景順投信 (IVZ) 2016 Q2 法說會逐字稿

This presentation, comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, geopolitical events and their potential impact on the Company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions.

In addition, words such as believe, expects, anticipates, intends, plans, estimates, projects, forecasts, and future conditional verbs such as will, may, could, should and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations.

We caution investors not to rely unduly on any forward-looking statements, and urge you to carefully consider the risks described in our most recent Form 10-K, and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure, if any forward-looking statement later turns out to be inaccurate.

Welcome to Invesco's second quarter results conference call.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco, and Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, and thank you for joining us. And as was just mentioned, Loren Starr, Invesco's CFO is on the call with me, and will be speaking to the presentation that's available on our website, if you are so inclined to follow along. And as we typically do, I'll give an overview of the business results for the second quarter. Loren will go into greater detail on the financials, and then importantly, we'll open it up to Q&A.

So let me begin by highlighting the Firm's operating results for the quarter, which you'll find on slide 4 of the deck. Long-term investment performance remained strong during the quarter, 68% to 73% of actively managed assets were ahead of peers on a three and five year -- three and five years, respectively. Strong investment performance, and our continued focus on meeting clients needs overcame the impact of the volatile markets during the quarter. Strong client demand helped drive passive and institutional flows, which led to long-term inflows of $4.5 billion during the quarter.

The adjusted operating margin was 38.6%, an improvement over the prior quarter, and during the quarter we returned $318 million to shareholders through dividends and stock buybacks. Assets under management were $779 billion at the end of the second quarter, up from $771 billion in the first quarter. Adjusted operating income was $330 million in the quarter, up considerably from $307 million in the prior quarter. Adjusted diluted earnings per share was $0.56, versus $0.49 in the prior quarter. Also noted during the quarter, we've raised our quarterly dividend to $0.28 per share, and we also repurchased $200 million of stock during the quarter.

Before Loren goes into details on the Company's financials, let me take a few minutes to talk about investment performance and flows during the quarter. Turning to slide 7 now, our commitment to investment excellence, and our work to build and maintain strong investment culture helped us deliver solid long-term investment performance across the enterprise during the quarter. Looking at the Firm as a whole, 68% of assets were in the top half on a three-year basis, and 73% were in the top half on a five-year basis.

On page 8, you'll see that flows into passive capabilities were quite strong, while flows into active capabilities were flat, with $4.5 billion in total long-term inflows. Flows into passive capabilities were driven by strong demand for Invesco PowerShares capabilities. This was the second best quarter in Invesco PowerShares' history, with roughly $3.8 billion in net new assets, and the strong flows are helping us continue to gain ETF market share. This reflects the longevity and the breadth of the PowerShares offering, as well as our continued focus on meeting client needs.

We are well-positioned in the current market environment through our low volatility suite, commodity suite, fixed income, and bank loan ETFs. As you're probably aware, smart beta strategies are growing at nearly twice the pace of the overall ETF market. Although this is prompting a wave of fund launches by competitors, our expertise in smart beta and factor investing continue to differentiate us in the market, and help us gain share. Although long-term flows are flat, on the active side, we saw solid demand for our alternatives, including real estate and multi-asset capabilities, as well as fixed income.

Asia Pacific demonstrated continued strength across retail and institutional, with tremendous momentum continuing into the third quarter. A continued focus on delivering strong investment performance, and bringing our broad range of capabilities to clients, contribute to the very positive results in the region. Globally, we also saw strong institutional flows during the quarter, which reflects our continued focus on this channel, and results in a series of positive institutional flows going back two years.

Client demand trends remain consistent, with particularly strong interest in fixed income, multi-asset, real estate, and our institutional pipeline remains very strong. So at the end of June, the won but not funded pipeline is up 15% on assets under management, versus the prior quarter and the prior year. Retail flows were flat this quarter, as investors weigh their options during some of the late quarter volatility. That said, we continue to see strength in fixed income, US dividend strategies, as well as retail alternative capabilities, specifically GTR and real estate.

Now let me take a moment, and highlight the business in EMEA. Our number one position in UK retail, our strong cross border retail business, and our robust institutional pipeline across EMEA, all position us extremely well ahead of a potential Brexit. We position our business over many years to serve clients who are located in a variety of countries across the region.

Our people and fund ranges are organized to meet those local needs. We are well-diversified across channel, with UK retail, cross border and institutional each comprising roughly a third of our business in the region. We're also diversified across asset class, with assets spread across equity, bond, and multi-asset capabilities. Lastly, with more than 1,300 people in the region, we are well-placed across the region with strong business, both the UK and on the Continent. And our level of diversification and our construct positions us extremely well to deliver for our clients in EMEA.

Investors across Europe reacted thoughtfully to the market volatility that occurred at the time around the vote. Since then, clients have taken advantage of the market movements by utilizing the full range of Invesco's comprehensive fund range to achieve their long-term investment objectives. As an example, we've seen strong movements into capabilities such as our highly regarded Global Targeted Returns funds, as clients seek to manage risk in their portfolios.

With regard to flows, our business in EMEA has demonstrated good resiliency through the Brexit topic, with flows improving when compared to the prior quarter, pre the announcement of the results of the UK referendum on June 23. For the month of June, up to the date of the Brexit vote, we saw daily average outflows of approximately $[78] million. Since the referendum vote, outflows have subsided to a daily average of $13 million. Although it's still early days, we feel good about the momentum in our EMEA business. And going forward, we're focused on staying close to our clients, managing our core business, and executing our strategy while adopting to any changes that might be brought about by Brexit.

