Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

[Audio Gap] Manager was $1.5 trillion in assets under management. That's one of the most diversified product ranges and solutions in the industry. For those of you who don't know me, I'm Brian Bedell, and I cover the [indiscernible] asset managers, both traditional and [ alts ] here at Deutsche Bank Company Research. So Allison joined Invesco in 2020 as their CFO. And in this role, she leads all global corporate finance functions, including strategic and financial planning. So we'll hear a lot about Invesco's position in the market and the drivers of the growth in her presentation. Before joining Invesco, Allison was the CFO at SunTrust Banks, where she led the structuring of the merger with BB&T now called Truist Financial. And before becoming CFO of SunTrust, she held a series of leadership roles throughout her 20-year career there. So a wide range of investment -- of management and financial experience. So our format today will include a presentation from Allison, and then we'll open it up to Q&A afterwards. So without further ado, let's welcome Allison.

Thank you. All right. Thank you, Brian and good morning. All right. So great to be here in person, and I appreciate everybody taking time to be with us and to look over our presentation. And just before we begin, I want to remind our audience that today's discussion may contain forward-looking statements, and actual results may differ materially from these statements due to a variety of important factors, including the risk factors that are in our Form 10-K and in our SEC filings. Any forward-looking statements speak only to today, and we may not update them even if our views change. So with that, let me start on Slide 3, where we highlight the attributes of what makes Invesco compelling and why we think investors should consider us. At Invesco, we're focused on serving our global client base, continuing to scale our growing business and delivering compelling returns for our shareholders. First and foremost, our strength rests on our global team of professionals that are dedicated to delivering a superior investment performance that helps people get more out of life. The firm is well diversified with $1.5 trillion of AUM as of April 30, which is down from $1.6 trillion on March 31, given the challenging market conditions. Our investment teams offer a comprehensive range of investment products across asset class, investment style and vehicle tight. With scale and competitive strength in areas of high client demand, we have delivered 7 straight quarters of organic growth. And we're well positioned for future growth. Today, I want to highlight 3 of the key capabilities that are really driving our success, ETF and index strategies, Greater China and private alternatives. We've delivered stronger financial results due in part to our industry-leading organic asset growth, along with a focus on driving cost efficiencies. This has resulted in improvement in our operating margin. Strong operating results have enabled us to strengthen our balance sheet with our leverage ratios improving meaningfully while also allowing us to increase returns to shareholders in the form of share buybacks and dividend increases. Turning to Slide 4. We're focused on offering clients the capabilities they need to meet their investment objectives. We're diversified across asset classes with $780 billion in equity, assets under management approaching $5 billion in fixed income and money market products. And we have a rapidly growing alternative platform with over $200 billion in AUM as of March 31. We're one of the world's largest active managers with over $1 trillion in active AUM, and we've built out our passive business in recent years with passive AUM growing to $500 billion as of the end of the first quarter. Clients are increasingly looking for deeper partnerships with their asset manager, and it starts with helping them understand what's needed to achieve their target outcomes. Our platform is built to meet client demands, whether it be through mutual funds, separately managed accounts, ETFs or increasingly customized solutions. As we move to Slide 5, you can see that over the past 2 years, we've made significant progress on key financial performance indicators that are closely tied to the drivers of shareholder value. As I noted, Invesco has delivered 7 consecutive quarters of organic growth and AUM has grown from $1.1 trillion at the end of the first quarter in 2020 to nearly $1.6 trillion as of March 31. Meanwhile, net revenue for the first quarter of this year was 9% higher than the first quarter of 2020, and adjusted operating income was 20% higher over this period. The revenue growth, coupled with strong expense discipline, helped drive a 350 basis point improvement in operating margin over this time. Rising geopolitical tensions and declining markets have pressured operating results this year, but it's a testament to the resilience of our platform that Invesco delivered 6% organic growth and maintained a 39.5% operating margin in the first quarter. To underscore the point, the resilience of our business is demonstrated on Slide 6 by comparing the results in the first quarter of '21 to the first quarter of 2022. In the first quarter of last year, the world was recovering from the initial wave of the coronavirus pandemic and all major equity market indices posted gains during this period. Interest rates remained at historic lows across most major economies, and China's economy led emerging markets as it recovered. With market tailwinds at our back, Invesco delivered $25 billion of net long-term inflows, which was a 9% organic growth rate. Our China JV, global ETFs and active balance funds drove inflows that quarter and the fund delivered over 40% operating margin. Just one year later, we find ourselves in a much different environment. Rising inflation is now a significant concern. Emerging markets slowed amid the Russia-Ukraine conflict, and resurgence of COVID lockdowns in China led to a risk-off sentiment that caused all major equity market indices to decline significantly in the first quarter. Despite these challenges, the firm delivered $17 billion of net long-term inflows representing a 6% organic growth rate in the first quarter. Operating margin declined, but remained healthy at 39.5%, a testament to the stability of our operating platform and our cost