Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

Hi, everybody. Welcome. I'm Ben Budish from Barclays. I cover the brokers, asset managers and exchanges sector. Thanks so much for joining us at our Americas Select Conference this year. Excited to get off with Allison Dukes, CFO, Invesco. Allison, welcome. Thanks so much for being here.

Thank you. Thanks for having me.

So maybe to kick it off. Over the last couple of years, investors have had to deal with a really volatile macro environment, resultant more challenging flows kind of for the industry in general. But you guys reported you returned to positive organic growth in the first quarter. Maybe to start out, how do you see investors responding to the current environment kind of as we see it today and maybe just kind of recycling back to the quarter. What sort of drove the improvement that you saw?

Yes. It's a tricky environment. Investors are, I think, struggling in general to develop any conviction around the path of the Fed and the path of inflation. It feels maybe a little bit better after last week, perhaps starting to get a little bit more clarity from the Fed. But certainly, that has been an impact over the last year plus and certainly impacted this kind of risk-off environment that we've been in. Despite that, we did see a return to inflows in the first quarter. That was largely driven by our institutional channel, in particular, was very pleased to see a few sizable mandates that funded in the first quarter. And notably, there were some -- there was an equity component to that as well, which was good to see and some encouraging but early signs from a flows perspective in the institutional channel. We also saw good, strong growth in the ETFs solution as well. ETFs have been a strong point for us. I think we've been in inflows in ETFs for 9 of the last 10 quarters. And in the institutional channel, we've been in inflows for, I'm going to lose track, but a few years now. And again, I think those are the real strengths in our capability set overall. Against that backdrop, though, we continue to see some challenges. I mean, overall, active equities continue to be challenged. We are seeing some improvement in redemptions there, but certainly not where we want it to be yet. And China continues to be slower growth, a slower recovery than we would have hoped, and it was an outflow quarter. We can talk about that as well, but that was a real challenging quarter for us as far as China goes.

Well, you mentioned ETFs as your largest business with over $500 billion of AUM. And as you mentioned, you've seen pretty positive flows over the last few years. Maybe talk a little bit about the product suite, the Qs, the smart beta, your targeted ETFs and how do you kind of view Invesco's differentiation?

Yes. We do have a differentiated capability set with our ETF platform. We do not participate as much in the bulk beta side. So we are the fourth largest ETF provider. Our market share is, roughly speaking, around, I'll say, 3%, but our revenue share is something north of 7%. So we do compete in a differentiated spot. We do have a higher revenue set of capabilities, higher fee capabilities. When you exclude the Qs, over 90% of our ETFs have fee rates that are on average 30 basis points. And so that is an attractive place to compete. We are able to -- we have developed strategies that are hard to replicate. When you think about our S&P Low Vol solution and the Equal Weight, several of the solutions there that are very attractive. Our ETFs in EMEA are a little more commodity-focused where there's been a lot of interest on the commodity side there. So we do feel like we have a differentiated set of solutions. We are taking market share. It's slow quarter-by-quarter and, of course, we're a distant fourth competitor, but becoming more and more relevant, more and more meaningful. And as you noted, we are north of $500 billion when you look at the ETF suite overall. I'd also mention our innovation suite. So really building off the success of the QQQ, which is not a revenue-generating ETF, but rather we receive a marketing support fee in that one. That has allowed us to really create a set of advertising that has really helped draw awareness to Invesco overall, has really helped build the brand of Invesco along with the QQQ. And off the back of that, we've launched our innovation suite. That was launched in the fall of 2020, so about 2.5 years ago, and I think it's north of $8 billion today, including the QQQM. And those are fee-generating ETFs, so a little bit different than the traditional QQQ.

Great. And I think you recently sort of shared some thoughts on the growth of the ETF business sort of in general over the next couple of years. I think you said you think it'll outpace the overall asset management industry by more than double. What are the key drivers here? Is it simply active to passive? What other sort of high-level trends do you see for the ETF industry?