Before I hand the call over to Loren, let me say a few words about the new DOL fiduciary rule. We're actively engaged with clients, as they work to understand the impact of the DOL rule on their business. And over the past couple of years, our discussions with clients have intensified, moving from clarification and interpretation, to practical application. We are in discussions with them regarding product implications, share class possibilities, and how best to leverage robo solutions such as Jemstep.

Based on our early discussions, we continue to believe our comprehensive range of capability positions us very well, to help our clients as the DOL rule is implemented. Additionally, given Invesco's tremendous expertise and experience partnering with clients, to address regulatory topics, for example our work on RDR in the UK, we view this as an opportunity to further deepen our relationships, provide new capabilities, and enhance our business overall. With that, I will now turn it over to Loren to review the financials in more detail.

Thanks, Marty. Okay. So quarter-over-quarter, you saw our total AUM increase by $8.1 billion, or 1%. This was driven by positive market returns of $10.7 billion. We also saw long-term net inflows of $4.5 billion. I should note of this $4.5 billion, $[0.9 billion] came from IBR leverage which is classified as our institutional passive fixed income.

We also saw the acquisition of our India joint venture get completed, and that brought in $2.4 billion. We saw inflows from money market of $2 billion. These factors were offset by negative FX translation of $7.7 billion, and we also saw outflows from the QQQs of $3.8 billion. Our average AUM for the second quarter was $784.5 billion, that was up 4.9% versus Q1.

Our net revenue yield came in at 43.7 basis points, which is 0.1 basis points lower than the prior quarter. Although this was a small change, there were a variety of factors which impacted our yield in Q2. These included AUM mix and lower performance fees, which reduced the yield by 0.7 basis points and 0.4 basis points, respectively. These factors were offset by 1 more day in the period, which increased the yield by [0.4] basis points. In addition, currency mix and the increase in other revenue each contributed [0.3] basis points to net revenue yield in the quarter.

Next let's turn to the operating results, page 13. Before I begin, I'd like to point out that we've evaluated and taken on board the SEC's new guidance on non-GAAP financial measures. Accordingly, you'll have already noticed the changes that we made in the format of our second quarter earnings press release, which now focuses primarily on the US GAAP results. In addition, the US GAAP period over period variances are now set out in detail in our earnings release.

Both our earnings release, and this investment presentation contain detailed reconciliations between our US GAAP and non-GAAP. And importantly, there's no change to how we've calculated our non-GAAP measures relative to prior quarters. But since we've already provided the US GAAP narrative in the earnings press release, my comments today consistent with the past practice will focus exclusively on the variances related to our non-GAAP adjusted measures. So actually, let's turn to the next page, that's titled non-GAAP operating results.

[You'll see] net revenues increased by $38.5 million or 4.7% quarter-over-quarter to $856.6 million, which included a positive FX rate impact of $6.4 million. Within the net revenue number, you'll see that adjusted investment management fees increased by $32.6 million or 3.5% to $962.9 million. This reflects higher average AUM for the quarter. Foreign exchange increased adjusted investment management fees by $7.7 million. Our adjusted service and distribution revenues increased by $5.7 million or 2.9%, reflecting the higher average AUM for retail products.

Foreign exchange increased adjusted service and distribution revenue by $[0.5] million. Our adjusted performance fees came in at $9.3 million in Q2, and were earned from a variety of different investment capabilities, including $5.5 million from our bank loan products. Foreign exchange increased these fees by $0.1 million. Our adjusted other revenues in the first quarter were $31.7 million, and that was an increase of $7.7 million from the prior quarter, and that was a result of increased transaction fees from real estate. Foreign exchange increased these revenues by $0.4 million.

Third-party distributions, service, and advisory expense which we net against gross revenues increased $1.3 million or 0.4%. This movement was in line with the higher revenues derived from our retail AUM, and FX increased these expenses by $2.3 million. Moving further on down the slide, you'll see that adjusted operating expenses at $[526.2] million increased by $15.2 million or 3% relative to Q1. Foreign exchange increased adjusted operating expenses by $4.1 million during the quarter.

Our adjusted employee compensation came in at $347.9 million, an increase of $7.6 million or 2.2%. This increase was driven by higher sales commissions and variable compensation costs, a full quarter of higher base salaries effective from March 1, and an increase in deferred compensation expense for the awards granted in the first quarter. This was offset by a decline in the seasonal payroll taxes. FX increased our adjusted compensation by $2.8 million in the quarter.

Adjusted marketing expenses increased by $3.6 million or 14.2% to $29 million, reflecting the seasonal increase in client events. FX increased adjusted marketing expense by $[0.3] million in the quarter. Our adjusted property, office and technology expenses were $82.8 million in the quarter, an increase of $1.7 million versus Q1 driven by higher technology costs. FX increased these expenses by $0.5 million.

Adjusted G&A expense at $66.5 million increased $2.3 million or 3.6%, and this was driven by professional service expenses when compared to the prior quarter, and FX increased G&A by $[0.5] million. But going on further down the page, you'll see that adjusted non-operating income increased $[15] million compared to Q1. And this difference was largely driven by higher equity and earnings from unconsolidated affiliates in the second quarter, but also the $7.1 million FX loss recognized in the prior quarter. The Firm's adjusted effective on tax rate on pre-tax adjusted net income in Q2 was consistent with the prior quarter at 26.5%, which brings us to our adjusted EPS of $0.56, and adjusted net operating margin of 38.6%.

And so, finally before I turn things over to Marty, I just want to provide a quick update on our capital management activities in the quarter. As you'll recall from our recent announcement, in addition to our ongoing share repurchase activity during the quarter, we entered into $150 million accelerated share repurchase program on June 30. And as a result of this, our end of period share count declined by approximately 1.7% quarter-over-quarter to 413.1 million shares. And with that, I will turn it back to Marty.

