Invesco Ltd (IVZ) — Q2 2024 Earnings Call Transcript

Thanks, operator, and to all of you joining us on Invesco's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website at Invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized webcasts are located on our website. Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew.

Thanks, Greg, and good morning to everyone. I'm pleased to be speaking with you today. During the second quarter, we had several bright spots of performance and growing business momentum against the continued complex market, economic and geopolitical backdrop. Leveraging our vast client network, our broad product suite and improving investment results, we continue to drive higher demand for our capabilities. For the period, we garnered $16.7 billion of net long-term flows, which is a 6% annualized organic growth rate, marking our best quarter in over two years. Importantly, we had net positive long-term inflows in each of our three regions across active and passive strategies and in both our institutional and retail channels. We ended the quarter with over $1.7 trillion in AUM, which was up 12% from the prior year, reaching a record high for Invesco. We generated positive operating leverage with revenues up over 3% from the first quarter. We expanded our operating margin by over 270 basis points to 30.9%. This resulted in adjusted operating income growth in the second quarter that was in double-digits on both the sequential quarter and year-over-year basis. As mentioned, the market environment remained choppy in the quarter, and while we saw broadening and increasing demand for risk assets, general uncertainty and continued higher interest rates have impacted client investment behavior and our business results. Notably, after a fluctuating April and May, most major equity indices rallied towards the end of the second quarter. U.S. markets continued to lead the way with the NASDAQ gaining 8%, followed by the S&P 500 increasing 4%. However, the theme of narrow market returns persisted with the S&P 500 equal weighted index declining by 3% in the quarter. Equity returns outside the U.S. were mixed with the MSCI emerging markets up 4%, Asia up 2%, and Europe down 1%. Improvement in China's equity markets, up 6% in the quarter, was a welcome bright spot. On the fixed income side, the Bloomberg global aggregate index declined by 1% in the quarter, while most major bond indices were relatively flat. All that said, we have plenty of reasons to be optimistic that with increasing market and interest rate clarity, a broadening of participation will continue to take hold, and investor appetite for more duration risk and global-oriented assets will increase. Moving on to Slide 3 of the presentation, we continue to believe that our advantageous market position and clarity of strategic focus provide us with the tools to deliver enhanced operating performance and returns for our shareholders. Specifically, we have built a strong global footprint with scale businesses in the U.S. and other key developed markets and a significant and unique Asia Pacific profile, which includes hard-to-replicate and leading 20-year-old joint ventures in China and 30 years of longevity in the growing Japanese market. We have also developed a diverse yet focused range of active investment strategies, including both public and private market strengths and a multi-asset profile that empowers Invesco to meet a range of client demands, provides us diversification to perform in various market cycles, and allows us to adjust as secular changes continue to develop. One of those secular trends is the continued client appetite for ETFs. Here, again, we are extremely well-positioned with a scaled and growing suite of capabilities. Our focus is on innovation and providing access to passive factor and active strategies. Our ETF franchise continues to gain market share globally while accelerating its profitability and its overall contribution to the firm. Finally, a hallmark of Invesco is our leading distribution platform. It's an area of particular strength in the U.S. wealth management market, which is the world's largest asset channel and an area with significant growth potential, particularly given the democratization of certain asset classes like private markets. Our strategic focuses, as you can see in the middle of Slide 3, are predicated on prioritizing the intersection of market size and secular change with Invesco's unique position to drive growth in the highest opportunity regions, channels, and asset classes. As expected, our top priority is investment performance, which is key to winning market share regardless of overall client demand. The highest order is continuing to enhance the quality of our active equity strategies, thereby driving greater retention and net flows into this important segment. We have tightened elements of risk management, and the relationship between investments, products, and distribution has never been stronger. Our investment teams have started to post much better performance numbers, which I'll highlight momentarily. An additional area of focus is on profitable