Q1 2024 Invesco Ltd Earnings Call
Okay.
Welcome to the Vet goes first quarter earnings call Conference call excuse me, all participants will be able to listen only mode until the question and answer session at that time to ask a question Press Star. One this call will last one hour to a lot more participants to ask questions. One question and a follow up can be submitted per participant.
As a reminder, today's call is being recorded now I'd like to turn the call over to Greg Ketron Invesco as head of Investor Relations. Sir you may begin.
Thanks, operator and to everyone joining us on the call today. In addition to our press release, we have provided a presentation that covers the topics. We plan to address the press release and presentation are available on our website at <unk> Dot com.
Information can be found by going to the Investor Relations section of the website. A presentation. Today will include forward looking statements and certain non-GAAP financial measures. Please refer you to disclosures on slide two of the presentation regarding these statements in measures as well as the appendix for the appropriate reconciliations to GAAP.
Finally, industrial is not responses before and does not edit nor guarantee the accuracy of our earnings teleconference. Transcripts provided by third parties. The only authorized webcasts are located on our website, Andrew Schlossberg, President and CEO and Allison Dukes, Chief Financial Officer will present, our results. This morning, and then we'll open up the call for questions I'll now turn the call over to Andrew. Thank you.
Greg and good morning to everyone I'm pleased to be speaking with you today.
Economic conditions remained relatively resilient in the first quarter and even though just diminished expectations for central Bank cards. This year equity markets continue to rise. The S&P 500 gained 10% during the quarter again, making it the best performing major equity index as the quarter progressed market breast began to them.
The gains in large cap growth in tech stocks continued to significantly lead the U S equity market rally more modest growth was recorded in developed markets outside of the U S and China markets continued to lag, but economic indicators and sentiment are showing some signs of a bottoming fixed income markets were generally weak this quarter.
But with prices dropping that's fed expectations changed.
During the quarter, we continued to see increasing client demand overall, we delivered $6 $3 billion in net long term inflows for organic growth rate up to 2%.
Organic slow growth and signs of improving sentiment drove markets and assets level levels higher again this quarter at Invesco and we ended the period with nearly $1 seven trillion dollars in assets under management or.
Our resulting net revenue and adjusted operating income growth up 1% and 7% respectively from Q4 levels, which reflects where we saw growth against our diversified asset mix profile, we remain optimistic that with increasing market clarity a broadening of market participation will continue to take hold and investor.
Appetite for more duration risk on in global oriented assets will increase we are well positioned to benefit across our business in this type of environment.
Now moving on to page three of the presentation and against this market backdrop, we highlight results in each of our investment capabilities.
We are aligning disclosures and the way we speak about our business to present, a more holistic and consistent view that encompasses all of our investment capabilities and each of these areas of our business is in a different part of its lifecycle with different trajectories. These are the capabilities, where we have invested resources and had conviction.
About the market and our position within it.
The objective of our enhanced disclosure is to foster a better understanding of various components of our investment capabilities.
And their performance and potential in order to drive a clearer view of a basketball as a whole our advantages in the market and our plans to drive profitable growth.
Now turning to a deeper look into Q1 across each of these capabilities and ongoing key driver of our strong organic slow growth is our ETF and index platform. During the quarter. We continued to gain market share recording 11 $2 billion in net long term flows representing a 12% annual organic growth rate.
This was one of our best flow quarters to date as we hit a record high up nearly $400 billion in long term AUM.
This quarter was led by our equity innovation suite, notably our fund Q2, two am this innovative product Leverages. Our Q2, two popularity, but with this fund we earn a direct fee on this product instead of significant marketing benefits in a relatively short time. It has become our third largest etfs in our product suite outs.
Side. The Q2. Additionally, we continue to expand and leverage our active investment teams into our ETF and index franchise. Our U S listed ETF strategies, incorporating our active teams now exceed $25 billion in AUM across over 25 products and multiple asset classes the advantages.
As of Etfs in both passive and active formats remain a focus for invesco and our clients.
Shifting to fixed income we continue to believe that as investors gain greater clarity on inflation and central bank interest rate policy. They will move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies.
This anticipated shift maybe more protracted given the mixed economic signals up late we're beginning to see green shoots and we're well positioned across the risk and duration fixed income asset classes to capture flows. We did see continued momentum into fundamental fixed income with $1 $1 billion of net long term.
Flows in the first quarter or nearly a 2% annual organic growth rate.
Leading drivers included investment grade strategy is delivered through our institutional channels as well as municipal bond strategies delivered through our mutual fund and SMA platforms.
Beyond our fundamental fixed income capabilities and additional $2 $1 billion of assets flowed into our fixed income related ETF and index strategies.
Important to our fixed income demand story is our rapidly expanding retail SMA offering which is one of the fastest growing in the industry with an annual organic growth rate of 24% and nearly $23 billion in AUM.
We're starting to see extension of duration with our top selling SMA this quarter being the intermediate tax exempt strategy and we're seeing growing interest in our intermediate taxable investment grade strategies as well.
We are well positioned to continue to grow our retail SMA platform to support the client demand for this vehicle delivery structure, especially within the U S wealth intermediary market, we have a long dated and established track record on our SMA platform that represents not only fixed income, but also traditional active equity and customer equity.
Index SMA is we see a lot of opportunity in this space and we look forward to continuing to share our progress with you.
