景順投信 (IVZ) 2022 Q1 法說會逐字稿

Good morning, and thank you all for joining us.

As a reminder, this conference call and the related presentation may include forward-looking statements, which reflect management's expectation about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations.

For a discussion of these risks and uncertainties, please see risks described in our most recent Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements.

We may also discuss non-GAAP financial measures during today's call. Reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation.

Welcome to Invesco's First 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'd like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, operator, and thanks, everybody, for joining us. And as typically what we do, I'll hit some of the highlights; Allison will hit more details on the results, and then we'll open up to Q&A.

So I'm going to start on Slide 3, if you happen to be following along with the deck. Solid business momentum continued during the first 3 months of the year. We did have net term -- long-term inflows of $17.2 billion in the first quarter. This is the seventh consecutive quarter of net long-term inflows. And our annualized organic growth rate in the quarter was 6% despite the market backdrop we were all experiencing.

This is a key outcome of the broadly diversified set of capabilities we've built over the past decade. And in this volatile market environment, we continue to be extremely focused on our clients and the strength and diversification of our business enabled us to continue anticipating and meeting their evolving needs.

In the first quarter, we continue to see strong demand for our key capability areas in particular, ETFs and fixed income. We maintain our focus on -- and investment in several key areas, including fixed ETFs, fixed income, factor index, private markets, active global equity, Great China solutions. This approach has helped us generate consistently strong and broad organic growth rate, and we ended the quarter with $1.6 trillion in assets under management.

Looking at our specific capabilities, our global ETF platform closed out a very strong order. ETFs generated net inflows of $19 billion in the first quarter. This includes the flagship QQQ product. We did increase market share in both ETF assets under management and revenues, and Allison is going to spend a few minutes today going more depth into the ETF platform.

We continue to see clients increasing their allocation to alternative strategies as they search for diversification and higher returns, and Invesco has built a broad and competitive platform across real estate and private credit to meet these client demand needs. We are confident in our ability to accelerate growth in these capabilities. In private real estate, net long-term inflows for $300 million first quarter, this comprised of new acquisition activities of $2.1 billion and investment realizations of $1.8 billion.

In our private credit business, robust bank loan product demand resulted in net long-term inflows of $3.1 billion, including the launch of 2 new CLOs. Our active fixed income business remained strong, generating long-term net inflows of $2.5 billion in the first quarter, including $2.2 billion from Greater China. Our active global equity business, our flagship product, including Invesco Developing Markets Fund, did see net long-term outflows of $1.5 billion due to the impact of the geopolitical environment that we are experiencing.

On the institutional side, our solutions-enabled opportunities accounted for 30% of our institutional pipeline at the end of the quarter. Within Greater China, our JV had net long-term inflows of $2.2 billion in the quarter, and our business in China continues to be a source of strength and diversification. And we expect continued strong growth in the years ahead while recognizing the near-term headwinds in China.

The momentum in our business has generated strong cash flows, improving our cash position to the point where there were some share buybacks in the first quarter buying back $200 million in common shares during the quarter. Our focus building a strong balance sheet and improving our financial flexibility put us in a position to take advantage of an economically attractive opportunity to redeem $600 million in debt that matures in November, which will now be redeemed in early May.

Given the strong momentum and growth in our business, the Board has also approved a 10% increase in the quarterly dividend. And as we look forward, this will determine -- delivering consistent organic growth, together with our disciplined approach to expense management which should enable us to generate attractive operating margins over the long term, while at the same time, allowing us to continue investing in growth and the efficiency of our global business.

Invesco's position as an investor and client-led firm differentiates us in the marketplace. Combined with the depth and breadth of our capabilities, our competitive strength, we are well positioned to win in a dynamic operating environment. We continue to focus our efforts on delivering positive outcomes for clients while driving future growth and delivering value over the long term for our stakeholders.

With that, I'll turn it over to Allison. Allison?

Thank you, Marty, and good morning, everyone. I'll start with Slide 4. Our investment performance continued to be solid in the first quarter, with 59% and 68% of actively managed funds in the top half of peers are beating benchmarks on a 5-year and a 10-year basis. These results reflect continued strength in fixed income, balanced products and Asian equities, all areas where we continue to see demand from clients globally.

Turning to Slide 5. We ended the quarter with $1.6 trillion in AUM, a decrease of $55 billion from December 31. As Marty noted earlier, our diversified platforms generated net long-term inflows in the first quarter of $17.2 billion, representing nearly 6% annualized organic growth. Active AUM net long-term inflows were $800 million and path of AUM net long-term inflows were $16.4 billion. Despite the inflows, market declines and FX rate changes led to a decrease in AUM of $85 billion in the quarter.

The retail channel generated net long-term inflows of $10.4 billion in the first quarter, driven by inflows into global ETF products. The institutional channel demonstrated the breadth of our platform and generated net long-term inflows of $6.8 billion with diverse mandates, both regionally and by capability funding in the period.

Regarding retail net inflows, our ETF capabilities generated net inflows of $19.2 billion. Excluding the QQQ, our net long-term inflows were $18.7 billion. I'll provide a little more commentary on our global ETF platform on the next several slides. But before I do, let me take a moment and touch on flows by both geography and asset class on Slide 6.

