Operator:

Welcome to Invesco's Second Quarter Earnings Conference Call. All participants will be on a listen-only mode through the question-and-answer session. [Operator Instructions]. As a reminder, today's call is being recorded. Now I'd turn today's call over to Mr. Greg Ketron, Invesco's Head of Investor Relations. Thank you. You may begin.

Andrew Schlossberg:

Thanks, Greg, and good morning to everyone. I'm pleased to be speaking with you today. During the second quarter, we had several bright spots of performance and growing business momentum against the continued complex market, economic and geopolitical backdrop. Leveraging our vast client network, our broad product suite and improving investment results, we continue to drive higher demand for our capabilities. For the period, we garnered $16.7 billion of net long-term flows, which is a 6% annualized organic growth rate, marking our best quarter in over two years. Importantly, we were in net positive long-term inflows in each of our three regions across active and passive strategies and in both our institutional and retail channels. We ended the quarter with over $1.7 trillion in AUM, which was up 12% from the prior year, reaching a record high for Invesco. We generated positive operating leverage with revenues up over 3% from the first quarter, and we expanded our operating margin by over 270 basis points to 30.9%. This resulted in adjusted operating income growth in the second quarter that was in double-digits on both the sequential quarter and year-over-year basis. As mentioned, the market environment remained choppy in the quarter, and while we saw some broadening and increasing demand for risk assets, general uncertainty and continued higher interest rates have impacted client investment behavior and our business results. Notably, after an up and down April and May, most major equity indices rallied towards the end of the second quarter. U.S. markets continue to lead the way with the NASDAQ gaining 8%, followed by the S&P 500 increasing 4%. However, the theme of narrow market returns continued with the S&P 500 equal weighted index by contrast declining by 3% in the quarter. Equity returns outside the U.S. were mixed with the MSCI emerging markets up 4%, Asia up 2%, and Europe down 1%. Improvement in China's equity markets, which were up 6% in the quarter were a welcome bright spot. On the fixed income side of the market, the Bloomberg global ag index declined by 1% in the quarter, while most either major bond indices were relatively flat. All of that said, we have plenty of reasons to be optimistic that with increasing market and interest rate clarity, a broadening of participation will continue to take hold and investor appetite for more duration risk on and global oriented assets will increase. So moving on to Slide 3 of the presentation, we continue to believe that our advantageous market position and clarity of strategic focus provides us with the tools to deliver enhanced operating performance and returns for our shareholders. Specifically, we have built a strong global footprint with scale businesses in the U.S. and other key developed markets and a significant and unique Asia Pacific profile, which includes hard to replicate and a leading 20-year-old joint venture in China and 30 years of longevity in the growing Japanese market. We have also developed a diverse yet focused range of active investment strategies. This includes both public and private market strengths and a multi-asset profile that empowers Invesco to meet a range of client demands, provides us diversification to perform in various market cycles and allows us to adjust as secular changes continue to develop. One of those secular trends is the continued client appetite for ETFs. Here, again, we are extremely well positioned with a scaled and growing suite of capabilities. Our focus is on innovation and providing access to passive factor and active strategies. Our ETF franchise continues to gain market share globally, while accelerating its profitability and its overall contribution to the firm. Finally, a hallmark of Invesco is our leading distribution platform. It's an area of particular strength in the U.S. wealth management market, which is the world's largest asset channel and an area with significant growth potential, particularly given the democratization of certain asset classes like private markets. Our strategic focuses, which you can see in the middle of Slide 3 are predicated on prioritizing the intersection of market size and secular change with Invesco's unique position to drive growth in the highest opportunity regions, channels, and asset classes. As you expect, our top priority is investment performance, which is key to winning market share regardless of overall client demand of highest order is continuing to enhance the quality of our active equity strategies and thereby driving greater retention and net flows into this important segment. We have tightened elements of risk management and the relationship between investments, products and distribution has never been stronger. Our investment teams have started to put up much better performance numbers, which I'll highlight momentarily. An additional area of focus is on a profitable organic growth. A significant driver of this is through our focus on high demand, scalable investment capabilities and delivery vehicles. In this regard, we are continuing to work to improve the operating leverage and profitability of our fixed income and multi-asset capabilities on the asset side of things and ETFs and SMAs on the vehicle side. Furthermore, we have a focus on private markets. We have a very strong institutional footprint, which has been historically focused on real estate and private and alternative credit. We are now taking steps to bring those capabilities into the faster growing wealth management space, while continuing to tap into ongoing demand in institutional markets globally. More tactically, we're focused on taking next generation technology and deploying it through our platform at the enterprise distribution and investment levels. And finally, we are improving the financial flexibility of the firm. Strengthening the balance sheet and generating operating leverage as we continue to deliver better returns for our shareholders. These are the outcomes that we're seeking to achieve through the key performance indicators that are outlined on the right-hand side of Slide 3. They are also the themes at the forefront of today's discussion on second quarter results. So flipping forward to Slide 4. Against the backdrop of the aforementioned market conditions and Invesco's strategic priorities and strengths that I just outlined, you can see on this slide the key flow drivers across our investment capabilities. Our strong organic flow growth in the second quarter continued to be led by our global ETF franchise. During the period, we continued to gain market share in this segment, recording $12.8 billion in net long-term inflows, which represented a 13% annual organic growth rate. This was our highest growth ETF quarter in over two years, and we ended the period with a record high of $415 billion in long-term ETF AUM. Growth this quarter was led by our equity innovation suite, our factor-based equities and our fixed income bullet shares franchise. The QQQM is our fastest-growing ETF and is now the third largest fund on our platform. This innovative product leverages our QQQ popularity, but we earn a direct fee instead of the marketing benefits we received on the QQQ trust, which equates to around $200 million annually. We also saw strong growth from EMEA this quarter with over $5 billion of net inflows, and we recently broke through the $100 billion mark of ETF AUM in that region. Additionally, we continue to innovate to meet client needs, Invesco is one of the few global asset managers capable of servicing clients to one customizable frost regional ETFs for exacting exposures such as the recently launched sustainable energy ETF, which garnered $1.6 billion in assets at its launch in June. The continued advantage of ETFs are evident in both passive and active formats and across all channels creating even more opportunity for expansion in this space. Shifting to fixed income. We continue to believe that as investors gain greater clarity on inflation and Central Bank interest rate policy, they're going to move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies. Though this anticipated shift may be more protracted than originally expected, we continue to see some green shoots. During the second quarter, client demand accelerated, and we garnered $1.6 billion in net long-term inflows into our active fundamental fixed income strategies, which is in addition to the $2 billion of fixed income ETF flows achieved. Active inflows were driven in part by municipal bond strategies delivered through our mutual funds and our SMA platforms. We ranked in the top five overall in munis and number two for high-yield munis, we're also well positioned in SMAs with over 50 strategies placed to more than 80 broker dealers in RA platforms. Our retail SMA offering has rapidly expanded to over $25 billion and has had an annual organic growth rate of 28%, making it one of the fastest growing in the industry. We're also positioned with fixed income strategies in our institutional channels globally. In this quarter, we had solid net inflows driven by investment grade strategies sourced in the Asian regions. We remain well positioned across the risk and duration fixed income asset classes and have plenty of reasons to be optimistic about our ability to capture flows as we continue to generate investment performance. Moving on to private markets. Here, we also maintained momentum in the second quarter, reporting net long-term inflows of $2.6 billion driven by the strength in our credit strategies, notably bank loans and CLOs. We also saw modest positive flows into direct lending as well as continued inflows into INCREF which is our non-exchange traded REIT focused on private real estate debt. This fund has maintained good momentum in the U.S. wealth management advisory space since its launch last year. It's important to note that our global real estate team has over $5 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters. Picking up on Asia Pacific managed assets, we generated exceptionally strong net long-term inflows of $6.7 billion in assets managed in this region. This was led by our China JV, where our net long-term inflows of $8.5 billion in the second quarter surpassed the full-year of 2022 and 2023 flows combined. These flows were driven by our strong performing fixed income and balanced strategies where demand return from investors seeking higher returning fixed income products given the low rate environment in China. We anticipate that this dynamic will continue to play out on the coming quarters given the evolving economic environment in the market. We also launched four new equity products this quarter in China, which added $200 million of flow during the period. Additionally, as part of a collaboration between our China JV and global ETF team, we launched in June, Europe's first ETF link to the ChiNext 50 Index, which is a fund with unique access to long-term growth potential in China. The ETF market in China has seen rapid growth recently, and we are uniquely positioned to gain share and be an early mover and innovator in this space. Picking up on multi-asset related capabilities. As noted, we saw modest net outflows attributable to lower fee quantitative strategies. And finally, the relative pressure on active fundamental equity flows did continue. However, as I have pointed out previously, we have seen moderation namely in the global, international, and emerging market segments. Net outflows in these strategies have slowed during the past several quarters to $1 billion to $2 billion in aggregate which is markedly lower than the 2022 quarterly peak outflows where we sold $6 billion. A continued bright spot in our active fundamental equity capabilities has been our global equity and income strategy, which is among the top selling active retail funds in the growing Japanese market. This fund delivered an incremental $1.2 billion of net inflows in the second quarter and its rapid rise in AUM has placed it in our top 10 active equity funds at Invesco. Overall, we're confident that the high quality active equity management will continue to be an area of significant portfolio allocations, and it's a reason that we are so acutely focused on investment quality and performance in this area. So moving on to Slide 5. This chart provides an alternative aggregation of our AUM and our flows to provide you with additional context on our results. From a geographic perspective, you can see that we delivered solid net long-term inflows across all three regions with particular strength in Asia Pacific, where we had over $10 billion sourced from clients in these markets. Strong growth in China was augmented by continued momentum in Japan, where we have seen institutional demand for fixed income, most notably investment grade as well as the continued retail demand for the aforementioned global equity and income strategy. It's important to note that this view of the Asia-Pacific region is a more holistic measure of the scale of our business than the previous slide. The AUM and flow numbers not only include the products that we manage in the region, but also the breadth of Invesco's other products managed globally that are sold into the Asia-Pacific market. An additional key takeaway from Slide 5 is depicted in the chart at the bottom center of the page. Here, you can see the significant improvement in return to positive net flows in our overall active investment strategies. This cuts across all asset classes, public and private markets. Furthermore, you'll note the graph on the bottom right of the page, the positive flows and strong improvement seen in our institutional channel. This is driven by demand pickup across both public and private credit. So moving forward to Slide 6 for an update on investment results. As I have reiterated several times this morning, investment performance is a top priority of our firm. This slide shows our overall results relative to benchmark and peers as well as our performance in key capabilities where information is readably comparable and more meaningful to driving results. Investment performance was solid in the second quarter, on a one, three and five year basis, overall performance improved incrementally from last quarter with 70%, 65% and 76%, respectively, of our AUM beating its benchmark. Additionally, on a one-year basis, we have improved, and we now have nearly 70% of our AUM in the top half of peers and 45% in the top quartile of peers. At the asset class level, we continue to have excellent fixed income performance across nearly all capabilities and time horizons, supporting our strong conviction and our ability to attract flows as investors deploy money into these strategies. Specifically, 92% of our fundamental fixed income capabilities are beating their benchmark with 83% of our AUM in the top half of peers on a five-year basis. We're acutely focused on improving fundamental equity performance and have been making progress here as well. Half of our funds are now performing above benchmark on a one-year basis, with 52% beating peers on a one and five-year basis. So hopefully, the overall additional context and the more detailed disclosures that we have shared today and last quarter have further clarified our results, outline the significant opportunities that we have before us and provided more clarity on our approach to capitalize on them over time. So with that, I'm going to turn the call over to Allison to discuss our financial results for the quarter, and I look forward to your questions.

Operator:

Sure. [Operator Instructions] Okay. And our first question comes from Glenn Schorr with Evercore. Your line is open.

Allison Dukes:

That is correct, Glenn. We continue to see within both of those capability categories, just continued mix across the product spectrum there, no real fee adjustments.

Andrew Schlossberg:

Yes. Maybe I'll start, Glenn, thanks for the questions. On the fixed income side, it's partially RFP volume. It's partially flow volume, it's partially demand that we're hearing towards longer-duration assets moving away from some of the short-term fixed income. And that's happening on both the retail and the institutional side of things. I don't know if you want to add anything on fixed income, I'll come back to that?

Andrew Schlossberg:

And then on Asia and China, in particular, yes, we're seeing very, very strong demand. Right now, it's been principally in the fixed income and fixed income plus, which is essentially balanced. A little less on the equity side. but the flows have been quite strong, and we think some of the developments in China on the economic side and some of the market reform are pretending well for client activity in China.

Operator:

Thank you. The next question comes from Brennan Hawken with UBS. Your line is open.

Allison Dukes:

Good question. Good morning, Brennan. I would say maybe somewhat, but the way I would think about it and just keep in mind, last quarter, we had a real anomaly as it related to the proxy costs that you saw coming through both service and distribution fee revenue and then offset on the third-party side. And so I feel like you almost have to throw out last quarter a little bit. But as you look at the relationship across a series of quarters, I think it's important to focus on the relationship between service and distribution fees and third-party distribution contra revenue because there's such a pass-through between those two elements. And then looking at that as a percentage of management fees, it runs relatively consistent in that 13% to 14% range, which I think we're finding to be a better relationship than just third-party as a percentage of management fees. But I do think there is some element of that mix shift in there to focus on as you think about that relationship going forward.

