Invesco Ltd. ($IVZ)

Good afternoon. My name is Patrick Davitt. I'm the U.S. asset managers analyst at Autonomous. It's my pleasure to welcome back Invesco's CEO, Andrew Schlossberg. As a reminder, if you have any questions, you can submit them to the Pigeonhole app, and I will try to work them in from the iPad here. So thanks for joining us again, and thank you. Good to have you.

Thanks for having me.

So I think we're about 3 years in now since you took the role. So as you reflect on that, what do you think Invesco and yourself have gotten right? What do you see -- where do you see room for improvement? And how have your strategic priorities evolved in the last year since we last chatted here.

Yes. Well, first, thanks for having me. And yes, no, we've accomplished a lot, I think, over the last couple of years, and hopefully, we can talk about a lot of it. I think I'd probably summarize it into 3 main areas of what we've been focused on and what we've been accomplishing. The first is a big focus on innovation. The second is a big focus on clarity in our business. And the third has been on execution and delivery. Around innovation, it's been in our product line. We've made a number of additions and changes and advancements in areas where there's a lot of demand, ETFs, SMAs, things like this around the world. The second thing has been in innovation has been partnerships. And we've established a few in the private market space, but we've also established a few more geographically in India and with the divestiture we made in Canada and created a partnership with -- and then a lot internationally. Invesco is now 40% of our client base and assets are from outside the U.S. So a lot around innovation. The second area really focused on clarity for the business. We've done a lot around our strategic priorities getting much tighter and divesting things where they just don't make sense or deemphasizing like a few of the things I mentioned before. Also on bringing clarity and simplification to our platforms, and in particular, in the investments area, where we now have a single equity, a single fixed income and a single private markets platform. And soon, we'll have one investment technology Alpha platform across, and we've made good progress there. And then last in delivery for our clients, we've been delivering better investment performance, and they've rewarded us with $150 billion of net new flows in the last 18 months and delivering for shareholders, not just the stock price appreciation, but the operating performance, we had 25% operating income growth first quarter year-on-year, 15% revenue growth, a delevered balance sheet and returning capital to shareholders. So we've been doing a lot. And then as you kind of look forward, more of that plus a real emphasis on personalization, whether that's through more usage of things like SMAs, I mentioned before, or retailization of private markets and into defined contribution or whether it's tokenization and digital assets in general. So a big focus now on those themes, too.

That's helpful. So moving to a more macro level, and then we'll get back to and dig in on a lot of that stuff. It seems like every year we're here, there's been a volatile spring. I think it'd be helpful to start with maybe a high-level discussion of what you're seeing in the marketplace. Firstly, could you update us on how investor behavior has evolved through the volatility? And to what extent you're seeing any meaningful shifts in client allocations?

Yes. We're starting to think the same thing, this March into April period, what's next each year. Look, one thing I would say from speaking with clients all around the world and institutions, wealth platforms, Asia, Europe, U.S., I'm not going to say there's a complete comfort with volatility, but I'm going to say there's a little more of a new normal to it and people not running from the volatility. I mean money is continuing to get put to work. Money is in motion. And in some places, we're seeing pretty meaningful growth. It's also getting reallocated inside asset classes as well. I mean we've seen good growth in investment grade and fixed income out in Europe. We've seen expansion in China into more balanced funds. We've seen more growth in global equity in Asia here in the U.S., a lot of ETF growth, a lot of SMA growth. So there's been money still in motion, but there's still a lot of cash on the sidelines, too. So we estimate around 20% of individuals portfolios are in some kind of cash investment, and we're still seeing that. But there's inflection points. I mean the changes in regulations and rules here in the U.S., also changes in the U.K., Japan are creating a place where more money is getting invested. And I mentioned our flow trajectory. So it's they're continuing -- we're continuing to benefit from, I think, some of that reallocation looking for global broader diversified asset managers that offer a lot of stability. So I mentioned the $150 billion we did in net flows in the last 18 months, but first quarter was around $20 billion, and we reported April at $18 billion of positive flows and May has seen a pretty good pace, too.

So on that specifically, you continue to post very, I would say, very impressive flow numbers in pretty much any kind of market at this point, which looks a lot like kind of a bigger comp that people like to look at for you and maybe you aspire to look like. What do you -- what part of your business do you think is driving such a strong and consistent flow picture relative to the group?

