景順投信 (IVZ) 2018 Q2 法說會逐字稿

This presentation and 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 believes, 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; Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much. And on behalf of Loren and myself, thank you for spending time with us today. If you're so inclined, you can follow the presentation, which is on our website. And I'll spend a few minutes reviewing the business results for the quarter, and Loren will go into more depth into the financials. And then today, we're going to talk about our competitive positioning in the context of industry trends and our key focus areas before we open it up for questions.

So I'm on Slide 5, if you happen to be following, and here is going to be the highlights of our discussion today. During the second quarter, gross sales were up 32% from the same quarter a year ago. Redemptions were up as well, however, which led to the outflows during the quarter. And I'll get into details about the outflows in just a few minutes here.

We completed 2 acquisitions during the quarter, Guggenheim Investments' ETF business and Intelliflo, the #1 technology platform for financial advisers in the U.K., which further strengthens our digital advice capability. We also continue to invest in growth drivers, which are meaningfully strengthening our business and contributing to growth now and in the future. And Invesco is a highly differentiated investment management organization, with numerous competitive advantages, and again, in a few minutes, I will speak to that.

On Slide 5, you will find a summary of results for the second quarter. We continue to demonstrate strong long-term investment performance, with 70% and 71% of actively managed assets in the top half of peers over 3 and 5 years. We achieved gross sales of $54 billion during the quarter, up 32% versus the second quarter of '17. And gross redemptions were $62 billion, driven by market dynamics, which led to total long-term outflows of $8 billion during the quarter. Adjusted net operating income was $376 million for the quarter, up from $357 million in the prior quarter. The operating margin improved during the quarter, increasing to 38.7%, up from 37.3%. We returned $124 million to shareholders during the quarter through dividends.

Our overall performance for the latest 3- and 5-year periods remains strong, with areas of exceptional strength. When we look at our investment teams and the investment processes, the approach is to focus on generating outperformance over a full market cycle. Where we are in this market cycle, it is impacting the relative performance of value-based equity investment approaches, which is to be expected.

As you can see on Slide 6, the outperformance of growth versus value stocks has expanded rapidly over the past 12 months, which is very typical at this stage of the market. This market dynamic places near-term pressure on fundamental active value-based equities, and in turn, client demand for these capabilities and flows, which we are seeing in our value-based equity capabilities. Importantly, however, the current conditions have hampered the value-based equity strategies in the short term, but long-term investment performance, as measured across the full market cycle, remains solid. The depth, breadth and tenure of our investment teams, combined with the consistency of their investment philosophy and approaches, give us a high degree of confidence that these capabilities will see significant and rapid improvements in performance when markets normalize.

As mentioned earlier, gross flows were up 32% versus the second quarter of '17. This is a near record for the organization. We saw continued strength in gross flows across active -- excuse me, across retail and institutional as well active and passive, all of which were meaningfully higher than the same period a year ago. During the quarter, demand for ETF capabilities was robust, and more specifically, we saw particular strength in our commodity ETFs, with nearly $400 million in flows for the quarter and year-to-date flows of $1.5 billion. We saw robust institutional activity, with gross sales up 55% versus a year ago, with broad-based demand across the range of equity, alternative and fixed income capabilities.

The higher level of redemptions relative to the prior year were largely driven by the growth versus value market dynamic in our value equity products as well as a large sovereign wealth and sub-adviser redemption that we highlighted in the prior quarter. We are highly confident the flow trend will improve, assuming a more favorable market dynamic.

I'm going to hand the call over to Loren. So he'll highlight the financial performance. Then I'll come back to highlighting the key differentiators that are creating a competitive advantage for Invesco.

Great, thank you, Marty. Quarter-over-quarter, our total AUM increased $29.1 billion or 3.1%. This was driven by the acquisition of the Guggenheim ETF business, which added $38.1 billion. So market gains of $10.3 billion, inflows from non-management fee earning AUM of $0.9 billion, inflows from institutional money market products of also $0.9 billion. And then we also had reinvested distributions of $0.7 billion. These factors were somewhat offset by negative foreign exchange translation of $13.8 billion. And then, as Marty mentioned, long-term net outflows of $8 billion. Our average AUM for the second quarter was $973.9 billion. That was up 2.4% versus Q1.

Looking at the net revenue yields, for the quarter, that came in at 40 basis points. And our net revenue yield, excluding performance fees, was at 39.5 basis points. That was a decrease of 0.4 basis points versus Q1. The acquisition of Guggenheim -- Guggenheim's ETF business and the impact of foreign exchange on our AUM mix reduced the yield by 0.9 and 0.3 basis points, respectively. These factors were somewhat offset by one extra day in the quarter and a pickup in real estate transaction fees within other revenues. And that increased the yield by 0.4 and 0.3 basis points, respectively.

Going to Slide 12, you will see our U.S. GAAP operating results for the quarter, and my comments today will focus exclusively on the variances related to our non-GAAP adjusted measures, which can be found on Slide 13. You'll see that our net revenues increased by $16 million, or 1.7% quarter-over-quarter to $974 million, which includes a negative FX rate impact of $11.2 million. Excluding this impact, our net revenues increased by $27.2 million.

This increase primarily reflects our higher average AUM from the Guggenheim acquisition, one additional day during the second quarter, and as mentioned, higher real estate transaction fees.

Adjusted operating expenses at 509 -- I'm sorry, $597.4 million, a decrease by $3.3 million or 0.5% relative to the first quarter. Foreign exchange decreased adjusted operating expenses by $5.4 million during the quarter. And excluding this impact, our adjusted operating expenses increased by $2.1 million. That increase was driven by seasonal growth in our marketing activities and higher G&A expenses, largely from irrecoverable taxes. This increase was then partially offset by a seasonal decline in comp expenses on lower payroll taxes and employee benefit costs. That traditionally happens in the second quarter.