Moving on to private markets, we maintained momentum into the first quarter with net long term flows of $1 billion driven by inflows in our credit strategies, notably bank loans. We also saw modest positive flows into direct real estate, primarily driven by <unk>, which is our non exchange traded REIT.
Focus on the private real estate debt.
Markets, which has had good momentum in the wealth advisory space since its launch last year.
Additionally, it's important to note that our real estate team has $6 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters, a greater market clarity is going to be required before we can begin to see significant return up demand and growth.
Moving on to our Asia Pacific managed assets. Despite overall client sentiment in China remaining relatively weak we didn't generate a modest positive net long term flows in our China JV driven by equities, particularly in our fast growing ETF lineup. This was augmented by the launch of four new.
Products and we continue to believe that some early signs of recovery in China could bode well for a more constructive market as 2024 progresses, we maintain our conviction in this market and our leading position within it as the asset management industry matures with the development of local retirement and capital market systems in the world's second largest.
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Beyond China. We also saw net inflows in our India business, We recently announced a joint venture with a leading Indian company for our funds business in that market. This partnership with the Hinduja group will enable us to continue to expand our distribution to serve more domestic investors in the Indian market.
And our multi asset and other related capabilities. We also generated net inflows led by our quantitative equity strategies, which were offset by outflows of remaining assets in our GTR capability in the U K, which we decided to close last year.
Generally the relative pressure on fundamental equity flows continued however, as I pointed out previously we have seen some moderation in certain areas of active equity flows, particularly in the global international and emerging market segments.
Net outflows in these strategies have moderated during the past several quarters to $1 billion to $2 billion per quarter markedly lower than the 2022 quarterly peak outflows of $6 billion.
One notable standout in our fundamental fundamental equity flows was in our global equity and income strategy, which is among the top selling active retail funds in the growing Japanese market. This fun delivered an incremental $1 $2 billion of net flows in the first quarter and its AUM has nearly tripled in the past year.
Overall, our asset flows in the first quarter continued to demonstrate the breadth of capabilities that we offer to serve our clients' diverse needs and performed through various market cycles. We believe that this positions us well in front of the rapid evolution underway in our industry. Our team remains focused on the value drivers that we believe create a competitive advantage.
Managed to deliver sustained strong asset flows, notably investment quality product breadth and differentiation and exceptional client engagement.
So moving on to slide four investment performance, which is always a top priority of our firm and as displayed on this slide we're showing overall results relative to benchmarks and peers as well as our performance in key capabilities, where information is readily comparable and more meaningful to driving company outcomes.
Overall investment performance was solid in the first quarter on a one three and five year basis, 66, 64, and 75% respectively of our AUM is beating its benchmark and around 70% of our AUM is in the top half of peers across all periods. We also have a significant number of funds.
That are now in the top quartile of performance with 46% hitting that mark on a five year basis, which is a considerable improvement over the last several quarters. We continue to have excellent fixed income performance across nearly all capabilities and time horizons supporting our strong conviction in our ability to attract flows as investors.
Pulling money into these strategies, 92% of our fundamental fixed income capabilities are beating their benchmark with 68% in the top quartile on a five year basis.
Fundamental equity three and five year performance has improved meaningfully over the past year was 56%.
In the top half of peers on a three year basis and 52% over five years, we have seen strengthening results across many of our domestic and global equity strategies as well.
So hopefully you find this more streamlined approach to discussing our results our investment capabilities and investment performance more straightforward and useful as you think about invesco and its potential as we continue to simplify and focus our business. We are also tightening our financial discipline, which will enable the allocation of resources to drive innovation.
<unk> and growth in our investment capabilities with that I'm going to turn the call over to Alison to discuss our financial results for the quarter and I look forward to your questions.
Thank you Andrew and good morning, everyone I'm going to begin on slide five.
Its under management at the end of the first quarter were nearly $1 seven trillion dollars $77 billion higher than last quarter at.
Higher markets, coupled with net long term inflows drove the increase in the U S. During the first quarter.
Of the 68 million dollar increase driven by higher market or.
$6 billion was driven by Etfs, including $20 billion by that keeps you kipp.
Fundamental equity AUM was $19 billion higher data markets.
As Andrew noted, we generated $6 $3 billion net long term inflows for organic growth of two 2%.
Long term net inflows were largely driven by Etfs, excluding the kinky Kim.
ETF inflows were $11 $2 billion in the first quarter.
Partially offsetting this was $5 $6 billion in fundamental equity net outflows during the quarter.
Net revenues adjusted operating income and adjusted operating margin all improved from the fourth quarter and I'll cover the drivers of that are pregnant shortly.
Adjusted diluted earnings per share was 33 for the first quarter.
We continue to simplify and streamline the organization to better position <unk> for greater scale and improved profitability in the future.
We did incur $5 million of organizational change related expenses in the quarter. We also achieved an incremental $4 million of that saving more than we had expected previously.
Efforts have resulted in $60 million of annual net savings this year.
Beating our goal of $50 million for 2024.
Overall operating expenses remained well managed.
We further strengthened the balance sheet by redeeming the $600 million senior notes that matured on January 30th.
As expected, we used $500 million in cash and we drew approximately $100 million on our credit facility to fully redeem the notes.
We ended the quarter with net debt of $362 million as we had other seasonal related cash usage during the quarter and we're still on track to approach net debt zero in the second half of this year.
