Invesco Ltd (IVZ) — Q2 2021 Earnings Call Transcript

Good morning and thank you all for joining us. As a reminder, this conference call and the related presentation may include forward-looking statements, which reflect management's expectation about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumptions and there can be no assurance that actual results will not differ materially from our expectations. For a discussion of these risks and uncertainties, please see the risks described in our most recent Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements. We may also discuss non-GAAP financial measures during today's call. Reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation.

Thank you, operator, and thank you everybody for joining us. We've reached the halfway point in the year and we're continuing to see strong momentum in our business, as you can see from the results that we reported this morning. But before I begin, I'd like to take a minute to recognize the hard work of our team at Invesco. Like almost everybody, our employees have been working in a work-from-home or a hybrid environment for more than a year now, and they've achieved these results in a very challenging environment. I'd like to thank the team for their dedicated focus and adaptability during this time. With the success of the virus, many of us have been coming back to the office and working together over the last few months, and I can tell you it's good to see our colleagues once again. We are at different stages of reopening around the globe. One thing I hear from everybody who is able to get back to the office is how great it is to see one another and work together. I will say, we're at our best when we're working together, collaborating, and innovating. I am excited about the future as we continue to open our offices to more employees and welcome them back. As always, we'll follow the status of COVID and local guidelines as we transition back to the office, meeting client needs and ensuring the continued health and well-being of our employees. Now, let me turn to the results. If you're so inclined to follow the presentation, I'm going to start on slide three, which is the highlights for the quarter. We achieved a new record in the second quarter for long-term net inflows totaling $31 billion. This follows net inflows of $24.5 billion last quarter and up year over year $18 billion in the second half of last year. Growth was led by net inflows into institutional ETFs, fixed income, and focused alternative capabilities. The key capability areas where we have scale, investment readiness, and competitive strength drove growth again in the quarter. These are areas where our investment performance is strong. We're highly competitive and well positioned for growth. Looking at our EPS, excluding the Qs that generated net long-term inflows of $12 billion during the quarter, net long-term inflows from alternatives during the quarter were $4.3 billion, including strength in our private markets business. We launched two CLOs during the period, raising $1 billion and generated net inflows into our real estate business of $1 billion. We continue to focus and invest in our alternative capabilities where we also see the benefit of our partnership with MassMutual, which we highlighted last quarter. MassMutual has committed over $1 billion to various alternative strategies, materially increasing the speed with which we can get to market for the benefit of our clients. We continue to innovate with strategies for retail investors through the launch of products such as INREIT and the partnership we announced with UBS, in which we will provide bespoke global property investment services for management clients of UBS in Switzerland, other parts of EMEA and Asia. We also have $5 billion in direct real estate capital available for deployments. We had net long-term inflows of $8.8 billion into active fixed income and within active global equities, our $53 billion developing markets fund, a key capability that came with the Oppenheimer acquisition, continues to see net inflows of nearly $1 billion during the quarter. Second quarter flows included net long-term inflows of $3 billion from Greater China, and our Chinese joint venture continues to be a source of strength and differentiation for us as an organization. Additionally, our Solutions-enabled institutional pipeline accounts for 35% of the pipeline at quarter-end, following the funding of a large passive mandate from Australia in the second quarter, which was enabled by our Solutions team. Allison will provide more information in a moment on flows, the pipeline, and results in the quarter, including the continued progress towards our net savings target. I would note that the growth we're experiencing is driving positive operating leverage, producing an adjusted operating margin of 41.5% for the quarter. Strong cash flows being generated from our business improved our cash position, helping build a stronger balance sheet and improving our financial flexibility for the future. Invesco's scale, investment readiness, and competitive strength position us well going forward, and we continue to focus our efforts on delivering positive outcomes for clients while driving growth. With that, I will turn it over to Allison to walk through the results in greater detail.

