Invesco Ltd (IVZ) — Q1 2022 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 guaranteed. 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 statement. 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 very much, Operator, and thanks, everybody, for joining us. As is typically what we do, I will hit some of the highlights, Allison will give more details of the results, and then we will open up to Q&A. So, I am going to start on slide three, if you happen to be following along with the deck. Solid business momentum continued during the first three months of the year. We did have long-term inflows of $17.2 billion in the first quarter. This is the seventh consecutive quarter of net long-term inflows, and our annualized organic growth rate in the quarter was 6%, despite the market backdrop we are all experiencing. This is a key outcome of the broadly diversified set of capabilities we have built over the past decade, and in this volatile market environment, we continue to be extremely focused on our clients. The strength and diversification of our business enabled us to continue anticipating and meeting their evolving needs. In the first quarter, we continued to see strong demand for our key capability areas, in particular, ETFs and Fixed Income. We maintain our focus on areas including ETFs, fixed income, Factor, Index, Private Markets, Active Global Equity, Greater China, and Solutions. These purchases help us generate consistent, strong, and broad organic growth, and we ended the quarter with $1.6 trillion in assets under management. Looking at our specific capabilities, our global ETF platform closed out a very strong quarter. ETFs generated net inflows of $19 billion in the first quarter; this includes the flagship QQQ product. We did increase market share in both assets under management and revenues, and Allison is going to spend a few minutes today going into more depth into the ETF platform. We continue to see clients increasing their allocation to alternative strategies as they search for diversification and higher returns, and Invesco has built a broad and competitive platform across real estate and private credit to meet these clients' demand needs. We are confident in our ability to accelerate growth in these capabilities in private real estate. Net long-term inflows were $300 million in the first quarter; this comprised new acquisition activities of $2.1 billion and investment realizations of $1.8 billion. In our Private Credit business, robust bank loan product demand resulted in net long-term inflows of $3.1 billion, including the launch of two new CLOs. Our Active Fixed Income business remained strong, generating long-term net inflows of $2.5 billion in the first quarter, including $2.2 billion from Greater China. Our Active Global Equity business, our flagship products including the Invesco Developing Markets Fund did see net long-term outflows of $1.5 billion due to the impact of the geopolitical environment that we are experiencing. On the institutional side, our solutions-enabled opportunities accounted for 30% of our institutional pipeline at the end of the quarter. Within Greater China, our JV had net long-term inflows of $3.2 billion in the quarter, and our business in China continues to be a source of strength and diversification. We expect continued strong growth in the years ahead, while recognizing the near-term headwinds in China. However, the momentum in our businesses generated strong cash flows, improving our cash position, leading to some share buybacks in the first quarter, buying back $200 million in common shares during the quarter. Our focus on building a strong balance sheet and improving our financial flexibility has put us in a position to take advantage of an economically attractive opportunity to redeem $600 million in debt that matures in November, which will now be redeemed in early May. Given the strong momentum in growth within our business, the Board has also approved a 10% increase in the quarterly dividend. As we look forward, we will determine the magnitude first, delivering consistent organic growth, together with our disciplined approach to expense management, which should enable us to generate attractive operating margins over the long-term, while allowing us to continue investing in growth and the efficiency of our global business. Invesco’s position as an investor and client-led firm differentiates us in the marketplace. Combined with the depth and breadth of our capabilities and competitive strength, we are well positioned to win in a dynamic operating environment. We continue to focus our efforts on delivering positive outcomes for clients, while driving future growth and delivering value over the long-term for our stakeholders. With that, I will turn it over to Allison. Allison?