I think there's a couple of things beyond what I mentioned already, I think, one, having as diverse business as we have, about half the company's assets are active, about half the companies are passive. I think that helps. The international complexion of the business, as I mentioned before, which is now up to 40% of our assets has grown materially in the last few years. And it's not as if those markets aren't competitive, but I think they're less saturated than some of the -- than the markets here in the U.S. So we've benefited from Japan really reigniting. We benefited from China reigniting U.K. and Europe as much as we don't -- most people don't think of them as growth markets. There is a lot of transformation of money flow in the insurance channel and the defined contribution channel, and we've been the beneficiary of that. And in all those markets, a common denominator is we've been there for decades, and we've never left and we never blinked, and we kept sort of our pace in those markets. And so I think that's an important common denominator.

The Qs obviously helped as well, and that was a big boost to your April flows, I think. There's been a lot more focus on increased competition there. So history would suggest that an established ETF with a liquidity advantage does have significant moats. So I think I agree with what you guys have been saying on that. But BlackRock and State Street could theoretically have significant power in the financial adviser channel, particularly through model portfolios. I guess, with the core concern, I think, being that they could bundle their products alongside their new Q products in model portfolios or things like that and get preferential placement. So I guess -- so the idea is, I guess, that new allocation flows could bypass Q in that way. So what options does Invesco have to defend its position? And are you investing in deepening distributor relationships or restructuring your model portfolio offerings to embed the Qs more defensively into adviser infrastructure?

Yes. That's a lot of questions.

Sorry.

Where do I start? No, no, no. The -- just for context for everybody, the Qs, it's -- the main fund is about $475 billion of assets, and it's part of a suite that has over $600 billion of assets, not just here in the United States, but internationally globally as well. So there is a bit of a moat around it in terms of its size and the brand halo that comes from it. It's the only QQQ fund. So that brand will be unique. And with that size comes really some of the liquidity benefits, tight spreads. There's about $0.5 trillion of notional options that trade off of it. So it's a very -- it's difficult to dislodge those assets with many of those starter attributes. The way that the licensing works on those products, we have an MFN. So we're licensing that index at 8 basis points. Any competitors that come in will also license it at 8 basis points. So the differential in our fees and what those competitors price their products at won't be that different. And given some of those benefits that I mentioned, not to mention that people have very low tax basis in the QQQ, which would prevent really an economic reason not to move. We feel like it's -- we're in a pretty privileged position. We've invested a lot through the marketing into those funds, and we'll continue to do that even through the conversion that we just made from a UIT into an ETF. And we have our own example of -- we put forward another Q fund a few years ago. And just to describe what we've seen 3 years ago, to today, the big Qs still grew by $60 billion. The funds up 2.5x in terms of assets. So there's plenty of growth there. Your comment about how we distribute that. We distribute it to every human and institution that we've met in the world, and we'll continue to do that. So we have very deep entrenched relationships. It's part of a very big ETF complex and a very big wealth distribution complex. So our penetration in model portfolios, our penetration in wealth and normal wealth platforms and with institutions is pretty high and I think defensible. We'll continue to invest behind those sorts of things. So we feel good about where we are with the Qs, and we feel really good about the conversion we were able to do at the end of last year. We've only had 1 quarter of that benefit. So we're looking forward to seeing that through the course of the year.

What do you think changed from NASDAQ's perspective? Because on the surface, it looks like they did this as a reaction to the change in structure for the Qs. Is that your understanding? And why do you think they're opening it up to more competition?

Yes. I mean they've said publicly the same thing they said to us, which is they view the opportunities for the Qs to be really large. I mean they view it to be much bigger than the $500 billion that is currently in the asset -- in the fund, and they wanted to have the opportunity to reach that market quickly. I mean that's been their explanation. That's their decision to make. I mean we'll continue to make sure we get the lion's share of that. We're about 60% of the NASDAQ, maybe even more index business. So we're very important to them. And they'll disproportionately work with us, I'm certain because of that.

So say those -- the 2 competitor products come in at a much lower fee, how much flex would you have to cut marketing and/or add securities lending in order to kind of match that if they come in at a much lower rate.

Yes. I mean we -- like I said, we're all going to be at 8 at least. And our products are priced at like 15% and 18%, respectively. So it's not -- there's probably not that much difference. We're comfortable where the prices for our fees are for our funds. We just reduced the fees on the Qs through the conversion. So I feel good about pricing regardless of where our competition comes out. In terms of sec lending, one of the benefits of moving to this ETF structure is that the fund securities are eligible for lending. We have lending programs. The thing is it's a very liquid, very large securities in that 100 set. So they're not the typical ones that you get good lending against, but that opportunity certainly is there, and we'll take advantage of it, but it is not large. And then what was your other -- was that it?

