Q2 2024 Invesco Ltd Earnings Call
Welcome to Invesco second quarter earnings Conference call, all participants will be on 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 allow more participants to ask question. One question and a follow up can be submitted per participant as a reminder, today's call.
Is being recorded now like to turn today's call over to Mr. Greg Kitchener, and physical as head of Investor Relations. Thank you you may begin.
Thanks, operator and to all of you joining us on Invesco as quarterly earnings call.
In addition to today's 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 <unk> com.
Information can be found by going to the Investor Relations section of the website.
Our presentation today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements in.
Measures as well as the appendix for the appropriate reconciliations to GAAP.
Andrew: And basically it was not responsible for 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.
Andrew Schlossberg, President and CEO, and Allison Dukes, Chief Financial Officer will present, our results. This morning, and then we will open up the call for questions I'll now turn the call over to Andrew.
Thanks, Greg and good morning to everyone I'm pleased to be speaking with you today during.
During the second quarter, we had several bright spots of performance and growing business momentum against the continued complex market economic and geopolitical backdrop, leveraging our best client network, our broad product suite and improving investment results, we continue to drive higher demand for our capabilities for.
For the period, we garnered $16 $7 billion of net long term flows, which is a 6% annualized organic growth rate, marking our best quarter in over two years Importantly, we were a net positive long term inflows in each of our three regions across active and passive strategies.
And in both our institutional and retail channels, we ended the quarter with over one seven trillion dollars and AUM, which was up 12% from the prior year, reaching a record high for Invesco.
We generated positive operating leverage with revenues up over 3% from the first quarter and we expanded our operating margin by over 270 basis points to 39%.
This resulted in adjusted operating income growth in the second quarter that was in double digits on both a sequential quarter and year over year basis.
As mentioned the market environment remained choppy in the quarter and while we saw some broadening and increasing demand for risk assets general uncertainty and continued higher interest rates and impacted client investment behavior and our business results, notably after an up and down April and May most major equity indices.
Rally towards the end of the second quarter U S markets continue to lead the way with the NASDAQ gaining 8% followed by the S&P 500, increasing 4%.
However, the team of narrow market returns continued with the S&P 500 equal weighted index by contrast, declining by 3% in the quarter.
Equity returns outside the U S were mixed with the MSCI emerging markets up 4% Asia up 2% in Europe down 1% improvement in China's equity markets, which were up 6% in the quarter were a welcome bright spot.
On the fixed income side of the market the Bloomberg Global aggregate index declined by 1% in the quarter, while most of the other major bond indices were relatively flat all of that said, we have plenty of reasons to be optimistic that with the increasing market and interest rate clarity a broadening of participation will continue to take hold and investor.
For more duration risk on in global oriented assets will increase so moving on to slide three of the presentation. We continue to believe that our advantageous market position and clarity of strategic focus provides us with the tools to deliver enhanced operating performance and returns for our shareholders.
Specifically, we have built a strong global footprint with scale.
As in the U S and other key developed markets and a significant and unique Asia Pacific profile, which includes hard to replicate and lead and a leading 20 year old joint venture in China, and 30 years of longevity and the growing Japanese market. We have also developed a diverse yet focused range of active investor.
Strategies. This includes both public and private market strengths and multi asset profile that empowers invesco to meet a range of client demands provides us diversification to perform in various market cycles and allows us to adjust our secular changes continue to develop one of those secular trends its the continued client appetite.
For Etfs here again, we are extremely well positioned with a scaled and growing suite of capabilities. Our focus is on innovation and providing access to passive factor in active strategies. Our ETF franchise continues to gain market share globally, while accelerating its profitability and its overall contribution to the firm.
Finally, a hallmark of Invesco was our leading distribution platform.
It's an area of particular strength in the U S wealth management market, which is the world's largest asset channel and an area with significant growth potential, particularly given the democratization of certain asset classes like private markets.
Our strategic focus is what you can see in the middle of slide three are predicated on prioritizing the intersection of market size and secular change with Invesco is unique positioned to drive growth and the highest opportunity regions channels and asset classes.
As you would expect our top priority is investment performance, which is key to winning market share regardless of overall client demand.
Highest order is continuing to enhance the quality of our active equity strategies, and thereby driving greater retention and net flows into this important segment.
Andrew: We have tightened the elements of risk management and the relationship between investments product and distribution has never been stronger our investment teams have started to put up much better performance numbers, which I'll highlight momentarily.
An additional area of focus is on our profitable organic growth a significant driver of this is through our focus on high demand scalable investment capabilities and delivery vehicles. In this regard we are continuing to work to improve the operating leverage and profitability of our fixed income and multi asset capabilities on the asset class.
Side of things and Etfs and SMA has on the vehicle side. Furthermore, we have a focus on private markets. We have a very strong institutional footprint, which has been historically focused on real estate and private and alternative credit. We are now taking steps to bring those capabilities into the faster growing wealth management space.
While continuing to tap into ongoing demand in institutional markets globally.
More tactically, we're focused on taking next generation technology and deploying it through our platform at the enterprise distribution and investment levels and finally, we are improving the financial flexibility of the firm strengthening the balance sheet and generating operating leverage as we continue to deliver better.