You'll note that the Americas had net long-term inflows of $7.9 billion in the quarter. While we saw strength in ETFs and our institutional business, we did see pressure from select active equity strategies, including developing markets and the diversified dividend funds.

Asia Pacific saw net long-term inflows of $5.6 billion, representing organic growth of 11%. Net inflows were diversified across the region and included $3.2 billion of net long-term inflows from Invesco Great Wall, our joint venture in China.

EMEA, excluding the U.K., also delivered a strong quarter of net long-term inflows totaling $5.9 billion, representing organic growth of 16%. This was driven by strength in ETFs and sales of senior loan products. From an asset class perspective, we continue to see broad strength in fixed income in the first quarter with net long-term inflows of $4.8 billion. Drivers of fixed income flows included institutional net flows into various fixed income strategies through our China JV, global investment grade, stable value and various fixed income ETF strategies.

Our alternative asset class holds many different capabilities, and this is reflected in the strong flows we saw in the first quarter. Net long-term inflows and alternatives were $7.6 billion, representing organic growth of 15% and was driven primarily by our private credit business. This included 2 newly launched CLOs and net long-term inflows into our senior loan capabilities.

In addition, we saw net inflows into commodity ETFs in both the Americas and EMEA. When excluding global GTR net outflows of $1.6 billion, alternative net long-term inflows were over $9 billion. Strength of our alternatives platform can be seen through the flows that is generated over the past 5 quarters with net long-term inflows totaling nearly $27 billion, representing a 12% organic growth rate over this time when excluding the impact of the GTR net outflows.

Now moving to Slide 7. As Marty noted earlier, given the strong growth in our ETF and other index capabilities, we wanted to provide a little more detail -- more detailed view on the business. With over 15 years of experience managing indexed assets and a team of seasoned ETF professionals in different strategic regions, Invesco's index business has always differentiated itself due to the innovative and value-added nature of our products.

Examples of this include first-to-market types of products like the Invesco senior loan ETF, distinctive families of ETF like the low-volatility suite, the bullet share ETF and our diversified range of commodity pools. We created the fast-growing QQQ innovation suite just a little over 1 year ago, and it has grown to $5.4 billion at the end of the first quarter. We managed $528 billion in ETFs and other index capabilities. The platform is diversified in terms of strategies, asset classes and client geographies.

Over the last 12 months, net inflows into ETFs and other index capabilities were $87 billion, a 21% growth rate. Net inflows into global ETFs over this period were $66 billion, which was a growth rate of 17% and new fees from these flows were $130 million, a 16% increase over the prior 12 months.

Now turning to Slide 8. Over the past 5 quarters, the ETF industry has seen over $1 trillion in net inflows, a 12% growth rate. Over the same period, Invesco's 17% growth rate has exceeded that of the industry. In addition, our market share flows has exceeded our market share vending AUM for 4 of the last 5 quarters, increasing our overall global ETF market share of 40 basis points over this period to 4.9%.

Moving to Slide 9. Invesco is the fourth largest ETF AUM adviser globally. Our platform is much more diverse than just [full] beta. We continue to innovate our product line, focusing on specialized strategies and growth areas such as smart beta, commodities, fixed income and more niche, traditional beta. These capabilities carry higher fee rates compared to both beta fee rates.

On a fee basis, we rank fourth in the industry with a 5.6% market share of annual fees. Given the commoditized nature of both beta products, almost 60% of the industry ETF AUM carries a fee rate of less than 10 basis points. In contrast, our ETF capabilities are anchored on strategies that help investors achieve targeted investment goals. The value-add proposition of our ETF business is expressed through sought-after products.

If you exclude the QQQ, over 90% of our ETF AUM has a fee rate 10 basis points or higher with the average fee rate being 33 basis points. Our ETF flows in the first quarter were also differentiated with over 80% of our ETF net inflow being in products that carry a fee rate of 10 basis points or higher. Looking at net flows and these higher fee products, our market share was nearly 14% of the industry, almost 3x our market share of ending AUM.

Slide 10 shows that the ETF industry is expected to almost double in size to $18 trillion or 18% annually by 2025. Invesco is well positioned to continue to gain market share. With our global scale as well as being a leader in commodity, smart beta, fixed income and our focus on innovative and thematic offerings such as the QQQ innovation suite and ESG products, we are positioned to capture client demand around the globe.

Our ability to capture flows in excess of our market share is driven by a number of factors, including our understanding of markets and clients; multi-decade ETF relationships in institutional and wealth management channels; a fast-growing European ETF product lineup that is now the second fastest-growing ETF business in the region; and our ability to build loyalty with a new generation of retail investors.

Finally, the brand recognition of the QQQ elevates Invesco's visibility in the global ETF market. The QQQ product has become the fifth largest ETF globally. Its popularity has spurred growth in the rest of our global ETF platform and laid the groundwork for the launch of adjacent fee-generating products as part of the QQQ innovation suite. We launched that suite in October 2020, and it has been highly successful, growing to $5.4 billion by the end of the first quarter, as I previously noted.

Now moving to Slide 11. Our institutional pipeline was $29 billion at quarter end, consistent with the prior quarter level. Pipeline remains strong and has been running in the $25 billion to $35 billion range dating back to late 2019. Pipeline also remains relatively consistent to prior quarter levels in terms of fee composition. Overall, the pipeline is diversified across asset classes and geographies. Our solutions capability enabled 30% of the global institutional pipeline and created wins and customized mandates. This has contributed to meaningful growth across our institutional network.

