Invesco Ltd (IVZ) — Q1 2015 Earnings Call Transcript

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Thank you for joining us today. I'm here with Loren Starr, and we will go through the presentation available on our website if you would like to follow along. We'll discuss our business results for the first quarter, with Loren providing more detail on the financial results, and then we will address any questions you may have. To start, I want to highlight our operating results for the first quarter, which you can find on Slide 3. Our long-term investment performance has remained strong, with 81% and 80% of our actively managed assets outperforming peers over the last 3 and 5 years, respectively. This strong performance, coupled with our comprehensive strategies and solutions, led to long-term net inflows of $10.3 billion in the quarter. Our adjusted operating income increased by 3.1% compared to the same quarter last year. In light of continued confidence in our business fundamentals, we're raising our quarterly dividend to $0.27 per share, which is an 8% increase from the previous period. Additionally, we returned $185 million to shareholders through dividends and buybacks this quarter. Our assets under management reached $798 billion, up from $792 billion in the previous quarter. Operating income was $374 million, compared to $373 million last quarter, and our earnings per share remained steady at $0.63. Before handing it over to Loren for the detailed financials, I will quickly review our investment performance as detailed on Slide 6. Our commitment to investment excellence and maintaining a strong investment culture has allowed us to sustain solid long-term performance across the firm. Looking at our entire firm, 81% of our assets performed in the top half over a 3-year period, and 80% did so over 5 years. There has been significant discussion in the market about the merits of active versus passive investing. At Invesco, we take a balanced view on this issue. Clients seek improved returns, reduced volatility, and reasonable fees. Our ongoing goal is to assist clients in meeting their investment objectives through a diverse array of capabilities and vehicles. We adopt a high-conviction approach to both our active strategies, characterized by high active share, and our passive strategies, driven by strategic data. Separately or together, these strategies provide effective tools for constructing portfolios that align with client investment goals. With our firm’s high-conviction investing approach and extensive range of capabilities, Invesco is well-equipped to help advisors and clients develop better portfolios. We are creating a series of white papers to provide greater clarity on both active and passive strategies, aiding investors and clients in building portfolios that better align with their objectives. Our dedication to fulfilling client needs through a broad spectrum of active and passive capabilities contributed to strong inflows in the first quarter. On Page 8, you will see that both active and passive flows were robust during the quarter, underscoring our ongoing commitment to delivering strong investment results and excellent client outcomes. Notably, these are the highest active flows we've achieved in two years. We also experienced strong inflows from our institutional and retail channels across all three regions during the quarter. The figures on Slide 9 demonstrate the broad diversity of flows across our global business, highlighting strengths in GTR, fixed income, quantitative equities, real estate, and International Growth, among others. The institutional pipeline of won but unfunded mandates is at an all-time high, featuring a diverse set of investment capabilities. Based on our discussions with clients and others, we've pinpointed several key themes that will propel growth and enhance shareholder value in our industry over the long term. Invesco is well-placed to deliver for clients, which is central to these major themes. Our long-term investment performance has been recognized, with Invesco recently being named one of the top 3 fund families for 2014 by Barron's magazine and the only fund family ranked in the top 5 across 1, 5, and 10 years. We provide a comprehensive array of unique investment capabilities through vehicles that align with client needs. Our teams are experienced and stable, working in local markets around the globe, providing distinct perspectives across various market cycles. This positions us competitively and enhances our ability to deliver value to clients and shareholders. We are pleased with our results for the quarter. The strong inflows from the first quarter are continuing into the second quarter across our global business in both retail and institutional channels, particularly in EMEA and Asia-Pacific, along with a wide variety of asset classes. In April, we have already generated nearly $3 billion in net long-term inflows. These flows reflect our ongoing progress in delivering strong investment performance and addressing client needs with a full suite of strategies and solutions, positioning us for long-term success. I'll now turn it over to Loren for further details on the financials.

