Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

Good morning. My name is Patrick Davitt. I'm the U.S. asset manager analyst here at Autonomous. It's my pleasure to welcome Invesco's President and CEO -- COO -- CEO, Andrew Schlossberg.

Give me whatever you want.

[Operator Instructions] So maybe to start, Andrew, as you reflect on your first year as CEO, what do you think Invesco has gotten right? And where do you see the most room for improvement?

Yes. And thanks, Patrick, for having me. So I probably started maybe the most important thing for Invesco's success, which is investment quality. And over the past year, our investment teams have started to put up much better numbers. So we have about 65% to 75% of our active assets are outperforming peers and that's up about 10 or 20 percentage points in the last 1.5 years and our first quartile peer rankings are around 40% of the assets up from around 20% or 25% 1.5 years ago. So investment quality I think is core in paramount to our success and we've seen some good improvement there. Organic flow growth. We did $10 billion in the organic flow growth last year, which was pretty decent in that market environment. That's accelerated into 2024, we're already past that only after a handful of months. We've increased the market share in our ETF business at about 2x to 3x, the rate of our flow share about 2x to 3x the rate of our asset -- our asset market share. We've started to introduce private market capabilities into the wealth channel. And we've repositioned our Asian business, which is starting to see the fruits of that labor and through reengagement in China and also growth in Japan. We looked at the expense base and we've taken out about $60 million, but maybe more importantly, repositioned the company to operate more as a global platform. And so consolidating teams, consolidating areas of the business that will make our expense base more agile. And we've been focused on improving the balance sheet. So we've, over the last year or 2 paid down $1.2 billion of debt and we're getting close to our zero net debt aspiration to put us back in a position to regularly buyback stock. So those are some of the things on the plus side. And I'd say on the challenges side, the biggest area of impact will be our ability to continue to progress in active equities and translate better investment performance and quality there into greater flow growth or [indiscernible] regardless of where the markets and demand is. And our goal is to really achieve at market or better flows regardless of the situation, we've got areas for improvement.

Maybe update us on your strategic priorities now and how you think you're executing against them?

Sure. So there's a handful of strategic priorities. And I think the first one is really around focusing the markets and the channels that we're seeking to execute in. And we're looking for markets and channels to refocus and put more resources and energy toward that are both large markets, but also have some kind of catalyst change that's going on where Invesco is positioned strong -- in a strong way today. And under those criteria, the U.S. is going to continue to be a very important market for us, obviously, for its size, but also significant generational wealth transfer. In China and the Asia Pacific region in general because of reforms, capital markets, developments and the growth of the retirement space in particular in China make those 2 markets the most important markets for Invesco. And so we're going to continue to concentrate our resources towards more like those and ones that have those kind of characteristics. The second strategic priority is around what I was mentioning on active equities. And so really being in a position to enhance the quality of our active equities and enhance the flows and the outcomes. We're doing that through new leadership through more risk management and a much tighter relationship between investments, product and distribution to be able to rebend that curve. The third area of priority is around taking our investment capabilities and vehicles that are in high demand and scale well and improving the profitability and operating leverage. Fixed income multi-assets on the asset class side and ETFs and SMAs on the vehicle side. The fourth strategic priority is around private markets and we have a very strong institutional private market business focused on real estate and alternative credit, bringing that into the wealth management space. The fifth area is around next-generation technology and deploying it through our platform, both at the enterprise level, the distribution level and the investment level. And then lastly, as I was just talking about a minute ago, Patrick, the financial flexibility and the balance sheet strength that will enable us to generate the kind of operating leverage and pay out and return to shareholders.

Great. So maybe taking a further step back, what do you think really differentiates Invesco. I'm sure it's a couple of things you just talked about from the other competitors and what continues to be a fairly challenged broader asset management space.

Yes. No, as I took a step back and reflected on that over the past year, myself and our team, there's probably a couple that I point out and some are a little redundant. I think one our global footprint. And in particular, our Asia Pacific and our China footprint I mean, it's China is a $90 billion JV asset under management market for us. Japan, $60 billion. India, we just put together a JV. These markets are places where affluence is moving, reform is changing, and we have a distinctive position and it's really hard to replicate. So I'd say that's one. Two is the fact that we have a diverse active investment platform that spans public, private markets and multi-asset. The third area I'd say is that ETF business. I mean it's a $600 billion ETF index strategy business that is the fourth largest but arguably the most innovative and one that has higher yield fee yields than others. And then lastly, just our distribution strength, in particular here in the U.S. wealth management market, which is the biggest market, how can we deploy that distribution strength through all of these capabilities and products. So I think those are the most distinctive ones.