Moving to slide six secular shifts in client demand across the asset management industry, coupled with more recent market dynamics have had a significant impact on our asset mix since the acquisition of Oppenheimer funds.
Going back to 2019 after the acquisition Etfs and index AUM, excluding that <unk> have grown from 171 billion or 14% of our overall $1 two trillion dollars in average annual 2019.
The 398 billion or 23% of our average AUR in the $1 six trillion dollars in the first quarter.
The <unk> product, we are no management fees from but does provide a substantial marketing benefit.
More than tripled in size over this time.
Sterling $74 million to $259 billion, or 6% or 15% of total average AUR.
We've also seen very strong growth in global liquidity growing from $77 million or 7% of average AUM.
$265 billion or 10% of average AUM in the first quarter.
These product areas carry lower net revenue yields compared to our overall net revenue yield.
During the same timeframe, we've seen weaker demand for fundamental equity and multi asset products, which carry higher net revenue.
This has been driven in part by the risk off sentiment that was sparked in early 2022, coupled with the pressure we experienced in developing markets and global equity as long as the closure of our GTR capabilities.
Our fundamental equity portfolio in 2019 with $348 million or 29% of our average any left by the first quarter that portfolio had declined at 274 billion.
Or 16% of our average any of them.
Multi asset also declined from 9% to 4% of average AUM over this timeframe.
Looking at the first quarter of 24 as compared to the fourth quarter of 'twenty. Three we continue to experience similar dynamics with Etfs growing from 22%, 23% and the kitchen can't growing from 14% to 15% of average AUR fundamental equity and multi asset remained flat at 16 and 4% respectively.
The result of revenue headwinds created by these dynamics has weighed on our results over the last several years.
While we've experienced excellent organic growth in lower fee capability like Etfs and global liquidity, it's not enough to offset the revenue loss from higher fee fundamental equity and multi asset outflows.
Our overall net revenue yield has declined meaningfully during this timeframe that decrease has been driven by the shift in our asset mix not degradation on the yield in our investment strategies net revenue yields by investment strategy have been relatively stable within the ranges provided on the slide.
The other point that I want to emphasize is that this multiyear secular shift in client preferences have been increasingly captured in our results. Our portfolio is better diversified today than four years ago, and our concentration risk in higher fee fundamental equities and multi asset products have been reduced.
These dynamics are challenging to manage through what they occur should portend, well for future revenue growth and marginal profitability in person.
Further we now have a more diversified business mix, which better positions the firm to navigate various market cycles, that's shifting client demand.
Yeah.
Speaker Change: Now turning to slide seven.
Speaker Change: Net revenue of 1.05 billion in the first quarter was $23 million lower than the first quarter of 'twenty, three and $7 million higher than the fourth quarter of 'twenty three.
The decline from last year was largely due to a $22 million decline in investment management fees driven by the shift in our asset mix just discussed servicing.
Service and distribution fees increased $43 million due to higher fund related fees and higher a U M to which the beta site, but this was largely offset by third party distribution service and advisory expenses that are passed through from service and distribution fees.
Speaker Change: The revenue increase from the prior quarter was primarily due to a $34 million increase in investment management fees due to higher average AUM, partially offset by the incremental asset mix shift and lower seasonal performance fees.
Service and distribution fees increased $32 million due to higher fund related fees, but were offset by a third party distribution service and advisory expenses.
Before I cover operating expenses I did want to note that the first for the first quarter certain operating expenses were reclassified to more accurately portray the nature of the expenses.
These expenses were previously classified as either marketing or property office and technology and they've now been reclassified SG&A expenses.
We've included in the appendix a two year look back on the rehab classifications to show the impact by expense category.
The reclassification had no impact on our reported operating revenues total operating expenses operating income or net income.
For comparability the variances I will be discussing includes a re class expense categories for the first quarter of 'twenty four and the first quarter fourth quarter of last year.
Total adjusted operating expenses in the first quarter were 770, excuse me were $757 million, an increase of $8 million from the first quarter of last year.
Put it in the first quarter of this year's operating expenses of $5 million related to organizational change expenses and $7 million of Alpha platform related implementation expenses, which in the first quarter of last year would have been recorded in transaction integration and restructuring expenses and not included in our operating expenses.
Adjusting for these items first quarter expenses were $4 million lower than the first quarter of last year.
Total adjusted operating expenses were $14 million lower than fourth quarter, largely driven by lower G&A expenses.
Employee compensation was $6 million higher than the first quarter due largely to the seasonal impact of higher payroll tax and other benefit resets in the first quarter.
<unk> totaled approximately $20 million.
This was partially offset by lower costs related to organizational changes that I'll touch on shortly.
Yeah.
G&A expense was $21 million lower than last quarter as we typically see higher G&A in the fourth quarter.
Our professional services fees in the first corner, where the primary driver of the decline in G&A expense.
We also had $7 million in spending related to our alpha platform implementation lower than the $12 million incurred last quarter.
Speaker Change: Going forward, we continue to expect one time implementing implementation costs about but it would be approximately $10 million per quarter in 2024, with some fluctuation quarter to quarter.
We'll continue to update our progress on the implementation and related costs as we move forward.
Speaker Change: The effective tax rate was 24, 6% from the first quarter, we estimate our non-GAAP effective tax rate to be between 23 and 25% for the second quarter of 2024.
