Invesco Ltd (IVZ) — Q2 2016 Earnings Call Transcript

This presentation, the 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, assets under management, geopolitical events and their potential impact on the company, 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 very much. And thank you for joining us and as was just mentioned, Loren Starr, Invesco CFO is on the call with me. And we'll be speaking to the presentation that's available on our website if you're so inclined to follow along. As we typically do, I'll give an overview of the business results for the second quarter. Loren will go into greater details on the financials and then importantly, we'll open up to Q&A. So let me begin by highlighting the firm's operating results for the quarter which you'll find on Slide 4 of the deck. Long-term investments performance remained strong during the quarter, with 68% to 73% of our actively managed assets ahead of peers on a three- and five-year basis, respectively. Strong investment performance and our continued focus on meeting client needs mitigated the impact of volatile markets during the quarter. Strong client demand helped drive passive and institutional flows, which led to long-term inflows of $4.5 billion during the quarter. The adjusted operating margin was 38.6%, an improvement over the prior quarter, and during the quarter we returned $318 million to shareholders through dividends and stock buybacks. Assets under management were $779 billion at the end of the second quarter, up from $771 billion in the first quarter. Adjusted operating income was $330 million in the quarter, up considerably from $307 million in the prior quarter. Adjusted diluted earnings per share was $0.56 versus $0.49 in the prior quarter. Notably, during the quarter, we raised our quarterly dividend to $0.28 per share and we also repurchased $200 million of stock during the quarter. Before Loren goes into details on the company's financials, let me take a few minutes to talk about investment performance and flows during the quarter. Turning to Slide 7 now, our commitment to investment excellence and our work to build and maintain strong investment culture helped us deliver solid long-term investor performance across the enterprise during the quarter. Looking at the firm as a whole, 68% of assets were in the top half on a three-year basis and 73% were in the top half on a five-year basis. On Page 8, you'll see that flows into passive capabilities were quite strong, while flows into active capabilities were flat, with $4.5 billion in total long term inflows. Flows into passive capabilities were driven by strong demand for Invesco PowerShares capabilities. This was our second best quarter in Invesco PowerShares history with roughly $3.8 billion in net new assets, and the strong flows are helping us continue to gain ETF market share. This reflects longevity and the breadth of the PowerShares offering as well as our continued focus on meeting client needs. We are well positioned in the current market environment through our low volatility suite, commodity suite, fixed income, and Bank Loan ETF. As you're probably aware, smart data strategies are growing at nearly twice the pace of the overall ETF market. Although this is prompting a wave of fund launches by competitors, our expertise in smart data and factor investing continues to differentiate us in the market and helps us gain share. Although long-term flows are flat on the active side, we saw solid demand for alternatives, including real estate and multi-asset capabilities, as well as fixed income. Asia-Pacific demonstrated continued strength across retail and institutional with tremendous momentum continuing into the third quarter. Our continued focus on delivering strong investment performance and bringing in our broad range of capabilities supply contributes to very positive results in the region. Globally, we also saw strong institutional flows during the quarter which reflects our continued focus on this channel and results in a series of positive institutional flows going back two years. Client demand trends remain consistent with particularly strong interest in fixed income, multi-assets, and real estate. Our institutional pipeline remains very strong. So at June, the unfunded pipeline is up 15% on assets under management versus the prior quarter and the prior year. Retail flows are flat this quarter as investors weighed their options during some of the late quarter volatility. That said, we continue to see strength in fixed income, U.S. dividend strategies, as well as retail alternative capabilities, specifically GTR and real estate. Now let me take a moment and highlight the business in EMEA. Our number one position in U.K. retail, our strong cross-border retail business, and our robust institutional pipeline across EMEA all position us extremely well ahead of a potential Brexit. We've positioned our business over many years to serve clients who are located in a variety of countries across the region. Our people and fund ranges are organized to meet those local needs. We are well diversified across channel, with U.K. retail cross-border and institutional each comprising roughly a third of our business in the region. We are also diversified across asset class, with assets spread across equity, bond, and multi-asset capabilities. Lastly, with more than 1,300 people in the region, we are well placed with a strong business in both the U.K. and on the continent. Our diversification and our construct positions us extremely well to deliver for our clients in EMEA. Investors across Europe reacted thoughtfully to the market volatility that occurred around the vote. Since then, clients have taken advantage of the market movements by utilizing a full range of Invesco's comprehensive fund ranges to achieve their long-term investment objectives. As an example, we've seen strong movement in the capabilities such as our highly regarded global targeted returns fund that clients seek to manage risks in their portfolios. With regard to flows, our business in EMEA has demonstrated good resiliency through the Brexit topic, with flows improving when compared to the prior quarter, pre the announcement of the results of the U.K. referendum on June 23rd. For the month of June, up to the date of the Brexit vote, we saw daily average outflows of approximately $78 million. Since the referendum vote, outflows have subsided to a daily average of $13 million. Although it's still early days, we feel good about the momentum in our EMEA business. Going forward, we are focused on staying close to our clients, managing our core business, and executing our strategy while adapting to any changes that might be brought about by Brexit. Before I hand the call over to Loren, let me say a few words about the new DOL Fiduciary Rule. We're actively engaged with clients as they work to understand the impact of the DOL Rule on their business. For the past couple of years, our discussions with clients have intensified, moving from clarifications and interpretations to practical application. We are in discussions with them regarding product implications, sharing best practices, and how best to leverage robo solutions such as Jemstep. Based on our early discussions, we continue to believe our comprehensive range of capabilities positions us very well to help our clients as the DOL Rule is implemented. Additionally, given Invesco's tremendous expertise and experience partnering with clients to address regulatory topics, for example, our work with RDR in the U.K., we view this as an opportunity to further deepen our relationships, provide new capabilities, and enhance our business overall. With that, I will now turn it over to Loren to review the financials in more detail.