Thank you, Loren. Let me just make a couple of summary comments, before we get to Q&A. We believe our ability to produce strong long-term net flows this quarter reflects the fundamental strength of our Firm, our expertise across a broad range of fundamental and factor-based capabilities, and our focus on helping retail and institutional clients achieve investment objectives.

We feel good about the momentum in our business, and flows were strong across the quarter, as we helped clients manage through the volatility we saw in June. Strong flows have continued into July, with more than $8 billion of long-term net inflows across variety of capabilities and regions. This $8 billion includes $6.5 billion that is related to the 529 mandate, which was recently funded.

As noted during our Investor Day and earlier this year, we're very well-positioned to help clients be successful, which in turn will enhance our market relevance, drive growth, and strengthen shareholder value over the long-term. And with that Loren and I, would like to take any questions you all have.

(Operator Instructions)

The first question comes from Craig Siegenthaler of Credit Suisse.

Thanks. Good morning, everyone.

Good morning, Craig.

So it's nice to see the strong rebound in your fixed income flows. Can you let us know which products were the largest contributor to the bond flows, and also can you help us think about the sustainability of the second quarter results into the second half?

Maybe I'll make a comment, and Loren can talk more specifically. As I just mentioned, we just continue to see really strong flows. And I think importantly, you're seeing, as I said long-term flows away from the 529 plan. We saw more than $1.5 billion already.

The pipeline continues to be very, very strong. And the other element that we're seeing is again, the PowerShares smart beta capabilities, the breadth and longevity of the range, it's really kicking in. And so, as we are right now, it looks like it's going to continue quite strongly through the quarter.

I'll just say generally, the growth in our fixed income is being driven by our US investment grade capability, which is pretty much, I think also in our institutional pipeline showing up as a large contributor. I just want to remind people that in the flows this quarter, there was about $[0.9] billion related to IBR leverage, which shows up in the fixed income column. But we also are seeing a lot of interest, even in PowerShares fixed income, emerging markets, sovereign debt, Chinese fixed income. So a variety of other fixed income capabilities factor into that, and each one is roughly $0.5 billion in size (inaudible) on their (inaudible).

And then on Brexit, I think the client reaction is significantly more muted than anyone was thinking about 30 days ago. But how are clients reacting in both the UK and Continental Europe today following the vote, and have you seen a lot of that initial reactive activity dying down?

Yes. And like us, like by others, they're very engaged with clients. I mean, what was really interesting was, you saw in our numbers, June, that was probably the peak of uncertainty, and you saw it in the flows being most negative year-to-date. Interesting, a number of institutional clients were waiting until after the vote, and what it really did, was serve to -- in their mind, it created clarity, and the institutional mandates started to fund quite 30 days past that.

And you're also seeing retail investors, making decisions is on where to put their assets. And again, we point out TTR has been a real beneficiary of that. And so, people are looking to -- just relook at their asset allocation capabilities. The good news is the breadth of our capability has put us in position that we can be helpful to them in any which way.

So it is early days, but everything we see, I frankly, think it's ultimately going to be an opportunity for a Firm like us. We are positioned very strongly structurally, for a Brexit. So that means, we're not distracted by trying to having to revamp product lines or anything along that way, and we can just be really, really focused on clients. Again, it was a total overreaction in light of, if you look at the Invesco share price. Again, I think the results are making that point quite clear.

And the other thing that's kind of worth mentioning, I mean, our team's been really good in terms of being innovative, and creating new products in advance of client demand. And so we would expect to see other, I think, very interesting products hit the UK market this year, towards the beginning of next year, I think there's an income-oriented sort of [GTR] type of product that's being looked at, as well as some enhanced index capabilities and factor capabilities too. So I think all those are going to really help us, even if we see continued sort of level of uncertainty around Brexit.

Thanks for taking my questions.

Thank you.

Thank you. Next question is from Ken Worthington of JPMorgan. Your line is now open.

Hi, good morning. First in terms of, maybe a couple questions on excess cash, what was the balance at the end of the quarter? And I recall that consolidation was a conceptual focus when that pool was being built, but I think product development and capital return have been higher priorities more recently. So how do you see that excess cash level evolving, and is $1 billion still the number you want to migrate towards over time?

Ken, total cash at the end of the quarter was $1.45 billion. And so, the regulatory requirement element of that was about $660 million, leaving us roughly $800 million-ish of capital. I mean, we're certainly within sort of tolerances around that $1 billion. And so, again I wouldn't get fixated on that $1 billion being sort of like this bright line that we have to hit. And clearly, we've been very opportunistic, and we'll continue to be very opportunistic with respect to returning capital, to the extent that we see our stock being valued, in a way that we think is not commensurate with our true value. So I would say look to our past practices, to evaluate how we're going to operate going forward. It will be very consistent.

Okay. Great. Thank you. And two little questions, maybe one on the Rhode Island plan. How's the transition gone, and how much money actually came over? When it was first announced, I know it was about $7 billion. Was that about what eventually moved over?

So what came over is $[6.5] billion, and so that was a combination of market impact and -- with the transition. It is now completed, the transition is in place, and everybody is very, very focused on expanding the capabilities through the retail channels. We think it's going to -- it's a great plan, and we think that we can help make it even more successful. So we're executing, as we speak.

Okay. Excellent. And then just lastly, active equity net outflows were pretty large this quarter. Obviously, it was a big risk off quarter. There was Brexit and other things. Maybe any observations you have on sort of the nature, either the lack of money coming in, or the more money coming out that kind of drove that big net outflow number this quarter?