Turning to Slide 12. Market volatility had a significant impact on our first quarter net revenue. It's the most evident in the $93 million decline in investment management fees from the fourth quarter, as noted on the slide. In prior quarters leading up to the first quarter, we have been generating strong year-over-year net revenue growth, growing at a 17% rate in the second half of 2021. This was being driven by both strong markets and organic growth.

As the first quarter unfolded, pressure from market volatility negatively impacted net revenues. As a result, our net revenues were essentially flat year-over-year. We did see improvement in money market fee waivers during the quarter as short-term rates increased and the Fed raised rates 25 basis points in mid-March. The net money market fee waiver impact had been running in the $20 million to $25 million range per quarter. The impact declined to $12 million in the first quarter. We expect the impact will decline to near $5 million in the second quarter. And by the third quarter, we expect little to no impact from money market waivers.

Total adjusted operating expenses were up about $10 million or 1% as compared to the first quarter of 2021. $6 million of the increase was due to certain changes to the pricing of transfer agency services that we provided -- that we provide to our funds, which went into effect in the third quarter of last year. The increased impact of property office and technology expenses, which was offset by a corresponding increase in service and distribution revenue.

Taking this into account, adjusted operating expenses were essentially flat year-over-year. Reductions in employee compensation were offset by higher marketing and G&A expenses, partly due to higher reopening activity in these areas as compared to the first quarter of 2021 when there was no travel. Going forward, the degree of activity in these areas is expected to increase as travel continues to come back.

Moving to Slide 13. We're very close to our goal of achieving $200 million in net savings this year. In the first quarter, we realized an additional $6.4 million in cost savings; $3 million of the savings was related to compensation expense; and $3 million related to a reduction in property expense as we continue to rightsize our facilities portfolio. The $6 million in cost savings are $26 million annualized, combined with the $167 million in annualized savings realized through 2021 brings us to $193 million in total or 96% of our $200 million net savings expectation.

In the first quarter, we incurred $22 million of restructuring costs related to this initiative. In total, we recognized approximately $240 million of our estimated $250 million to $275 million in restructuring costs associated with the program. We expect the remaining restructuring costs for the realization of the program to be up to $35 million. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.

Now moving to Slide 14. Adjusted operating income decreased $8 million from the first quarter of last year to $495 million, driven by the factors I previously noted. Adjusted operating margin was 39.5%, slightly lower than the first quarter of last year. EPS was $0.56 versus $0.68 a share last year with the main driver being lower nonoperating income.

In the first quarter of 2021, equity and earnings of unconsolidated affiliates was $37 million, favorably impacted by the improving CLO valuations at the time as compared to $4 million in the first quarter of 2022. Other gains and losses declined $30 million from last year to a loss of $20 million in the first quarter of 2022, driven by lower mark-to-market valuations of our seed capital due to negative market performance.

The effective tax rate was 24.2% in the first quarter. We estimate our non-GAAP effective tax rate to be between 24% and 25% for the second quarter of 2022. The actual effective rate may vary from this estimate due to the impact of nonrecurring items on pretax income and discrete tax items.

Slide 15 illustrates our ability to drive adjusted operating margin expansion against the backdrop of the client demand-driven change in our AUM mix and the resulting impact on our net revenue yield. Our operating margin 2 years ago in the first quarter of 2020 was 36%. At that time, we reported a net revenue yield ex-performance fees and excluding the QQQ of 41.8 basis points. In the first quarter of 2022, our net revenue yield declined 5.2 basis points to 36.6 basis points, yet our operating margin has improved to 39.5%.

We've been building out our product suite to meet client demand, and client demand has been skewed towards lower-fee passive products as evidenced by the mix shift between active and passive AUM. Realizing our business mix is shifting, we continue to be focused on aligning our expense base with these changes. This has enabled the firm to improve and maintain strong operating margin despite the client demand-driven decline in net revenue yields.

Now a few comments on Slide 16. Our balance sheet cash position was $1.3 billion on March 31, and approximately $708 million of this cash is held for regulatory requirements. The cash position improved from the first quarter of '21, even as we deployed $200 million in cash to fund share buybacks in the first quarter. Our leverage ratio, as defined under our credit facility agreement was 0.8x at the end of the quarter. And if you choose to include the preferred stock, the leverage ratio was 2.5x, both being substantial improvements in our leverage profile over the past year.

As Marty noted earlier, our stronger balance sheet and financial flexibility put us in position to capitalize on an economically attractive opportunity to early redeem the $600 million of senior notes that have a maturity date of November 30 of this year. As short-term interest rates increased in the first quarter, the make-whole related to an early redemption of the debt became attractive enough to provide a financial benefit to redeem the debt early, and it will be fully redeemed on May 6. This will save us approximately $11 million in interest expense over the period beginning in early May through what would have been the November 30 maturity date.

The make-whole and other fees will be approximately $5 million based on current indications, and these will be recognized at the time of redemption, but the savings and the fees will impact interest expense.

With respect to our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. As we stated, we intend to build towards a 30% to 50% total payout ratio over the next several years. We completed the previously announced share buybacks of $200 million in the first quarter, and our Board approved a 10% increase in our quarterly common dividend. Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility, and our first quarter results demonstrate that progress.