I think that's it.

Okay. marketing. So marketing, as we noted in the proxy when we converted the fund, we put a range of $60 million to $100 million, and that's our expectation. We also have full discretion over how that $60 million to $100 million gets spent, meaning you can support and benefit that whole ecosystem that I just described internationally, domestically. And if we choose to relook at that, given the competitive position that we're in now, that's at our discretion.

Got it. So the other big topic that's new this year in terms of potential negatives in your business is the addition of platform fees or ETF distribution fees. You said on the 1Q call that you do not expect that change to have a material impact on Invesco. So could you unpack that statement a bit more? Is there a positive offset? Or just think that large-scale players like Invesco have more pricing power with distributors than small?

Yes. Let me do just that and unpack it a little bit. So as mutual funds, and this is a U.S. topic. As mutual funds assets in the industry decline as well as for Invesco relative to ETF assets, it's kind of natural that distribution partners and platforms would be looking to share in the economics of the ETFs just like they have of the mutual funds. One of the points I was making on our earnings call was that natural trajectory of our mutual fund business and the amount of fee sharing that we pay is going down as the ETF ramps up. And if and as we pay fee sharing in certain instances, they could end up offsetting. And that's what I was mentioning as part of the material impact. In terms of size and scale, the benefits of being a $1.2 trillion asset manager, ETF asset manager and a $2.5 trillion overall manager with a big position in U.S. wealth is that we have a lot of irons, I guess, in the fire with our partners and those platforms. And they and we look at that holistically, whether it's value-added things we do with them, ways we support their distribution, other products we have in the lineup. And so that's the size and scale comment. And we have several ETFs in this instance that are things that are very much bought and very much expected by RIAs or individual investors. So that's the benefit of scale point. The last thing I'll say is we've been doing ETF. The reason why it was maybe -- there's been a lot of excitement about this topic recently and why maybe we're not as excited about it. We've been doing ETF fee sharing with certain partners for some time. And the way those work is you pay on future ETF flows, not back books. you look at the economics of the ETF after you've paid all of your fees. So think of a net fee rate all the way down after the licensing fee, after the custodian fee all the way down and then a percentage of that. You do it not for your whole range, but maybe selectively for certain products. You don't do it for the whole platform. You might do it in select parts of the platform. So I share all that with you just to say it's a very strategic conversation and a selective conversation. And I think that's why I mentioned the materiality for our company is not that large.

Yes. Okay. Makes sense. Let's move to active equity. It seems that the average active equity manager is still not really outperforming benchmarks. It's a little bit better this year, but on the whole, not that much better. So with that in mind, how are you thinking about the path to active equity ever getting more traction with investors again? And what do you think needs to change in the industry to get this kind of stubborn trend of outflow to shift back in your favor?

Yes. I'm sparking a little bit because I've been in the industry for a long time. And one thing that absolutely hasn't changed is investors like excess return. And so if you deliver good investment quality to investors, those active equity managers are winning relative share. Maybe the demand is lower, but they're winning. And so our #1 focus on returning active equity at first out of outflows and into inflows across the whole company is investment quality. And it's more than just performance. It's risk management. It's appropriate -- it's good fees or fair fees. And it's about having deep high-quality teams. And so over the last several years, we have been consolidating things around teams that exhibit all of those attributes. And I feel really good about how we have that set up and organized now. About half our AUM in active equity is on a 5-year basis now in the top quartile of peers. So we have better chances to win. And our flow picture, while it's still negative in aggregate for active equities around the world, for our clients outside the U.S., which is about 1/3 of the assets, we're in positive flows. And for the parts here in the U.S. from U.S. clients, the negative flow rate has definitely improved. And so I think it's -- the game you play is good investment quality and a lot of things correct. And we're working on how to port our active equity into different formats than just mutual funds, which has been the preponderance of the assets. So ETFs, SMAs, these sorts of things.

Okay. We'll get to active ETFs. another wrench has been thrown into this conversation, right, which is AI. So how are you thinking about -- I think there's some news from Robinhood on this today. How does Invesco think about the risk of AI-driven commoditization of active management, specifically as quantitative and machine learning-based strategies become more accessible to clients?