Thank you very much, Marty. Quarter-over-quarter, total AUM increased $5.9 billion or 0.7%. This was driven by market gains of $14.4 billion and long-term net inflows of $10.3 billion, which translates to an annualized organic growth rate of more than 6% on long-term assets. These gains were partially offset by negative foreign exchange of $9.5 billion and outflows from money market and the QQQs of $6 billion and $2.6 billion, respectively. Assets also fell by $0.7 billion due to the ETNs that did not come over as part of the transaction with Deutsche Bank that closed this quarter. Average AUM for the quarter was $795.4 billion and that was up 0.7% versus the fourth quarter. Our net revenue yield came in at 46.1 basis points, an increase of 0.2 basis points versus Q4. This was driven by higher performance fees in the quarter, which added 1.6 basis points. The increase was partially offset by a few items: 2 fewer days during the quarter; the negative impact from FX on product mix; and lower other revenues, which collectively reduced our net revenue yield by 1.4 basis points. Next, I'm going to turn to the operating results. Our net revenues increased $11.7 million or 1.3% quarter-over-quarter to $917.5 million, which included a negative FX impact of $20.9 million. Within the net revenue number, you'll see that investment management fees declined by $9.3 million or 0.9% to $1.02 billion. This was the result of 2 fewer days during the quarter and the impact of the strengthening dollar on our product mix. The decrease was partially offset by higher average AUM, and FX decreased investment management fees by $26.7 million. Service and distribution revenues declined by $4.3 million or 2%, also in line with day count. FX decreased service and distribution revenues by $0.7 million. Performance fees came in at $51.7 million, an increase of $32.7 million relative to Q4. Real estate amounted or accounted for roughly $35 million of the increase. The U.K. accounted for $10 million, and the remainder came equally from Asia and bank loan capabilities. Foreign exchange decreased performance fees by $0.6 million. Although very difficult to predict as we've discussed, for the remainder of the year, we'd expect performance fees to be approximately $5 million per quarter. Other revenues in the first quarter were at $31.2 million, a decrease of $2.9 million; the decline was largely due to a lower level of real estate transaction fees versus the prior quarter. Foreign exchange decreased other revenues by $0.2 million. Looking forward, we'd expect other revenues to be roughly $35 million per quarter. Third-party distribution, service and advisory expense, which we net against gross revenues, increased by $4.5 million or 1.1%. This increase was in line with higher average AUM. FX decreased these expenses by $7.3 million. Moving further on down the slide, you'll see that our adjusted operating expenses at $543.1 million grew by $10.4 million or 2%, relative to the fourth quarter. Foreign exchange decreased operating expenses by $11.2 million during the quarter. Employee compensation came in at $362.7 million, an increase of $15.7 million or 4.5%. This step up was a result of seasonal payroll taxes, variable compensations linked to performance fees earned in the quarter, and a 1-month impact of higher base salaries that became effective March 1. Foreign exchange decreased compensation by $7.3 million in the quarter. Given the anticipated drop in performance fees for the remaining quarters in 2015, we'd expect compensation to decline by approximately $10 million to $15 million in Q2 and then remain roughly flat during the remainder of the year. Note importantly that this guidance assumes flat markets and consistent FX to current levels. Market expense decreased by $5.6 million or 17% to $27.4 million. This decline was driven by a lower level of advertising in the quarter due to delays in the timing of certain campaigns. Foreign exchange decreased these expenses by $0.7 million. Consistent with our prior guidance, we'd expect marketing to run at about $30 million per quarter. Property, office and technology expense was $77.8 million in the first quarter, which was up $2.2 million. FX decreased these expenses by $1.3 million. Property, office and technology costs should run at approximately $80 million per quarter, again in line with our prior guidance. G&A expense at $75 million was down $1.9 million or 2.5%. FX decreased G&A by $1.3 million. Again, this is in line with our prior guidance and we believe G&A costs will average around this level through the remainder of the year. Continuing on down the page, you'll see that our nonoperating income increased to $4.8 million compared to the fourth quarter. The increase was driven by higher equity in earnings from unconsolidated affiliates, which benefited from favorable marks in certain of our Invesco private capital and real estate portfolios. The firm's effective tax rate on pretax adjusted net income in Q1 was 26.3%. With respect to our future tax rate, I need to point out that in Q2, we'd expect a one-time tax increase due to New York City tax legislation enacted in April, resulting in a 2-percentage-point increase in that quarter. The rate will then return to the 25.5% to 26.5% level through the last half of the year and going forward. Which then brings us to our adjusted EPS of $0.63 and adjusted net operating margin of 40.8%. Given the continued momentum behind our business, we believe we are on track to produce good margin expansion relative to last year. Given where we sit today, year-over-year incremental margin is at the high end of our 50% to 65% target. And with that, I will turn things back over to Marty.