transformation efforts. As we move to Slide 7, I'll transition into a deeper dive into 3 of the key capability areas that have been drivers of growth for Invesco. Given our differentiated position, scale and investment readiness in each area, we expect that these capabilities will continue to drive outsized growth for the firm given the large and growing client demand. Turning first to our ETF platform, where our AUM exceeds $0.5 trillion in a market that's expected to grow significantly through 2025. ETFs factor and index strategies have been the largest contributor to our organic growth over the past 12 months with $62 billion of net long-term inflows. I'll touch on our business in China, which is the fastest-growing market for asset management in the world and represents over $100 billion in AUM for Invesco. And finally, I'll share details of our private alternatives platform, where we have market-leading offerings in direct real estate and private credit. So moving to Slide 15. With over 15 years of experience managing indexed assets and a team of seasoned ETF professionals in different strategic regions, Invesco's index business has always differentiated itself due to the innovative and value-added nature of our products. Examples of this include first-to-market types of products like the Invesco senior loan ETF, distinctive families of ETFs, like the low volatility suite and the bullet share ETFs, along with our diversified range of commodity pools. We managed $528 billion in ETFs and other index capabilities. The platform is diversified in terms of strategies, asset class and client geographies. Over the last 12 months, net inflows into ETFs and other index capabilities were $87 billion, a 21% growth rate. Net inflows to global ETFs over this period were $66 billion, a growth rate of 17%. And new fees from these flows were $130 million, which is a 16% increase over the prior 12 months. Moving to Slide 9, Invesco is the fourth largest ETF AUM adviser globally. Our platform is much more diverse than bulk beta. We continue to innovate our product line, focusing on specialized strategies in growth areas such as smart beta, commodities, fixed income and more niche traditional beta. These capabilities carry higher fee rates as compared to bulk beta fee rates. On a fee basis, we ranked fourth in the industry with a 5.6% market share of annual fees. Given the commoditized nature of both beta products, almost 60% of the industry ETF AUM carries a fee rate of less than 10 basis points. In contrast, Invesco's AUM carries a fee rate of -- in contrast, Invesco's ETF capabilities are anchored in strategies that help investors achieve targeted investment goals. So if you exclude the QQQ, over 90% of our ETF AUM has a fee rate of 10 basis points or higher with the average fee rate being 33 basis points. Slide 10 shows that the ETF industry is expected to almost double in size to $18 trillion or 18% annually by 2025. Invesco is well positioned to continue to gain market share. Our ability to capture flows in excess of our market share is driven by a number of factors, including our understanding of markets and clients, multi-decade ETF relationships and institutional and wealth management channels, a fast-growing European ETF product lineup, that's now the second fastest-growing ETF business in the region and our ability to build loyalty with a new generation of retail investors. Finally, the brand recognition of the QQQ elevates Invesco's visibility in the global ETF market. The QQQ product has become the fifth largest ETF globally. Its popularity has spurred growth in the rest of our global ETF platform and laid the groundwork for the launch of adjacent fee-generating products as a part of the QQQ innovation suite. We launched the innovation suite in October of 2020, and it's been highly successful, growing to $5.4 billion by the end of the first quarter. Now moving to Slide 11, switching gears, I want to spend a few minutes on our business in China, particularly given the level of flows we have seen from the region over the last several quarters and the high level of interest in our business there. We launched the first Sino-U.S. joint venture in China in 2003 as Invesco Great Wall. We've been in the market for almost 2 decades with a unique JV structure and relationship with our partner. How we operate in China is differentiated from other joint ventures. While we have a 49% ownership of the JV, our partner is a Chinese government-backed power company who has been a good partner. Invesco leads the management of the JV, leveraging our global asset management expertise since the inception of this partnership. We run the business in China with Chinese management, and our clients are Chinese investors. We have a very strong relationship with banks and insurance companies and digital distribution has been a major contributor in recent years in terms of bringing in new onshore business. There's been a lot of coverage about China's relaxation on wealth management and personal pensions. Invesco Great Wall with its long-term presence and strong capabilities is well positioned to capture these opportunities. Invesco Great Wall has launched several target date and target risk fund to fund pension products, and they're actively serving bank wealth management clients through the institutional channel. AUM sourced from bank wealth management clients grew significantly during 2019 through 2021 and has become an important part of Invesco Great Wall's institutional business. China is estimated to account for over 40% of global net flows through 2024, and Invesco is well positioned to capture this growth. Additional opportunities for us in China include mutual funds, institutional clients and sovereign wealth funds. As China continues to open up and improve its capital markets, we also expect additional opportunities in pension reform, global investors increasing interest in Chinese investments and cross-border investment opportunities. Turning to Slide 12. We've built a diversified business in China with over $109 billion in AUM at the end of the first quarter. 