Invesco Ltd (IVZ) — Q2 2015 Earnings Call Transcript

Thank you very much, and thank you everybody, for joining Loren and myself. And those that wish to follow the presentation, it is on our website, if you are so inclined. Today, I'll review the business results for the second quarter. Loren will go into greater detail around the financials. And as our practice, both Loren and I will answer any questions that anybody might have. So, let me start by highlighting the firm's operating results for the quarter, you'll find this on Slide 3 of the presentation. Long-term investment performance remained strong during the quarter. 75% and 79% of actively-managed assets were ahead over a three- and five-year basis respectively. Strong investment performance, combined with a comprehensive range of strategies and solutions we offer to help clients achieve their desired investment objectives contributed to long-term net inflows of $5.9 billion for the quarter. Adjusted operating income was up 4.2% compared to the first quarter. The quarterly dividend is $0.27 per share, which is up 8% over the prior year. We also returned $198 million to shareholders during the quarter through the combination of dividends and stock buybacks. Turning to the summary of the results for the quarter, assets under management were $803 billion at the end of the second quarter, up from $798 billion in the prior quarter. Operating income was $390 million in the quarter versus $374 million in the prior quarter. Earnings per share were $0.63 per share, the same as the prior quarter. Before Loren goes into details on the financials, let me take a moment to review investment performance during the quarter inflows. Turning to Slide 6, investment performance remained strong across the enterprise, in spite of the volatility later in this past quarter. Looking at the firm as a whole, 75% of the assets were in the top half on a three-year basis. 79% were in the top half on a five-year basis. I am now on Page 7. I think we all recognize that every client has a unique set of investment objectives with a desired set of outcomes that can be achieved in a variety of ways. We believe the greatest opportunity for clients to achieve those investment objectives is by using a well-constructed portfolio that is needs-based, spans asset classes and considers both active and passive strategies. One of the greatest strengths of Invesco is the broad range of active and passive capabilities we offer our clients. It's a key differentiator for us in the marketplace. Our focus on meeting client needs with a broad range of active and passive capabilities drove solid flows into our business during the second quarter. Active and passive flows we saw across the globe reflect continued efforts to deliver strong investment performance and provide excellent outcomes for clients. Although retail flows were impacted by the macro event, we saw strong flows in our institutional channel during the quarter. The figures on Slide 8 reflect a broad diversity of flows we saw across our global business during the quarter, which included strength in fixed income, namely investment grade, stable value, global total return, real estate, and other asset allocation products. Despite significant funding during the quarter, the institutional pipeline of won but not funded mandates remains strong and diversified across asset classes. We feel good about the results for the quarter. In spite of the late volatility we saw in the second quarter, we continue to see strength in Asia Pacific and EMEA particularly, and across the broad range of asset classes. These flows were the result of the continuing strong investment performance, and our ability to meet client needs with a range of strategies and solutions, which positions us well for long-term success. And from my perspective, this quarter really represents the value of being broadly diversified by channel, asset class, investment capabilities, and the value of the investments we have made over several years. Smart data in ETFs, European cross-border investments, the institutional business globally, alternatives, fixed income. We have a history of advancing our business during uncertain times, whether it comes through markets or, more recently, the impact of such developments coming from the regulatory changes. We believe we are positioned very well. We believe we are making the investments to continue to strengthen our business, while at the same time, we recognize we are in an uncertain time, and we will be thoughtful during this period. Loren?