Andrew: <unk> for our shareholders.
These are the outcomes that we're seeking to a tree achieved through the key performance indicators that are outlined on the right hand side of slide three they are also the themes at the forefront of today's discussion on second quarter results.
So flipping forward to slide four.
Against the backdrop of the aforementioned market conditions, and invesco as strategic priorities and strengths that I just outlined you can see on this slide the key flow drivers across our investment capabilities, our strong organic slow growth in the second quarter continued to be led by our global ETF franchise during.
During the period, we continued to gain market share in this segment recording $12 $8 billion in net long term inflows, which represented a 13% annual organic growth rate.
This was our highest growth ETF quarter in over two years and we ended the period with a record high of $415 billion in long term Etfs.
Growth. This quarter was led by our equity innovation suite or factor based equities in our fixed income bullet shares franchise. The acute UQM is our fastest growing ETF and is now the third largest fund on our platform.
This innovative product leverages, our QQ to popularity, but we aren't a direct fee instead of the marketing benefits, we receive on the <unk> trust, which equates to around $200 million annually.
Andrew: We also saw strong growth from the Amit from EMEA this quarter with over $5 billion of net inflows and we recently broke through the $100 billion Mark of ETF AUM in that region.
Additionally, we continue to innovate to meet client needs Invesco is one of the few global asset managers capable of servicing clients to one customize them all cross regional Etfs for exacting exposure such as the recently launched sustainable energy ETF, which garnered one $6 billion in assets at its launch in June.
Jim.
The continued advantage of Etfs are evident in both passive and active formats and across all channels, creating even more opportunity for expansion in this space.
Shifting to fixed income we continue to believe that investors as investors great gain greater clarity on inflation and central bank interest rate policy theyre going to move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies.
Though this anticipated shifts may be more protracted than originally expected we continue to see some green shoots during the second quarter client demand accelerated and we garnered one $6 billion in net long term inflows into our active fundamental fixed income strategies, which is in addition to the $2 billion of fixed income <unk>.
Flows achieved.
Active inflows were driven in part by me by municipal bond strategies delivered through our mutual fund and our SMA platforms, we rank in the top five overall in munis and number two for high yield munis were also well positioned in SMA with over 50 strategies placed on more than 80 broker dealers and <unk> platforms.
Andrew: Our retail SMA offering has rapidly expanded to over $25 billion and has had an annual organic growth rate of 28%, making it one of the fastest growing in the industry.
We're also positioned with fixed income strategies, and our institutional channels globally and this quarter, we had solid net inflows driven by investment grade strategy sourced in the agent region, we remain well positioned across the risk and duration fixed income asset classes and have plenty of reasons to be optimistic about our ability to capture flows as we can.
Andrew: Turning to generate investment performance.
Moving on to private markets here, we also maintained momentum in the second quarter recording net long term inflows of $2 $6 billion driven by the strength in our credit strategies, notably bank loans and CLO is we also saw modest.
Positive flows into direct lending as well as continued inflows into N Kraft, which is our non exchange traded REIT focused on private real estate debt.
This fund has maintained good momentum in the U S wealth management advisory space since its launch last year.
It's important to note that our global real estate team is over $5 billion of dry powder to capitalize on opportunities emerging from the market dislocation over the last several quarters.
Picking up on Asia Pacific managed assets, we generated exceptionally strong net long term inflows of $6 <unk>.
$7 billion in assets managed in this region.
This was led by our China, JV, where our net long term inflows of $8 $5 billion in the second quarter surpassed the full year of 2022 and 2023 flows combined.
Flows were driven by our strong performing fixed income and balanced strategies, where demand returned from investors seeking higher returning fixed income products, given the low rate environment in China.
Andrew: We anticipate that this dynamic will continue to play out in the coming quarters, given the evolving economic environment in the market. We also launched four new equity products this quarter in China, which added $200 million of flow during the period. Additionally.
Andrew: Additionally, as part of a collaboration between our China, JV and global ETF team, we launched in June Europe's first ETF linked to the Chi next 50 index, which is a fund with unique access to long term growth potential in China. The ETF market in China has seen rapid growth recently, and we are uniquely positioned to.
Gained share and be an early mover and innovator in this space.
Picking up on multi asset related capabilities as noted we saw modest net outflows attributable attributable to lower fee quantitative strategies.
And finally, the relative pressure on active fundamental equity flows did continue however, as I pointed out previously we have seen moderation, namely in the global international and emerging market segments net outflows in these strategies have slowed during the past several quarters to $1 billion to $2 billion in aggregate, which is <unk>.
Lower than the 2022 quarterly peak outflows, where we saw $6 billion.
A continued bright spot in our active fundamental equity capabilities has been our global equity and income strategy, which is among the top selling active retail funds and the growing Japanese market. This fund delivered an incremental $1 $2 billion of net inflows in the second quarter and its rapid rise in AUM has placed it in our top 10 active <unk>.
Equity funds at Invesco overall, we're confident that the high quality active equity management will continue to be an area of significant portfolio allocations and it's a reason that we are so acutely focused on investment quality and performance in this area.
So moving on to slide five.