Thanks, Marty. Okay, so quarter-over-quarter you saw our total AUM increase by $8.1 billion or 1%. This was driven by positive market returns of $10.7 billion. We also saw long-term net inflows of $4.5 billion. I should note, of this $4.5 billion, $0.9 billion came from IVR leverage, which is classified as our institutional passive fixed income. We also saw the acquisition of our India joint venture complete and that brought in $2.4 billion. We saw inflows from the money market of $2 billion. These factors are offset by negative FX translation of $7.7 billion and we also saw outflows from the QQQs of $3.8 billion. Our average AUM for the second quarter was $784.5 billion, which was up 4.9% versus Q1. Our net revenue yield came in at 43.7 basis points, which is 0.1 basis points lower than the prior quarter. Although this was a small change, there were a variety of factors which impacted our yield in Q2. These included AUM mix and lower performance fees, which reduced the yield by 0.7 basis points and 0.4 basis points, respectively. These factors were offset by one more day in the period, which increased the yield by 0.4 basis points. In addition, currency mix and the increase in other revenue each contributed 0.3 basis points to net revenue yield in the quarter. Next, let's turn to the operating results on Page 13. Before I begin, I'd like to point out that we've evaluated and taken on board the SEC's new guidance on non-GAAP financial measures. Accordingly, you already noticed the changes that we've made in the format of our second quarter earnings press release which now focuses primarily on the U.S. GAAP results. In addition, U.S. GAAP period-over-period variances are now set out in detail in our earnings release. Both our earnings release and this investment presentation contain detailed reconciliations between our U.S. GAAP and non-GAAP measures. Importantly, there is no change to how we've calculated our non-GAAP measures relative to prior quarters. Since we've already provided the U.S. GAAP narrative in the earnings press release, my comments today, consistent with past practice, will focus exclusively on the variances related to our non-GAAP adjusted measures. So, actually, let's turn to the next page that's titled non-GAAP operating results. You've seen that revenues increased by $38.5 million or 4.7% quarter-over-quarter to $856.6 million, which included a positive FX rate impact of $6.4 million. But then within that revenue number, you'll see that adjusted investment management fees increased by $32.6 million or 3.5% to $962.9 million. This reflects higher average AUM for the quarter. Foreign exchange increased adjusted investment management fees by $7.7 million. Our adjusted service and distribution revenues increased by $5.7 million or 2.9%, reflecting higher average AUM for retail products. Foreign exchange increased adjusted service and distribution revenue by $0.5 million. Our adjusted performance fees came in at $9.3 million in Q2 and were earned from various investment capabilities, including $5.5 million from our bank loan products. Foreign exchange increased these fees by $0.1 million. Our adjusted other revenues in the first quarter were $31.7 million, an increase of $7.7 million from the prior quarter, which was the result of increased transaction fees from real estate. Foreign exchange increased these revenues by $0.4 million. Third-party distributions service and advisory expense, which we net against gross revenues, increased $1.3 million or 0.4%. This movement was in line with higher revenues derived from our retail AUM, and FX increased these expenses by $2.3 million. Moving further down this slide, you'll see that adjusted operating expenses at $526.2 million increased by $15.2 million or 3% relative to Q1. Foreign exchange increased adjusted operating expenses by $4.1 million during the quarter. Our adjusted employee compensation came in at $347.9 million, an increase of $7.6 million or 2.2%. This increase was driven by higher sales commissions and variable compensation costs, a full quarter of higher base salaries effective from March 1st, and an increase in deferred compensation expenses for the awards granted in the first quarter. This was offset by a decline in seasonal payroll taxes. FX increased our adjusted compensation by $2.8 million in the quarter. Adjusted marketing expenses increased by $3.6 million or 14.2% to $29 million, reflecting the seasonal increase in client events. FX increased adjusted marketing expenses by $0.3 million in the quarter. Adjusted property, office and technology expenses were $82.8 million in the quarter, an increase of $1.7 million versus Q1, driven by higher technology costs. FX increased these expenses by $0.5 million. Adjusted G&A expense at $66.5 million increased by $2.3 million or 3.6%, driven by professional services expenses when compared to the prior quarter, and FX increased G&A by $0.5 million. Going further down the page, you'll see that adjusted non-operating income increased to $15 million compared to Q1, and this difference was largely driven by higher equity earnings from unconsolidated affiliates in the second quarter, as well as the $7.1 million FX loss recognized in the prior quarter. The firm's effective tax rate on pretax adjusted net income in Q2 was consistent with the prior quarter at 26.5%, which brings us to our adjusted EPS of $0.56 and adjusted net operating margin of 38.6%. Finally, before I turn things over to Marty, I just want to provide a quick update on our capital management activities in the quarter. As you'll recall from our recent announcement, in addition to our ongoing share repurchase activity, during the quarter we entered into a $150 million accelerated share repurchase program on June 30th. As a result of this, our end of period share count declined by approximately 1.7% quarter-over-quarter to 413.1 million shares. With that, I will turn it back to Marty.