Allison Dukes:

I don't think I would think of it as a tailwind so much as those types of expenses are going to vary quarter-to-quarter as you have everything from legal, consulting, outsource costs, implementation costs of various projects we've been trying to provide transparency into the alpha implementation, but that is, of course, not the only thing we're ever working on as we think about just our overall platform and system. So I wouldn't think of it as a tailwind, but you should expect a little bit of variability in that line item quarter-to-quarter. Travels in there, entertainment, client entertainment, all of it.

Allison Dukes:

Sure.

William Katz:

Thank you very much. I was wondering if you could unpack in your comments around sort of diving a little bit more into retail democratization beyond maybe INREIT. What else are you working on? And are there any incremental distribution relationships that may be on the horizon?

William Katz:

Okay. Just as a follow-up, coming back to capital return. Thank you for the updated guidance. So as you think about strategically from here, is it now more of a capital return story as you normalize and grow earnings? Or is there an eye on potentially increasing M&A to maybe bulk up incremental growth, particularly in the alternative side. Just trying to understand how we should think about the durability of that capital return?

William Katz:

Excellent. Thank you.

Craig Siegenthaler:

Thanks. Good morning everyone. We wanted to come back to the 6% organic growth rate in the quarter. Given the sizable ETF inflows versus net redemptions in fundamental equities, how did organic revenue growth trend relative to 6%?

Craig Siegenthaler:

Yes, Allison. So on an organic revenue basis and it's tough for us to do it, because we just have by kind of major asset class. We don't have the underlying funds. But I wanted your perspective on kind of how the organic revenue growth was trending relative to the 6% AUM organic growth?

Andrew Schlossberg:

Yes, I would only add that some of the headwinds that we've been facing over the last couple of years, a couple of them are starting to abate a bit. In particular, the flows out in Asia and in particular, China and flows into alternative credit like bank loan are net positive towards what you were asking and Allison was describing.

Allison Dukes:

So I think the best way to answer that question as it relates to implementation is just project timing overall. And we will continue to be in implementation mode through '25 and really through '26. We expect to transition our AUM onto the Alpha platform in a series of waves and those ways are going to begin in the fourth quarter of this year, and then they'll run through 2025. So that implementation is really we're in this testing phase. We're in the learning phase. We're really working through planning for these various ways. And I think implementation will run through at least '25, and then we will be working on decommissioning testing and running parallel through '26 on the other side of that.

Operator:

Thank you. And our next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Allison Dukes:

Yes. I think I focused less on the intra-quarter monthly and maybe more a little bit on the exit rate probably to get at your question because within the month, within the weeks, within the days, it could vary so much as markets fluctuate so much. And I think, hopefully, also you've seen in the additional disclosures in the back, just further detail around the various market indices that really impact us. Given our global footprint, we have such a diversified set of exposures that you can't really manage which market is moving in what direction on any given day. So I would point to the exit rate, which the exit rate for the second quarter was around 25.2 basis points. So a touch lower than the average net revenue yield for the quarter. Of course, even in the first few weeks of July, we continue to see puts and takes in all of that. So it's very difficult to predict exactly where it would end up. I continue to come back to, we're focused on driving revenue. We're focused on driving organic revenue. And net revenue yield is simply a function. It's math of where the flows are coming from. The organic flow rate of 6% is something we're quite proud of, and I think a testament to the breadth of our platform and how aligned it is with client demand.

Patrick Davitt:

Excellent. Thanks. And then a broader question. It's obviously nice to see the big recovery in China flows, but the political rhetoric is obviously getting pretty heated with China, and it seems both parties, it will be a pretty popular punching bag. So I know it's tough to gain these things out for sure, but what assurances do you have? Or could you give that the JV would be safe on a broader trade war between the U.S. and China? Thanks.

Allison Dukes:

Yes. I think I'd just underscore that by saying that the flows and the performance of the JV are entirely dependent on the performance of the Chinese domestic economy. So to the extent the trade war is challenging for the domestic economy there that would put pressure on overall AUM through those both flows and market performance there. But that, likewise, probably would put some pressure on our investments in the United States as well. So think about it less as a political football and more highly dependent on the strength of the Chinese economy.

Operator:

Thank you. And our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Andrew Schlossberg:

Yes. Thanks for the question. And yes, the growth has broaden down. I think we have something like 10 ETFs just in the U.S. that have had more than a $1 billion of inflows in the past six months year-to-date. So the business is starting to broaden out. Some of the key growth strategies that we have, obviously, as the market starts to adopt active ETFs, especially here in the U.S. market. That's a key area of focus. We were one of the early movers in active ETFs. We have a little over $10 billion in that space, but more importantly, we have around $30 billion of assets that are affiliated with our investment teams playing some role in that investment strategy. And we think that's going to continue to grow as the vehicle remains popular, but more than passive gets put into those vehicles either through fundamental or quantitative techniques or both. The other element of growth for us is beyond the United States. And we talked a little bit about our expansion and our growth in Europe, which is now over $100 billion in AUM. And you can see the demand starting to grow throughout Asia, China, Japan, in particular. So geographically, we feel like there's earlier days in some of those markets outside of the U.S. And then our lineup, which has been historically heavy on equities, one of the areas of greatest growth has been in the fixed income space. And we continue to think that passive fixed income alongside fundamental is going to be a pretty significant area of growth going forward. And then as alternative strategies, in particular commodities continue to, or find favor back in the market and things like alternative credit and bank loans continue to grow in demand. We're very well placed in those spaces. So the growth has been good. I think the growth can continue to be as strong and just more diverse as we go ahead.

Andrew Schlossberg:

The last thing I'll just say on net flows, but on profitability, the ETF business continues to scale well and the profit margin expansion from that business and its contribution continues to go from strength-to-strength. So we have a very scaled platform that does deliver accretive profitability.

Allison Dukes:

Sure. I think I'd go back to our guidance for the year, which was we've said all things being equal back on December 31 with AUM at December 31, but overall expenses would be in the $3 billion range. Obviously, we've done quite a bit better in terms of AUM since that guidance, and you can see that impact overall on comp expense, in particular, given the Alpha guidance of around $10 million plus or minus in terms of implementation costs each quarter, all else being relatively consistent and equal and not a lot of puts and takes other than back to Brennan's question, I mean, things are a bit lumpy quarter-to-quarter, and I just can't predict the lumpiness. I'd come back to comp to revenue. And I know I'm answering more than just G&A, but we manage expenses in totality. Comp to revenue is trending above 42% for the year. I think it will be closer to 43% for the year. And the rest, I would say, relatively consistent, absent some lumpiness, but I can't predict quarter-to-quarter. So not entirely precise, but about as precise as I can get, and I wish I knew with real precision as well, but I think that gives you a reasonable expectation for the year.

Allison Dukes:

Thank you.

Daniel Fannon:

Thanks. Good morning. Andrew, I wanted to follow-up on one of your comments from, I guess, was Slide 3 where you talked about profitable organic growth. I mean, that seems like something you would always be focused on. So curious if there's anything more behind that in terms of what's maybe you're looking to exit certain RFPs or businesses? Or is it just more prospectively like what business you're looking to take on versus maybe what you might have done before?

Daniel Fannon:

Okay. That's helpful. And then just as a follow-up, I was hoping to get an update on the MassMutual relationship in terms of what them helping you see them build your alternative franchise and then also tapping into your product set into their broader distribution force, if there's been any update there?

Allison Dukes:

Yes. I would just -- I mean they continue to be great partners investing across a variety of capabilities from our real estate to our CLO capabilities, in particular and just strong partners as we evaluate future product launches. And as Andrew noted, they've really amplified our ability to leverage our own balance sheet to get products to market faster.

Andrew Schlossberg:

And to utilize the capital for other sources and needs as well.

Kenneth Worthington:

Great. Thank you for taking the questions, squeezing me in. You saw a nice recovery in institutional flows. Can you size the institutional pipeline? I think you used to give one not funded and tell us a little bit about the major buckets like factor and solutions that haven't come up in conversation thus far.

Andrew Schlossberg:

Ken, the only thing I'd add is, as we've said on previous calls, I think things have slowed down by about -- this is for the industry, by about a quarter or two on fundings. I think some of the progress we're seeing is that maybe that pace is picking up a little bit. The strengths, in particular, on public and private credit. And as Allison said, it's really cross-regional, but I'd say Asia and Europe, in particular, seem to have picked up at a greater pace.

Kenneth Worthington:

Awesome, thank you very much for the color.

Greg Ketron:

Yes, operator, we do have time for another question.

Michael Cyprys:

Great, thanks so much for squeezing me in. Just a question on Japan. I was hoping you could elaborate on your footprint and business in Japan today. Hoping you could talk a little bit about how that business has grown. And then looking out, maybe you could talk about your outlook and how you see the opportunity evolving in that marketplace just given the shift in the market out of deflation and some of the recent regulatory changes to expand the NISA tax-exempt accounts, where -- what sort of products and strategies do you expect to see growth evolving in that marketplace and also the opportunity for ETFs as well? Thank you.

Michael Cyprys:

Great. Thank you so much.

Operator:

Okay. And the next question and our last question comes from Brian Bedell with Deutsche Bank. Your line is open.

Andrew Schlossberg:

Yes. Let me start with the back end of the question, and then I'll go to the front. Yes, we definitely see demand picking up in the active ETF space. Right now, it's been largely into active fixed income and we launched some new strategies that were options-oriented strategies on equities, but that's driving off of more passive benchmarks. I think in time, fundamental active strategies, or some combination of fundamental and quantitative active strategies are going to find their way into the active ETF space. And we're very much in the development stage of that right now. And so I think that's something to watch over the next couple of years. In the more short run on improving our net flow rate, it is going to get driven in the first instance by improved investment performance and we are starting to see that, in particular, in the domestic equity categories, U.S. as well as other developed markets around the world. But it's also going to need to come with some more demand from clients. And that we really haven't fully seen yet redeveloped in the U.S. wealth market. Every day, we're focused on it. Our sales team is working closely with our product design teams and our investment teams both on the retention side where there's performance improvement that we need to be in front of clients with, but also growing the gross sales rate in the marketplace. So I think, look, I think the performance is improving and that's a significant step in the right direction that we expect going forward.

Andrew Schlossberg:

And as I said before, I think the broadening out of the markets, potentially into value markets, small mid-cap non-U.S. I mean we have very strong investment performance in those areas. So with some pockets of demand returning, we're cautiously optimistic.

Andrew Schlossberg:

Okay. So in closing, I really want to mention that, hopefully, it came through that we're well positioned to help clients navigate the impact of evolving market dynamics and subsequent changes that are happening in their portfolios. As market sentiment improves, this should really translate to even greater scale, performance and improve profitability. And given the work we've done to strengthen our ability to anticipate, understand and meet the evolving client needs, I could say I'm very excited for the future of Invesco. I want to thank everybody for joining the call today, and please continue to reach out to our Investor Relations team for any additional questions. We appreciate your interest in Invesco and look forward to speaking with everybody again soon.

Operator:

Welcome to Invesco’s First Quarter Earnings Call -- Conference Call, excuse me. All participants will be on a listen-only mode until the question-and-answer session. [Operator Instructions] This call will last one hour. To allow more participants to ask questions, one question and a follow-up can be submitted per participant. As a reminder, today’s call is being recorded. Now I’d like to turn the call over to Greg Ketron, Invesco’s Head of Investor Relations. Sir, you may begin.

Andrew Schlossberg:

Thank you, Greg, and good morning to everyone. I’m pleased to be speaking with you today. Economic conditions remained relatively resilient in the first quarter and even though these diminished expectations for Central Bank cuts this year, equity markets continued to rise. The S&P 500 gained 10% during the quarter, again making it the best-performing major equity index. As the quarter progressed, market breadth began to improve, though gains in large-cap growth and tech stocks continued to significantly lead the U.S. equity market rally. More modest growth was recorded in developed markets outside of the U.S. In China, markets continued to lag, but economic indicators and sentiment are showing some signs of a bottoming. Fixed income markets were generally weak this quarter, with prices dropping as Fed expectations changed. During the quarter, we continued to see increase in client demand overall. We delivered $6.3 billion in net long-term inflows for an organic growth rate of 2.2%. Organic flow growth and signs of improving sentiment drove markets and assets levels higher again this quarter at Invesco, we ended the period with nearly $1.7 trillion in assets under management. Our resulting net revenue and adjusted operating income growth dropped 1% and 7%, respectively, from Q4 levels, which reflects where we saw growth against our diversified asset mix profile. We remain optimistic that with increasing market clarity, a broadening of market participation will continue to take hold and investor appetite for more duration, risk on and global oriented assets will increase. We are well positioned to benefit across our business in this type of environment. Now moving on to page three of the presentation and against this market backdrop, we highlight results in each of our investment capabilities. You’ll note that these categories align with those presented in conjunction with our net revenue yield and portfolio migration disclosures, which we’ve been highlighting the last several quarters, and Allison will expand on later in her comments. We are aligning disclosures in the way we speak about our business to present a more holistic and consistent view that encompasses all of our investment capabilities. And though each of these areas of our business is in a different part of its life cycle with different trajectories, these are the capabilities where we have invested resources and had conviction about the market and our position within it. The objective of our enhanced disclosure is to foster a better understanding of various components of our investment capabilities and their performance and potential in order to drive a clearer view of Invesco as a whole, our advantages in the market and our plans to drive profitable growth. Now turning to a deeper look into Q1 across each of these capabilities. An ongoing key driver of our strong organic flow growth is our ETF and Index platform. During the quarter, we continue to gain market share, recording $11.2 billion in net long-term flows, representing a 12% annual organic growth rate. This was one of our best flow quarters to-date, as we hit a record high of nearly $400 billion in long-term AUM. Growth this quarter was led by our equity innovation suite, notably our fund QQQM. This innovative product leverages our QQQ popularity, but with this fund we earn a direct fee on this product instead of significant marketing benefits. In a relatively short time, it has become our third largest ETF in our product suite outside the QQQ. Additionally, we continue to expand and leverage our active investment teams into our ETF and Index franchise. Our U.S. listed ETF strategies incorporating our active teams now exceed $25 billion in AUM across over 25 products and multiple asset classes. The advantages of ETFs in both passive and active formats remain a focus for Invesco and our clients. Shifting to fixed income, we continue to believe that as investors gain greater clarity on inflation and Central Bank interest rate policy, they’ll move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies. Though this anticipated shift may be more protracted given the mixed economic signals of late, we’re beginning to see green shoots and we’re well positioned across the risk and duration fixed income asset classes to capture flows. We did see continued momentum into fundamental fixed income with $1.1 billion of net long-term flows in the first quarter or nearly a 2% annual organic growth rate. Leading drivers included investment-grade strategies delivered through our institutional channels, as well as municipal bond strategies delivered through our mutual fund and SMA platforms. Beyond our fundamental fixed income capabilities, an additional $2.1 billion of assets flowed into our fixed income related ETF and Index strategies. Important to our fixed income demand story is our rapidly expanding retail SMA offering, which is one of the fastest growing in the industry with an annual organic growth rate of 24% and nearly $23 billion in AUM. We’re starting to see extension of duration with our top-selling SMA this quarter being the intermediate tax-exempt strategy and we’re seeing growing interest in our intermediate taxable investment-grade strategies as well. We are well positioned to continue to grow our retail SMA platform to support the client demand for this vehicle delivery structure, especially within the U.S. wealth intermediary market. We have a long-dated and established track record on our SMA platform that represents not only fixed income, but also traditional active equity and custom equity index SMAs. We see a lot of opportunity in this space and we look forward to continuing to share our progress with you. Moving on to Private Markets, we maintain momentum into the first quarter, with net long-term flows of $1 billion, driven by inflows in our credit strategies, notably bank loans. We also saw modest positive flows into Direct Real Estate, primarily driven by NCREF, which is our non-exchange traded REIT focused on the private real estate debt markets, which has had good momentum in the wealth advisory space since its launch last year. Additionally, it’s important to note that our Real Estate team has $6 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters, but greater market clarity is going to be required before we can begin to see significant return of demand and growth. Moving on to our Asia-Pacific Managed Assets, despite overall client sentiment in China remaining relatively weak, we did generate modest positive net long-term flows in our China JV, driven by equities, particularly in our fast-growing ETF lineup. This was augmented by the launch of four new products and we continue to believe that some early signs of recovery in China could bode well for a more constructive market as 2024 progresses. We maintain our conviction in this market and our leading position within it as the asset management industry matures with the development of local retirement and capital market systems in the world’s second largest economy. Beyond China, we also saw net inflows in our India business. We recently announced a joint venture with a leading Indian company for our funds business in that market. This partnership with the Hinduja Group will enable us to continue to expand our distribution to serve more domestic investors in the Indian market. In our Multi-Asset and Other related capabilities, we also generated net inflows led by our quantitative equity strategies, which were offset by outflows of remaining assets in our GTR capability in the U.K., which we decided to close last year. Finally, the relative pressure on fundamental equity flows continued. However, as I pointed out previously, we’ve seen some moderation in certain areas of active equity flows, particularly in the global, international and emerging market segments. Our net outflows in these strategies have moderated during the past several quarters to $1 billion to $2 billion per quarter, markedly lower than the 2022 quarterly peak outflows of $6 billion. One notable standout in our fundamental equity flows was in our global equity and income strategy, which is among the top-selling active retail funds in the growing Japanese market. This fund delivered an incremental $1.2 billion of net flows in the first quarter and its AUM has nearly tripled in the past year. Overall, our asset flows in the first quarter continue to demonstrate the breadth of capabilities that we offer to serve our clients’ diverse needs and perform through various market cycles. We believe that this positions us well in front of the rapid evolution underway in our industry. Our team remains focused on the value drivers that we believe create a competitive advantage to deliver sustained, strong asset flows, notably investment quality, product breadth and differentiation, and exceptional client engagement. So, moving on to Slide 4, investment performance, which is always a top priority of our firm and is displayed on this slide. We’re showing overall results relative to benchmarks and peers, as well as our performance and key capabilities where information is readily comparable and more meaningful to driving company outcomes. Overall, investment performance was solid in the first quarter. On a one-year, three-year, and five-year basis, 66%, 64% and 75%, respectively, of our AUM is beating its benchmark and around 70% of our AUM is in the top half of peers across all periods. We also have a significant number of funds that are now in the top quartile of performance, with 46% hitting that mark on a five-year basis, which is a considerable improvement over the last several quarters. We continue to have excellent fixed income performance across nearly all capabilities and time horizons, supporting our strong conviction and our ability to attract flows as investors deploy money into these strategies. 92% of our fundamental fixed income capabilities are beating their benchmark, with 68% in the top quartile on a five-year basis. Fundamental equities, three-year and five-year performance has improved meaningfully over the past year, with 56% in the top half of peers on a three-year basis and 52% over five years. We’ve seen strengthening results across many of our domestic and global equity strategies as well. So hopefully you find this more streamlined approach to discussing our results, our investment capabilities and investment performance more straightforward and useful as you think about Invesco and its potential. As we continue to simplify and focus our business, we are also tightening our financial discipline, which will enable the allocation of resources to drive innovation and growth in our investment capabilities. With that, I’m going to turn the call over to Allison to discuss our financial results for the quarter and I look forward to your questions.

Operator:

Thank you. [Operator Instructions] Okay. And our first question comes from Dan Fannon with Jefferies. Your line is open.

Allison Dukes:

Sure. There’s definitely a bit of an anomaly in those line items this quarter. We’ve got an elevated $21 million of fund related expenses, which really shows up as a fee and that was related to a fund proxy expense. The fund Board determined that a shareholder meeting was necessary to elect new trustees. That’s a pretty infrequent occurrence. In fact, the last time that occurred was in 2017. But as a result, there’s a $21 million fund related expense that shows up in that third-party contra revenue. It’s offset -- the majority of it is offset. There’s $18 million that was paid for by the funds and that would be recorded as Service and Distribution revenue. So I think when you look at the quarter-over-quarter change with year-over-year and the sequential quarter, you obviously see that large anomaly, not something we would expect to occur given the last time was in 2017. When you look about -- think about the relationship and you’re right, the relationship, just the ratio is running relatively high. If I look at third-party contra revenue, that usually runs about 41% to 42% of management fees. But it’d be on the higher end in some of the lower revenue years, just due to there’s fixed cost inside of that line item. I would expect it to be above the higher end this year, maybe somewhere around 43%. Again, just as we’re coming into the year, starting at a lower revenue trajectory. As you look back at 2020 as kind of a reference, it would be in a similar range back then. So I think that’s one way to think about it, Dan.

Allison Dukes:

So, your -- the question of what gives us confidence that fundamental equity is a continued headwind? I mean, I would say, it could still be a continued headwind. I think what gives us confidence as we look at the trajectory overall from here is that we continue to manage that exposure down or if the market effectively continues to manage it down, as well as client demand continues to be more for our passive capabilities than active. That is obviously an industry-wide trend. We don’t expect a change in that trend. So to be clear, we’re not expecting fundamental equities to necessarily turn into a strong tailwind, but we do think the magnitude of the headwind will continue to diminish as it becomes a less significant component of our overall AUM mix and we continue to grow the other categories and we are seeing strong organic growth rates as we’ve noted in many of the other categories. So one thing we can -- well, the several things we continue to focus on, and I know Andrew touched on this, we can continue to go into it, is investment performance. Very focused on the investment quality behind fundamental equities and making sure we continue to make good progress there and we are demonstrating progress there. There are underlying -- as we decompose our fundamental equities, there are underlying trends there that create headwinds, not the least of which is our exposure into both developing markets and global equities, which given some of the geopolitical challenges that are out there, continues to be an asset class that is not strongly in favor and that will continue to be a headwind so long as we have some of the geopolitical challenges underlying the trends for client preference there.

Dan Fannon:

Thanks for taking my questions.

Ken Worthington:

Hi. Good morning. Thanks for taking the question. High level, MSCI World and S&P were at all-time highs at the end of March. Invesco’s stock price has lagged this year and is down since the beginning of 2023. You touched on a series of points over the discussion this morning, but pulling it all together, as you review the stock price performance over the last 12 months to 15 months, maybe first, what is your assessment? And then, Allison, you highlighted that mixed issues have negatively impacted earnings and those have moderated. Can you help us better evaluate that mixed moderation is approaching the level that can better allow earnings to grow and better allow the stock price to perform better?

Allison Dukes:

And I’ll just touch, Ken, on the mix moderation. I think, look, there is just at some point a mathematical sort of tipping point that happens there as you think about our AUM mix and where the effective sort of net revenue yield is today based on the composition we have. As it gets closer and closer to what our passive net revenue yield is, there’s a bit of a terminal value there. We in no way expect our fundamental equities to go entirely to disappear. There continues to be strong demand there. In fact, our growth sales were quite strong. But you look at the underlying headwinds and pressures, again, particularly given some of our exposure and our tilt towards global and developing markets, it creates a lot of headwinds. But there is a terminal value there as we start to see the mix continue to diversify as ETF and Index become an even greater percentage of our overall portfolio. The organic growth there is creating positive net revenue growth. Fundamental fixed income, we’re seeing positive net revenue growth. We continue to see good net revenue growth and global liquidity and a lot of this just continues to be offset, not entirely, but moderately offset by fundamental equities. Those headwinds will diminish at some point, just given client demand and asset allocation.

Ken Worthington:

Great. Excellent. And just, Allison, as a follow-up, that tipping point comment, how close are we to that tipping point? How far in the future do you think that is or maybe we’re already there?

Ken Worthington:

Thank you both.

Brennan Hawken:

Good morning. Thanks for taking my questions. I’d like to start with the shift to -- the shift in expenses. The shift of some expenses into G&A and a method of signaling that these expenses could maybe eventually be cut or slim down as the operating model is adjusted and streamlined?

Brennan Hawken:

All right. Another question on disclosure. Hopefully this one turns out to be a little more fruitful. So, it seems like you guys are shifting the AUM disclosures here to align with Slide 6 where you provide the yields. But just a couple of questions. This is net revenue yield, right? So it excludes performance fees, but it is net of anything going on with distribution. I just want to make sure I’m looking at that correctly when we think about how to use it as a modeling tool and going forward, if this is going to be the way in which we should model, are we going to get a more granular disclosure of these yields so we’ll be able to really fine tune models tightly and maybe some historical time series showing what the fee rates were historically so we can really fine tune?

Brennan Hawken:

Okay. And is -- are the monthly AUM disclosures going to align with this too? Sorry.

Brennan Hawken:

Thank you.

Unidentified Analyst:

Hey, all. Thanks for taking the question. This is Luke [ph] on behalf of Alex. Just another question while we’re on the topic of updated disclosure. Can you just run through the major components in the Private Markets business, maybe how big each bucket is and how you’re thinking about the growth outlook for this part of the business? Thanks.

Andrew Schlossberg:

And maybe I’ll -- look in terms of growth, what we mentioned this quarter in the credit side, our bank loans and floating rate strategies continue to be in demand and we’re one of the market leaders in that space across all vehicle types and we don’t see that abating. And then on the Real Estate side, the greatest opportunity for us in terms of growth right now is taking what’s largely been an institutional recognized franchise and bringing it into the wealth space as we’ve been talking about. And we have a few strategies in market right now that I mentioned earlier, our Real Estate equity strategy and then also more recently, our Real Estate debt strategy. Both of those products have been in the market for a few years now. The debt one more recently and they’re well picked up by wealth platforms and continue to be picked up by wealth platforms. So as demand continues in that space, we think we can be a pretty active participant.

Allison Dukes:

Sure. And then I would just remind that the degradation of the fee rate doesn’t necessarily mean degradation of revenue and so that’s one of the things we’re trying to unpack as we continue to refine the disclosures on Page 6 and where the organic growth is coming from. We can have great, strong growth in ETFs and no real growth in some of our higher fee categories and still see fee rate degradation, but see strong revenue growth. So that’s the most important thing to remember and where we’re trying to, again, provide those disclosures. So where do we expect things to go from here? I mean, I think as we continue to manage expenses and we are very actively, thoughtfully and aggressively managing our expenses and we will, while I said, we don’t expect any significant organizational change costs from here. That doesn’t mean we won’t continue to find opportunities to create further organizational changes. What I want to be clear on is we weren’t necessarily guiding to, you should expect X more in organizational expenses, because we’re not in the midst of a major program, but we are in the midst every day of looking at for decisions we can make to continue to refine and streamline the organization and we’ll take advantage of those opportunities as we have been for the last year, since first realigning the business a year ago. We have continued to really step through a series of changes and we will continue to step through changes as we see opportunities to streamline the business. We really believe we’ve got the opportunity to continue to create positive operating leverage. I have no reason to believe we couldn’t do it starting this quarter. I will just be clear, client demand and markets have continued to be headwinds. Markets, not so much last quarter, but client demand was a headwind. We could see markets be a headwind this year, depending on what continues to happen from a geopolitical perspective and some of the impact that has on our developing markets exposure in particular. But that said, we absolutely have the opportunity to create positive operating leverage from here.

Operator:

Okay. Thank you. And our next question comes from Glenn Schorr with Evercore. Your line is open.