Thanks, Marty. So now we'll go through the asset roll-forward and operating income. So quarter after quarter, you'll see that our total assets under management increased $5.3 billion, or 0.7%. This was driven by FX translation of $8.5 billion, and long-term net inflows of $5.9 billion. These gains were partially offset by negative market returns of $6.2 billion and outflows from money market and the QQQs of $2.6 billion and $0.3 billion respectively. Our average AUM for the second quarter was $810.9 billion. That was up 1.9% versus the first quarter. However, as Marty mentioned, due to the market declines in June, our end of period AUM came in at $803.6 billion, which is in fact 0.9% lower than our Q2 average AUM. Our net revenue yield was 46.2 basis points, which represented an increase of 0.1 basis points versus Q1. The drop in performance fees quarter over quarter accounted for a decline of 1.9 basis points, which was more than offset by a variety of factors, including an improved mix, which added 0.7 basis points, one extra day during the quarter, which added 0.6 basis points, favorable FX and higher other revenue, each of which added 0.3 basis points. Let's turn to the operating results now. Net revenues increased $19.1 million or 2.1% quarter over quarter to $936.6 million, which included a positive FX rate impact of $5.1 million. Within the net revenue number, you'll see that investment management fees increased by $59.7 million or 5.8% to $1.08 billion. This was a result of higher average AUM, one extra day during the quarter, and the impact of the growth in higher yielding product. FX increased investment management fees by $7.2 million. Service and distribution revenues increased by $6.2 million or 2.9%, also in line with higher average AUM, and the increased day count. FX increased service and distribution revenues by $0.2 million. Performance fees came in the quarter at $13.1 million, and they were earned from a variety of different investment capabilities, which included bank loans, real estate, Asian equity and quantitative equity. Foreign exchange had no impact on our performance fees. Other revenues in the second quarter were $37.9 million, which was an increase of $6.7 million, and that line item benefited from a higher level of real estate transaction fees. Foreign exchange decreased other revenues by $0.1 million. Third-party distribution service and advisory expense, which we net against gross revenues, increased by $14.9 million or 3.7%, and this increase was in line with our higher average AUM and higher day count. FX increased these expenses by $2.2 million. Moving further down on the slide, you'll see that our adjusted operating expenses at $546.4 million grew by $3.3 million or 0.6%, relative to the first quarter. Foreign exchange increased operating expenses by $2.3 million during the quarter. Employee compensation came in at $351.4 million, a decrease of $11.3 million or 3.1%. The decrease was consistent with the decline in seasonal payroll taxes and a reduction in variable compensation linked to performance fees earned in the first quarter. These declines were partially offset by a full quarter of higher base salaries that went into effect on March 1. And foreign exchange increased compensation by $1.7 million. Marketing expense increased by $3.3 million or 12% to $30.7 million. FX increased marketing expenses by $0.2 million in the quarter. Property, office, and technology expense were $82.2 million in the second quarter. That was up $4.4 million. This increase was the result of higher property-related expenses, and foreign exchange increased these expenses by $0.3 million. G&A expense came in a little bit higher this quarter at $82.1 million. That represented a $6.9 million increase or 9.2%. The increase in G&A was the result of $3.6 million of additional fund and regulatory costs, as well as higher professional service expenses associated with technology initiatives, which amounted to $2 million. Foreign exchange increased G&A by $0.1 million. Moving on down the page, you'll see the non-operating income decrease $6.7 million compared to the first quarter, and that was largely driven by lower equity and earnings from unconsolidated affiliates. The firm's tax rate on a pretax adjusted net income basis in Q2 was 28.7%, which was consistent with the guidance that we provided in the first-quarter call. Looking forward, our tax rate will return to the lower level of 25.5% to 26.5%. Which brings us to our adjusted EPS of $0.63 and our adjusted net operating margin of 41.7%. Let me just take a few minutes to discuss Invesco's financial outlook, before turning things back over to Marty. At the end of Q2, clearly negative market sentiments and risk-off behavior on the part of many clients occurred, and that was driven by the situations in Greece and China. As a result, as I mentioned, we find ourselves starting the last half of the year at a level of AUM that is, in fact, lower than what we average in Q2, and roughly flat to the average AUM we had across the first half of the year. We continue to believe that Invesco is very well positioned for success, and we face many significant growth opportunities, many of which do require further investment on our part, in order to realize. At the same time, we are aware of our needs to manage our expenses in a disciplined way, especially when markets are particularly volatile and uncertain. So as of today, our expense guidance is still roughly in line with what we discussed with you in the first half of the year. Nothing has changed. However, we will be looking closely at other areas of spend and investment with an eye to prioritize and look at certain non-critical projects and initiatives to see if we can delay certain events, particularly until the market has stabilized. However, on a positive note, in the last half of July, we have seen some improvements in the markets, and a significant positive turnaround in the retail sentiment in Europe and our ETF business. In fact, just in the last two weeks of July, we generated more than $1 billion of net inflows. In addition, we continue to see very strong institutional demand across a variety of our investment capabilities, and we would say that should this improvement continue, we do believe that our organic growth rate is on track to meet our plan of 3% to 5% for the year, and our incremental margin target of 50% to 65% is achievable. With that, I will now turn things back over to Marty.

Thanks, guys. Maybe the first question, and maybe for both of you. Loren, maybe just given what you said in terms of the shifting tone and sentiment in July. You mentioned the last two weeks. I don't know if you have a full-month picture, but even more important than that, you gave some color on the institutional pipeline. Just on the retail. When you think about maybe up through April, all the momentum and the progress that you have been seeing versus some of the pull-back that we have seen in the past couple of months, we just want to get a sense on which products continue to work, where you are seeing that demand. In the cross-border, we have seen huge swings early in the quarter versus what we are seeing now. I just wanted to get an update there, since that is a big driver for you.