Our adjusted non-operating income decreased $20.3 million compared to the first quarter, reflecting the foreign exchange mark-to-market on our seed investments during the quarter, as well as higher interest expense associated with the credit facility borrowing to fund the Guggenheim transaction. The tax rate for the quarter held steady at 20.6%, which brings us to our adjusted EPS of $0.66 and our adjusted net operating margin of 38.7% for the quarter. I also just wanted to point that our headcount increased by 181 employees to 7,315 employees, primarily reflecting the individuals on-boarded resulting from the Intelliflo and Guggenheim acquisitions that closed during the quarter.

Before turning things back to Marty, I just wanted to quickly provide a couple of updates, and the first is on current month flows. Overall, the July flow picture remains rather choppy, with strong sales and pipeline opportunities offset by elevated redemptions, many of which feel one-off in nature. Through the month of July, we have experienced net outflows of approximately $3 billion. This result is largely explained by 2 separate account terminations and a sell-off in commodity ETFs in U.S. and Europe.

On a somewhat longer-term basis, we are confident that our flow picture will stabilize and turn positive, driven by many of the focused areas of growth for Invesco. Additionally, we continue to see a healthy institutional pipeline of won but not funded business that will help accelerate our flows back to positive territory.

So the next area of update I'd like to turn to is China, which is in fact a great example of a focus area of growth for Invesco. We're seeing strong demand for our Invesco Great Wall joint venture, or IGW as we call it. In June, IGW's Jingyi money market fund was selected as 1 of 7 money market funds to be included in YuE’Bao, which is the money market program administered by Ant Financial, which is an affiliate of Alibaba. The program, which serves as the money market platform connected to mobile payment services, Alipay, manages nearly $250 billion in AUM and represents a very exciting opportunity for IGW and Invesco. So since going live in June 14, 2018, IGW has seen very strong flows and substantial growth in a number of client accounts on its platform.

From the end of the first quarter of 2018, the AUM of IGW's money market fund increased from about $80 million to almost $3.5 billion. We believe that IGW's new relationship with Ant Financial and its strong long-term investment performance across its many capabilities, will provide Invesco with significant growth opportunities immediately and in the future. In fact, we expect that total flows, including those into money market, will be about $6 billion for IGW in Q3.

The final part of my China update addresses our current approach of consolidating only 49% of IGW in our AUM flows and non-GAAP P&L.

Given Invesco's leadership in the joint venture, the recent change in regulation allowing increased foreign ownership and our active dialogue with our JV partners around gaining additional ownership interest, we'll begin reporting 100% of IGW beginning in the third quarter.

And with that, I'd like to turn things back to Marty, who will provide additional detail on some of these key differentiators that are creating competitive advantage for the firm.

Great. Thank you, Loren. So I'm now on slide 15, and as I said a few minutes ago, I want to highlight the macro trends that are transforming the industry. But in fact, these have been in place for some time, and I think they're all quite well-known throughout the industry. The point, though, that's important is that the pace of change, so pace of the adoption of these macro trends, is accelerating at a very rapid pace and is literally creating winners and losers in the industry today. And it's really important to understand these trends in the context of our strategic positioning and our future direction.

We've been developing and expanding our capabilities ahead of these trends for more than a decade, and we continue to aggressively develop them for the future. I'm highly confident in our strategy, our ability to execute and the results they will generate in the near term and long term. And now, let me just take a few minutes to put these into context of the macro strategy.

Our key strengths and differentiators put us in a strong position to be a winner within the industry for many years to come.

Our investment platform is comprised of broad diversity of high-quality, well-tenured teams, with high conviction in their philosophy and processes. We have a comprehensive range of investment capabilities and vehicles, with market-leading presence in the fastest-growing segments, including alternatives, multi-asset, ETFs and smart beta. We have a long-established global presence with deep client connectivity in key markets, including fast-growing markets for us such as China and EMEA. Our at-scale global platform drives efficiency and effectiveness while enabling us to commercialize key technologies for the benefit of our clients.

And lastly, our market-leading solutions capability draws on our comprehensive range of capabilities to deliver outcomes in line with the needs of our retail and institutional clients around the world.

Our core business is very healthy and strong, which provides a strong foundation for future growth. We're investing in growth drivers that complement our core business, a combination that sets us up for strong and diversified organic growth. Running a disciplined business enables us to reallocate investment in areas where we see tremendous opportunity, which you'll find on Slide 17. We began building the ETF franchise in 2006, with the acquisition of PowerShares and more recently, have expanded our ETF capabilities with Source and Guggenheim. We are now the fourth-largest ETF provider globally, and #2 in smart beta globally.

We have 40 years of experience and expertise in factor investing, well ahead of competitors in the space. We currently manage more than $160 billion in factor strategies for a range of clients around the world. We continue to leverage our factor expertise, most recently with the launch of 8 fixed income factor ETFs this week. We have a market-leading solutions capability that works with our distribution and advice teams to create customized portfolios for clients, drawing on our comprehensive range of products.

Invesco is an early mover in digital advice market, with our acquisition of Jemstep, and we are aggressively expanding our capability with the addition of Intelliflo. As we mentioned in our first quarter call, Jemstep has gone live with a number of clients in the United States, and in the U.K., Intelliflo is already the #1 technology platform for financial advisers, and we are seeing strong post-acquisition momentum. We're working to expand our digital advice capability globally.

We continue to build our institutional capability, investing in talent and resourcing and strengthening our client experience. We're seeing continued momentum in the institutional area, with gross flows up 55% year-over-year. Our early entry into China provides a strong foundation for growth in one of the world's fastest-growing markets. China is projected to account for half of the global AUM growth over the next decade. We're currently ranked 4 out of all foreign asset managers in China, and we continue to build the business with the recent launch of the very popular Belt & Road Fund. And as Loren talked -- just mentioned, we are very excited and the relationship with Ant Financial, and that very impressive platform.

What truly makes Invesco unique is not any one of these capabilities or growth driver, but our ability to bring these capabilities and growth drivers together to meet the needs of our clients. This unique combination is what defines our competitive differentiation. We're proactively investing in the business, building on our first-mover and competitive advantage to drive sustainable broad-based growth, in line with our clients' and the industry direction.