We remain focused on executing the strategy that aligns with our key areas of focus, continuing to invest ahead of client demand in these areas. At the same time, we're focused on optimizing our organizational model and disciplined expense management. This approach has resulted in a stronger and more resilient operating margin. This has also facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile, putting us in position to capitalize on opportunities such as the early debt redemption. As we look toward the future, Invesco is in a strong position to deliver value over the long run to all of our stakeholders.

And with that, I'll ask the operator to open up the line for Q&A.

(Operator Instructions) Our first question comes from Brian Bedell with Deutsche Bank.

Maybe just to start with the ETF presentation, and thanks for all of that detail. Just thinking about the sort of the base fee organic growth potential in ETF business, and how you called out the sort of the higher fee rates and the product development about sort of the long-term runway for further product development in this area, whether that's coming mostly from the innovation side or just add-ons to other products, maybe including thematic ETFs and sort of your optimism maybe for the overall ETF fee rate, excluding the QQQ potentially increase over time.

Yes, I'll make a couple of comments. Look, I mean, if you just look at the franchises Allison went through, I mean, it's evolved enormously over the last -- from when we got it in 2006. And it is an absolute source of strength. And the fundamental strength really is the noncap weighted part of the business, and product innovation and development is as fundamental to success in ETF business. So we anticipate that to continue. And yes, and again, I think the results speak for themselves, and we would anticipate that to continue as we go forward. So I don't know if that's helpful, Brian, but...

Yes. I'm sure there's a lot more to come in the future. And then maybe just on the geopolitical backdrop, what you're seeing, obviously, a lot of cross currents in China, of course, with lockdowns accelerating and then, of course, the whole situation in Europe. Maybe if you could just comment on how you're seeing flow trends evolve into the second quarter now that this is going on longer. And within Europe, whether you're seeing a difference in the U.K. versus the continent in terms of sales growth, in terms of whether the geopolitical situation there is affecting 1 region versus the other?

Yes. Look, it's a great point. And it is a contrast, right? But there is definitely a sentiment headwind, both in China and in Europe. And I'd say largely for different reasons, right? It's really the Russia-Ukraine situation, which is quite acute on the continent and in the U.K. It has -- I'd say the first element was a slowdown and people sort of moving more towards risk off. We'll just have to see as we go forward. This is so hard to predict. If it sort of settles in to still a horrible situation, but you could see some sentiment sort of balance out there.

With China, it's different. I mean it is COVID, and this is -- they're in a worst situation with COVID since the beginning, and that has definitely impacted sentiment and it is impacting flows from really equity products to fixed income products, and we continue to be in flows there. But again, I think it is an economy that the leadership is very focused on and they want growth, they need growth and anticipate they're going to do what they need to support the growth in China.

And I'd say picking up on your question of do we see a difference in sentiment between the U.K. and Continental Europe, I don't think I'd point to a difference in sentiment related to the geopolitical issues going on there. I think if you look -- if you kind of peel back the results in the first quarter, impact of the outflows in our GTR product are felt most acutely in the U.K. as the majority of that is based in the U.K., some headwind in Continental Europe.

But in terms of sentiment, a little bit of a shift -- a bit of a risk off sentiment and a shift into commodities, which is certainly driving some of the strength in our ETF flows in the first quarter. But I wouldn't point to any major differences between the 2.

The next question comes from Brennan Hawken with UBS.

So curious about the -- how we should think about fee rate pressure. I know it's always a tricky one to about, but maybe something that might help a little bit is to think about it tactically. What did you see in the trends through the quarter? And then based upon what we've been seeing so far, I know the markets are really volatile. So not necessarily asking for a forward look, but maybe what was the exit rate? And what are the general trends here so far quarter-to-date we think about truing up in -- at least tactically?

I'll do my best, Brennan, to take a stab at that. It's rather difficult, as you know. Maybe I'll start with just a reminder the net revenue drivers are always going to be organic growth, mix of flows and AUM and market dynamics. Over the last year, we've also had the impact of money market fee waivers, which, as I noted, we expect that to be going away. But trying to unpack that and develop a view around where we see it going over the next quarter or 2 is very difficult.

Maybe kind of, again, separating what are some of the trends we see. If we look at, in particular, the decline in our active net revenue yield, and we do provide some additional disclosures around active versus passive net revenue yield in the appendix of the presentation this quarter. I think some of what we see there is just this divergent market beta where both our emerging markets and China equities have underperformed relative to the developed market indices. And so that's put real pressure on our active net revenue yield. And we've also seen outflows, particularly in developing markets and some of our other higher-fee active equity products, while experiencing inflows into active fixed income, which, of course, are going to be on the lower end of the fee range.

Then you look at the passive net revenue yield and some of the declines there, and that's really a more, I'd say, recent impact of some of the really sizable low-fee large institutional index mandates that we put into the AUM mix last year, think IOOF as well as some of the growth of our ETFs in EMEA and the innovation suite, which while the innovation suite is fee generating, it will be on the slightly lower end of our passive fee rate. So those are some of the trends that we're experiencing. I think the biggest issue moving forward will absolutely be market dynamics as I think about what we could expect in the second and third quarter.