Michael, I'll take the first question and then Marty can add his thoughts. Regarding July, our net flows remain relatively stable. The challenges we faced in the first two weeks were completely balanced out by the positive movements in the latter half of the month. Currently, our daily flows are showing strong positive signs, which is encouraging. We have several products that are performing well and in high demand. Alternatives as an asset class are seeing good inflows, particularly GTR, bank loans, CLOs, and alternative fixed income, which are all proving to be strong contributors for real estate. This trend is expected to continue. Balanced products are also an area of growth for us, with balanced offerings in EMEA and CE. The weakness we experienced was mainly in equities, which were significantly impacted during April and May, especially domestic equities, UK equities, and China. This was the primary reason for the reduced flows. However, the products that are still attracting interest, particularly in fixed income, reflect our investment in enhancing our capabilities and the demand we are receiving from both retail and institutional clients. We anticipate that these trends will persist. We hope that equity markets, which contributed to our challenges, are stabilizing, leading to increased interest in our products. The ETF segment also faced a slowdown for a period, primarily due to an influx of flows toward hedged foreign exchange and international products, areas where we don't have as strong a foothold compared to some competitors. However, as I noted earlier, we have observed a turnaround, and our ETF offerings are now gaining traction across many of our capabilities.

That's helpful. And Loren, just on the expenses, it sounds like keenly an eye on things, just given the volatility in the market. I think in the past you have given some guidance on the line items, and just particularly the G&A. You called out a couple of items that you have seen maybe were more elevated. But I just want to get some sense going forward where these things should be running, and I hear your comments on keeping an eye on the markets, but just anything that was maybe more noisy this quarter?

I would note that G&A expenses increased. There were several items that could definitely be considered one-time occurrences. You might identify about $3 million to $4 million of non-recurring costs in G&A. The challenge is that while some expenses may decrease, others could arise. Therefore, there is a mix of recurring and non-recurring items in G&A. We are closely monitoring this area and are actively managing it. I would say it was at a high level in the second quarter overall, and we hope to see some reduction. It's difficult for us to provide precise guidance on where it will settle, but if I had to estimate, I would suggest it might be in the range of $75 million to $80 million. However, forecasting this line item is challenging due to certain expenses related to product launches or specific regulatory requirements, where spending is necessary.

Thank you. Maybe we could get a little more color on the Asian franchise. I think, I heard your comments on equities in China, but in general, that is $60 billion now. $1.3 billion in positive flows, and I think there was like $7 million in performance fees from the region. If you could just get a high level, what is working, what do you still need to build across Asia, because I think it held up a lot better than people might have thought.

Two points. So we look at it as one of the fundamental strengths of the organization. Lots of commentary about China right now, but if you look three to five years, it is a very important place to be. We look at our greater China capabilities as unique. We look at our presence in mainland China as unique, both retail and institutional. And it may go through a challenged period here, but we think we are uniquely positioned there. What I would say is we talked about the institutional business. The leadership in Asia Pacific. The institutional leadership is new this year, very, very strong. We think that, and we are seeing greater results already, which is frankly hard to believe, and we're seeing it in Australia along, also Japan is a very strong institutional market for us, and historically, that's not been the case. We are seeing additional success frankly before I would have thought that was the case institutionally in the region. And again, we're looking for continued positive contributions from that region for us.

I'd say the things that are really working for us, we have seen a lot of demand for fixed income product in Japan. We're seeing a lot of institutional business generally. Australia as well is taking on our GTR product. Real estate continues to be a theme. A lot of things working for us in many different regions within that Asia category.

Thank you. Last quarter, you mentioned on the institutional pipeline, the won but not-yet funded was at an all-time high. Any color? I hear you, that the pipeline's good. I'm just curious on how good.

It's pretty much at the same level as last quarter, which is very encouraging. The key question for us all is what institutions will do and when they will fund. If the market remains stable, we expect funding to occur, and we have no evidence to suggest otherwise. However, we've observed that in unsettled markets, institutions tend to be slower in their funding. Our won but not funded amount continues to reach record highs.

Hopefully I got this right. It looks like you won a larger series of large active US institutional fixed income mandates in the quarter. Generally not an asset class I think of first when I think of Invesco, and I mean no offense there. But can you flush out what is happening, where the mandates are being won, and any color you can provide?

We are seeing it across a broad fixed income, stable value, and we are seeing it both in terms of corporate activity, our Taft-Hartley business. It is spread across a variety of asset classes. The one that we are probably most pleased with is the growth in the corporate side, which has never been necessarily the strongest area we have played in. We continue to add resources to be more meaningful to the corporate clients that we are working with. It's really in broad fixed income and stable value, where the largest wins took place.