Thank you, Loren. Let me just make a couple of summary comments before we get to Q&A. We believe our ability to produce strong long-term net flows this quarter reflects the fundamental strength of our firm, our expertise across a broad range of fundamental and factor-based capabilities, and our focus on helping retail and institutional clients achieve their investment objectives. We feel good about the commencement of our business. We closed strong across the quarter as we helped clients manage through the volatility we saw in June. Strong flows have continued into July with more than $8 billion of long-term net inflows across a variety of capabilities and regions. This $8 billion includes $6.5 billion that is related to the 529 mandate which was recently funded. As noted during our investor day and earlier this year, we were very well positioned to help clients be successful, which in turn will enhance our market relevance, drive growth, and strengthen shareholder value over the long term. With that, Loren and I would like to take any questions you all have.

Thanks, good morning everyone.

Good morning, Craig.

So, it’s nice to see the strong rebound in your fixed income flows. Can you let us know which products were the largest contributor to the bond flows and also can you help us think about the sustainability of the second quarter results into the second half?

Maybe I'll make a comment and Loren can talk more specifically. As I just mentioned, we just continue to see really strong flows. And importantly, as I said, long-term flows away from the 529 plan saw more than $1.5 billion already. The pipeline continues to be very, very strong. Another element that we're seeing is, again, the PowerShares data capabilities, the breadth and longevity of the range. It's really kicking in and so this - right now it looks like it's going to continue quite strongly, across the board.

I'll just say generally, the growth in our fixed income is being driven by our U.S. investment grade capability, which is showing up as a large contributor in our institutional pipeline. I just want to remind people that in the flows this quarter there was about $0.9 billion related to IVR leverage, which shows up in the fixed income column. We are also seeing a lot of interest in PowerShares, fixed income emerging markets, sovereign debt, Chinese fixed income, so a variety of other fixed income capabilities factor into that, with each one being about roughly $0.5 billion in size.

And then on Brexit, I think the client reaction is significantly more muted than anyone was thinking about 30 days ago. But how are clients reacting in both the U.K. and continental Europe today following the vote? And have you seen a lot of that initial reactive activity dying down?

