The operator welcomes participants to Invesco's second quarter earnings conference call and explains that the call is being recorded. Greg Ketron, Invesco's Head of Investor Relations, then explains that a presentation is available on Invesco's website which covers the topics that will be discussed. Marty Flanagan, Chairman Emeritus, then provides a few comments before Andrew Schlossberg, President and CEO, and Allison Dukes, Chief Financial Officer, present the second quarter results and open the call up for questions.

Marty is proud of Invesco and its talented people, and he is confident in Andrew Schlossberg and the leadership team's ability to achieve the full potential of the firm. He believes that Invesco has the right strategy and team to navigate the current market environment and to deliver value to clients and shareholders. Andrew then takes over and expresses his privilege to lead the global investment management organization and his commitment to delivering value for clients.

Invesco is well-positioned to lead during a period of growth and change in the asset management industry. They are committed to improving their performance by simplifying their organizational model and aligning their expense base. In the second quarter, financial markets showed signs of recovery but investors remain cautious due to the uncertain economic backdrop. Market gains were concentrated in large-cap technology stocks while other markets, such as emerging international and China, had flat or negative returns.

In the second quarter, Invesco's diversified business experienced sustained organic growth in several key areas, primarily driven by global ETF net long-term inflows. Performance is steadily improving in several of their global equity capabilities and their fixed income performance remains robust. Additionally, their business in Greater China returned to organic growth this quarter, despite the slower asset management industry growth in the region.

Invesco Great Wall raised $1.4 billion from six new product launches in the second quarter, ranking fifth amongst all asset managers in China. Fixed income assets saw positive net flows of $1 billion, and money market assets saw $15 billion of net new assets, moving Invesco into the top 10. Active equity strategies saw net long-term outflows of $4.5 billion, with developing markets accounting for $1.2 billion. Performance is improving and it is expected that client demand for risk-on assets will return, leading to further stabilization of net flows in these key investment strategies.

Despite experiencing $1.7 billion in net outflows in private markets during the second quarter, the company has an excellent track record in both private real estate and private credit sectors and is confident that they will see robust growth in the institutional channel as client caution abates and reallocations occur. The company is also prioritizing building balance sheet strength, investing in key growth areas, and returning capital to shareholders, with $150 million in common stock being repurchased in the first half of June.

Andrew expresses confidence in the team in place at Invesco to execute on the opportunities created by Marty over his 18 years as CEO. He then introduces Allison, who will provide a closer look at the results and take questions. The company has a strong balance sheet and is committed to driving financial performance. They are taking action to simplify the company and eliminate unnecessary complexity, and have identified initial cost savings. These changes are expected to bring revenue growth and enhanced near-term profitability.

Investment performance improved in the second quarter, with 66% of actively managed funds in the top half of peers or beating benchmark on both a three-year and a five-year basis. Assets under management increased to $1.54 trillion due to technology stock surge, foreign exchange movements, reinvested dividends, and net inflows in the money market products. Despite net long-term outflows for the quarter, there was strong momentum for net inflows in June. Passive capabilities saw $6.4 billion of net long-term inflows, while active strategies saw $8.4 billion of net outflows. Growth in key capabilities such as ETFs and the Greater China business helped to recapture client demand.

In the second quarter, the global ETF franchise had a strong organic growth rate of 9% with $5.7 billion of net inflows. The top-selling ETFs were the S&P 500 Equal Weight and the QQQM, which had $3.3 billion of net influx. There was $1.1 billion of net outflows in the currency and commodity ETFs, while retail clients had $200 million of net inflows. In Japan, the Henley Global Equity and Income Fund had $1.6 billion of net inflows, making it the top selling retail fund in Japan. In the institutional channel, there were $2.2 billion of net long-term outflows, primarily in the Americas. In Asia Pacific, there were $1.5 billion of net inflows due to growth in Japan and a rebound in the China joint venture.

In the second quarter, fixed income capabilities experienced $1 billion in net inflows, partially offset by net outflows in EMEA ETFs and global and emerging market equities. Alternatives experienced $3.4 billion in net outflows, with $1.9 billion from public alternatives and $1.5 billion from private markets. Invesco has a diverse range of alternative capabilities, with $72 billion in public alternatives and $72 billion in direct real estate AUMs.