Ken, the one thing I would just mention, there's about [$2.8 billion] related to international growth. That was sort of the thing that we -- I think people understand that there was one client who, it turned out there was a parting of ways. But that international growth capability has performed extremely well. It's been a closed capability, and it's one that I think is going to get filled up pretty quickly through the course of this year.

So I view that as a little bit one-offish, with respect to kind of the equity -- active equity outflow. And the other elements are sort of somewhat consistent with past -- what you've seen in the past. So I don't think there's anything that's accelerating outflow, relative to that category, other than that one element.

Great. Thank you very much.

Thank you. The next question is from Alex Blostein from Goldman Sachs.

Hey, guys, good morning. Thanks. A couple of quick questions. I guess, first around the margins. Obviously, you saw the adjusted margin improve sequentially, given better revenue environment, but still down pretty meaningfully year-over-year. So if [we're seeing] more a range-bound market, which obviously feels like a big if right now, but under that scenario, how should we think about the trajectory of the margin for the rest of the year? And then, is there anything else your guys are targeting on the expense front, to help drive margins higher in today's environment?

Yes, Alex, I'll take that. So I think our expectation even with markets being flat, which is the way we normally forecast anyway, and even with the pounds being down, where it is for the haft half of the year, we would expect margins to be on an upward trajectory, as we continue to grow organically, and continue to work hard on the optimization work around costs.

The Firm has done, I think a really great job of creating capacity for investment without having to add to costs, really through using as we talked about in the past, greater use of our shared service centers, being able to leverage technology more effectively, streamlining, simplifying a lot of our processes. So that work is going on as you know, and so we're on track with respect to the optimization which we've discussed, provide some expense relief of roughly $30 million to $45 million by the end of the year.

And so, that run rate which is actually now beginning to flow through our numbers, is something that's been very helpful. I want to just remind people, we had those acquisitions that came on board, Jemstep and Religare. And those expenses are being offset through this optimization, whereas the revenues are showing up in the revenue line item. So we do think that that's going to help further drive margin expansion.

Our incremental margin continues to be at a very high level, and with that sort of 50% to 55% to 60% incremental margin. And our fee rates, because of the mix that's coming in, particularly around institutional being at a higher fee rate than what's going out, we'll continue to benefit from that. So I think all those factors to us say, that we can continue to see margins increase, and get up to the levels that we've seen in the past without too much stretching. Clearly, it's a factor of the market, of course, and what (inaudible).

Sure.

I might add a point though. I would say from my perspective, where we're really going to see the margin expansion is really on the organic growth. We continue to be very disciplined on expenses as we always have, and as Loren just described, but I'd tell you for the 11 years I've been here, I don't know that I know a time when I've seen so many of our initiatives sitting in front of us, to have such is an impact.

You're starting to see an institutional, factor based, smart beta solutions. And so, our debate internally is, what is the wise move of investing in these to get the returns, versus being very cautious? And again, it's something we do all the time, but it's really that market relevance, expansion of the business is sitting right in front of us, and it's a very exciting time, quite frankly for us.

I mean, just generally, because I know people are curious, in terms of guidance around expenses generally, we would see expenses be sort of roughly flat from the current levels through the course of the year, based on sort of flat markets and FX. So that provides a nice backdrop, as we continue to grow the revenue line item.

Got it. That's very helpful. Thanks, guys. A second question on the on the DOL. Understand it's still pretty early, but it seems like there's a lot of moving pieces already happening on the distribution side of things, and different kind of messages from various distribution partners. What do you guys hear from some of the larger distributors out there, whether it's wire houses or some of the more regional platforms, and specifically as it relates to essentially payment for shelf space? And how those conversations are evolving?

Yes. So I would say from my perspective, which is probably naive, I thought there was going likely to be a uniform response. But in reality, what's happened is each of those distributors are different. Their businesses are positioned differently, and so they're all variations on a theme. And that makes sense is, quite frankly.

And look, also, there are ways to continue to be supportive of the brokerage business, but knowing that the movement is towards their advisory businesses. And so, they're putting the DOL in place along those lines. And again, that plays well to an organization such as ours, where we have such a range of high conviction fundamental capabilities, and factor based investing. And so, it would be too early for us to be very specific on what the outcomes are.

But as I've said, it looks like you could see some changes to share classes. You could see some different changes in the use of focus on asset classes and the like. So that's what we know right now. But again, I would be getting ahead of our clients if I --

And the other thing that we also see, is maybe a theme is the use fewer providers. And so, it's the ones who are probably, have the broadest set of capabilities, good performance who will probably fair better, [in the sense] that there's assets in motion as a result of DOL. We think we're probably as well-positioned as one can be in that environment.

Yes. Understood. Thanks so much.

Thank you.

Thank you. Next question is from Brennan Hawken of UBS.

Thanks, good morning. A quick question on the fee rate here, and we saw the management fee rate decline quarter-over-quarter. I know that you guys often speak to the revenue yield, but just hoping if it's possible to ask a question, cutting out some of the other noise and just speaking specifically to the investment management fees divided by AUM. What drove that? Was it mix? And if so, should we think about that as being sustainable? And I think last quarter, you had given some indications saying, that you expect the fee rate to improve throughout the year, and is that still your expectation?

Yes, so obviously the management fee rate does have -- is impacted by FX, and so there are some factors there as well, as overall equity component versus non equity, and so in a market decline, you'll see some of that change. There is another element around our gross management fee rate, which people should be aware of. It's the RDR impact, right, as we sort of continue to bleed out the old fee rate, and replace it with a net fee rate, that has an impact on the gross management fee yields.

