Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

Sorry for the delay, guys. We had a little technical issue, but my name is Patrick Davitt. I cover the asset managers here at Autonomous, and it's my pleasure to welcome CEO -- Invesco's CEO, Marty Flanagan, I think, on just the phone, given the technical issues as well as the surprise addition of MassMutual's CEO, Roger Crandall for our first asset management conference. Before we get started, I just wanted to quickly flag. We're using pigeon hole for Q&A. You should see a live Q&A tab on the right side of your screen. If you have any questions for Marty or Roger that we can get to later. And with that, I will pass it over to Marty for some intro comments.

Great. Thanks, Patrick, and thanks for having us. And as you point out, Roger Crandall is joining me today. And we thought 2 years past the combination with Oppenheimer and the partnership with MassMutual that it would be a good time to review the progress of the combined firm and just talk about our relationship. So let me make a couple of comments and put the combination in context. Patrick, can you hear me?

Yes.

Okay. Sorry, I had some static.

Yes, I heard it too.

Okay. Sorry about that. Back in 2018, when we announced a transaction with Oppenheimer and the partnership with MassMutual, what we saw was that the combination would create an organization with a differentiated set of investment capabilities, expanded distribution, scale benefits and the related synergies. What we did not anticipate was the market environment we're about to enter and negatively impact the timing of the expected returns of the combination. Q4 of '18 brought market headwinds that impacted both Oppenheimer and Invesco fairly significantly. We did close the transaction in May of 2019 and successfully reached our synergy target by Q3 of '19, which was earlier than expected. And of course, we did hit the dollar amount. By the end of '19, the integration was complete, and we're forecasting momentum picking up in 2020. In fact, we did see that in January and February. But needless to say, the pandemic and the unforeseen impacts created significant headwinds for Invesco. But through '20 -- or excuse me, through April '21, we've seen 10 consecutive months of net long-term inflows including nearly $32 billion of long-term inflows for the first 4 months of 2021 and including long-term inflows of $24.5 billion in Q1, which was a record for us in the quarter and represented nearly 9% annual long-term organic growth. Our investment in key capabilities and our focus on clients continues to produce good momentum in the business. We are continuing to make progress across channels, geographies and asset classes. And it is a significant improvement in retail channel that we saw in the second half of 2020 that continued into Q1 of 2021 with $10 billion of long term flows generated in the Americas, $3.7 billion of long term flows in EMEA and Asia was incredibly strong with long term inflows of $16.7 billion. And that was a record for our Asia PAC region. Our institutional pipeline continued to grow increasing from $30 billion at the end of the year to $45 billion at the end of Q1. And 60% of these one but not funded pipeline, was enabled by our solutions capability. We continue to be very focused on generating positive operating leverage and improving our operating margin. We continue to invest in our business while working through the strategic evaluation that we announced last year and achieving our cost savings of $200 million by the end of 2022. We are 50% of the way there. Our efforts to strengthen the balance sheet are yielding good results with improvements in leverage and liquidity, and we do look to delever as opportunities arise. With the solid progress and our efforts to build financial flexibility, our Board approved a 10% increase in the common dividend to 17% of the share in April. And we remain committed to a sustainable dividend and to returning capital to shareholders both over the long term through combination of modestly increasing dividends of share repurchases. And we're committed to continue to invest in our business as we look to the future and really appreciate MassMutual's commitment in that regard and with that I am going to turn it over to Roger for a couple of questions -- few comments before Q&A. Roger?