It's a very popular wrapper in the United States in particular. It's just got liquidity and dividend characteristics, I think -- and tax characteristics that are quite attractive for investors in the United States. And we do see the demand continuing to be very strong for that wrapper. At the same time, we see markets that aren't there yet, and we think that there is a real future for their increased demand. And Europe, in particular, I noted on the commodity side, but there's still a lot of room and there's still a strong preference for active and for mutual funds in Europe. But we think there's an opportunity to further expand demand for the ETF wrapper in the future. And then in China, ETFs just are not passive in particular. It's just not really a solution that has been adopted yet. That is still very much an active market. There's a lot of alpha that can be generated still in China where the market is still, relatively speaking, immature relative to the United States. And we think there's a tremendous opportunity a little bit further down the road in places like China.

Maybe just sort of last question on the ETF business. You mentioned, I think, that your products tend not to be commoditized. As this sort of grows for Invesco, what do you see as sort of the mix impact on your overall fee rate? How should investors sort of think through that?

Sure. If you think about the fee rate and again, the fact that when you exclude the QQQ, you really see a fee rate that, let's call it, on average, is around 30 basis points. And you think about where our mix has continued to shift over the last few years as demand for active has just not been as strong as demand for passive. I would say the impact of the fee rate overall should be rather negligible. And we're not quite as focused on what is -- what does passive do to our fee rates because in a lot of ways, I'd say we've seen a lot of that migration. It's really about what it can do for us from a revenue perspective, from an operating income and a margin perspective and the operating leverage we can create as we continue to grow scale in the ETF platform. I think we're just getting into the zone where we'd say we're starting to perhaps see the benefits of scale. But we're very focused on continuing to grow that capability and really garnering the benefits of scale.

Great. Let's move over to fixed income now. So we've been entering a period of rising rates and higher yields for some time now. Demand for fixed income has generally been pretty strong. What are you guys seeing in terms of demand, particularly for active fixed income products? What are the key areas where demand has picked up?

Yes. We hope and we think that as the impact of inflation starts to moderate, and there's, again, a little more conviction around the path of central banks that this should be a strong year and a strong environment for fixed income. And when I say 1 year, I mean the next 12 months. I'm not sure exactly how calendar year '23 is going to unfold yet as we're almost halfway through it. I think this should actually, as I said, be an interesting year for fixed income investors. We think we've got the breadth of capabilities and solutions. We know we do across the spectrum that really should satisfy a variety of client needs. I would say municipals are an area right now that look particularly strong and interesting as high net worth investors or tax aware and tax conscious. And that -- we think our capability set plays well for that set of needs. I'd point to high-yield fixed income as well as an area of real interest right now, I mean, really, the breadth of solutions. Interestingly again here in Europe, we see real demand for U.S. treasury funds. And so that demand has been picking up, and there's a lot of interest across the board. So tough year for fixed income in 2022. We do think we're pretty well positioned to see a better year in '23 and certainly into '24.

Great. I want to spend a little time a little later kind of digging into the China business. But just while we're talking about fixed income, I think in the recent quarter, you noticed that there were some outflows in fixed income across your Chinese business despite kind of higher rates in the area, kind of the opposite trend that's sort of playing out elsewhere. What are the dynamics in China that drove this sort of behavior?

Yes. In the fourth quarter, when they started to reopen China, you saw a real spike in yields and, of course, the offsetting lowering of prices. And in that, you really saw redemptions pick up. It's a client base. It's an investor base that values more of a stable NAV. And when prices started to decline, you saw a real spike in redemptions, and that caused an industry-wide spike in redemptions. And that led to outflows overall. Towards the end of the fourth quarter, we started to see that pick up, and it really persisted through most of the first quarter. It started to improve or at least abate a bit over the course of the first quarter, but we're still not seeing demand overall just for active products in general return in China, not to the level we would have expected, particularly given the fact that the economy is open, the economy is recovering, you're starting to see consumption patterns maybe normalize a bit. But demand for risk assets has still been muted relative to what we would expect, and it did start with this kind of interesting reopening and the reaction to the decline in prices overall.

Interesting. Maybe moving over to active equities. It's been generally a pretty challenging environment, especially with public equity indices selling off in 2022, although we've seen a bit of a pickup this year. I think you reported a moderation on active equity outflows in Q1. What's sort of the driver there? Where are you seeing the strongest pockets of demand? And what do you think it takes to get the segment back to organic growth? Is it sort of something internal you can control? Or is it sort of dependent on the broader macro and just appetite for that sort of asset class?