Andrew: Chart provides an alternative aggregation of our AUM and our flows to provide you with additional context on our results from a geographic perspective, you can see that we delivered solid net long term inflows across all three regions with particular strength in Asia Pacific, where we had over $10 billion sourced from clients in these markets.
Strong growth in China was augmented by continued momentum in Japan, where we have seen institutional demand for fixed income, most notably investment grade as well as the continued retail demand for the aforementioned global equity and income strategy.
It's important to note that the views that this view of the Asia Pacific region is a more holistic measure of the scale of our business in the previous slide the AUM and flow numbers not only include the products that we manage in the region, but also the breadth of invesco. Other products managed globally that are sold into the Asia Pacific market.
An additional key takeaway from slide five as depicted in the chart at the bottom center of the page here you can see the significant improvement and return to positive net flows and our overall active investment strategies. This cuts across all asset classes public and private markets. Furthermore, you'll note the graph on the bottom right of the page.
Andrew: The positive flows and strong improvement seen in our institutional channel. This is driven by demand pick up across both public and private credit.
So moving forward to slide six for an update on investment results as I have reiterated several times. This morning investment performance is a top priority of our firm. This slide shows our overall results relative to benchmark and peers as well as our performance in key capabilities, where information is ratably comparable and more mean.
<unk> photo driving results.
Investment performance was solid in the second quarter on a one three and five year basis overall performance improved incrementally from last quarter with $70 65, and 76% respectively of our AUM, beating its benchmark. Additionally on a one year basis, we have improved and we now have nearly 70% of our AUM in the top.
Half of peers and 45% in the top quartile peers.
At the asset class level, we continue to have excellent fixed income performance across nearly all capabilities time horizons supporting our strong conviction in our ability to attract flows as investors deploy money into these strategies, specifically, 92% of our fundamental fixed income capabilities are beating their benchmark with 80 <unk>.
3% of our AUM in the top half of peers on a five year basis, we're acutely focused on improving fundamental equity performance and have made been making progress here as well half of our funds are now performing above benchmark on a one year basis with 52%, beating peers on a one and five year basis.
So hopefully the overall additional context into more detailed disclosures that we've shared today and last quarter have further clarified our results outlined the significant opportunities that we have before us and provided more clarity on our approach to capitalize on them over time, so with that I'm going to turn the call over to Alison to discuss our financial results.
<unk> for the quarter and I look forward to your questions.
Alison: Alright, Thank you Andrew and good morning, everyone.
If we get them again on slide seven with our second quarter financial results.
Total assets under management at the end of the second quarter wherever one seven trillion dollars $53 billion or three 2% higher than last quarter and at a record high for endoscopy.
Higher markets account for $27 billion of the increase while net long term inflows drove a $16 7 billion dollar increase in AUR during the corner.
Of the 27 billion dollar increase due to higher markets 24 billion was driven by Etfs, including $21 billion I think he keeps him.
As Andrew noted net long term inflows were strong at $16 $7 billion, which represented an organic growth rate of nearly 6%.
We had long term net inflows across most of our investment capability E.
E T F N plus excluding the Q2 Q4 $12 $8 billion in the second corner.
APAC managed generated $6 $7 billion in net inflows private market strength to $6 billion in net inflows and fundamental fixed income had $1 $6 billion in net inflows.
Partially offsetting this was $6 $3 billion in fundamental equity net outflows during the corner.
Average assets under management grew $56 million or 3.5% corner by corner to one point X seven trillion dollars.
Net revenues adjusted operating income and adjusted operating margin improved from the first quarter and I'll cover the drivers of that improvement shortly.
Adjusted diluted earnings per share was 43 cents for the second quarter versus the prior quarter Etfs or 33 cents.
Alison: We further strengthened the balance sheet during the second quarter by paying down the credit facility from $368 million drawn at the end of the first quarter to zero drawn at the end of the second quarter. We ended the quarter with net debt of nearly zero and we're on track to remain it nets out to zero or better in the second half of this year.
As a result, we do expect to resume share buybacks in the third quarter.
Moving to slide eight as we've discussed in prior call secular shifts in client demand have altered our asset mix and net revenue yield as our process capabilities has allowed us to capture evolving client product preferences.
And this has been increasing like captured in our results.
Our portfolio is better diversified today than four years ago, and our concentration risks and higher fee fundamental equities and multi asset products has been reduced.
Alison: These dynamics should portend, well for future revenue growth and marginal profitability in Paris that affirm is better positioned to navigate various market cycles events and shifting client demand.
Alison: One other element to note on this slide are the current net revenue yield trends are ranges by capability are representative of where the net revenue yield.
Have ranged over the past five quarters, and we know the net revenue Youll drivers and we're in the range the yields have trended more recently.
This should provide you better visibility on where current net revenue yields are running by capability.
Yeah.
Alison: Turning to slide nine net revenue of $1 $1 billion in the second quarter was $33 million higher than the first quarter, a 3% increase and nearly unchanged from the second quarter of last year.
The increase from last quarter was largely in line with a 3.5% increase in average AUR from quarter over quarter.
Investment management fees were $27 million higher than last quarter, driven by higher average AUM, partially offset by the aforementioned AUR mix shift.
Her pharmacy are $16 million higher than the first quarter due to seasonality as we typically see an increase in performance fees in the second quarter as compared to the first quarters.