Blackstone has a direct real estate business with a range of investment styles and a private credit platform with over $38 billion in assets. Their direct real estate holdings are diversified across product property types, with commercial office properties comprising 35%, apartments and residential 23%, industrial 22%, and retail and specialty 20%. They have been reducing their exposure to traditional office properties since the beginning of the COVID-19 pandemic, and their average loan-to-value across direct real estate funds is 35%.

The figures for AUM may change over time and vary according to the fund. Approximately half is in institutional separate accounts or closed-end funds, and the rest are open-end funds. Real estate activity has been slower in the first half of 2023, and the pipeline was $22 billion at quarter end. Despite net outflows in the second quarter, the institutional business remains in net inflows for the year-to-date. The pipelines have been running between mid-20 to mid-$30 billion since late 2019.

In the second quarter, net revenue was $1.09 billion, $83 million lower than the same quarter in 2022 and $15 million higher than the first quarter. This was largely due to lower investment management fees resulting from an asset mix favoring lower-yielding strategies, partially offset by higher performance fees earned on private real estate mandates. Total average AUM was $1.49 trillion, with $32 billion higher than the first quarter, however $25 billion of the increase was in QQQ average AUMs for which no management fees were earned. Meanwhile, average passive AUM ex-QQQ was up $3 billion and average active AUM was flat. Despite market volatility, the pipeline remains strong with $6.6 billion in net inflows and a diverse business mix with alternative and active equity accounting for 40% of the total associated assets.

In the second quarter of 2023, total average AUM increased by 3%, with a $58 billion increase in average money market AUM due to investor sentiment. The asset mix shifted, likely due to market movements and risk of sentiment, and total adjusted operating expenses were $27 million higher than the second quarter of 2022, with $27 million of compensation expenses related to executive retirements and organizational changes. The company is simplifying the organization to increase scale and profitability.

In the third quarter of 2023, the company expects to recognize $20 million in additional costs associated with their operating model adjustments. They have identified $50 million of annual run rate expense savings that will be realized by the beginning of 2024. The company is managing variable compensation to a full-year outcome in line with company performance and industry practices. Marketing expenses were $32 million, $4 million higher than the prior quarter, and property, office and technology expenses were $2 million higher than the first quarter. G&A expenses of $114 million increased $19 million from the prior quarter, which included $7 million in spending on the Alpha NextGen program.

In the second quarter of 2023, Alpha NextGen saw an increase in expenses due to a reduction in indirect tax credits. G&A expenses are expected to be flat or lower in the third quarter due to continued investment in key growth areas and technology programs and limiting hiring to key areas. Adjusted operating income was $302 million and the adjusted operating margin was 27.7%, with an effective tax rate of 24.7%. Excluding costs related to executive retirements and other organizational changes, second quarter earnings per share would have been $0.05 higher. The estimated non-GAAP effective tax rate for the third quarter is expected to be between 23% and 25%.

The company has been prioritizing building balance sheet strength, and as a result their cash balance increased to $1.01 billion and net debt decreased to less than $500 million. They also repurchased $150 million of common stock, equivalent to 2% of the total common shares outstanding. Their leverage ratio is 0.7x and their goal is to bring net debt excluding preferred shares down to zero in 2024. The company is committed to driving profitable growth and financial performance.

Allison Dukes states that the overall message on the health of the portfolio is good, despite the challenging environment due to the backup in transactions and the difficulty to put leverage on some of these transactions. She highlights that the portfolio is performing well and the company has made strong decisions to diversify the portfolio, such as managing down the office exposure. To see activity pick back up, there needs to be a normalization in the leverage markets.

Glenn Schorr asks Allison Dukes about the efficiency savings of $20 million in the third quarter and $50 million by the end of 2024. Dukes clarifies that the savings will fall to the bottom line, but there will be an offset from ongoing investments. Schlossberg adds that the company has a global portfolio and is seeing increased demand for real estate debt, as well as opportunities in the wealth management markets.

Andrew Schlossberg is aiming to simplify and streamline the organization in order to generate better profit growth, improve the quality of investment performance, accelerate strategic execution, and use their scale and leverage in the business. They have already started this process earlier this year and will continue throughout the year and going forward. Examples of this process include simplifying and improving the investment team and quality improvement.