Our acquisition of PowerShares more than a decade ago, our decades-long experience in factors, our first-mover advantage in digital advice and our early entry into China demonstrate our experience, our commitment to clients and our focus on investing for growth.

We're confident of our organic growth prospects. We remain focused on executing for clients, leveraging our competitive advantage and investing for growth, which we believe ultimately drives shareholder value.

So with that, operator, if you will open up the call for questions, Loren and I will be happy to answer all the questions.

(Operator Instructions) Our first question comes from Dan Fannon from Jefferies.

I guess, first, I mean, Marty, you mentioned highly confident about flows improving, and we look at kind of Slide 22 and some of the performance challenges and what you talked about with regards to where we are in the cycle. I guess, can you give us a little bit about whether it's product, region. And we heard what happened -- what's going on in July. I guess, what gives you the confidence around flows improving in this kind of more immediate time period?

Yes, so Dan, it's a great question. And if you told me we would be in this part of the cycle, with this concentration and having such a huge impact on the value versus growth in December, I wouldn't have imagined it, quite frankly. The impact that you're seeing is because of the great success of these capabilities over the last number of years. We've -- clients have very high demand for these capabilities. Now the exact opposite happens when you get to these stretch periods. And the point that we're really trying to make is that high-quality teams, there's not demand for the capability right now that's driving the current flow -- the large part of the current flows. But I think, our point is, the depth and breadth of interest of capabilities around the world in so many channels and regions is very, very strong, and that tends to offset these things. But really, what has changed is the magnitude of that change. We've not seen in 10 years, more than 10 years, such a concentrated market impact. And again, a good part of our equity capabilities have been in value. So again, it's the broadness of the organization, I think, that's really -- we're pointing out, and that the narrowness of where these redemptions are largely coming from.

Okay. And I guess, just to follow up on that, institutionally, is -- you guys mentioned a backlog, and we've heard this before. I guess, is there -- if we think about the products and where that demand is coming, is there any differentiation from previous periods? Or is there an acceleration of certain products or regions that you would like -- that you could highlight?

Yes, good point. So it's never been broader, right? So you're seeing it in equity. And what equity, as you imagine, that's largely factor capabilities institutionally outside of the United States. Real estate continues to be a very high area. Alternatives, beyond that, bank loans and things such as GTR continues to be an area that institutions are continuing to look at. Risk parity is an area. So again, it continues to be very -- broader than it's ever been that we're seeing. And the point to look at is the gross flows. What did happen this quarter, and frankly, what we are seeing, the one large redemption in this quarter, it was really driven -- it was an equity capability with good performance, but you are seeing clients start to -- some of them are worried with some of the equity exposure, with some of the topics of trade around the world and the like, how -- we're not seeing a ton of it, but that's an example of 1 or 2 of those and they can make a big difference in a quarter. And I think that's really the point. Looking from quarter-to-quarter is very difficult, always has, Dan. But if you look at the history of growth for us institutionally over the last couple of years, it continues to just improve.

And the other thing, Dan, I would just mention is the pipeline of opportunities is at an all-time high. In terms of fee rate, it's about 65 basis points across the entire pipeline, which is well in excess of our overall fee rate. And the terminating pipeline, so to speak, is at 24 basis points. So again, when you look at it on a revenue-adjusted basis, even though the headlines are kind of large, really, from a revenue perspective, we should feel and we do feel very optimistic about what the pipeline is bringing to us. And again, the predominance, you said it's broad-based, which it is, but there is a significant growth, continues to be a growth, in alternatives, which tends to be at a higher fee rate as well.

Our next question comes from Craig Siegenthaler from Crédit Suisse.

Just given the detail around Jemstep on the last call, with 6 financial institutions going live this year, and I think it was 5 banks and 1 insurer, when should we expect Jemstep to start contributing to net flows? And how large is the underlying advisory AUA in the platforms that will go live this year or have already gone live?

So again, we continue to look to 2019 for the beginning of -- a level of contribution that would start to be interesting. So we've not moved off that, our confidence just continues to strengthen along that. Quite frankly, I don't have the number of AUA of the institutions, but it would be -- frankly, I just don't have it right now, so. But it's a large number and an impressive number, and that's what gives us confidence that we'll see the success in 2019, right?

And then just as a follow-up, did any financial institutions sign up since the April call?

We are in process of adding some financial institutions. And again, we're -- we're in that contracting period, so there's nothing we can say. But when we're through it, you will hear about it.

Our next question comes from Patrick Davitt from Autonomous Research.

The IGW consolidation, is that $6 billion, you mentioned the total AUM that's being consolidated, or new flow? And how should we think about the fee rate impact from consolidating that AUM?

The $6 billion is, think of it as the new flow at 100%. We would be consolidating 100% of the AUM and flows going forward, which is, right now, the joint venture is about $22 billion in size. So there'd be another $11 billion showing up in our assets under management. Obviously, the money market is more at the institutional rate. But there is the opportunity to do more than just money market on the Ant Financial platform, which is at significantly higher rates, obviously, for active products. You're sort of closer to 75 to 100 basis points, in that range. So it is something that is a little hard to model right now because it's very much in flux. The immediate kind of opportunity is probably at the lower money market fee.

So it's fair to say the vast majority of it is money funds right now?

At this point, yes.

Our next question comes from Ken Worthington from JPMorgan.

First, on outflows, obviously elevated this quarter, and you mentioned market conditions is a factor. The way I see it is I see more of a boom and bust cycle for Invesco occurring as you promote and rapidly grow certain products, only to see performance at some point and sort of driving the bust part of the cycle. So we saw this with IBRA, and this may be playing out in GTR and Diversified Dividend. Do you see it the same way? And are you structuring growth that might be more consistent and repeatable, and ultimately, have less risk of this sort of boom and bust cycle?