Thank you. We'll open up to questions, please.

So if we normalize for day count and FX, what was the delta in the revenue yield excluding performance fees sequentially?

To normalize, you mean eliminating or taking out the impact of FX, which had a negative effect this quarter. The impact was likely around 0.3 basis points due to FX. This was balanced by a positive mix benefit in terms of flows, but overall, the contribution from non-U.S. higher fee products was diminished because of FX. I'm not certain if I have fully addressed your question, but I hope I covered some of it.

Yes. So basically, it sounds like what you're saying is, if we exclude FX and day count, we're probably looking at a flat to moderately improving revenue yield excluding performance fees, am I paraphrasing that right?

Yes. So yes, the day count impact was about 0.8 basis points. We talked about the FX mix being about 0.3 and then the other revenues were about the remainder. So that's the normalized elements.

Okay, great. And then on the performance numbers. The 3- and 5-year performance numbers have been really steady. But the last 2 quarters, the 1-year performance numbers have deteriorated a bit. And can you help us maybe understand what's driving that and whether or not this is a concern to you guys at this point?

Yes. For us and probably everybody, the 1-year numbers tend to be the most volatile. Largely, the movement in energy had some impacts on the number of the larger portfolios. That said, when we look at dispersion, dispersion's actually very, very tight on that shorter term number. So it's nothing that we're worried about at the moment.

First, just at a high level. You are one of the largest and most diverse franchises out there, but are there any manufacturing or distribution areas that you think might be worth addressing? And how do you view the decision to build versus buy, especially considering the growing importance of scale in the industry?

When we assess our organization today, our investment capability appears to be well addressed. The qualities of our team and the results they are producing are all exceptionally strong. The most significant organic development we have undertaken in the last three years has been in fixed income. Currently, the performance indicators are quite impressive. We noted three years ago that as we began this journey, our team has progressed further than expected in organic growth. I believe we are in a robust position there, and we do not perceive any gaps at this time. We will continue to enhance our existing strengths.

Okay, great. And then separately, just given kind of the pending money market fund regulatory changes, and any updates on kind of your plans on how you might potentially transition that business? And then stepping back, any shift in how you might be thinking about the money market fund business just from a strategic standpoint?

Yes. Again, really talented group that we've had, been in the business a very, very long time. I think you probably have seen, with some of the new regulation and some of the people we have been focused, you have 60 days and in shorter duration. We've had a fund in that space for 30 years. So, yes, we're naturally, I'd say, positioned, strongly there. We're also seeing institutional clients, they still want in short-duration, cash management and it's going to be bear markets and funds with separate accounts, it will continue to be there.

And I'll just say, we've had very productive dialogue with distributors of our traditional products in terms of other types of products that would be very interesting. So, we feel that the business is going to be quite resilient despite the regulation changes.

Could you provide more details on April and the institutional backlog? Specifically, is there anything different regarding the products that are either becoming a larger part of sales or, conversely, those that may be experiencing a slowdown?

