few quarters to fully fulfill some of those redemption requests and then we also see that in times of equity market recovery some of those redemption requests actually get canceled.
So you manage through them and we'll see where it goes but we don't feel any sort of uncomfortable just comfort with where it is now nor is it unusual relative to past cycles as we think about coming in to go bad.
I would note and we've been managing our office exposure down Sans Covid began in March of 'twenty 'twenty. So.
When you look at where our office exposure was coming into 2020, it made up about 45% of our total portfolio today, that's down to about 35%.
And as we noted and that's going to be even lower in the United States and we've been managing it down more aggressively in the U S. It's going to trend quite a bit higher in places like APAC region, not have not seen an impact to the office environment in terms of loan to value I would say generally speaking it's about a 30%.
Evaluate you know its not running a whole lot higher than that.
I will also say in terms of our lenders and the sources of that leverage is very well diversified.
No no concerning exposures anywhere and feel like we have a lot of diverse good sources of funding and and those have held up really nicely.
Great. Thank you very much.
Thank you and our next question comes from Daniel Fannon with Jefferies. Your line is open.
Hi, Thanks, good morning.
Andrew I was hoping you could expand upon the areas of growth.
Active fixed income try our solutions all the areas that have been listed in the presentation. You talked about the you know Marty in terms of talks about for some time I'm curious about how you were thinking about on the margin changing those areas of increased focus or less given the market backdrop today is much different than probably when we were outlined initially.
Couple of years ago.
Yes, Thanks, Dan.
Looks like I said at the beginning.
Over the whole course of my career, the last 20 plus years at Invesco, we've been continuously updating our strategic priorities and adjusting and changing where client needs are are going and where we anticipate them going.
And I've been a part of putting together those strategic priorities that Allison have already been talking to you all about over the last year or two and I frankly don't see any of those really changing in terms of our priorities at all.
But I would say is you know how.
How do we come up with them and they're really a function of where we believe client demand will grow.
Where we think we have competitive strengths to build on and so the areas that I would highlight will sound similar.
To what you've heard before I'd really emphasize.
The bar belling of client needs between all some private markets.
In Etfs and index thing is a huge part of the growth and where we have strong franchises, we've talked about China as a as a growth market for us and we believe in that.
Regardless of geopolitics, and ebbs and flows and cycles.
Have strong franchises in active fixed income and solutions and we're going to continue to scale those.
We're going to ensure we have quality and differentiation interactive equity with an emphasis on global in particular, and we're going to continue to build scale through the back and Middle office transformations, we've been talking about with investments in both foundational technologies and innovation for enhancements and I guess, what I'd say is we will continue to look at those and evolve them.
The team is highly focused on executing we're going to continue to accelerate the pace with regard to that and continue to get sharper on our strategic execution to deliver.
That's pretty much where where we are right now and we'll continue to keep you updated.
Yeah.
Thanks, that's helpful and then Alison just wanted to clarify something.
The numbers you gave.
For the quarter.
You said there was a $10 million one time benefit I think that was in G&A, but maybe if you could talk about what are the kind of REIT run rates as we think about the rest of the year based upon what we got here in the first quarter in terms of expense levels.
Sure. So yes, I noted that there was a $9 million of indirect tax credit that was on G&A and that would not recur you Shouldnt expect that I also noted that incentive comp expense, we have an unusual $13 million of retirement expense.
Related to our executive changes and we expect to incur another $20 million related to the same in the second quarter of this year and so when you think about the $9 million that wont recur plus over the next $20 million of retirement expense and I would say beyond those we would expect.
We can hold expenses roughly flat for the next few quarters and adjust.
Adjusting for variable comp of course and that that's roughly flat as all things being equal that we would adjust variable comp in line with market changes.
Understood. Thank you.
Thank you and our next question comes from Brennan Hawken with UBS. Your line is open.
Oh, Thank you and good morning. This is Adam Beatty in for Brennan.