Yes. Like us, like by others, we are very engaged with clients. It was interesting to see in our numbers for June, which was probably the peak of uncertainty where you saw the flows being most negative. Interestingly, several institutional clients were waiting until after the vote, and what it really did was start to create clarity in their minds and institutional mandates started to fund fairly quickly, within the 30 days past that. We're also seeing retail investors making decisions on where to put their assets, with GTR being a beneficiary of that. Overall, people are looking to re-evaluate their asset allocation capabilities. The good news is the breadth of our capabilities puts us in a position that we can be helpful to them in any situation. It is really early days, but we believe, frankly, it is opening up opportunities for our firm. We are strongly positioned, structurally for Brexit with no distractions from revamping product lines or anything similar, allowing us to focus on clients. The decline in Invesco's share price has overreacted, which is evident from our results.

The other thing worth mentioning is that our teams have been really good at being innovative and creating new products in advance of client demand. We would expect to see more interesting products hit the U.K. market this year and the beginning of next year. This includes an income-oriented type of GTR product that is being looked at, as well as some enhanced index capabilities and factor capabilities. So, we believe all these will really help us, even if we see continued uncertainty surrounding Brexit.

Thanks for taking my questions.

Thank you.

Hi, good morning. First, in terms of maybe a couple questions on excess cash. What was the balance at the end of the quarter? And I've recalled that consolidation was a conceptual focus when that pool was being built. But I think product development and capital return have been higher priorities more recently. So how do you see that excess cash level evolving, and is a billion dollars the number you still want to migrate towards over time?

Ken, total cash at the end of the quarter is $1.45 billion, and so the regulatory requirement element of that was about $660 million, leaving us roughly $800 million of capital. We're certainly within tolerances around that billion. Surely I won't get fixated on that billion being the bright line that we have to hit. We have been very opportunistic and will continue to be opportunistic with respect to returning capital to the extent that we see our stock being valued in a way that we believe is not commensurate with our true values. So, I would say look to our past practices to evaluate how we're going to operate going forward; it will be very consistent.

Okay, great. Thank you. And two little questions: maybe one on the Rhode Island plan, how’s the transitioning gone? And how much money actually came over when it was first announced? I know it was about $7 billion; was that about what eventually moved over?

So, what came over was $6.5 billion, and those are combinations of your market impact. The transition is now complete, and everyone is very, very focused on expanding the capabilities through the retail channel. We believe it’s going to be a great plan, and we think that we can help make it even more successful. We're executing as we speak.

All right. Excellent. Then just lastly, active equity net outflows were pretty large this quarter. Obviously, it was a big risk-off quarter with Brexit and other things. Maybe any observations you have on sort of the lack of money coming in or more money coming out that kind of drove that big net outflow this quarter?

Ken, the one thing I would point out is that the 2.8 billion related to international growth was something that we noted. I think there was one client that parted ways, but that international growth capability is performing extremely well. It has been a close capability, and I believe it will be filled up pretty quickly through the course of this year. So, I would consider that a little bit of a one-off with respect to the active equity outflow. The other elements are consistent with what you’ve seen in the past, so I don’t think there’s anything that’s accelerating outflows relative to that category other than that one element.

Great, thank you very much.

Hey, guys. Good morning. Thanks. A couple of quick questions. I guess, first around the margins. Obviously, we saw the adjusted margin improve sequentially given a better revenue environment, but still down pretty significantly year-over-year. So, if we're seeing more range-bound markets, which obviously feels like a big if right now, but under that scenario how should we think about the trajectory of the margin for the rest of the year? And then is there anything else you guys are targeting on the expense front to help drive margins higher in today's environment?

Yes, Alex, I'll take that. Our expectation, even with markets being flat, which is the way we normally forecast anyway, is for margins to be on an upward trajectory as we continue to grow organically and continue to work hard on the optimization work around cost. The firm has done a great job of creating capacity for investment without adding to costs, really through using, as we have discussed in the past, greater utilization of our own shared service centers, leveraging technology more effectively, and streamlining, simplifying our processes. That work is ongoing, and we are on track with respect to optimization which we discussed providing some expense relief of roughly $30 million to $45 million by the end of the year. That run rate, which is now beginning to flow through our numbers, has been very helpful. Just a reminder, we had those acquisitions that came onboard, Jemstep and Religare, and those expenses are being offset through this optimization while the revenues are showing up in the revenue lines. We believe these factors will continue to help drive margin expansion. Our increments on margin continue to be at a very high level with that sort of 55% to 60% incremental margin. And given that the fee rate is positively affected because of the mix of business coming in, particularly around institutional being at our higher fee rate than what's being drawn down, we'll continue to benefit from that. I think we can see margins increase and reach levels we have seen in the past without too much stretching.