It's a fascinating point of view. So I put it in the context that we've had net inflows for 9 years. And I'd say very few firms have done that. And I think what it does show is that the fact is, clients do have different demands during different parts of the cycle. And as they see risk on, risk off, they build their portfolios accordingly. And it is no different now. And what you're seeing with this value versus growth, you see where all the flows are going throughout the industry at a retail level because you can get clear line of sight. This is a dominant flow picture there, in particular, within ETFs. And so I wouldn't call it a boom and bust cycle. I think it's driven by client demands. This current period might be most extreme because of where the market is, though. I mean, last time we saw something like this, it's not at the exact level, but it'd be in the '99, 2000 period.

Okay. And then Invesco, I think, recently lowered fees in Canada. Can you describe kind of the actions you took and why? And given Canada and Europe both are sort of higher-fee regions, how should we think about the fee outlook for the Continental European market?

So Ken, that was a fairly small asset base that got adjusted. So it's not material to any real revenue impact. The reason that was done is because there was a discrepancy between similar products in the U.S. and Canada. And so they needed to bring that more in alignment because there was -- we were creating sort of an unhealthy arbitrage opportunity that just needed to be closed. So that was all it was, pure and simple. So there's no sort of plan, other than just kind of making sure our product line makes sense.

Our next question comes from Jeremy Campbell from Barclays.

Just wondering if we could dig in a little bit more on the retail side of flows. It looks like that was a big driver here in the quarter. Looks more U.S. and U.K. dominated. I know you highlighted the growth value dynamic, but maybe just additional color on where it's coming from? Is it model portfolios, brokers sold? What's kind of the view from the ground there?

Yes, no, you just -- you hit it, right? I mean, it's -- we are in the advice channel, so it's literally driven by investors -- the large -- where it starts really is a fall-off in demand, and that's what, in turn, starts to drive up the net outflows because of that. And so there's -- it's really a demand topic right now.

And so just, I mean, I think in terms of overall magnitude, I mean, again, I think as long as we -- to put in context, the biggest outflow in the quarter was the sovereign wealth outflow that we preannounced, by far and away. U.S. value, we've talked about it, it's, as a category within the industry in outflow, it's certainly been a very difficult challenging market for that category. And so we're seeing about $2 billion, just generally, of outflow across value, which is again somewhat consistent with overall industry trends. U.K. equities, which is again, sort of a value-oriented category, is about $1.3 billion, related to that category. International growth is about $1 billion. And then, there is an element, which we talked about in the past, related to our REIT product in Japan, which is a retail product, Shinko REIT, and that was about $1 billion. And when you put that all together, I mean, you really explain marginally what is going on in the outflow in the quarter.

Got it. And then on the capital side, I know you guys are focused on delevering after the Guggenheim deal here. But I guess, with just the weakness in the stock, and the sector at large, I mean, does that all maybe change your thinking a little bit to do maybe a moderated pace of delevering, combined with a little bit of a buyback, given here, the valuation at the current levels?

I think we see the stock as being extremely attractive. We are clearly focused on reinstating our buyback program, which, I think, we've discussed would be in the fourth quarter. We are also trying to preserve our current credit rating. And it is something where we have a real view that if we were to sort of accelerate the buyback sooner than before we get the leverage back in line, that we would be tempting a downgrade, which takes a long time to actually come back from. So we do understand the topic. But the time value here, we're talking about a couple of quarters at most before we can sort of crank up the buyback machine again.

And sorry if I missed this. But did you guys say which strategies the 2 July terminations came in? Were they active equity or...?

Of the 2, one was direct real estate and the other was similar sovereign wealth outflow that we've talked about before, so similar topic.

Asian equity.

Asian equity, yes.

Our next question comes from Brennan Hawken from UBS.

Loren, I don't think you touched on this, but the last quarter, you had updated an outlook for revenue yield before performance fees being 40 basis points for the rest of the year. This quarter it came in a bit below that. Is the 40 basis point outlook still something that we should use? Or should we revise that?

Yes, so, there's the account noise within that, and so it kind of goes up and then it goes down, depending on day count. I think probably somewhere between 40 and 39.5 is very safe, in that range for the last half of the year. I do think as we get into 2019, where we continue to see some of the lower-priced products and our success in our ETF business expand, you're probably looking at sort of down to 39 basis points. Again, but importantly, and again, it's an easy point to overlook, this is not because of fee cuts, this is because of the mix of our products. And as we gain scale in these lower-fee products, we're actually seeing incredibly attractive incremental margins. And so we don't see anything wrong with the fee rates dropping as long as we're building scale in these products and our margin on those products are at a higher rate than the firm's overall, which is the case. But anyway, that would be our sort of updated guidance around fee rate, net revenue yield, excluding performance.

Got it. And just following up, and I know there've been a couple of questions on it, so sorry about coming back to it, it's just a little confusing. The growth versus value performance gap that you all highlighted, it's not really all that new. I think that's part of the reason why there's some confusion. Also, you guys -- Invesco really has a quite a diversified offering. So it's not like we think about you all as really levered to one style versus the other. Is the idea here that -- and Marty, I think you spoke to it earlier, is the idea here that just the remixing away from value right now within Invesco products is what's so overwhelming, and therefore, that's why it's noteworthy? If you can just flesh that out a bit, that'd be great.

Glad you're asking, if it's not understood. So I'll try again. So it's really the magnitude of the change in the concentration, right? So if you look year-to-date, the amount of money going into momentum-based growth products is enormous. If you want to use ETFs as a proxy, whether it be cap-weighted or even in smart beta, the vast majority of the money is going into a very few number of funds that are momentum-based. So this extreme period, from that perspective, I'm not making any judgments about the merits of it, but that's what you're seeing. And what we've had over the last number of years is great success in the value-based capabilities. That's been the driver of flows for us in the U.S. retail channel, in particular. When the demand for those comes off and you see such a magnitude in change of relative performance, that's when you -- and it's literally happened this year, I mean, that's when you saw the change in flows. That's how quickly the sentiment changed from an investor point of view, and I think that's really the point that I'm trying to highlight. Not that in fact -- we saw this -- we all have been in the industry a long time, you know this is a natural thing that happens. But it's actually the magnitude of it right now, in particular this year, how it change d investor, retail investor sentiment in particular.

