Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

Okay. Good morning. Thanks, everyone, for joining us here at the UBS Financials Conference. Are we online? I think so. Okay. Thanks, everyone, for joining us. I'm -- I had the pleasure being joined Allison Dukes, Invesco's CFO. Allison has some prepared remarks, and then we're going to jump right into the fireside chat. There is -- if you have questions as you're watching that you want to pass on to me, there's a Q&A link in the webcast. You also could either e-mail me or ping me on Bloomberg. So with that, why don't I turn it over to Allison?

Great. Thank you, Brennan, and I appreciate you having us here this morning. Just a couple of points I'll highlight before we jump in with any questions. As you saw through last night through July 21 -- 2021, excuse me, we have now reported 13 consecutive months of net long-term inflows, and that includes over $57 billion so far this year for the first 7 months of 2021. And it's really our investment in these key capabilities and the focus on our clients where we continue to produce just the momentum that we're seeing in our business and really the progress that we're seeing across channels, geographies and asset classes. In the second quarter, the retail channel generated net long-term inflows of just under $10 billion, right at $9.5 billion, and that was really driven by our positive ETF flows. And I think what was just notable, particularly in the second quarter, was the meaningful improvement year-over-year, which really reflected the ongoing improvement we're seeing in our equities capabilities in the Americas in particular. Notably, our global ETF platform captured 4.2% of the industry flows in the second quarter, and that's really against the backdrop of our market share, which is 2.7%. So we're really punching above our weight. And what was particularly impactful was the share of the revenue pool that we're capturing. We captured about 8% of the revenue pool in the second quarter, which I think really points to the strength of our ETF capabilities. The institutional channel generated net long-term inflows of $21.6 billion in the second quarter, and that was augmented by the funding of an $18 billion passive indexing mandate in Asia Pacific. But even after funding that large mandate, our institutional pipeline ended the quarter at a pretty healthy $33 billion at June 30. And that really points to the strength of our solutions capabilities, which enable 35% of that pipeline. So overall, we've got a lot of things that are working quite well. We continue to really focus on generating positive operating leverage and improving operating margin, and we've seen that progress over the last several quarters. And along the way, we continue to invest in our business and really are focusing on investing in our business so that we can really grow our strategic opportunities or areas of strength and our key capabilities, while at the same time focusing on our strategic evaluation and achieving our net cost savings goal of $200 million by the end of next year. So far through the second quarter of this year, we've realized about 63% of that. So we're well on our way. Our efforts to strengthen our balance sheet are really yielding good results with meaningful improvements in both leverage and liquidity. And at the same time, we continue to create these opportunities to reinvest in the business and return capital to shareholders. So really trying to make progress against all of those initiatives at the same time. And with that, Brennan, I'm going to turn it over to you.

Thank you, Allison. That -- you touched on several of the topics that I wanted to explore in some of those comments. So you talked about some of the flow dynamics that you've seen. Obviously, the flows have gotten a great deal stronger than they were a little over a year ago. But one of the outcomes has been that we've seen a resumption of fee rate pressure. In the second quarter, the net revenue yield was down by almost 1 basis, 0.9. And it seemed like 0.2 was from the money fund fee waivers, another 0.2 likely from the fee mandate, at least, that was my math, similar in that ballpark. And what was the rest? Was it adverse mix shift? Or did other factors come into play? And should we consider -- should we count on another -- the math from that low-fee mandate? And did it come in the middle of the quarter? So should we average that in here for 3Q?