Ken, just adding to that, if you look at our fixed income performance, it's really very strong. And the client results are frankly sooner than I would have thought, and I think you'll see, we talked in prior years, we thought we were going to miss this whole fixed income cycle, and it was just really making sure we had the capabilities for the next one. That said I would say we're making progress before I thought what would have happened. So it's all very good from my perspective.

Great. And then maybe my follow-up. Invesco made a large push in product development in marketing into alternative products in the US and Europe over the last 18 months. So the track records are still young and developing, but Q2 would seem to put these products to the test. So the question is how are the products performing? Are they meeting your expectations? And given maybe the change in sentiment, how are conversations evolving with the intermediaries to really sell the products, both in the US and in Europe? Thanks.

Very good question, Ken. Our view is that, if you are taking feedback from the clients, the feedback has been quite clear, whether it be retail or institutional, but retail in particular is relatively new, that allocations are going to go from 5% to 15% to 20%. Whether they get that high, who knows, but let's just say they go to 10%. That is just quite an opportunity. We have had the investment capabilities internally, largely for institutions. We, as you know, put probably the broadest range of alternatives into the retail market, beginning at the end of last year. Our view always was, think of no shorter than three years before you're going to get results, because of, as you say, developing the track record and the like. And every once in a while, you get some success before its time. The first one that came on was IBRA. You all know how successful that has been. It continues to be successful. The one that is an early success right now is GTR, and it's in the UK, on the continent, in the United States. Asia, the derivatives component slows that down in that region on a retail basis. So we think it's going very, very well, and it's nice to have another early surprise if you want to call it that, from a client response in GTR. With regard to your question, the volatility of the markets. Did we see disproportionate flow into the alternative bucket on the retail side? We did not. I think that's too early. I think if we continue to have a couple more quarters of this, the intention is going to be there. One limiting component continues to be the distribution channel's ability to get alternatives on their platform. There is high desire, but the mechanics of getting them on the platform are still slow. It's not a criticism, they're just being very, very cautious. Just recently, GTR has been added to a couple of very important platforms here in the United States. That should be a good development in the future.

And just on GTR. The good news is GTR is now at $6.5 billion in terms of AUM, and if you add in the won but not yet funded component, it would be at $9 billion. It really just continues to grow, and again, a very attractive fee rate on that product. Roughly 100 basis points. Good to know.

In these past quarters where there was a pretty significant decline in the stock price, you have ramped up your stock purchase quite a bit. Didn't really seem like that happened this quarter. Could you walk through the thought process around that, given the weakness in the stock last quarter?

Patrick, I think we have debated internally for some time about how to react to certain market dislocations, and it's always unclear when to go in big, because you have to have a real strong view on the market, and tactically, you can get in and you can do some. We did buy more this quarter than we did last quarter. At the same time, we are still feeding some large products as the large feed capital needs that we need to balance across the buy-back opportunities. And we are still looking to maintain $1 billion in excess of what we have from the regulatory capital perspective. And so there's a balancing act that continues to exist our prioritization of how to use capital. The first call on our capital is always going to be the internal one, in terms of organic needs, which would be the seeding. And so I think given the size of the seeding, this is probably the largest element, in terms of being a little bit more circumspect, doing more on the buyback. We will continue to be very systemic in our buyback. And again, the stock may go up. We're going to continue to buy. The stock may go down, and we're going to continue to buy. And so, we have seen our ability to forecast markets as a challenge. And it's probably better on our part to be more systematic as opposed to trying to time the markets in a big way.

More broadly, it seems every day now there is either a regulator or a press article talking about bond liquidity. And you always enter that conversation, given your size in the bank loan markets. Curious if all of that kind of noise is bleeding into your conversations with clients, and to what extent you feel like that conversation is going positively for you?

It's a good question. Look, I think when you read the public commentary generally in the papers, it's too shallow of a commentary, quite frankly, to say. Money managers, including ourselves have been constructing portfolios for decades. It's the fundamental strength of what we do as an industry. In portfolio construction, you are always looking at liquidity needs and the like, and there's an assumption in the paper that if you are in bank loans, you have 100% in illiquid, hard to trade bank loans, and it is just false. So if you look at the combination of our bank loan products or others, there is a high liquidity component to it. There are back-up lines of credit. The clients absolutely understand that, it's just the public commentary doesn't. But I will say the industry is working things like shortening settlement periods and the like in bank loan markets and doing the things that we should, just to continue to make the markets more efficient, more effective for the benefit of our clients. That is our perspective on it.

Thank you so much.

So just trying to run the math a little bit, if you're feeling pretty good about the 3% to 5% organic growth rate and July is basically a push, and we know the first half of the year. It would suggest the theme here is the institutional business is doing pretty well, but the thrust of the question is, I think you have to have some pretty big numbers coming through in the second half of the year. Are you at a point now where you are starting to really take advantage of scaling some of the products? Obviously, you gave the disclosure on GTR terms. But just more broadly, one of the pushbacks has always been, oh you have a lot of small funds, but nothing that is really sizable. Do you think you're at a nice inflection point now where you are starting to scale some really scalable assets globally?