Thank you, Marty, and good morning, everyone. If you'll turn to slide 4, our investment performance was strong in the second quarter with 72% of actively managed funds in the top half of peers or beating benchmarks on a five-year and a 10-year basis. This reflected continued strength in fixed income, global equities, including emerging market equities and Asian equities, all areas where we continue to see demand from clients globally. Moving to slide 5, we ended the quarter with $1.525 trillion in AUM. Of the $121 billion in AUM growth, approximately $66 billion is a function of increased market values. Our diversified platform generated gross inflows in the second quarter of $114.4 billion. This is an 82% improvement from one year ago. Net long-term inflows in the second quarter were $31.1 billion, representing 10.6% annualized organic growth. Active AUM net long-term inflows were $2.1 billion and passive AUM net long-term inflows were $29 billion. The retail channel generated net long-term inflows of $9.5 billion in the quarter, driven by positive ETF flows. This represents a $24.1 billion improvement in net long-term inflows from one year ago driven by significant improvement in equities in the Americas. The institutional channel generated net long-term inflows of $21.6 billion in the quarter augmented by the funding of a nearly $18 billion Australian passive mandate. Looking at retail net inflows, our ETFs, excluding the QQQs, generated net long-term inflows of $12.1 billion. Our global ETF platform again, excluding QQQs, captured flows in excess of its market share of AUM in the second quarter and for the first half of 2021. Net ETF inflows in the United States included a continued high level of interest in our S&P 500 Equal Weight ETF, which generated $2.6 billion in net inflows in the second quarter, following $4 billion of net inflows in the first quarter. Looking at flows by geography on slide 6, you'll note that the Americas had net long-term inflows of $5 billion in the quarter, driven by net inflows in the ETF, various fixed-income strategies, private market CLOs, and the direct real estate net long-term inflows that Marty mentioned. Asia Pacific again delivered another strong quarter with net long-term inflows of $28.3 billion. Net inflows were diversified across the region; nearly $18 billion was from the large passive Australian mandate that funded from our institutional pipeline in May. The balance reflects $4.8 billion of net long-term inflows from Japan, $3 billion in inflows from Greater China of which the majority was from our China JV, $1.8 billion from Singapore, and the remainder arising from other areas across the region. Long-term inflows for EMEA, excluding the UK, were $1 billion driven by retail flows, including net inflows into alternatives, particularly our US and European senior loan funds. ETF net inflows in EMEA were $2.2 billion in the quarter. Finally, the UK experienced net long-term outflows of $3.2 billion in the second quarter, driven largely by net institutional outflows in multi-asset and investment-grade capabilities. $2.4 billion of these net long-term outflows relate to our global targeted return capability, which had $10.2 billion globally in AUM at the end of June. The overall UK net long-term outflows in the second quarter were an improvement of $2.7 billion as compared to the first quarter net long-term outflows of $5.9 billion. This improvement was driven by UK retail primarily inflows into the European equity fund and lower net outflows during the quarter across a number of fixed-income and UK equity capabilities. Turning to flows across asset classes, equity net long-term inflows of $15 billion reflect a good portion of the Australian mandate and ETFs including our S&P 500 Equal Weight ETF that I mentioned. We continue to see broad strength in fixed income in the first quarter with long-term inflows of $13.6 billion. Drivers of fixed income flows include institutional net flows into investment-grade strategy and retail net long-term inflows into various municipal funds and fixed maturity products in Asia. It's worth noting that although we did have fund launches in China in the second quarter, they were not at the pace of what we experienced in the first quarter. You see this largely reflected in the $9.1 billion decrease in the net flows in the balanced asset class during the quarter to net outflows of $1.8 billion. Our alternative asset class holds many different capabilities and this is reflected in the flows we saw in the second quarter. Net long-term flows and alternatives improved by $4.5 billion over the first quarter, driven primarily by our private markets business through a combination of inflows from the newly launched CLO, direct real estate, senior loan, and commodities capabilities. Included in these alternative flow results is also the GTR net outflow that I just noted. If you exclude the global GTR net outflows, alternative net long-term inflows were $7.2 billion—quite significant in the quarter. Moving to Slide 7, our institutional pipeline was $33.3 billion at June 30 reflecting the funding of the large passive indexing mandate in Asia Pacific assisted by our custom solutions advisory team. Excluding the impact of the $18 billion passive mandate in the first quarter, the pipeline has increased in size and remains relatively consistent with prior quarter levels in terms of asset and fee composition. Overall, the pipeline is diversified across asset classes and geographies, and our solutions capability enabled 35% of the global institutional pipeline and created wins in customized mandates. This has contributed to meaningful growth across our institutional network, warranting our continuing investment and focus. Turning to Slide 11. You'll note that our net revenues increased $52 million or 4.1% from the first quarter as a result of higher average AUM in the second quarter. The net revenue yield excluding performance fees was 34.8 basis points, a decrease of 0.9 basis points from the first quarter yield level. The decrease was driven mainly by asset mix shift, including higher QQQ and money market average balances as well as the impact of the large passive Australian mandate that funded in May. This decrease was partially offset by the improvement in markets in the quarter. The incremental impact relative to Q1 of higher discretionary money market fee waivers was minimal in the second quarter, but the full impact on the net revenue yield for the second quarter was 0.7 of a basis point. We do expect fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels. Total adjusted operating expenses increased 1.9% in the second quarter, a $14.4 million increase in operating expenses was mainly driven by variable compensation and marketing. Higher variable compensation as a result of higher revenue, offset by the reduction in payroll taxes and certain benefits from the seasonally higher levels that we experienced in the first quarter. We also recognized further savings in the quarter resulting from our strategic evaluation. Marketing expenses increased $9.8 million in the second quarter mainly due to seasonally higher levels relative to the first quarter, which is typically the low point for marketing spending annually. We also reevaluated the timing of various branding campaigns and launched targeted initiatives in the quarter across the globe. Operating