Just wanted to ask about the institutional pipeline and maybe the pipeline to the pipeline. If you will how how discussions are going there products or areas of interest and I think in the past you've also said that the blended fee rate on the institutional pipeline is roughly the same as the firm wide blend wondering if that's.
It's still true after all the ones you fundings. Thank you.
Yeah, Let me make a couple comments we'll.
Chairman here, So let me talk about outside the United States as I mentioned, Andrew and I were just Asia.
The client interactions and charter very strong yeah, we continue to expect.
Gross there institutionally.
Japan also we've looked at that.
Oh market fixed income market in particular actually P equity.
There is demand for equity in Japan, which has been a while since estimate case cobalt for your particular.
In Australia, the clients are actually very strong in that market, particularly that's very much more in Washington, and I'm sure you've heard barbell oriented with probably the most extreme.
We.
We sort of run into.
She grew strongly Joe stuff, whether it be in our private credit. It was an area of recent interest where historically I believe real estate.
Our success on the passive side in Australia, and the same thing.
So it's.
Sure.
There continues to be an area of frustration from in particular is actually pushing.
What's there so.
It's al.
Eddie REIT waves to stick with us.
I mean, we're well positioned with the strategies that Marty was just alluding to where we're seeing more and more investor interest be it private markets or index thing fixed income multi asset all sort of in in demand. One thing I'd say is I also maybe shares a couple of details I'm definitely with dislocation that is.
Going on in the market over the last several quarters, we are see seeing institutions sort of rethinking their allocations its putting.
Decisions in motion.
That we think are going to be opportunities for us to capture at the same time, though it is delaying some of those decisions as they're looking for more clarity.
So it's a bit of a both ends of the spectrum story.
And Adam I, just add on the fee rate in the fee rate does tend to run from it ranges from mid 'twenty to mid 30 basis points and it has been actually holding up very nicely as you think about them. The information that we shared on page seven and you can see a large.
A portion of the pipeline is comprised of backward active equities as well as alternatives and specifically that would be private markets primarily.
So it is running on the higher side and I was pleased to see the active equity component of it recognizing we had some meaningful active equity fundings in the first quarter and the pipeline is replenishing and nicely in a really well balanced way. It does reflect the bar belling am that Andrew noted, but it's it's holding up nicely in terms of fee compensation.
Yeah.
Excellent. Thank you for all that detail I appreciate that and then just a quick follow up on G&A and you. You know you had a couple of call outs.
But just in terms of the third sort of third party spend was wondering if that was you know unusually low or what the trajectory might be looking like for that in the future. Just in terms of cost control. It sounds like you've you've got that pretty well in hand, but just curious on the outlook there. Thank you.
And it was on the low side this quarter and I would expect it to fluctuate more I don't expect that lower third party spend would hold necessarily but you know as we noted the technology foundational enhancements, we've been making you're going to see that.
Show up in G&A, and property office and technology and so I think my my comment earlier in response to Dan's question around excluding the indirect tax benefit and exploiting the retirement expense I would expect.
Expenses to be roughly flat for the next few quarters, all things being equal.
Got it that's great. Thank you Ralph.
Thank you and our next question comes from Bill Katz with Credit Suisse. Your line is open.
Yeah.
Okay. Thank you very much and congratulations on your next phase of your career and Andrew as well.
So just coming back to the private market private credit opportunity could you maybe in his talk a little bit go into them. The next layer down in terms of where you see the opportunity on direct lending.
And then incrementally where else you might sort of need to spend and then energy you mentioned, you're seeing some reallocations by institutions can you talk about where they're coming from to fund some of the new opportunities. Thanks.
Let me make a couple comments.
First of all Big picture comments.
The fundamental strength.
Bank loans yellows and that is the core of the franchise. We havent built we know it's indirect lending we do see that as opportunity. We also see a crowded space, but we've.
We've got capabilities.
Our performance.
So that is.
Its force and private credit also where we are let's see demand has worked.
Institutional wed frankly, all should always supposed to be an area of focus not a REIT not were not critical so let's see where that goes.
But again it goes to.
Our corporate at toy Fair, we think there's opportunity.