It's a good question, Bill. You get scale by doing good things for clients, and I think you start by if you look at our performance, it's really very strong. That said, you have to do something about it. We, as a firm, for the last couple of years in particular, have refocused again on taking those capabilities that can become offered globally to clients and taken to clients globally, and that is what we have done and that's what you're starting to see, whether it was risk parity, GTR, bank loans, real estate. So that is an absolute focus of the firm, where it makes sense to do that, and we have been making progress, and we are focused on accelerating that progress. And I think you're seeing that.

The opportunity around the products that have global demand, whether it's IBRA or GTR or some of the bond products, that is absolutely what we're focused on, and I'd say we're making progress. It's not something where for fixed income we said it is happening faster than we thought, actually, but we're probably not at a level where you would say we're at the same scale of some of our larger competitors. But again, we value the diversification, too. I make that point, that we don't want to be probably as large as our competitors in certain products. We like to have a series of diversified capabilities, all that work on a global basis.

That's helpful. And I think you mentioned in your prepared remarks that the regulatory pressures are building in terms of the costs. Is that idiosyncratic to Invesco, or is that more of an industry dynamic? Where are you seeing it? And then if you still feel pretty good about the incremental margin range, and we know the G&A, does that suggest there's a little more operating leverage on comp from here?

Let me take the first part. The regulatory thing, it is hitting everybody. Not like the banks, but we think it's quite overwhelming, the amount of regulations that have come this way. Where it's hitting the most, so again, it will depend on if the firm is global or not. If you are a global firm, the UK was probably the most dramatic in its change and its regulatory environment and the demands on a firm, the investments we have made around that are material. You also have impacts of things like RDR and what does that do. We have talked about that over the years. We thought we would be a winner. We are a winner in it, but by the way, you have to make changes along the way. The continent is another area where again, much more complex regulation impacting the business and the like. Yes, we're spending money. But what I would say too, it also increases the barriers to entry, which I think, that is fine for us. It's probably too bad for the market. But longer term, the bigger stronger firms that can make investments will, and will frankly probably do better than the mid-sized smaller firms. You come to the United States, we have had again, an awful lot of regulation come out. It wouldn't be to the same magnitude there. I think some have paid close attention to, which you have all have is, what happens with the fiduciary rule. That could have some incredibly negative consequences ultimately to all of our clients. Well-intended, but currently proposed, not very thoughtful. That said, we think we are going to be one of those firms that is quite well positioned if some version of this rule comes out. I think others are going to be at quite a disadvantage. It really is an influence on businesses like I have not seen in my career, and we do feel that we can take advantage of opportunities that emerge as business models get changed through the regulatory dynamics.

To answer the last part of your question, Bill, the answer is yes. It's leverage on all the line items. We are seeing with the now renewed strong growth in cross-border flows in EMEA, for example, that the trend on the fee rate should be more positive. FX has improved slightly as well, which is again very important in terms of getting that operating leverage in some of our most scaled products. I think those elements will help, and as you know, our compensation line item is probably most strongly driven by investment performance. It's probably reasonably stable, so there isn't sort of a sense of large needs to change compensation. For those reasons, we think that 50% to 65% opportunity on incremental margin is there, as long as the trend comes back, or it continues, where we are seeing the flows come back in the most important places.

Marty and Loren, why do you think there is such a bifurcation, such a difference between the behavior of institutions and individuals during the quarter? And by that, I mean if one pieces together the different pieces of information that you are giving us, and the different tables that show the flow of assets, it looks like it was a fixed income-led, institutional-led, US-lead advance. And active advance. And there wasn't nearly as much retail activity, and I should say fixed income and alternatives. But so heavily institutional. What is your sense, obviously, you can't get into the heads up of individual investors everywhere. That's impossible, but from talking to your colleagues and distributors, what is your best sense of why there is such a difference of behavior by retail investors and institutions?

That is a great question. This is something we have all examined throughout our careers, and despite our efforts to educate the market with clients, not just us but also distributors and consultants, we continue to observe varying behaviors. Institutions tend to be more consistent in their long-term investment strategies. On the retail side, what we've noticed, and I don’t have the exact numbers, is not so much redemptions but rather that retail investors are pausing their investments. Instead of committing to a regular monthly investment plan in US equity, they are hesitant. They become quite worried about events happening in Greece, China, and even the advice they receive from their advisors. Advisors play a crucial role for our retail clients, and it’s very common for them to hold off on investments. It’s as straightforward as that, but the effect is noticeable.