So you mentioned the active equity and you recently finished an internal realignment of the portfolio management operation. So perhaps update us on how that's tangibly impacting fund performance at this point.

Yes. I mean, some of the numbers I was mentioning before, I think we went from strength to strength on the fixed income side. I think over 90% of our assets are -- beat their benchmarks over all time periods on the fixed income side. So as the people move up the curve, we're very well positioned on fixed income and I think, as I said, went from strength to strength that we just brought together teams that had been operating in different ways in Europe and the U.S. I think on the equity side, there's pockets of improvement. We're starting to see better results on the global side of equities. We're starting to see better results -- continued good results on the small and mid-cap side. It's like our U.S. value complex and our U.K. equity complex. So the investment results are getting there. I think what's as important, though, is getting ourselves focused on where are the places where demand is going to be and how do we accelerate either the capture of new growth or slow the redemption patterns for places where there's more secular change going on.

Makes sense. So in that vein, Invesco has been one of the more consistent inflows in the group. So how do you see the biggest drivers of organic growth playing out from here, both in the near term and the longer term?

So as we think about organic revenue growth, the biggest place that's going to seem to trajectory in the next little bit is that active equity portfolio. So I won't repeat that. Where we're seeing the most demand and where we see a pickup in organic growth even this year versus last year's strength, the #1 is out in Asia. So China, in particular, the flows that we're seeing in the last couple of months or more than the flows we saw in the last 2 years. And our asset level in China is now just a few percent below, it's all-time high. So despite all the challenges in China, we're seeing it as -- it's a net flow grower for us and something we think we can sustain. In the ETF business, ETFs faster growth this year than last year, but I think maybe more exciting from my perspective is broadening out. So what was just sort of U.S. equities, U.S. large cap is now getting into mid and small, getting into places like floating rate and bank loans, further out the curve on fixed income. Fixed income where it's been really dominated in the short term is now starting to move out to municipals, investment-grade, European corporates were starting to see demand. And then as I was talking before, private market spent a lot of time getting our strategies placed on the wealth platforms and building out our specialist teams and building out our network. And I think that flywheel could start pick up in the coming years.

Great. We'll touch on a few of those later. But maybe on the inorganic side, Invesco has been one of the more active acquirers of the public asset managers. So how do you think M&A fits into your strategic plans now and what opportunities would you consider?

So clearly, we've got a lot to do internally and we've been busy. The last year really repositioning the company and starting to see some of the term that I was mentioning. And we have a lot more to do organically. Also, the focus on our balance sheet and really being in a position where we can be back in the market regularly buying back stock in the second half of the year is really, really critical in our top priority right now with cash. As time progresses and as opportunities present themselves on the M&A side, I think the places where we would pay attention are in private markets, but it would be in places that are extensions of things that we do today, in the real asset space, in the alternative credit space. So I think those will be the primary areas. But right now, we have a ton of opportunity organically.

Makes sense. On that point, your ETF business has been a strong growth driver. You probably have one of the best ETF franchises out there. So maybe dig in a bit more on the trends in that space and how Invesco can continue to compete and gain market share again [indiscernible]?

So the history of our ETF business or part of the history of our ETF business is that it was largely design for retail or wealth management. It was largely designed around innovative or alternative beta or whatever you want to call it, and some harder to reach strategy or harder to reach parts of the market. And I think all of those -- and it's had an innovation and partnership like that. And I think all of those things have helped us grow to where we've gotten to and stay focused in the areas where we can compete and frankly, where we could drive profit sales and the fee rates are decent in those areas. We'll continue to innovate that way into the traditional passive market and into the traditional wealth markets and institutional markets, so we're doing it. We're doing this thoughtfully around the world. I think the bigger -- I think this sort of incremental growth from there is going to come from the -- of active into the ETF format. And there's been head fakes on active into the ETF format for 10 years. We have around $25 billion of our ETF assets are -- have an active team affiliated with the strategy, either it's an active fund or active team is helping to manage the fund, which makes us one of the leader in the active ETF space, think about how small that is. I think this reality of being able to bring fundamental and quantitative index like for active through a more efficient vehicle like an ETF is a major growth opportunity. And there's very few firms that have both the experience size of scale of the ETF platform with as much quality active that we have fundamentally and quantitatively. And so I think that is going to be a decent chapter of growth.