expenses remained at lower-than-historic activity levels due to pandemic-driven impact to discretionary spending, travel, and other business operations. However, we did resume some client activity in business travel late in the second quarter, which is reflected in both marketing and G&A expense. As we look ahead to the third quarter, our expectations are for third quarter operating expenses to be modestly higher compared to the second quarter, assuming no change in market and FX levels from June 30. We expect that the higher AUM levels driven by net inflows and market improvement in the second quarter will have a modest carryover impact on both revenues and associated variable expenses in the third quarter. We also expect a modest seasonal increase in marketing-related expenses as spending typically increases in the third and fourth quarters. One area that's still more difficult to forecast at this point is when COVID-impacted travel and entertainment expense levels will begin to normalize. We are engaging in more domestic travel and in-person engagement. We expect to see continued modest resumption of these activities across the third quarter. Additionally, our U.S. mutual funds board has approved certain changes to the pricing of transfer agency services that we provide to our funds. As a result, we anticipate that our outsourced administration costs, which we reflect in property office and technology expenses, will increase by approximately $25 million on an annual basis. Offsetting this will be a corresponding increase in service and distribution revenues, resulting in a minimal impact on operating income. We expect this new pricing structure to go into effect in the third quarter, and to be fully in place by the fourth quarter. Moving to slide 9, we update you on the progress we have made with our strategic evaluation. As we've noted before, we are looking across four key areas of our expense base: our organizational model, our real estate footprint, management of third-party spend, and technology and operations efficiency. Through this evaluation, we will continue to invest in key areas of growth, including ETFs, fixed income, China solutions, alternatives, and global equities. In the second quarter, we realized $7.5 million in cost savings: $2 million of the savings were related to compensation expense and $5 million related to property, office, and technology expenses. The $7.5 million in cost savings were $30 million annualized, combined with the $95 million in annualized savings realized through the first quarter of 2021, bringing us to $125 million in total, or 63% of our $200 million net savings expectations. As it relates to timing, we still expect approximately $150 million or 75% of the run rate savings to be achieved by the end of this year, with the remainder realized by the end of 2022. Of the $150 million in net savings by the end of this year, we anticipate we will realize roughly 70% of the savings through compensation expense. The remaining 30% would be spread across occupancy, tech spend, and G&A. We expect the total program savings to be 65% in compensation and about 35% spread across the other categories. For the $125 million of the expected $150 million in net savings by the end of this year that are already in the quarterly run rate, the degree of net savings per quarter will continue to moderate going forward. In the second quarter, we incurred $20 million of restructuring costs. In total, we recognized nearly $170 million of our estimated $250 million to $275 million in restructuring costs that were associated with this program. We expect the remaining transaction costs for the realization of this program to be in a range of $85 million to $105 million through the end of 2022. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results. Moving to slide 10, adjusted operating income improved $38 million to $541 million for the quarter, driven by the factors we just reviewed. Adjusted operating and margin improved 130 basis points to 41.5% as compared to the first quarter. Most importantly, our degree of positive operating leverage reflected in our non-GAAP results was 1.8 times for the quarter, underscoring our focus on driving scale and profitability across our diversified platform. I would also point out that our adjusted operating margin back in the third quarter of 2019, which was our first full quarter following the Oppenheimer acquisition was 40.9%. At that time, we reported a net revenue yield, excluding performance fees of 40.7 basis points. At the end of the second quarter of 2021, our net revenue yield ex-performance fees was 34.8 basis points, yet our adjusted operating margin was 41.5%. We have been building out our product suite to meet client demand, and client demand has been in lower-fee products. We're focused on aligning our expense base with changes in our business mix, enabling the firm to generate positive operating leverage and operating margin improvement. Non-operating income included $42 million in net gains for the quarter, compared to $26 million in net gains last quarter, primarily due to increased unrealized gains on seed money and co-investment portfolios. The effective tax rate for the second quarter was 22.8%, compared to 24% in the first quarter. The effective tax rate on net income was lower in the second quarter primarily due to a change in the mix of income across taxing jurisdictions. We estimate our non-GAAP effective tax rate to be between 23% and 24% for the third quarter. The actual effective rate may vary from this estimate due to the impact of nonrecurring items on pre-tax income and discrete tax items. A few comments on slide 11; our balance sheet cash position was $1.3 billion at June 30th, and approximately $750 million of this cash is held for regulatory requirements. Our cash position has improved considerably over the past year, increasing by nearly $350 million, largely driven by the improvement in our operating income. Our debt profile has improved considerably as well, with no draws on our revolver at quarter-end. As a result, we've substantially improved our net leverage position. During the quarter we repaid the remaining $177 million forward share repurchase liability in April, and there are no remaining share repurchase contract liabilities. In terms of future cash requirements in the second quarter, we recorded an adjustment to the MLP liability associated with the Oppenheimer purchase, reducing this liability from our original estimate of nearly $385 million down to $300 million. We anticipate funding this liability in the fourth quarter of 2021. While we do anticipate a degree of insurance recovery related to the matter, the insurance claims process is inherently complex, and we do not have an update at this stage of the timing or size of that recovery. Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility. In summary, we continue to see growth in our key capabilities. We remain focused on executing the strategy that aligns with these areas while completing our strategic evaluation and reallocating our resources to position us for growth. Finally, we remain prudent in our approach to capital management. We're in a strong position to meet client needs, run a disciplined business, and continue to invest in and grow our franchise over the long term. With that, I'll ask the operator to open up the line to Q&A.