Speaker Change: The actual effective tax rate can vary due to the impact of nonrecurring items on a pre tax income and discreet tax items.
Moving to slide eight we achieved an incremental $4 million in net expense savings in the first quarter related to the organizational changes on an annualized basis, we have achieved $60 million and net savings exceeding our $50 million target for 2020.
And while we did realized $5 million of organizational change related expenses in the first quarter. We're not currently expecting any further significant restructuring costs associated with these efforts our full benefits from our simplification efforts will be seen over time, as we generate revenue growth and margin recovery.
As we've discussed we manage variable compensation to our full year outcome in line with company performance and competitive industry practices.
Speaker Change: Historically, our compensation to net revenue ratio has been in the 38% to 42% range trending towards the upper end of the range in periods of lower revenue.
Current AUM levels, we would expect the ratio to be slightly above the higher end of this range for 2024.
Yeah.
I'll finish on slide nine we continued to make progress on building balance sheet strength in the first quarter, we redeemed the $600 million senior notes that matured on January 30th using the $500 million in cash and drive $100 million on our credit facility to accomplish that.
We ended the corner with $900 million in cash and $368 million drawn on the facility as the first quarter is a seasonally high cash usage quarter.
We ended the quarter with net debt of $362 million compared to nearly $600 million a year ago all in line with our expectations.
These actions resulted in an improvement in our leverage ratios and we're now down to a leverage ratio excluding the preferred <unk> five four times a significant improvement over the past several years.
Speaker Change: We expect to pay down the credit facility as we move through the second and third quarters approaching our goal zero net debt in the second half of this year.
So have to begin to more regular stock buyback program as we move towards that goal.
We're pleased to note that our board approved an increase in the quarterly common stock dividend.
220, <unk> per share effect of this corner that's reflects the strength of our balance sheet cash position and stable cashless.
To conclude the resiliency of our firm's net flows performance as evidenced again this quarter and we continue to make progress on simplifying the organization and building a stronger balance sheet.
Also investing in areas of growth, we are committed to driving profitable growth at a high level of financial performance and we have the right strategic positioning to do so.
And with that I'd like to open it up to Q&A.
Thank you at this time, if you'd like to ask a question. Please press star one you'll be announced prior to asking your question. Please pickup your handset when asking your question to withdraw your request. Please press star two one moment for our first question.
Okay and our first question comes from Dan Fannon with Jefferies. Your line is open.
Thanks, Good morning.
Daniel Thomas Fannon: I guess Allison first to start maybe a modeling question the service and distribution revenues versus the third party expense. The deltas are directionally understand they went higher because of higher asset levels.
The ratio was more negative this quarter. Similarly last quarter also directionally, whether the opposite way. So just trying to understand what are the other kind of more detailed facts behind that and how we should think about that prospectively.
Sure.
There's definitely a bit of an anomaly in those line.
The line items this quarter, we've got an elevated $21 million of fund related expenses.
Expenses, which really shows up as a fee and that was related to a fund proxy expense and the fund board determined that a shareholder meeting with necessary to elect new trustees and that's a pretty infrequent occurrence in fact, the last time that occurred was in 2017.
But as a result, there's a $21 million fund related expense that shows up in that third party Contra revenue it's offset.
Daniel Thomas Fannon: The majority of it is offset there was $18 million that was paid for by the funds and that would be recorded as service and distribution revenue. So I think when you look at the quarter over quarter change, but the year over year and the sequential quarter. You, obviously see that that large anomaly not something we would expect to occur again in the last time was in 2017.
When you look about think about the relationship and you're right. The relationship. The just the ratio is running at a relatively high if I look at third party Contra revenue that usually runs about 41% to 42% of management fees and but it would be on the higher end and some of the lower revenue year years, just due to fixed cost inside of that line item.
Daniel Thomas Fannon: And I would expect it to be above the higher end this year, maybe somewhere around 43% and again just as we're coming into the year starting at a lower revenue trajectory. As you look back at 2020 is kind of a reference that would be in a similar range back then so I think that's one way to think about it Dan.
Okay. Thanks, that's helpful and then.
Just going back to the disclosures in the fee rates and kind of the mix of understanding. This has been a long kind of trend since the Oppenheimer deal, but if I walk fundamental equity assets were up 9% year over year, that's still represents your highest bucket.
Flat quarter over quarter, but I guess, what gives you confidence that that's not still a headwind.
Beta is removed and you still have the outflow trends that had been going on and why we wouldn't still see continued degradation.
Degradation.
So.
Daniel Thomas Fannon: The question of what gives us confidence that fundamental equities is it a continued headwind.
I would say it could still be a continued headwind I think what gives us confidence as we look at the trajectory overall from here is that we continue to manage that.
Exposure down or at the market effectively continue to manage it down as well as client demand.
AG continues to be more for our passive capabilities that active that is obviously an industry wide trend.
We don't expect a change in that trend so to be clear, we're not expecting fundamental equities to necessarily turn into a strong tailwind, but we do think the magnitude of the headwind will continue.
Not to diminish as it becomes a less significant component of our overall a U M bags and we continue to grow the other categories and we are seeing strong organic growth rates at least as we've noted and many of the other categories and the one thing we could well several things we continue to focus on and I know Andrew touched on that we can continue to go into it is invest.