Thank you, Marty, and good morning, everyone. I will start with slide four. Our investment performance continues to be solid in the first quarter, with 59% and 68% of actively managed funds in the top half of peers or beating benchmarks on a five-year and a ten-year basis. These results reflect continued strength in Fixed Income, Balanced Products, and Asian Equities, all areas where we continue to see demand from clients globally. Moving to slide five, we ended the quarter with $1.6 trillion in AUM, a decrease of $55 billion from December 31st. As Marty noted earlier, our diversified platform generated net long-term inflows in the first quarter of $17.2 billion, representing nearly 6% annualized organic growth. Active AUM net long-term inflows were $800 million, and passive AUM net long-term inflows were $16.4 billion. Despite the inflows, market declines and FX rate changes led to a decrease in AUM of $85 billion in the quarter. The retail channel generated net long-term inflows of $10.4 billion in the first quarter, driven by inflows in the global ETF products. The institutional channel demonstrated the breadth of our platform, generating net long-term inflows of $6.8 billion, with diverse mandates both regionally and by capability funding in the period. Regarding retail net inflows, our ETF capabilities generated net inflows of $19.2 billion. Excluding the QQQ, our net long-term inflows were $18.7 billion. I will provide a little more commentary on our global ETF platform on the next several slides, but before I do, let me take a moment and touch on flows by both geography and asset class on slide six. You will note that the Americas had net long-term inflows of $7.9 billion in the quarter. While we saw strength in ETFs and our institutional business, we did see pressure from select active equity strategies, including developing markets and the diversified dividend funds. Asia-Pacific saw net long-term inflows of $5.6 billion, representing organic growth of 11%. Net inflows were diversified across the region and included $3.2 billion of net long-term inflows from Invesco Great Wall, our joint venture in China. EMEA, excluding the U.K., also delivered a strong quarter of net long-term inflows, totaling $5.9 billion, representing organic growth of 16%. This was driven by strength in ETFs and sales of senior loan products. From an asset class perspective, we continue to see broad strength in Fixed Income in the first quarter with net long-term inflows of $4.8 billion. Drivers of Fixed Income flows include institutional net flows into various Fixed Income strategies through our China JV, global investment-grade, stable value, and various Fixed Income ETF strategies. Our alternative asset class holds many different capabilities, and this is reflected in the strong flows we saw in the first quarter. Net long-term inflows and alternatives were $7.6 billion, representing organic growth of 15% and was driven primarily by our Private Credit business. This included two newly launched CLOs and net long-term inflows into our senior loan capabilities. In addition, we saw net inflows into commodity ETFs in both the Americas and EMEA. When excluding global GTR net outflows of $1.6 billion, alternative net long-term inflows were over $9 billion. The strength of our alternative platform can be seen through the flows that it has generated over the past five quarters, with net long-term inflows totaling nearly $27 billion, representing a 12% organic growth rate over this time when excluding the impact of the GTR net outflows. Now, moving to slide seven, as Marty noted earlier, given the strong growth in our ETF and other Index capabilities, we wanted to provide a more detailed view on the business. With over 15 years of experience managing indexed assets and a team of seasoned ETF professionals in different strategic regions, Invesco’s Index business has always differentiated itself due to the innovative and value-added nature of our products. Examples of this include first-to-market types of products like the Invesco Senior Loan ETF, distinctive families of ETFs like the low volatility suite, the bullet-share ETFs, and our diversified range of commodity pools. We created the fast-growing QQQ Innovation Suite just a little over one year ago, and it has grown to $5.4 billion at the end of the first quarter. We managed $528 billion in ETFs and other Index capabilities. The platform is diversified in terms of strategies, asset classes, and client geographies. Over the last 12 months, net inflows into ETFs and other Index capabilities were $87 billion, a 21% growth rate. Net inflows into Global ETFs over this period were $66 billion, which is a growth rate of 17%, and new fees from these flows were $130 million, a 16% increase over the prior 12 months. Now turning to slide eight. Over the past five quarters, the ETF industry has seen over $1 trillion of net inflows, a 12% growth rate. Over the same period, Invesco’s 17% growth rate has exceeded that of the industry. In addition, our market share flows have exceeded our market share of ending AUM for four of the last five quarters, increasing our overall Global ETF market share by 40 basis points over this period to 4.9%. Moving to slide nine. Invesco is the fourth largest ETF AUM advisor globally. Our platform is much more diverse than just bulk beta. We continue to innovate our product line, focusing on specialized strategies in growth areas such as smart beta, commodities, Fixed Income, and more niche traditional beta. These capabilities carry higher fee rates compared to bulk beta fee rates. On a fee basis, we ranked fourth in the industry with a 5.6% market share of annual fees. Given the commoditized nature of both beta products, almost 60% of the industry ETF AUM carries a fee rate of less than 10 basis points. In contrast, our ETF capabilities are anchored on strategies that help investors achieve targeted investment goals. The value add proposition of our ETF business is expressed through sought-after products. If you exclude the QQQ, over 90% of our ETF AUM has a fee rate of 10 basis points or higher, with the average fee rate being 33 basis points. Our ETF flows in the first quarter were also differentiated, with over 80% of our ETF net inflows being in products that carry a fee rate of 10 basis points or higher. Looking at net flows in these higher fee products, our market share was nearly 14% of the industry, almost three times our market share of ending AUM. Slide 10 shows that the ETF industry is expected to almost double in size to $18 trillion or 18% annually by 2025. Invesco is well-positioned to continue to gain market share. With our global scale, as well as being a leader in commodities, smart beta, Fixed Income, and our focus on innovative and thematic offerings such as the QQQ Innovation Suite and ESG products, we are positioned to capture client demand around the globe. Our ability to capture flows in excess of our market share is driven by a number of factors, including our understanding of markets and clients, multi-decade ETF relationships in institutional and wealth management channels, a fast-growing European ETF product lineup that is now the second-fastest-growing ETF business in the region, and our ability to build loyalty with a new generation of retail investors. Finally, the brand recognition of the QQQ elevates Invesco’s visibility in the global ETF market. The QQQ products have become the fifth largest ETF globally. Its popularity has spurred growth in the rest of our global ETF platform and laid the groundwork for the launch of adjacent fee-generating products as part of the QQQ Innovation Suite. We launched that suite in October 2020, and it has been highly successful, growing to $5.4 billion by the end of the first quarter, as I previously noted. Now, moving to slide 11, our institutional pipeline, with $29 billion at quarter end, is consistent with the prior quarter's level. Pipeline remains strong and has been running in the $25 billion to $35 