52% of the AUM is from retail clients and 48% is institutional. We manage AUM in all asset classes and distribution is unique. Digital distribution to retail investors has become a mainstream channel, along with the traditional bank distribution channels. And this is not just for money market funds. With our market position and tenure in China, we're beneficiaries of this trend. Our long-term commitment and strong track record have put Invesco in an advantageous position, and our strategic position and continued investment in China has resulted in a 38% annual growth rate since 2021 -- excuse me, since 2018. In recognition of the strength of the business, Invesco was recently ranked the #1 China onshore business and the #4 foreign asset management firm in overall China in 2022. While COVID lockdowns have affected investor sentiment in China and have recently impacted our growth there as seen in the first quarter inflows from Greater China and the JV, we believe the fundamental long-term market opportunity remains compelling. Moving to Slide 13. As of March 31, Invesco had $211 billion in alternatives AUM, including private and public alternatives. Within our alternatives platform, we have a diverse range of capabilities, including $93 billion of public alternatives spanning commodity strategies, listed real estate and hedged and macro strategies. Moving to Slide 14. Real estate is the largest component of our private alternatives platform, with $92 billion in AUM as of March 31, including $74 billion of direct real estate. Invesco competes throughout the capital stack by investing in direct real estate and originating real estate debt. Our direct real estate business offers a range of investment styles, including core and core plus strategies as well as funds with higher return strategies. Our real estate team encompasses over 500 employees globally in 16 countries with a presence in North America, Europe and Asia, and we've invested throughout many cycles in our nearly 40-year history. We have a robust platform, global coverage and scale, which positions us to continue to grow in this important market segment. On Slide 15, we show the breadth of direct real estate capabilities that we offer. Our real estate capability is diversified and can be a one-stop shop for clients as Invesco Real estate invest across the risk return spectrum from core to high return across open-end, closed-end and separately managed account structures. Turning to Slide 16. Since 2018, our real estate business has experienced organic growth of 12% per year, outpacing market growth of 6% per year with $74 billion in assets under management. We're well positioned in a market that McKinsey expects to grow by approximately 3% per year through 2025. Direct real estate has historically been an institutional business. Our focus has expanded to leverage our retail distribution network to increase access to these strategies for a broader set of retail investors as well as growing offerings and higher return strategies and real estate debt. As shown on Slide 17, our private credit platform is the second component of our private alternatives business with $44 billion in assets under management, anchored by our bank loan capability, which holds U.S. and European securities. We have over 30 years of experience managing bank loans, and we have relationships with over 2,000 unique companies and over 200 private equity firms. We also offer direct lending to middle-market companies as well as opportunistic investments in special situations and distressed credit. And moving to Slide 18. With our real estate business, our private credit platform is diversified across the risk/return spectrum, ranging from highly weighted CLO notes to opportunistic credit, distressed and special situation investments to target equity-like returns with credit-like risk. As shown on Slide 19, our private credit platform has grown significantly from $33 billion in 2020 to $44 billion at the end of the first quarter. McKinsey estimates the global market for private credit and bank loans to be $1.6 trillion, growing at approximately 6% per year, and we're well positioned to capture that future growth. Now switching gears and moving to our capital priorities, beginning on Slide 20. Our focus has been to build a stronger balance sheet and improve financial flexibility. The momentum in our business has enabled us to make significant progress in our capital priorities, which entail balancing the need to continue to invest in our business, notably in the key growth areas that I just highlighted as well as deleveraging and creating a more flexible balance sheet for the future. We've accomplished these goals while improving our capital return to shareholders. We repurchased $200 million of stock in the first quarter, and the Board recently approved a 10% annual dividend increase in April. And we were in a position to take advantage of an economically attractive opportunity to early redeem $600 million of debt in early May. Fitch recently recognized these improvements, upgrading our senior unsecured debt rating from A- to A. On Slide 21, we demonstrate the improvement in our leverage profile over the last several quarters. Our leverage ratio was 1.25x at the end of the first quarter of '21 and has improved to 0.82x by the first quarter of '22. Our leverage profile stands to further improve with the redemption of the $600 million of debt in early May. Meanwhile, as I noted, we resumed share buybacks in the first quarter while improving our cash position to $1.3 billion. Overall, we're making solid progress in our efforts to improve liquidity and build financial flexibility and our first quarter results and subsequent actions regarding the dividend increase and early debt redemption demonstrate this. In conclusion, as we look toward the future, Invesco in a strong position to deliver value over the long run to all of our stakeholders. We have a full suite of investment capabilities across a range of investment styles and vehicles to serve diverse client needs. We also have scale and investment readiness and capabilities with high client demand that are poised to grow well into the future. Seven straight quarters of organic growth, coupled with disciplined expense management and capital allocation have allowed us to make strong progress against our financial objectives. With continued growth in our key capability areas, we remain positioned to win in large, fast-growing markets, including ETFs, China and private alternatives. And by executing on our strategic priorities, we're confident in our ability to serve clients around the globe and to deliver significant value to our shareholders. So with that, Brian, I'll now take any questions.