Hi. Thank you very much. I would like to discuss private markets. You mentioned it briefly in the second quarter, but I am interested in a broader perspective on what has the most growth potential. Specifically, what strategies are you implementing on the retail side to drive growth, and what do you envision for the size of this segment?

Yeah, Glenn, thank you for that. Obviously, it's been an area of focus for much of the industry. Our principal driver right now has been real estate. It's a very strong global real estate group, direct real estate. Some of the more recent developments have been trying to get that into the retail channel. INREIT, which is nonpublic, is now available in the US. It's early days. That was also funded by MassMutual for about $400 million, which is really important. We think that has great potential in the next year or so as it's in the marketplace based on the historical performance of our real estate group. The other was really a venture with UBS in offering the same thing direct real estate with some listed real estate securities through Switzerland, other parts of EMEA, and Asia Pac. So, those seem to be really immediate opportunities. Quite frankly, some of our private credit has more recently been gaining attention with institutional investors. They have a better track record and with that track record, we're now seeing the follow-on. We look at this as a very important part of our business as we go forward.

Thanks. Allison, you mentioned a small increase in expenses for Q3. Could you provide some clarity on how much below normal our expenses are right now? I understand we can't predict when normal travel and spending will resume, but it seems like current expenses are somewhat normal while market conditions are not. Can you help put that into perspective for us?

Yeah, it's a hard one because we have to look back at where we were in the last half of 2019 to try to figure out what normal might have been, and I'm not sure that that's normal going forward. I think we're probably $10 million to $15 million per quarter below what we would have seen in the last half of 2019, and I don't expect we'll see all of that come back just when we get back to whatever some permanent state is. I think we're ways off from that just given the international travel restrictions that look like they're going to be in place for a while. But I do think we are certainly starting to see a resumption of domestic travel within regions that are allowing it, and we're certainly seeing, as we reopen offices, some pickup in just client activity overall. So I think probably a good estimate is to think about being maybe $15 million below what normal used to be. Some element of that will come back over time.

That’s awesome. Thank you for that. Appreciate it.

Hi. Good morning. Thanks for taking my questions. Super high level maybe first for you, Marty. As you look to the future maybe over the next three years to five years, what do you see as the most significant factor that's influencing the direction you're taking Invesco? I think if I asked that question maybe five years ago you might have said something like factor-based investing. But what are your thoughts today?

Yes, Ken, that's an excellent question and one you've mentioned before. Currently, many of our past investments are yielding significant results, especially the impact from China, which continues to be a strong point for our organization. Estimates suggest it could represent about half of all flows in the asset management industry over the next five years, though I can't confirm that. Nonetheless, it's a significant influence. Additionally, our solutions are increasingly integrated into virtually all client interactions, not just in institutional settings but also in retail. This has been a key factor in our ETF and index businesses and will remain vital moving forward. We've also recently expanded our factor and indexing capabilities to institutional clients, responding to their need for fewer money managers while expecting comprehensive services. You can see this trend reflected in our recent success with the IFF win in Australia. Overall, these are the major trends I identify, and the changes are already underway. That's my perspective.

Awesome. Great. Thank you. And then maybe Allison, you mentioned UK outflows including some outflows from GTR. Does the decline in GTR assets lower the capital that you're either required to operate within Europe or volunteer to hold to operate in Europe, or is the growth elsewhere in Europe or the UK mitigating these declines?