Yes, I would say that in my nearly 10 years here, I've never seen such a broad and deep situation. We've experienced instances before with positive net flows across regions, but never all regions at once, both retail and institutional. Previously, when that happened, it was more limited in terms of investment capabilities. Right now, we're observing strong performance in areas like GTR, risk parity, international equities, real estate, and fixed income, along with all our quantitative capabilities. It's very comprehensive and robust. Typically, the first quarter tends to be one of the strongest periods for net flows for various reasons. While we can't predict the future, it appears that April is shaping up similarly to the first quarter, indicating that the outlook for the organization remains quite strong.

Great. That's helpful. Regarding the regions, everything appears positive, except for Canada, which was close to breakeven. Is there anything occurring there that could improve the outlook or indicate increased demand or product shifts?

Yes, there are two key points. First, our ETF business has become very significant. The ETFs are reinforcing our active management approach, and we are beginning to see that take shape. Additionally, we have introduced some well-considered products in Canada that should benefit our retail channel. Another crucial area of focus for us is the institutional business, where we believe we can achieve greater success than we have in the past. We are fully committed to improving this aspect in Canada and are optimistic about our prospects there.

I will point out that Canada was positive, even though it didn't show up. It rounded to 0, but they were positive this quarter.

On regulatory front, we're hearing whispers and some chatter from some of your competitors that the FSOC and other bodies are really starting to kind of focus in on the liquidity issue. And the fact that a lot of products are being marketed as liquid products, but the underlying assets can become illiquid quite quickly. Are you hearing similar issues, and is there any more color you can give us on where you think that trend is going from a regulatory standpoint? And what, if anything they could do, that could alleviate that issue, I guess?

Yes. I wouldn't classify it as whispers, rather it's an open dialogue. It begins with regulators seeking a better understanding at the FSOC level about how money managers oversee portfolios. Managing liquidity is not a new concept; it's a fundamental strength of the industry that has existed for a long time. The difference now is the increased oversight from the FSOC, which is educating other regulators who have an interest in this area. From an industry perspective, there are initiatives underway that aim to improve potential liquidity, and these are being addressed. There have been positive developments in the bank loan sector, and more progress is anticipated there. Overall, I believe it's a beneficial dialogue and an important one, with education playing a significant role. As an industry, we will continue to improve wherever possible.

Is there any sense that any regulatory changes or the outcome would be a significant negative for you from either a capital, I guess, some sort of capital issue or having some sort of reserves?

Yes. I would consider it an ongoing discussion right now. If your question assumes there's an issue, I can acknowledge there are areas for improvement on the margins, but that is typical across the industry. Therefore, I believe we are quite far from any regulatory changes since we are still early in the process.

It appears that Europe remains a significant growth area for you. This might seem like a naive question since you may point out that your AUM base is still relatively small. However, I have a two-part question: first, can you discuss the successes you've experienced there and how extensive they are? And second, given the pace of growth, are you encountering any capacity issues yet?

Yes, we've been discussing this area for some time, and it's not something that developed overnight. When we focused on it about 3 to 3.5 years ago, it was a broad initiative. Our product offering has been robust and strong, and our investment performance has been excellent. We also made significant improvements in how we serve our clients, which has contributed to this progress. Additionally, we revamped our servicing capabilities, which has been beneficial. The U.K. market has always been strong, and we worked on enhancing our position in the cross-border retail market across the continent, which has shown growth and continues to do so. Currently, we do not have any capacity issues. Furthermore, we believe there are opportunities for improvement in institutional areas, and you're beginning to see some positive results in our numbers, although we consider ourselves to be in the early stages of what we expect in the next 1, 2, or 3 years for institutional growth in EMEA.

And Bill, I will also just comment that, in terms of country-wise, Italy has been a big driver of some of the flows and success, but Spain as well. A lot of the dynamics that happened in Italy are now showing up in Spain. So Spain, Italy, Germany, and Switzerland are all contributing nicely, but Italy right now is probably outsized in terms of its contribution on a cross-border flow.