Andrew discussed the changes being made in order to simplify the investment team, globalize client engagement and delivery, reduce product lines, and evolve the culture. He also addressed Brennan Hawken's follow-up question on real estate, defining nontraditional office and discussing the decrease in traditional office allocation from 20% to 13% in the Americas from 1Q 2020 to 2Q 2023.

Allison Dukes discussed the majority of the portfolio repositioning being due to deliberate dispositions rather than declining asset values. She then clarified that the office exposure was not larger than what they would define as traditional and was only broadly defined as such. Brian Bedell then asked about the size of redemptions for open-end strategies in real estate and the opportunity to expand these strategies due to potential bank pullbacks.

Allison Dukes explains that the redemption rate in open-end strategies is higher than usual, but it is manageable and normal. Andrew Schlossberg adds that demand for private credit and direct lending is increasing, though it will take some time to become a meaningful part of the private markets. Finally, Brian Bedell asks if the $7 million run rate for the AlphaGen program should be considered a net cost savings.

In the second quarter, it was reported that the cost of Alpha NexGen and organizational-related changes was around $7 million. It is expected to remain at this level for the next few quarters and savings will not be seen until 2024 or 2025. Buyback activity was strong in the quarter.

Andrew Schlossberg commented on the success of the cash management and money market business, which has doubled in less than three years. He credited the focus on quality, client engagement, and pricing for the $15 billion in inflows this quarter. Allison Dukes added that they were pleased with their progress in improving the balance sheet to give them the flexibility to be opportunistic in the second quarter with their buybacks.

Andrew Schlossberg states that the company's focus is to grow their private real estate and private debt businesses organically, but they will also consider inorganic opportunities if they present themselves. He also states that the real growth driver for their real estate business will be through the wealth management channels, which they have already started.

Allison Dukes discusses the Alpha NextGen transaction, which has been taking longer than expected. She states that both parties have been responsive and thoughtful in regards to the cost and time involved, and that negotiations around the ultimate cost are ongoing. She does not specify what has gone right or wrong with the transaction.

The Chinese government recently announced a fee rate limit of 1.2% for products in China, which is estimated to affect $24 billion of Great Wall's portfolio. The company is still working through the overall impact and timing of the fee cuts.

The third and fourth quarters of this year will see a decrease in revenue between $5 million and $10 million for the Joint Venture, which will lead to a lower net income. Despite this, the reform is expected to lead to an acceleration of growth in China's mutual fund industry, and the company is well positioned to benefit from this. There has been a decline in net revenue yield due to an uneven recovery in asset classes and a risk-off sentiment, but there is high demand for the company's lower fee passive assets.

Andrew Schlossberg and Allison discussed the pressure on fee rates due to the popularity of lower-fee ETFs. They also discussed the recovery in active equity strategies due to market recovery and improved performance in developing market strategies. Lastly, Andrew Schlossberg highlighted the strong position of the company in China, noting the government's pro-growth reforms and the company's long-term success due to its reputation and assets under management.

Allison Dukes and Michael Brown discuss the revenue line that was down due to lower real estate transaction activity. Dukes explains that there were some "puts and takes" in the line item, with real estate transaction fees being higher and front-end fees being lower. Brown asked if it was fair to assume that the next couple of quarters would be similar to that level, to which Dukes replied that it would be a reasonable expectation. Dukes then shifts the conversation to the fee rate and the mix shift trend that has been happening for some time. She asks if they are adjusting the expense base fast enough to deal with the trend, as there has been a lag effect of expenses.

Allison Dukes talks about how the fee rate for ETFs has declined to 16 basis points and is expected to stay around that rate in the long-term. She also mentions that fee rates for commodities and currency ETFs are higher and that there is pressure in China due to the fee cuts. She suggests that the fee rate will even out and diminish slightly as the mix of ETFs shifts and passive capabilities continue to grow.

The company has been working to reposition their expenses in order to support where the business is going, with the goal of improving their operating margin. This has been a difficult challenge, as they have had to quickly remix their asset base over the last year and a half. The company is confident they can improve their operating margin and are focusing on this area. They are looking at the different components of their business to see what expenses are needed for each asset class.

The company is making changes to the expense structure of the business to better support the revenue environment for the next few years. The conference has come to a close, with the company thanking everyone and looking forward to speaking with them next quarter.

This summary was generated with AI and may contain some inaccuracies.