And I'd add to it. And look, it's the right question I ask and continues to be focused on and we, as a team, too. But you have to ask a question hand-in-hand with profitability. And I think what we've demonstrated is that we've been continuing to drive profitability with this movement in fee mix. And internally, and Allison talked about it, we continue to make sure our resources are aligned, are rightsized against where we're seeing the profitability within the organization. And again, I think, that said, that look back from 2020 forward, I think, demonstrates that we've been able to do that, and we intend to continue to do that, too.

And Marty, it's a great segue and it kind of tees up the next question, which is the environment has been challenging volatile certainly. Seems like there's less risk appetite here, at least in the near term. So how are you guys thinking about the expense base here this year?

Compensation trends seemed a little bit better than certainly we had been expecting. Is that better-than-expected comp sustainable in the near term? How should we be thinking about truing up our outlook for expenses? And how are you guys thinking about managing it given the environment?

Yes. Let me make a couple of comments and give it to Allison. Look, I think you're hitting on the high points. The first thing you have to do to be successful is you can't cost cut yourself to success. We've been very focused on it over the last few years, as Allison has spoken to. But really, we're in a position where driving the resources against things that really matter for the future, that's what we've been doing and also in this environment of what matters to our clients and employees, ensuring that we're keeping that right balance where clients continue to have confidence in us as an organization and quite frankly, the talent in the organization to keep them energized against generating the results.

And so that is something that we continue to be very focused on, we'll continue to do it, but ensuring that we're being responsible. And I'll stop and have Allison pick up on that and make some comments.

Thanks, Marty. So a couple of things. One, just a reminder, our expense base is about 1/3 variable and 2/3 fixed. So when we think about that variable component of the expense base, it just can't react fast enough when you have a pretty strong market downdraft like what we experienced late February and through March. And of course, we continue to experience that as we make our way through April.

So it takes some time for that variabilized expense base to fully catch up to the lower revenue. And at the same time, 2/3 of our expense base is fixed. And I think that's an area where we've been spending a lot of time, as you know, the last couple of years, really thinking about our overall cost structure and making some choices as we think about how to continue to shift that and lighten up some of the cost structure. And we've made really good progress, we believe, with $193 million of that expense base really well addressed over these last couple of years.

Getting back to your observations on comp, comp is well managed because we've been just really thoughtful and disciplined around headcount over the last year or so. And so while there is seasonality in our compensation expense in the first quarter, and it does tend to run $20 million, $25 million higher than the fourth quarter, comp was pretty well managed against that as we look at headcount. And, of course, the variable part of our compensation expense reflects the lower revenue we experienced in the first quarter as well.

As I think about the rest of our expense base, you see where we've continued to make some progress on our facilities expense. We will continue to address our facilities portfolio overall as we just think about our footprint and the role the office plays in our future and take advantage of some opportunities there. But the other thing I'd point to is we've been experiencing this very low- to no-travel environment for some time now. And as I think about our expense base going into the second quarter and beyond, I do expect we will continue to see some pickup in activity.

We saw some pickup in the fourth quarter and the first quarter. We get the start-stop as we all understand from kind of country to country and region to region. We still remain completely closed in China as an example. But we are seeing travel really start to pick back up and clients wanting to see us again across North America and Europe. And so with that, I expect a little bit of pickup in activity. I do not expect us to get back to pre-COVID levels for a variety of reasons, but I do expect it to be -- to trend just a little bit higher from here.

Long way of saying, while we do think there will continue to be this market pressure and revenue pressure, we'll be thoughtful and selective in managing our expense base, but not knee-jerk reactive because it's really important that we continue to invest for the business, that we expect will be here a year from now despite some of the geopolitical tension we experienced right this minute.

Thanks for that. Very, very thorough response. Just 1 clarifying question, Allison. You made reference to reviewing the facilities footprint. Do you have any expected time frame for when you all might have an idea about what that review will suggest for changes?

I think ongoing, because leases are -- they're rolling. And so as we have the opportunity to make decisions, we're being thoughtful and selective just given that we work in a different environment than we would have a few years ago. So it's going to be an ongoing opportunity. And I'd point just beyond our facilities portfolio to a lot of components of our expense base. As opportunities arise to address that, we're going to be very thoughtful about where we continue to invest and where we may be able to free that up to invest somewhere else.

The next question comes from Glenn Schorr with Evercore.

I'm curious, we've seen different markets. I'm just curious on the higher rates and the impact on flows. You've obviously mentioned them benefiting from the floating rate and bank loan product. You also mentioned some flows into some index products as people derisk. Can you give us the full lay of the land on where the pluses and minuses are coming impacted in the higher rates and what to expect as the Fed does its thing? Because I think it's always a little more on the positive side than people expect, I think they brace for impact of big outflows and there's some different moving parts.

I'll make a couple of comments and Allison will also. So Glenn, you're hitting on, really, the topic. I mean -- so where are we seeing flows? Allison said, in the high-margin fixed income, short duration bank loans. We have a very strong commodity suite within the ETF business. We've had that for a very long time, and it's really just in this market has become quite popular, as you would imagine. Real assets is another one, direct real estate will continue to be an opportunity for us.

Quite frankly, we're seeing marked improvement in our value equity capabilities. And that's sort of been an asset class over the last decade. There's not been a lot of interest. We'll have to see what the client demand is for that, but strong investment performance coming on the back of it. So again, we're going to -- it's really the breadth of this product lineup that -- it's not a sort of 1 answer to the marketplace. And I think we're well suited for the environment that we're going to go into.