Yes. So as you noted, net revenue yield, excluding performance fees, was down about 0.9 basis point. And I think what we've pointed to on the earnings call was that it was really driven by mainly by an asset mix shift, which included higher QQQ balances as well as higher money market average balances. And then, of course, the impact of that larger pass of Australian mandate that did fund in May. So we did have almost 2 months of that in the quarter. And we saw a partial offset on all of that from market gains in the quarter. So there were some positive offsets. And on the money market side, it wasn't quite, 0.2 basis point, probably closer to like 0.10 basis point. And so the sequential impact of the higher discretionary money market fee waivers was probably not all that significant. I mean it's meaningful kind of inside of the entire quarter. So the absolute impact inside of the quarter was about 0.7 basis point. A sequential change relative to the first quarter, it was probably closer to 0.10 basis point. So that was sort of the breakout of the mix. Certainly, the passive index mandate had an impact, but it's also just mix shift overall as we continue to see real demand for some of those lower fee capabilities, which would include the QQQ suite. In terms of the outlook and what does it mean from here, I'd say we do expect the fee waivers to remain in place for the foreseeable future, just until we begin to recover to some more normalized rates, whatever that looks like and whenever that does happen. But we do -- we don't anticipate any real change in the short term. And then the drivers of net revenue yield from there are really going to depend on that mix of flows, certainly the market impact. And the third quarter will reflect the full quarter impact of the Australian passive mandate. But again, we had almost 2 months of it in the second quarter. So it wasn't fully baked in, in the second quarter, but it's not necessarily that material of a change relative to the second quarter. But the thing I'll keep us coming back to is that while net revenue yield is important and it is a really easy lens to look at and we can see where it declined quarter-over-quarter, one of the things we focus on is really more largely operating income and operating margin. There are going to be longer-term sort of really structural dynamics that exist not just for us but for the industry, as client demand continues to shift into lower-fee passive strategies. And that's why we've been so focused on building out those passive strategies and really building out the diversity of our platform so that we are able to capture demand where client demand exists and really deliver on those customized solutions for our clients. But against that, we have to be able to demonstrate positive operating leverage. And so we don't focus just on the fee rate, and we've got to focus on the overall impact of profitability. And our positive operating leverage in the second quarter was about 1.8x. And so we really -- I think it demonstrates the strength of our platform and the opportunity we have to really drive scale and profitability across the diversified platform. And then, yes, I think I made a comment on the earnings call that if you look back a couple of years ago, our net revenue yield was at 41 basis points. And now it's closer to 35 basis points, and that's driven mainly by client demands and that shift in client demand and the way in which we see the asset mix changing. But against that, despite a 6 basis point drop in net revenue yield, our operating margin has improved from 40.9% to 41.5%. Now there was a dip in the middle of that, that mapped the pandemic in 2020, but we are really able to demonstrate that even with 6 basis points lower net revenue yield, we can continue to demonstrate really strong operating margin as we really think about rightsizing the chassis of our platform and shifting our platform to deliver these passive capabilities.

Right Yes. No, that was a very -- these were all very, very fair remarks on the earnings call, and it's an important thing to stay focused on. When we think about some of the -- so helpful color, almost 2 months on low-fee mandate. So that math would be a little bit less of an impact quarter-over-quarter. It will still be there but not quite as significant. When we think about the money market fund waiver side of things, your money market franchise as far as the institutional, I think, as you said. So when we think about Fed in June, now you've got a 5 basis point floor on reverse repo, IOER is a little bit higher, shouldn't that help to moderate that headwind a bit, given I would assume you have a treasury orientation most people do, especially institutional side? So shouldn't that be a little bit early?

It was helpful. I mean it is a little bit of relief. It basically raised the floor on rates to 5 basis points from 0. And so it was really put in place to protect the money markets more broadly from seeing negative clearing rates and short-dated treasuries and repo markets, but it's not the only factor that really influences how we have to think about these money market waivers. There are other factors, namely competitive factors that will continue to factor into our calculus as we think about how much and where. The biggest impact, the most helpful impact will be if we see a change in short-term rates. So if, in fact, we do get to lift off and there is a change of Fed funds by 25 basis points, that would significantly reduce the waivers that are associated with our institutional money market funds. And retail take higher short-term rates to begin to see an impact of waivers that are really related to the money market funds. So I think those are probably going to be most impactful, but that I'd still caveat that the market is going to be impacted by the supply and demand dynamics in the short-dated treasury and repo markets, and then we've got the overall competitive factors as we think about just the level of AUM and funds with existing waivers and gross yields and just the competition we would be facing in each one of those. So it's not as simple as a change in any one particular rate, but no question, any change that's in the upward direction is helpful.

Right. Sure. And when we think about that 25 basis points being actual formal Fed fund hike being most impactful and assuming that it flows through to all the other corresponding rates, LIBOR and whatnot all move and the competitive dynamics are stable, does that -- how much of that -- I believe you said it's 0.7 bps to your net revenue yield. Does the first hike get rid of like half, 1/3, any sense about how much it might get rid of?

It'd be hard to actually probably link it that much. I mean, I don't know if it's quite half, but it could be, as you think about when they went in place. And again, I keep saying the competitive dynamics, there's always going to be a bit of a herd mentality in some of these things as we think about what we need to do to retain the business we have and continue to earn the business we want to earn. But maybe 1/3, maybe half, it's hard to estimate that exactly.