Yes. I mean we're thinking about it back to building on my last statement, having the best humans. And if we have the best humans and that we can actually provide them with the right tools, we can do great things. And the last year or 2, we've been prioritizing getting AI tools and our teams trained very effectively. It's now accessible to everybody in the company. It's now used by 3/4 of our employees every day in some part of their work. And I'd say the place where it's being used the most is from our investments organization. I'm impressed and proud of our investors that they're not looking at it as a threat. They're really looking at it as an opportunity. And so the use cases they're using and we're using are to get that next edge over our competitors. And so things like performance and performance analysis retrospectively and prospectively, sell signaling to get better at when to move on or just some examples, research aggregation that can reduce the amount of time that we get to combine your information and our information together. These are all now getting built until the processes. And again, if we can just get some -- a little bit of edge there, same on the client management side. This is when you retain assets a little longer, you grow assets a little better, grows revenue over time. And I think that's what we're trying to do, much more than the expense side. And I think it's going to be a long, long time until, if not ever, where people are just completely turning over all of their investments to anything about that.

Moving to ETFs. We've touched on it a little bit. It's obviously been a big driver of your flow outperformance -- can you talk about the trends in that space more broadly, how you're growing share and dealing with, to the point on the Qs, increasing competition?

Yes. We've been in the ETF space about a little over 20 years now. And so the growth of the business mostly organically, but we've done some add-ons over time has gotten us to a place, as I mentioned before, that's about $1.2 trillion now. And we've been doing it by outflowing our market share rate and maintaining and growing our overall market share. And I think the recipe for that, that we're continuing to do in a competitive space that's been competitive for a long time is making sure that our innovation and not just on the product side, but on the distribution side, on the structuring side stays in front of others. And we've been able to do that successfully by also not trying to be everything for everybody. And so we picked the geographies we've picked deliberately. We picked the part of the markets that we want to focus on. And I think that intentionality has been important. And then you end up competing on things that are more than just price and you compete on value or you compete on speed. And we've done that in the U.S. We've grown quite significantly in Europe now. We're almost $200 billion of ETF AUM, and we're starting to ramp up more significantly in Asia. So I think the business should go from strength to strength. It's a very accretive business for Invesco. It now has margins that are significantly in excess of our overall operating margin for the company. So it scales really well. It's one global platform. So we see a lot of room left.

On the Europe and Asia point, I guess people always say like Europe is 5 to 10 years behind the U.S. I imagine Asia is 10-plus -- do you see -- as you look at kind of the adoption curves, do you see it kind of catching up at some point?

Yes. I think there -- some of that's true, the statements you made, but they're very different. And I think that's maybe the way that we've been able to do well in Europe and we do well in Asia and other areas, and we'll do well in Asia on this is, I think, accepting the differences. And so in Europe, the institutional market is pretty big for ETFs. The use of active has actually been around a little longer in the ETF space. So we have some things that are introduced. On the other hand, the fixed income side isn't as built out as it is here in the U.S., and we've been taking advantage of some of the things we've learned here in the U.S. And then in Asia and in Europe, what's actually moved faster than in the U.S. are digital platforms. And so our ETF businesses, what we're learning on digital platforms in places outside the U.S., whether that's neobanks or fully digital wealth managers, we're applying back here in the States. So I think there's advantages to actually having your eyes around the world.

Digging in a bit more on active ETFs, it feels like everyone that we talk to is launching active ETFs and trying to kind of I guess, market it as the savior for the business.

How do they say it?

I guess how are you differentiating your active ETFs versus what feels like a pretty crowded space at this point? And to what extent, if you can tell, are these products just cannibalizing existing active AUM?

Yes. I mean some of it is due to what I said a little earlier about how we differentiated our ETF business in general. We have about -- we have about 40 active ETFs globally, most of those in the U.S., but some of them in Europe. They're largely in fixed income, option income areas, commodities, and we have about $40 billion. So we've seen good uptake -- we've also been in the market for some time with a little more of an active orientation in our passive ETF lineup, meaning we're using other factors in passive than just capitalization weighted. So we kind of have an ethos of active orientation already in our ETF franchise, which means the end client thinks of us that way. And because we have such a big passive, talking to people about active and passive is very natural for us. And having the ETF complex as large as we have allows us to use all the scale benefits that are already there with that incumbent position. So we think we're able to -- we're not -- the reason I mentioned 40 active ETFs is that it may be getting to large enough. And so I don't think the way you're going to measure success in active ETFs is how many funds you have. I think it's going to be when you launch them to who you launch them and do you stick to what your real strengths are in active. because if you're just thinking it's going to port over bad active into another vehicle and mana from Haven is going to come, it just not -- is not what we see happening. And to that end, we're usually -- we're going to build out our active ETF business through new launches, not through conversions, probably not through share class extensions, maybe here and there, but it's largely going to be new fund launches. So may they cannibalize our active mutual fund business over time? It's possible, but that's not really the design.