Performance and very focused on the investment quality.
Hi in fundamental equities and making sure we continue to make good progress there and we are demonstrating progress there and there are underlying M. As we decompose our fundamental equities there are underlying trends there that create headwinds I'm not the least of which is our exposure and developing markets and global equity, which given some of the geopolitical.
Challenges that are out there continues to be an asset class that is not strongly in favor and that will continue to be a headwind. So long as we have some of the geopolitical challenges underlying the trend for client preference there youre delivering in fundamental equities is one of the firm's top priorities analysis and outline where those are.
Global International emerging market equities in particular their demand spans the world and we're well positioned to take advantage of that as demand comes back and so we'll manage the things, we can control, which alison outlined around investment quality.
Daniel Thomas Fannon: You know and quality of the teams.
Thanks for taking my questions.
Daniel Thomas Fannon: Thank you and our next question comes from Ken Worthington with JP Morgan Your line is open.
Hi, good morning, Thanks for taking the question.
Kenneth Brooks Worthington: Hi, hi level M.
M. A C I world and S&P, we're at all time highs at the end of March.
Invesco stock price has lagged this year and is down since the beginning of 'twenty three.
Touched on a series of points over the discussion this morning.
But pulling it all together as you review the stock price performance.
For the last 12 to 15 months, maybe first what is your assessment and then Alison you highlighted that mix issues have negatively impacted earnings and those have moderated can you help us better evaluate that mixed moderation is approaching the level that can better allow earnings to grow in <unk>.
Alison: Or allow the stock price to perform better.
Yeah, I mean look clearly as a starting point, we're not pleased with where the share price is.
We're working hard to improve that in the areas that we can that we can control.
And growth in areas like like Japan and out in Asia Pacific Some of the headwinds that we've had with a large portion of our assets in places where some demand has not has not picked back up in terms of asset flow demand that is places in global and international emerging equities are areas like China.
<unk> continued to be places, where we feel well positioned but market demand our client flows needs to come back.
So those are some of the things that we're focused on from a growth standpoint, and from an expense standpoint, continuing to be disciplined with the expense base and using opportunities to rotate our expense base to areas. We anticipate we'll grow going forward, which we continue to highlight.
So those are the things that we're going to continue to do to drive the.
The profitability of the company and hopefully the share price higher.
And I'll just touch on the the mix moderation.
You know I think well do there is just at some point a mathematical sort of a tipping point that happens there as you think about our backs and <unk>, where the effect of sort of net revenue yield is today based on the composition, we have and it gets closer and closer to what our passive net revenue yield is there's a bit of a term.
Mineral values are we in no way expect our fundamental equities to go entirely yeah to disappear. There's there continues to be strong demand. There in fact, our gross sales were quite strong.
But you look at the underlying headwinds and pressures again, particularly given some of our exposure and our tilt towards global and developing markets and it creates a lot of headwind, but there is a terminal value there as we start to see that the mix continues to diversify as ETF and index come in even greater.
Percentage of our overall portfolio at the organic growth there is creating positive net revenue growth.
Fundamental fixed income, we're seeing positive net revenues growth.
We continue to see good net revenue growth and global liquidity and a lot of this just continues to be offset I'm not entirely but moderately offset by fundamental equities.
Those headwinds will diminish at some point and just given our client demand and asset allocation.
The only other thing I do want to add as you know markets have been as we all know have been been narrow.
Even inside the indexes as has client demand.
As has the amount of cash that remains sitting on the sideline. So there are some positive things that we think as clarity comes into the markets that are more at a greater rate.
We'll start to see demand broaden out.
Okay, excellent and just house and as a follow up that tipping point comment how close are we to that tipping point, how how far in the future do you think that is are or maybe we're already there.
It's hard to say because it is so quiet demand driven and again like if I just look at our net revenue yield of 26.1 basis points that you think about our.
Alison: Passive ETF and index kind of net revenue yield of 15 to 20.
A whole lot closer to that at 26.1, and then we were at 40 basis points. So there is that and I don't know that tipping means growth because I do think we believe their stabilization of stabilization will then allow that.
Annualized net new revenue growth to really take hold and we can start to see it in true organic revenue growth that would match the organic flows hard to say exactly but I do believe we're getting closer and closer and we are as challenging as this quarter was we are optimistic as we look at the rest of the year and we're optimistic.
Mr because of a variety of trends as we look at and.
Markets haven't hurt April it's obviously not been terrific, but markets are modestly helpful. Our organic growth continues to be very strong we see pockets of growth.
Cross frankly, almost all asset classes, we're very encouraged by what we see in terms of the organic growth trends both in the first quarter and continuing throughout the year and we know where our expenses are well managed against it. So we actually feel reasonably confident that we're starting to reach a pivot point am I just cant be certain what client.
A man and markets home.
Thank you both.
Yeah.
Thank you and our next question comes from Brennan Hawken with UBS. Your line is open.
Oh good morning, Thanks for taking my questions.
Brennan Hawken: I'd like to start with the shift to just shifting expenses you know.
This shift of some expenses into G&A.
No.
A method of signaling that these expenses could maybe eventually be cut or swim down as the operating model is adjusted and streamlined.
Well no the shift was not a if I understood. Your question correctly. It was not a way of saying I mean truly the shift was just reclassifying expenses, where they better belong.