And the only thing I'd add to that is just not surprisingly, investors are going to be looking for more floating rate credit-sensitive assets, and that's really what you see driving the strength in our senior loan flows and where we would continue to see demand. And I think it's, again, the breadth of the capabilities we have there are well positioned to capture that demand.

And maybe just a follow-up on -- related to MassMutual. Obviously, an even bigger owner now. Can you remind us what you're managing for the general account? What kind of flows you're getting out of retail and what the future holds in terms of the future synergies between the 2 organizations?

Sure. I'll take that. So in terms of what we're managing for them, we manage about $5 billion on their broker-dealer platform. They have also committed over $1 billion to various Invesco alternative strategies. So the relationship is, I would say, mutually beneficial and has the opportunity to continue to grow and expand from here.

As you note, they are a larger owner. They continue to be very bullish on the overall profile of Invesco and our opportunity to continue to grow market share and position our product capabilities to capture the demand that's out there. So we're working with them really on both sides of the ledger as we think about the opportunity we have to manage more on their broker-dealer platform and also the opportunity that we have together to co-invest in various alternative capabilities and strategies.

You want to add anything about that, Marty?

Again, just it's a very strong relationship strategically. And we're both looking for ways that we continue to mutually benefit from the relationship as we go forward.

Our next question comes from Robert Lee with KBW.

Maybe a question on the Great Wall JV. So I just want to think about the economic impact of it. Obviously it's been a strong source of flows the last couple of years, even if it's slowing down right in the moment. But what's the right way to think of the economic contribution? I believe most of noncontrolling interest is from the Great Wall JV? Or so if we're trying to think of its impact, is it as simple as just adjusting that for your 49% share? Or is there a different way that we should be thinking of it?

Let me start with, when you look at our non-GAAP results, we look at that in terms of -- in revenue, you see 100%. And then below the line, we back out the 51% we don't own. So we can spend some time walking through that, making sure that's clear, but that's how it's reflected in the P&L. So you see 100% on the top line, but by the time you get to the bottom line, it reflects 49% of our ownership. Is that your question, Rob?

Well, yes, I guess if I think of the 20 -- I guess my understanding was that the $29 million of noncontrolling interest was mainly the 51% that flows -- was mainly the Great Wall JV, right? So that -- be that 51%?

Yes. That's correct.

Yes. Okay. Great. And then...

Correct. So as -- yes, go ahead. Sorry.

No, no, no. That -- well, please finish your comment. Sorry.

No, there was nothing else to add. Sorry, go ahead, Rob.

Okay. We're just back and forth. But sticking with the Great Wall JV, and I know this has come up in the past. And I know for a while, you've been looking at how you get a majority stake. Can you update us on that?

And more specifically, given that understanding you have operational control of the JV and you run it day to day, year to year. But can you maybe update us what kind of maybe safeguards you feel like you have? You haven't been able to get to the majority ownership, still a minority ownership, even though you have operational control. Are there other safeguards we should be thinking of that kind of help protect your position in that joint venture?

Yes. Let me make a couple of comments. And look, you're hitting on the most important part. And from the beginning, we've had management control and that's really why we've been successful. And that has really been the competitive differentiator with us versus many of our competitors in the market.

The reason for not getting the majority, this in and out on COVID is just not helpful, right? It's just in lockdown. And every time we start to get to -- it really was geopolitical elements, I'd say, probably 2 years ago, and has really been more of the COVID lockdown right now. And until that calms down, we're not going to get -- we're probably not going to get it done for a few quarters. We'll just have to see how that goes.

The desire is there on both parties. The pathway is something that we know what we want to accomplish, and we will in time, but I would not be worried about the risks associated with the relationship. It is very strong and very well laid out for us as an organization.

Our next question comes from Bill Katz with Citigroup.

So maybe just starting with the balance sheet a little bit. I appreciate the update on the debt for May. And as you think about into the second half of the year, can you talk a little bit about what your priorities might be? How much sort of residual cash you're willing to run with on the balance sheet between sort of excess cash and required cash, and then maybe the delta between incremental debt repurchase versus share repurchase, just given where the stock is trading?

Sure. So I'd say, in terms of priorities, just overall, our capital priorities are consistent and just, first and foremost, reinvesting in the business to support future growth. We continue to prioritize that and will, and you've seen that. And I think that's what's put us in a good position to capture the flows we did in the first quarter despite a really challenging environment.

Next is to maintain a strong balance sheet and then to return excess cash to shareholders. So I actually think we checked each 1 of those boxes nicely in the first quarter as we had the opportunity to further strengthen the balance sheet and return cash to shareholders through the dividend increase and share repurchases.

As I think about moving forward, when we get on the other side of redeeming this debt, and I'll point to the fact that we'll be using a combination of cash and perhaps some draw on the revolver to early redeem that $600 million. And so it does -- we have been building cash in anticipation of paying this debt off at the end of this year. We pulled it forward by 6 months. And it's a bit of a challenging environment as well in terms of just cash flow generation being slightly weaker than we would have expected or hoped for in 2022, just given the market pressure and dynamics that we're experiencing through revenue.