Okay. I'm going to pivot to alts. Maybe update us on the specific kind of product road map and distribution strategy to grow that business from here.

For alts?

Alts.

Yes. So just for context, private markets for Invesco is about $135 billion of assets, and it's been built over multiple decades. 95% of it's been placed with or owned by institutions, typically a defined benefit of sovereign wealth and endowment foundation. So over the last several years, we've been investing in and executing a strategy against diversifying that to become more present in the wealth space, not just here in the U.S. but internationally and over time into other parts of institutional, notably the retirement defined contribution space, again, not just here in the U.S. but internationally. And because of our existing asset base being in real assets, real estate largely and in alternative credit, -- there were pockets of that where we wanted to have natural extension growth and have a more -- a broadly accessible product line, not everything to everybody, but broadly accessible. And we also were limited by not having infinite amount of capital to invest behind these strategies to get them launched, going and really moving. So that drew us to partnerships, which we executed on last year first, about a year ago with Barings, where we are now working together on private alternative strategies in the income space. So using parts of our direct lending and CLO bank loan strategies and their higher-end direct lending and special situations to have a unified product that we can bring to the wealth space. And we're going to do a second one with them here later this year that's similar with a bit more octane. And then our second partnership we did with LGT Capital -- and that was a little more on the capital appreciation side, bringing some of their strengths in private equity and infrastructure with some of the strengths I mentioned before for us in real estate. And we're going to bring that -- those products to market here this year soon, the first for wealth and the second for the defined contribution space. And in both instances, the MassMutual and LGT Capital, respectively, invested upwards of $1 billion in capital behind those strategies to incubate and have them move forward. And so we've been able to actually launch product pretty quickly compared to our competition. I think where we are right now, we have a much broader built-out product line. I think as we look forward, there's more opportunity for us to replicate similar things in Europe and in Asia. There's probably some opportunities for us to do a few more things here in the U.S., but I think it's starting to get away from being a product thing for Invesco and much more a distribution element and really get that flywheel turning.

On the LGT partnership, can you share any more kind of on the time line of the first close? I know sometimes it can be tricky talking about these target fund sizes, fee structures for that inaugural offering.

Yes, difficult to talk about. We're really targeting to start to see some of that in the back half of the year. The fee structures are set up that these will be highly competitive fee structures. We want to be in a place where we can actually win share in the wealth space, and we want to target the defined contribution space. So these will have good fees, but competitive in the marketplace. Fee sharing is the way we've set up these partnerships is each party is indifferent about who manages what percent of the assets, the fee sharing and splits are the same, which is a great investor outcome and shareholder outcome. So nobody is self-selecting, and it really makes a lot more sense to how we can manage the portfolio. So -- the fee sharing is going to be a function of we just want the products to be successful from an investment and size standpoint. But this is going to take time. I mean these -- I think one of the things that I think has been a little overextended in the private market space into wealth and into defined contribution by the industry, not Invesco particularly, is that this is going to take time to get from 1% or 2% allocations to 5% or 6% or 8%. This is going to be years for this to happen, not quarters.

On that point, there's obviously been a lot of noise on the retail democratization theme this year. From your perspective, has it meaningfully impacted the retail alternatives growth outlook? Or is this more of a blip in your view? And maybe update us on how your conversations with distributors have gone on this theme.

Sure. Look, I think -- and we have different characteristics than others. So I'll speak a little bit for the industry and mostly for Invesco. I think from an industry perspective, the conversations we've had with wealth platforms and defined contribution plan sponsors, I don't think this has changed their outlook on the importance of private markets into their clients' portfolios. So that's been our general experience. I think the end clients, the participant maybe in a 401(k) plan or the individual investor invested through their adviser, I think has a sharper eye on what is in these strategies. And I think that, in the end, might, in the short run, be a little painful for certain firms and folks. But in the medium to long run, I think it's just going to make a much more informed investor base that knows the difference between an interval fund and a BDC or knows the difference between direct lending and distressed or knows about concentration risk or knows about a 5% redemption limit. And I think it's not that these weren't disclosed. It's -- I just think through experience, people will learn more. And it's so early that I think there's a lot of opportunity to move forward. I actually think in the 401(k) space, I think a lot of this is actually helpful because this will end up in people's target date funds in time. And I think a lot of the liquidity challenges that we're seeing in retail just will exist less in 401(k) space. And I think these are wonderful holdings that should be in people's retirement plans. And I think people's knowledge and experience is just going to advance that.