Andrew Schlossberg:

Yeah. I mean, let me talk about both. On the SMA platform, as I mentioned, it’s now grown to about $23 billion, which is which is multiples higher than just a few years ago. The immediate success that we’ve been having is in the fixed income space, where there’s been decent demand and a lot less supply of offering and we’re seeing that kind of across the piece and fixed income. More recently, we’ve been introducing custom indexes and elements of the active strategies, which have had a slower pick up where there’s more supply in the market. But we think off the backdrop of what we’ve built, there’s opportunity there. And then in time, we think the SMA platform like the ETF is going to continue to be a preferred vehicle, which will allow us to bring other strategies -- fundamental strategies or other fundamental and quantitatively developed strategies together into that SMA platform. So we’re -- we think we’re in early stages of growth in SMAs and I think going to the way the technology and operational platforms set up now in a more modern way, it scales a lot better than SMA businesses did a decade or two ago. On active ETFs, we’ve been in that space, we’ve been one of the pioneers in active ETFs starting as far back as 10 years to 15 years ago. We have -- as I mentioned in my remarks, we have about $25 billion of AUM that has an active team connected to it, which doesn’t mean just active funds. So about half of that is in active ETFs in the classically defined sense and the other half is passive oriented strategies, but supported by or working with one of our investment, active investment teams, things like Multi-Asset or Bank Loans are examples of that. And we continue to think that the ETF chassis and which we’re large and scaled in is going to continue to bring in not just traditional active strategies, but also alternative active strategies, meaning ones that combine fundamental and quantitative approaches. And we think we’re set up well to be a leader there, given the quality of our active, the depth of our ETF range and the recognition I think we have on the wealth platforms, which will drive this growth. So, it -- both areas are vehicles that we’re excited about and I think there’s a lot of opportunity to bring our capability to.

Operator:

Thank you. And our next question comes from Bill Katz with TD Cowen. Your line is open.

Andrew Schlossberg:

Great. Let me -- I’ll start and then, Allison, can pick up. Two different components of our Indian business that are -- our Indian profile that are worth mentioning. We use India as a very large enterprise back office, middle office center, and that’s been phenomenal for us in a place where we’re going to continue to invest behind and continue to -- it will be one of the places that helps us streamline the cost base over time. Separate to that, we have an Indian Fund business and what we announced in the last few weeks was that we were forming a joint venture with a large Indian business called Hinduja Group. And Hinduja Group is bought 60% of our interest, so we’ll have a minority interest and Hinduja is well recognized company in India and also financial services company in India, which we think in a combined way can help us grow and accelerate the pace of development that we have there and we can we’re better suited as a minority interest in that regard. And those are the sorts of things I think you could think about as we continue to go market-by-market, looking for ways to both grow and to think about where we deploy our resources, capital and operating expense.

Allison Dukes:

Sure. I don’t know that the net of that, third-party distribution is that meaningful. So, if I go back and just kind of recap what I said there, you’ve got about $18 million related to that proxy event that was recorded as revenue and $21 million that’s recorded than a third-party contra revenue. So, effectively $3 million that was borne by Invesco there. Not terribly meaningful as you think about net revenue yield. So, I don’t -- so I’m not trying to dodge your question, but I don’t know that it’s terribly meaningful to net revenue yield. I know it is a bit confusing, though, and I would continue to guide to the thinking about that, something around 43% of third-party contra revenue as a percentage of management fees is the right way to think about that relationship in a low revenue environment, and as revenue improves, you should expect that to kind of come back down into that 41% to 42% range and that proxy event being a bit of an anomaly. As it relates to our return of capital, and I’m sorry, I might have missed that question was when buybacks might resume. Buybacks, again, I think, as we approach our target of zero net debt, which we expect to be middle back half of this year and we are being very thoughtful in our cash management overall, very pleased with what we’ve been able to do so far and very much in line with our expectations. We expect we’ll reach it middle to back half of this year and we do hope to be resuming more regular share buybacks. I think I’ve noted in the past our total payout ratio would be in the 40% to 60% range. I might expect it and just sort of these lower earnings environments to be on the higher end of that range. Hopefully I covered that question there, Bill.

Allison Dukes:

Great. Thanks.

Operator:

Thank you. And our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Andrew Schlossberg:

Yeah. Let me start and Allison can pick up on that last part in particular. It’s very much driven by client demand. And what I mean by that is, where there is interest in fundamental strategies that are the same or similar to ones that we offer today, we’ll offer them and we’ll bring them forward. We haven’t seen that so much to-date. They’ve either been a new strategy or a variant of, but we’ll continue to bring the best capabilities we have into the active ETF wrapper where it completely makes sense. You’re going to see some of that, I think, in the industry come through conversions. You’re going to see some of that come as cloned or as newly originated funds. But I think, ultimately, you’re really going to see the ETF as a preferred wrapper for many investors to have lots of different ways of deploying active into it. As I was saying before, some fundamental, some quantitative, some that are going to be a variety of both. So I think there’s going to be a decent amount of product development and I think each firm is going to have a different strategy on it. We’ve got some of the unique attributes that I mentioned and you’ll probably see all the above from us. In terms of the fee rates and where they’re included, I’ll leave it to Allison.

Brian Bedell:

Okay. Okay. That’s a good color. And then just on the classic ETF franchise, just maybe if you can talk about how you view the scalability of that and clearly you’re always making investments across your product lines. But if we continue to see outsized growth in that franchise, should we expect that to be positively contributing to your margins over time?

Allison Dukes:

Well, I mean, I say in the bottom part of your question, yes. And it is positively contributing to our margin today. It’s just offset by some of the outflows on the fundamental equity side. So to be very clear, our overall traditional ETF franchise is margin accretive as it stands today and we are starting to see the benefits of scale, although I think we’re just scratching the surface of it and continuing to grow that is a true focus for us.

Brian Bedell:

Great. Great. Thank you for the call.

Operator:

Okay. And our final question comes from Craig Siegenthaler with Bank of America. Your line is open.

Andrew Schlossberg:

Yeah. I know it could be a little bit confusing, so I’ll let Allison pick up. I think in the region, did we have positive flows in the region? Let me distinguish. The managed assets that you see on Page 3, the negative is driven by a Japanese equity capability that we have that had some net flows -- net outflows in the first quarter. So that was the only driver of negative impact on what we call Asia-Pacific Managed Assets on Page 3. But maybe from a regional perspective, Allison, why don’t you pick up?

Andrew Schlossberg:

And Craig, you can see some of that on Page 13 in the appendix. We show it on a sourced flow perspective.

Allison Dukes:

Yes. Ours includes redemptions and realizations. And so when you look at our flows in Private Markets, largely driven by bank loans, which I think Andrew noted, it’s a little over a $1 billion in bank loans. We did see inflows on the Real Estate side as well in Direct Real Estate and that would be net of realization. Some of the outflows were actually on the listed side and some of the listed Real Estate.

Allison Dukes:

Thank you, Craig.

Operator:

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

Operator:

Thank you for standing by, and welcome to Invesco's Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. Now, I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you. You may begin.

Andrew Schlossberg:

Thanks, Greg, and hello, everyone, and I'm pleased to be speaking with you today. In a reversal from the third quarter, overall market sentiment in the fourth quarter turned more constructive as investors began to gain confidence, putting money back to work in the last several weeks of the calendar year. Equities and fixed income were both beneficiaries of a growing belief that central banks would cut rates sooner in 2024. The S&P was the best-performing major equity index and while outside the US, there was solid market growth in Europe, while China continued to lag. Fixed income markets performed well, led by government bonds as expectations for tightening interest rates earlier in 2024 prevailed. The market volatility and shifting macro trends exhibited this past quarter, strengthened our conviction in the areas we focused on throughout 2023, and continuing to reposition Invesco to perform through various market cycles and in front of the rapid evolution underway in our industry. As discussed on previous calls, we continue to streamline and simplify the company for the benefits of our clients, colleagues and shareholders. The focus of these efforts is to further emphasize long-term investment quality, strengthen our diverse product offering and build on our value proposition that uniquely meets a broad range of client needs around the world. We are also tightening our financial discipline, which will further enable us to allocate resources to drive innovation and acceleration for the benefits of clients. We're going to continue to leverage our scale to more effectively invest in profitable growth and further strengthen a culture that attracts and retains the top talent in our industry. While our work in each of these areas continues, we are making good progress, and I'm appreciative of the client focus and dedication of my Invesco colleagues around the world. Our results, which are highlighted on slide 3 of the presentation, summarize many of these external and internal factors at play. During the quarter, we continued to benefit from growing client demand and assets beginning to move off the sidelines. In the fourth quarter, we delivered $6.7 billion in net long-term inflows, which is a testament to our advantageous position with deep client relationships, strong geographic mix and a broad suite of in-demand solutions. While organic flow growth and improving sentiment drove asset levels higher, most of the gains occurred later in the quarter, limiting the revenue impact in the fourth quarter but increasing AUM nearly 7% from September 30 levels. Several factors contributed to our strong organic flow growth in the fourth quarter. Most notably, demand for our ETFs and our SMAs continue to drive market share gains in these important product platforms. During the quarter, we achieved $14 billion in positive flows in our ETF factor and index capabilities globally and hit a record high of $634 billion in AUM. We also produced our 13th consecutive quarter of positive flow growth in SMAs as we continue to see strong demand for custom tax optimized solutions in the US wealth management channel, in particular. The second set of quarterly organic growth drivers were the return to positive flows in two of our most critical growth areas, our China business as well as the broader Asia Pacific region and private market alternatives. While overall sentiment in China remained relatively weak, our well-established position in the country drove positive organic growth in the fourth quarter. The majority of the flow growth came from the launch of seven new products, which were augmented by equity product sales in existing capabilities. Strong demand for these new products could signal a more constructive 2024 in China. Long term, we remain optimistic about this market and our unique leadership position within it. We continue to believe that the Chinese asset management industry will grow and mature in the coming years with the development of the local retirement and capital market systems in the world's second largest economy. In private markets, we generated net long-term inflows led by a stabilization and modest inflow into direct real estate and inflows to credit strategies, notably bank loans, which includes CLOs. We have over $6 billion in dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters, but we will need greater market clarity before we begin to see significant growth. Shifting to fixed income, which is a key area of strength for Invesco. We continue to see steady ongoing growth, having reported positive inflows in 19 of the past 20 quarters. Leading contributors in the fourth quarter included investment grade, custom SMAs, as well as municipal bond strategies. As investors gain greater clarity on inflation and Central Bank interest rate policy, we expect clients to move out of cash and extend the duration profiles of their fixed income allocations into a wider range of strategies. As previously highlighted, fixed income is one of our absolute strengths in Invesco, and we remain focused on ensuring we're well-positioned to capture an outsized share of this ongoing reallocation. Finally, pressure on active equity flows continued in the fourth quarter for both the industry and for Invesco. We continue to emphasize investment quality, product differentiation and client engagement to ensure we remain a leading provider in this space with a focus on our in-demand capabilities where we can gain market share. Despite the continued headwinds, we have seen some moderation in certain areas of active equity flows particularly in global, international and emerging market segments. Our net outflows into these important strategies moderated during 2023 to $1 billion to $2 billion a quarter, significantly lower than what we experienced in 2022. These early signs of reversal have been led by our Global Equity and income strategy, which achieved top retail selling status in Japan and delivered an incremental, $1.4 billion of net inflows in the fourth quarter. While we are cautiously optimistic about market conditions for 2024, we remain prepared to meet client and shareholder expectations across a range of scenarios. We have the breadth of capabilities, the discipline to drive performance as well as the organizational structure and focus to ensure we are well positioned to meet evolving client demands. As market sentiment improves, this should translate to even greater scale, performance, and improve profitability. With that, I'm going to turn the call over to Allison for a closer look at our results and I look forward to your questions.

Operator:

Thank you. [Operator Instructions] The first question comes from Glenn Schorr with Evercore. Your line is open.

Andrew Schlossberg:

Yes, it does. Let me start and Allison can pick up. It's a little of both. So, some of the money market flows out of Invesco and our business is largely corporate treasurers they're buying T-bills directly. So I wouldn't look at that as a great indicator from Invesco. As we're out talking to clients and we're looking at of where flows are going. Early signs have been clearly into ETFs, which might be telling you a little bit about conviction and maybe the lack of there full conviction. And then on the fixed income side, active and otherwise, starting to move into municipal bonds, in particular, some investment-grade strategies. Europe is picking up a little bit, but I'd say it's pretty early days on assets moving off the sidelines.

Glenn Schorr:

Makes sense. So, in that revenue yield slide, you showed us the come down and you talked about not degradation of product pricing, but just mix shift. With the markets up so much, average assets ending assets way above average assets, how much of that revenue yield pickup could we see coming back the other way in the first quarter? I'm not sure you've gone through that math yet, but obviously, markets are up a bunch.

Andrew Schlossberg:

And the other thing I'd add, and you're seeing it as well. I'm sure the broadening out of the market, and as Allison mentioned earlier, the greater diversification in our overall portfolio of client assets puts us in a position under any kind of market environment where we think we're relatively well positioned.

Allison Dukes:

Thanks, Glenn.

Daniel Fannon:

Thanks. Good morning. I wanted to follow up on Slide 7 and talk a bit more about the Alternatives in private markets dynamics in the quarter and more prospectively, how you were thinking about the potential growth in that business, considering the broader alts bucket has been seeing outflows for you, but yes, I think there's some underlying trends. I think you've talked about seeing some inflows. But curious to get a little bit more of an update.