The increase in performance fees, but primarily driven by private real estate and our China JV business.
Total adjusted operating expenses in the second quarter were $750 million, a decrease of $7 million or 1% from the first corner.
Compensation expense was $1 million lower than the prior year.
The benefit from lower seasonal related compensation expenses in the second quarter was offset by higher compensation related to higher revenues in the second quarter, including higher performance fee related comp.
G&A was $7 million lower than the prior quarter as costs associated with our alpha platform implementation increased $7 million in the first corner of $12 million in the second quarter, which was more than offset by lower professional related fees in the second quarter.
Going forward, we continue to expect Alpha related one time implementation cost to be approximately $10 million per quarter for the remainder of 2024 with some fluctuation quarter to quarter.
Continue to update our progress on the implementation and related costs as we progressed through the implementation.
On a year over year basis total adjusted operating expenses were $12 million flatware, adjusting for $27 million related to executive retirements and organizational change it related expenses in the second quarter of last year, largely driven by lower G&A expenses.
Quarter over quarter positive operating leverage was 400 basis points, driving a $39 million or 13% increase in operating income and a 270 basis point improvement in our operating margin to 13, 9%.
The effective tax rate was 22, 1% in the second quarter, we estimate our non-GAAP effective tax rate to be between to be between 23 and 25% for the third quarter of 2020 for the actual effective tax rate can vary due to the impact of nonrecurring items on pre tax income and discreet tax items.
Alison: Now I'll finish on slide 10, we continue to make progress on building balance sheet strength in the second quarter at the end of the first quarter, we had $368 million drawn on our credit facility as we redeemed the $600 million in senior notes that matured on January 30th.
And the first quarter in the seasonally high cash usage corner.
We ended the first quarter with net debt of $362 million during the second quarter, you pay down the credit facility to zero and improved our net debt position to nearly here at.
Both results were ahead of our expectations.
These actions resulted in an improvement in our leverage ratios and we're now down to a leverage ratio excluding the preferred stock.
0.28 times, a significant improvement over the past several years.
Given these results, we expect to maintain or improve our net debt position going forward. We're also in a position to begin a more regular stock buyback program in the third quarter.
Initially, we expect to buyback around $25 million per quarter, depending on market conditions, we expect our total payout ratio to move into the 50% to 60% range, which we will continually evaluate.
To conclude the resiliency and strength of our firm's net flow performance as evidenced again this quarter. We continued to make progress on simplifying the organization and building a stronger balance sheet, while also continuing to invest in areas of Pratt.
We remain committed to driving profitable growth, our high level of financial performance and enhancing our return of capital to shareholders.
And with that well open up the.
Call It a Q&A at the operator, we'd like to open it up.
Yeah.
Sure at this time, if you'd like to ask a question. Please press Star then one you will 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 Glenn Schorr with Evercore. Your line is open.
Hi, Thank you.
Just a couple of qualifiers.
The fee rate came down the fee rate range came down on Etfs and multi asset I just want to make sure that first bullet says basically that that is a result of ongoing mix shifts that not some actual fee adjustments correct.
That is correct when we continue to see within both of those capability categories. Just continued mixed across the product spectrum, there no real fee adjustments.
Okay Cool and then maybe just a little bit more color you've made to leap forward leaning comments that were interesting one was related to the green shoots for fixed income I didn't know if that was related to RFP is picking up and and the other one was on the APAC close and in China, specifically and you said you.
Speaker Change: This dynamic continues to play out so I wonder if you could expand on those two comments. Thank you.
Yeah, maybe I'll start Glen Thanks for the questions on the fixed income side, it's partially RFP volume, it's partially flow volume.
Speaker Change: Partially demand.
That we're hearing towards a longer duration assets moving away from some of the short term fixed income and that's happening on both the retail and the institutional side of things. So if you want to add anything on fixed income I'll come back to.
And then on Asia, and China in particular, yeah, we're seeing very very strong demand right now it's been principally in the fixed income and fixed income plus which is essentially balanced a little less on the equity side.
But the flows have been quite strong and we think some of the some of the developments in China on the economic side and some of the market perform.
Pending well for.
Speaker Change: For client activity in China.
Thanks, Andrew.
Thank you. The next question comes from Brennan Hawken with UBS. Your line is open.
Good morning, Thanks for taking my questions.
Wanted to drill into the distribution and servicing fee dynamic.
It seems as though this has been a trend towards maybe on a net basis, you know a a bigger and bigger headwind from net distribution.
Is this similar to what we're seeing on the fee rate side, where it has to do with mix shift and away from products that have some distribution revenue components in and maybe.
Speaker Change: Such as Etfs, you know less less of that benefit and therefore somewhat sustainable.
A good question and good morning Brendan.
I would say maybe somewhat but the way I would think about it and just keep in mind last quarter, we had a real anomaly as it related to the proxy costs and that you saw coming for best service and distribution fee revenue and then offset on the third party side and so I feel like you almost have to throw out last quarter, a little bit, but as you look at the relation.
Ship across a series of quarters.
I think it's important to focus on the relationship between service and distribution fees and third party distribution Contra revenue.
Because there's such a pass through between those two elements and then looking at that as a percentage of management fees. It runs relatively consistent in that 13% to 14% range.