Yes. Yes. Okay. If we can start the Q&A session. And if anyone -- we can make this interactive. So if anyone has a question, just feel free to raise your hand. And we can have the mic go around, but then I've got plenty of questions to start off as well. So maybe I'll start while people are thinking. But that was a wonderful presentation, Allison. It was very detailed as always, and then we got a little coin the private alternatives business. So that's -- I do want to dive into that a little deeper. But maybe before that, if we could just talk about maybe the growth algorithm in general for Invesco in the future. And I would say your product mix and diversification both in distribution is similar to one of the leaders in the industry of BlackRock in a lot of ways, similar organic growth profile as well. So what do you see in -- for the future growth path in leveraging that product base and the distribution? Marty likes to joke that it's an overnight success. And all of a sudden, you see that the flows turn dramatically positive like 7 quarters ago. Do you see the future is more around product innovation, adding new products? Or do you think it's more about leveraging that distribution and your whole solutions capability?

Yes. The answer is it really is a little bit of both. And yes, Marty will say it was an overnight success, but it's really a reflection of many, many years of investment, trying to invest ahead of where we think client demand would be. And I do think our recent results have started to really demonstrate some of the success in that strategy. So I think a couple of things. One, what we try to do today is double-click into a few of our key capability areas, our ETFs, China and our private alternatives. Within those areas, I think we absolutely have the opportunity to continue to innovate. And we see some evidence of that innovation. A couple of things I mentioned along the lines of the QQQ innovation suite within our ETF capabilities, we'll probably touch on sort of some of the private real estate alternatives that we're making available to retail investors as well. And so we really threw INREIT. So we have the opportunity to continue to innovate within these capabilities. We have sort of the base of capabilities. It's really that innovation within that we think will actually continue to demonstrate growth. Our sales and distribution capabilities being so kind of regionally focused and well distributed across the globe is absolutely an asset where there's a lot of runway to continue to leverage that. And we think that will be really important in our success in the future.