If I could ask another high-level question to you, Marty. During the course of this call, we have talked about all of the many businesses in which Invesco competes, other than active equity investing. We've talked about risk parity, global total return, bank loans, other alternatives, real estate, and so forth. My sense is that there is a view in this business by many people who follow it that somehow active equity investing is the holy grail, it's a good business, and that everything else, especially fixed income, is not as good. What are the merits of that, whether people believe that? What is the truth about your business? By that, I mean that as Invesco transitions to these other businesses in many quarters, other than active equities, is that a good thing? Should I feel good about it, should I feel bad about it, or indifferent?

Good question. So here's our answer. So it gets to the comment that I made earlier. Every single client, whether retail or individual, has a unique set of investment objectives, and you can get there through a variety of ways to meet their outcomes. What we are committed to, and how we have built the firm is having a broad range of investment capability to meet those needs. High conviction capabilities, whether they are active or passive. So when we talk about passive, we believe in smart data. It is a better data, and you get better information for your clients. The combination thereof is how we think we can generate the results for our clients over time. I can't pass on my individual judgment on how somebody should build their portfolio. That said, I'll put on my personal advice. Over time, always, active management will give you the greatest returns for the level of risk of investment. That is a fact. That is not common wisdom right now, because of the period we have come out from 2009 on, and the bounce off the bottom, three rounds of QE, et cetera, et cetera. It is an absolute mistake to be giving up on active equity investing. And I will say you go cap weighted passive investing, the best you can do is an average, minus fees. I don't think that is how you serve your clients best.

And Eric, just on the purely Invesco-specific financial point, the margins on those capabilities, fixed income or alternatives, are certainly as good as what we have seen in active equity. So there isn't a financial give-up in terms of us moving from one active class to another, particularly as long as we have scale and those capabilities.

I come back, Eric, just to make the point. Our view is if you are looking to invest in Invesco, our absolute focus is on our clients first, and we think if you do a good job for clients and you run a disciplined business, Invesco is going to do really, really well. I think that is really an important thing to understand, too.

Thank you.

My question is again on the institutional side. Just curious with the strength you are seeing there, are you having success cross-selling to existing institutional clients, or are these new relationships mostly? Just trying to get a sense of kind of the breadth?

Quite frankly, many of them are new. And frankly, an area that we are focused on to improve is having a greater number of relationships with each of our institutional clients. Not just what's in, but many of them are multinationals and just doing a better job of serving them around the world. And again, we think we are one of very few organizations that can do that, so we look at that as an opportunity for us.

Great. And then just also, just thinking about the backdrop, volatility, and what that presents potentially opportunistically for you. Has your views around M&A changed at all? Do you think about potentially being more aggressive in a market like this, where maybe some peers or others aren't in as good a position as you are?

Our views haven't changed. We are still focused on identifying the skill gaps and product gaps that we need to address. This is our primary criterion. We aim to develop solutions internally first, but I wouldn't say we have fully achieved that yet. In challenging markets, there are often unexpected opportunities, and while we haven't reached that point, we will have to wait and see what unfolds.

So coming to the ETF business, you have got a foothold there. It's a number four position. Still a small fraction of the overall market, and fairly concentrated for you by AUM flows in a few products. But you have talked a lot about growing the platform with smart data. Seems like more and more of your competitors are talking about it, too. I thought perhaps you could speak to whether you feel, if you have a comfortable lead in the race here. What your competitive advantages are, and whether you think there's a first advantage in some of these product ideas. Any thoughts on that competitive landscape?

I believe that the entry of others into the market confirms that it's a strong idea and beneficial for clients. Their presence suggests a positive trend. In the ETF market specifically, being a first mover is advantageous, which differs from institutional mandates or retail mutual funds. Therefore, product development is crucial, as there tend to be only a couple of similar products that occupy shelf space, making it important to be among the first or second entrants. We also see our competitive edge in smart data as significant; our product range is the broadest and the most established. With our long-standing track record, we have extensive experience in the marketplace, which is valuable over time. New entrants face challenges due to these established advantages.

Thanks, and then coming back to the fiduciary rule, I think most of the focus has been on how this impacts intermediaries. There's been a little bit of talk about how this could be more challenging for bundled defined contribution providers, but at least in my view, it seems rarely supported by anything specific in the legislation that would accelerate any of the pressures that already existed or introduce any new pressures. As you think about the opportunity in DCIO, any thoughts on how the rule changes the competitive landscape for the legacy providers?