Yes. No, no, I get that. I mean it will probably also -- and of course, it depends on substitute pricing also basically what bank deposit betas, right?

Yes. All the liquidity dynamics that will be at play.

Right. We saw in the last hiking cycle that the betas stayed low initially. So that would probably help it be towards the upper end of the relief side, but all fair. Okay. But the ballpark of 1/3 to half is a reasonable way to at least think about it if we want to try and think about it in that?

I think if you wanted to try to model something that's not an unreasonable way to think about it.

Great. Excellent. So shifting gears to the backlog. You made reference to the backlog staying solid at $33.3 billion, and I would agree, I thought that, that was pretty encouraging because if you net out where the backlog was in 1Q the -- when you guys reported 1Q earnings and you had that $18 billion mandate in there, that was actually about $5 billion lower. So it improved ex the big mandate. So you've also talked -- and you've also talked I believe you said fee rate was the best that it has been in your time at Invesco in that pipe. Of course, the big Australian mandate coming out improves the fee rate of it. But when we think about the -- where we're going here, there's a lot of attention. You and I talked about it. You put out your AUM last night. It suggests to me at least that it suggested almost $2 billion of inflows, but investors are really focused on the content there. So how should -- when we think about that pipeline, it's the highest you have seen. When we think about the fact that maybe the flows are slowing in retail, does that -- the fact the pipeline is higher fee, does that provide a ballast to those slowing mutual fund flows? And therefore, maybe we shouldn't be as worried about the fee rate as we have been? Or how do you think about that? How good is that institutional fee rate in that plan?

Well -- and so my comment on it's the strongest I've seen since I've been here was excluding the large passive mandate which was really only in the pipeline for what we reported in the first quarter. And then it fully funded in the second quarter. So I think -- the fee rate on our institutional pipeline, it tends to run in the high 20s, low 30s. So it's below the firm average net revenue yield, but I think it's higher than people tend to assume it might be. And in the second quarter, at the end of the second quarter, as I noted, it was on the higher side. And the asset class tilt is a little bit skewed in this quarter more towards our alternatives capabilities. And that's what really is continuing to add some improvement to the average fee rate that we see in that pipeline. So answering your question there. And with the average fee rate, it's going to move around quarter-to-quarter. By virtue of it being an institutional pipeline, you've got some large chunky mandates, and they really do span geographies and they span asset classes. And so you really do see a mix of our capabilities that are bundled into these customized solutions in particular. The majority though will be not the majority, but largely, they will be passively managed, and so they can tend to run somewhat on the overall on the lower side of our fee rate. And I think that's really where you see just sort of how it moves quarter-to-quarter. Your question around does it offset anything that's slow on the retail side, but look, we're focused on moving both at the same time. Ideally, you've got both engines firing really well at the same time, but there are a lot of market dynamics at play. And I think some of the slowdown we've seen tracks some of the broader industry slowdown on the retail side over the last few months. And so ideally, we're focused on all channels and all asset classes really performing at the highest level at all times, but that's why we run a diversified platform, and we're grateful to have that diversified platform with the breadth of capabilities, the breadth of products and solutions and really being able to rely on 2 channels, not dependent on just 1.

Right. That's fair. That's all very fair. So when we think about some of the institutional business and the success that you had in Australia, maybe can you talk a little bit about how winning a mandate like that impacts your competitive positioning in that marketplace? What's the best way to think about the opportunity that you have in that region, not only with ANZ and the idea that I'm sure you don't just spike the football with a low-fee mandate and think that that's all you can do for that huge super national, but also then more broadly in that market, does it provide a lot of credibility? Does it give you more advance?

Yes. That's a great question. The mandate, the IOOF mandate was assisted by our custom solutions advisory team. And so it's really an opportunity for us to offer that solutions-based differentiated passive investment capability that gives us the chance to demonstrate how we can meet client needs for a key strategic client with the potential to expand that relationship beyond just this initial mandate into additional higher fee opportunities. To your point, we didn't do it just for this one opportunity. It's really an opportunity to leverage our broader in-house indexing capabilities. We know clients are working with fewer asset managers. We know Australia is a very competitive market, and it's certainly early days for us, but we continue to see real opportunity as we go forward. When we talk about solutions, thought leadership, custom portfolios, these are all really just different important ingredients to a successful money manager. And several years back, we decided to take our indexing capability that we developed in conjunction with our ETF business and our self-indexing in particular, along with our analytical capabilities and started going to institutions with these indexing and other capabilities together. So we see this as an opportunity to create a much deeper partnership with this institution and other institutions in the region as well and really demonstrate the breadth of our capabilities. And so we see this as an entry point, and we're anticipating that we can really be helpful to them and an important part of growth going forward.