Things like traveling like entertainment and belong in marketing it belonged in G&A.
So it was a really trying to get expenses, where they need to be so we better reflect the true nature of those expenses.
And not necessarily a signal in any way.
Alright. Another question on disclosure hopefully this one turns out to be a little more fruitful. So it seems like you guys are shifting AUM disclosures here to align with slide six where you provide the yeah.
Yields, but just a couple of questions. This is net revenue yield right. So it excludes performance fees, but it but it is net of anything going on with distribution.
I just wanted to make sure I'm looking at that correctly, when we think about how to use it as modeling tool and and going forward. If this is going to be the way in which we should model are we going to get a more granular disclosure of these yields so we'll be able to really fine tune models tightly.
And maybe some historical.
Time series, showing what the fee rates were historically, so we can really fine tune.
So a couple of things one yes, the 26.1 consistent with the disclosures we've had them that are in the press release and here in terms of the net revenue yield yes, we've been you and several others were very encouraging of us continuing to evolve our disclosures to this kind of format and so.
We hope you find it more helpful going forward, we think it's more helpful as well.
In terms of the disclosures and the fee rates. We provided in this range here will be the the way in which we continue to provide that and we will adjust those ranges should the ranges actually no longer proved to be accurate, but they are they are the right ranges and we do see each one of these categories really operating within that range again very dependent.
And then on client demand.
Within any of these categories and we do have strategies that really do kind of hit the barbell of the different ranges that are there and so its very dependent on client demand.
We did provide history by these categories and I think our presentation. So you can go back and see some of the flows by category and then we've got that the ranges there as well, but we will update the ranges going forward at the ranges change, Okay, and and is are the monthly AUM disclosures going to align with this too.
Sorry.
Yes, they are.
Thank you.
Thank you. The next question comes from Alex Blaustein with Goldman Sachs. Your line is open.
Hey, al Thanks for taking the question. This is Luke on behalf of Alex I'm. Just another question, while we're on the topic of updated disclosure can you just run through the major components and in the private markets business, maybe how big each bucket is and how you're thinking about the growth outlook for this part of the business. Thanks.
Sure the major buckets would be maybe starting with real estate would be add on we would see direct real estate Oh, that's around $69 billion and listed real estate, which would be around $15 billion. So those would be the.
The two components of real estate.
And then private credit, which is primarily bank loans at about $39 billion and add then our distressed and direct lending funds, which totaled just about 2 billion, maybe a little north of $2 billion between them.
And maybe I'll look in terms of in terms of growth. What we mentioned this quarter in the in the credit side, our bank loans and floating rate strategies continue to be in demand and we're one of the market leaders in that space across all vehicle types and we don't see that.
Beating and then on the real estate side.
The greatest opportunity for us in terms of growth right now is taking what's largely been a institutional.
Recognized franchise and bringing it into the wealth space as we've been talking about.
And we have a few more a few strategies in market right now that I mentioned earlier, our real estate equity strategy and then also more recently, our real estate debt strategy.
Brennan Hawken: Both of those products had been in the market for a for a few years now that that one more recently and they're well picked up by wealth platforms and continue to be picked up by wealth platforms. So as demand continues in that space. We think we can be a pretty active participant.
Got you that's helpful. I appreciate the color.
Just one more maybe circling back on like the fee rate dynamics, you guys highlighted expense savings slightly better than prior expectations, but with the continued degradation of the fee rate can you just frame how youre thinking about the pace and trajectory of margin expansion over the next 12 to 18 months.
Sure and then I would just remind that the degradation of the fee rate does not necessarily mean that degradation of revenue up and so and that's one of the things we're trying to unpack app as we continue to refine the disclosures on page six and where the organic growth is coming from the App. We can have great strong growth.
And Etfs and no real growth and some of our higher fee categories and still see fee rate degradation, but see strong revenue growth.
So that's the most important thing to remember am and where we're trying to again provide those disclosure so where do we expect things to go from here I mean I think.
As we continue to manage expenses and we do a we are very actively thoughtfully and aggressively managing our expenses.
And we will while I said you know, we don't expect any significant organizational change costs from here, but that doesn't mean, we won't continue to you.
And find opportunities to create further organizational changes are what.
I want to be clear on is we werent necessarily guiding to you should expect X smart and organizational expenses.
Because we're not in the midst of a major program, but we are in the midst everyday of looking at for decisions. We can make to continue to refine and streamline the organization and we will take advantage of those opportunities as we have been for the last year since first realigning the business a year ago, and we have continued to really step through a series of change.
And we will continue to step through changes as we see opportunities to streamline the business and we really believe we've got the opportunity to continue to create positive operating leverage I have no reason to believe we couldn't do it I'm starting this quarter and I will just be clear client demand in markets have continued to be headwinds at market is not so much last quarter, but client demand with the headwind.
And we can see markets be a headwind this year, depending on what continues to happen from a geopolitical perspective, and some of the impact that has on our developing markets exposure in particular.
But that said, we absolutely have the opportunity to create positive operating leverage from here.
Continue to also.
Uh-huh invest behind these growth capabilities that we've been mentioning the last several quarters and.
Brennan Hawken: We've been able to do that at a from a net standpoint as you see in the in the results and where we're really seeking to create an organization that that's more flexible.
An organization Thats more streamlined and focused that allows us to rotate that expense base.