Yes, it's a good question, and I think everybody is searching exactly for what the right answer is. I think if it does go through in its current form, which I doubt, because it is absolutely unworkable and it does any number of things, but if it did, I think it would be quite unsettling to the whole marketplace. It would put a value on size, which could be, quite frankly one of those catalysts for combinations that you would not have imagined previously. It also, in some of the support commentary, it is very specific in sending people towards types of investment strategies, types of investment products, types of vehicles, that will clearly have unintended consequences for investors. We have the unique position from being in the United Kingdom, and with RDR and there's corollaries there. So trying to create purity is a wonderful goal, but what you have seen in the United Kingdom is individual investors. There are more people not taking advice right now because of RDR, and their total cost has gone up. I believe you're going to have that same type of thing here. The people that most need advice won't get advice, and they'll be disadvantaged by the whole process. So it's hard to answer the question until we know what comes out at the other end. But as currently, I think it would be quite disruptive.

Okay, thanks so much.

First off, congrats on the quarter, particularly in what has proven to be a really difficult and challenging environment for a bunch of your peers. So I just had one question left at this point. You highlighted that towards the tail end of July, volatility in Europe is subsiding. Now that you are seeing flows and trends come back, what is different in recent experience versus earlier in the year, or is it just a return to the products that were popular, and working before? And is there any difference between retail and institutional. Just some color from there would be helpful.

It feels largely like a return to the previous part of the year as opposed to some new trend emerging that is different from what we saw before. Maybe there's a little less interest in corporate bond product than we saw before still, but that is being offset by some other products, that fixed income, long-dated corporate fixed income maybe less so. That is about the only thing that I can point to that feels a little bit different.

No. It was just a one-time situation that is no longer going to affect our P&L.

Okay, thanks.

A little bit more about the opportunities you see to leverage the breadth of product across the franchise, to build customized offerings across both active and passive strategies, as well as maybe other alternative quantitative or allocation services, and I know it's still relatively early days, but any early read into relative economics of what I would assume would be chunkier mandates, if you will?

I understand the gist of your question, which revolves around how to integrate various capabilities. This is an area of significant focus for us, and I would say we're in the early stages of success. Opportunities are likely highest for us in Asia, particularly in China, but we're also seeing potential on the continent. We believe there should be opportunities in the United States as well, although progress in those two regions has been relatively slower.

We have conducted an initial assessment of the relative economics of larger mandates. There has been no change in the appeal of the mandates that will remain in stable value. The broad fixed income area is one where we lack significant scale, and it is showing marked improvement as we generate more assets under management in that category. These are the two main factors driving our performance. Regarding GTR, the economics are strong, similar to what we observe across the cross-border spectrum, where rates are generally high. Aside from that, we have discussed other aspects that present very attractive margins, which should enhance our overall margin.

Got it. That's helpful. And then, just in terms of some of the newer vehicles we are seeing on the actively-managed ETF front, just given your market presence with PowerShares and as you communicate with your client, how important is non-transparent actively managed ETFs? Is that something that investors are really looking for, or is transparency in terms of portfolio holdings not really that high on the list for your clients?

The conversation has been going on for some period of time. And if you remember, we have introduced two or three active ETFs five or six years ago. We were one of the firms ahead of the exemption. And I think I have said in the past, we still have them. They might have $3 million in them across the board, and it's probably our CTFO.

And those are transparent.

I'm a firm believer that people primarily invest in strategies aimed at achieving their financial goals, rather than specifically in investment vehicles. Mutual funds are excellent for long-term investors, and while we understand the importance of transparency and disclosure, our clients haven't shown much interest in non-transparent ETFs. We believe the benefits some highlight about these ETFs can also be addressed through different share classes within mutual funds. Even though we are equipped to offer active ETFs and have both ETFs and mutual funds available, we are simply not seeing the demand, which contrasts with what might be suggested in the media.

Got it. Thanks for taking my questions.

Thank you. Most of my questions have been answered, but I have one more. This hasn't been discussed in your calls for a while, but I'm curious about potential mergers and acquisitions. You've primarily focused on in-house product development for several years since the Morgan Stanley acquisition and have mentioned it as a low priority. As you've gone through the product development cycle, is there anything you've thought, "We would have liked to build this, but for some reason, we couldn't"? Does that influence your thoughts on possibly considering some mergers and acquisitions now, even if not on a large scale? I would just like to hear your updated perspective on this.

Good question. They have not changed too much. I think you're right, and as Loren has said and we have said, we first look to advance the business looking internally, organic development, and that is what we have done. If you look at the range of capabilities right now, we don't see a lot of gaps, and during that process, we thought the gaps we had, we did solve internally so we don't see gaps right now. That said, that's continuing why it puts M&A on the back burner, because we look to M&A when we can solve the problem with the capabilities that we have. Where we have done it though, Rob, it's more in India, that was a market that looked over at a very long term, a good thing to do when we saw a way to get into India, and a relatively small investment, and we think it's a good investment over the long term. So it was more country than capabilities. But as I said earlier on the call, nothing looks obvious at all right now. That said, if the market does get very challenging, it's amazing what pops up in those periods, but it's not apparent at this time.