Excellent. Another capability that you all launched recently was the illiquid real estate offering, INREIT. How should we think about the size of that product? Is it permanent capital? What is the fee rate on it look like? And how does it differentiate with the exclusive offering that you guys had with UBS? And can you launch similar offerings to that UBS product with other wealth management platforms? Or did the arrangement limit the opportunity to do so?

Yes. It's a good question. They're really -- they're both great examples of the opportunity we have to provide our traditional institutional capabilities to our retail investors. And we see this as a real strategic opportunity, a large opportunity for growth in democratizing our private real estate capability and broadening that to retail investors as retail investors seek exposure to private real estate assets. And both of these initiatives, both INREIT and the opportunity with UBS really allow us to leverage our deep and broad retail distribution capabilities at the same time. So INREIT, that registration statement is on Form S-11 that's filed on the SEC's website. It was declared effective by the SEC last quarter, and it was an offering of up to $2.4 billion of INREIT shares in the primary offering and up to $600 million of INREIT shares pursuant to the distribution reinvestment plan. And again, it's really a democratization strategy as retail investors look for alternative sources of income and capabilities. On the UBS side, that's really a bespoke real estate offering, and we announced the partnership with UBS in June, where we will provide this property investment service for our wealth management clients -- excuse me, for UBS' Wealth Management clients in Switzerland and in other markets in EMEA as well as in Asia. And it's really an investment opportunity in direct real estate but also real estate securities, and it's going to provide clients of UBS with income-producing strategies that really offer a stable return profile. So it's exciting, and I think we're able to leverage capabilities we've had for a long time. We've been working on for a long time and deliver them to the retail investor in a different way. In terms of the fee rate, a lot of these fees, you asked that question, they do tend to be on the higher side. And so it is additive to the overall profile of Invesco.

Great. Okay. And then when we think about the -- these -- there's been a lot of attention to some of these SMA products, particularly the low-fee and zero-fee products. My own parent company, it was sort of one of the first movers there and certainly drew a lot of attention in the marketplace. But when you guys actually embraced some of these products and had a reasonable amount of success, how should we think about what the -- I can't imagine that they are in and of themselves probably not all that great of a profit source, but what are the other benefits that they provide? Do they help your positioning on the actual platform itself? And is this just a function of the shrinking of the counterparty lists at wealth management firms? Or is there something more significant happening?

Yes. Well, so I do think the reference to this kind of zero-fee, low-fee SMA platform that is with UBS, it's important to kind of dissect what it is and what it isn't for us. We added 7 fixed income SMAs in the second half of last year, and that included short to long duration fixed income strategies with both Tax-Aware and impact ESG overlay options. And we're off to a good start. I think we've raised around $700 million in AUM through this capability and this partnership with UBS. The label though maybe is a little bit misleading in some ways. In that case, the host wealth manager actually pays the asset manager. What it does is it really simplifies the cost structure though for clients, the end client by making one payment from the client to the wealth manager and then we are paid by the wealth manager rather than the client. And so it is maybe a little bit of a misnomer in some ways, at least that it's zero fee. It's not. We're not working totally for free. But -- so why do we do it? Yes, there is the continued sort of simplification of the product shelves as wealth managers are working with fewer asset managers, and it's important to be thoughtful about. But we also think it's really important to have a robust SMA offering as a part of our U.S. retail wealth management business and really focusing on the higher end of the wealth management advisory market. And it gives us the opportunity to deliver our investment capabilities to clients across a lot of these innovative wrappers. And it remains a real strategic priority for us. We think retail SMAs are poised for strong growth, really given the intersection of a lot of trends that are happening right now. You've got that demand for client customization, whether it's ESG and impact strategies You've got lower account minimums that are continuing to be, I'd say, a trend that we don't think is going away and then you've got the desire for greater tax efficiency. And so we see it as an opportunity for us to continue to leverage our capabilities and our strengths there and working with our wealth management partners.