Unfortunately, the short answer to that question is, no. The AUM decline there does not impact the regulatory capital that we have to hold. It's a little more complicated than that and it focuses a little bit more on the P&L specifically expenses than it does AUM levels.

Thanks. Great. Thank you very much.

Great. Thanks for taking my questions. Marty, I had a question for you on Greater China. Some of your competitors have opened up wholly-owned subsidiaries. Others have been able to take on, I guess, a majority stake. I know you've talked about it for a while but can you update us on where Greater China stands with your movement to at least economically take a majority stake in the operational units you run, but just an update on some of that.

Yes, great. So it might be some of the competitors, but to remind everybody, we own 49% of the joint venture right now. Our partner Huaneng Power, we have been in conversations for two years to take a majority stake. There has been an agreement in principle, but it has not moved forward for various reasons, COVID being one of them. Quite frankly, that would be the principal reason. But it has not hurt us. I think this is a really important thing and to contrast our position to others; we've had management control since the beginning of the venture. That really has what separated our success as compared to our competitors. We literally operate as one entity within China in the retail markets for INVESCO Great Wall, but institutionally we'll go to large institutions with the retail platform and our institutional platform. So, again, that's really what's enabling the growth. We also have a wholly-owned subsidiary focused on other elements within China. And I think, as you look at where others are, I think it's important to look at separate announcements from actual occurrences. Generally, it has slowed down over the last 18 months from most institutions trying to get to market with some of these new undertakings.

Great. I'd like to follow up on Intelliflo. You haven't discussed it much lately, but about a year ago, you launched it on the Citi platform. I saw recently that State Farm is going to begin using the platform. Can you update us on its current status, whether it's meeting your expectations, and if you anticipate it will contribute to new product sales as it rolls out?

Yes. Right now, there's about $1 trillion in assets under advisement. So you've seen some nice growth. State Farm is an important addition. Obviously, it's very early days and we have a relationship with Citi. The real focus of the past year was really pulling together the different elements of Intelliflo and creating a single operating platform to go to the clients holistically. You are now starting to see the outcomes of that and will be more specific when events are material enough to have that conversation. We're starting to get the momentum back in the business. Last year slowed down some just with the COVID environment. But again, we're still optimistic about the prospects of Intelliflo.

Great. Thanks. Good morning, everyone. If I could begin with the following points.

Hey, Brian.

Good morning. Can you discuss the outlook for net revenue yield going into the third quarter, considering the strong growth in passive versus active in the second quarter? Also, will you benefit from lower money market fee waivers, given the rate and IOER rate?

Yes. I have a few points to mention. The main factors influencing net revenue yield from quarter to quarter will primarily be the mix of flows, which corresponds to client demand. We believe we're achieving scale on a well-diversified platform, allowing us to capture demand where it arises. However, this mix will certainly affect revenue yield. Market fluctuations will always have a significant impact every quarter. As for money market waivers, they constituted about 0.7 basis points of a drag this quarter. Looking forward, while an increase in IOER would be beneficial, changes in Fed funds would have a greater effect, even though they are not perfectly correlated. We will be strategic about our positioning relative to the competition, and we aim to manage these waivers carefully, especially as we collaborate with our distribution partners on the institutional side, which accounts for about 80% of our waivers compared to 20% for retail. This allows us to share some waivers while ensuring our clients achieve their expected results. Regarding net revenue yield, I anticipate a slight decline, but I want to highlight our performance compared to 2019, where our net revenue yields are 6 basis points lower, yet our operating margin has increased to 41.5%. While we recognize the need to include net revenue yield in our models, we approach it from a broader perspective, focusing on overall revenue generation and positive operating leverage within our platform. Our performance over the past year underscores this approach.

Thank you for your question. Can Marty or Allison provide some insights on how much sustainable products, both active and passive, contributed to flows in the second quarter? Also, what is our assets under management for these products and how do we define them? An update on that would be helpful. Additionally, could you share the strategy for future product launches in this area, even in general terms?

Let me make a couple of comments just on our sustainable ESG capabilities, and then I'll let Allison pick up. For us, we look at ESG as an incredibly important part of what we do. We are absolutely focused on integrating our ESG capabilities across the whole organization. Seventy-five percent of all our assets now have integrated ESG within our capabilities. I think as you know, it's really been driven by EMEA in the first instance. It's an absolute business necessity and we think it is throughout the totality of our organization. If you look specifically at dedicated ESG assets under management, it is about $52 billion today, and we continue to see growth there. If you look at our ETFs, we have one of the highest market shares of ESG ETFs, given our long track record, and again, they'll continue to see flows because of that. But again, if you look at this as just an absolute imperative for us to get right, throughout the organization, whether it’s how we manage money, but also the capabilities in the marketplace, and literally working with clients to ensure we're meeting what's important to them as we work through this.