Well, thank you, Marty, and good morning, everybody. Thanks for being here today. For those of you who aren't familiar with MassMutual, we're a mutual life insurance company based in Springfield, Massachusetts, where we founded it way back in 1851. What started with 31 local folks putting up $100,000 selling policies to friends and neighbors. We've now grown to one of the biggest life insurance companies in the United States, still effectively owned by our policyholders as a mutual company. We have over $600 billion of assets under management, another $240 billion of assets under advisement through our 7,000 financial advisers and our broker dealer. Of $28.6 billion of total adjusted capital, a record high, and really pleased that we were able to pay $6.2 billion in benefits to our policyholders last year. And are -- should be paying about $1.7 billion in dividends this year to our participating policyholders. So everyone who is a MassMutual policyholder, thank you for being a member of our company. MassMutual offers a broad range of protection, accumulation, wealth retirement products and services, including life insurance and annuities. And you may have seen we just closed on the acquisition for $3.5 billion of Great American Life Insurance Company of Ohio, significantly strengthening our annuity platform, making us the top 5 writer of both life insurance and annuity. I mentioned that we've got 7,000 agents and advisors that are part of our distribution force. And we've also recently rolled out some significant technology that gives them incredible capability from a digital perspective to work with clients both around wealth management and protection needs. We think there's a tremendous opportunity to reach more people, both for their investment needs and their protection needs through different channels. And that was 1 of the things the Great American acquisition gave us with significantly more distribution in different channels. So we've been paying dividends to our policyholders for 153 years. And that kind of brings us to our relationship with Invesco. As you're aware, we've owned OppenheimerFunds for many years. In fact, OppenheimerFunds and assets under management had grown twentyfold since we acquired the firm in 1990. And as we were looking at the long-term best interest of our policyholders in terms of continuing to generate strong earnings growth in our underlying investments. So 1 of our key differences from other mutual companies is we own operating business for interest in operating businesses. And not just the portfolio of securities and private investments to back our liabilities. And we really thought the combination of OppenheimerFunds with Invesco would provide stronger growth opportunities over time. So we were really pleased to be able to put this transaction together and become a very large shareholder in Invesco and do it in a very tax-efficient manner. As you can imagine, acquiring OppenheimerFunds in 1990, we had quite a gain. The deal was a $6 billion deal, which significantly increased our capital by about $4 billion. The -- structuring it as the preferred and common transaction was very tax-efficient from our perspective. In addition to giving us the steady dividends from the preferred, which matches very well with our long-term liabilities. It enabled us to participate in the growth we saw in Invesco. And we really saw with Marty and his team, operators who could, as Marty mentioned, actually get the cost synergies that were built into the deal out early. And really pleased now to see Invesco turning to growth. As Marty mentioned, tremendous operational efficiency right now with margins improving and flows improve. I would like to comment a little bit. There have been some discussions about since our lockup ended on May 24, when we were selling shares. We were not selling shares yesterday. We have no intention of doing a secondary or selling any shares. We see tremendous upside in Invesco from this point, both on an operational basis, but also, frankly, from a valuation basis in wealth. We've been working with Invesco, both in terms of putting their products on our shelf, which I'm sure we're going to talk about. And MassMutual has also committed over $1 billion from our general investment accounts, particularly to Invesco alternative strategy. So I'm looking forward to the conversation today.

So I've obviously been receiving a lot of questions about the lockup coming off. So I think you nipped that in the bud, Roger. Thank you for that. Maybe we'll start with how the strategic relationship is developing. I think a lot of people would have expected it to be a little bit more robust than it is 2 years in now, where you see the future opportunities and I'll pepper in some Invesco specific topics as we go through that to keep Roger involved. So he's not just sitting there trailing his thoughts. So let's start, Roger, how would you characterize MassMutual's strategic relationship with Invesco now, what's gone well, what hasn't gone well? And how do you feel about the most obvious future opportunities?

Yes. Yes. I mean, I feel really good about the relationship and potential for growth in the years ahead in Invesco. I think, clearly, the pandemic was a giant hurdle, and Marty talked about that. And we were really pleased about how the team worked through all that. We're continuing to talk to Invesco, particularly about some of their alternative capabilities. So we've committed to some real estate products that they have. And we've also been using their products in our broker dealer. And I think it's really important to point out. Our advisers are making choices for their clients. It's an open shelf in effect. We're really pleased where we see Invesco on that shelf, and we're continuing to work with them in product development, particularly in the annuity area, where I mentioned we made a significant acquisition the other day. We really think that the stake in Invesco aligns really well with the long-term nature of our company. Again, as a mutual company, we have the luxury of thinking about a long-term business in a long term way. We -- our general investment account typically grows somewhere between 5% and 6% every year because our policies are very long-term in nature. It's actually a little hard to wrap your head around how long-term they are. Our oldest policyholder today is 108, and she's had her policy with us 91 years. So when people buy permanent life insurance, it is a very, very sticky liability. In fact, I would argue life insurance companies are the original permanent capital vehicle from that perspective. So we just tend to grow year after year after year, and investments like our holding of Invesco can be very long-term in nature, and that's how we think about this.