On that, what operational challenge -- I mean, it feels like there's some light at the end of the tunnel that's actually happening. What operational challenges still exist around daily valuation or liquidity matching and also education of the sponsors?

Yes. We did a survey which we coded with Sari and 85% of the plan sponsors said they want to see this in their plan. I think the education is going to be less with the plan sponsors and more with the participants and also more with regulators and government and others that have a responsibility to make sure that these work well for shareholders. So I think that the education is really more with the participant than it is going to be with the plan sponsor. I think the operational challenges and the liquidity challenges again, this is where I think the defined contribution has an advantage because the preponderance of VC assets today are in target date or life cycle or some kind of mass allocation fund and where this will end up in time is a sleeve inside that. And it will be a sleeve of 5% to 20% or some appropriate amount based on your age or your risk tolerance or your asset levels. And those things are really more straightforward on an operational basis to work through liquidity, to work through how these things -- where valuation matters and where maybe it matters a little less. Commingled trust funds are going to be probably a vehicle of choice that they'll move through. Those have really good pure economics. So I think in the 401(k) space, it's actually going to be a lot less operationally intensive. I do not think there's a world where people are going to have a single fund option that says Invesco private equity fund. It's just -- that's not -- I don't think the reality.

There's a question from the audience here that's adjacent to this, more from the insurance perspective, your relationship with MassMutual. Maybe update us on the asset management strategy through your relationship with MassMutual and maybe scaling for more third-party insurance mandate.

Yes. I mean the insurance -- first, the relations with MassMutual is very strong, and it's very deep. They're both an owner in the company's common equity. They're an owner or they have a stake where we have the preferred equity, which we talk about later, has become smaller. They're the biggest investors through their general account in many of our newer private market strategies, and we work with them through their insurance network as well. So it's very deep. And whenever there's an opportunity for us to bring something to market or for them to work with an asset manager, of course, they have bearings, but we're the cousin. And our combinations with Barings and the relationship with MassMutual, there's plenty of opportunity. As it relates to other insurance companies, we work with many insurance partners, and there's no limitation to working with other insurance partners, whether it's at their general account or in their insurance advice networks. In fact, some of the biggest growth that we've seen in the last year, especially outside the U.S. has been with insurance partners in places like the U.K. or in Japan.

Great. So we've talked about ETFs, active equity, alts, like you've got all of these pieces in place. It would seem to kind of compete more meaningfully in model portfolios or SMAs that kind of package all this stuff into one flavor. Update us on your progress and kind of attacking that opportunity more aggressively.

Yes. In the beginning of our conversation, when I was talking about some of our focus going forward, and I mentioned personalization, it's just that what you're asking about. We've been growing in the SMA. We think it's important to have an SMA, a robust SMA business. We think it's important to have a robust models business. We've taken the SMA business now to about $40 billion from $10 billion, maybe 3 or 4 years ago. So it's grown quite rapidly. But it's been more narrow. It's been in fixed income mostly. We'd like to see that expand out. And then in models, the growth has been a little more modest for us. It's a place we really want to ramp up. And what we believe is the advent of models as a really good allocation source for retail, wealth and mid-market, in particular, in upmarket is the potential is very high. It scales well. Technology is much better now. And the recipient of a lot of those assets are ETFs. And so we've been pretty robust in lots of people's models, but we'd like to see our models business where we're the asset allocator get larger.

Okay. Makes sense. I want to touch a little bit on the non-U.S. business, which you've hit a few times throughout the conversation. I think you're particularly well positioned to address China and APAC given your joint ventures there. So maybe update us on how that business has been tracking through this year's volatility and what the broader Asia strategy is at this point?