billion range dating back to late 2019. Pipeline also remains relatively consistent with prior quarter levels in terms of fee composition. Overall, the pipeline is diversified across asset classes and geographies. Our solutions capability enabled 30% of the global institutional pipeline and created wins in customized mandates. This has contributed to meaningful growth across our institutional network. Turning to slide 12. Market volatility had a significant impact on our first quarter net revenue. This is most evident in the $93 million decline in investment management fees from the fourth quarter, as noted on the slide. In prior quarters leading up to the first quarter, we have been generating strong year-over-year net revenue growth, growing at a 17% rate in the second half of 2021. This was driven by both strong markets and organic growth. As the first quarter unfolded, pressure from market volatility negatively impacted net revenues. As a result, our net revenues were essentially flat year-over-year. We did see improvement in money market fee waivers during the quarter, as short-term rates increased, and the Fed raised rates by 25 basis points in mid-March. The net money market fee waiver impact had been running in the $20 million to $25 million range per quarter. The impact declined to $12 million in the first quarter. We expect the impact will decline to near $5 million in the second quarter and by the third quarter, we expect little to no impact from money market waivers. Total adjusted operating expenses were up about $10 million or 1% as compared to the first quarter of 2021. $6 million of the increase was due to certain changes to the pricing of transfer agency services that we provide to our funds, which went into effect in the third quarter of last year. The increase impacted property, office, and technology expenses, which was offset by a corresponding increase in service and distribution revenue. Taking this into account, adjusted operating expenses were essentially flat year-over-year. Reductions in employee compensation were offset by higher marketing and G&A expenses, partly due to higher reopening activity in these areas, as compared to the first quarter of 2021 when there was no travel. Going forward, the degree of activity in these areas is expected to increase as travel continues to come back. Moving to slide 13. We are very close to our goal of achieving $200 million in net savings this year. In the first quarter, we realized an additional $6.4 million in cost savings. $3 million of the savings was related to compensation expense and $3 million related to a reduction in property expenses as we continue to right-size our facilities portfolio. The $6 million in cost savings of $26 million annualized, combined with the $167 million in annualized savings realized through 2021, brings us to $193 million in total or 96% of our $200 million net savings expectation. In the first quarter, we incurred $22 million of restructuring costs related to this initiative. In total, we recognized approximately $240 million of our estimated $250 million to $275 million in restructuring costs associated with the program. We expect the remaining restructuring costs for the realization of the program to be up to $35 million. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results. Now, moving to slide 14, adjusted operating income decreased $8 million from the first quarter of last year to $495 million, driven by the factors I previously noted. Adjusted operating margin was 39.5%, slightly lower than the first quarter of last year. EPS was $0.56 per share versus $0.68 per share last year, with the main driver being lower non-operating income. In the first quarter of 2021, equity in earnings of unconsolidated affiliates was $37 million, favorably impacted by the improving CLO valuations at that time, compared to $4 million in the first quarter of 2022. Other gains and losses declined $30 million from last year to a loss of $20 million in the first quarter of 2022, driven by lower mark-to-market valuations of our seed capital due to negative market performance. The effective tax rate was 24.2% in the first quarter. We estimate our non-GAAP effective tax rate to be between 24% and 25% for the second quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items. Slide 15 illustrates our ability to drive adjusted operating margin expansion against the backdrop of the client demand-driven change in our AUM mix and the resulting impact on our net revenue yield. Our operating margin two years ago in the first quarter of 2020 was 36%. At that time, we reported a net revenue yield ex-performance fees and excluding the QQQ of 41.8 basis points. In the first quarter of 2022, our net revenue yield declined 5.2 basis points to 36.6 basis points, yet our operating margin has improved to 39.5%. We have been building out our product suite to meet client demand, and client demand has been skewed towards lower-fee passive products, as evidenced by the mix shift between active and passive AUM. Realizing our business mix is shifting, we continue to be focused on aligning our expense base with these changes. This has enabled the firm to improve and maintain a strong operating margin, despite the client demand-driven decline in net revenue yields. Now a few comments on slide 16; our balance sheet cash position was $1.3 billion on March 31st, and approximately $708 million of this cash is held for regulatory requirements. The cash position improved from the first quarter of 2021, even as we deployed $200 million in cash to fund share buybacks in the first quarter. Our leverage ratio, as defined under our credit facility agreement, was 0.8 times at the end of the quarter; if you choose to include the preferred stock, the leverage ratio was 2.5 times. There have been substantial improvements in our leverage profile over the past year. As Marty noted earlier, our stronger balance sheet and financial flexibility put us in a position to capitalize on an economically attractive opportunity to early redeem the $600 million of senior notes that have a maturity date of November 30th of this year. A short-term interest rate increase in the first quarter made the make-whole related to an early redemption of the debt attractive enough to provide a financial benefit to redeem the debt early. It will be fully redeemed on May 6th. This will save us approximately $11 million in interest expense over the period beginning in early May through what would have been the November 30th maturity date. The make-whole and other fees will be approximately $5 million based on current indications, and these will be recognized at the time of redemption; both the savings and the fees will impact interest expense. With respect to our capital strategy, we are committed to a sustainable dividend and returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. As we stated, we intend to build towards a 30% to 50% total payout ratio over the next several years. We completed the previously announced share buybacks of $200 million in the first quarter, and our Board approved a 10% increase in our quarterly common dividend. Overall, we believe we are making solid progress in our efforts to improve liquidity and build financial flexibility, and our first quarter results demonstrate that progress. We remain focused on executing the strategy that aligns with our key areas of focus, continuing to invest ahead of client demand in these areas. At the same time, we are focused on optimizing our organizational model and disciplined expense management. This approach has resulted in a stronger and more resilient operating margin. This has also facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile, putting us in a position to capitalize on opportunities such as the early debt redemption. As we look toward the future, Invesco is in a strong position to deliver value over the long run to all of our stakeholders. And with that, I will ask the Operator to open up the line for Q&A.