And so, I would say that is sort of permanent and sustained as we go forward, but it doesn't have any impact on the net revenue yield, because commensurately, our global [paying] away, goes away too. So that's why you have to almost look at that net number to understand the dynamic of that shifting mix. But they're, in terms of the trends around what's driving our management fee, and we still feel that it's quite stable.

Maybe I mean, to the extent that Europe is a little bit slower than it has been in the past, it's one engine that was driving that fee rate, which is probably not something we would necessarily look to be driving forward. But we are seeing continued engines around Asia alternatives, which is helping us continue to see that fee rate increase, as well as the institutional mix generally being better. So I'd say the net revenue yield ex performance fees quarter -- next quarter and going forward is kind of flattish to this quarter. And so, that would be, so even with FX.

So I think even with FX down, so I think with FX down obviously, that has a negative impact, but because the mix is positive, it's probably offsetting it. So hopefully that's helpful, in terms of the modeling on the fee rate. A lot of dynamics underneath clearly, have some impact, but generally you would expect to see that trend in terms of improving fee rate continue, but maybe at a somewhat slower pace.

Okay, got it. Thank you. That's helpful. And then, I know that it's probably pretty hard to be -- maybe hard might even be understating it, to be anything close to precise, but given how important the UK is to you all, is there a way that you could help us understand how you're thinking about the different things that might happen to your expense base and to your business, based upon the handful of likely outcomes that have been thrown out there from a post Article 50 world?

Sure. So again, take this, the reality is no one knows exactly, so let's do the more likely than not. The more likely than not is that Brexit is going to happen, and that you're going to end up with trade agreements between the continent and UK that are mutually beneficial. It's going to take time to get there. That said, let's get down to our business.

Our business, as I was trying to highlight, we are already structured for a post-Brexit environment, a very strong UK business, a very strong Continental business. And we don't see any changes there, and for all -- for a range of reasons. And the impact on the business is going to be largely driven by the economic environment. And there is a scenario, where it's less negative than everything that you've heard.

I mean, with the pound depreciating, that's actually, the exporters in the UK are actually doing very, very well. So I think the reality is, it's going to be very hard at a political level. But I would say, is our business is a business that is structured for the change, and there is a need for asset management services. And we just really don't see this industry being hurt to the degree that some other businesses might be, where they're literally going to have to move people to different parts of -- out of the UK, out of the continent, and vice versa. So it is just not part of what's going to happen to us as asset managers.

Now there are some asset management firms that are not structured like we are, and they're going to have to do some work, to get positioned to be continually successful. But again, we're trying very hard to point out, looking at the elements we talked about earlier, it's a huge part of the world, it's a strong part of the world. They're clearly going through some changes, but I think it's a total mistake to think that the region will not continue to be important, and that it will not continue to be an important part of our business.

Okay. Thanks for that color.

Thank you. Next question is from Glenn Schorr of Evercore.

Hi, thanks. Just a quick follow-up question on your comments on July. Besides the 529 funding, the about [$1.5 billion] of inflows, does it have a comparable mix to what we saw in the quarter, alternatives and fixed income, and in equities, on the out?

So on the 529, the $6.5 billion, about $2.1 billion is equity, $3.5 billion is fixed. There's.$0.4 billion of money market, and $0.5 billion of alts. So that 's on the 529 of the flows. Sorry, did that answer your question?

No, I appreciate that though. That's a good follow up. The $1.5 billion, that wasn't part of the 529 --

Oh, I am sorry. I thought you were (multiple speakers) the $1.5 billion, and that was just related to market and outflows. And so, I don't think it -- I don't know how, where it came out at.

No, the question, of the $8 billion, what's the $1.5 billion? What were the flows for the $1.5 billion?

Does it look like the second quarter with alternatives and fixed incomes inflowing with equities on the outflow?

So of the $8 billion, we have -- I don't know, if we have all the detail right now. Some are, is what my experts are telling me. Okay, very good.

Okay. And then just curious, you alluded to [IBRA] in Europe, I think performance is good. It feels to me that this is a really good backdrop for that product. Has it gone into positive flows? And do you think we're turning the corner, net deposit flows just globally?

IBRA gone positive in the second quarter, but it was largely institutionally driven. Retail has significantly improved, so it's just very modestly in outflow. So I would say both on the retail and institutional side, a very good sort of indication of this product, sort of being better positioned now, than it had in the past, given the very, very strong performance.

Great. And just one more follow-up, Loren, if I could. The -- y in the prepared remarks, you mentioned a bunch of things that are, I wouldn't call it turning the corner, but things that are just doing well in general outside of maybe active equity, or parts of active equity. So is the 3% to 5% organic growth rate still [cool], can it happen without US equities? It mean, it looks like it can, given everything else, so I just want to get that straight.

I mean, we think it's -- I mean, that 3% to 5% obviously is what we think we can do over time. It's been sort of more of a benchmark. I think for this year, we would like to see us, at least enter that range, but given obviously, what's going on in Europe, it's been a little bit of an unusual situation. So I don't want to sort of promise flows, because that's always -- that's probably even harder than promising performance fees.

But we, everything that we see, in terms of institutional pipeline growing, the fact that we have certain parts of our business, clearly Asia is absolutely strong, both on the retail and the institutional side. And we see PowerShares hitting new records, or close to records on flows. I think it's certainly reasonable for us to think that we could get close to that 3% at a minimum.

All right, excellent. Thank you.

Thank you. The next question is from Chris Shutler of William Blair.

This is actually Andrew Nicholas filling in for Chris. My first question is on GTR. Obviously, you've had exceptional performance there across all time periods, particularly on a year-to-date basis, and with respect to some of the strategy's largest peers. Was just curious, if you could provide some color on how that pipeline is looking, and that asset class as a whole?