Which I think we're finding to be a better relationship than just a third party as a percentage of management fees and but I do think there is some element of that mix shift in there and to focus on as you think about that relationship going forward.
Okay, Thanks for that Allison and.
How should we be thinking about the lower professional related fees and G&A I believe you said, that's what drove our G&A to be a bit lower here. This quarter is that sustainable could you maybe give us a little color and thinking about.
That as a potential tailwind going forward.
I don't think I would think of it as a tailwind so much as those types of expenses that are going to vary quarter to quarter. As you have yeah everything from legal consulting outsource costs for implementation cost of various projects. We've been trying to provide transparency into the alpha implementation, but that is of course.
Not the only thing wherever working on as we think about.
Just started for all platform.
And systems, so I wouldn't think of it as a tailwind, but I do you know you you should expect a little bit of variability in that line item corner to corner travel than their entertainment client entertainment all of it.
Okay. So just basically a lumpy thanks for taking my questions.
Sure.
Yeah.
Thank you. Our next question comes from Bill Katz with TD caller. Your line is open.
Thank you very much I was wondering if you could unpack some of your comments around sort of diving a little bit more into retail democratization of beyond maybe what what else you're working on and are there any incremental distribution relationships that maybe on the horizon.
Yeah. Thanks, Bill, it's Andrew I'll start.
The the most recent has been in real estate debt and so that credit funds that real estate credit Fund was was launched about a year ago. It's been added to two major wealth management platforms over that period of time, which is which is quite fast.
Along with the several dozen of of other related platforms for our EIS and the like so between the real estate equity and real estate debt funds. You know those are the two principal things. We're focused on we also have some alternative credit strategies in the market, but the progress on real estate that the demand from clients not just here.
In the U S and in the wealth channels, but around the world has been has been quite strong.
Okay, and just as a follow up coming back to a capital return. Thank you for the updated guidance. So as you think about strategically from here is it now more of a capital return story as you normalize and grow earnings or is there a I potentially increasing EBITDA.
Hey to maybe bulk up our incremental growth, particularly until iterative side, just trying to understand how we should think about the durability of that capital return.
Sure I, you know I'd say our comments there are really consistent with our past comments, it's not one or the other but yeah. We remain we want to be well positioned so that we can be opportunistic for both and given some of the balance sheet challenges of prior years, it's been hard to be opportunistic now we're in a position where we want to really stay focused on.
Speaker Change: Returning capital to shareholders and.
Remaining open to where we may have the opportunity to fill out some capabilities consistent with past conversations around that and so getting.
Getting the balance sheet back to a good healthy place gives us the opportunity to return more capital to shareholders and consistent with our earnings improvement and we're going to stay focused on earnings improvement, we're going to look for opportunities to reinvest in ourselves to drive that organic growth I think we've demonstrated and.
We certainly have the ability to do that with the breadth of our organic growth over the last five years.
But we remain open minded and thoughtful as we see any opportunities to fill in gaps that exists on the platform today.
Do you want to build cash and return capital to shareholders.
And.
Excellent. Thank you.
Thank you and our next question comes from Craig Siegenthaler with Bank of America. Your line is open.
Thanks, Good morning, everyone. We wanted to come back to the 6% organic growth rate in the quarter, given the sizable ETF inflows versus net redemptions in fundamental equities, how did organic revenue growth trend relative to the 6%.
Speaker Change: How is the organic revenue growth trending relative to the 6% I just want make sure I'm understanding your question.
Yeah House, and so on a organic revenue basis, and it's tough for us to do it because we just have by kind of major asset class. We don't have the underlying funds, but I wanted your perspective.
Of how the organic revenue growth was trending relative to the 6% Omar.
Organic growth.
I think.
I would say well what I would try to do I'd point, you back to the disclaimers on Friday, where we tried to really narrow and give you more in more detail and as much precision as we can to help guide exactly that.
We narrowed the net revenue yield a range is that you'll see there and in the commentary on the far right tried to give you even a further direction around where we're trending in that so there's a fair amount of precision relative to a U S.
And any you know I think in any given quarter and obviously, our focus is to drive that organic revenue growth.
And that's what we've been highly focused on it has been it has been challenging in recent years, given the pressure on fundamental equities and the trade on the ETF side as you know I would say, it's trending better at trends almost neutral at this point in a lot of different ways, but I think you can start to track it and you shouldn't be able to start to track at much more.
Asleep.
With these new disclosures.
Yeah, I would only add that the.
Some of the headwinds that we've been facing over the last couple of years, a couple of them are starting to abate a bit.
In particular, you know the flows out in Asia and in particular, China and flows into alternative credit like bank loan.
Our our our net positive towards but what you were asking analysis it was describing.
Thank you just for my follow up it's on the State Street Alpha implementation. So when will all see integration expenses start to go down I think you have that $10 million target, but I wanted to understand when they would start to go down and when do you think there'll be totally gone.
So I think the best way to answer that question as it relates to implementation is just project timing and overall and.
We have been Ah Yeah, we will continue to be in implementation mode for <unk> through 'twenty, five and really through 26, we expect to transition or a U M onto the alpha platform in a series of waves and those waves are gonna began in the fourth quarter of this year and then they'll run through 2025.