Yes. That's great. It's amazing. I have to have so much product you can still actually expand. It's almost like the more product you create, the more ideas that you have. I know we have NASDAQ coming up next in person. I know they're very bullish on the innovation suite as well. I said it's been a huge success from their perspective and the growth potential of that.

It really has. I mean I think as I noted at the end of the first quarter, it's up over $5.5 billion from the launch in October of 2020. And it really does offer sort of the breadth of capabilities, and we're really seeing the uptake. Just looking at some of the flows over the last 90 days, just the QQQ continues to be one of our strongest growing ETFs.

Yes, despite the tech route, it's still -- it's propelling and it's great tactics the retail buying. Let's go into the alternative. You provided a lot more color in this presentation. So I really appreciate that. It's obviously the theme of democratizing alternatives to retail investors is a huge theme within the alternative managers. They're obviously trying to get into retail distribution. The most of them don't have the experience on distribution that Invesco has and the other traditional managers have. How do you see -- you sort of have both in the next -- in between both the product capabilities and the distribution. How should we expect Invesco to leverage that going forward, given I think retail allocations are still less than 5% to alternatives and demand evidently is growing in the brokerage channels, warehouses and private banks. So can you just talk about that evolution on the retail side?

Yes. We're definitely trying to leverage the intersection of those 2 key strengths that you noted. One is, as I talked about, just the depth of our experience in the private real estate market, 40 years of experience there combined with the breadth of the distribution network that we have and how to bring those 2 together to really create this democratization for the retail channel. I think we've got early success with the launch of INREIT, continuing to build that out. We think that's going to be a really important capability as we continue to work through our various distribution channels to really bring that capability to the retail market. We also have launched about 10 months ago a partnership with UBS, where we are offering direct real estate investment capabilities to their wealth management clients in Switzerland and other parts of Europe and Asia. In the first 10 months or so, that was up to over $600 million. So really starting to demonstrate, I think, where there is demand for this kind of capability. I do think growth there will be -- could be a little bit bumpy at times just because we are trying to -- while there's demand, it's with new products and trying to leverage this in a new way, a new distribution channels. And there could be some obstacles here and there, but we really do believe that long term, this is a driver of growth that this is an important component for the retail investor to continue to diversify their own investments and that as we continue to build this out that this is a product and a solution that we think we're well positioned to capture the growth that's there.

Are you seeing more demand through the warehouse channels or more on the private banking side, like you mentioned with UBS or is it...

I would say a little bit more on the private banking side, working on the warehouse channels, making progress, but it's steady as it goes there.

Yes, the sales machine is always difficult to penetrate and then...

And then once you can penetrate it starts to take off from there, so. Yes.

Yes. Definitely. And then on those -- on the capabilities, so I appreciate all the color that you laid out in the different strategies and the return target profiles. Looks like your -- you have the gamut of both certainly real estate and private credit. So those are the 2 bigger areas within the retail side. Any thoughts about other areas like private equity infrastructure in terms of either building that organically within Invesco? Or is we're thinking about that in an M&A sense?

I'd say we're always thinking about it. And it just has to make sense. I mean, we've built what we have organically. It's taken us a while to get there, but we've built it organically. And I think we're really demonstrating the success of that. That's always going to be a cost-effective way to build it. And at the same time, there are sometimes opportunities. And I think we've been pretty consistent in the response we get from an M&A perspective, which is to the extent we find capabilities that do fit, and they meet client demand, and there's not a lot of overlap. And of course, where the price makes sense, then we may have an interest. We do think private alternatives are going to continue to be a big growth driver. We do think client demand is not going to go away there. And so we will continue to be open-minded. Feel very good about the capabilities we have and feel very good about just the depth that we have there and the innovation across that we can continue to leverage, but that won't be absolutely to the exclusion of other capabilities. Over time, we'll always be open-minded.

Yes. And then you can even do that in lift outs, I would assume as supposed to say...

Theoretically, yes.

Theoretically just throwing that out there. Maybe zoom backing on China. That's -- you've been a leader there. You're one of the first asset managers to have such a big position in China. Now we're seeing obviously a little bit more competition. BlackRock is being more aggressive in China. Maybe just talk about your view of how China will develop over the next 5 to 10 years? You can almost see it as a binary type of situation on the one side. Like you said, the wealth management market is opening up. There's a huge middle class that has a strong desire and need for product say for retirement. And the government has been allowing a lot more asset management, both on the wealth management side and on the asset manufacturing side in the market. On the second hand, competition is increasing, and we have geopolitical tensions that are always rising. -- just what your thoughts are, which outcome do you think over the next 5 to 10 years will be positive and growing one? Or is it going to be more of a hurdle?