organic growth. A significant driver of this is through our focus on high demand, scalable investment capabilities and delivery vehicles. We are continuing to improve the operating leverage and profitability of our fixed income and multi-asset capabilities on the asset side and ETFs and SMAs on the vehicle side. Furthermore, we focus on private markets. We have a strong institutional footprint, historically focused on real estate and private and alternative credit. We are now taking steps to bring those capabilities into the faster-growing wealth management space while continuing to tap into ongoing demand in institutional markets globally. More tactically, we're focused on taking next-generation technology and deploying it through our platform at the enterprise distribution and investment levels. Lastly, we are improving the financial flexibility of the firm by strengthening the balance sheet and generating operating leverage as we continue to deliver better returns for our shareholders. These are the outcomes we are seeking to achieve through the key performance indicators outlined on the right-hand side of Slide 3. They are also the themes at the forefront of today's discussion on second-quarter results. Flipping to Slide 4, against the backdrop of the aforementioned market conditions and Invesco's strategic priorities and strengths that I just outlined, you can see the key flow drivers across our investment capabilities. Our strong organic flow growth in the second quarter continued to be led by our global ETF franchise. During the period, we continued to gain market share in this segment, recording $12.8 billion in net long-term inflows, representing a 13% annual organic growth rate. This was our highest growth ETF quarter in over two years, and we ended the period with a record high of $415 billion in long-term ETF AUM. Growth this quarter was led by our equity innovation suite, our factor-based equities, and our fixed income bullet shares franchise. The QQQM is our fastest-growing ETF and is now the third largest fund on our platform. This innovative product leverages our QQQ popularity, but we earn a direct fee instead of the marketing benefits we received on the QQQ trust, equating to around $200 million annually. We also saw strong growth from the EMEA this quarter with over $5 billion of net inflows, and we recently broke through the $100 billion mark of ETF AUM in that region. Additionally, we are innovating to meet client needs. Invesco is one of the few global asset managers capable of servicing clients through customizable regional ETFs for specific exposures, such as the recently launched sustainable energy ETF, which garnered $1.6 billion in assets at its launch in June. The continued advantages of ETFs are evident in both passive and active formats across all channels, creating even more opportunities for expansion in this space. Shifting to fixed income, we believe that as investors gain clarity on inflation and Central Bank interest rate policy, they will move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies. Although this anticipated shift may be more protracted than originally expected, we continue to see some green shoots. During the second quarter, client demand accelerated, and we garnered $1.6 billion in net long-term inflows into our active fundamental fixed income strategies, in addition to the $2 billion of fixed income ETF flows achieved. Active inflows were driven in part by municipal bond strategies delivered through our mutual funds and our SMA platforms. We ranked in the top five overall in munis and number two for high-yield munis. We're well-positioned in SMAs with over 50 strategies placed with more than 80 broker dealers in RIA platforms. Our retail SMA offering has rapidly expanded to over $25 billion, with an annual organic growth rate of 28%, making it one of the fastest-growing in the industry. We're also positioned with fixed income strategies in our institutional channels globally. In this quarter, we had solid net inflows driven by investment-grade strategies sourced in the Asian regions. We remain well-positioned across the risk and duration fixed income asset classes and have plenty of reasons to be optimistic about our ability to capture flows as we continue to generate investment performance. Moving on to private markets, we maintained our momentum in the second quarter, reporting net long-term inflows of $2.6 billion driven by the strength in our credit strategies, notably bank loans and CLOs. We also saw modest positive flows into direct lending as well as continued inflows into INCREF, our non-exchange traded REIT focused on private real estate debt. This fund has maintained good momentum in the U.S. wealth management advisory space since its launch last year. It's important to note that our global real estate team has over $5 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters. Picking up on Asia Pacific managed assets, we generated exceptionally strong net long-term inflows of $6.7 billion in assets managed in this region. This was led by our China joint venture, where our net long-term inflows of $8.5 