Great. Thanks very much. Good morning, Allison and Marty.

Good morning.

To begin with the ETF presentation, I appreciate all the detailed information provided. I'm curious about the organic growth potential of the base fee in the ETF sector, particularly regarding the increased fee rates and the opportunities for product development. Can you share your thoughts on the timeline for further innovations in this area? Are these developments primarily driven by new ideas or enhancements to existing products, such as thematic ETFs? Additionally, what is your outlook on the potential for overall ETF fee rates, excluding the QQQs, to rise in the future?

I have a few comments to make. If you look at the franchises Allison mentioned, they have evolved significantly since we entered in 2006, and they are a clear source of trends. The core strength lies in the non-cap weighted segment of the business, and product innovation and development are crucial for success in the ETF industry. We expect this trend to continue, and I believe the results demonstrate that. We foresee continued growth as we move forward. I hope that helps, Brian.

Yeah. That’s helpful. Sure. There is a lot more to come in the future. And then maybe just on the geopolitical backdrop, what you are seeing, obviously, with a lot of cross currents in China, of course, with lockdowns accelerating, and then of course, the whole situation in Europe. Maybe if you could just comment on how you are seeing flow trends evolve into the second quarter now that this is going on longer and within Europe, whether you are seeing a difference in the U.K. versus the continent in terms of sales growth, in terms of whether the geopolitical situation there is affecting one region versus the other?

It's a very valid point, and there is indeed a contrast. However, there are noticeable sentiment challenges in both China and Europe, albeit for different reasons. In Europe, particularly due to the ongoing Russia-Ukraine conflict, the situation is quite serious. In the U.K., the initial issue was a slowdown, leading people to adopt a more cautious approach. We will have to monitor developments moving forward, as it's challenging to predict how things might stabilize, even though the situation remains difficult. In China, the causes are distinct. The ongoing COVID situation is at its worst since the pandemic started, which has certainly affected sentiment and flows from both Equity and Fixed Income products. Despite this, I believe the Chinese leadership is very focused on the economy and recognizes the need for growth, anticipating measures to support that growth.

In response to your question about the difference in sentiment between the U.K. and Continental Europe, I don’t see a significant difference in sentiment related to the current geopolitical issues. If we look closely at the first quarter results, the outflows affecting our GTR product are primarily seen in the U.K., given that most of it is based there, although there are some challenges in Continental Europe as well. In terms of sentiment, there has been a slight shift towards a more cautious outlook and changes in commodities, which have positively influenced our ETF flows during the first quarter. However, I wouldn’t highlight any substantial differences between the two regions.

Okay. Great. That’s clear. I will get back in the queue for a couple of follow-ups. Thanks.

Thank you.

Good morning. Thanks for taking my questions. So I am curious about how we should think about fee rate pressure. I know it’s always tricky to think about, but maybe something that might help a little bit is to think about it tactically. What did you see in the trends through the quarter, and based upon what we have been seeing so far? I know the markets are really volatile, so not necessarily asking for a forward look, but maybe what was the exit rate and what are the general trends here so far quarter-to-date when we think about drilling up, at least, tactically?

I will do my best, Brennan, to take a stab at that. It is rather difficult as you know. Maybe I will start with just a reminder that the net revenue drivers are always going to be organic growth, mix of flows in AUM, and market dynamics. Over the last year, we have also had the impact of money market fee waivers, which as I noted, we expect that to be going away. But trying to unpack that and develop a view around where we see it going over the next quarter or two is very difficult, maybe kind of again separating what are some of the trends we see. But if we look at, in particular, the decline in our active net revenue yield, and we do provide some additional disclosures around active versus passive net revenue yield in the appendix of the presentation this quarter. I think some of what we see there is just this divergent market beta, where both our emerging markets and China equities have underperformed relative to the developed market indices, and so that’s put real pressure on our active net revenue yield. We have also seen outflows, particularly in developing markets and some of our other higher-fee active equity products, while experiencing inflows into active fixed income, which, of course, are going to be on the lower end of the fee range. Then, you look at the passive net revenue yield and some of the declines there and that’s really a more, I’d say, recent impact of some of the really sizable low-fee large institutional index mandates that we put into the AUM mix last year, think IOOF, as well as some of the growth of our ETFs in EMEA and the Innovation Suite, which while the Innovation Suite is fee generating, it will be on the slightly lower end of our passive fee rate. So those are some of the trends that we are experiencing. I think the biggest issue looking forward will absolutely be market dynamics, as I think about what we could expect in the second and third quarters.