Yes. Well, so I'll give you my thoughts, of course. Always difficult to prognosticate on geopolitical events as I think we've all learned this year. So a couple of things. One, I think I noted in the presentation that the market expects 40% of all new flows will come from China in the next 5 years, which is a pretty stunning...

It's a stunning number.

Number to begin with. And so as you think about the fact that the competition is increasing there, yes, but we have a really strong market position and 20 years of experience. And so with that level of growth and the expectations of the growth, we think we're very well positioned to continue to grow our market share even with increased competition. What makes our structure rather unique is this JV structure, where -- while we're the 49% owner, we have full management control and our partner is a Chinese government-backed power fund. So they're not in the financial services space. And so as we think about sort of what does that mean for any geopolitical concerns, I think we feel like we're well positioned and not exactly a foreign firm in many respects. We -- it is really Chinese investors creating product for Chinese end clients. And so it really is a domestic business in many respects, even though it's a joint venture, obviously, with a U.S.-based firm. So I think one present challenges aside, and we certainly have seen an impact on consumer sentiment there, but we think that's very temporary and even some of the measures that have been announced this week, I'm hopeful that we'll start to see a little bit of an improvement in sentiment onshore in China. But even absent that, you've continued to see strong growth. You see demand and you have an expectation that this is an economy that's going to continue to grow very meaningfully over the next few years.

Yes. It's great that you have -- it feels like a domestic firm there as well.

Yes.

So that's hugely important. And do you have the same type of product innovation capabilities in that JV structure as you do for the Invesco overall? And could that be another big runway for growth even aside from the flows that are coming in?

Yes. No, absolutely. And the answer is yes. We do have that same innovation capability, and it's really tailoring the product to the demands of the client base there, and it's unique. Passive investing really hasn't made its way to China yet. There's still a meaningful amount of alpha that can be created through active management there. And so as you think about what the future could look like as that market matures, I think we're ways away from that market really maturing. But you can really think about a lot of the capabilities that we deliver across the United States and Europe as being the types of products and capabilities you can continue to innovate in China as their demand expands. The other interesting aspect there that gives us the opportunity to continue to think about innovation a little bit differently is the distribution channels. And the fact that digital distribution is a much more, I will say, accepted distribution channel in China than what we might see in other markets. And so we have the opportunity and have been quite innovative in how we think about that as well.

That's an interesting point, actually. The movement of passive. I mean, it's sort of more in the U.S., it's grown over to Europe. And so the leadership in these industries have typically been active. And so as that migrates across the world and you have such a good position in passive obviously...

Right. We can bring those capabilities there. Just I don't think we're -- I think we'd be a bit early right now as you think about where investor demand is.

Right. Well, maybe shifting to passive on the ETF side. So you're a leader in factor-based investing smart beta. How do you think about -- you do have a presence in beta ETFs. I think of across the Invesco range of products, one area that you're not really substantial in the beta ETF side. And how do you think about either potentially acquisitions in that area or -- and it's very few properties available or just growing it organically, and you're partnering with your smart beta franchise, given that we have seen over a long period of time, a little bit more demand for beta ETFs versus smart beta ETFs?

Yes, I'd say a couple of things. One, as you look at our European ETF lineup, it does tilt a little more beta. And so it does look a little different than what our U.S.-based ETF lineup looks like. And so from that perspective, and I think we're the second fastest-growing ETF provider in Europe. So we do have those capabilities, and it is a little bit regionally different. As we think about where we've really developed, we think a niche and been able to compete very effectively, it is on the smart beta side. I mean we have been able to really, I think, capture a part of the market that's quite attractive, where we're not competing on cost. And I think that's the consideration of building out beta capabilities as you are competing more on cost because there are very few ways to differentiate your product set. And so I'll never say never to anything, but I think we feel very good about the position that we have today. We feel very good about what the growth dynamics around that and the revenue that's associated with it and frankly the margin. As our business continues to shift to be -- to really capture the demand that's on the passive side, and we continue industry-wide to see a little less demand for active capabilities. We like being positioned in a product suite where we are able to differentiate our capabilities.