billion in the second quarter surpassed the full-year of 2022 and 2023 flows combined. These flows were driven by our strong-performing fixed income and balanced strategies, as demand returned from investors seeking higher-returning fixed income products given the low rate environment in China. We anticipate that this dynamic will continue to play out in the coming quarters, given the evolving economic environment in the market. We also launched four new equity products this quarter in China, which added $200 million of flow during the period. Additionally, as part of a collaboration between our China JV and global ETF team, we launched in June Europe's first ETF linked to the ChiNext 50 Index, providing unique access to long-term growth potential in China. The ETF market in China has seen rapid growth recently, and we are uniquely positioned to gain share and be an early mover and innovator in this space. Turning to multi-asset related capabilities, we saw modest net outflows attributable to lower-fee quantitative strategies. Finally, the relative pressure on active fundamental equity flows did continue; however, we have seen moderation in the global, international, and emerging market segments. Net outflows in these strategies have slowed in recent quarters to $1 billion to $2 billion, markedly lower than the 2022 quarterly peak outflows where we sold $6 billion. A continued bright spot in our active fundamental equity capabilities has been our global equity and income strategy, which is among the top-selling active retail funds in the growing Japanese market. This fund delivered an incremental $1.2 billion of net inflows in the second quarter, and its rapid rise in AUM has placed it in our top 10 active equity funds at Invesco. Overall, we're confident that high-quality active equity management will continue to be an area of significant portfolio allocations, which is a reason we are focused on investment quality and performance in this area. Moving on to Slide 5, this chart provides an alternative aggregation of our AUM and flows to provide you with additional context on our results. From a geographic perspective, you can see that we delivered solid net long-term inflows across all three regions, particularly in Asia Pacific, where we had over $10 billion sourced from clients in these markets. Strong growth in China was augmented by continued momentum in Japan, where we have seen institutional demand for fixed income, particularly investment-grade, as well as continued retail demand for the global equity and income strategy. It’s important to note that this view of the Asia-Pacific region is a more holistic measure of the scale of our business than the previous slide. The AUM and flow numbers not only include the products that we manage in the region but also the breadth of Invesco's other products managed globally that are sold into the Asia-Pacific market. Another key takeaway from Slide 5 is depicted in the chart at the bottom center of the page. Here, you can see the significant improvement in the return to positive net flows in our overall active investment strategies, cutting across all asset classes, public and private markets. You'll note the graph on the bottom right of the page, showing the positive flows and strong improvement seen in our institutional channel driven by demand pickup across both public and private credit. Moving forward to Slide 6 for an update on investment results. As I have reiterated several times this morning, investment performance is a top priority for our firm. This slide shows our overall results relative to benchmarks and peers as well as our performance in key capabilities where information is readily comparable and more meaningful to driving results. Investment performance was solid in the second quarter, on a one, three, and five-year basis. Overall performance improved incrementally from last quarter, with 70%, 65%, and 76% of our AUM beating their benchmarks, respectively. Additionally, on a one-year basis, we have improved, nearly 70% of our AUM are in the top half of peers, and 45% are in the top quartile of peers. At the asset class level, we continue to have excellent fixed income performance across nearly all capabilities and time horizons, supporting our strong conviction in our ability to attract flows as investors deploy money into these strategies. Specifically, 92% of our fundamental fixed income capabilities are beating their benchmark, with 83% of our AUM in the top half of peers on a five-year basis. We're focused on improving fundamental equity performance and have been making progress here as well. Half of our funds are now performing above benchmark on a one-year basis, with 52% beating peers on one and five-year bases. Hopefully, this additional context and the more detailed disclosures that we have shared today and last quarter further clarify our results, outline the significant opportunities before us, and provide clarity on our approach to capitalize on them over time. With that, I'll turn the call over to Allison to discuss our financial results for the quarter, and I look forward to your questions.