And I’d add to it, Brennan, it’s the right question to ask and you continue to focus on it, and we as a team, too. But you have to ask the question hand-in-hand with profitability and I think what we have demonstrated is that we have been continuing to drive profitability with this movement in Phoenix, and internally, and Allison talked about it; we continue to make sure our resources are aligned and right-sized against where we are seeing the profitability within the organization, and again, I think that said, that look back from 2020 forward demonstrates that we have been able to do that, and we intend to continue to do that, too.

Okay. Thanks for that. And Marty, it’s a great segue and it kind of tees up the next question, which is the environment has been challenging and volatile; it certainly seems like there is less risk appetite here, at least in the near-term. So, how are you guys thinking about the expense base here this year? Compensation trends seemed a little bit better than, certainly, we had been expecting. Is that better-than-expected comp sustainable in the near-term? How should we be thinking about truing up our outlook for expenses and how are you guys thinking about managing it, given the environment?

Yeah.

Sure. A couple of things. One, just a reminder, our expense base is about a third variable and two-thirds fixed. So when we think about that variable component of the expense base, it just can’t react fast enough when you have a pretty strong market downdraft, like what we experienced late February and through March, and of course, we continue to experience that as we make our way through April. So it takes some time for that variablized expense base to fully catch up to the lower revenue. And at the same time, two-thirds of our expense base is fixed, and I think that’s an area where we have been spending a lot of time over the last couple of years really thinking about our overall cost structure and making some choices as we think about how to continue to shift that and lighten up some of the cost structure. We have made really good progress in our view, with the $193 million of that expense base really well addressed over these last couple of years. Getting back to your observations on comp, comp is well managed because we have been really thoughtful and disciplined around headcount over the last year or so. And so while there is seasonality in our compensation expense in the first quarter, which does tend to be around $20 million, $25 million higher than the fourth quarter, comp was pretty well managed against that as we look at headcount, and of course, the variable part of our compensation expense reflects the lower revenue we experienced in the first quarter as well. As I think about the rest of our expense base, you see where we have continued to make some progress on our facilities expense. We will continue to address our facilities portfolio overall, as we just think about our footprint and the role the office plays in our future and take advantage of some opportunities there. But the other thing I’d point to is we have been experiencing a very low to no travel environment for some time now, and as I think about our expense base going into the second quarter and beyond, I do expect we will continue to see some pickup in activity. We saw some pickup in the fourth quarter and the first quarter. We get the start-stop as we all understand from country-to-country and region-to-region. We still remain completely closed in China, for example, but we are seeing travel really start to pick back up and clients wanting to see us again across North America and Europe. And so, with that, I expect a little bit of pickup in activity. I do not expect us to get back to pre-COVID levels for several reasons, but I do expect it to trend just a little bit higher from here. Long way of saying, while we do think there will continue to be this market pressure and revenue pressure, we will be thoughtful and selective in managing our expense base, but not major reactive, because it’s really important that we continue to invest for the business that we expect will be here a year from now, despite the geopolitical tension we are experiencing right now.

Yeah. Thanks for that. Very thorough response. Just one clarifying question, Allison. You made reference to reviewing the facilities footprint. Do you have any expected timeframe for when you all might have an idea about what that review will suggest for changes?

I’d say it’s ongoing, because leases are rolling, and so as we have the opportunity to make decisions, we have been thoughtful and selective, just given that we work in a different environment than we would have a few years ago. So, that’s going to be an ongoing opportunity, and I point just beyond our facilities portfolio to a lot of components of our expense base as opportunities arise to address that, and we are going to be very thoughtful about where we continue to invest and where we may be able to free that up to invest somewhere else.

Thanks for all the color.

Thank you. I am curious; we have seen different markets. I am just curious on the higher rates and the impact on flows. You have obviously mentioned and benefited from the floating rate in bank loan products. You also mentioned some flows into some index product salespeople derisk. Can you give us the full lay of the land on where the pluses and minuses are coming impacted by the higher rates and what to expect as the Fed does its thing? Because I think it’s always a little more on the positive side than people expect that if you take rates for impact of big outflows, and there are some different moving parts. Thanks.

I will make a couple of comments, and Allison will also. So, Glenn, you are hitting on really the topic. I mean, so where we have seen flows, Allison sits in the high market in our Fixed Income, short duration bank loans. We have a very strong commodity suite within the ETF business. We have had that for a very long time and it’s really just, in this market, has become quite popular, as you would imagine. Real assets is another one, direct real estate will continue to be an opportunity for us. Quite frankly, we are seeing marked improvement in our value equity capabilities, and that’s sort of an asset class where there has not been a lot of interest over the last decade. We will have to see what the client demand is for that, but strong investment performance coming on the back of it. So, again, it’s really the breadth of this product lineup that is sort of the one answer to the marketplace, and I think we are well-suited for the environment that we are going into.