That's very helpful. And then, Loren, maybe just for yourself. I think you said you're running at the high end of your incremental margin. I just wanted to make sure I interpreted that correctly. From here you're at the high end or you were at the high end and, therefore, you're not going to sustain the high end?

No. For the full year, year-over-year, when considering our incremental margins, if everything goes well, we will be at the high end of that range in terms of delivering incremental margins.

You've talked about the efforts to increase traction at third-party distribution channels in the U.S. and I think you've been slightly frustrated by the progress there, given your strong performance. Retail flows were pretty robust this quarter, so maybe an update on how that's going, a little color on what's selling? And whether you feel increased brand recognition might suggest some sustainability there?

Yes, let me begin with the conclusion. Recently, we achieved significant brand recognition, ranking 8th, which is a remarkable improvement compared to 5 years ago when we were not even on the list. This is an important milestone. However, we still have not fully bridged the gap between perception and reality, which is an ongoing effort that tends to take longer than expected. Despite this, we are making good progress. If you examine the underlying fundamentals, alongside our diverse capabilities and performance across various platforms, things are getting stronger. Furthermore, as our distributors have undergone several changes and have become more organized, this development benefits us. We anticipate a greater impact from some of our key distributors than we might have expected 2 or 3 years ago due to these improvements.

Okay, great. And then staying with retail distribution. I think we can agree the independents and RIA channels are growing in importance. They're far more fragmented channels and so I think a lot more expensive to sell through. So any sense of how much of your retail flows have been going to those channels, and more broadly, how you're thinking tactically about selling into that channel without driving up cost too much?

Yes, we are focused on this channel, which is similar in various ways across the board. We anticipate continued growth, but currently, the output from this channel compared to the main sources is significantly different. However, we plan to keep our focus on this for the long term, and I believe you're pointing out that it's a prudent strategy, which we have been following and will continue to do so.

Marty, just on the alternative side, you mentioned that you feel like you have the products that you need. I just wanted to get a sense; when you see the demand in that product category, I know it's pretty diverse, but are you seeing more on the institutional side or you're seeing some uptake in some of the newer products on the retail side that's driving those flows?

I have a few comments, and Loren can add to them. Institutionally, real estate remains very strong for us, as do World Bank loans. Additionally, risk parity is performing well for our organization. Furthermore, multi-sector credit is gaining traction, and GTR has also been quite successful, with assets totaling around $5 billion in just about a year and a half in the market. This continues to be a focus for institutional investors. On the retail side, in the United States, we introduced a broad range of alternatives last year. We expect to evaluate its success three years from then. It's a lengthy process, and as Luke mentioned, distributors are slow to adopt. They anticipate that alternatives will represent 15% to 20% of a client's portfolio, but the available options in their channels do not meet that asset allocation target. This presents a headwind, yet products like risk parity and GTR are garnering significant interest in retail channels, and we have seen positive flows for them.

Okay, that's helpful. And then Loren, just a quick one. Buybacks in the quarter just picked up. Just wanted to get a sense, is that seasonal because of grants or is it just, given where your cash level is, the net debt, are you having more flexibility?

It tends to be a little seasonal as we've discussed in the past, because we have some of the restricted stock grants granted March 1, and we certainly do our best to eliminate the dilution associated with those grants as quickly as possible. So going into the second half, you may see the levels step down a bit.

First, cross-border. Having huge success in Europe, can you talk about the sales of the SICAF products in Asia? You've got a lot of product. You have a fabulous track record in this product. Do you have the right product in distribution to meet investors' tastes in Asia? And I know this is a hard benchmark, but like, if you're doing so well in Europe, how do you make Asia as good for Invesco in cross-border as it is in Europe?

Yes, those are good questions. There are several ways I could respond. Our core strength lies in our investment capabilities in Greater China, and we're seeing strong performance and an increase in flows there. The recent launch of the Hong Kong-Shanghai Connect, which raised nearly $2 billion in just three days, illustrates the market's opening up and the asset classes attracting interest. Additionally, we want to enhance our effectiveness in the market, and with a new retail leader in place, I believe we will see improvements in this area. Japan, too, has transformed significantly over the past two years and is now very active for us and likely for other managers as well, particularly in fixed income and broader equity capabilities. I expect to see results in the Asia-Pacific region this year that we've not experienced in some time.