Thank you, Andrew, and good morning, everyone. I'm going to begin on Slide 7 with our second-quarter financial results. Total assets under management at the end of the second quarter were over $1.7 trillion, $53 billion or 3.2% higher than last quarter end and a record high for Invesco. Higher markets account for $27 billion of the increase, while net long-term inflows drove a $16.7 billion increase in AUM during the quarter. Of the $27 billion increase due to higher markets, $24 billion was driven by ETFs, including $21 billion by the QQQ. As Andrew noted, net long-term inflows were strong at $16.7 billion, which represented an organic growth rate of nearly 6%. We had long-term net inflows across most of our investment capabilities. ETF inflows, excluding the QQQ were $12.8 billion in the second quarter. APAC managed generated $6.7 billion in net inflows. Private markets drove $2.6 billion in net inflows and fundamental fixed income had $1.6 billion in net inflows. Partially offsetting this was $6.3 billion in fundamental equity net outflows during the quarter. Average assets under management grew $56 billion or 3.5% quarter-over-quarter to $1.67 trillion. Net revenues, adjusted operating income and adjusted operating margin improved from the first quarter, and I'll cover the drivers of those improvements shortly. Adjusted diluted earnings per share was $0.43 for the second quarter versus the prior quarter EPS of $0.33. We further strengthened the balance sheet during the second quarter by paying down the credit facility from $368 million drawn at the end of the first quarter to zero drawn at the end of the second quarter. We ended the quarter with net debt of nearly zero, and we're on track to remain at net debt of zero or better in the second half of this year. As a result, we expect to resume share buybacks in the third quarter. Moving to Slide 8, as we've discussed in prior calls, secular shifts in client demand have altered our asset mix and net revenue yields, as our broad set of capabilities has allowed us to capture evolving client product preferences. This has been increasingly captured in our results. Our portfolio is better diversified today than four years ago, and our concentration risk in higher fee fundamental equities and multi-asset products has been reduced. These dynamics should bode well for future revenue growth and marginal profitability improvement. The firm is better positioned to navigate various market cycles, events, and shifting client demand. One other element to note on this slide is the current net revenue yield trends. The ranges by capability are representative of where the net revenue yields have trended over the past five quarters, and we note the net revenue yield drivers and where in the range the yields have trended more recently. This should provide you better visibility on where current net revenue yields are running by capability. Turning to Slide 9, net revenue in the second quarter was $1.1 billion, $33 million higher than the first quarter, a 3% increase and nearly unchanged from the second quarter of last year. The increase from the last quarter was largely in line with a 3.5% increase in average AUM quarter-over-quarter. Investment management fees were $27 million higher than last quarter, driven by higher average AUM and partially offset by the aforementioned AUM mix shift. Performance fees were $16 million higher than the first quarter due to seasonality, as we typically see an increase in performance fees in the second quarter compared to the first quarter. The increase in performance fees was primarily driven by private real estate and our China joint venture business. Total adjusted operating expenses in the second quarter were $750 million, a decrease of $7 million or 1% from the first quarter. Compensation expense was $1 million lower than the prior quarter. The benefit from lower seasonal-related compensation expenses in the second quarter was offset by higher compensation related to higher revenues, including higher performance fee-related compensation. G&A was $7 million lower than the prior quarter as costs associated with our Alpha platform implementation increased from $7 million in the first quarter to $12 million in the second quarter, which was more than offset by lower professional related fees in the second quarter. Going forward, we continue to expect Alpha-related one-time implementation costs to be approximately $10 million per quarter for the remainder of 2024 with some fluctuations quarter-to-quarter. We'll continue to update our progress on the implementation and related costs as we move forward. On a year-over-year basis, total adjusted operating expenses were $12 million lower, adjusting for $27 million related to executive retirements and organizational change related expenses in the second quarter of last year, which were driven largely by lower G&A expenses. Quarter-over-quarter, positive operating leverage was 400 basis points, driving a $39 million or 13% increase in operating income and a 270 basis point improvement in our operating margin to 30.9%. The effective tax rate was 22.1% in the second quarter. We estimate our non-GAAP effective tax rate to be between 23% and 25% for the third quarter of 2024. The actual effective tax rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items. Now I'll finish on Slide 10. We continue to make progress on building balance sheet strength in the second quarter. At the end of the first quarter, we had $368 million drawn on our credit facility as we redeemed $600 million in senior notes that matured on January 30, and the first quarter is a seasonally high cash usage quarter. We ended the first quarter with net debt of $362 million. During the second quarter, we paid down the credit facility to zero and improved our net debt position to nearly zero. Both results were ahead of our expectations. These actions resulted in an improvement in our leverage ratios, which are now down to 0.28x, a significant improvement over the past several years. Given these results, we expect to maintain or improve our net debt position going forward. We're also in a position to begin a more regular stock buyback program in the third quarter. Initially, we expect to buy back around $25 million per quarter depending on market conditions. We expect our total payout ratio to move into the 50% to 60% range, which we will continually evaluate. To conclude, the resiliency and strength of our firm's net flow performance are evident again this quarter, and we continue to make progress on simplifying the organization and building a stronger balance sheet while also continuing to invest in areas of growth. We remain committed to driving profitable growth, a high level of financial performance, and enhancing capital return to shareholders. With that, we'll open up the call to Q&A, if the operator would like to open it up.