Andrew Schlossberg:

And as we look forward, we continue to view private markets and alternatives as one of our best opportunities. As Allison said, on the credit side, about $45 billion in assets. And on the private real estate side, another $70 billion in assets and seeing some moderation of flows and some positive gains, as Allison mentioned, we're first to see in this environment. I think if we take the long-term view, what we've been very focused on over the last several years is diversifying from a largely institutional base into a wealth management base and the issuance of our non-traded REIT credit real estate credit strategies and other sort of distressed and direct lending strategies, both into institutional, but probably more impactfully into retail, we continue to see as a great long-term opportunity for us.

Allison Dukes:

Let me start with Alpha. And if you think back around the implementation costs for the last few quarters, they have been growing. So we -- it was $7 million in the second quarter, $8 million in the third quarter, $12 million in this most recent quarter. And then our guide was to roughly $10 million a quarter per quarter throughout 2024, there will be fluctuations. It is not precise. We are deep into implementation. And so there is going to be some variability and some uncertainty quarter-to-quarter, but I think the $10 million expectation is reasonable with what we know today. The expectation is we are building to a peak, and then there are expenses that will be coming out the other side. So – and that is 2025 and beyond. So we're not ready to give exact guidance on that yet. But it isn't just a flattening out. It is building to a peak, and then there are some expenses that start to come back down. As implementation cost fade and there are some – the ability to continue to rationalize and streamline some of our systems, which will lead to some expense rationalization on the other side. And as a reminder, that is as much about -- the whole effort is as much about really eliminating the duplication of systems and some of the heavily customized processes that we have today and really moving towards a single operating model to streamline our operations and accelerate some of what we can deliver from a client experience perspective. I think you mentioned some of the other expense line items, maybe let me touch on some of those. Note that the G&A was seasonally high in the fourth quarter, and I would expect that to be a bit lower in the first quarter. From a compensation expense perspective, as we noted, there's always seasonality in the first quarter. We typically expect to see compensation expense about $25 million higher in the first quarter for taxes, FICA and the like, but we also expect to fully realize our $50 million in expense savings. So there's another $6 million that we expect will be realized in the first quarter. All of that is, of course, assuming flat markets at 12/31, et cetera, et cetera. But hopefully, that gives you some color that relates to the primary driver of alpha seasonality of G&A coming back down, seasonality and compensation expense going up modestly, but that's offset by the realization of our expense savings.

Operator:

Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Allison Dukes:

Sure. Let me take a stab at that. So yes, you are correct. The fourth quarter adding back severance expenses would be our lowest quarter. And so what is impacting that? Certainly, it's business mix. Before I go to business mix, I will also note, just from an underlying expense base standpoint, keep in mind, for all the years prior to the last three quarters on this chart, we had TIR as a line item. And there was a significant amount of our expense base that within TIR. So our expense base has been fully loaded for the last three quarters inclusive of all the alpha implementation costs. So that is part of the pressure on margins, although it is not the whole story. The business mix story and the degradation in revenue is absolutely part of the story as well. Business mix is a big driver of it as you continue to see the shift in our business mix, as we highlighted on page 7, from fundamental equities into some of our lower fee capabilities, including ETFs and index even global liquidity to some extent as well. And within that, as I noted, even within those passive capabilities, you see some business mix pressure just in the most recent couple of quarters with demand for products like the S&P 500 Equal Weight and QQQM as opposed to commodity ETFs, bank loans and some of the other higher fee capabilities that would be within that asset category. So it is business mix among the categories and within the categories. In terms of margins, margins sort of by region are relatively consistent. I think it's worth noting in China, we've often pointed to our margins there, which you can look at and see really as you add back the joint venture there are higher than the firm average. They are modestly lower now with the implementation of the regulatory mandated fee cuts in China, which we have noted -- that -- the margins there are still stronger than the firm average and still very attractive, very positive in our positioning there and our growth rate there. We're very optimistic there. But modestly lower than it would have been previously. And the fourth quarter was our first full quarter of the realization of those fee cuts, which has an overall impact of about $10 million per quarter in revenue.

Allison Dukes:

Thank you. Ken.

Bill Katz:

Okay. Thank you very much for taking the question this morning. Maybe to mix up a little bit. I was wondering if you could just sort of expand a little bit on where you stand with your relationship with Mass Mutual and the opportunity to potentially accelerate growth either into the alternative segment or perhaps even on building out some retail democratization products?

Bill Katz:

Maybe just a follow-up on capital. So it sounds like you're in a much better spot just in terms of reengaging on buyback. Allison, are you expecting to be able to buy back stock in concert with carrying the line of credit? Or do you need to get on the other side of that before you'd restart buyback? And then more broadly, what kind of payout rates should we be thinking about now that your earnings are more diversified and the earnings power is higher?

Bill Katz:

Thank you.

Mike Brown:

Great. Thank you for taking my questions. Maybe just a quick follow-up on that last question on capital allocation and -- as you get further along on your goals on the balance sheet, do you expect M&A to kind of come back into the equation not necessarily large M&A, but perhaps maybe more on the bolt-on side as you think about adding capabilities and perhaps altering the strategic asset mix as you start to look out to, say, 2025?

Mike Brown:

Okay, great. That's good to hear. And then maybe if I just change gears to the developing markets fund. You had flagged performance has improved there. That product is still outflowing, but assuming that performance can continue to improve. I guess my question is what causes client interest to really come back to this fund, just given that seems like investor sentiment and interest in EM strategies is just kind of remains tepid. Is this going to be more about a kind of lower redemption story and kind of narrowing on the redemptions? Or can that eventually translate to more of a growth story?

Mike Brown:

Okay. Thank you, Andrew.

Brennan Hawken:

Good morning. Thanks for taking my questions. Allison, I appreciate the color on 1Q expense. But when we're thinking about full year 2024, is the right base by which to grow off of that 3.06 billion that's adjusted for some of the charges. And how should we think about -- are you able to keep that flat? Or is that going to be having some positive pressure here through 2024?

Brennan Hawken:

Okay. Thanks for that color. I appreciate it.

Brennan Hawken:

Thanks for taking my questions.

Operator:

And our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Allison Dukes :

Great questions. And precisely, the topic we spend a lot of time talking about thinking about and really working on as a team. That the QQQ is a tremendous asset for us and the brand awareness that that creates can't be underestimated. The opportunity that creates for us in terms of the marketing budget that comes from that. All of our sort of ad campaigns, the brand work we do is really fueled by the QQQ. And so it's it is a tremendous asset to us. And it is certainly unique in nature and that's the value it creates. So we have to be very thoughtful about how do we optimize the value that is created from that capability. The QQQM, as you note, is approaching $20 billion and has been a cannibalization strategy and a very successful one, given it's only about three years old, and it has grown that quickly and assuming there is continued demand in the underlying or interest in the underlying exposure there, we expect the growth in that capability to continue. In terms of the actual net revenue yield from the published fee rate, it would be about half net of all of the costs there. So it is -- it would be one of the lower-yielding capabilities, again, part of what we were pointing to in terms of the business mix that is driving some of the pressure on net revenue yield overall. So it's a two-sided coin but one that is certainly well positioned to capture client demand.

Brian Bedell:

Great. That's great color. And then maybe just a follow-on. I think Allison, you mentioned it, of course, you are investing in the business as well, sort of reinvesting some of those cost saves. Maybe if you can just talk about the top two or three areas from an investment management perspective in terms of product that you are investing in to Catalyst growth? You just talked about the QQQ franchise, maybe you can leave that one out. And I think on private markets, you mentioned that's an investment area, however, that can also be an area where M&A can play a role. So maybe if there -- if you can talk about any other say, a couple of areas that you're most excited about in terms of investment dollars that you're putting in and growth that could result from that?

Andrew Schlossberg:

And to a forward room on our shelf for that, I mean, we've been routinely pruning and closing parts of the product line that we haven't seen demand in and closed several hundred strategies over the last few years. The only other thing I'll point to beyond what Alison covered would be it's probably less investment capabilities that you'll see extensions on and more how it gets delivered to the market. So the trend towards vehicles like ETFs and SMA and bringing things beyond passive capabilities or fixed income capabilities is something we're going to continue to seek to lead in.

Operator:

Thank you. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Allison Dukes:

Reasonable question. I would say, as Andrew said, we do continue to think about the opportunities we have from a bolt-on perspective with certain capabilities from an M&A perspective. And given our balance sheet, is returning to a better position, but we want to be in a position to continue to build cash as we think about some of those opportunities and making sure we're in position should we find the right bolt-on capabilities to be able to execute. So it's a balance of making sure we have the ability to execute on several of those priorities, and it's not going to be all in returning cash to capital to shareholders.

Andrew Schlossberg:

Let me start and then Allison can pick up. Probably the two most important strategies were the non-traded REIT or in REIT strategy where MassMutual was – or early seating partner. I don't have the exact percent that they have, but I would say it's still relatively large, although we've been generating a decent amount of volume over time from one of the big wealth platforms in the US. And then the second one was our real estate debt strategy that we just brought to the wealth management market. That was the other sort of strategically important strategy. But I'll turn it to Alison maybe for more specifics on the numbers you asked about.

Andrew Schlossberg:

And aside from the capital, which is clearly important, I think the signaling and showing up at these wealth management platforms in particular, not with new investment capabilities, but there are new packages that we're putting things together in. And I think that's really critical in terms of credibility that we show up at these platforms with.

Operator:

Thank you. The next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Allison Dukes:

I would say, high-level goalposts and this is going to -- longer term, and it's going to take us some time to get there. But getting back into the mid-30s is absolutely our high-level kind of goalpost. I hope everybody here is loud and clear. We are in no way satisfied with where our margins are today and getting them back on a quarterly basis, north of 30% and starting to climb back into the low 30s and mid-30s from there, absolutely the goal over the next handful of years. Our focus coming into 2024 is absolutely around expense discipline. We've done a lot of work on our expense base. We've got a lot of headwinds and things we have to make our way through at the implementation being the most notable and sizable of that -- but despite that, our expectation is to really try to hold our expense base relatively flat. And as you know, and thank you for giving us a little bit of grace on that one, that it is hard to predict it quarter-to-quarter, especially with the impact of revenue in market. So it's really about being very disciplined on everything we can control and where we can continue to take expenses out in places where it's not necessary and evaluate opportunities to eliminate those expenses or reinvest them in areas that will help facilitate and fuel further growth.

Andrew Schlossberg:

Yeah. Look, I think the -- I'll just speak generally about them because getting specific is difficult. The real estate debt strategy, we were seeing a lot of demand and interest for that, and you should expect to more of that in the market, and we should be talking more about that going forward. And then private credit strategies, whether they're distressed or direct lending, how we can position and factor those into the wealth channels and just to be clear, this isn't just in the US. It's in Europe and Asia Pacific as well.

Operator:

Okay. And our last question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Allison Dukes:

Thanks Mike. I would say, what the relationship our expense base being about a third variable is still a reasonable relationship and expectation to think about as you think about the potential growth in revenue. So, I would start with that, certainly, as we've seen some of the real revenue pressure. It has made it difficult because there is some element of our expense base that's fixed. But I think as we anticipate starting to climb out from a revenue perspective, I think the one-third relationship is still a reasonable expectation. In terms of what we will do and how we will continue to think about streamlining, I mean, look, it's a continuation of so much of what we've done and a lot of what I just said, which is -- we are going to continue to evaluate our expense base everywhere. We're looking at our margins at a granular level on where we can really unlock some costs and evaluate some of what's been done in the past and perhaps where it doesn't need to be done that way in the future. We have been on a multiyear effort as it relates to facilities and rationalization of office space. And I would say -- I'd call out some usual suspects that you would expect us to be focused on elements like that, that's going to continue. That takes many years to really make it dent in, and we will continue to do things like that. But it's broader than that and really thinking about how we streamline our business, how do we really think about operating more holistically and a lot of the work that started almost a year ago now. I mean maybe with that, Andrew, if you want to kind of close on some of our thoughts there.

Michael Cyprys:

Great. Thanks so much.

Operator:

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

Operator:

Welcome to Invesco's Third Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, today's call is also being recorded. Now, I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you. You may begin.