Great. Loren, in terms of performance fees, love the guidance. Can you help us understand which areas you have the greatest visibility on in terms of performance fees and what areas you have less?

The situation is quite unclear. Regarding real estate and private equity, where we've seen significant performance fees accumulate, the timing of specific property sales played a crucial role. Now that we have better visibility, we didn't have a clear understanding of when these sales would occur. A substantial portion of this became evident in the current quarter; we were aware something was coming but were uncertain about the timing, and most of it materialized now. However, this doesn't imply that additional performance fees won't arise. We expect more from real estate, but not at the same level as we have observed this year. In private capital and private equity, due to our stringent accounting standards, we cannot recognize any performance fees until there is no possibility of a clawback. Typically, this occurs close to when the fund is winding down, which likely won't happen this year but could be more of a 2016 or even 2017 situation. This aspect is harder to predict. On the visibility front, we do have a good grasp. The U.K. trusts show good performance, and we’ve provided guidance while assessing the performance and trigger dates. We usually see figures around $10 million or higher in the first quarter. The bank loans present some challenges; however, we have a general idea of when a loan may advance and the potential for performance fees when launching a new loan. The quant strategies seem promising as they also rely on specific performance triggers. Hence, I believe the $5 million guidance per quarter is reasonable, though there could be unexpected developments. Overall, the $5 million per quarter seems like the appropriate estimate.

Okay, great. Then lastly for Marty. There are a number of new, nontransparent ETF structures that have been proposed and Invesco's partnering with one such provider. What are your thoughts on the opportunities of the new wrap or the new structure? What does that mean for the active management mutual fund industry if anything?

Yes, Ken, we've discussed this before. My personal view is that while it's interesting, I don't see it as a significant innovation. The ETF structure offers well-known benefits that market participants appreciate, such as liquidity and certain tax advantages. It also provides transparency in portfolios, unlike open-ended mutual funds, which are designed more for the long term and are generally more suitable for active management. This new structure may gain traction, but I believe that in 5 or 10 years, it won't play a central role in the marketplace as it is currently considered. However, we will keep monitoring the situation as my perspective could very well be incorrect. Therefore, we will ensure we're involved.

Just on the ETF business, I mean, you've had a lot of success in Europe with the traditional businesses and I know it's been the focus on trying to grow ETFs there, but it seems like that's one part of your business where maybe you've had less traction than hoped. So can you maybe update us, just given the potential growth prospects of ETFs in the U.K. and the continent, kind of how maybe you're looking to reenergize that part of your business and what are you thinking about the opportunities there?

You're absolutely right. In the regions where we launched the ETFs business several years ago, we experienced minimal success, as the market was quite different from what we expected. We anticipated a level of retail interest comparable to that in the United States, but that turned out not to be the case; the focus was more on institutional use. The market experienced a significant transition from primarily derivatives-based ETFs to physical ones, which is now nearing completion. We still see substantial opportunities in this space. Recently, in the past year, we have taken a step back to reassess our approach, and there has been a recent ETF launch in that region. In the near term, we view the U.K. as primarily an institutional opportunity and have begun to invest more effort there over the last six months.

I mean, as part of that, similar to what you've done in the U.S. where your retail distributors also market the PowerShares product. So is this related to combining distribution efforts?

No. That is on the continent. That is the case. There's still an open strategic question for us with RDR, what is the best way to use ETFs in the retail channel in the U.K.? And we're still working on that. So in the meantime, we're actually using our U.S.-listed ETFs in the U.K. into certain of the institutional market there.