Hi, thank you. Just a couple of clarifications. The fee rate range came down on ETFs and multi-assets. I just want to make sure that first bullet says, basically, that's a result of ongoing mix shift and not some actual fee adjustments, correct?

That is correct, Glenn. We continue to see within both of those capability categories just continued mix across the product spectrum. There are no real fee adjustments.

Okay, cool. And then maybe just a little bit more color. You made two forward-leaning comments that were interesting. One was related to the green shoots for fixed income; I don't know if that was related to RFPs picking up? And the other one was on the APAC flows in China specifically, and you said you think this dynamic continues to play out. So I wonder if you could expand on those two comments. Thank you.

Yes. Maybe I'll start, Glenn, thanks for the questions. On the fixed income side, it's partially RFP volume. It's partially flow volume; it's partially demand that we're hearing towards longer-duration assets moving away from some short-term fixed income. And that's happening on both the retail and the institutional sides of things. Do you want to add anything on fixed income, Allison?

No.

And then on Asia and China particularly, yes, we're seeing very strong demand. Right now, it has been principally in the fixed income and fixed income-plus, which is essentially balanced. Not as much on the equity side, but the flows have been quite strong, and we think some of the developments in China on the economic side and some of the market reform are pointing well for client activity in China.

Thanks, Andrew.

Good morning. Thanks for taking my questions. I wanted to drill into the distribution and servicing fee dynamic. It seems as though this has been a trend towards maybe on a net basis, a bigger and bigger headwind from net distribution. Is this similar to what we're seeing on the fee rate side, where it has to do with mix shift away from products that have some distribution revenue components, maybe such as ETFs; less of that benefit and therefore, somewhat sustainable?

Good question. Good morning, Brennan. I would say maybe somewhat, but the way I would think about it and just keep in mind, last quarter, we had a real anomaly as it related to the proxy costs that you saw coming through both service and distribution fee revenue and then offset on the third-party side. I feel like you almost have to throw out last quarter a little bit. As you look at the relationship across a series of quarters, it's important to focus on the relationship between service and distribution fees and third-party distribution contra revenue because there's such a pass-through between those two elements. And then looking at that as a percentage of management fees, it runs relatively consistent in that 13% to 14% range, which I think we're finding to be a better relationship than just third-party as a percentage of management fees. But I do think there is some element of that mix shift in there to focus on as you think about that relationship going forward.

Okay. Thanks for that, Allison. And how should we be thinking about the lower professional related fees in G&A? I believe you said that's what drove G&A to be a bit lower here this quarter. Is that sustainable? Could you maybe give us a little color regarding that as a potential tailwind going forward?

I don't think I would think of it as a tailwind so much as those types of expenses are going to vary quarter-to-quarter as you have everything from legal, consulting, outsource costs, and implementation costs of various projects. We try to provide transparency into the alpha implementation, but that is, of course, not the only thing we're ever working on as we think about just our overall platform and system. So I wouldn't think of it as a tailwind, but you should expect a little bit of variability in that line item quarter-to-quarter. Travel, entertainment and client entertainment, all of it.

So just basically lumpy. Thanks for taking my question.

Sure.

Thank you very much. I was wondering if you could unpack in your comments around sort of diving a little bit more into retail democratization beyond maybe INREIT. What else are you working on? And are there any incremental distribution relationships that may be on the horizon?

Yes. Thanks, Bill. It's Andrew. I'll start. The most recent has been in real estate debt. And so that real estate credit fund was launched about a year ago. It's been added to two major wealth management platforms over that period of time, which is quite fast, along with several dozen other related platforms for RIAs and the like. So between the real estate equity and the real estate debt funds, those are the two principal things we're focused on. We also have some alternative credit strategies in the market. But the progress on real estate debt and the demand from clients, not just here in the U.S. and in wealth channels, but around the world has been quite strong.

Okay. Just as a follow-up, coming back to capital return. Thank you for the updated guidance. So as you think about strategically from here, is it now more of a capital return story as you normalize and grow earnings? Or is there an eye on potentially increasing M&A to bulk up incremental growth, particularly in the alternative side? Just trying to understand how we should think about the durability of that capital return?

Sure. Our comments are consistent with what we've said before. It's not just one option; we aim to be well positioned to take advantage of both. Due to some balance sheet challenges in previous years, being opportunistic has been difficult. Now, we want to focus on returning capital to shareholders while remaining open to opportunities that align with our previous discussions. Improving our balance sheet allows us to return more capital in line with our earnings growth, and we will concentrate on enhancing our earnings. We'll seek chances to reinvest in our business to foster organic growth. We've shown that we can achieve this through our strong organic growth over the last five years. However, we will stay open-minded and consider opportunities to address any gaps on our platform.

Excellent. Thank you.

Thanks. Good morning, everyone. We wanted to revisit the 6% organic growth rate in the quarter. Given the sizable ETF inflows versus net redemptions in fundamental equities, how did organic revenue growth trend relative to 6%?

How is the organic revenue growth trending relative to the 6%? I just want to make sure I'm understanding your question.

Yes, Allison. So on an organic revenue basis, and it's tough for us to do it because we just have by kind of major asset class. We don't have the underlying funds. But I wanted your perspective on how the organic revenue growth was trending relative to the 6% AUM organic growth.