Andrew Schlossberg:

Thanks Greg and good morning to everyone. I'm pleased to be speaking with you today. But before I begin my commentary on the quarter, I did want to take a moment to acknowledge the humanitarian crisis in the Middle East. We are deeply saddened by the loss of life and devastation and the impact it's had on civilians across the region. We're focused on the safety and the well-being of our colleagues and their families and our thoughts are with everyone who has been impacted by the heartbreaking recent events. But now turning to the topic of the third quarter earnings, I'll start today's presentation on Slide 3. Volatility and uncertainty continue to define global financial markets with interest rates rising and investors awaiting more clarity from central bankers, there's an extraordinary amount of cash that's been moved to the sidelines where investors can earn acceptable returns, while they await more certainty. The slowing and narrowing investor activity has been a near-term challenge for our industry, but it also sets the course for an eventual reallocation and money moving back into higher risk-based assets. Our results, which are highlighted on Slide 3, in many ways, reflect these dynamics. However, our unique positioning with deep client relationships, a strong geographic mix and a broad suite of investment solutions helped us deliver positive net long-term inflows in the third quarter. One of the primary contributors to our relative net flow strength is our robust ETF and SMA platforms. Our ETF business delivered record flows in the third quarter, which were concentrated in our leading factor-based capabilities. It was one of the strongest ETF quarters we have experienced as we continue to gain market share. We captured nearly three times our industry share of net asset lows to our market share of AUM, and importantly, over three times of our industry share on a revenue flow basis as well. Additionally, we continue to enhance the commercialization of our SMA platform and are seeing strong momentum in flows, particularly within fixed income, where we have posted 12 consecutive quarters of positive net flows despite the challenging market environment. Within these vehicles, we are well-positioned to meet the increasing interest around personalization and tax optimization that we're seeing by wealth management clients in both the US and around the world. While areas of growth like ETFs, SMAs, and fixed income have been strong for us this year, we continue to see flow pressure in active equities. While headwinds have persisted in this asset class industry-wide, we are beginning to see marked improvement in Invesco, in particular in the global, international, and emerging market equity segments. In aggregate, our net outflows in these strategies are significantly lower than what we experienced in 2022 and have stabilized at around $1 billion in outflows each of the last two quarters. We continue to put considerable effort into further improving investment quality, product differentiation, and client engagement in these capabilities to ensure we are well-situated ahead of the eventual renewed demand in these important and higher fee-yielding asset classes. We're going to spend some time on the call today highlighting how we're positioning the firm against shifting investor demand, its impact on our asset mix, net revenue and our net revenue yield, and how we're organizing to meet the evolving client demand in both the near and the longer term. As we've outlined previously, we are undertaking a multi-quarter plan to simplify and streamline the organization to position the firm around rapidly evolving client demands. Our aim is to operate with more agility, improve our consistency of investment quality, create a more seamless client experience, and more efficiently leverage our size and our global scale to enable better outcomes for our clients and drive even greater profitability. We have already made meaningful progress in these areas and we will continue to execute pace in the coming quarters. Some of the key highlights on the evolved investment platform that we have achieved to-date include the following; we've established a unified globally integrated fixed income platform, we're creating a single, highly focused multi-asset group from three distinct teams. We're bringing together leadership across our fundamental active equity teams and we're further strengthening our private market platform that spans both real estate and private credit capabilities. Notably, all of these simplification efforts will enable us to more fully take advantage of the benefits of our State Street Alpha platform, as a single global investment operation engine across asset classes. On the product and distribution side of our business, we've also made considerable progress in repositioning growth and efficiency. We've combined our ETF, SMA, and model portfolios efforts into a single strategy and group. Going forward, we believe that these capabilities will be the leading vehicles of choice for our clients. Our established infrastructure, brand, and innovation will enable us to continue to lead and bring both active and passive capabilities to investors in an even more personalized and efficient way. We're also continuing to prune our product line and we've reduced it by over 150 products in the past year. Further, by globalizing many aspects of our marketing and digital delivery, we're finding opportunities to leverage our scale, simplify our applications, unify our data, and use technology to strengthen these capabilities while lowering costs. There are efficiencies to be gained from all of these simplification efforts, which we are beginning to realize and we will continue to do so over time. However, these efforts are much more or more about -- much more than just expense savings. We view these as drivers of revenue acceleration, which will allow us to improve our investment quality, reallocate our expenses and capital base much more effectively, and deliver sustainable profit growth and margin expansion and time. Moving ahead to Slide 4. As investors gain greater clarity on inflation and Central Bank interest rate policy, we expect clients to move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies. Fixed income is a clear area of strength for Invesco and we're focused on ensuring we are well positioned to capture what we believe will be an outsized share of this reallocation. As you can see on this slide, our $500 billion plus fixed income platform has strong investment performance, requisite scale, diversity across asset classes and client geography, it spans public and private investments, and it has a robust offering of both active and passive products. The globally integrated institutional quality platform has been a consistently strong grower for Invesco, having posted long-term net flows over the previous 18 quarters and it's very strong top-tier investment returns across a wide range of fixed income capabilities. A few highlights to note on our favorable position that are on the page include our global liquidity capabilities, which have grown AUM by over 150% over the past five years, and we're now squarely in the top 10 of institutional money fund managers in the top five amongst nonbank-owned providers. Our stable value capability is well-placed in DC platforms and ranks as a top manager in the US institutional marketplace. Our municipal capabilities rank in the top five largest among mutual fund managers in the US and number two amongst high-yield muni fund managers. Within our investment-grade capabilities, our relative performance has been improving since the recent mini banking crisis and our long-term performance strength has helped us nearly double our AUM in the past five years. Furthermore, our global and emerging markets fixed income capabilities of stellar performance and are very well placed for growth in the UK, European, and Asian institutional and retail markets. And finally, we believe that significant opportunity exists for even greater expansion of our fixed income ETFs and bank loan capabilities which are two notable strengths of Invesco. So, against the backdrop where clients are seeking to work with fewer asset managers to meet the breadth of investment requirements, fixed income is clearly an area of our business that is poised to continue to gain market share and drive even greater profitability as the eventual rotation beyond cash unfolds. Finally, and before I turn the call over to Allison, I want to take a moment to highlight on Slide 5, another important piece of the Invesco investment thesis, our strategic relationship with MassMutual. Our engagement with MassMutual has many facets that create a meaningful, mutually beneficial strategic relationship. First, MassMutual is one of our largest investors as both a common equity and preferred shareholder. So, we're mutually aligned to delivering profitable growth and long-term success against the backdrop of an evolving industry. MassMutual is also a significant investor over the past years and supporting many of our newly launched private market and other key strategies with a total of $3.5 billion of commitments. Notably, this is three to four times the multiple of seating of our own products on our own balance sheet. MassMutual has significantly increased their commitments since the inception of our relationship, and this is meaningfully bolstering our growth trajectory in our private markets business, both institutionally and in our wealth management channels where early access to capital is paramount to setting the course for growth. Finally, we work closely with MassMutual on behalf of their clients and we are pleased to be a third-party manager of $9 billion of assets through their insurance and broker-dealer channels, where we ranked the largest sub-advised and defined contribution investment-only manager on the MassMutual platform. To summarize, this is a powerful and important relationship for Invesco with significant potential ahead. We continue to explore avenues with MassMutual to make this relationship even more meaningful in the future. With that, let me turn the call over to Allison for a closer look at our results, and I look forward to your questions.

Operator:

Thank you. [Operator Instructions] And our first question comes from Glenn Schorr with Evercore. Your line is open.

Andrew Schlossberg:

Hey Glenn, thanks, it's Andrew. I'll start and Allison will chip in as well. The cash on the sidelines a bit, but whether it's from wealth managers or from institutions, it's something like 25% to 35% portfolios are allocated to that from best we can tell from lots of conversations with clients. And I think it's exactly what you described, waiting for clarity from central banks, waiting for a reason to move off the sidelines and get paid to do so. Conversations have been very active whether it's through our solutions efforts or just through direct conversations. And it's -- I think it's really those things and that's straightforward and simple. On the money market side, Allison, why don't you pick up?

Glenn Schorr:

I appreciate. One just quick follow-up is as you noted, the fee rate on fixed income is obviously lower than overall. But I would imagine there's some pretty high incremental margins. If flows do happen in the way you think into fixed income as people start extending duration, how should we think about that interplay between fee rate and margins kind of like the same conversation we've had for years? Thanks.

Andrew Schlossberg:

And Glenn, we -- some of the things we talked about last quarter and this quarter, we further brought together elements -- disparate elements of our fixed income platform, and we wanted to call up a scale in that platform for just the reasons Allison described.

Operator:

Thank you. And our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Andrew Schlossberg:

Yes, hi, it's Andrew. Just maybe I'll pick up on the second part first. We think it will come in both active and passive. And as you said, the diverse range that we have in both, in some ways, we're a bit indifferent, but the conversations are happening on both sides of the equation. In terms of areas that are particularly of focus and things that we're having conversations about it, we're well positioned, the municipal portfolio, whether that's investment grade or high yield, the performance is stellar. The funds are highly rated, they're well known, and that's probably the first protocol we would point to. On the investment-grade side, European corporate bonds had been of interest and have been an area where we're positioned well. And then really just anything across as people move a little further on the curve, even elements of our short-term fixed income portfolio. So, it's pretty wide ranging, but I'd sort of point out those areas, in particular, especially because we're just well -- we're well placed there to take share.

Allison Dukes:

Good morning Craig, I'll start. I think the most important component of the flows in IGW was really that it was driven by fixed income. And I think we're just seeing with the interest rate tightening that's happening inside of China, a diminished appetite for fixed income overall. We actually saw inflows in equities over the quarter. So, we do think it's hard to gauge exactly the timing as to when economic sentiment will recover there. I think we're confident the government is doing quite a bit to try to stimulate some stabilization there and improvement in the sentiment overall. Hard to say exactly which quarter that will be and when things will snap back, we do -- we are very confident -- very well-positioned when that does occur.

Operator:

Thank you. And our next question comes from Daniel Fannon with Jefferies. Your line is open.

Allison Dukes:

Sure, good morning Dan. So, on the expenses, let me clarify that, we expect that, that $50 million will be fully realized by the first half of 2024. And so that -- I expect we will actually start to see some of those savings materialize here in the fourth quarter. I'm expecting somewhere around like $10 million improvement in compensation expense in the fourth quarter. So, that run rate is out to almost probably $40 million. So, I actually think we'll start to see the majority of those savings materialize in the fourth quarter and then continue into next year. That, of course, is all things being equal and dependent of AUM and where markets go in variable compensation. A part of the increase in the severance and reorganizational expenses in the third quarter is because we did pull forward some of those savings, so we would start to realize the benefits of them in the fourth quarter. And so again, I know there were some expectations because we provided an expectation that severance is expended to be closer to $20 million in the third quarter. It was $39 million as we seek to pull forward some of those savings. Where do we expect to see them? Honestly, it's quite broad-based as we are looking at just making thoughtful streamlining decisions across our entire organization. It's everywhere from areas of operations to streamlining some of our investment teams. As Andrew noted in his remarks, to just pocket the simplification where we can globalize some of our teams and seek to do things one way across the globe instead of multiple ways. I couldn't point to any one particular area. I will tell you the majority of the savings you will see are in compensation expense, and that is, of course, excluding any first quarter seasonality that you see in payroll and taxes and the like.

Allison Dukes:

Sure. The institutional pipeline, the one not funded pipeline, so the same as we typically provide some color to, it was about $20 billion in the third quarter so a little bit lower than the prior quarter, although the fee rate was a little bit better, the composition pretty consistent. So, it still looks pretty good. I would say, if I look at our inflows, excluding the GTR, very sizable redemption that we pointed to. If I look at our gross inflows in the quarter, it was about $17.5 billion in gross inflows from the institutional channel and that was about 43% of that was from our pipeline. So, our pipeline continues to be healthy, strong. It does not really reflect the full breadth of the activity in the institutional channel. But it's certainly a good health measure and it's kind of consistent in that $20 billion to $30 billion range.

Operator:

Thank you. And our next question comes from Ken Worthington with JPMorgan. Your line is open.

Allison Dukes:

Sure. Good morning. What shrunk would have been equity. Alternatives actually held pretty consistent to the prior quarter. And I think we mentioned we've got about $6 billion in dry powder and that's been pretty consistent. So, it's actually been one of the challenges is it's been difficult to deploy just because the transaction activity, particularly in private real estate is relatively low, just given some of the financing dynamics that are going on. But what we saw was a little bit of diminishment in the pipeline for equities overall.

Allison Dukes:

The bulk of the $6 billion would be more real estate-oriented than it would be private credit. We've got several things that are -- we are working on, I would say, in terms of what we're trying to bring to market in both the real estate space and the private credit space as we look to capture some of the opportunities there out there right now, particularly from an opportunistic standpoint and a stress standpoint.

Ken Worthington:

Great. Thanks very much.

Brennan Hawken:

Good morning. Thanks for taking my questions. I wanted to start on fee rate. So, the actual investment advisory fee was a lot of pressure, but distribution offset kind of allowed the net revenue yield to be only down modestly. So, was there any noise in that net distribution line? Or is that the right way to think about that going forward?

Brennan Hawken:

So, are you saying that we should look at it more on a year-to-date basis than this quarter specific?

Brennan Hawken:

Excellent. That's great. And not that I want to give Greg more work, but it definitely would be great to see like fee rate or like revenue by asset class along with the flow disclosure that might help to given -- particularly given the dynamics at play for your business, just a recommendation. On -- for my follow-up, you said that there was a big loss of a single account with GTR. Was the fee rate given that, that was a single large investor, was that fee rate sort of below the average for your alts business for the firm broadly just given the size?

Brennan Hawken:

Yes. Okay, great. And thanks for pointing out that on page -- on Slide 9, of course, I just more meant in a way that we could actually embed within the financial models, right? So, we could have it in greater detail. Does Slide 9 tie to the AUM disclosures you guys have in your pressor?

Brennan Hawken:

Sure. Of course. Sorry to be a pain in the butt. Thank you.

Operator:

Thank you. The next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Allison Dukes:

Good morning. I'll take that one. I'd say, honestly, the Basel III capital requirements have little to no impact on us at all. There's very little that we do that has have any relationship to the areas that are impacted by Basel III. So, I would say, in terms of where might we have some opportunities, we could take advantage of. Certainly, we're all seeing the opportunity to continue to think about capturing some private credit share as we continue to see that be a challenge for the banking system and a lot of that getting pushed out of the banking system. We've certainly already seen the impact of that over the last five years, and I expect that those trends will continue. I think it also creates opportunity on the real estate debt financing side, and I think consistent with Andrew's prior comments and where we see some opportunities in our positioning our capabilities there to take advantage of that as well.

Michael Cyprys:

Sure. I get it doesn't apply to you, but just curious how you see that impacting the banks, which then may reprice or pull back capacity, which is to the question I was getting at. But maybe we'll move on. Just a question here on efficiencies. That's an area of focus for you guys in streamlining the organization. I was just hoping you might be able to speak to some of the potential from generative AI, how you guys are experimenting with that today? How do you see the opportunity set from that? How might be able to quantify the benefit there over time?