And the only thing I’d add to that is just, not surprisingly, investors are going to be looking for more floating rate credit-sensitive assets, and that’s really what you see driving the strength in our senior loan flows and where we would continue to see demand. I think it’s, again, the breadth of the capabilities we have there, and we are well-positioned to capture that demand.

Thank you. Can you provide an update on MassMutual? As a larger owner now, could you remind us of what you are managing for the general account, what type of flows you are experiencing from retail, and what the future looks like regarding the synergies between the two organizations? Thank you.

Sure. I will take that. So, in terms of what we are managing for them, we manage about $5 billion on the broker-dealer platform. They have also committed over $1 billion to various Invesco alternative strategies. So the relationship is, I would say, mutually beneficial and offers the opportunity to continue to grow and expand from here. As you know, they are a larger owner and continue to be very bullish on the overall profile of Invesco and our opportunity to continue to grow market share and position our product capabilities to capture the demand that’s out there. So we are working with them on both sides of the ledger, as we think about the opportunity we have to manage more on their broker-dealer platform and also the opportunity that we have together to co-invest in various alternative capabilities and strategies.

Again, it’s a very strong relationship strategically, and we are both looking for ways to continue to mutually benefit from the relationship as we go forward.

Thank you for all that.

Great. Good morning. Thanks for taking my questions. Maybe a question on the Great Wall JV, so just wanted to see, when you think about the economic impact of it. Obviously, it’s been a strong source of flows the last couple of years even if it’s slowing down at the moment. But what’s the right way to think of the economic contribution? I believe most of the non-controlling interest is from the Great Wall JV or so we are trying to think of its impact is it as simple as just adjusting that for your 49% share, or is there a different way that we should be thinking of it?

Yeah. Let me start with, when you look at our non-GAAP results, we look at that in terms of revenue. You see 100% and then below the line we back out the 51%, we don’t own. So we can spend some time walking through that to ensure that’s clear. But that’s how it’s reflected in the P&L. So you see 100% on the top line, but by the time you get to the bottom line, we reflect 49% of our ownership.

Okay. And maybe…

That’s correct.

Yeah. Okay. Great. And then…

That's correct. Please go ahead. Sorry.

No. No. Please make sure your comment, sorry.

No. There is nothing else to add. Sorry, go ahead, Rob.

Okay. Just back and forth, but sticking with the Great Wall JV, and I know this has come up in the past. I know for a while you have been looking at how do you get a majority stake, and can you update us on that? And more specifically, given that understanding of operational control of the JV and you run it day-to-day, year-to-year, but can you maybe update us on what kind of maybe safeguards you feel like you have, even though you haven’t been able to get to the majority ownership, still a minority ownership? What safeguards should we be thinking of that kind of help protect your position in that joint venture?

I appreciate your question. The key point is that management control has been essential to our success and distinguishes us from many competitors. Our inability to achieve majority ownership is largely due to the ongoing COVID situation, which has created lockdowns that hinder progress. Whenever we seem close to that goal, geopolitical issues arise, as we saw around two years ago, and the current COVID restrictions are still impacting us. It may take a few more quarters for this to change, but both parties desire the same outcome and we have a clear plan to work toward it. Rest assured, the relationship remains strong and well-structured for us as the owner.

Hey. Great. Thanks for taking my questions.

Thanks, Rob.

Okay. Thank you very much. Thanks for taking the questions. Good morning, everybody. So, maybe to start with the balance sheet a little bit. I appreciate the update on the debt for May. And as you think about into the second half of the year, could you talk a little bit about what your priorities might be, how much sort of residual cash you are willing to run with on the balance sheet between sort of the excess cash and required cash and then maybe the delta between incremental debt repurchase versus share repurchase, just given where the stock is trading? Thank you.

Sure. I’d say, in terms of priorities, just overall, our capital priorities are consistent. First and foremost, reinvesting in the business to support future growth. We continue to prioritize that and will; you have seen that. I think that’s what’s put us in a good position to capture the flows we did in the first quarter despite a really challenging environment. Next is to maintain a strong balance sheet and then return excess cash to shareholders. So I actually think we check each one of those boxes nicely in the first quarter as we had the opportunity to further strengthen the balance sheet and return cash to shareholders through the dividend increase and share repurchases. As I think about moving forward, when we get on the other side of redeeming the debt, and I will point out that we will be using a combination of cash and perhaps some draw on the revolver to early redeem that $600 million, and so we have been building cash in anticipation of paying that debt off at the end of this year. We pulled it forward by six months, and it’s a bit of a challenging environment as well in terms of just cash flow generation being slightly weaker than we would have expected or hoped for in 2022, just given the market pressure dynamics that we are experiencing through revenue. So, against that, I think we will continue to be focused on building cash so that we can be in an opportunistic position to reinvest in the business and to think about continued progress on the balance sheet. Our next debt maturity won’t be until 2024. So we have got some time in advance of that next $600 million maturity. I think I missed the last part of your question. I think you asked something about share repurchases?