I understand. I would like to refer you to the disclosures on Slide 8, where we have refined the net revenue yield ranges and provided commentary on the far right to guide you on our current trends. We have a good level of precision regarding Assets Under Management. Our primary goal is to drive organic revenue growth, which has proven challenging in recent years due to pressures on fundamental equities and trends in the ETF market, as you mentioned. However, I believe it is showing improvement and is currently trending towards neutral in several respects. You can begin to monitor this more closely with our new disclosures.

Yes, I would only add that some of the headwinds we've been facing over the last couple of years are starting to abate a bit. In particular, the flows out in Asia and in particular, China, and flows into alternative credit like bank loans are net-positive towards what you were asking and Allison was describing.

Thank you. Just for my follow-up, it's on the State Street Alpha implementation. So when will alpha integration expenses start to go down? I think you have that $10 million target, but I wanted to understand when they would start to go down. And when do you think they'll be fully gone?

The best way to answer that question as it relates to implementation is project timing overall. We will continue to be in implementation mode through '25 and really through '26. We expect to transition our AUM onto the Alpha platform in a series of waves, which are going to begin in the fourth quarter of this year, running through 2025. So that implementation is really in the testing phase, working through planning for these various waves. Implementation will run through at least '25, and we'll be working on decommissioning and running parallel through '26 on the other side of that.

Thank you, Allison.

Hey, good morning, everyone. I want to move back to the fee rate trajectory. Obviously, a little bit better in the quarter, but I imagine the April drawdown was probably a bit of a drag on it. So could you speak to the monthly cadence through June? And maybe how you feel about the 3Q run rate given how you exited 2Q? Thank you.

I think I focused less on the intra-quarter monthly and maybe more on the exit rate probably to get at your question because within the month, within the weeks, within the days, it could vary significantly as markets fluctuate. I think, hopefully, you've seen in the additional disclosures in the back, just further detail around the various market indices that really impact us. Given our global footprint, we have a diversified set of exposures that you can't manage which market is moving in what direction on any given day. I would point to the exit rate for the second quarter, which was around 25.2 basis points, a touch lower than the average net revenue yield for the quarter. Of course, even in the first few weeks of July, we continue to see puts and takes in all that. It's very difficult to predict exactly where it would end up. I continue to come back to, we're focused on driving revenue. We're focused on driving organic revenue. And net revenue yield is simply a function, it's math of where the flows are coming from. The organic flow rate of 6% is something we're quite proud of and a testament to the breadth of our platform and how aligned it is with client demand.

I think what we've all seen in the markets over the last very short period of time, in the last week or two, some broadening out, which I think we've all been looking forward to for a long time. One of the reasons we outline the diversity of our range of assets and investment capabilities, if that prolongs, that should be a net positive for us.

Excellent, thanks. And then a broader question. It's obviously nice to see the big recovery in China flows, but the political rhetoric is getting pretty heated with China, and it seems both parties will be a popular punching bag. So I know it's tough to gauge these things for sure, but what assurances do you have? Or could you give that the JV would be safe on a broader trade war between the U.S. and China? Thanks.

It's a complex question to answer. I want to remind you that our China joint venture operates as a domestic-to-domestic business. All the assets we manage serve individual investors in that market, and everything is managed locally. It’s a highly focused operation, and our partnership there is very strong and resilient. Would you like to add anything, Allison?

Yes. I think I'd just underscore that by saying that the flows and the performance of the JV are entirely dependent on the performance of the Chinese domestic economy. To the extent the trade war is challenging for the domestic economy there, that would put pressure on overall AUM through both flows and market performance there. That probably would put some pressure on our investments in the United States as well. So think about it less as a political football and more highly dependent on the strength of the Chinese economy.

Thank you.

Hi, good morning. Thanks for the question. I was hoping we could dig into the strategy around Invesco's ETF business a little more broadly. So you guys continue to see really good growth there, and that's been consistent. It's nice to see you broaden out a little bit. But to your point earlier, the fee rate continues to sort of shift lower here. So as you look further out, can you maybe walk us through areas where you're seeing the best opportunity for Invesco to broaden your ETF growth and even more? And perhaps talk a bit about some of the existing and new initiatives that could stabilize and improve the fee rate as you look further out.