So I think the GTR pipeline is featuring in a lot of the growth in the pipeline generally. That's the one that's probably up more than [20]% quarter-over-quarter. So it's just one that, continues to be aimed -- I think, also with respect to some of the continued products, that it's distancing itself even further, relative to other products. So it has the ability to grow far beyond its current level we would expect, and is being looked at, I think, reviewed in the US by consultants, and then taken on as well.

So that's an important component of getting that completed, for us to really fulfill ultimately, I think, what could be the full potential, as well as on the retail side in the US, where I think it's about $0.5 billion, or maybe it's a little less, maybe $300 million or something like that. But it hasn't really been launched fully, and it hasn't hit [peer] its track record yet. So once does it that, I think it's really going to have an opportunity to do a lot more than what [we're seen in the US].

Great. Thank you. That's helpful color. And then on the DOL rule, I think general expectations are that the rule will drive flows to products that either have lower fees, very strong relative performance, and/or a combination of both. I'm just wondering if you have any thoughts on which of those two factors will play a bigger role in driving flows in a post-DOL world, and how you think your product suite is positioned to compete on each front?

Yes, so our view is this, is that it's probably less simple than your perspective. What our financial advisers are trying to do, they're trying to generate excess returns, risk-adjusted returns over time, and you cannot get there with cap weighted indexes. And so, it really is a combination of high conviction fundamental, good performing active as you're describing, in combination with passives, and where we think the combination is, is in smart beta.

And when you combine those together, you get an overall -- the total cost is less. And so, that's why this element of being strong in solutions really, really matters for an organization. So we just look at the position of the Firm, and having the whole range of capabilities, and the ability to help with solutions, and that's at a retail level, we think we're positioned very well. I think the firms that are disadvantaged, are those that are very, very narrow in scope. And clearly, if you're a high cost, narrow in scope, moderately performing organization, you're in trouble.

Thanks for taking my questions.

Thank you. Next question is from Chris Harris of Wells Fargo.

Thanks. Hi, guys. Hey, so a few quick questions on your UK pound hedge. Obviously, this position is significantly in the money. Regarding the accounting of that, is that a mark-to-market methodology, or are we going to see gains as you start exercising that position? And then, part two of the question is, given where the pound is today, how big of a step down in income can we expect, when you have to roll that hedge?

So, I mean, in terms of the US GAAP, it's mark-to-market. And then that's, you're going to see that flowing through the P&L, and you are seeing that flowing through the US GAAP P&L currently.

In terms of our non-GAAP disclosure, what we've done is we've backed out that mark-to-market, and we are only bringing in what has been actually realized. And so, this quarter that was a very small amount of money, in terms of the [impact]. For next couple of quarters, just based on the current rate it's probably close to $0.01 in EPS for each of the quarters going forward. So in terms of what we would do if we were going to roll it, because we have it out through the Q1, I think we're going to be patient, and then think about whether we need to, or want to, obviously, again, have to look at the cost.

For us to, so a lock-in right now at current rates, or a discount to current rates, because we've been using as the money puts, I'm not sure if anybody would be too excited about a hedge at [1.25] or something like that. So it is something that we're going to continue to look at, and evaluate, as to whether we continue to roll this thing. But certainly, we're going to hold on to what we've got right now, and we continue to benefit, at least from a cash flow and EPS perspective from the protection it's providing.

Great. Okay. Thanks for clarifying that. And then, a quick follow-up on comp. It sounds like there's a few discrete items that impacted the number this quarter. How should we be thinking the about comp in the back half of the year? And I apologize if you addressed this in the comments earlier.

No, I think it's going to be roughly flat to current levels. So I think that's the way you can think about, sort of flat. There's a little fluctuation here and there, but generally flat.

Okay, thank you.

Thank you. Next question is from Dan Fannon of Jefferies.

Thanks. Good morning. I appreciate all the color from Brexit, and the commentary around flows thus far. I guess, is there any kind of negative fallout that you are seeing institutionally, or certain regions where you actually are seeing maybe some changes more to the negative that might be longer term? Or has it generally been kind of consistent across the board?

I mean, it really has been consistent. And as I said, and let me make sure, this is in response to sort of the Brexit impact?

Correct.

Yes. No, I mean, it really did unleash, in particular in the UK and on the continent, people decided to move forward with the -- their attention to fund different institutional capabilities. And then, if you -- as Loren said, if you just go to Asia-Pac right now, it's just very, very strong for us, and sort of really have not been any impacts that you could tie to that event, or other uncertainty is in the world. In fact, for us, much differently than that, it just -- the pipeline as we keep saying, it just keeps getting stronger and stronger. And so, we've not seen that.

Another thing I'd say, is probably around the DOL, there's probably more question marks just generally.

Yes.

I think it was to the comment that was made, are people, are certain is clients going to gravitate to using exclusively low fee product, as opposed to active product? And so, whether insurance companies or others may choose to do something like that in the future, unclear, but if it happens, it would happen obviously to industry-wide. As we said, I think we're well-positioned to operate in that world, because we do have a low fee --

What I would add though, is that what is happening is, financial advisers want to generate excess returns, adjusted excess returns that you just can't get in cap weighted indexes. And so, active is here to stay, and if you're a good investor, you're going to do well.

Okay, that's helpful. And I guess, I was wondering if there has been any benefits from the Rhode Island win that you can talk about. If that's been helping your pipeline, or if that's raised the profile for your Firm within that channel, and if there's been any benefits?

There's no question it's raised the profile, and it is helping very, very much. As I said, we're actually -- it's at two different levels. We have a solutions element that's starting to kick in, frankly where you would imagine, but at the retail level, and also in Asia Pac, there is, and mainland China in particular, just really growing opportunity. So again, we'd say it's early days for us in that area. But again, we feel we have a very, very strong capability, and there's an awful lot of activity around it.