Okay, okay. Thanks for that additional color, Marty. Last sort of clean-up for me. For July, the outflows to date, I believe, Loren, you had said there's a sovereign wealth in the direct real estate. As far as -- given that there's sovereign wealth that's a big part of it, is that outflow a lower fee item, or is that more in line with the firm average? Should we think about that when we start to model here at the current quarter?

Because it's active equity, and it's well-performing, I mean, it's probably more in line with the firm's overall fee rate, which is unfortunate in terms of the impact. And the real estate, direct real estate, is probably also at a similar fee rate.

Our next question comes from Michael Carrier from Bank of America Merrill Lynch.

Loren, maybe, first one, just on expenses. It seems like comp, and I think, property office tech came in a bit better. I know some of that's probably FX impacted. But maybe just any update for the second half of the year, given some of the guidance that you gave for the first half?

Yes, so I think our guidance sort of largely stays intact. We've been maintaining good vigilance on our expenses, and comp is part of that. Some of that is, I think, just flexing down, the normal flexing down of incentives, sort of, incentives in relationship to operating income. But we would say, guidance that we gave earlier stays intact.

Okay, got it. And then, Marty, just one more on the flow outlook. So the growth versus value, look, I understand that. When I think about some of the initiatives that you guys have been working on, so whether it's the broader, sort of, ETF platform, and then when you combine that with some of the digital investments as you head into '19, I guess, I'm just trying to understand how you guys think about maybe the next 12, 24 months in an environment where some of those investments start to kind of contribute and produce more significantly, but maybe we still have this growth versus value issue going on, versus, obviously, if that starts to shift, then that would be more of a tailwind. But I mean, like, do you see some, maybe, normalizing in these outflows, just given some of those investments maybe scaling?

That's the point I'm trying -- been trying to make, so thank you, I'll try to clarify it. There is a high degree of confidence that the investments that we've been making and the strengthening of the business, whether it be institutional, and you could start to see the institutional capabilities, China is meaningful for us. The pace of change and our strengthening there is very, very strong. But then, the same thing with these -- the ETF platforms that we are now just getting through building up the range of capabilities that we want. Post acquisitions, always, it takes time to get capabilities on platform. So that's what we're going through with Guggenheim right now. It takes months and quarters, not the day you close, it doesn't mean you're on the platform. Those conversations are all going very, very well, literally in any range of model conversations with various platforms. So that's why our confidence is so high. And you're going to start to see, again, whether it be Jemstep or Intelliflo, start to have impact to the organization next year. So I think the question that you're asking, let's assume that the market stays -- that market dynamics stays where it is, do we anticipate the likelihood of us generating flows beyond these redemptions? We do. It's more likely in 2019 than it is this year, because hard to call a market, and we're not going to call a market. So we're going to anticipate that it plays out for another 2 or 3 quarters before you get some change there.

Our next question comes from Bill Katz from Citigroup.

So a couple of sort of tactical modeling questions. And I might have missed this, there's a lot going on this morning. Did you guys call out the strength in the other revenue line this quarter? I sort of felt like that was a much bigger variant than maybe what the prior guidance was, but I may be misremembering that. And then I do have a follow-up question.

So that was related to our J-REIT launch in Asia, which had a significant amount of transaction fees associated with it. So it was related to a fund launch.

So would you expect that to get back into that mid-teens type of level on a go-forward basis?

Yes, most likely. I think I would view that as more of a one-off.

Where are you -- you mentioned in the press release, but I didn't hear it in the commentary this morning, in terms of the global efficiency initiative, when you sort of get to that sort of run rate of annualized savings, is that still a year-end '18 number at this point in time?

Absolutely. And we're making progress, we're in mid-implementation of some of the outsourcing, and we're getting some of the benefits, which, again, is allowing us to maintain expenses and guidance, sort of roughly where we had them, even despite some of these acquisitions that we've done. So we're feeling good about our optimization efforts and certainly would expect to see them continue on into 2019.

And just one last one, and Marty, maybe for you. Just stepping back, a lot of focus on flows, of course. I think you've laid out previously a long-term guidance of -- or at least an aspirational goal of 3% to 5%. Can you just sort of help us with the building blocks and how you get from sort of what's a little bit of a choppy view right now, sort of putting away the style box issue for a moment, how you get from where you are today, and really, the industry at large, to that sort of that, mid -- low to mid-single-digit organic growth rate?

Yes, so Bill, it's not going to be any one thing, but it's literally going to be a combination. We have a combination of areas that we've been talking about, right? So we're continuing to see growth and strength in alternatives. We're continuing to see growth in factor capabilities, and I'd put ETFs in that bucket, but it goes beyond that. You're seeing institutional clients outside of the United States. Look at that as a growth area. And then, frankly, when these digital platforms start to kick in, too, those are, they're differentiated in the marketplace, and it's really the breadth of those capabilities that will get there. And again, I think you would have -- markets are what they are. And again, as I said before, if you asked me in December if you would have seen the magnitude of this growth versus value trade going on, I would not have seen it. And if it hadn't -- if it had just stayed status quo, we would be through that organic growth target that we talked about.

,

And the other way to think about it, Bill, is if you look at our current assets under management, I mean, you could highlight that there's at least 1/3 of our assets that are sort of growing at a high single-digit, double-digit rate in terms of ETFs, factors, solutions, digital we talked about, which are yet to come. If you really just do the math around taking that part relative to the rest of our core business, which may be growing at a more flattish, lower single-digit rate, you really get to that 3% to 5% quite quickly, just in a handful of years, as long as you can sustain the build-out and the growth on these high-growth areas, which is clearly, what we're talking about and what we're focused on.