Yes. I think Marty hit on most of it. In terms of flows for the quarter, they were softer than in the first quarter. I think it was a little less than $2 billion. We had quite a bit stronger flows in the first quarter, which really, I wouldn't say there's anything specific driving the lower flows in the second quarter other than perhaps some market headwinds. We certainly saw some highs in the first quarter and a little bit of pullback from that could be pointing to some post-election highs that were driving the first quarter and some modest shifts from growth. Overall, our ESG capabilities continue to be quite strong in terms of performance and demand. As Marty noted, we're capturing more than our fair share of the market in terms of flows into the ESG capabilities.

Great. Hey, thank you for your update.

Thank you.

Hi, thanks. Good morning. I wanted to follow-up on your comments around balance. I think Allison you mentioned there were fewer fund launches. That category obviously had some outflows, but performance is good. So, maybe if you could give us an update on kind of the outlook for that category?

Yes. What really drove the real strength in the first quarter were the fund launches in China in particular. We had probably a high watermark just given the strength of those launches, both in terms of the size and performance overall. I think inside of our JV, we have seven fund launches again in the second quarter. I think about five of them were balanced, again driving about $1 billion in flows. So, it continues to be strong overall. Just some lumpiness quarter-to-quarter, I wouldn't necessarily point to anything specific beyond that.

Okay. That's helpful. And then, just on the strategic evaluation and understand the targets and kind of where you sit today, but curious as you've kind of gone through this in the areas of investments that you're looking to put some of those savings in some of those buckets, if there's been any real changes from the original expectations that you're allocating more dollars to we're seeing more growth, or it seems like we're getting the same kind of message each quarter, but curious if there's any more detail around things that might be different than when you originally outlined it?

I'll start and let Marty add his thoughts. You're hearing the same message each quarter because our strategy remains consistent. I believe it's important to recognize the focus and continuity in our approach. We're investing in key capabilities where we believe future demand will grow. While we're already seeing client demand in some areas, we anticipate that this demand will continue, and we will maintain our focus on these capabilities. Regarding any specific changes, I wouldn't say there's anything significant prompting us to adjust our strategy. There may be softer sentiment in China, but this doesn't change our belief that it's a vital growth area for us, regardless of the market sentiment or political discussions that fluctuate. We remain strongly committed to our solutions capability, which is crucial for our future growth, evident in both our institutional pipeline and overall performance. Our ETF capabilities are strong growth drivers, and we've been capturing more than our market share in flows. Last quarter, we captured around 4.2% of flows while holding a market share of 2.7%. More importantly, we've secured over 8% of the revenue pool of ETF flows, highlighting the strength and positioning of our capabilities, which are appealing due to their differentiated performance and outcomes. Reflecting on the past year, there haven't been any major surprises; the market has been supportive, which has helped us. However, we're committed to aligning our cost structure to sustain the strong operating margins and operating income growth you’ve observed this past year.

Allison, that's well said. Dan, it's no mistake when you look at the second quarter highlights when we call out the key capability areas. They haven't changed because that's where our heads down. We see that as the great opportunity for us as an organization. They align with some of those macro trends that we talked about a few minutes ago, and it has been disproportionate investment from us and also disproportionate results. So, you're not going to see a change much quarter-to-quarter.

Thank you.

Good morning. Thank you for taking my question. Considering the success you've had with your solutions offering, how do you build on that strength? How do you maintain differentiation? Are you noticing competitors trying to replicate your success? How do you stay ahead? How much of this business actually recurs over a few quarters or years? I understand it's early, but could you provide any statistics, estimates, or insights on that?

Yes. It's a great question. I can't describe what competitors are doing. But our approach was a little different from the standpoint of we started with recognition any number of years ago that clients wanted a broad range of investment capabilities, and that's what we've been building out. Importantly what we did building a solutions team is it sits on top of the investment team. So, it does not compete with the investment teams; it uses the investment and existing capabilities. That is somewhat unique as best we can tell in the marketplace. The client engagements are such that it's literally an engagement with the clients to understand what they're trying to accomplish with the portfolios and delivering a range of capabilities along the lines. The more recent one, as I mentioned a few minutes ago, was introducing index capabilities to institutions. The totality of that is what creates the importance of relationships with clients, and you end up expanding your mandates per client in these relationships. It's early days, but we're seeing it is persistent in time. Also, as I said a few minutes ago, it's very important institutionally. It's also quite important in the retail channel. So, we just look at it as quite frankly it's the way that business has been done as we look to the future.