Great. Thank you.

Thank you. Next question is from Robert Lee of KBW.

Thanks. Good morning, guys.

Good morning.

I guess, my first question is, just maybe any update you may have, or thoughts you have around the -- obviously, the SEC's proposed different liquidity rules on the 40 Act products, and certainly that impacts ETFs. I know you've talked about in this the past, Marty, but current thoughts as maybe you've been part of any interaction with the SEC, on kind of what's likely? And given, the explosive growth in smart beta ETF products and other products, do you think that there's any risk that it kind of is inhibits some of the in [liquid alts] on the strategies that you're running out there?

So, is smart beta inhibiting some of the strategies we're running? So can you help me?

Well, I meant, just if you have different liquidity or derivative requirement, and different strategies as proposed, is that going to inhibit how you run things?

Got you. Look, as we've said in the past, and I think we all just saw -- so anticipate something coming out on the liquidity rule, the involvement that the industry has had, is that we think there is going to be a commonsensical outcome, which would be a good thing. And if that is the case, it's going to be, quite frankly, an awful lot of work, but it's something that's very manageable for the industry.

The derivatives rule again, it's -- it is I would say, the first notion of it was, it would have gotten in the way of a number of products for the industry. And in particular, for us at a retail level, GTR probably would have been very, very challenged in the proposed rules. We're sensing that we're going to end up with a better outcome, which will not get in the way of a number of our products.

I don't want to be so definitive yet, because it's not there. But I'd say very good progress, and be very thoughtful on really trying to help the SEC get to what they need. And so, the dialogue has been constructive. And so again, we'll see what ultimately comes out. But at the moment, I would say it's trending to commonsensical good, thoughtful outcomes on both levels.

Great. And maybe sticking with the regulatory theme, I mean, the business that we never really talk about is your money fund business, but come October, you've got changes taking effect. You have predominantly an institutional business there. So can you maybe any update, on how you think come October, any sense of how clients are going to behave? And obviously, you've seen prime to [govy] movement anyway within the industry, but any concerns that's going to -- I don't know -- shrink that business? And then in that context, any rethinking of the strategic positioning within Invesco?

A good question. So you've already seen it, in the number of money fund providers have over the last couple of years, you're probably going to see it again, and it's going to be a smaller number of firms that are -- have committed to, and successful in that area. So we're actually committed to it.

We've done a bunch of work on the product lineup. And you're going to see us, I think -- you are going to see it be a very strong part of our business and growing. And in fact, I think in July there's been $4 billion of money fund inflows already. So we're anticipating that it's going to be a stronger part of our business going forward.

Great. Thanks for taking my questions.

Thank you. Next question is from Brian Bedell of Deutsche Bank.

Great. Thanks very much. Hey Marty, just start off with a question on the smart beta franchise. Obviously, you've had a good, a relatively good first mover advantage in that. But as you do see more competition coming into that market, given the attractiveness of the product, what kind of steps are you taking to leverage that first mover advantage? And talk about, to what extent you see that improving within DOL, and can you leverage the Jem, I guess, traction on leveraging the Jemstep platform as well?

A good question. So we look at smart beta as a subset of factor investing. And again, I think very importantly, I'm repeating myself, but we're one of very, very few firms that have a factor-based capability that's been with us for 35 years, and the fundamental investing that we have. And so, it's the combination of those around the world for us, that put us in a unique position.

So factor investing outside the United States is much more an institutional business, and it's growing in demand. But on the continent, Loren mentioned that we're looking at doing some things in the UK, with the retail level, actually there and Asia Pac, it's actually growing the demand. In the United States, it tends to be a retail focus, and expressed as smart beta through ETFs.

And where we look at our strategic positioning, I think very importantly then, differently than a mutual fund, where you can have 200 of the same X, Y, Z funds competing, it's very hard to see beyond really three ETFs of sort of the same color be successful, just because of the nature of the ETF with market makers and the like. So first mover advantage matters a lot.

The other thing that really matters, too, is the longevity of -- so think, length of track record. And if you look at the PowerShares lineup of smart beta, any number of funds are 10 years old. And so, when people are looking to invest or looking at length of capability, also looking at the liquidity within it, and so, those are very different dynamics than you would have with a mutual fund.

And so, the good news is people are coming in, so it confirms the attractiveness of smart beta. That said is, it's going to -- it's a very, very competitive space to enter into, to say nothing of how you do work in conjunction with active management within your organization? So we think it will [burn] a pretty good position -- (multiple speakers)

I think of it again, like any, like you'd imagine, we continue to launch very innovative and then products in advance of competitors. So that's also part of our strategy, is making sure that we have that first mover advantage. And just given the depth of our team, and our connection to our clients, I think we're [achieving it quite well].

And is Jemstep part of this process, is that (inaudible) outlook for near term, or intermediate term horizon for the traction there?

It's a good question. I'm sorry. So yes, so still early days for Jemstep. It's proving to be a very constructive addition to the Firm. It is an application, so if you want to call it, the sales cycle is longer. There is a tremendous amount of interest in it, and it -- I think you said it right, it's sort of is looking to mid next year, that type of thing before you start to see an impact.

But again, it's very much positioned to be helpful to our clients, not competing with our clients. So it is direct-to-consumer, and it is, as I said earlier, it is -- we're having deeper conversations with clients, because of the capability that we have to help enable them deal with the range of things that they are dealing with coming through DOL and the like.