Our next question comes from Glenn Schorr from Evercore.

I just want to follow up on the conversation around the pace of change speeding up and next-gen passes, specifically. So I'm just curious what's gone -- you've broadened the new platforms, you've built out product set, you've adjusted pricing where you need to. Can you talk about the conversations with the distributors? Or are you seeing it in sales already? What's going on behind the scenes that give you confidence that, that's going to start contributing? Because if it does, it could make a big difference offsetting some of the style box stuff.

Yes, and so it's not limited to retail. Look, every conversation that I'm in, we are -- institutional clients around the world, they're doing the same thing, they're narrowing their relationships. They want more from money managers and not just a range of capabilities, which is, I'd call it, table stakes, a range of strong performance capabilities over market cycles. But it's these element to have, to be able to get into a solutions conversations with them, help them do analytical work, help them through any number of things: How do you think through factors, how to use factors, it's about leadership, ESG, whatever might be. There aren't a lot of firms that have that depth and breadth of capability and the range to do that. When you go to the retail channel, it's clear, everybody here understands the U.S. market very well, you are seeing that narrowing of those platforms. And again, that same dynamic is happening. And it's beyond thinking of just a single product on a platform. Yes, that is the majority of what it is today. But more and more, can you help, more holistically, with these platforms from the standpoint of helping build models, participate in building models, helping the -- the successive factors in the retail channel, it's intellectually accepted, the magnitude of it is nowhere where most of us think it's going to go. So the demand has to be created, and the demand is going to be created through education. So do you have the capabilities to help educate, hand-in-hand with some of these platforms. Again, very few firms can do that. So those are the types of things that are creating real competitive advantages for the firms that have that, the breadth of those capabilities and the resources to compete in that way. And that's very different than what it was 5 years ago.

I think marketing spend was up a bunch year-on-year this quarter. Some of that is branding, some of that is selling what's working now. Is any of that targeted towards this education -- does it fall in under this education process?

Yes, absolutely.

And sales force and distribution arm and educators, if you will, has that all been built out? And your confidence is higher now because we're closer to the payoff?

No question about it, right? And again, what we are doing, and again, you'll hear other firms talk about it, but what we are doing with digital capabilities around marketing and education are at a level that we've never done before. And that is the future, and it's pivoting from sort of past practices and past capabilities to the future. And it is being accepted in a very strong manner.

Our next question comes from Kenneth Lee from RBC Capital Markets.

Looks like there was an increase in fund launch costs in the quarter. Wondering if you could tell us what's in the pipeline in terms of new products. And whether there is any opportunity for Invesco to participate in investor demand for private credit products?

Just on the fund launch products, you read the U.S. GAAP release, good for you. That's related to the products that we consolidate. So that actually, that comment is only relevant for U.S. GAAP. It's a CLO-related expense that gets consolidated out in our non-GAAP, so -- but with that said, there are quite a bit of new products that are being looked at and probably the one that is most recent is, we have 8 new BulletShares ETFs that were just launched around factor-based, all self-indexed and managed. So I think that's one that we feel is going to have some very strong demand and uptake with clients who really haven't had access to these types of products in a real way. And Marty, I don't know if you want to talk more broadly about new product introductions that we're looking at?

Yes, it has -- again, very, very focused on where we think the world's going. So in the retail institutional world, it is literally completing the build-out of what we think is meaningful and desired by end clients, both retail and institutional, with factors, and that's what you saw with this factor launch. You'll see probably a couple of more of them, probably ending in the first quarter of next year. That would be the end of probably what we think as the aggressive build-out. It is on the back of Guggenheim and Source. And we think having the totality is important. And again, don't think of these just as ETFs by themselves. They are an important part of our solutions capability and the models that we build for clients or helping institutions as they look to embed factors more broadly in some of their thinking in their portfolios.

And then he had a question on private credit.

Yes, so within our alternative business, it is an area that we have some capability. It is not nearly as broad or deep as some of the big PE-type firms. But again, I think the range of our alternative capabilities is strong, and you've seen the success over the years.

Got you. And just one more bit. In terms of housekeeping, it looks like there was a bunch of factors that drove the tax rate a little bit higher. Wondering if there's a more updated guidance for the tax rate going forward?

Yes, so again, we're speaking to the non-GAAP financials, which are probably more relevant. 20.6% was the effective tax rate, which was steady to the first quarter and it is consistent with our guidance going forward. So I'd use that as the non-GAAP tax rate. In terms of the U.S. GAAP tax rate, that can move around quite a bit, depending on the different products that we have to consolidate. So I find that number a little bit more difficult to provide guidance on.

Our next question comes from Alex Blostein from Goldman Sachs.

A question, I guess, around capital priorities from here. So you're responding to industry challenges, clearly, by making several acquisitions over the last couple of years. Do you feel that, at this point, the build-out is generally done from an acquisition perspective and we should think about you guys returning to close to 100% payout of net income starting 2019, or do you see opportunities for more deals?

Yes, from my perspective, the acquisitions that we've made over the last couple of years are, from our perspective, meaningful and important for the success of the organization going forward and meeting client demands. It is hard to predict the future. I don't see -- generally, you don't see the opportunities until they present themselves, right? So there's nothing obvious at the moment. But it's -- again, we will continue to do what we've done in the past and stay to our capital priorities, as we have said. But if there's something that comes along that we think will materially improve the competitive positioning of the firm, we would clearly pay attention to it.

And that would be, again, in the areas of digital, distribution and ETFs, or something else?

Hard to predict, quite frankly. Because if you looked at the breadth of the firm right now, we think we have very competitive set right now, you just don't know what the opportunities emerge. So I really wouldn't want to lock ourselves into a box. That has been a priority over the last couple of years and we think it's been very helpful.