So against that, I think we will continue to be focused on in cash so that we can be in an opportunistic position to reinvest in the business and to think about continued progress on the balance sheet. Our next debt maturity won't be until 2024. So we've got some time in advance of that next $600 million maturity.

I think I missed the last part of your question. I think you asked something about share repurchases.

I was just trying to understand, like as you think about maybe second half of the year and you pay down debt and multimarkets will stabilize, how much residual cash you're willing to work with on the balance sheet? And then when you sort of look at the stock trading, you're sub 20 versus your next debt payment not coming due until 2024. How do you think about just sort of buyback versus further husbanding of capital?

Sure. I think in general, we'd love to see cash be somewhere around -- and I'm going to use generality here, $1.5 billion or so. That just puts us in a nice comfortable position beyond our regulatory requirement to have cash for opportunistic needs and also weather any downturns. And I do think as we think about this year, we're cautious not knowing what the environment might hold from this point forward. We're watching closely, and we're going to be -- we're going to err on the side of conservativity as we think about the impact the market might have on our overall revenue dynamics and cash position.

So I don't know if we're husbanding cash so much as being very thoughtful and prudent as we think about our balance sheet and keeping our balance sheet in a very strong position. We're operating in a different environment than we were 2 years ago. When I think about the first quarter of 2020 and how much pressure that puts on our balance sheet and on our profile overall, we're in a much, much stronger position 2 years later because of the work that we've done and because of our prudent approach to the balance sheet. And this would not be the time to back off that strategy.

Understood. Just as a follow-up, and I apologize, a bit of a 2-part unrelated question. Just -- I might have missed your commentary, Allison, just on the sequential decline in the equity and earnings line. And then the bigger picture question, just as you look at the alts bucket, can you talk a little bit about what you have coming in terms of opportunity for growth into maybe the second half of this year, any flagship funds or just general new product initiations? And then could you sort of clarify how much you're sort of getting tapping into the retail [demonetization]? I thought I heard $300 million, I just wanted to see if I heard something different.

Let me take the first one. Just in terms of equity and earnings, if you think about first quarter of 2021, there was a gain of about $36.7 million, that's because of the CLO marks at the time. So you had just CLO mark-to-market moving in a pretty strong upward direction in the first quarter of '21. Compare that to this quarter, which was about $4 million, so just modest gains there. But again, this is all just mark-to-market unrealized gains and losses. So that's the difference year-over-year.

As it relates to alternatives and opportunities going forward, I'll continue to point to our private market capabilities and what we've spent the last couple of quarters talking about both in terms of real estate and our senior loan capabilities. You're certainly seeing both of them be in demand right now, particularly the senior loan capabilities, as we noted. Just given the investor move towards short-term floating rate, credit-sensitive assets, it provides a really significant opportunity for growth in that asset class for the balance of the year. But also, our private real estate business does as well as we continue to grow our capabilities there.

Marty, do you want to add anything there?

I think you got it.

Our next question comes from Ken Worthington with JPMorgan.

Different parts of the real estate market have bounced back, others are still struggling. So I guess how are Invesco's direct real estate portfolio -- how is it positioned and performing here? And it does look like that both Invesco Asian and Invesco U.S. direct fund have been in market more recently. So how is fundraising going in those products if they haven't yet wrapped up?

And I guess maybe lastly here, the outlook for real estate transaction fees, I think you called it out in the quarter as being, I think, $10 million or $11 million in the quarter. Are we back to normal for those transaction fees? And if so, what does normal look like from here versus the depressed level that we saw more recently?

All right. Let me try to take that maybe in reverse order. On the transaction fee, I think you're pointing to a $10 million transaction fee that we noted is in other revenue, and that's really a property disposition fee within private real estate. So net inflows were about $300 million in real estate, but there's obviously transaction activity behind that and it was pretty broad across the platform.

I think we commented on the acquisition activity, it was about $2.1 billion in the quarter. But the realization, which is what can trigger the property disposition fees was about $1.8 billion in the quarter. And so from time to time, you're going to trigger some of those property disposition fees. I don't know if we could point to normal because it's going to be somewhat episodic in nature depending on the nature of those dispositions.

And then I think I'll add on to that, it's important just to remember that a large percentage of that AUM through realization doesn't actually leave Invesco, it's really redeployed into new properties. And so I don't know if I point to that as normal or something we should expect quarter-to-quarter. As I think about just again, coming back then to the part of your question around our real estate portfolio, it's pretty well positioned and well diversified across the different real estate classes, multifamily, office, industrial, retail. We've obviously been quite thoughtful over the last few years, given some of the various pressures on some of those categories.

It's also well diversified across regions. It is a global business. And so our strategy is not to be too concentrated in any 1 particular area or asset class. And I think there -- we feel like there are pretty strong growth profile -- growth dynamics for that one going forward.

Our next question comes from Dan Fannon with Jefferies.

I wanted to follow up. I appreciate the comments on the balance sheet, the flexibility in the capital and priorities. I guess the 1 area that hasn't been discussed is just M&A. And so curious about your appetite for potential M&A in this type of backdrop, alternatives or private market capability expanding that, certain areas of focus. Or if it's -- in terms of priorities, this is just further down the spectrum and not really something you're focused on at this point.