A couple of quick questions. One is on the alt and distribution. You mentioned earlier in the conversation that there is a high bar on the distributor side to accept alts. At least, that is my read of what you said. I am just wondering what is there for it, and is it simply a matter of time and performance over time to prove out, to get on platforms, or is there other things going on?

It's a good question. The desire is there, but it's complicated. The distributors are figuring out what they want on the platform and how to implement it. Educating the sales force is essential. There's a strong emphasis on ensuring suitability, which I believe are positive developments. We want to avoid being on a platform that could lead to unfavorable outcomes for our clients, so the focus has really been on educating the sales force about their goals, the feedback from distributors, and our confidence in the capabilities from the money manager. This is what has slowed the process down. There are only a few alternative capabilities available across different platforms, but we likely have as many as anyone else in the market.

Right.

I think it will change though. I think it will pick up the pace as people get more confident.

So it's dedicated sales team into distributors, as well as just helping them understand the various products?

Yes. To be clear, I am also saying the distributors themselves, like a Morgan Stanley are spending a huge amount of time on education for the sales force there.

Right.

They want them very focused on suitability. It's jointly solving that problem. That is really the element where it's taking an awful lot of time.

I got it. There has been a know your customer regulatory requirement in the asset management community, referred to as FATCA. I'm curious if that has impacted flows, not just in this quarter but also in the next few quarters, since I believe it went live on July 1. Can you share if this is something you could benefit from?

As far as I know, we have been working on FATCA for two years now. It has not been anything that has surfaced in any of our conversations with any of our distributors or regions about clients being somehow disturbed or displaced or acting differently than they otherwise would. So at least from where I sit today and what I have heard, it's sort of been a non-event. It's probably been a lot of work, but it's not created a different demand behavior.

Okay. Thanks.

The long-term net inflows continued to average somewhere in the mid to upper single digit billions per quarter, so quite encouraging. Just looking out over the next couple of years, recognizing it's tough to predict, but what do you think are the biggest opportunities and risks to that range from an asset class product perspective? I certainly recognize that part of your value proposition is having that diversification to be where the demand is, but I just wanted to get your take there.

I believe the greatest opportunity for us lies in people returning to equities. It's been a while, but I think they will come back. We can revert to similar percentages due to demographics and other factors. With respect to our firm, we have a long-standing strength and a wide range of capabilities. When there is active movement back into equities, it will significantly impact us. The risk, however, is entering a challenging bear market, which could prolong that situation. Nonetheless, all we have discussed today highlights our diverse capabilities, which positions us advantageously.

And Loren, you mentioned that, it sounded like maybe you are pulling back on a little bit of spending here. What are you maybe delaying in terms of project spending, and what magnitude of dollars are we talking about? Thanks. It's an active discussion right now, so we are not at a point where I would say we would provide any different guidance than what we have in the past. As I said, our current guidance is pretty much in line with what we said before. It's going to be more of a discussion as we continue look, are we in a really turnaround, where flows are coming back. I'd just say it's one that we are looking at day-to-day. In terms of things that you could be delayed, there's certainly things that are prioritized and delayed, relative to other things you absolutely have to do because of client need or a regulatory need. That is the kind of thing that we are looking at, is could you delay three months or six months and not really affect clients in a regulatory situation.

Yes, thanks for taking my questions, although a lot of them have already been asked here. I may have missed it, but we talked about the fixed income flows being heavily influenced by some institutional mandates. Was that the same case for the balance, because that looked to spike up during the quarter?

We observed significant interest in our balance product, particularly in Europe. This product is part of our industrial perpetual team, which integrates the expertise of our equity and fixed income teams. Additionally, there was considerable interest in our balanced product in China. Within the balance category, IBRA has also attracted great institutional interest, and we are seeing strong demand there.

You had mentioned the fact that the organic growth target on long-term assets is between that 3% and 5% range for the year. Do you just have a bit more clarity? Is there more institutional stuff in the pipeline? I think right now we are sitting in the 2% to 2.5% range.

We definitely see strong interest in the large institutional pipeline, as Marty mentioned, which is at an all-time high, in addition to retail activity returning. July was somewhat of a lost month, but we are making good progress. If we maintain a rate of about $2 billion per month, we could reach approximately 4%, based on my calculations. I also believe we have the potential to exceed that.

Thank you very much, and thank you, everybody for joining Loren and myself, and have a good rest of the day. Thank you.