I might add a point though. From my perspective, where we’re really going to see margin expansion is on organic growth. We continue to be disciplined on expenses as we always have been. But I tell you for the 11 years I've been here, I don't know of a time when I've seen so many of our initiatives poised to have a significant impact. You're starting to see factor-based smart beta solutions come into play. Our internal debate is how best to invest these to achieve the desired returns versus being cautiously optimistic. Of course, we always do that, but it's an incredibly exciting time for us.

Just generally because I know people are quite curious, guide on expenses would be to expect them to be roughly flat from the current level through the rest of the year based on flat markets and FX. That provides a nice backdrop as we continue to grow the revenue line item.

Got it. That's very helpful. Thanks, guys. Second question on the DOL. I understand it's still pretty early, but it seems like there are a lot of moving pieces already happening on the distribution side of things and different kind messages from various distribution partners. What are you hearing from the larger distributors out there, whether they are warehouses or some of the more regional platforms, specifically as it relates to essentially payment for shelf space and how those conversations are evolving?

From my perspective, I naïvely thought there would likely be a uniform response, but in reality, each of those distributors are different, and their businesses are positioned differently. There are variations on the theme, and that makes sense. There are ways to continue to support the brokerage business, but knowing that the movement is towards their advisory businesses. They’re placing a DOL on the landscape along those lines. This plays well for organizations like ours, where we have such a range of high-conviction fundamental capabilities and factor-based investing. It’s too early for us to be specific about the outcomes, but the changing parameters could lead to changes in share classes and focus on asset classes. This is what we know for now, but I'd be cautious about jumping ahead of our clients.

Another change is the use of fewer providers. The firms who have the broadest set of capabilities, and good performance, will probably fare better as assets change as a result of DOL. We believe we're well positioned to operate in that environment.

Yes, understood. Thanks so much.

Thank you.

Thanks, good morning. Quick question on the fee rate here. We saw management's fee rate decline quarter-over-quarter. I know that you guys often speak to the revenue yield, but I hope to ask a question here that cuts out some of the other noise and speaks specifically to the investment management fees divided by AUM. What drove that? Was it mix? Should we think about that as sustainable? And I think last quarter you had given some indications saying that you expect the fee rate to improve throughout the year. Is that still your expectation?

The management fee rate is impacted by FX, and there are some underlying factors, as well as the overall equity component versus non-equity. When the market declines, you’ll see changes in that dynamic. There's another element around our gross management fee rate, which is the RDR impact. This transition is likely to be sustained as we go forward. It doesn’t impact the net revenue yield significantly since our pain, which is associated, goes away too. Therefore, you should analyze the net number to understand the dynamics behind these shifts. We still feel that our management fee environment is stable overall. While Europe is slower than it has been previously, it is one engine that was driving that fee rate, but we are observing strength in Asia and alternatives, which helps continue to sustain our fee rate.

Okay, got it. Thank you. That’s helpful. And then, I know that it’s probably hard to be precise, but given how important the U.K. is to you all, is there a way that you could help us understand how you're considering potential impacts to your expense base depending on the likely outcomes from a post-Article 50 world?

Sure. The reality is no one knows. If we project the most likely outcome, which is Brexit will happen, you are likely to end up with mutually beneficial trade agreements between the continent and the U.K. It will take time to get there. Our business has been structured for a post-Brexit environment. We’re a strong U.K. business, a strong continental business, and we don’t foresee major changes there. The prime factor affecting the business will largely be driven by the economic environment. There is a scenario where the outcome is not as negative as believed. The depreciation of the pound has actually been beneficial for exporters in the U.K. Our business is well situated for any changes due to Brexit, and we don't expect the asset management industry to suffer to the extent that other businesses, which might have to relocate employees or restructure.

Okay, that's helpful.

Hi, thanks. Just a quick follow-up question on your comments on July. Besides the 529 funding, about $1.5 billion of inflows, does it have a comparable mix to what we show on the quarter, alternatives and fixed income inflows with equities on the out?

Of the $8 billion, the $1.5 billion was market and outflows, and I don't precisely know how it broke down.

The question is around the $8 billion; what were the flows for the $1.5 billion?

I believe it's similar to what my experts are telling me.

Okay, very good.

Just curious; you alluded to GTR's performance being good, which is great for the product. Has it gone into positive flows, and do you believe we're turning a corner to achieve positive flows globally?