That implementation is really we're in the testing phase and we're in the learning phase, we're really working through planning for these various waves are.
And you know I think implementation will run through at least 25, and then we will be working on decommissioning testing and running parallel through 26 on the other side of that.
Thank you Allison.
Thank you and our next question comes from Patrick Davitt.
With autonomous research your line is open.
Hey, good morning, everyone, I'm, telling them about queued up fee rate trajectory, obviously, a little bit better in the quarter, but I imagine the April draw down was probably a bit of a drag on it. So could you speak to the monthly cadence through June and maybe how you feel about the <unk> run rate give.
How you exited two Kim thank you.
Yeah, I think I forget the last one the intra quarter monthly and maybe more a little bit on the exit rate and probably to get at your question.
Within the months within the weeks within the day that it can vary so much as markets.
<unk> fluctuate so much and I think hopefully I'll say you've seen in the additional disclosures in the back just further detail around the various market indices that really impact us given our global footprint, we have such a diversified set of exposures that you can't.
You can't really manage out which markets meeting and what direction on any given day, and so and I would point to the exit rate, which the exit rate for the second quarter was around 25.2 basis point, so a touch lower than the average net revenue yield for the quarter.
Of course, even in the first few weeks of July App. We continue to see you know puts and takes in all of that so it's very difficult to predict exactly where it would end up.
I continue to come back to we're focused on driving revenue are focused on driving organic revenue.
And that revenue yield is simply a function, it's math of where the flows are coming from the organic flow rate of 6% is.
Something we're quite proud of them and I think a testament to the breadth of our platform and how aligned it is with client demand.
I think what we've all seen in the markets over the last very short period of time in the last week or two some broadening out which I think is something we've all been looking forward to for a long time.
And one of the reasons why we continue to try to outline the diversity of our of a range of assets and investment capabilities and if that prolongs that should be a net positive for us.
Makes sense. Thanks, and then a broader question, it's obviously nice to see the big recovery in China flows, but the political rhetoric, because obviously getting pretty heated with China. It seems both parties it'll be a pretty popular punching bag. So I know, it's tough to gauge things these things out for sure, but what assurances do you have or could you could you give.
That the JV would be safe broker broader trade war between the U S and China. Thanks.
Speaker Change: Really.
Focused business and our partner.
There is a the relationships very strong and.
Oh, I'm very resilient I don't know if you'd add anything yeah, I think I'd, just underscore that by saying that the flows and the performance of the JV are entirely dependent on the performance of the Chinese domestic economy, so to the extent the trade war.
You know it is challenging for the domestic economy, there that would put pressure on overall a U M M. Three bed flows and market performance there.
But that like wise, probably would put some pressure on them on our investments in the United States as well, so I think about it less as a political football and more are highly dependent on the strength of the Chinese economy.
Thank you.
Thank you. The next question comes from Alex Blaustein with Goldman Sachs. Your line is open.
Hey, good morning. Thanks for the question I was hoping we could dig into the strategy around in vascular ETF business, a little more broadly.
So you guys could you use your really good growth there and that's been consistent and it's nice to see it broaden out a little bit but to your point earlier the fee rate continues to sort of shift lower year. So as you look further out can you maybe walk us through areas, where you're seeing sort of the best opportunity for invesco to broaden your ETF, we're getting growth, even more and perhaps talk a little bit about some of the existing and new.
Initiatives that could maybe stabilize and improve the fee rate as you look further out.
Yeah. Thanks for the question and yeah. The growth as it has broadened out I think we have something like 10 Etfs just in the U S. A that have had more than $1 billion of inflows.
You know in the past six months year to date, so that the business is starting to broaden out some of the key growth strategies that we have obviously as the market starts to adopt active etfs.
Especially here in the U S market. That's a key area of focus we were one of the early movers in active Etfs are we have a little over $10 billion in that space, but more.
More importantly, we have around $30 billion of assets that are affiliated with our investment teams playing some role in that investment strategy and we think that's going to continue to grow as the vehicle remains popular but but more than passive gets put into those vehicles either through fundamental or quantitative techniques or.
Or both.
The other element of growth for us is beyond the United States, and we talked a little bit about our expansion in our growth and in Europe, which is now over 100 billion in a U M and you can see the demand starting to grow throughout Asia, China and Japan in particular, so geographically we feel like there is earlier days in some of those markets out.
Side of the U S.
And then our lineup which has been.
Historically heavy on equities are one of the areas of greatest growth has been in the fixed income space and we continue to think that passive fixed income alongside fundamental is going to be a pretty significant significant area of growth going forward and then as alternative strategies and a particular commodities.
Continue to or find favor back to the market and things like alternative credit and bank loans continue to grow and demand, we're very well placed in those spaces.
So the growth has been good I think the growth can continue to be as strong and just you know.
More diverse as we as we go ahead.
Great. Thanks, how about the last thing I'll, just say Oh, that's flows but on profitability.
The Etfs, our business continues to scale, well and the profit margin expansion from that business and its contribution.
To go from strength to strength, so we have a very scaled platform.
That does deliver accretive profitability.