Okay. To trail back a little, I think there's about $1 billion of kind of AUM at Invesco that's kind of directly related to MassMutual. Are you satisfied with the performance of that AUM one; and what level of commitment could you make in terms of future mandates to Invesco? Where do you see that number going?

Yes. I think there are 2 places. So first, there's between $4.5 billion and $5 billion of Invesco assets that are in our broker dealer. And Invesco is actually #2 in flows. If we look about where flows are coming out of our broker-dealer on the retail side. So that's in addition to the $1 billion that we've committed on the general investment account. We have ongoing regular dialogues about Invesco investment capabilities and how they align with our general investment account. So I would certainly expect that we're going to do more with them over time. I can't sit here and say, "Oh, it's going to be this number or that number. I think what's really important is, as our investment team has gotten to know the broader capabilities behind those and beyond those that were at OppenheimerFunds. We've been really impressed. You've seen that Invesco made tremendous progress on the solutions side. And really, life insurance is a very solutions focused business. So I'm optimistic we're going to continue to do more with Marty and the team over time.

And Marty, could you answer that from Invesco's perspective, please?

Yes. Look, we'll be somewhat reinforcing Roger's comment. I would just start from an organizational point of view, the engagement is very strong, very broad. It's -- MassMutual is a very talented group of people, great investors. And as Roger talked about through all broker-dealer and looking forward to the annuity, those are all real opportunities. And the progress made through the broker-dealer last year was material. And again, the pandemic was a real topic for us. And so I'd put that in a very good area. But I would also give a lot more credit to the $1 billion. I don't think people are really understanding the impact that has. Our seed capital for products, whether it be co-investments or seed capital is about $800 million. So the additional $1 billion exceeds all of the seed capital and co-investments that we have as a firm. And having MassMutual being an anchor investor in some of these alternatives it's not just the dollars, but it gets the products to the market. We couldn't have done that last year, quite frankly. And the reputational advantage of having a third-party commit the dollars is also really, really important. So I think it needs to be looked at as much more strategic than just $1 billion. It's a lot of money, and it materially increased our capacity to get important products off the ground.

That's helpful. Thanks. And it really answered my next question, so I'll move on from that. Roger, you mentioned you see upside in Invesco's stock. You're not planning to sell any shares. But maybe 1 question on that before we move on. I guess, how does MassMutual think about the stake from a capital standpoint, right? You're a private company. Could you give us any insight into how you view the stake and the preferred relative to your capital requirements and needs?

Sure. So again, if you look at the 2 pieces, the prefer, as I mentioned, is a very long duration instrument, so it matches very well with our liabilities. So that's kind of an integral part of our ALM. The fact that it is an investment-grade rating, preferred is important to us. The way capital charges worked for an insurance company, capital requirements go up as ratings go down. So obviously, common equity has one of the higher capital requirements. That said, the way we look at this is very much through the equity method of accounting. So we obviously would love to see Invesco's stock continue to perform well. But what we're really looking for is earnings growth over time. Because as we take a look at things in kind of 5- and 10-year kind of planning increments helping Invesco grow. So Marty's point about us putting money into an unlisted REIT, for example, to help get it going. We can really leverage the capital we're putting in beyond just getting a great return on that capital, which we would expect all the investment funds that we've invested in to get would actually help Invesco grow their business kind of more rapidly. As I also mentioned, we had total adjusted capital of $28.6 billion. I just mentioned, we did a $3.5 billion acquisition. So if you kind of take a look at it from the size of our balance sheet, this equity holding, although one of our larger ones is not out of line given the broad scale of the company.

That's helpful. Got it. I have one now kind of on the recovery in Invesco's flows, Marty. I think in my 15-plus years of covering the space, I don't think I've observed such a significant swing in organic growth from essentially one of the worst flowers in the group to one of the best. What do you see as the key drivers of that shift? How sustainable do you think it is?

Hey, Raj -- I mean, Patrick, it looks like we lost Marty. So I'll keep an eye out if you guys want to continue.