I would say, Alex, I mean, per our plan, our current thinking is, yes, we'd be back into payout in terms of, probably not at 100%, but typically, we've been sort of in that 70% to 80% range, because we do seed a fair amount of our new product launches. And so there's -- continues to be a pipeline of sort of organic needs around some of that capital. But we're -- certainly in terms of the thinking, we'd be back into buyback mode by the end of this quarter -- or end of fourth quarter.

Yes, got it. And my second question, I guess, is just around the U.K. equity business. Performance obviously remains pretty challenged, some of that is style driven, some of that had some specifics. I guess, can you remind us what the AUM base there in U.K. equities and what the revenue pool on those assets is today? And I guess, as we get kind of closer to Brexit, again, maybe just a reminder, what percentage of your U.K.-based product comes from the Eurozone customer base? And if there's any sort of risk to that as we get closer to the end of the year?

Why don't I pick up on Brexit, and then Loren can follow up on the other. So look, where it stands right now, the vast majority of the money managers are benefiting from sort of this delegation model. That is the case for us, and it would not materially change our business model. We'd end up with some more people on the continent, but not to a dramatic amount, and that seems to be the state of play as we move forward. So it's not nearly as challenging as it is for some of the investment banks or the passporting topics.

And Alex, out of a total Invesco U.K. asset base of $136 billion, $27 billion is U.K. equities.

Our next question comes from Chris Shutler from William Blair.

Can you talk about the Intelliflo acquisition and how you see it fitting into the digital strategy? It looks to me like more of an end-to-end complete platform, whereas Jemstep is, I think, more of a front end, so is that fair? And could you help us just distinguish between those 2 assets and how you intend to leverage them in their respective markets?

A very good question. So the U.K. market has changed so dramatically, post some of the regulations. And what you saw happening was the IFAs were starting to move to platforms to help with some of their investment decisions on the funds that they will use and due diligence and the like. And so the center of gravity became these platforms. Intelliflo became, obviously, a very important one, with 35% of the market share. It is an open platform. It will remain an open platform. That said, it is an opportunity for us to work with Intelliflo and create models through solutions and the like that would benefit the existing IFAs on the market, and we're working through a number of things right now. So it is very different, but it's a different marketplace. Where we see the benefit coming together in time with Jemstep and Intelliflo is not just in some of the technologies, but it'll be a combination of some of the platform benefits, along with the front-end that we think will enhance our offerings in both markets over time. And we'll also look to some other markets around the world as we look forward here.

Okay, and was there a purchase price for Intelliflo? Or any financial details on how much revenue, profit, et cetera?

Yes, so it wasn't a material acquisition, relative to, let's say, Guggenheim. So we've not disclosed the nature and the magnitude of the transaction and very consistent with our past practices. It's not going to be material to revenues and expenses, P&L impact, this year at least.

Our next question comes from Brian Bedell from Deutsche Bank.

Maybe just coming back to the net revenue yield comment, Loren, on the sort of migration towards that more 39 basis point area next year. And in terms of your assumptions on that, you mentioned that the pipeline of new potential wins, more in a 65 basis point area. So it is -- I just wanted to see if your assumption of hitting that pipeline is within that 39 basis points? I realize the ETF franchise and the money market business is going to dilute that. So if you actually do hit a lot of that pipeline, would there be upward -- upside to that 39 bps? Or is that already in your assumptions?

Yes, great question. I mean, the pipeline really goes out 6 months, 9 months, it's not all the way into 2019. Typically, they get funded and so the 2019 commentary is a little bit uninformed in terms of what the pipeline is going to look like at the end of the year. So the guidance that I'm giving you, take it with a grain of salt. It's not based on a ton of information, other than sort of general trends of mix of where we see the growth and largely around ETFs in particular, and then to some extent, money market as well. So I would say we could do better than that. It's quite possible, but we kind of think that all, absent any other information, that's probably the right place to guide people.

Okay, okay, that's helpful. And then maybe a big picture question on sort of the large chunky institutional outflows. This is obviously an industry issue we're seeing across the asset manager space. And it's -- a lot of it's not in your control because of the allocation decisions by sovereign wealth funds and pension plans. But you guys do have a very good menu of products and solutions capabilities to potentially be on the winning side of some of those things. So maybe, Marty, if you can talk about sort of how you see that outlook, whether there's a chance you'll get some more wins like the Rhode Island 529 plan. And then maybe sort of how you see it sort of from a risk perspective of pension plans doing more allocations away from your core products?

Yes, it's a really good question. So what I can say generally is, and this would be around the world. Globally, what we are seeing, the finals that we are in, and actually, through quite a broad range of capabilities, the size of the mandates are dramatically larger than what they've been over the past number of years. That's a very good sign that's going to continue. And we, within the pipeline, as Loren said, and we -- it continues to grow, continues to broaden and continues to strengthen. We also try our best to determine what the redemptions are by doing all the things that you would hope: Client engagement, get the feedback they would have, how the performances is, all those things that you would think be normal factors in decision-making. We don't do a good job in forecasting redemptions institutionally. More often than not, or I'd say -- if there's not -- you'll get an immediate termination. And it can be a corporate event, it can be an asset allocation decision they just had at a pension meeting. So it is really hard to do it, and we continue to try to get better at it. But it makes it hard for these conversations from a credibility point of view, when you look at the one-offs that happened and clients are entitled to make those decisions, and they do and they frankly should. So again, we try to do a better job, we'll continue to try to do a better job of it. It's very hard to get real insight into it. But what we do have a much better sense is the growing magnitude of the size of institutional accounts and the breadth of them.

Yes, I guess, that would sort of say, to the extent that you can, and I guess, maybe move the sales force towards maybe a more proactive solution sale, that would maybe get you in that conversation earlier? Is that -- or do you think that's kind of a [moot] point?

It's actually 2 different things. So let me follow up, I see where you're going. So look, the whole firm, the sales force, is changing how we're facing off with clients. It is not a selling a product. It is a deep, broad relationship with the client, trying to understand what they're trying to accomplish and meet their needs in a broad way. That is really what's going on. And compensation has changed to follow that approach as opposed to being sort of product specific to the total relationship of a client. So that's probably not unique to us, but anybody that has a broad range of capabilities or solutions capabilities is likely doing that. It still doesn't mean that you're going to get the insights into individual decisions that can happen.