Yes. So combined, Asia and Europe for us are about $800 billion of client assets, about half-half. So our Asian business at $400 billion in assets from the region is really strong. And that's probably -- I mean, I don't have the exact numbers, but it's grown significantly. Flows have been very strong. And I think importantly, they've been now more diverse. China is about $155 billion of that $400 billion. Japan is now over $100 billion. We now have our JV in India with a local partner where we own a minority share, but we're going to participate in that market. Broader Southeast Asia in some of those markets have been quite strong. So we now have a pretty diverse business over there that's more than one country or one product type. With regard to China, in particular, which I think is a really unique piece of Invesco, as I mentioned, the size has gotten quite large. We're now the #1 foreign-owned or foreign affiliated JV-type asset manager in China. And we're in the top 10 of all retail asset managers in China. So we're really relevant and significant. We've been there 23 years. It's a domestic to domestic business. So it benefits from the strength of China's capital markets developing and retirement markets developing, which has been the main reason we've been attracted to China is those 2 things need and have to develop, and we're starting to see that occur. But now with the size and scale we have and brand relevance I mentioned, the business is 50% plus operating margins, no capital coming in, dividends out every year. And it's now about 20% money markets, 40% fixed income, 20% equities, whatever the other math is for balanced. It has an ETF business that's about $15 billion growth from nothing 4 or 5 years ago. So we now have quite a diverse complex there. And it's been growing pretty rapidly. So we did, I think -- I think around $9 billion of flows last quarter. It's a little ramped up from last year, but it's just been a very good organic growth business and we continue to be favorable about that domestic market.

Staying on non-U.S., I think you've had particular success with a growth equity strategy in Europe. Is that right? Or...

In Europe or is it in Asia? In Japan, global equity, in particular, yes.

How are you thinking about kind of replicating that kind of success with other active strategies?

Yes. We definitely want to replicate. And so that strategy is growing pretty significantly. I think importantly, that strategy, we've been in Japan for a long time, and we have many mandates with Japanese distribution platforms. This is the most recent one and probably the first one that's been as broad-based as something like global equity. It's not a cyclical category. It's a core holding for every Japanese household that's investing in markets. And it's really benefited from this move from savings to investing that's happening in Japan. And it's happening in Japanese equities, but it's also happening in global equities. And so we still feel like we have a lot of room to grow there. But that product, while it's been successful in the last few years, we incubated and started developing that track record 3 or 4 years before that. And so we are doing the same with some other strategies right now, U.S. strategies, emerging market strategies, European strategies. And our brand has gotten so much bigger and more recognized in Japan. We're launching an ETF in a couple of weeks, the Qs ETF in Tokyo. So we're going to broaden that business out, and I think it's pretty helpful. But global equities is a core asset class, and we're happy to have that.

Great. As we get towards the end, I want to pivot to expenses and margin. I think your favorite topic of the last few years and tends to be a key focus for most investors I talk to. It sounds like there's finally a light at the end of the tunnel for the Alpha NextGen project. What point should we expect that to become a tailwind rather than a headwind?

We're going to finish executing that platform at the end of this year. And we made a pretty important pivot last year in going to this hybrid model, and we still think we can get many, if not all, the benefits that we had expected. So first thing is getting it installed. That will -- from a tailwind perspective, we'll lose all the implementation costs. So that will be a good thing as we move forward into '27. We also -- and I'm glad we did this platform when we did it, and we're finishing it when we're finishing it for a lot of reasons, but we now will have a single system that aggregates all of our data, allows our -- the investment engine to have single analytics, ease of delivery and all of the things that are prerequisites to apply things like AI and apply things like advanced analytics. And so I think we'll start to see that tailwind behind -- start to become a tailwind. And then we're eliminating, I think, over 100 systems. So the ability for us now to really relook at elements of the cost base and see what we can do will become more true as we get into '27. We just had all eyes, as you would, I think, expect as shareholders or interested people in implementing. We will get this done this year.

Great. And I guess through that lens, you've made some headcount reductions. Where do you see the remaining levers to pull on the operating leverage side of technology, real estate, product rationalization? And then more broadly, where do you think that could lead the operating margin over time?

Yes. I mean, in fairness, we're -- we were 8,500 employees a year ago. We're 7,500, but most of that reduction was through 2 divestitures. We did the Indian JV and the Canadian sale of our fund range. And so in both those instances, we're keeping some revenue. We're sub-advising back the Canadian funds, a big portion or 1/3 of them. And in India, we're participating through our 40% ownership. And in time, maybe some sub-advised relationships with India. So I think that's a perfect example of what we've been doing in Invesco, which is being thoughtful about the expense base and in this case, really keeping it flat, but realigning the expense base and investing in these growth areas to be able to do that. And I think that's a muscle we've now built and we're going to flex over the next little while. I think there's opportunities in technology that we just mentioned with Alpha and the runoffs that we'll see there. I think there's opportunities in the real estate portfolio. As we get out of places like Canada, our leases now we're out of those. So I think that will start to pull through. And then the product line, as I mentioned before, we're going to continue to consolidate towards our top managers in our top areas. And I think that's going to allow us to continue to keep the cost base pretty efficient. So we continue to see room to invest -- reinvest that into our business and still be very thoughtful about holding expenses -- holding the line on expenses, which has been a strength of the firm.