Where we need to in different market conditions, but with the long term in mind.
Yeah.
Yes.
Okay. Thank you and then next question comes from Glenn Schorr with Evercore. Your line is open.
Hi, Thank you.
Maybe one on <unk> and the spirit of driving growth in high demand solutions can you Peel back the onion, a little bit on your what you're doing what successes you've had on both the SMA platform and active Etfs I know two things one there sorry.
Yeah, I mean, let me, let me talk about both on the SMA platform.
As I mentioned, it's now grown to about $23 billion, which is which is multiples higher than our than just a few years ago. The immediate success that we've been having is in the fixed income space.
Where theres been decent demand and a lot less supply of offering.
And we're seeing that kind of across across the piece in fixed income more recently, we've been introducing custom indexes and and elements of the active strategies, which have had a slower pick up where there's more supply in the market, but we think off the backdrop of of what we built there is opportunity there.
And then in time, we think the SMA platform like the ETF.
He is going to continue to be a preferred vehicle, which will allow us to bring other strategies fundamental strategies.
Or are there fundamental and quantitatively.
Develop strategies together into that SMA platform. So we're we think we're in early stages of growth in SMA is anything going to the way the technology and operational platforms set up now in a more modern way at scale is a lot better than SMA businesses did a decade or two ago.
On active Etfs, yeah, we've been in that space, we've been one of the pioneers in active Etfs are starting as far back as 10 to 15 years ago. We have as I mentioned in my remarks, we have about 25 billion of a U M. That's has an active team connected to it.
Which doesn't mean just active funds so about half of that is in active etfs in the in the classically defined sense and the other half is a passive oriented strategies, but supported by working with one of our investment active investment teams things like multi asset or bank loans are examples of that and we.
Continue to think that the ETF chassis, and which were large and scaled in is going to continue to bring in not just traditional active strategies.
But also alternative active strategies, meaning ones that combined.
A fundamental and quantitative approaches and we think we'll we'll we're set up well to be a leader there given the quality of our active the depth of our ETF range in and the recognition I think we have all the wealth platforms, which will drive this growth. So it's both areas are vehicles that were excited about and I think there's a lot of opportunity.
To bring our capability too.
Okay appreciate that thanks.
Thank you and our next question comes from Bill Katz with TD Cowen Your line is open.
Oh, Thanks, So maybe a big picture question first just a couple of articles just about sort of streamlining your India platform.
Seem to be a little bit different when I heard just now in terms of the JV just sort of wondering if you could talk a little bit about just the opportunity to continue to streamline globally or to reinvest into faster growth areas and how that might ultimately feedback to earnings.
Great. Let me I'll start and then Alison can pick up.
Brennan Hawken: Two two different components of our Indian business that are or Indian profile that are worth mentioning we use India is a very large enterprise back office Middle Office Center, and that's been phenomenal for us in a place where we're going to continue to.
To invest behind to continue to it will be one of the places that helps us streamline.
The cost base over time.
Separate to that we have an Indian fund business and what we announced in the last few weeks.
Was that we were forming a joint venture with a large Indian business called Hinduja group and Hinduja group is about 60% of our interests are well have a minority interest and then do just well recognized company in India and also financial services company in India, which we think in a combined way can help us.
Grow and accelerate the pace of development that we have there and we can we're better suited as a as a minority interest in that regard and those are the sorts of things I think you could you could think about as we continue to go market by market looking for ways to both grow and to think about where we deploy our resources.
Our capital and operating expense.
Okay. My next question then the cheat a little bit how should you just go back to the distribution discussion I was taking notes special to make sure I understand it and maybe apply it to the 26.1 basis point average fee rate for the quarter and what would be the exit rate. If you normalize for the sort of unique fund cost.
And then you mentioned that you're gonna be swapped back to sort of net zero.
By the second half of this year, but you might be able to sort of rethink capital return along the way at what point should we anticipate buyback, particularly where the stock is trading now thank you.
Sure you know I don't know that.
Net of that third party distribution is that meaningful and so if I go back and just kind of recap what I sat there.
You've got about $18 million related to that a proxy event.
It was recorded as revenue and $21 million, that's recorded Dennys third party Contra revenue, so effectively $3 million that was borne by Invesco theyre.
Not terribly meaningful as you think about net revenue yield. So you know I don't I don't I don't I'm not trying to Dodge your question, but I don't know that it's terribly meaningful to net revenue yield.
I know it is a bit confusing, though am and I would continue to guide to the I'm thinking about that you know something around 43% of third party Contra revenue as a percentage of management fees is at the right way to think about that relationship and a low revenue environment and.
You know as revenue improves you should expect that to kind of come back down into that 41% to 42% range and that proxy of that being a bit of an anomaly.
As it relates to our return of capital and I'm, sorry, I Might've missed that question was your when buybacks might resume buybacks.
Again, I think as we approach our target of zero net debt, which we expect to be middle back half of this year and are we are being very thoughtful on our cash management overall very pleased with what we've been able to do so far and very much in line with our expectations and we expect we'll reach it met all of the back half of this year and.
We do hope to be resuming more regular share buybacks and I think I've noted in the past our.
Total payout ratio would be in the 40% to 60% range I might have expected and just sort of these lower earnings environments to be at the higher end of that range.
Hopefully I covered that question there bill. Thanks, so much yes. Thank you.