Makes sense. You mentioned bond flows, which I think is probably one of the biggest topics that come up in my conversations with clients, and we've seen a nice improvement in onflows this year and actives kind of come back as well but mostly going to like very large bond houses. So how do you feel about how Invesco is positioned for that potential wave of flows into fixed income product as we get more clarity on rates? And then I guess more specifically, what are your strengths?

Sure. Fixed income process across active, passive liquidity out to loans is around $500 billion of assets. So we have a large platform. And it's been flowing -- positively flowing for 20 of the last 21 quarters, including last quarter, we'll be heading a few billion come in. I think the biggest opportunity for us in the short run is what you were mentioning, people reenergizing into the longer end or even the medium end of the curve, where we're very well positioned. And we're starting to see some of that momentum come in. Both institutional and retail as much so out in Asia, Europe as we are in the U.S. So I think this is a phenomenon across the piece. There were a little bit of head fakes with, I think, interest rate clarity. So people are still getting paid for their cash. And so there is still quite a bit of money sitting in liquidity strategies and probably will stay there for some period of time. Where our strengths are amongst many is our municipals business here in the U.S. Investment grade, high yield, we're one of the largest muni managers. Very good short-term fixed income business, stable value business into D.C. An investment grade and corporates really around the world. So we have a full spectrum of strategies. There's for minimal competition, but I think there -- through the results we're seeing with our performance, we think we can take some fair.

Staying on the bond point, the press and some executives continue to push this narrative that there's going to be this massive rotation from money funds -- the bond funds at some point. But there does not appear to be much data, we found that really supports that argument, particularly if you go back to the '90s when rates were kind of consistently 4% to 6%, you've got $17 trillion still in deposits earning almost nothing. So where do you stand on that today?

Yes. I think maybe a little more skeptical like you are. I think the money is going to stay there longer for the sole reason that people are getting paid and they're not ready to take. I think that's a shorter term phenomenon. I don't know if that's 6 months, 12 months, 24 months, but we certainly haven't seen that flood and flow happen. And I think until you get more clarity from the Fed. And I think until we maybe get through some of these political cycles, that may -- we may still see little bit on the sidelines. I will say, though, cash balances in general, from what we read from talking to institutions and financial institutions around the world have come down. I mean the -- what was probably in the mid-20% range for financial institutions is now high teens low 20%. The money is moving off the sidelines. I just don't know if it's a little rush, and it's not necessarily all going into fixed income.

So you mentioned APAC as a big differentiator. Maybe start with the talk about your view on that opportunity broadly, how you view your specific business there. And more specifically, how the operating environment has turned more favorable in China.

Yes. Let me start with China and just build on what I said earlier, this is a business we're very bullish on and has been a great business for us that we formed over 20 years ago. And I think had we not gotten into that market 20 years is going to establish some of the moats that we have as now being one of the top few asset manager, retail DBS managers there, it's a very difficult market, a harder market to come into now. We have $90 billion in assets. We have about 50% operating margins and the yields are in the blended or in the high 30 basis point rate. No capital required and we're about 50% ownership with a very strong JV partner. Despite all of the challenges the last few years, as I said, our asset base is now getting back to where it was, and we were pretty much flat flow, now starting to see an acceleration all through that time period. I think the challenge had been, people were really getting away from equities and going more into cash like investments. And what we're starting to see the last couple of months with the reforms in the market and property valuations, you're starting to see if you come into balance strategies back into equity strategies and that's where the demand we see picking up. And as I said, given that we're a well-established, high investable quality, well-known, well placed and digital platforms, international platforms. And I think less Western firms focusing on China, it's a real differentiator for us and a real -- we see a growth catalyst. Japan is a similar growth story but for different reasons. We've been in Japan for decades. And it was one of those markets where you're always waiting for that moment. And it feels like we might be in that moment now. I think the retirement reforms that are getting in place in Japan. I think the focus of the government on their capital markets and the confidence, I think that's emerging of their consumer is we're seeing in our Japanese business. So there was a $30 billion asset business 4 years ago is now $60 billion from Japanese clients. And our biggest growth strategy there the last year was in global equities. So I mean it's, we think, a really wonderful market that we stay all the time through. And I think it's going to -- I think as others come back in the market, I think we have a leap forward. And then I'll contrast it with India, where we had been going alone for many years and doing okay. And we decided to divest our interest in India, about 50% of it earlier this year, but form a JV relationship with a large conglomerate -- financial conglomerate, and we think that could accelerate our growth or taking some cash off the table and some risk on the table. So those 3 markets in nature are principal growth market that we feel really good about each.