Yes. And that's interesting on the how you mentioned on the QQQ side, I know you said this before on earnings calls as well, but it's really helped your -- even though your don't [ fees ] on that, it's really helped your overall franchise. And I think you've also talked about on earnings calls before, but there's always this concern about fee rate pressure in the asset management industry. Frankly, it's usually more mix-related than actual [ taking of ] pricing separate, like you mentioned there is price cutting on the beta ETF side. But nevertheless, the profitability of your ETF franchise is just as high or if not higher than the rest of the complex. So maybe just talk about a little bit how -- yes, you see fee pressure from that mix perspective because the flows are coming into the ETFs faster. However, you've been able to expand margins through that generate. Do you see that trend continuing?

We do. Absolutely, the biggest pressure we have is mix shift. It's not deep cutting. And as we continue to see strong client demand for some of our lower fee passive capabilities, it has an impact, obviously, on the net revenue yield overall. The good news is we're well positioned where there's client demand. And I think our organic growth rates over the last couple of quarters are industry-leading on many levels. And so we're competing at a very high level and capturing the demand and the more challenging aspect of that is the demand is coming more in the lower fee capabilities. And so against that, we've been very, very focused on just the operating expense base and making sure that the size of our chassis is rightsized to what that client demand and revenue profile looks like and being very thoughtful from -- you saw some of the work we did a couple of years ago and taking some cost out and then being very disciplined and trying to maintain that cost structure against that as we do continue, and we expect we will continue to see strong demand in flows across some of those lower fee capabilities. I do think, as we noted in the presentation, we are competing in a different space on the ETF side, in particular. When you exclude the QQQ, 90% of our flows are priced -- or excuse me, our products are -- I'm going to say that differently. 90% of our AUM is priced at 10 basis points or higher. That is very different than a bulk beta kind of ETF shop would look. And so given we see such strong demand there, given it's such a growth driver, it does allow us to continue to, I think, manage our margins in such a way that we're creating that flywheel of cash to continue to innovate and invest in our growth capabilities. I will say while the QQQ does not generate revenue, the innovation suite does have a different fee structure around it. We are continuing to grow that. The QQQ creates enormous brand awareness and marketing value to us.

Yes, that's very clear. Maybe just talk about the current environment a little bit. Flows through the industry are challenged just because of the backdrop that we're seeing the shift to away from growth towards value away from tech and high PE stocks. Naturally, we've got a lot of geopolitical risk and then concerns obviously about the Fed over tightening potentially. How are you seeing that impact flows, let's say, for the second quarter? I don't know if you -- I know we'll get the May report in a couple of weeks. But how are you seeing that environment play out for Invesco right now? As you did say, retail investors are buying these debts and now we're seeing the market pull back up. I think we had a bear market for all of like 20 minutes last week or something.

Yes. So you saw our April flows. We did release those. And those were in modest outflows kind of broke our 2021 month, I think, streak of inflows. So disappointing at the same time and looking across the industry, we appeared to be one of the stronger competitors. Again, I don't know if we can take a lot of pride in being one of the least worst, but that does appear to be where we are. And in this environment, it is -- we have a confluence of so many events that are so uncorrelated. The COVID lockdowns in China are completely different and uncorrelated to the inflation risk that we're managing in Europe and the United States and then certainly with a war in Europe who would have thought we would have these 3 different events. And I think have we not seen the lockdowns in China, we might have seen positive flows simply because we would have continued to see strong inflows in that region, but that has a material impact for the time being. So I would say what I expect for second quarter overall, May has been challenging, just like April. I think the markets moved in a pretty similar direction over the course of the month of May. -- against that, I think we still feel very good, though, just again about all the long-term capabilities. There is definitely a bit of a rotation happening and investor sentiment is in a risk-off environment. We think we'll compete very well against that. In the long term, we're well positioned.