The GTR has gone positive in the second quarter; it was largely institutionally driven. Retail has significantly improved, so it’s just modestly in outflow. Both retail and institutional indications of this product show better positioning now than in the past, given the strong recent performance.

Great. And just one more follow-up; Loren, if I could. In the prepared remarks, you mentioned things that are generally doing well outside of maybe active equity. So, is the 3% to 5% organic growth rate still viable? Can it happen without U.S. equities? Given that all else is working, I just want to clarify.

We think it's still viable. The 3% to 5% organic growth rate is what we aim for over time. This year, we would like to enter that range, but clearly, what is happening in Europe makes it a bit unique. Therefore, I don’t want to offer specific promises around it since that could be elusive, but everything indicates that we should approach our targets if factors around our institutional and retail businesses, particularly in Asia, remain strong.

Excellent. Thank you.

Hi, this is actually Andrew Nicholas filling in for Chris. My first question is on GTR. Obviously, you’ve had exceptional performance there across all time periods, particularly on a year-to-date basis and with respect to some of the strategies, largest peers. I was just curious if you could provide some color on how that pipeline is looking and that asset class as a whole?

The GTR pipeline is certainly featured in a lot of the growth in the pipeline generally. It’s up more than 20% quarter-over-quarter, and it continues to evolve. It is distancing itself from other products. I believe it has the potential to grow significantly beyond its current level. Consultants are reviewing it positively in the U.S., which is an important aspect of embracing its growth. Retail engagement is also stronger, although a full two-year track record is still pending. Once achieved, it should present a real opportunity in the U.S.

Great. Thank you. That’s helpful color. And then on the DOL rule, I think general expectations are that it will drive flows to products with lower fees, strong relative performance, or a combination of both. I’m wondering if you have thoughts on which of those factors might drive flows more in the post-DOL world and how you view your product suite's competitiveness on each front.

Our view is that it's less simplified. Financial advisors are trying to generate excess risk-adjusted returns over time; you cannot achieve that with cap-weighted indexes. It is really a mixture of high conviction fundamentals, good performing active as you described, combined with passive, and where we feel the advantage sits is with smart data. Combining these, offers reduced total cost. This makes the range of our capabilities very beneficial at the retail level. Firms with narrow product scopes and moderate performance will find heightened challenges in this evolving environment.

Thanks for taking my questions.

Thanks. Hey, guys. A few quick questions on your U.K. pound hedge. This position is significantly in the money. Regarding the accounting of that, is that a mark-to-market methodology, or will we see gains as you start exercising that position? And, regarding the current state of the pound, how big of a step-down in income can we expect when you have to roll that hedge?

In terms of U.S. GAAP, it’s mark-to-market, which flows through the P&L, and you’re witnessing it flowing through currently. For our non-GAAP disclosure, we backed out that mark-to-market and included only what has been realized. In this quarter, that impact was very small. For upcoming quarters, based on the current rates, it’s probably close to one penny EPS for each quarter. As for how we handle the rolling hedge, we’re patient; we will evaluate whether we need to, considering the cost versus the current rates.

Great, okay. Thanks for clarifying that. And then a quick follow-up on comp. It sounds like there are a few discreet items impacting the number this quarter. How should we think about comp in the back half of the year?

It’s going to be roughly flat to current levels, so I think that’s the way you can think about it—essentially flat with fluctuations here and there.

Okay. Thank you.

Thanks. Good morning. Appreciate all the color from Brexit and your commentary around flows thus far. Is there any kind of negative fallout that you’re seeing institutionally or in certain regions where you’re perceiving longer-term shifts, or has it been kind of consistent across the board?

It really has been consistent. Regarding the Brexit impact, as I was trying to highlight, we are engaging deeply with clients. Interestingly, we noted in our June numbers that uncertainty peaked during that period, leading to the most negative flows. Instead, we observed that a number of institutional clients have moved forward quickly to fund their mandates. If you look further into Asia-Pac, it remains strong. There is no evidence that Brexit has impacted our pipeline negatively; in fact, it’s getting stronger by the day.

The only thing I would add is there are some question marks surrounding DOL and it's uncertain how certain clients may gravitate towards exclusively low-fee products versus active funds.

Financial advisors will look for ways to generate excess returns, which active management is positioned to deliver, ensuring its longevity and relevance.