I don't know if I think I'd add anything Dara I I'll say, this and I'll, let Andrew China, because I think you actually interact with that last part of the question them and in terms of where we expect to how we expect to continue to fund growth and then he kept ability I would just say that's exactly what we've been doing for the last two years.
And so as you think about the fact that and you know we've been managing expenses lower for the last 18 months, obviously, that's been against a very challenging market backdrop, we've been investing throughout.
And we have been reallocating ever since we did our strategic review a couple of years ago.
Finally, reallocating expenses to funding and keep growth capability. So the growth of China, they've gone into private markets. The growth of our fixed income business. Our ETF franchise, we have been investing all along the way and really holding expenses.
Very tightly managed well maintained them alongside that so I just want to make sure. It's clear that's not a new strategy that's exactly what we've been focused on at the team.
And Bill Hey, Thanks for the question.
What I would add to Alex's last point and then pick up on Marty's is.
Just to emphasize what I also said that reallocation is going to continue and it's going to continue towards private markets boats are a real estate equity and debt and our private credit which comprises the bank loan strategies that Marty was talking about as well as direct lending and distressed debt, we see demand over the long run continuing to grow there in terms of your.
Your question about where are we seeing money come from and it's a little early to pinpoint it exactly but a couple of things. We're seeing one we're actually seeing people moving beyond their passive cap weighted benchmarks and actually moving out to other forms of indexing, but also enter into active strategies, both on the equity and fixed it.
I'm side, which we think it's a real positive thing.
We're also seeing them kind of reallocated across their their private markets and alternatives portfolios.
Meaning more towards some of the things that we were emphasizing credit but again that's early days as people are working through their private portfolio is taking a little bit longer.
So those are some of the areas, where we're seeing we're seeing movement.
Yeah.
Okay. Thank you and then just as a follow up you mentioned that was continue to build the balance sheet as we go through this year.
As patient of sort of a pay down of debt in January of next year looking beyond that could you talk a little about capital management priorities and how you think about M&A, what you might need versus capital return. Thank you.
Yeah.
How much.
So.
Just at a high level.
Our priorities don't change it has not changed and our interim analysis could talk part of it is really really a question of that business and I think we've probably done it my.
My best job that we've done as a management team are reallocating into.
Into areas of crow's feet and sort of squeezing cost out of areas that are.
Less of an opportunity as you go forward.
Always looking for M&A because of fueling our strategic step if we can't do it organically and that really has not changed.
But if you ever want to pick up as your thoughts there yeah. I mean, just to just to absolutely ramp besides what Marty said the commitment to our balance sheet and improving it remains a significant focus for me and the executive leadership team moving forward.
We'll continue the priorities that Allison and Marty have described with regard to M&A.
Just as Marty said, we feel really good about the portfolio of businesses, we have the geographies the position to our clients and.
And we feel like we have scale and strength to move forward.
With the business, we have today will continue to pay attention to the M&A environment, but it's not the priority at the moment.
I think the only thing I would add all of that is our our strategy is to put our balance sheet and a position where we can be opportunistic.
We feel very good about the capabilities, we have and but we're very focused on improving the balance sheet and I'm very pleased that we were able to raise the $2 billion at in the midst of this environment over the last six weeks out we've got a terrific very supportive group of lenders I think it puts us in a great position to be able to continue to manage our leverage profile down both of them.
Upcoming 24 to be able to pay that off with a combination of cash and usage of the revolver and beyond that our next maturity is in 2022nd $500 million I think it will be in a terrific position to continue to manage our capital structure down from there. So you know.
If anything we feel like we're on our front foot and we continue to put ourselves in a position to operate on our front foot.
Thank you.
Thanks Bill.
The next question comes from Ken Worthington with JP Morgan Your line is open.
Hi, good morning, Thanks for taking the question first Marty it's been a pleasure working with you. All these years first Franklin that invest cap. So best of luck on the next step in your career.