Yes. Thanks for the question. The growth has broadened down. I think we have something like 10 ETFs just in the U.S. that have had more than $1 billion of inflows in the past six months year-to-date. The business is broadening out. Some of the key growth strategies we have, obviously, as the market starts to adopt active ETFs, especially here in the U.S. market. That's a key focus area. We were one of the early movers in active ETFs; we have a little over $10 billion in that space, but more importantly, we have around $30 billion of assets affiliated with our investment teams playing some role in those investment strategies. We think that's going to continue to grow as the vehicle remains popular, but more than passive gets put into those vehicles either through fundamental or quantitative techniques or both. Beyond the United States, we talked about our expansion and our growth in Europe, which is now over $100 billion in AUM. You'll see the demand starting to grow throughout Asia, particularly in China and Japan. Geographically, we feel there's earlier days in some of those markets outside of the U.S. Our lineup has been traditionally heavy on equities; one of the areas of greatest growth has been in fixed income. We continue to think that passive fixed income alongside fundamental is going to be a pretty significant area of growth going forward. And as alternative strategies, particularly commodities, continue to find favor back in the market, we are well-placed in those spaces. The growth has been good, and I believe it can continue to be as strong and diverse as we go ahead.

Great. Thanks for that.

The last thing I'll just say on net flows but on profitability, the ETF business continues to scale well, and the profit margin expansion from that business continues to go from strength-to-strength. We have a very scaled platform that delivers accretive profitability.

Great. Thanks, Andrew, that's helpful. Allison, one for you just to round out the G&A discussion. A couple of puts and takes as you highlighted earlier in the quarter. But zooming out, what are the expectations for maybe G&A for the full year and as Alpha continues to linger through 2025? Any sort of early thoughts on G&A outlook for 2025 as well? Thanks.

Sure. I'd go back to our guidance for the year, which has been in the $3 billion range. We've done better in terms of AUM since that guidance. You can see that impact overall on comp expense, given the Alpha guidance of around $10 million plus or minus in terms of implementation costs each quarter. All else being consistent and equal, not many puts and takes other than back to Brennan's question; things are a bit lumpy quarter-to-quarter. I can't predict the lumpiness. I'd come back to comp to revenue. We're trending above 42% for the year; I think it will be closer to 43% for the year. The rest, I'd say, is relatively consistent, absent some lumpiness, but I can't predict quarter-to-quarter.

Got it. That's helpful. Thank you.

Thank you.

Thanks. Good morning. Andrew, I wanted to follow up on one of your comments from, I guess, Slide 3, where you talked about profitable organic growth. I mean, that seems like something you would always be focused on; so curious if there's anything more behind that in terms of what you're looking to exit in certain RFPs or businesses? Or is it just more prospectively like what business you're looking to take on versus maybe what you might have done before?

Yes. I think a couple of areas that I emphasized further, picking up on what I just said about ETFs, the ETF vehicle and the SMA vehicle as we're growing in size, they scale well. Our focus on profitability is to continue to utilize technology more, driving the expense base, or at least holding the expense base flat as we continue to grow and see the flows and revenues generated from those vehicle choices. Regarding fixed income and multi-asset, we brought together multiple investment teams in those areas. As those capabilities are in demand from clients, similar to the vehicles just described, they will scale well. We believe we have a pretty complete product range that can layer on assets and revenues to expand profitability. So that's what we mean by that.

Okay, that's helpful. As a follow-up, I was hoping to get an update on the MassMutual relationship in terms of them helping you see them build your alternative franchise and then also tapping into your product set into their broader distribution force, if there has been any update there?

Yes. I mean it continues to be a really strong relationship that we value tremendously. As we've mentioned in the past, and it continues to be a significant focus for both us and them, is growing out the private market set of capabilities. Currently, through their general account and otherwise, they have 3x to 4x the amount of capital invested in our strategies that we hold on our balance sheet. That has been important for seating and co-investing some of the strategies that I mentioned before, starting to grow the wealth management platforms, particularly in real assets. We continue to progress and grow through the traditional insurance channels and offer our products and capabilities. We're one of the leading providers on MassMutual's platform, and that continues to focus on all our investment capabilities but particularly our model portfolios and ETFs where we see growing demand for Invesco.

Yes. They continue to be great partners, investing across various capabilities from our real estate to our CLO capabilities, in particular. They have been strong partners as we evaluate future product launches. As Andrew noted, they've amplified our ability to leverage our own balance sheet to get products to market faster.

Okay, thank you.

Great. Thank you for taking the questions, squeezing me in. You saw a nice recovery in institutional flows. Can you size the institutional pipeline? I think you used to give one not funded and tell us a little bit about the major buckets like factor and solutions that haven't come up in conversation thus far.