That’s helpful, and regarding the Rhode Island win, have you seen benefits from it in terms of enhancing your profile in that channel?

Absolutely, it has raised our profile significantly and it's driving capabilities through both retail channels and in Asia-Pac with an abundance of activity. We feel strong about the potential here, although it is early days.

Great, thank you.

Thanks. Good morning, guys.

Good morning.

I guess my first question is just any update you may have or thoughts on the SEC’s proposed liquidity rules on 40 Act products and certainly that impact on ETFs. I know you’ve talked about this in the past, Marty, but current thoughts, as you’ve been part of any interaction with the SEC on kind of what’s likely? Given the explosive growth in smart data, ETF products, and other strategies, do you think it could risk inhibiting some of the strategies you’re running?

In the course of my many years in this industry, it has frequently been said that consolidation is imminent, but it hasn't materialized. Time and again, it feels very different today. One contributing factor could be the maturing industry. A current aspect is that we’ve had a strong beta run since 2009, due to government intervention, which has supported cap-weighted indexes. However, I believe that this trend is not sustainable. There will be room for active management to thrive, even if doom’s day is proclaimed by some. Rising costs in regulatory compliance and cyber framework pressures are likely drivers for increased consolidation within the sector. Yet, we’re fortunate to be well-positioned at this juncture; our business has never been stronger, with many engines firing nicely.

That's great. And maybe sticking with the regulatory theme, your money fund business is perhaps under the radar, but come October you’ve got changes taking effect. You have a predominantly institutional business there. Can you share any updates on how you think clients are going to behave, given the industry's trend of prime to government conversions?

You've seen numerous money fund providers consolidating over the years, and that trend will continue. A smaller group of firms will prove to be committed and successful in that business. We have been active in improving our products and, as of July, have already seen $4 billion in inflows into our money fund business. We are optimistic about this business becoming even stronger moving forward.

Great. Thanks for taking my questions.

Great, thanks very much. Hey, Marty, just to start off with a question on the smart data franchise. Obviously, you’ve had a good relatively good first-mover advantage in that category. However, as you see more competition in that market, what steps are you taking to leverage that advantage? I would also like to know how smart data is affected within the context of DOL and the Jemstep platform.

We see smart data as part of our factor investing and are proud to be one of the few firms with a factor-based strategy that's proven itself over 35 years alongside fundamental investing. That combination is critical in our global positioning. While factor investing is growing demand outside the U.S., we are focusing on retail in the form of smart data through ETFs. Regarding competition, we do recognize the unique challenge of having many similar products when compared to mutual funds; a few ETFs can differentiate themselves due to their market maker dynamics. This means that our early mover advantage is crucial, particularly given our longevity in this space and the associated liquidity. The competition is growing, which affirms the appeal of smart data; however, entering this market is not easy. We maintain a focus on high-quality initiatives and expanding our footprint.

As a company, we aim to be innovative and proactive in launching new products ahead of demand. This includes the support and solutions Jemstep provides for clients. While it's in its early stages, we foresee deeper conversations with clients via this platform, particularly as it helps meet the demands arising from DOL and other regulatory measures.

Great. And lastly, Marty, your perspective on the rising speculation of consolidation in the asset management industry. Do you believe that continued underperformance in active management could lead to significant consolidation or necessitate product rationalization?

Having been in this industry for quite a while, the assertion of impending consolidation has been stated for the last five years with little formality. But, given the current state, I agree, it feels different this time. Active management will always exist; we have seen a run since 2009 that has created growth for cap-weighted indexes, but it's unsustainable. The need for active management will reassert itself over time, and we'll see competitive advantages for those firms that can demonstrate consistent performance. Rising regulatory costs will prompt larger firms to consider consolidation. We will remain judicious about opportunities to strengthen ourselves through potential mergers, and we are very focused on capital flexibility as we currently have significant growth potential.

Great. That's great color. Thank you so much.

Thank you.

All right, thanks, guys. Hey, Loren, just two quick follow-ups. One is just on the management fee; you mentioned on a net basis given RDR that that’s transitioning. I want to get a sense on timing, how much of that’s played out versus how much longer it continues? And then I don’t think you mentioned it, but just any color on the performance fees outlook?

The RDR impact will likely be largely completed by the end of this year; that's my guess. In terms of performance fees, I think roughly $5 million per quarter should be a reasonable estimation moving forward. For other revenues, we see that hanging around the $30 million a quarter mark.

Okay, thanks a lot.

Sure.