Great. And then, just lastly, Marty, maybe just your perspective on, this rising speculation of consolidation in the asset management industry broadly, if active management continues to underperform, and if products need to be rationalized? Maybe just your view on whether you think that that will happen, and then to what extent you may participate either in acquisitions or even combining with another firm?

So I've now been in the industry for quite a long time, and it's been declared to consolidate for every five years it seems.

Yes.

But it typically hasn't, for various reasons that we all know. I would be in the camp, consistent with others, that it does seem very different this time. And I, if you wanted, you could look at it as a maturing industry, but when you talk about active management, my view is, you go in cycles. And we've had this beta run from 2009 on with government intervention, which aligned the stars for cap weighted indexes. That's not sustainable. So I think that's been overdone. That said, it's here to stay.

I think you are going to see greater growth of factor investing as we said, but active management will actually -- it will thrive. I think those individuals that are calling it, a dead asset class, are making a mistake. So that said, I think the other element that's really driving the notion of consolidation, it's regulatory landscape. It is so costly to keep up with all of these, to say nothing of cyberspace. So it's rising costs and a competitive environment. I think those are the dynamics that are going to also be changing, will be forces to drive consolidation.

And luckily, we're fortunate enough to be positioned extremely well, as we just have been talking about on this call. I'd say the business here has never been stronger. It's seemingly getting, all engines are kicking in quite nicely, and matched against the trends that are in place.

And I think the people that try to catch up with the trends, it's going to be very hard. You need to have started them three years, five years ago, seven years ago honestly. That said is, we don't see a lot of gaps, but we will continue to pay attention to the marketplace. As we have in the past, selectively, as things -- if we can become a stronger organization by teaming up with another organization, we'll continue to do that. That said is, that's not our focus right now.

That's great color. Thank you so much.

Thank you.

Thank you. Next question is from Michael Carrier of Bank of America.

Thanks, guys. Hey, Loren, just two quick follow-ups. One is just on the management fee, you mentioned on a net basis, given RDR, that that's kind of shifting. Just wanted to get a sense on timing, like meaning how much of that has played out, versus how long can we expect to see that?

And then, I don't think you mentioned it. Maybe it's because there's no real clarity right now, but sometimes you give a little color on the performance fees in terms of outlook. So just any color there?

So I think the RDR impact is going to be largely completed by the end of this year. That would be my guess, so you can expect that be completely played out. In terms of performance fees, you're right, I don't have full clarity. I think I would still say, it's sort of roughly $5 million a quarter. And for the other revenues, which is another element I think, so again hanging roughly around $30 million a quarter is the right way to think about.

Okay. Thanks a lot.

Sure.

Thank you. Next question is from Michael Cyprys of Morgan Stanley. Your line is now open.

Thank you. Good morning. Just curious how you're thinking about the next phase and evolution of ETFs as a wrapper, particularly active ETFs, both on the non transparent side, which I think so far only NextShares has approval from the SEC, but also if more can be done on the transparent [ITV, ETF] side as well?

So we're one of the first firms to have exemptive relief for active ETFs, and we launched them I'm going to say, in 2007, two of them. And I think what's in them, is basically our seed capital. So there's a lot of conversation about active ETFs. They've just really have not taken off.

So we have the capability to do it. We keep analyzing it. We've just not seen that as a big -- a lot of demand for it. Now if you read the papers, you would think that's all anybody cares about. So that's been our experience. So maybe we just have it wrong, but that's our experience.

With regard to different wrappers, if you look at NextShares, it's interesting, but it can be 100% achieved by a share class and a mutual fund. If you use a R6 share class, you get the exact outcome, without the challenge of -- a different vehicle trying to get launched within a channel. And although it's creative, I think that's really been the headwind for it. So it could ultimately be successful, but again, I think there's an easier way to get there. And you really need to do it in conjunction with your clients, i.e. think distribution partners.

So things will continue to evolve. I personally, think that the area that will continue to grow the most, and probably be the most additive is smart beta, because it is -- and you get better outcomes with smart beta, than you do with cap weighted indexes. So I think that's really going to be where the gravitational pull is, when you look at these ranges of capabilities that you've just highlighted. So that's our view. We could be wrong, but that's what we're thinking right now.

Okay, thanks. And then just coming back to the flow side, active flow is bit soft in the quarter. I know you mentioned a meaningful redemption there. But if we just look at the gross sales, that's been a bit weak. So just curious how you're thinking about reaccelerating the pace of gross sales on the active side, what sort of strategies or actions can you take, whether it's with distribution partners, or with investment and sales teams, and so forth?

Yes, I look, the reality is, we're still in an uncertain market. If you just play back the year, look at January, February, what happened, you'd look around at what's happened in Brexit and the knock-on, and that tends to be the big driver. If you look within our flows, we've had tremendous flows in US dividend stocks, which is consistent with this sort of, I want yield, I want some growth, but I'm somewhat concerned about the environment.

If you look at the value capabilities, I feel really, really good about the teams, and how they're managing. What tends to be in those are energy and financials, which have been hurt here again in the volatility. So my basic view is that you to continue to ensure that you have high quality teams that can deliver over a market cycle. And I think really that's the important thing. You can't look quarter to quarter, year by year. Calendars don't matter. Market cycles matter, and you're going to get excess returns with strong asset management.

And I think when the psychological environment moves, I think that's where you're going to really see the net flows actually pick up in those active capabilities. So again, I think you have to segment them to the different styles. I think that's really what's driving it right now.

Okay, thank you.

Thank you. And that's the last question in queue.

Well, thank you very much. On behalf of Loren and myself, I appreciate the engagement and the questions, and we'll be speaking with you next quarter. Thank you.

And that concludes today's conference. Thank you for your participation. You may now disconnect.