And then where do you see kind of all of these efforts leading in terms of like a long-term margin trend over time?

Yes. Well, we made a goal -- a near-term goal a couple of years ago to get to the mid-30% operating margin level. In first quarter, we had 34.5% operating margin from what was high 20s a couple of years ago. And we said as we kind of got -- and we still need to pull that through, our long-term goal is to get into the high 30s operating margin, all things equal, not seeing market -- major market corrections. And I think we're on the path to that. I think some of it is going to be the built-in operating leverage that I mentioned through the expense base and some of the opportunities we have. But mostly the continued growth in these places that continue to scale well, China, ETFs, the fixed income platform and a slower attrition rate and things like fundamental equities, we're confident we can get to that level, all things equal.

That dovetails to a question from the audience here. Fee rate degradation has been a big focus, but you've been hinting, I guess that it feels like there's some stabilization occurring because of some of the reasons you just highlighted. Maybe update us on the moving parts in there and think there's a path to at least kind of flattish fee rate.

Yes. I mean a lot of times we get asked about net revenue yield, and it's slightly an unfair measure, which is what you're talking about because what's really important is, are you growing organic revenue and are you driving profitability. But nevertheless, the question about stabilizing that net revenue yield is mostly a function not of fee pressure. We really haven't seen that. It's mix shift. And so as the mix shifts to more ETFs and less fundamental equity, the net revenue yield is naturally going to go down. But my comment about the ETF business being at the same, if not higher margin than the fundamental equity business, you just need to do more volume. And so I think what's been happening with Invesco and where it's inflected is we had one driver of what I was describing. Now we have 3 or 4 drivers. And so I think to continue to get that net revenue yield stabilize, but more importantly, that organic revenue continuing to be positive from what was very negative a couple of years ago is going to be a function of ETFs keep growing. China keeps growing, global equities keeps growing. The fixed income business grows and then we attrit less in some of those domestic equities, all of that will contribute to organic revenue growth. But it's the mix. It's really not fee pressure.

I want to finish on capital. We mentioned MassMutual, and you've made a lot of progress delevering, working down the preferred at MassMutual. So firstly, what are the considerations for working that down further? And then more broadly, how are you thinking about the capital deployment through balance sheet improvement, buybacks, payouts, et cetera?

Well, when we wind the clock a year ago or 2 years ago, we feel a lot better about the flexibility we now have to actually even have that conversation. And just to recap, we reduced the preferred by $1.5 billion over the course of last year from this time last year. We retired another $0.5 billion of debt that matured in January of this year. So it's a very different looking balance sheet. We've made the first priority to reinvest in our business, and I mentioned that, and we're going to continue to do that through product line through technology and some of these organic revenue and organic growth drivers. But once you get past that, -- we've also said publicly, we want the payout ratio to be about 60%, and we're very much on a path to do that. We just increased our share -- our regular share buyback to $40 million a quarter from $25 million. We just increased the dividend. So we want to get that payout to be at around that 60% range. And then that takes us to the preferred or to other forms of debt. We do have -- at the end of the first quarter, we had about $1 billion on our revolver. Our priority is to get that back down. That was on the revolver to retire some of that other preferred debt. And so when you get into the back half of next year, assuming all kind of goes to expectations, we could be in a position to rethink do we do something more on that preferred. But we'll see where we are in the market conditions. But the priorities are what I just mentioned right now. And then you fast forward to the end of this year, the beginning of next year, the leverage ratio for the company is there is much different than what it was 2 years ago.

And then lastly, Invesco has been quite acquisitive over the years. There's some news hitting today that a large asset for sale. But I'm curious to get an update on your thoughts of that use of capital. And if you do see using that avenue, what holes you could see filling inorganically?

Yes. I mean we worked really hard to get the balance sheet to where it is. And a lot of it's been with the discipline that we talked about over the last half hour or so. We also have a $2.5 trillion manager with as much range as we have and diversity, there's not a lot of gaps and a lot of things that are really missing. and we have scale. And we've been growing. We did $150 billion of net new flows in the last 18 months. It's kind of the size of an acquisition, and we did it organically. So I guess the long-winded way of saying our -- that's really been what the focus is. We like partnerships a lot, and we've done a few. If we see opportunities to add things on through partnerships or other -- or acquisitions, we're paying attention, but it's not at the top of the priority list.

Got it. Thanks a lot.

Thank you. Good to see you.

Thank you.