Okay, great. And the second question is just really kind of a, I guess I'll call it, a big picture industry question. But it's interesting your take on it. I mean, you talked about this morning how the marketplace kind of misunderstands the active versus index performance dynamic over time, and some of your peers have made similar comments today and in the past. So I'm just kind of curious, what besides some white papers? I mean, is there anything as a industry or maybe individually as a company? You feel you can do to kind of get that message out? Because it feels like it certainly gets overshadowed by the press and whatnot. So I'm just kind of curious what kind of things you could do as an industry to actually get that point across?

That's an excellent question, and it's why we are responding similarly to others. We believe it's our responsibility to educate the market about the facts. The reality is that active managers have not performed well. We assumed that everyone understood this, but that simply wasn't the case. This has led to a situation where, since 2009, in this ongoing market cycle, we've seen unprecedented conditions that have made passive investing attractive—circumstances we haven't witnessed since 1929. It has been too easy to conclude that active management is ineffective, but to truly understand this, we need to examine market cycles, from peak to peak and trough to trough. Additionally, there is a significant misunderstanding regarding relative performance, risk mitigation, and drawdown. Our research indicates that active management is incredibly valuable. Moreover, I believe we are entering a market where the benefits of active management will be more clearly recognized. Therefore, we have a responsibility to present the facts to our clients and the marketplace.

I mean, along those lines, I'm just curious, I mean, if there's been some inkling that maybe in the institutional world that argument resonates or is resonating maybe somewhat more. But any sense as you think about the retail world that you’re getting some traction with those kind of...?

Absolutely. Our retail sector is in need of solid information. The recent paper we published has generated significant interest within the adviser community because they require accurate data to support their discussions with clients. It has become too commonplace to read simplistic articles and suggest a passive index without substantial facts. It's vital to disseminate accurate information. We maintain a balanced approach given our active and passive business models. We believe that high conviction in both active and passive strategies—what we refer to as smart data—yields better results for clients. We are not committed to a singular approach, as we offer a diverse array of capabilities to better serve our clients’ needs. This approach also resonates with advisers. Ultimately, assisting them in constructing portfolios to achieve favorable investor outcomes is our core mission.

Marty, I have a 2-part question that actually follows on from the question that was just asked. Are you essentially saying that putting aside the admittedly important issues of risk and drawdowns, I'm certainly not disposing those mentions as not important, they're very important. But are you essentially saying that if one looks at a full-market cycle, that it is simply not the case, that active managers have underperformed typically on passive strategies?

Not all. You can access the white papers. Essentially, we analyzed peak-to-peak and trough-to-trough market cycles over the last five cycles, examining all major U.S. funds and 17 different asset classes in total. About 61% of all managers outperformed the passive index, which was based on an active share of 60%, a figure that only encompassed around 10% of the funds. Our focus was merely to assess the performance after excluding five indexes, independent of the process of selecting a good manager. You can review the paper and form your own conclusions, but I find the results quite compelling.

I appreciate that. I will read it. I have one follow-up. One dimension to this active passive that has not been discussed at least today is the whole tax issue and the idea that it is supposedly the case. I haven't really documented this myself that there are too many active managers who are not tax mindful. What does Invesco have to say about that part of the discussion?

One of the advantages of an active manager is their ability to manage the tax implications of their holdings. I would categorize that as a positive aspect of active management. While I can't speak for every active manager, I believe that most asset managers pay close attention to tax considerations and have dedicated tax teams to assist with these matters, just as we do. It's important to note that while these tax strategies are significant, most investments are likely held in retirement accounts, which may lessen the impact for many individuals. Nonetheless, it's an important topic.

So you guys are performing at such a high level right now in so many different areas. Just wondering if you can share your thoughts about maybe your strategic priorities over the next few years? And really, kind of wondering, what areas are you guys really focused on, perhaps, trying to grow further or if there are areas that are maybe underrepresented or perhaps not in your suite at all that you're really taking a hard look at it and making some additional investments there?