On on China, and Asia, you know it was mentioned a number of times money coming out of fixed income where is that money going to is it largely cash or is it some of it going into equities given the rally we've seen there and is there a better opportunity to capture that money as it transitions from one asset class to another.
And in terms of maybe what's going on in Asia outside of China, I think we sort of danced around this a couple of times, but to what extent are higher rates impacting the demand for some of invesco is more popular yield focused products like bank loans real estate since yellows I think like you know you said you raised three shallows that seems to be.
Contrary to what we're seeing elsewhere, so you're having success there and then bank loans seems more standard with with outflows. So how does this all sort of circle around the demand for Asia for these higher yielding products.
Yeah, Let me make a couple of comments and Oh.
Thanks for coming soon by the way 18 years goes very fast.
So that's just your.
So I mean that was a sort of hit on it. So you know what are we seen them trying to let's say the retail market right. Now I mean, you are definitely seeing.
Any of those investor confidence strengthened and so we are seeing more towards balanced products and equity products or where she was not the case for some period of time.
Again.
So as ive ever and I were just there.
Just can sense the confidence scoring in the marketplace. So we anticipate that we can still grow when he's.
Institutional clients are there.
All of the road very very sophisticated.
Don't lose their portfolios.
Yeah, Yeah understood on the point I would say that probably a more reflective at the moments of care, whether they want to see.
You see the markets a love for their investments.
Hum what we are seeing.
In Japan for example, there is interest in active fixed income, which is really not the experience for us recently has been more passive.
And also growth.
So what equity capabilities again, which is not what we've seen for a number of years.
Talk about Australia, so local government.
The one thing I'd say in the in the long run 10 to the question on China.
Our single biggest opportunity is is or the retirement market development in China, and so the notion of looking at more traditional asset allocation. So what long term house asset allocations. We think is going to be candid begin to find its way into that marketplace also the digital sort of distribution and the way the digital is.
The primary way that retail investors and best there is a higher turn but that also means that they are able to kind of look at the trends and we're starting to see some of the some of the equity movement. Even early on there. So that's all for now.
Okay, great. Thank you very much.
Thanks Scott.
Yes.
Our next question comes from Microsoft Bruce with Morgan Stanley . Your line is open.
Great. Thank you. Good morning, So just a question on the grade at Greater China business. Just curious how you think about the stickiness of duration of a U M and your greater China business versus other regions of the World I think if we look overall your retail business has about three and a half four year duration or so for your retail customers. Just curious how different that is in China, how do you.
See that evolving over time, and then how do you how does the cost of gathering new flows in China compare to say the U S business.
Yeah, again, I'll make a couple of comments.
So.
You've heard we're very bullish I mean, it is the single largest opportunity in asset management, just if you look.
Our global flows into the industry, China's kind of make up a third of those flows over the next three to five years and that's just for all the reasons that we know the size of the population the absolute focus on developing our retirement system.
Different from most markets are not quite as you know for existing dollars was new money coming in so if you're strongly placed are coming they're going to grow in Europe .
We placed.
Also very differently, but they're starting to hit on.
So much the money are probably half the flows are coming through particular world class horse right now.
Actually started.
Just you know financial for example, they have 800 million clients and so you don't need a lot of money to make a big impact. So I'd say, we're just early days in what you're gonna see happening so.
The cost structure I think it's also very important to know.
Very competitive market.
Almost the most competitive market in the world.
So it's not easy to be successful there.
And expenses to.
Operate there but.
Allscripts these more details.
It's very profitable.
We have scale and it's reflected in the margins, but yeah.
Yeah, I would say like it's accretive to the firm margins. It's a it's a real it's a well scaled business, even though we think we've got a lot of room to continue to grow it but it is accretive to the farmer margins overall.
And while it is a competitive marketplace as Marty noted.
Where the 12 largest asset manager in China.
And the we're the largest forehand asset manager 11 ahead of us.
Are all Chinese and and so we are very well positioned we are in a very competitive player and we have an opportunity to really not only grow as the market growth there, but also take market share as we've been able to do in the last few years. So in terms of the cost of gathering and you know I think it's a very well managed.