Yes. We definitely saw an improvement, in redemptions in the first quarter. So in the fourth quarter in our global equity franchise in particular, we saw outflows of $6.5 billion. And in the first quarter, that had improved to outflows of a little over $2 billion, and that includes our Developing Markets Fund. So still really challenging outflows, but significantly reduced outflows from what we saw in the fourth quarter. And sales actually continue to be strong. It's redemptions that have driven a lot of the outflows. What's going to change that, what's going to continue to improve it is investor -- investment performance. And we have seen a real improvement in our investment performance and the Developing Markets Fund in particular, I think we're back to top quartile on a 1-year basis, and that has continued to improve. Going to take a little while for the 3 and the 5 to catch up, but we have seen that inflection point. And I think we're very encouraged by what we're seeing there. And I think that's going to certainly help with the reduction in redemptions. And again, we're seeing that on a pretty ongoing basis. So that -- without question, that particular strategy overall was the most damaging impact last year. And not surprisingly, developing markets was not an asset class that investors were particularly interested in last year. And so as investor demand returns to that particular strategy and as our investment performance improves, we think we should continue to see some pickup. And overall, we're focused on investment performance. Demand for active equities is challenged relative to other strategies. And we know we've got to be among the best in investment performance in order to garner the flows that we're looking for there, and we're highly focused on that.

Private markets business. One of your smaller segments but still over $100 billion of AUM and one of your fastest growing. Could you maybe provide like a brief overview of this business? What are the key exposures, your primary growth drivers, sort of the subsegments within private markets that can really need a lot of things?

Sure. The 2 biggest components of private markets for us, it's direct real estate, which is about $73 billion; and credit, which is about $37 billion. So on the direct real estate side, that's a business we've been in for many, many decades, primarily an institutional business, although we are focused on continuing to grow our retail capabilities there. We have a well-developed business across both North America, Europe as well as Asia Pacific, and people on the ground in all 3 areas, and that is an area that has continued to perform quite well for us and continues to grow. On the credit side, that $37 billion is largely comprised of our bank loan business. I mean, it's almost entirely that with the exception of about $1 billion in distressed and $1 billion in direct. So those are some newer strategies that we are continuing to grow and build on the back of the success of our bank loan business, where really private equity and the like is negligible for us. The private market's focus for us is largely real estate and credit.

And on the credit side, can you just talk a little bit about fixed versus floating? It seems from the pure traditional or alternative asset managers, there is kind of demand for floating rate private debt. What does your mix look like there?

Well, the bank loan business would largely be floating. And so since that's the vast majority of our credit business, again, it's going to be primarily a floating exposure there. I would say, on the distressed and the direct side, a bit of a mix, rather small overall. And so I think if you have to think about it, it would largely be floating right now.

And what about in the real estate business? There's a sort of a broad industry concern about commercial real estate office in particular. I think you called out that the direct real estate portfolio is about 1/3 of your AUM. How do you think about sort of the near-term risk in terms of general office softness, perhaps refinancing risk in terms of properties that may need to be financed in the next few years?

Yes. I think that stat was -- of our direct real estate exposure, about 1/3 is actually office, and that's down from what was more like 45% at the beginning of COVID. So at the beginning of 2020, our portfolio would have looked more like a 45% exposure to office. We have been working that down over the last few years. That's down to about 1/3. And if you actually broke it out across the continents, it would be a lower percentage in North America and a slightly higher percentage in Europe and in Asia, where the office environment just isn't as challenged as it is in the United States. So we feel pretty good actually about our office exposure at the moment. It is a challenging environment in the United States. We have been very focused on repositioning that portfolio over the last few years into places like multifamily and industrial and some of the specialty areas like medical office and cold storage, and those have been attractive sectors to be in. Our loan-to-value is about 30%, so pretty low loan-to-value overall on the portfolio. So well managed, well diversified. We think in a good spot, given some of the stress we would expect to see right now.

Great. Sticking with the real estate theme. Can you talk a little bit about INREIT, your non-traded REIT, has become a very hot topic in the last year with some of the stresses in some of the large competitor products. What's the demand like? Can you talk about your distribution? And how are you rolling this product out to the wires? And just kind of an overview of what it looks like.