Yes. It's a good question. I don't know that if there's any earth-shattering news, we're going to really very much stay on the path that we're on. And as I've said during this call and Loren has too, it is really the first focus of broad, deep investment capability to perform well. And again, we'll focus on getting better there, and where we can be more thoughtful on product capabilities we will. We're doubling down in a number of areas that we've been on. We think we can do a better job having our investment capabilities available around the world, more effectively. That is an area of focus for us. We also think that the broader acceptance of alternatives around the world for the organization is an area of focus for us. And probably, the third leg is the institutional business. We think collectively, we're at different phases in different parts around the world. We think that is a real opportunity for us as an organization also.

I apologize if this has been hit on already, but just wanted to get a sense, obviously, with the great growth out of Europe. I'm assuming, but I'm not certain, is that net revenue yield fee accretive, given that that's growing so much faster than everything else right now?

Yes, absolutely. The fee rate in Europe tends to be, on a net basis, 80 and above. So it's certainly at the higher end of our product offerings.

Great, that's helpful. And then secondly, obviously, PowerShares has been a great story this year. I mean, can you guys update us on maybe your sort of product development plans? Have you been raising the budget there to sort of launch new ETFs, given what you've seen a big move into smart beta in '15?

I would say it's a continuation of what we've done. I think we try to be thoughtful about our product introductions, and we'll continue to do that as opposed to put things in the market and hope they work. So I'd say it'd be more deliberate development as opposed to many, many things.

Yes. I would say some of the things we've recently done, like our Equal Weight Russell product, were very successful this quarter. BuyBack Achievers continues to perform well, and S&P 500 High Dividends, among others, have shown strong results, though some are relatively new. High Beta was also a notable success this quarter. I believe the products we've launched are starting to gain traction, and there may be more opportunity for growth within our existing product lineup rather than pursuing new initiatives.

Most of the questions have been answered already, but just one quick one on performance, which remains really strong across the franchise. U.S. seems like the kind of the one area that continues to have some challenges, particularly in the core and growth areas. So Marty, I just wanted to get your thoughts there and any changes you think are necessary?

Yes, thank you. If you examine the core, there is some relative underperformance. However, the team is doing an excellent job and maintaining discipline. This is consistent with trends we have observed in previous market cycles, where they tend to accumulate cash during these times, and they have been doing just that. I have confidence in their strength. The growth team has also reported impressive numbers. In the last three years, Julie has successfully integrated large-cap growth, and they have performed exceptionally well. We feel reassured in both areas.

I joined the call late, so I apologize if this has already been discussed, but Marty, could you please share your thoughts on the Department of Labor fiduciary proposals? Are you receiving any feedback from your wholesalers regarding the distribution channels, both for warehouses and RIAs? Additionally, what is your perspective on the defined contribution channel? Do you think it will have any impact on your product line, and are there specific areas, such as multi-asset and PowerShares, that might perform particularly well if stricter fiduciary rules are proposed?

Yes. Brian, that last part of your question, I couldn't hear. I don't know if Marty, you could.

On the product side, do you think products like multi-asset or those in the PowerShares complex might benefit from more stringent fiduciary standards?

Let me share a few comments. The fundamental idea is sound, and the principles in place are strong. I believe that's a thoughtful approach. Additionally, I think financial advisers have been very considerate and focused on their clients. Raising the bar is beneficial, and the Department of Labor is concentrating on ensuring that their proposals do not create unintended consequences, particularly for smaller plans and accounts that might lose access to advice. This is a critical issue they are currently addressing. As an organization, we offer investment capabilities. The challenge lies more with financial intermediaries and our involvement depends on our strong investment performance and diverse offerings. If we maintain competitive fees, we will continue to be in a favorable position. How we interact with intermediaries using their models and various approaches is something we already do. Overall, although we don't have all the specifics, it's a good idea to continue to elevate standards. I believe our firm is well-positioned for what lies ahead, whether in the defined contribution or retail sector. Okay. Thank you very much on behalf of Loren and myself. Thank you for your time and questions, and I look forward to speaking to everybody soon. Have a good rest of the day.