Well, I am just trying to understand, like, as you think about in the second half of the year and you pay down debt and hopefully all should stabilize, but how much residual cash you will put on the balance sheet, and then when you sort of look at the stock trading sub-20 versus your next debt payment not coming due until 2024? How to think about just sort of buyback versus further husbanding of capital?

Sure. I think, in general, we would love to see cash be somewhere around, and I mean, in generality tier, $1.5 billion or so. That just puts us in a nice comfortable position beyond our regulatory requirement to have cash for opportunistic needs and also whether any downturns. And I do think, as we think about this year, we are cautious not knowing what the environment might hold from this point forward. We are watching closely, and we are going to err on the side of conservativeness as we think about the impact the market might have on our overall revenue dynamics and cash position. So I don’t know if we are husbanding cash so much as being very thoughtful and prudent as we think about our balance sheet and keeping it in a strong position. We are operating in a different environment than we were two years ago. When I think about the first quarter of 2020 and how much pressure that put on our balance sheet and on our profile overall, we are in a much stronger position two years later because of the work that we have done and because of our prudent approach to the balance sheet; this would not be the time to back off that strategy.

Understood. Just as a follow-up and apologize, a bit of a two-part unrelated question. Just I might have missed your commentary, Allison, just on the sequential decline in the Equity earnings line. And then the bigger picture question, just as we look at the alts bucket, can you talk a little bit about what you have coming in terms of opportunity for growth into maybe the second half of this year in flagship funds or just general new product initiations? And then could you sort of clarify how much you are sort of getting tapping into retail democratization? I thought I heard $300 million; just wanted to see if I heard something different? Thank you.

Let me start by discussing equity and earnings. In the first quarter of 2021, we experienced a gain of approximately $36.7 million due to the CLO marks at that time, with CLO mark-to-market shifting significantly upward. In contrast, this quarter's figures show around $4 million in modest gains. However, these are all mark-to-market unrealized gains and losses, leading to the year-over-year difference. Looking ahead to alternatives and growth opportunities, I want to highlight our private market capabilities, especially regarding real estate and our senior loan offerings. Both areas are currently in demand, particularly the senior loans, as investors lean towards short-term floating rate credit-sensitive assets, presenting substantial growth opportunities in that asset class for the remainder of the year. Our private real estate business is also expanding as we enhance our capabilities. Marty, would you like to add anything?

No. Rightly said.

Okay. Great. Thank you all.

Hi. Good morning. Thanks for taking my question. Different parts of the real estate market have bounced back. Others are still struggling. So, I guess, how are Invesco’s direct real estate portfolio? How is it positioned and performing here? It does look like both Invesco Asia and Invesco U.S. Direct Fund have been in the market more recently. So how is fundraising going in those products, if they haven’t yet ramped up? And I guess maybe lastly here, the outlook for real estate transaction fees? I think you called it out in the quarter as being, I think, $10 million or $11 million in the quarter. Are we back to normal for those transaction fees? If so, what does normal look like from here versus the depressed level that we saw more recently? Thanks.

Let me address that in reverse order. Regarding the transaction fee, you're referring to the $10 million fee we mentioned as part of other revenue, which is associated with property dispositions in private real estate. We saw net inflows of about $300 million in real estate, and there was significant transaction activity across the platform. We reported acquisition activity of about $2.1 billion in the quarter, while realizations, which trigger property disposition fees, amounted to around $1.8 billion. From time to time, these property disposition fees will be triggered, but I wouldn’t classify this as normal since it will vary depending on the specifics of the dispositions. Additionally, it's worth noting that a large portion of the assets under management associated with realizations doesn’t actually leave Invesco; they are generally reinvested into new properties. So, I wouldn’t consider this a normal expectation each quarter. On the topic of our real estate portfolio, it is well-positioned and diversified across various real estate sectors like multifamily, office, industrial, and retail. We have been strategic in recent years given the challenges some of these categories face. The portfolio is also globally diversified. Our aim is to avoid being overly concentrated in any one area or asset class, and we believe these sectors maintain strong growth potential moving forward.

Okay. Great. Thank you very much.

Thanks, Ken.

Thanks. Good morning. So I wanted to follow up. I appreciate the comments on the balance sheet and flexibility in the capital and priorities. I guess the one area that hasn’t been discussed is M&A, and so curious about your appetite for potential M&A in this type of backdrop. Alternatives or private market capabilities are expanding; that’s certain areas of focus. Or if it’s in terms of priorities, is this just further down the spectrum and not really something you are focused on at this point?

It’s a good question, and I would really point to, right now, as Allison has been talking about just on this call, really private markets is a very important area for us. We have two fundamental strengths that we have been talking about, and our head is focused on growing those organically right now. But if there was an opportunity in the alternative space that complemented our current portfolio, we would surely be very open-minded to it. That would be the priority as we thought about M&A. But we are not waiting to continue to build that business; we are continuing to invest in it.