Okay. For my second question, this is likely directed at Allison. I recognize that our liquidity situation has been improving. You've mentioned the upcoming MLP liability funding later this year. Although there are still some demands on liquidity, we are undoubtedly in a much stronger position now, and those demands are significantly lower than they were a year ago. With that perspective, what are your updated priorities for capital management? How should we consider the potential for an increase in share buybacks? We did see a recent dividend increase, but how do you prioritize these various demands on liquidity moving forward?

Sure, thanks Brennan. Yes, the resolution of the MLP matter will be a terrific milestone for us to get through. That's been out there for a while now. It's something we've been anticipating and reserving for. As we think about the funding of that matter and the fact that the liability, at this moment, does appear to be lower than we were previously anticipating is good news. We look forward to the resolution of that in the fourth quarter. As we get through that, that clears out a lot of these I'll call them contingent liabilities, that were things we needed to be cognizant of and manage our cash flow for over the past year plus. As we look forward, beyond the resolution of that, I mean, I'd say a couple of things. One, we continue to focus on the improvement of our balance sheet overall. Our leverage profile, as I noted, continues to improve with the strength of EBITDA depending on how you think about our leverage, but looking at the non-preferred element of the capital structure, I mean, we're below 1x now with the results in the second quarter. That's strong improvement. We're going to continue to be focused on opportunities that we have to improve our balance sheet. I don't know what that means just yet. But we do have maturities as you know that come up in 2022 and 2024, and those remain areas of optionality for us, as we think about balance sheet improvement. Beyond that, we are going to continue to be committed to that sustainable and modestly increasing dividend. We increased the dividend last quarter and we will continue to look for opportunities to increase the common dividend, concurrent with improvement in our performance and our results. Longer term, resuming share buybacks, I don't know when that will be. As I said, we want to get through the MLP matter, and we continue to be focused on the leverage profile. Share buybacks certainly remain an opportunity for us to continue to return capital to shareholders.

Thanks for that color.

Okay. Excuse me. Thank you very much for taking my questions this morning. Marty maybe a question for you, just as you think about your relationship with MassMutual. Where does that go from here? Maybe think through the capital need versus the opportunity to grow organically through their distribution pipe, and then, maybe any opportunity that you could see, working with them on M&A?

Yeah. Thanks, Bill. It has been multifaceted, as you're pointing out. One is a co-investor and seed enabler in alternatives. That's been very, very positive, not just for the investment itself, but really the credibility of a seed investor with other institutional clients. The retail channel is about, correct me Allison, about $10 billion on the retail platform right now, where the number to flowing organization within that right now. As you know, they've recently closed the acquisition of the REIT business, which looks like it's going to be an opportunity for us as we move forward. We continue to work together on a very regular basis on various opportunities as we look to the future. With regard to M&A, not exactly sure what the question is. They understand our strategy very much as an organization. If something made sense along the lines we've talked about in the past, that it improves our strategic position. It's complementary to our business. There's sort of, if you want to call it the necessity of cultural alignment, I'm sure they would be supportive of that.

Yeah. The one thing I'd say is we manage about $5 billion on the broker-dealer platform.

Okay. That's helpful. And then, just a follow-up coming back to capital management for a moment, certainly appreciate a little uncertainty, as you go to the end of the year with the liability still outstanding. But just given where the stock is trading today against your relative positioning, I'm just surprised that buybacks would be fourth on your list. Can you talk a little bit about maybe the internal rate of return assumption you have between new business growth coming in the door versus the opportunity to buy back stock at these price points? Thank you.

Yes, I mean, I don't want to imply that it's fourth on the list. As we've said before, it's not quite as linear a waterfall as that would imply. We are being thoughtful about the timing and when we would resume buybacks. We're certainly thoughtful about how we think about that internal rate of return relative to other opportunities. The one thing I didn't say, and I should have said, is the number one opportunity we have is to continue to invest in our own growth. We are constantly thinking about the opportunity we have to invest in our own product launches, to invest in our own capabilities, and we think that drives longer-term growth that shareholders are really looking for. Buybacks aren't fourth and last by any means, but we've had a number of parallel paths we've been running over this past year and resolving some of these contingent liabilities as well as improving the balance sheet overall. We're making good progress there, and we're going to continue making progress as we think about all these opportunities we have.

Thank you, guys.

Great. Good morning. Thanks for taking the question as well. I was hoping to go back to private markets discussion for a second and really zone in on the retail opportunity you see for Invesco. Maybe just a little more color on what product specifically you're sort of aiming to penetrate the retail footprint with, sort of what is your go-to-market strategy there? And considering a significant amount of open space and building appetite for private market solutions in the retail channel, can you get there organically, or do you think you need to acquire additional capabilities?