Great. Thanks, Andrew that's helpful. Alison one for you just to round out the G&A discussion a couple of puts and takes as you highlighted earlier in the quarter, but zooming out kind of what are the expectations for maybe G&A for the full year and as Alpha continues to kind of linger through 2025, any sort of early thoughts on G&A outlook for 2025 as well thanks.
Short you know I think I'd go back to our guidance for the year, which was and we said all things being equal back on December 31st Fund AUM at December 31st of.
Overall expenses might be in the $3 billion range.
Obviously.
Speaker Change: We've done quite a bit better in terms of a U M. Since that guidance and you can see that impact over all of them on comp expense in particular.
Given the alpha guidance of around $10 million, plus or minus a in terms of implementation cost each quarter.
Speaker Change: Whilst being relatively consistent and equal and not a lot of puts and takes other that and you know back to Brennan's question, I mean things are a bit lumpy quarter to quarter and I just can't predict the lumpiness I'd come back to.
Speaker Change: Comp to revenue and I know I'm answering more than just G&A, but we manage expenses and totality and come to revenue is trending above 42% for the year I think it'll be closer to a 43% for the year.
And the rest I would say relatively consistent absent some lumpiness, but I can't predict quarter to quarter, so not not entirely precise but about as precise as I can get and I wish I knew would real precision as well, but I think that gives you a reasonable expectation for the year.
Got it that's helpful. Thank you.
Yep.
Thank you and our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks, Good morning, Andrew I wanted to follow up on one of your comments from I guess it was slide three where you talked about.
Organic growth I mean that seems like something you would always be focused on so curious if there's anything more.
Behind that in terms of whats, maybe youre looking to exit certain rfps or businesses or is it just more prospectively like what business Youre looking to take on versus what you might have done before.
Yeah, I think there's a couple of the areas that I that I called out and I'd I'd emphasize further and thanks for the question picking up on what I, just said about Etfs, the ETF vehicle and the SMA vehicle as we are growing in size.
Scale, well and so our focus on profitability there is continuing to to utilize technology more continuing to drive the expense base or at least hold the expense base flat as we continue to grow and see flows and revenues generated from those vehicle choices and then in fixed income.
Speaker Change: And in multi asset about a year ago, we brought together multiple investment teams in those two respective areas and we believe as those capabilities continue to be in demand from clients.
Similar to the vehicles that I just described the scale well and we feel like we have a pretty complete product range in a pretty complete set of investment capabilities that we can just hopefully layer on assets and revenues to expand profitability. So those that's what we mean by that specific area.
That's helpful. And then just as a follow up I was hoping to get an update on the mass mutual relationship.
In terms of what.
I'm, hoping you will see them build the alternative franchise doing also tapping into your product set into their broader distribution force if there's been any update there.
Yeah, I mean, it continues to be a really strong relationship that we value tremendously.
You know as we've mentioned in the past and it continues to be.
A significant focus for both us and them is growing out the private market set of capabilities.
And currently through their general account and otherwise you know they have three to four times the amount of capital invested in.
In our strategies that we hold on our balance sheet, and then and that's been a really important part of the seeding and co investing of some of the strategies that I talked about before that are starting to grow the wealth management platforms in particular and in real and real assets in terms of of we continue to progressing.
Grow through the traditional insurance channels and offer our products and capabilities.
One of the leading providers are on.
Unmask Mutuals platform and that just continues to be an ongoing focus.
Speaker Change: All of ours, and that's across the complete set of investment capabilities, but in particular things like our model portfolios and Etfs, where we see their us there, there's growing demand and significant opportunity for invesco.
Yeah, I would just I mean, they continue to be great partners investing them across a variety of capabilities from our real estate to our CLO capabilities in particular at and just strong partners as we evaluate future product launches and am as Andrew noted they've really amplified our ability to.
Leverage our own balance sheet to get products to market faster.
Great. Thank you Andy.
For other sources and needs as well.
Okay.
Okay. We have time for one more question. Our last question comes from Ken Worthington with JP Morgan Your line is open.
Great. Thank you for taking the question and squeezing me in on you saw a nice recovery in institutional flows can you size. The institutional pipeline. If you used to give one not funded and tell us a little bit about the major buckets like factor in solutions that hasn't come up in conversation thus far.
Sure I'd say the institutional pipeline is it's pretty consistent with last quarter. It stays around that kind of 14 $15 billion range. You know I think what we continue to find us and the pipeline is and okay, but not excellent measure of what we can explore.
And just given the breadth of our flows that come in and outside of the pipeline. So you saw the strength in Florida over the last quarter or so and the pipeline has been relatively consistent over the last few quarters and it seems to be about 30% of our flows that come from the pipeline.
The rate continues to be on the high side, there as well as we've said for a long time. It ranges in the 25 to 35 basis point range and we continue to see it really on the relatively high side. So.
Speaker Change: I think no real change one way or the other it continues also to be well diversified across regions and we see I think really the strength of our institutional flows coming from a variety of regions as well.
Speaker Change: The only thing I'd add is as we've said on previous calls I think things have slowed down by about this for the industry by about a quarter or two on fundings I think some of the progress. We are seeing is that maybe that pace is picking up a little bit the strengths in particular on on our public and private credit and as Alison said.
It's really cross regional but I'd say Asia and Europe in particular seem to be.