Sure. The institutional pipeline is pretty consistent with last quarter, staying around this kind of $14 billion, $15 billion range. We find the pipeline is an okay but not excellent measure of what we can expect given the breadth of our flows coming outside of the pipeline. You saw the strength in flows over the last quarter or so, and the pipeline has been relatively stable over the last few quarters. It seems to account for about 30% of our flows that come from the pipeline. Fee rates continue to be on the high side there as well, tending to range in the 25 to 35 basis point range, maintaining that high side. There’s no real change either way. It's diversified across regions, and we see the strength of our institutional flows from a variety of areas.

Ken, the only thing I'd add is some of the progress we're seeing is that the pace is picking up a little bit. The strengths, notably on public and private credit, are consistent across the regions. Asia and Europe, in particular, seem to have picked up the greater pace.

Current sales have really picked up in the quarter relative to the prior five quarters. Redemptions are a bit better, but strength is driven by gross sales.

Great, thanks so much for squeezing me in. Just a question on Japan. I was hoping you could elaborate on your footprint and business in Japan today. Hoping you could talk about how that business has grown. And then looking out, maybe you could address your outlook and how you see the opportunity evolving in that marketplace just given the shift out of deflation and some of the recent regulatory changes to expand the NISA tax-exempt accounts? What sort of products and strategies do you expect to see growth evolving in that marketplace, including the opportunity for ETFs as well? Thank you.

Our profile has been established for about 30 years, managing approximately $60 billion in assets for Japanese investors. This includes a combination of insurance, institutional, and retail wealth platforms. Recently, we've seen significant growth in the retail sector, particularly with our global equity income strategy, which has been a strong long-term business and has accelerated over the past year due to various factors. We are optimistic about the ongoing reforms and changes in the market, including NISA and the overall environment as inflation begins to rise. This has sparked increased interest from investors, who are becoming more educated and re-engaging with the equity markets. The demand for ETFs is expected to rise, and we are enhancing our position in that area. Historically, our focus has been on fixed income, but we are now starting to witness growth in that sector as well.

Great. Thank you so much.

Operator, we do have time for one more question.

Great, thanks. Thanks for squeezing me in. Just coming back, maybe, Andrew, to a comment you made earlier in the presentation about the focus on performance and the fundamental equities. Clearly, that's the most accretive area from a net revenue yield perspective. Can you talk about how you're leveraging the improved performance in the sales process across the franchise for fundamental equities and any conviction around getting back to sort of flow neutral, maybe aside from the developing market fund? And then on the active ETF side, I realize that's still very small, but if there's any potential to grow that relative to mutual funds, might that actually improve the ETF fee rate of 14 to 16 basis points if you have any traction there?

Yes. Let me start with the back end of the question, and then I'll go to the front. Yes, we see demand picking up in the active ETF space. Right now, it's been largely into active fixed income. We launched some new strategies that were options-oriented strategies on equities, but that's driving off of more passive benchmarks. I think in time, fundamental active strategies or some combination of fundamental and quantitative active strategies are going to find their way into the active ETF space, and we're very much in the development stage of that right now. Short run on improving our net flow rate, it's going to be driven by improved investment performance, and we are starting to see that, particularly in domestic equity categories, the U.S. and other developed markets around the world. It will also come with increased demand from clients, which we haven't fully seen redeveloped in the U.S. wealth market yet. Every day, we're focused on it. Our sales team is working closely with product design and investment teams on retention, where performance improvement needs to be emphasized to clients, and growing the gross sales rate in the marketplace. We're optimistic that performance is improving, and that’s a significant step in the right direction going forward.

I would just add that we're focused on outperforming the industry as best we can there. Industry expectations, given the secular challenges, and shifts we're seeing from active to passive, don't anticipate strong inflows for fundamental equity. We’re aiming to outperform in every aspect, so as Andrew noted, we're focused on investment performance. We're looking to streamline outflows turning neutral, ideally to inflows, but we'll take every inch we can. Our incredible strength across every capability continues driving that profitable growth, and we're optimistic about improving our operating margin from here.

We have strong investment performance in value markets, small mid-cap non-U.S. I think with demand returning, we're cautiously optimistic.

To sum up, we are well positioned to help clients navigate the impacts of evolving market dynamics and subsequent changes in their portfolios. As market sentiment improves, we expect greater scale, performance, and improved profitability. Given the work we've done to strengthen our ability to anticipate, understand, and meet evolving client needs, I'm very excited for Invesco's future. Thank you for joining the call today, and please continue to reach out to our Investor Relations team for any further questions. We appreciate your interest in Invesco and look forward to speaking again soon.