It's a good question. And I would really point to -- right now, as Allison has been talking about just on this call, really, private markets is a very important area for us. And we have the 2 fundamental strengths we've been talking about. And our head is focused on growing those organically right now.

But if there was an opportunity in the alternative space that complemented our current portfolio, we would surely be very open-minded to it. That would be the priority as we thought about M&A, but it's -- we're not waiting to continue to build that business. We're continuing to invest in it.

Got it. And then a follow-up on just the institutional pipeline. I'm curious, just the solutions business, if you could talk about the kind of client profile that you're typically having success with and expand upon that. We know some of the larger mandates last year, but kind of on the ongoing business.

And then within active equities, which also is a little bit larger slice of the pie, can you talk about what strategies are driving or where the demand is on that front from the institutional pipeline that you guys disclosed?

Yes. Let me talk about solutions. So it's -- the client breadth is very, very broad. It's from corner office wealth management teams in the United States using the solutions capability to large [sovereign] wealth funds around the world. So it really serves all different types of clients and doing various different services for them. But as we said, it's been fundamental to our success institutionally and very supportive of our wealth management business also.

And I think then maybe coming to the other part of your question there, part of what we're seeing in terms of the growth in active equities in the pipeline would be driven by China and some of the institutional mandates that we're seeing through our JV there. I would point to -- I mean, you note the pickup and just the overall component of active equity, not surprisingly as a result to the average fee rate of the one-not-funded pipeline, while it continues to be within our range of high 20s, low 30s. It's on the high end of that range, as you would expect. And our alternative mandates continue to grow there as well.

So the pipeline is shaping up quite nicely. It's certainly a leading indicator. We believe, of future AUM growth, and we're pleased with how that's shaping up. The pull-through this quarter was a little bit lower than usual. Somewhat in the normal range, but lower as we just saw some pushing of those mandates out given some of the geopolitical risk and a little bit of a pause on that. But the pipeline itself is shaping quite nicely.

Our next question comes from Patrick Davitt with Autonomous Research.

Just 1 on the ETF disclosure. The fee premium obviously that you highlighted, that is a great position to be in, but I think begs the question, if that doesn't just mean those funds are lagging the broader ETF industry in terms of seeing more compression.

So first, to what extent are you seeing pressure from competitors on those higher fee products in the ETF side? And second, what gives you confidence that those higher fee rates are defensible in the long run due to what we see with other ETFs -- more passive like ETFs?

Yes. So look, where the -- the fee pressure really comes in both betas, right, where there's any number of competitors and it's easy to get into. Obviously, it's dominated by a few. There's just been less of that across the industry once you leave that, and it's largely because there aren't many duplicative ETFs, and they are generating the returns and the results that clients want. And I would say as long as clients are feeling they're getting value for the ETFs, the fees will stay in place.

In the full beta side, there's just very little -- there are very few ways to compete other than for fees. And in the space in which we operate, there is the opportunity to differentiate. And so I don't know that we would say the fee pressure is lagging because you really can create a differentiated product offering there.

Our next question comes from Michael Cyprys with Morgan Stanley.

Just maybe coming back to expenses. I think, Allison, you mentioned the expense base is 1/3 variable, 2/3 fixed. I guess where would you like to see that over time? And what's the opportunity to shift more of the expense base to variable and what actions might we be able to take?

I would always love to see it go more towards variable. And if we had that opportunity, we'll push everything we can, but it's not totally realistic. So I think the opportunity we have is just really longer term, and it's broader based. As we think about the fact that our business continues to shift and you see that through everything we've discussed this morning, the real demand for our passive capabilities, it's creating a fundamental shift and just the revenue dynamics of our business. And against that, we've got to be very thoughtful about positioning the chassis of our expense base.

And so some elements of that are going to be fixed, but we've got to address even the fixed components to really reflect where demand is today and where we expect it's going to continue to be 3, 4, 5 years from now. And where we have the opportunity to variabilize the expense base, we will. Compensation is a pretty highly variable component of our expense base. We are a people-driven business, and we will continue to be a people-driven business. And so that gives us opportunity, but we're thoughtful about how we use that opportunity as well.

So it's hard to say exactly where else we can go, but I think the biggest thing we can do is continue to address some of our fixed costs. I'll point back to the properties portfolio as an example of that. As we think about facilities and the opportunity we have to take some fixed costs out, that's how we're thinking about really adjusting the operating expense base going forward.

And just given some of the changes that you've made to the expense base already, I guess what would you expect the pace of expense growth to be over the next few years, assuming flat markets?

That's hard to say, of course, given the inflationary environment we're operating in. I think in a lot of ways, inflation doesn't hit us in quite the same way it hits other industries, but I'm not sure we felt it entirely yet either. I'll point to travel as an example of that. I think the inflationary pressure on travel is going to find its way back into our expense base and that of others. I just don't know how long that environment might persist or whether or not it resets to some new level that we have to contend with.

I think we can manage our expense base reasonably well, again, putting aside market. The real unknown is just the overall macroeconomic environment and the inflationary impact on the expense base. I think that's the bigger probably pressure. I'm not going to call it risk, but upward pressure on our expense base as we think about just managing our business going forward.

Okay. Well, thank you very much. I appreciate the engagement and the discussion and have a good rest of the day. Much appreciated.

Thank you. And that concludes today's conference. You may all disconnect at this time.