Have picked up at a at a greater pace.
Greg has really picked up in the quarter relative to the prior five quarters and redemptions are a little bit better, but it's really the strength is really driven by these cross sale.
Awesome. Thank you very much for the color.
Thanks, Tim Operator, we do have time for another question.
Okay and our next question comes from Microcircuits with Morgan Stanley. Your line is open.
Great. Thanks, so much for squeezing me in just a question on Japan I was hoping you could elaborate on your footprint and business in Japan today, hoping you could talk a little bit about how that business has grown and then looking out maybe you could talk about your outlook and how you see the opportunity evolving in that marketplace, just given the shift in the market out of deflation in some of the recent regulatory changes to expand that Isa.
Tax exempt accounts, Ah, where where what sort of products and strategies do you expect to see growth evolving in that marketplace and also the opportunity for Etfs as well. Thank you.
Yeah. It's a great question. Thanks, Thanks for that let me start our profile is as I mentioned, it's we've been there for a long time, it's about 30 years old we have around $60 billion of assets managed assets managed.
For Japanese investors, its a mix of insurance institutional and retail wealth platforms. The greatest area of growth in the last little while has been in retail where we've actually we were talking before about this global equity income strategy.
So it's been a it's been a good long term business for us that's really accelerated in the last year or so.
With and for some of the reasons that you described we remain really optimistic about the reforms and changes that are happening there not not just <unk>, but.
The overall market's inflation starting to come into play more excitement that we've seen up close and personal from investors getting a re educated and re interested into the equity markets are Etfs is going to be an area of increased demand and we're starting to further build out our position there.
M E T apps, but it's traditionally been a fixed income market for us and a and Anna on equity market as well private markets are also starting to pick up so it's really across the piece and we have a really really developed position and brand and reputation in there.
Great. Thank you so much.
Hey, operator, we do have time for one more question.
Okay. The next question and our last question comes from Brian Bedell with Deutsche Bank. Your line is open.
Oh, great. Thanks, Thanks for English excuse me in I'm, just coming back maybe Andrew to a comment you made earlier in the presentation about the focus on performance and the fundamental equities you know clearly that's the most accretive area from a.
Our net revenue yield perspective can you talk about how you're leveraging the improved performance in the sales process across the franchise for fundamental equities and any conviction around getting back to sort of flow neutral maybe maybe aside from the developing markets on AR and then on the active Etfs I realize it's still very small.
But if there's any potential to grow that relative to mutual funds you know make that actually improve the ETF fee rate of the 14 to 16 basis points. If you have any traction there.
Yeah, Let me start with the back end of the question and then I'll go to the front, yeah, we definitely see.
Demand picking up for the active and the active ETF space right now it's been largely into active fixed income and we launched some some new strategies that were options oriented strategies on equities, but that's driving off of a more passive benchmarks I think in time fundamental active strategies or some combination.
Speaker Change: A fundamental and quantitative active strategies are going to find their way into the active ETF space and we're very much in the development stage of that right now and so I think that that's something to watch over the next couple of years and the more short run on improving our net flow rate. It is going to get driven in the first instance by improved investment performance.
And we are starting to see that in particular in the domestic equity categories U S.
As well as other developed markets around around the world, but it's also going to need to come with some more demand from clients and.
And that we really havent fully seen yet redevelop in the in the U S wealth market every day, we're focused on it our sales teams working closely with our product design teams and our investment teams. Both on the retention side, where there's performance improvement that we need to be in front of clients with.
But also growing the gross sales rates are in the marketplace. So I think look I think the performance is improving and that's a significant step in the right direction that.
That we expect going forward.
I would just add to that I mean, where we're focused on outperforming industry as best we can there industry expectations, given the secular challenges and the and the chefs we continue to see from active to passive and the industry expectations are not not for strong inflows at when it comes to fundamental equity that said, we're looking to outperform.
In every aspect and so as Andrew noted, we're highly focused on investment performance.
Speaker Change: And where we can narrow those outflows are and turn it into something neutral and of course, we would ideally love to be in inflows and but we're going to focus on and taken every edge. We can there and really the building blocks to return that to a more stable position and in the meantime, I think we've been able to demonstrate the incredible.
Strength across every other capability that we have and that's really what's delivering that profitable growth and we're optimistic I mean, our expectation is we can continue to create the operating.
Margin improvement from here and we remain focused on every element of that and as I said before I think that the broadening out of the markets.
Essentially into value market small mid cap non U S. I mean, we have very strong investment performance in those areas. So with some pockets of demand returning.
We're cautiously optimistic.
That's great color. Thank you very much.
Okay. So in closing I really want to mention that.
Hopefully it came through that were well positioned to help clients navigate the impact of evolving market dynamics and subsequent changes that are happening in their portfolios.
As market sentiment improves this should really translate to even greater scale performance and improve profitability and given the work we've done to strengthen our ability to anticipate understand and meet the evolving client needs I can say I'm very excited for the future of Invesco I want to thank everybody for joining the call today and please continue to reach out to our investor.
Relations team for any additional questions. We appreciate your interest in Invesco and look forward to speaking with everybody again soon.
Thank you and that concludes today's conference you may all disconnect at this time.
Yeah.