Speaker Change: Great. Thanks, Thanks Bill.
Thank you and our next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks, Good morning folks, maybe just to come back to the active ETF question.
To the extent you're quoting these from fundamental strategies or I guess the question is you know what is your appetite to create active etfs that are either clones of the fundamental strategies or worse or similar types of strategies and can you capture a fee read on those E T.
<unk> management fee, you need or not overnight.
Net revenue yield on those Etfs that are similar to the fundamental strategies and I guess as you're growing them or are they included in the ETF bucket or the or would they be in the fundamental buckets.
Yeah, Let me start and I'll see you can pick up on that on that last part in particular.
It it's very much driven by client demand and what I mean by that is where there is interest in fundamental strategies that are the same or similar to ones that we offer today.
We will offer them and we'll bring them forward, we haven't seen that so much to date, they've either been a new strategy or a variant of <unk>, but we'll continue to bring the.
Speaker Change: The best capabilities, we have and to the active ETF wrapper, where we're completely makes sense.
Youre going to see some of that I think in the industry come through conversions youre going to see some of that come us as clone.
Or as a newly originated funds.
But I think ultimately you're really going to see the ETF as a preferred wrapper for many investors to to have lots of different ways of deploying active into it as I was saying before some fundamentals. Some quantitative some that are going to be a variety of both so I think there's gonna be a decent amount of product development and <unk>.
Each firm is going to have a different strategy on it we've got some unique attributes that I mentioned and you'll probably see all the above from us in terms of the fee rates and where they are included.
Leave it to Allison so as we.
As those grow and as we start to embark on that they would show up in the Etfs and index investment capability category.
And when as and if it changes the fee rate, we would adjust that range as well in the disclosures, but we've got a ways to go and just creating critical mass there that would actually create a change in that range.
Okay. Okay. That's good color and then just on the on the classic ETF franchise.
Just maybe if you can talk about how you view the scalability of that and clearly you're always making investments in across your product lines.
But if if we continue to see outsized growth in that franchise should we expect that to be a positively contributing to your margins over time.
Yeah.
Yeah I'll let.
Well Allison you're starting up to go well I mean, I'd say in the bottom part of your question, Yes, and it is positively contributing to our margin today, it's just offset by some of the outflows on the fundamental equity side, so to be very clear.
Our overall traditional ETF franchise.
Is margin accretive and as it stands today and we are starting to see the benefits of scale and although I think we're just scratching the surface of it and are continuing to grow that is as a true focus for us.
Really across all part I mean, we often talk about.
When we you know an origination new product or scaling existing products, but there's a whole ecosystem behind it which as we get larger allows us to continue to have operating leverage technology plays a big part operations plays a big part capital markets plays a big part and I think these are some of the advantages we have and having been in the.
E T F business for multiple decades on having the size and scale we have so it.
It does scale well in incremental margins should improve over time.
Great great. Thank you for the color.
Operator, we have time for one more question.
Okay and our final question comes from Craig Siegenthaler with Bank of America. Your line is open.
Thank you guys I hope everyone's doing well.
My first one is on Asia. So you.
You had positive flows in the China, JV and in India, where your overall APAC business had net outflows. So I was curious what were the largest sources of redemptions by geography and product and APAC This past quarter.
Yeah, I know it can be a little bit a little bit confusing. So I'll, let alison pick up I think in the region. We have positive flows in the region.
So let me distinguish the managed assets that you see on page three the negative is driven by a Japanese equity capability that we have that had some that had some net flows.
Net outflows in the first quarter. So that that was the only driver of negative impact on what we call Asia Pacific managed assets on page three but maybe from a regional perspective, Alex amongst you pick up from a source perspective, we were in inflows.
In fact, it was pretty strong about $3 $3 billion of inflow, so 6.6% organic growth rate.
Largely driven by Japan continued to see a lot of success in Japan, but our Henley global equity and income fund.
We.
Continued success in India, just under $1 billion of inflows in India, a positive flows in the China JV as we noted as well so overall a strong growth in the region from a sourcing perspective.
And Craig you can see some of that on page 13 in the appendix we show it on a source flow perspective.
Got it thank you for that and just my follow up you.
You had 1 billion of private market net flows and I can see there were $2 8 billion of long term outflows.
Does your definition of outflow include both redemptions and realizations because as you know.
Some of your competitors exclude realizations from the net flow definition.
Yes, ours includes redemptions and realizations and so when you look at our flows in private market largely driven by bank loans, which I think Andrew noted its a little over $1 billion in bank legs are we did see our inflows on the real estate side as well in direct real estate and that would be net of realizations and some of the outflows.
We're actually on the listed side and some of the listed real estate.
Thank you very much.
Thank you Craig Thank you.
Alright, well.
Thanks to everybody for joining and in closing I really want to reiterate them, we're well positioned to help clients navigate the impact of evolving market dynamics and subsequent change to their portfolios.
And we very much believe that as market sentiment improves this should translate into you even greater scale performance and improve profitability given the work we've done to strengthen our ability to anticipate understand and meet evolving client needs I'm very excited for the future of Invesco I want to thank everybody for joining the call today and please reach out to our investor relation.
And his team for any additional questions and we continue to appreciate your interest in basketball and look forward to speaking again very soon thank you.
Thank you and that concludes today's conference you may all disconnect at this time.