I think you said China in particular are looking a lot better in the last few months. So what's the outlook for organic growth in that region for the rest of the year and then maybe longer term?

Yes. I think strong. I mean last -- it's been our strongest growing region in the last 5 years. Last year was slower, but still positive from that market. And I think this year is off to a really strong start, as I was saying, even more than the last year its aggregate. So I think that region is going to contribute more of our -- of our flow growth this year the last and then maybe more importantly, I think it's going to start to increase the revenue trajectory as well given some of the fee yields in those businesses.

Great. Let's move to Private Markets and Alts. Firstly, let's start with reminding us of the main capabilities you have in Alts and Private Markets and how Invesco is attacking the opportunity provided by retail de-marketization.

Yes, we've been in the Private Market space institutionally for decades and decades and really not in the well space at all until the last few years like many. Our profile is about $140 billion of private strategies of which $90 billion is real assets, real estate, of which most is equity, but some is debt. It's a global profile, invest in Asia, Europe and the U.S., very large built out, very institutionally recognized with all the sovereigns and pensions and endowments that you think around the world. The more our private or alternative credit business is built off the back -- back on of a bank loan, CLO business and then more recently into direct lending and distressed. And that's a more nascent business. And we like both of those spaces, as I was mentioning, because they've been so institutional, the real growth opportunity for Invesco is to use our distribution strength, use our education that we've built for retail advisers, build the product development strength that we have and bring some of those strategies into wealth. And we started that effort a few years back. We've invested behind all of those elements that I mentioned. And we've started, we have a real estate equity and real estate debt strategy, both that are placed on a few of the biggest wealth management platforms in the United States and dozens of other platforms, and we start to see the flywheel start to build for those, in particular, real estate debt.

So it sounds like the most immediate opportunities are real estate. So how are you thinking about expanding this opportunity beyond real estate?

Yes. So extensions that -- obviously, on the alternative credit side. We're going to continue to look for opportunities to bring those strategies into wealth. But for us, because we've been relatively small, there's big institutional opportunities as well. It will be on the distressed side, probably as much as, if not more than the direct lending side. In time, and we will continue -- we will bring them into the wealth market as well. But right now, the real estate strategies are the ones that we're really focused on. And we think we're in a sweet spot for real estate debt. There's not a lot of supply out there of investors in vehicles that are appropriate for retail. And we have a long track record of success and we're seeing a lot of reverse inquiry for that.

That brings nicely into the next question and a question from the audience. We just heard last week from KKR Capital Group that they're announcing a partnership to launch hybrid liquid, illiquid products for the mass affluent market. Is that a path that Invesco would explore as you look to do more private credit, private equity type strategies?

It was a really interesting announcement and partnership from 2 really good competitors in firms. And I think it's indicative of a few things that are going on in the marketplace that are probably applicable for Invesco too. One is that the openness to deal partnerships and for people to do cooperations together where one has strength, the other has unmet opportunity, I think we're going to continue. And for a company like Invesco where we've done JVs, we've done partnerships. We're -- we'll continue to and we'll continue to explore those. So I think it was indicative of things that are going on in the industry and are interesting to us. I think it was also indicative that, it's important that you have, especially in the wealth space that you have a reputation and built out distribution. It means you have institutionally incredible private market strategies. And I think between those 2 firms, they have both of those things. I bring that to Invesco where we have all those elements inside our company in the real asset and the private credit space and in the distribution space. I think where we could see some partnership opportunities is maybe as we bring multi-alternatives to market from mass affluent or for small institutions in places where we're not choosing to participate in the private market space like private equity, maybe some elements of infrastructure. So partnering to bring a more broad suite of capabilities, I think, is interesting. I thought the capital take pay or notion of public private in a portfolio was interesting and noble and we'll see -- that's not something we've explored yet, but I think it's new concept.

Another one at this point from the audience. I guess a lot of the alternative managers have been talking about their view at least, that there's only going to be 3 to 5 winners in the space and that you need to have a broad product offering to be one of those winners. What's your view on that? And how competitive do you think Invesco's offerings are to those?