Yes. Well, I'll continue with you there, Roger. Let's see what are we? I don't know how much you can say on this, but I think you made it pretty clear you're not planning on selling. A lot of people are asking on the pigeon hole, would MassMutual consider increasing their stake in Invesco or even acquiring the whole company?

Yes. Look, what I would recommend in this a very sophisticated audience here on this. Our shareholder agreement is public, and it puts restrictions on how much we can own of Invesco. It's capped at 22.5%. So I think that makes it pretty clear. We're not going to acquire the whole company if you take a look at that shareholder agreement.

Got it. In that vein, a couple of questions on -- I'm not sure you can answer this really. But the idea that you don't have any intention to sell, what would have to change for that view to change? I assume just that it goes up a lot more.

Well, again, I think, I recognize because we're not publicly traded. We're not following -- a mutual company is a little bit of an unusual construct. But I kind of put it this way. We owned OppenheimerFunds for a very long time, right, from 1990. And we saw its relative position given what was happening in the market, combining it with someone that had broader distribution and then, frankly, also a broader array of investment capabilities because the array of investment capabilities at Invesco again, some of their all capabilities, I particularly kind of call out their real estate capabilities, but particularly, they're smart beta suite. That ability to get scale that ability to have operational efficiency and the ability to use smart beta in a way that you can kind of provide solutions. We didn't have those capabilities within OppenheimerFunds. So we ultimately decided owning 16.5% of a company that had broader distribution, a broader array of capabilities and the ability to have really significant scale, which we thought was going to become increasingly important in the industry. That's why when we looked at it from our long-term policy hold the lens, owning a smaller percentage of the larger, more diversified company made more sense than owning 100% of a company that performed extraordinarily well over the years that we owned it. But again, as we think about things, we think of them in these kind of 5- and 10- and even 20-year kind of increments to structuring it frankly this way works for us as well.

It looks like we got Marty back. Can you hear me, Marty?

Yes, I can. Yes, sorry about that. Can you hear me?

Yes, I can hear you. Thank you. So the question I had posed to you -- sorry, hold on, was basically in the time I've been covering this space, I don't think I've seen an asset manager swing from being 1 of the worst flowers in the group to one of the best as quickly as Invesco has over the last 10 months or so. What do you see as the key drivers of that shift? And how sustainable do you think it is, which is one of the bigger questions I get from investors.

Yes. Look, it's a great question. And the reality is all the work that we've done in the prior 5, 10 years had really been building up to the results that you're seeing right now. And during the transition with Oppenheimer, you definitely do go through those hiatus periods and the challenging markets we talked about. We just -- the pandemic, in particular, was just really difficult. And so 2020 is sort of the missing year because of the pandemic for us. But what's driving it, if you look at the ETF business, the factors indexing private markets we've been talking about, real estate bank loans, active fixed income, global equities, emerging markets equities, China, in particular, 17 years later, the overnight success for us. And really the impact of solutions. So it's all those things that we've been building or investing over the years that are now really just coming -- they're right -- it's what clients are demanding. And that's how we built the business and the results are coming through quite nicely now.

On the China point, I think Invesco is probably the most successful of these pure-play U.S. asset managers in the region. And I still think investors are a little confused as to how that evolved. Could you may be quickly help us understand how that success evolved. And now that everyone appears to be getting licenses there, how defensible you think that position is?

Yes. So at the most macro level, i.e., you see a lot of estimates. I mean, China has been the opportunity for decades. The reality is coming to life in a meaningful way. And if you look at the flows being generated out of China, they're some of the largest in the world. And you can only anticipate that is going to continue. So we're in China in multiple different ways where started with the joint venture 17 years ago with Huaneng Power, and the financial arm of the energy company. And what it's called Invesco Great Wall, so it's brand building their recognition, but very differentiated than the others that have joint ventures, we've had management control from day 1. So we operate as Invesco in China, along with the -- our institutional business. And so it's -- we're the #1 rated foreign money manager in the retail business there. And institutionally, we're -- depend on what chart you look at, sort of top 5 as an institutional manager. So it's multidimensional, and we have very strong relationships with the banks, insurance companies. Also these digital platforms are really meaningful and impactful to our business. So we continue to invest in China. We continue to advance the business. And clearly, we think the results will continue to come through.