Got it. And then a follow-up on just the institutional pipeline; I am curious about the kind of client profile that you are typically having success with and expand upon that? We know some of the larger mandates last year, but kind of on the ongoing business? And then within active equities, which also is a little bit larger slice of the pie. Can you talk about what strategies are driving, or whether demand is on that front from the institutional pipeline that you guys disclose?

Yeah. Let me talk about solutions. So, the client practice is very, very broad. It’s from corner office wealth management teams in the United States using the solutions capability to large sovereign wealth funds around the world. So it really serves all different types of clients in doing various services for them. But as we said, it’s been fundamental to our success institutionally and very supportive of our wealth management business also.

And I think, Dan, maybe coming to the other part of your question there, part of what we are seeing in terms of the growth and active equities in the pipeline would be driven by China and some of the institutional mandates that we are seeing through our JV there. I would point to, I mean, you note the pickup and just the overall component of active equity, not surprisingly. As a result, I’d say the average fee rate of the one non-funded pipeline, well, it continues to be within a range of high 20s, low 30s. It’s on the high end of that range as you would expect, and our alternatives mandates continue to grow there as well. So, the pipeline is shaping up quite nicely. It’s certainly a leading indicator, we believe, of future AUM growth, and we are pleased with how that’s shaping up. The pull-through this quarter was a little bit lower than usual, somewhat in the normal range, but lower as we just saw some pushing of those mandates out, given some of the geopolitical risks and a little bit of a pause on that, but the pipeline itself is shaping up quite nicely.

Great. Thank you.

Hey. Good morning, guys. Just one on the ETF disclosure, the fee premium, obviously, that you highlight in the deck is a great position to be in. But I think there’s a question if that doesn’t just mean that those funds are lagging the broader ETF industry in terms of seeing more compression. So, first, to what extent are you seeing pressure from competitors on those higher fee products in the ETF side? And second, what gives you confidence that those higher fee rates are defensible in the long run through the lens of what we have seen with other ETFs, more passive like ETFs?

The fee pressure primarily arises in bulk beta where competition is abundant and entry is relatively easy, even though a few companies dominate the space. However, there has been less pressure across the industry outside of that area, primarily because there aren't many similar ETFs, and the existing ones are delivering the returns and outcomes that clients are seeking. As long as clients perceive value in the ETFs, the fee structure is likely to remain stable.

In the bulk beta segment, there are very few ways to compete apart from fees, and in the markets where we operate, there is potential for differentiation. Therefore, we wouldn’t necessarily say that the fee pressure is lagging, as it is difficult to create a distinct product offering in that area.

Hey. Good morning, and thanks for squeezing me in. Just maybe coming back to expenses, I think, Allison, you mentioned the expense base as one-third variable, two-thirds fixed. I guess, where would you like to see that over time, and what’s the opportunity to shift more of the expense base to variable, and what actions might you be able to take?

I would always love to see it go more towards variable, and if we had that opportunity, we will push everything we can. But it’s not totally realistic. So, I think the opportunity we have is just really longer-term, and it’s broader-based. As we think about the fact that our business continues to shift and you see that through everything we have discussed this morning and the real demand for our passive capabilities, it’s creating a fundamental shift and just the revenue dynamics of our business, and against that, we have got to be very thoughtful about positioning the chassis of our expense base. And so, some elements of that are going to be fixed, but we have got to address even the fixed components to really reflect where demand is today and where we expect it’s going to continue to be three years, four years, five years from now. Where we have the opportunity to variabilize the expense base, we will. Compensation is a pretty highly variable component of our expense base. We are a people-driven business, and we will continue to be a people-driven business. That gives us opportunity, but we are thoughtful about how we use that opportunity as well. It’s hard to say exactly where else we can go, but I think the biggest thing we can do is continue to address some of our fixed costs. I will point back to the property portfolio as an example of that as we think about facilities and the opportunity we have to take some fixed costs out. That’s how we are thinking about really adjusting the operating expense base going forward.

And just given some of the changes that you have made to the expense base already, I guess, what would you expect the pace of expense growth to be over the next few years assuming flat markets?

That’s hard to say, of course, given the inflationary environment we are operating in. I think, in a lot of ways, inflation doesn’t hit us in quite the same way it hits other industries. But I am not sure we felt it entirely yet either. I will point to travel as an example of that. I think the inflationary pressure on travel is going to find its way back into our expense base and that of others. I just don’t know how long that environment might persist or whether or not it resets to some new level that we have to contend with. I think we can manage our expense base reasonably well, again putting aside market, and the real unknown is just the overall macroeconomic environment and the inflationary impact on the expense base. I think that’s the bigger, probably, pressure; I am not going to call it risk, but upward pressure on our expense base as we think about just managing our business going forward.

Great. Thank you.

Okay. Well, thank you very much. I appreciate the engagement in the discussion, and have a good rest of the day. Much appreciated.