And hopefully, things bounce back, and the momentum continues. Maybe if I could just finish up with ESG. That's huge area. You have leadership on that side. And if anyone by the way, if anyone has questions, feel free to jump in. We have another 5 minutes or so left. But ESG has been such a big trend for asset management broadly and Invesco obviously has strong leadership there. Your roots in Europe really help, I think, create an early sort of advantage for you in that area overall. I'll start with one part, and I'll come back for a second part of this question. But on ESG, I think you've got around $100 billion of dedicated sustainable AUM in those type of strategy?

$89 billion at the end of the first quarter was in what we would consider dedicated ESG.

Dedicated ESG strategies. And then -- so talk about, on the one hand, product development and ESG strategies. I know you've been very successful for some of the ETFs, especially, but also could we see conversions in Article 8 and Article 9 products in Europe as well as a potential runway for more dedicated product? And then secondly, talk about your -- creating an ESG basically investment consideration process across the entire firm? I know your goal is to create a 100%. Where are you on that?

Yes. Okay. So a couple of things. So the $89 billion in dedicated ESG AUM. Of that, $13 billion, $14 billion would be an ETF ESGs -- ESG ETFs. And that makes us the second largest ESG ETF provider globally and in the United States. And so we are continuing to innovate and create those ESG capabilities across different asset classes and different vehicles. And I think, look, we will continue to expand that as we continue to see investor demand for it. There's -- Europe is certainly a little further along in terms of their demand and what we see in the United States. Might we see more across Europe. I think yes, we could. And we will continue to create that product and convert that product as we see that demand exists there. Our goal, as you note, is to get what we consider minimal, but systematic integration in terms of ESG capabilities and governance thought process across all of our AUM. We're at 85% as of the end of the first quarter. So we're making meaningful progress on that integration. And I think we are well positioned. I'd say just different regions or sort of different at different stages of the life cycle in terms of their demand for the capabilities.

Maybe talk about that a little bit. Europe, obviously, has been leading that. And I know climate has been a bigger growth engine in Europe as the ESG factor Obviously, social and governance is also big too. But in the U.S., U.S. broadly has been slower to adopt ESG and there's -- through many of the distribution channels, it's very strong, but there's also somewhat of a little bit less of a demand for investing in these products. Maybe just talk about whether you see that changing in the U.S. and the U.S. sort of adopting a little bit more of a European lands? Does performance matter so much more in the U.S. that it really will depend on how the products perform?

It's a good question. It's a bit of a personal view on it, I suppose. But I do think performance matters probably a little bit more in the U.S. I do think that's what we see across the spectrum. I think there is a desire to have some ESG capabilities in a lot of portfolios, but it's not universally shared and it's not a desire without the performance criteria that comes with it. And so I think it will grow. I do. I think over time, it will grow in the United States. I'm not sure we'll get right to where it is in Europe. But I think our strategy, our objective is to continue to create a product where we do think there will be demand and that does fit the appetite and the needs and the interest of the investors that we see here. And over time, I think we'll find that right fit in the investor, will find the right fit, too. And I don't think we're unique in that. I think this is a bit of an industry kind of challenge as we think about where does this fit in the U.S. investor appetite.

Right. And are you seeing demand from the distribution channels, in particular, such as in private banking or on the higher net worth side? Is there more of a need from those investors to try to diversify and have an ESG objectives there?

I'm not sure I would say it's different than it has been for the last couple of years. Yes. I wouldn't call it higher or lower, but rather consistent and that there is going to be -- within those -- within their investor -- within their client base, there are going to be clients that always have and always will have that demand for that in their portfolio. But I'm not sure I would say we're seeing it increase. And so we're going to continue to manage as the demand is there.

Yes. Yes. That makes sense. If I can -- if there are no questions, I'm going to sneak in one more just on the so kind of ESG alternatives impact investing. It's relatively new. The private equity managers who have leadership there because it's a private -- the private nature of impact investing. Any desire to -- as you think about building out your alternatives platform over time, we talked about infrastructure and private equity. Any thoughts about creating an impact platform?

Yes, we have nothing near term in the hopper, but we do continue to evaluate that and where that could fit overall within our capabilities, leveraging some of the experience we have. And certainly, as we've talked about, we've got the experience, both on the ESG side and on the private side. And so you could perhaps see where there could be an intersection there. We don't have any near-term plans to leverage that. But I could see where that could be out at some point.