Sure. So INREIT was launched coming up on a most, gosh, 2 years ago now, I think it was. And it's right at about $1.1 billion, so it's still relatively small. The time frame in which we came to market with it probably a little bit challenged relative to some of the better-known competitors that are out there and then certainly challenged relative to some of the dynamics impacting those competitors over the last 6 months. That said, it's been a good-performing strategy overall, and we are working closely with some of the wirehouses, and we think very close to actually having it on the platform. I think given some of the challenges and the concentration of exposures that they've seen, there is some need to diversify their own product offering on behalf of their retail clients. And we know our strategy is really well positioned to capture some of that demand. We're not as well known in the retail channel. That has largely been an institutional business and a very successful institutional business and one where we're well known on the institutional side. So trying to transition that into the retail side and really work through our distribution channels there. It's been a learning opportunity and one that I actually think is going to serve us well as we continue to think about how do we bring private markets capabilities to the retail channel.

All right. Let's pivot a little bit. I want to spend some time talking about your China business. So Invesco Great Wall. Maybe at a high level, can you talk about the strategy, how is it differentiated from your peers who may be also offering asset management services in or out of China?

Yes. We are celebrating our 20th anniversary in China this year. So Invesco Great Wall was, without question an early entrant, and that has served us well. And that has created growth dynamics for that business that are very hard to replicate. That is -- I think, our AUM there, I'm going to use round numbers, around $90 billion or so in AUM through China Great -- or Invesco Great Wall right now. And that is really a joint venture with our partner. And it is Chinese investment managers creating Chinese solutions for Chinese end investors. It is very much a domestic business, very ring-fenced in nature as well. We are the largest foreign-owned asset manager in China. And again, I think that is a real testament to the strength of the business and to the years that we've been there, and we continue to see really strong growth characteristics and growth dynamics around the business overall. As I mentioned earlier, it's an active market there. It's very nicely balanced between retail and institutional. It's pretty well diversified across asset classes as well. But the opportunity, as China continues to grow and as the retirement industry in China continues to grow and mature and the capital markets activities there continue to grow. I think we're very well positioned.

Great. And what's sort of the outlook here in terms of -- you sort of mentioned growth. And maybe also thinking about some of the differences between that market and others. We talked earlier about the sort of attitude towards fixed income. When the asset values go down, the interest really sort of drives up. Any other sort of nuances to appreciate -- to understand about that industry. How does sort of the investor base think perhaps differently versus your U.S. or European exposure?

Sure. I mean, look, it's a maturing investor base. I mean, it is one that continues to develop and has characteristics of maybe the U.S. investor base many decades ago, like 40, 50 years ago in a lot of ways. And you've got, again, just wealth creation happening there in a retirement industry that is just now beginning to get legs. And so that influences a lot of the attitudes and behaviors. What we've seen in the fixed income dynamics over the last 6 months is a great example of how there is growing investor understanding of what can happen when yields spike and prices fall. As I mentioned, it's an active market. So in terms of overall attitudes and behaviors, there's just not an interest in passive yet because alpha is so easy to create there. And so there is a bit of an almost IPO-ish mindset. When you launch new products, you really garner a lot of flows. And that's where a lot of the interest is right now. And so it's important for us to be launching new products, to be in that market and capturing those flows. We are hopeful to launch a few new products in the second quarter, which again positions us well, assuming demand continues to come back. You also see a lot of demand for more balanced strategy. So I would say higher demand for balanced than what you might find in some of the more mature markets. And that actually dictates a lot of the strategies we launch, which tend to be some equity, but a lot of balanced, I would say, in nature.

And what about on the political front. There's always headline news about political tensions between the U.S. and China. You spoke a little bit about how the business is Chinese management for Chinese investors. But how do you think about these tensions sort of impacting the overall opportunity in China near term and long term?

Yes. Look, it is a challenging environment from a political standpoint right now. And we certainly have a lot of headlines, and the governments are both really trying to understand each other's positioning at the moment. Because our business is pretty well ring-fenced there, we really try to stay focused on the dynamics of demand in China, which is, as I said, really a function of market growth there and the overall economic growth of China. And so it's somewhat ring-fenced in nature. We're highly conscious of the dynamics. We're very aware. We stay very close to it on all sides and are very thoughtful about a variety of scenarios. Our view is that's a market we want to be in. It's the fastest-growing market that exists for asset management over the next 10 years. We are the dominant foreign owned player there. We are well positioned, and we want to stay close to some of the challenges, but we're also very pleased with the business we have there.

Great. Maybe sticking in APAC outside of China. What are sort of the most interesting opportunities for Invesco in that region?