Yes. So, it's a very good question. I said it was the INREIT, which is being introduced to the retail market right now to illustrate our capability. Our view is that the largest opportunity for growth for direct real estate capability is in the retail channel globally. That's not unique to us. I think many firms have tried to figure out how best to engage alternative firms in particular, how to access that channel. It's very hard from the standpoint of those firms if you're an alternative firm and have the capability. You really need that retail presence with distributors, wholesalers, and the like to be successful. There are very few firms like us that can pull that off, and we look at this as a really important development for us. So again, just what we've done with UBS and now through multiple distributors here in the United States. We don't think that we have the capabilities that are in demand within that channel, and it's early days as far as I'm concerned for what we're going to see move forward here.

So, it sounds like organically is kind of the path here on private markets as opposed to anything inorganic?

Yes. Yes. We have plenty to give with the capabilities that we have right now in the retail channel.

Got you. Great. And then just maybe a quick follow-up, Allison for you, any apologies if I missed it, but can you talk a little bit about the fee rates associated with the $33 billion institutional pipeline? And then, curious again within the old part of the institutional pipeline, what strategies does that comprise of? Thanks.

Sure. If I look at the pipeline and look at the fee rate, what we've disclosed previously is the fee rate for our institutional pipeline tends to be – it's below the firm average, but it tends to be in the kind of high 20s, low 30s basis points. As I look at the fee rate of the pipeline at the end of the second quarter, it's the highest I've seen since I've been at Invesco. I'm quite bullish as I look at the pipeline both in terms of the size, but it was replenished back to $33 billion following the $17 billion funding of the Australian mandate. The composition of the pipeline itself in terms of average fee rate and the balance across those regions and asset classes is pretty balanced across the United States, Asia Pacific, and EMEA. In terms of asset classes, kind of coming back to the second part of your question, it's actually a little bit higher on the alternative side than it has been in the last few quarters. That really points to our private markets capabilities, both our real estate capabilities and our senior loan capabilities. Again, this speaks to the strength of those capabilities and the demand that exists in the institutional channel.

Great. Thank you very much.

Hi. It's Mike Cyprys from Morgan Stanley. Thanks for squeezing me in here. Just a question on China, given the success that you guys had over there. I hope you could talk a little bit about your approach to distribution in China. What's worked, what hasn't worked as well? What lessons do you take away from your deep experience in the region as it relates to distribution? And maybe you could also touch upon some of the digital distribution initiatives as well and how that's evolving?

Yes. Thanks, Mike. Great question. It's a very, very competitive market, and success is only going to come in the retail channel if you are deeply embedded in China and have your business driven by the local Chinese, which is the case for us. You have to be a little more typical than we might see in the United States, where there are very important engagements with large banks and insurance companies getting on platforms and serving in that way. I'll say half of our retail flows right now are on some type of digital platform. It started with us with Ant Financial as we came in early, I think the first foreign money manager to their very large money fund, and then it expanded from that into other capabilities and then onto other platforms within the marketplace. What you'll also see is the digital engagement is at a level that is the most sophisticated in the world, and how you engage with clients—the demands on the organization are quite extraordinary. But by the way, the benefit is it just has helped us in other parts of the world as we think of those types of engagement as they continue to evolve in different marketplaces. From the retail channel institutionally, same thing. Some of the most sophisticated institutional investors in the world, and it is—you just have to bring the best and brightest within the organization representing the full range of capabilities. This is another example where some of the largest penetrations with those institutional clients and multiple mandates are in China for us, and it really reflects the necessity of the depth and breadth of an organization and to be able to serve the institutional clients at a very high level. I don't know if that's insightful, but that's what's worked for us.

Great. Thanks. And just a follow-up question, maybe more for Allison around the impact of market movements on your expense base. I think in the past you've said maybe about one-third of the expense base is variable or so or moves with market. Is that still right? Then, I see you called out about $18 million or so impact on the comp side for market movements on slide 9. Should we think about that being driven by the 5% market appreciation in your AUM in the quarter translating into that $18 million impact, so $72 million annually? How should we be thinking about that?

So, a few points to note. Firstly, yes, roughly one-third of our expenses are variable and mainly influenced by market conditions, although other factors also play a role. Additionally, when reviewing the market variable comparisons on slide 9, remember that foreign exchange is included. You can observe a consistent relationship between our compensation and revenue, and as revenue grows, the performance of assets under management, along with other factors, influences compensation and leads to an increase in variable compensation. I wouldn't suggest there is any change in the historical relationship here; it remains in line with our previous guidance. I'll leave it at that. Did that answer your question?

Sure. Thank you.

Okay. Yes. Operator, I'm sorry. Did I cut you off?

Yes, I just want to thank you very much for your time on behalf of Allison. We appreciate your engagement, and we'll be in touch. Have a good rest of the day.