Our next question comes from Chris Harris from Wells Fargo.

I wanted to come back to investment performance because it is, obviously, so important. When I look at Invesco, I mean, you guys have clearly, significant scale, significant financial resources. You think those would be really pretty material competitive advantages, particularly relative to smaller asset managers, but it just seems like that's not necessarily translating into superior investment performance, at least on the equity side of the firm. Just wondering if you guys can maybe talk a little bit about why you think that might be, and if there is anything you can do to perhaps address that?

Hard to address it because I disagree with it, so -- again, it's back to the conversation that we have, we've been having. So we do have, in our equity capabilities, value -- a large value bias and they have grown in size over the last number of years because of the very good performance. It's relatively underperforming where we are in the marketplace, and that has -- it -- when you look at the macro numbers, it paints the overall macro numbers, there's still very, very strong performance throughout the organization. So that's the best that I can do with that. If you want to play back the tape 12, 18 months ago, the numbers are very, very different and you wouldn't even have asked the question.

Okay, let me just get a clarifying question here then. These performance numbers we're looking at, the AUM in top half versus peer group, doesn't it control for that? So like the growth numbers are versus growth managers and the value numbers are versus value managers? Or is that not necessarily the case?

It depends on the peer group, too. So if you look at within our -- if you look at our growth capabilities, international growth capabilities, there's a value bias to it. So it will look like it's relatively underperforming those firms that are momentum growth investors. So if you want to say that, that's the same style, you can draw that conclusion. That is a shortfall of trying to simplify something by style boxes. As an industry, that's what we do. But when you look at the individual mandates, that's not how clients are investing or individual investors are investing through IFAs or financial advisers. That's really where the problem is. And if you compare our Diversified Dividend capability, which is a value capability, against Comstock, which is a very deep value capability, people are making very different decisions about that. Those are, in broad strokes, value capabilities. That's where the flaws come in.

And Chris, I'd say the one thing that's probably self-evident, though, is we don't offer today currently, as much growth -- pure growth and momentum-oriented products as others do. And I'd say, that is, right now, showing up as a business challenge because that's what's selling, as Marty said. And so you could certainly fault us, if you wanted to, that we don't have as much of a balance in our mix of products to cover the kind of extreme environment that we're in today, because we do have a, probably a higher concentration in value-oriented products, particularly in the U.S., than maybe others do.

Our last question comes from Michael Cyprys from Morgan Stanley.

Marty, I just wanted to circle back on your commentary before about some of the industry challenges. Curious how you see the industry evolving in response to those challenges that you outline. What changes to firm structures and operations could we see? And do you think we could see more consolidation, broadly, and in what sense -- situation could it make sense for Invesco to partake in that?

Yes, so you, like everybody, does a lot of thinking about these things. And look, the way that we've been building the firm, the way we've built the firm and how we continue to evolve, we think is addressing that very, very directly. And we think broad breadth of investment capabilities is table stakes, they need to be able to perform over market cycles. That's not enough. You literally have to have a solutions capability to interface with these clients as all, whether it be a retail platform or institutional platform, is narrowing. What you also need under those things, in our view is, and you can see by, we believe, technology is an enabler, not just operationally, but very much for meeting client needs. That's why we're building those platforms. And we also believe that you do need scale to generate, to be competitive in this marketplace. If you asked me about the level of scale you needed 5 years ago, I would not have thought that, that was such a hugely important factor for success going forward. It is, because of the demands on money managers going forward, to do more than just manage money for clients and not just invest in investment capabilities, but also in operational capabilities, largely around technology. So scale becomes really an important factor as you look to success going forward, so you can make these investments all been talking about.

And then just following up quickly on the solutions side, I just wanted to dig in there a little bit more. Just curious how much in assets would you say Invesco is managing today in solutions mandates? And can you talk about how you're expanding your capabilities on the institutional side of solutions? It's a competitive marketplace. How are you approaching the solutions market on the institutional side and what's differentiated with Invesco's approach?

Yes, so we probably -- so it's been a buildup over the last 2-plus years. We have north of probably 45 professionals in the solutions group. Differently than a number of our competitors, what they use is our range of capabilities, all right? So it is using out capabilities to meet client needs. Solutions probably gets overused because it's expressed in different ways. So we actually use it in the retail channel. It started in the U.S. retail channel for us, working with, if you want to call it, corner offices, and working with financial advisers, analyzing their portfolios and helping them determine how best to change their asset allocations to meet the needs that they want. So solutions, by the name itself, suggests that we take all the assets and manage them all, it's a misnomer, but -- so that's what's happening at the retail level. Institutionally, it's somewhat of the same engagement, where very sophisticated clients are working with firms like us, and our solutions team, to do analytics and looking at their portfolios to see how they might make changes to meet different outcomes that they want to. These are sophisticated institutions. They have resources and capabilities. They're wanting to get different perspectives in making their decisions. That's what's different. So many of these interactions are not leading to taking over the totality of the assets, but broadening our relationship with them and expanding the number of mandates we might have with them. From a pure solutions assets under management...

Yes, I mean, if you aggregate kind of the multi-asset and all those things. I mean, we're talking about, $60 billion, something in that range. But again, I think, it's -- the biggest opportunity maybe right now, in terms of being an enabler for our retail and institutional business, as opposed to a pure standalone business that is creating solutions or doing LDI or something of that nature.

And is that $60 billion on the institutional side, or is that both, how you're seeing that...?

That's both retail and institutional.

Okay, and then on the institutional side, is there a number that you're able to share there?

Probably half-and-half, somewhat -- maybe a little bit more retail than institutional.

Speakers, we show no further questions in queue at this time.

Great, thank you very much for joining Loren and I, and we'll be in contact next quarter and before that in various conversations. Thank you.

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