Accretive business overall.
Yeah, and the only thing I'd add just and it was it was reminded actually being out of the region recently as Marty mentioned in it.
We are very well regarded in the market and our reputations and built over 20 years in fact, we're celebrating our 20th anniversary this year of <unk>.
GW of Invesco, great wall.
And being in that market for a long period of time not only build the scale that we have today that Alison was mentioning but also just the reputation with with all parts of the ecosystem there and so we think it's a real differentiator just the longevity of our JV.
Yeah.
Great. Thank you.
Thank you and our next question comes from Patrick Davitt with Autonomous Research. Your line is open.
Hey, good morning, everyone.
This was the first quarter, a meaningful meaningful U K inflows and in many years could you flesh that out a bit more or is there something unique or lumpy that happened or are you starting to sense a real positive shift is finally emerging there. Thank you.
Look I'll make a comment Andrew rent.
For a number of years. So she was lucky enough to be there during the Brexit so.
Especially with a lot of changes happening in a lot of good work I feel really good about what's happening in the UK on the continent.
We're seeing retail and there's been a lot of folks are.
There was a big institutional mandates that funded this quarter, but I would say the underlying fundamentals are strong and.
We anticipate.
Also as noted all things being equal or we anticipate it to be back to full.
Full year for <unk>.
Perfect.
I mean, it's it's all we've always had a high quality sort of active focus in the marketplace in the UK in particular, you know our legacy in the equity side and the performance is getting stronger in those asset classes and there's some demands come back we're capturing it so I'd say it's.
It's largely on the back of good investment performance.
I didn't get on the heels of that investment performance were seeing retail redemptions improved overall.
And so obviously the UK is working through their rate environment and their economic environment. Much like we are we think we're really well positioned to capture additional flows though as rates stabilize and has sentiment at at some point and produced over there as well.
Thank you.
Okay.
Thank you our last question comes from Alex Blaustein with Goldman Sachs. Your line is open.
Hi, all thanks for taking the question. This is Luke on Alex's behalf.
As part of Andrew's announcement, you guys highlighted a number of other operational realignments can you just help frame the operational benefits of these and then any potential cost saving opportunities that could be realized.
Over what period of time do you think that could occur. Thanks.
Yeah, So I'll pick up on some of the benefits and I'll, let Alison chime in as well here. So.
There's a few and let me start at the top we definitely believe it's going to help us accelerate the execution of the strategy and the strategic priorities. We've been outlining how we think it's going to help us internally streamlined some decision, making simplify ourselves and be able to move at pace and that's what's required by our clients right now to move.
You know at pace and to deliver good results and quality service.
Thank God that these changes will also help us enhance our best in quality over time.
And ultimately we think it's going to help us further leverage the global operating platform and the scale that we've we've built over overtime Allison.
Yeah look I wouldn't point to cost savings just shot there are a lot of ins and outs and puts and takes as we're thinking about reorganizing around these changes, but really chiming in on am Andrew's comments, we're very focused on making the organizational organization simpler and more streamlined so that as we gained.
Gail we can generate additional operating leverage and really starting to get ourselves organized in a way that app, we do not have to grow expenses at too much as as markets improve but more importantly, as we grow organically and create that organic fee right Brad.
So you know I think at this point and we think these changes are going to be very helpful and they organized the company in a more simple way and well look forward to sharing more adds as we continue working away.
Let me just wrap up.
The other really important thing and we've been talking about it here to stay and previously this will absolutely facilitates.
To reallocate assets are dollars and time and expertise to areas of growth higher.
High degree of confidence and Andrew and Alison and the team I spoke about before it is the most.
Experts intelligence, you've got a basketball separate had and.
High degree of confidence.
The future or what have you executed so it's really very exciting for clients employees and shareholders are importantly.
So with that.
Thank you very much and Oh.
In July .
Thank you. Thank you.
Thank you that concludes today's conference you may all disconnect. At this time speakers you may standby for post conference.
Yeah.
Okay.