Michael Cyprys:

Great. Thank you.

Brian Bedell:

Great. Thanks. Good morning folks. Thanks for taking my question. Maybe just back to Slide 9, maybe on the fundamental equities franchise. Obviously, given industry pressures, that's -- that shrunk as a proportion of your overall asset base, but it is the highest revenue yielding area. So, can you talk about maybe what types of investments you're making in the overall fundamental equities franchise that might help the organic growth prospects of that? And then also maybe just to what extent are you viewing active ETFs as a potential vehicle enhancement for that platform?

Brian Bedell:

That's great color. Thanks for that. And then maybe just on the expense side, Allison, just a clarification, the $10 million in the fourth quarter improvement in the compensation line. Does that exclude or include the dynamic of the charges between the two quarters, 3Q and 4Q?

Brian Bedell:

Yes. No, that makes sense. And just I don't know if you're able to comment on other 4Q expenses in EMEA marketing is typically seasonally high but anything else on the property line and the G&A line, other than the -- you made the State Street output commentary, obviously, but anything else on those two lines for 4Q?

Brian Bedell:

Okay, great. Thanks very much.

Operator:

Thank you. And our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Allison Dukes:

Sure. Good morning Alex. Our expenses this year a little bit noisy for two reasons. One, a lot of the executive retirement, the reorganization efforts and the severance associated with that and then the fact that we no longer have TIR after the first quarter. So, I will say when you back that out, it's actually quite consistent. They've been quite flat. And Alpha has been running in our expense base to the tune of $7 million or $8 million a quarter since the second quarter when it moved out of TIR and fully into our expenses. So, there's sort of that -- it's a fully loaded expense base and we are trying to call out where there are some one-timers associated with that. We will continue our simplification efforts well into next year. We aren't going to let up and continuing to find efficiencies. I don't know that they will be to the tune of the materiality we've seen in these last couple of quarters as we've sought to bring a lot of that forward. But we will continue with those efforts, and we'll call it out when it is material. As I think about next year and what could help us improve operating margin above that 30%-ish range, it absolutely becomes -- it's largely a revenue story, and we are very, very focused on revenue and just the impact, again, that we have experienced with the remixing of our asset base and the market depreciation that has impacted us quite significantly starting late last year, again, in developing markets and global equities, especially as Andrew noted earlier. I think independent of where revenue goes, we are highly focused on really managing that expense base next year. We will provide more guidance as we get into January. Alpha is a huge focus for us next year and Alpha is going to be fully loaded in our expense base. We'll be giving more color to that as the quarters unfold. But that will impact our ability to really drive our expense base down in 2024 because we'll be working on fully going live and running parallel on several systems at the same time. So, again, we'll create transparency, but all of this is with an eye towards simplifying and streamlining our end-to-end delivery so that we can create positive operating leverage coming out of 2024 and anticipating further growth in our AUM. I just want to underscore, I mean, a lot of the flows that we're seeing, we're very pleased with what we saw in the third quarter. We recognized it was quite a bit better than what the rest of the industry is seeing. And I think it really speaks to the diversification of our platform and how aligned it is with client demand. It's giving us the opportunity to make really thoughtful decisions as we continue to simplify our organization and really invest in the capabilities and the technology that's going to be necessary to create that positive operating leverage going forward.

Alex Blostein:

Got it. All right. That's helpful. Thank you. And just a quick clarification question for you guys on the net revenue yield. So, I appreciate the comments around diversification of the business improving and that should provide some stability to the net revenue yield. Just a quick reminder on China, I think there are some decreases in pricing that either already occurred or yet to occur. So, just remind us maybe the magnitude of that and whether it's already fully in the run rate and what you expect that to hit? Thanks.

Alex Blostein:

Got you. great. Thank you very much.

Patrick Davitt:

Hey, good morning. Thanks for squeezing me in. So, it sounds like you're changing your tone a bit on the path to future fee rate declines. But at the same time, it sounds like you expect much more bonds, fund flows and ETF demand from here, which are among the lowest fee buckets. So, what changed to kind of change your tone on the potential for fee cuts if the lowest fee buckets end up being the biggest inflow contributors?

Andrew Schlossberg:

Yes, Patrick, I'd just add to what Allison said, the APAC multi-asset private markets that you see on Page 9, volume would increase that in time. relative to where we are. And then on the fundamental equity side, we've -- we sort of underperformed on our market share capture and our redemptions. And so as you see redemptions start to mitigate and get into positive flows eventually, that's going to be through market share gains. And so I think on both sides of that and I think Allison covered it well.

Allison Dukes:

Yes, I would say going back to when I joined the firm a few years ago, we were saying the ETF business was neutral to the firm margin. It's been quite some time since it would have been dilutive. We are certainly in a position now where it is accretive to the firm's margin overall and we're very focused on continuing to grow that business because it is accretive to the firm's margin. And I think as you think about what could -- one of the two biggest things that could really improve margin for this firm overall, it is rapidly growing the size of that business, stemming the redemptions and fundamental equities and again, growing that pie overall from $1.5 trillion in AUM, so something quite a bit larger than that. Scale is what is going to add contribution from a margin perspective.

Operator:

We do have time for one final question. And our last question comes from Finian O'Shea with Wells Fargo Securities. Your line is open.

Andrew Schlossberg:

Yes, thanks for the question. Much of the private market seeding for the strategies we talked about earlier has happened already and so the comments we made around the $3.5 billion are largely inclusive of all of that. As we move forward and bring additional private market strategies, MassMutual will hopefully will continue to be that kind of partner, but much of its happened already, which leads us to executing on the ground, as you said with growing third-party assets from institutions and wealth managers, which is what we've been doing the last several years and getting ourselves situated for that demand to continue to come. So, that's that. What was the other piece on the MassMutual -- do you have another piece of MassMutual?

Andrew Schlossberg:

Okay. All right. Okay. Well, thanks, everybody, for joining the call today and we continue to believe that we have great opportunities at Invesco as we discuss today and that we have momentum from which to build. We're very well-positioned as investors gain better visibility on rates and market direction and put their money back to work. Hopefully, you've seen that we have the breadth of products, scale, performance, and competitive strength to meet the spectrum of client needs and we are simplifying and streamlining the organization to better position for greater scale, performance and improve profitability. So, thank you for your interest in Invesco and we look forward to speaking again soon and next quarter.

Operator:

Welcome to Invesco's Second Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] Today's call is also being recorded. Now I'd like to turn today's meeting over to your host, Mr. Greg Ketron, Invesco's Head of Investor Relations. Thank you. You may begin.

Marty Flanagan:

Thank you, Greg. And before I turn the call over to Andrew and Allison, I want to say it's been a pleasure to work with all of you over the years. It's really been an exciting, challenging [indiscernible] participate in a fascinating industry that has continued to evolve and change, but always seeking to create better outcomes for clients and shareholders. Over the years, I've learned from my engagement with all of you, all the key stakeholders, clients, analysts and shareholders, which has been instrumental in the success of Invesco. I'm immensely proud of this organization and the talented people around the world that make Invesco what it is. There's a tremendous opportunity for the firm going forward. Invesco has the right strategy, the right team leading this organization into the future while navigating a challenging current market environment. The reality is that the strategies across firms in our industry are not very different. What separates winners and losers are those organizations that can execute effectively across all cycles and market conditions. Andrew, Allison and the rest of the executive leadership team and our broader senior leadership team, represent the most talented and experienced team Invesco has ever had. They are laser focused on accelerating the growth strategy and making the necessary changes for the benefit of clients and shareholders. This is a team very well prepared and knows how to execute and deliver for all stakeholders. I'm confident in Andrew's and the leadership team's ability to achieve the full potential, and I look forward to seeing the firm to do great things in the years ahead. Thank you. Andrew, I'll turn it over to you.

Allison Dukes:

Thank you, Andrew, and I also want to convey my appreciation to Marty for his leadership. Good morning to everybody joining us today. I'm going to begin on Slide 4. Overall investment performance improved in the second quarter with 66% of actively managed funds in the top half of peers or beating benchmark on both a three-year and a five-year basis. This is an improvement from 64% for both time frames in the first quarter. We have excellent performance in fixed income across nearly all capabilities and time horizons. Performance lagged benchmark in certain U.S. core and gross equity funds. Performance in global and emerging markets equities has been a headwind, but we are encouraged to see steady and meaningful improvement emerging in this asset class. Turning to Slide 5. AUM was $1.54 trillion at the end of the second quarter, which was $55 billion higher than the last quarter. Technology stock surged in the second quarter, and as a result, QQQ AUM reached $200 billion, an increase of $27 billion as compared to the end of the first quarter. Market increases and additional products, foreign exchange movements and reinvested dividends combined to increase assets under management by a further $15 billion. Net inflows in the money market products were $15 billion, and net long-term outflows were $2 billion. Despite the net long-term outflows for the quarter, we exited the quarter with strong momentum after more than $2 billion of net inflows for the month of June. We expect that we outperformed most peers on a net flow basis, another data point demonstrating the value of our breadth of capabilities in a difficult environment for our organic asset growth. Client demand for passive capabilities was strong. And as a result, we garnered $6.4 billion of net long-term inflows in the second quarter. Offsetting the growth in asset was $8.4 billion of net outflows and active strategies. Through growth in our key capability areas, we are recapturing client demand as it moves to favored capabilities led this quarter by growth in ETF and our business in Greater China. Our global ETF franchise delivered a strong quarter, growing at a 9% annualized organic growth rate with $5.7 billion of net inflows. Our top-selling ETFs included the S&P 500 Equal Weight and the QQQM, which grew to over $13 million in AUM after posting $3.3 billion net influx. Innovation remains a key strength in this area, the QQQM, which was launched less than three years ago, now representing the fifth largest ETF in our lineup. Currency and commodity ETFs, part of our alternative asset class experienced net outflows of $1.1 billion during the quarter. We delivered net inflows of $200 million from retail clients in the second quarter, an improvement from $3.7 billion in net outflows in the prior quarter. A rebound in Asia Pacific net flows was the primary driver of growth. More specifically, we've experienced strong growth in Japan for several quarters now, ending the second quarter with $54 billion of AUM. Our Henley Global Equity and Income Fund garnered $1.6 billion of net inflows from Japanese clients, making it the top selling retail fund in Japan on both a quarterly and year-to-date basis. Moving forward, we are well positioned in this important market and Japanese markets are experiencing some of the most constructive conditions for risk on assets in many years. Offsetting growth in the retail channel was $2.2 billion of net long-term outflows in the institutional channel, primarily in the Americas. The channel remains in net inflows year-to-date after $6.6 billion of net inflows in the first quarter. Further, we have a robust and diversified one-not-funded pipeline. Moving to Slide 6. Net long-term inflows resumed in Asia Pacific with $1.5 billion in the second quarter due to the growth I just discussed in Japan and a rebound to net inflows in our China joint venture. Net outflows were modestly negative in the Americas and in EMEA. Looking at flows by asset class. Fixed income capabilities experienced net inflows for the 18th straight quarter with $1 billion. Drivers of growth this quarter included China, where we launched an institutional fixed income product and our tax-managed SMA capability, partially offset by net outflows in EMEA ETFs. Net outflows in global and emerging market equities continued to be a headwind in the second quarter with $3 billion of net outflows, including $1.2 billion from our emerging market spot. Encouragingly, this is similar to the net outflows experienced last quarter from emerging markets and below the redemption rates we experienced last year. We are optimistic that headwinds appear to be further diminishing in emerging markets. Alternative net outflows were $3.4 billion in the second quarter. Public alternatives accounted for $1.9 billion with $1.1 billion concentrated in commodity and currency ETFs as commodities have been out of favor across the industry in recent quarters. Private markets net outflows were $1.5 billion, inclusive of $1 billion of net outflows in direct real estate strategies. As we move to Slide 7, I'd like to take a few minutes to highlight our global alternative platform, which had $182 billion in assets under management as of June 30. Although market conditions have made it a challenging year for organic growth in the asset class, we have high conviction that alternatives will be one of the key pillars of our long-term success. Within alternatives, we have a diverse range of capabilities, including $72 billion of public alternatives, spanning commodity strategies, listed real estate and hedged and macro strategy. Real estate is the largest component of our private alternatives platform, with $72 billion in direct real estate AUMs at the end of second quarter. Invesco competes throughout the capital stack by investing in direct real estate and originating real estate debt. Our direct real estate business offers a range of investment styles, including core and core plus strategies as well as funds with higher return strategies. Our private credit platform is the second component of our private alternatives business with $38 billion in assets under management, anchored by our bank loan capability that holds U.S. and European securities. We have over 30 years of experience managing senior corporate loans, relationships with over 2,000 unique companies and more than 200 private equity firms. More recently, we began to offer direct lending to middle-market companies as well as opportunistic investments in special situations and distressed credit. On Slide 8, we want to provide a deeper look at our direct real estate portfolio, where we have 40 years of experience investing on behalf of our clients worldwide. Our direct real estate holdings are well diversified by product property type. Commercial office properties comprise about 35% of our AUM. Apartments and other residential properties account for approximately 23%. And the AUM share of industrial properties, about 22% at the end of the second quarter. The final 20% of our AUM is invested in retail and specialty sectors, including mixed-use developments, self-storage and medical. Focusing on office properties specifically, since the beginning of the COVID-19 pandemic, we've been deliberately managing our exposure down, particularly in the Americas and EMEA as market dynamics have shifted with attitudes towards remote work. In the first quarter of 2020, 42% of our institutional open-end AUM and core and core plus strategies was comprised of traditional office properties. At the end of the second quarter, it was 27%, and our exposure in the Americas was reduced by about one-third. Several of our direct real estate funds use leverage but were measured in our approach and the average loan-to-value across our direct real estate funds was approximately 35% as of March 31, 2023. These figures may fluctuate over time and vary across specific funds. We serve our clients through a range of vehicle types and manage liquidity in accordance with the established bylaws of each fund. Approximately half of our AUM is in institutional separate accounts or closed-end funds with a predetermined life. The remainder in open-end vehicles that manage redemptions on a best effort basis. In our open-end funds, redemption requests go into a queue and are mainly met by net investors into the fund. Investors in our open-end strategies are highly sophisticated institutional investors that understand it may take several quarters to work down a redemption queue while preserving the fund performance for all investors. Of our full business cycle, we would expect funds to average a redemption queue of 5% to 6% of NAV. This can fluctuate higher in times of market volatility like we've been experiencing recently. As of the end of the second quarter, all of our open-end funds were operating according to normal redemption protocols and our real estate teams have successfully navigated market cycles for four decades. Real estate activity has been slower during the first half of 2023, and we would expect activity to be muted in the near term until market conditions improve. In the long run, we expect that investor demand for private market capabilities will grow significantly, and we're well positioned to capitalize on that growth. Let's all move to Slide 9. Our institutional pipeline was $22 billion at quarter end, consistent with last quarter. Although we experienced net outflows in the second quarter, our institutional business remains in net inflows for the year-to-date, and we continue to win new mandates. Our pipelines have been running in the mid-20 to mid-$30 billion range, dating back to late 2019. So this is on the lower end of that range. We view our pipeline as strong given the market volatility we've been experiencing and the $6.6 billion in net inflows that occurred in the first quarter. As we've noted previously, some mandates are taking longer to fund in this environment, we would estimate the funding cycle of our pipeline is running in the three to four quarter range versus two to three quarters prior to the market downturn. Our solutions capability enabled 35% of the global institutional pipeline in second quarter and we're pleased to see this share increased from 14% last quarter. We embed solutions into our client interactions, and we have ongoing engagements about new opportunities. The pipeline reflects a diverse business mix with alternative and active equity accounting for 40% of the total associated assets. Now turning to Slide 10. Net revenue of $1.09 billion in the second quarter was $83 million lower than the second quarter of 2022 and $15 million or 1% higher than the first quarter. The decline from the second quarter of last year was due largely to lower investment management fees, driven by asset mix favoring lower-yielding strategies. The sequential quarter increase was primarily due to higher performance fees earned on private real estate mandates, a $4 million decline in other revenues partially offset the increase in performance fees. A shift in asset mix has had a meaningful impact on our revenue due to the uneven performance across key market indices as well as investor preferences for passive and risk of strategies, including demand for money market products. Total average AUM for the second quarter of $1.49 trillion, with $32 billion or 2% higher than the first quarter. However, $25 billion of the increase was in QQQ average AUMs for which we do not earn management fees. A further $4 million of the increase was in money market AUM. Meanwhile, average passive AUM ex-QQQ was up $3 billion and average active AUM was flat to last quarter. As compared to the second quarter of 2022, total average AUM increased by $38 billion or 3%. The primary driver was a $58 billion increase in average money market AUM given the risk of investor sentiment of the past 12 months. Average assets in the QQQ were $12 billion higher than the second quarter of 2022. Average passive AUM, excluding the Qs, increased by $9 billion while average active AUM declined by 5%. We believe that a meaningful portion of the asset mix shift that has occurred is a product of market movements and risk of sentiment, and those pressures should abate as preference for risk assets, returns and conditions improve. That said, growth in investor preference for passive exposure and solutions capabilities is a long-term secular trend, and we continue to reposition our cost base to align with changes in our business mix as we build greater scale in key capability areas. Total adjusted operating expenses in the second quarter were $789 million, $27 million higher than the second quarter of 2022 and an increase of $40 million from the prior quarter. Included in our second quarter operating expenses were $27 million of compensation expenses related to executive retirements and organizational changes. In the second quarter of 2022 expenses of this nature were not included in our non-GAAP results as they were included in transaction, integration and restructuring expenses. We recognized $13 million of such expenses in the first quarter of 2023. Also impacting second quarter compensation expense with higher incentive pay on $22 million of performance fees partially offset by a seasonal decline in payroll taxes. As Andrew noted, we are simplifying the organization to position the firm for greater scale and profitability as we grow our revenue base. The majority of the $27 million of compensation expense I mentioned was related to executive retirements and the balance was a result of other organizational actions taken in the quarter. We will action further adjustments to our operating model over the remainder of 2023 and would expect to recognize approximately $20 million of additional costs associated with these decisions in the third quarter. The full benefits from our simplification efforts will be seen over time as we generate revenue growth and margin recovery. To this point, we have identified $50 million of annual run rate expense savings that will be realized by the beginning of 2024. Work is ongoing to quantify and action additional opportunities, and we will keep you informed on our progress. As we've discussed, we managed variable compensation to a full-year outcome in line with company performance and competitive industry practices. Historically, our compensation to net revenue ratio has been in the 38% to 42% range, trending towards the upper end of that range and periods of revenue decline. At current AUM levels, we would expect the ratio to continue to be at or slightly above the high end of the range for 2023, when excluding the cost pertaining to executive retirements and other organizational changes. Marketing expenses of $32 million, $4 million higher than the prior quarter, indicative of the seasonally higher activity we typically see in second quarter. Marketing expenses were $4 million lower than the second quarter of last year as we are tightly managing discretionary spend in this revenue environment. Property, office and technology expenses were $2 million higher than the first quarter primarily due to higher software costs, partially offset by the end of overlapping rent now that we have completed the move to our new Atlanta headquarters. G&A expenses of $114 million increased $19 million from the prior quarter. Second quarter expenses included approximately $7 million in spending on our Alpha NextGen program, which was previously included in transaction, integration and restructuring expenses. Going forward, these costs will be reflected in our non-GAAP results. We would expect quarterly average spending on Alpha NextGen to remain at the same level for the next few quarters. As we mentioned on our last call, we benefited from indirect tax credits in the first quarter, a reduction in credits received drove a $3 million increase in expenses quarter-over-quarter. The remaining increase in G&A expenses related to higher project spending for ongoing technology improvement initiatives as well as normal fluctuation that we can see in G&A period to period after relatively lower spending in Q1. Looking ahead, we expect G&A expenses in the third quarter to be flat to modestly lower than the second quarter. We're balancing continued investment in our key growth areas and technology programs while diligently managing discretionary spend, and we are limiting hiring to key growth areas and critical positions. We've also been increasing our use of lower cost locations where it makes sense to do so. As an executive leadership team, we are committed to driving profitable growth in the coming quarters. Moving to Slide 11. Adjusted operating income was $302 million in the second quarter, which included the costs related to executive retirements and other organizational changes. Adjusted operating margin was 27.7% for the second quarter. Excluding the costs related to retirement and other org changes, second quarter operating margin would have been 250 basis points higher. Earnings per share was $0.31 in the second quarter, excluding those same expenses related to executive retirement and organizational changes, second quarter earnings per share would have been $0.05 higher. The effective tax rate was 24.7% in the second quarter. We estimate our non-GAAP effective tax rate to be between 23% and 25% for the third quarter of 2023. The actual effective rate may vary from this estimate due to the impact of nonrecurring items on pretax income and discrete tax items. I'll finish on Slide 12. Building balance sheet strength has been an unwavering priority, and I'm pleased to note that our cash balance increased in the second quarter to $1.01 billion, and that with $1.5 billion of outstanding debt that lowered our net debt to less than $500 million. We were able to achieve this reduction in net debt while also repurchasing $150 million of common stock in the quarter, or 9.6 million shares, equivalent to 2% of the total common shares outstanding. The share buybacks occurred at an average price of $15.65, which we viewed as a very attractive opportunity. The improvements we have made on the balance sheet in the past several years facilitated our ability to take advantage of this opportunity. Our leverage ratio, as defined under our credit facility agreement was 0.7x at the end of the second quarter modestly lower than last quarter. We are committed to building an even stronger balance sheet, and our goal is to bring net debt excluding the preferred shares down to zero in 2024. We have an opportunity to further address outstanding debt with the maturity of the $600 million in senior notes at the end of January. We ended the second quarter with nothing drawn on our revolving credit facility. To conclude the resiliency of our firm's net flows performance in a difficult market for organic growth is evident again this quarter, and I'm pleased with the progress we're making to simplify the organization and build a stronger balance sheet while continuing to invest in key capability areas. As a firm, we're committed to driving profitable growth and a high level of financial performance, and we're confident that we have the right talent, mindset and strategic positioning to do so. And with that, I'll ask the operator to open up the line to Q&A.

Glenn Schorr:

Hi. Thanks. Appreciate it. Just a follow-up question on real estate. So obviously not unique to Invesco, but just given higher rate, some problem areas and long-tail workouts across parts of real estate demand is low as you mentioned. So curious if you could just sum up what's the overall message on the health of the current portfolio? I think you put all that extra disclosure to tell us it's good. But I wonder if you could just comment that. And two more importantly, what do you think the environment does need to look like for demand for real estate related products to improve? Because that would be a big growth driver for when we get there.

Andrew Schlossberg:

And Glenn, I'd just add that as we look forward to opportunities, recall our portfolio is fairly global. So the dynamics are pretty different outside the U.S. than the U.S., and it's a pretty diverse national footprint as well in the United States. Also I'd say is real estate debt is something we're hearing increased demand for and have capability there, and we're going to continue to focus on opportunities in the debt side of the market. And then the last thing I'd say is, while the institutional market is fairly well penetrated, the wealth management markets in the U.S. and globally we see tremendous opportunity where portfolio allocations are less than 1% to things like real assets at the moment.

Allison Dukes:

Sure. Good question. Thank you. And let me clean that up a little bit. $20 million in additional costs that we expect to incur in the third quarter with $50 million of net realized savings that we expect to be realized in the beginning of 2024, not the end. And so yes, to answer your question, that would be net savings that we would expect to fall to bottom line tax affected, of course.

Operator:

Thank you. And our next question comes from Brennan Hawken with UBS. Your line is open.

Andrew Schlossberg:

Sure. Thanks, Brennan. Good questions. Maybe just to start at a high level of what we're trying to achieve. So our aim of simplifying and streamlining the organization, obviously, is to generate better profit growth, but it's also to improve quality of investment performance. We want to simplify the organization so we can accelerate more quickly strategic execution, and we want to be able to use our scale and leverage that we have in the business. So what we did was we started this process earlier this year. And to answer your question, it's going to continue through the course of this year and going forward. This is an ongoing effort to continue to reposition our business for where client demand is. A few examples of some things that we've been working on and will continue to work on. One is around investment team simplification and quality improvement. So for instance, we brought together three multi-asset strategy teams into one. We're further bringing together our fixed income platform around the world. We've enhanced leadership, global leadership with our co-CIO structure and fundamental equity. So things like that around investment team simplification, we'll continue to focus on. We're also looking to globalize core elements of our client engagement and client delivery. So we combined leadership in the Americas and EMEA. We established a single marketing organization. We're globalizing digital platforms, and we're taking out complexity in our product platform. We combined our ETF and SMA and custom index leadership and reduced our product line by over 150 products. So lots going on in the client delivery side. And then we're simplifying and reviewing our operating and enterprise models sort of end-to-end looking for ways to take advantage of those front-end changes and move them through the cost base and be more efficient. And then the last thing I'd say, which I think speaks to what we're going to continue to do going forward is evolve the culture. And so we're going to be tightening our execution edge as a team. We're going to be simplifying our operating and organizational models, which we've started, and we're going to enhance the accountability around profit growth. So you should expect to continue to hear updates from me and Allison regularly about these efforts.

Allison Dukes:

Let me take maybe the second one first. That would primarily be dispositions. The vast majority of that would be deliberate choices that were made, not declining asset values there. So it's been a rocky environment but not an entirely terrible one to try to exit and reposition that portfolio. So I think we were I think our timing was good in a lot of ways, we moved quickly, and we've been able to, I think, show the results very quickly. So that – there's a good news story there, not a bad news story. In terms of what's – I'm not sure I followed your question on traditional office versus not in traditional office.

Allison Dukes:

No. It's not larger than what we would define. If you think about what's outside of what we would consider traditional things like medical office buildings and things that we would truly consider to be different than mid-rise, high-rise kind of office exposure.

Operator:

Thank you. And our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Allison Dukes:

Yes, I'll take the first one. I'd say the redemption rates in the open-end strategies. And again, what we tried to do was narrow down the percentage of our portfolio that is an open-end strategy. And with that, normal redemption rates through the cycle would be kind of 5% to 6%. And as we noted, we'd be on the higher side of that. We would be above that range. And it varies though and it varies quite a bit across the different products. So on average, it's a touch higher than where we are today. Operating though very normally and very consistent with what we've experienced in cycles like this over 40 years in the business. So more than anything, I think what we hope to convey is it's quite normal and quite manageable. And there are no liquidity issues or concerns across any of those individual funds. I'd say maybe, Andrew, you want to take direct lending.

Brian Bedell:

Got it. That's great color. And then just on the cost side, Allison, maybe on the AlphaGen program, it sounds like that $7 million run rate is sort of – it's a cost number, but I guess is that – should we be considering that to be like a net cost number of savings? And I guess, do we have any idea yet longer term as you get that platform completely on to and integrated with Alpha, any sense of sizing what potential cost savings can come from that initiative longer term?

Brian Bedell:

Yes. It's great color. Thank you.

Operator:

Thank you. Our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Allison Dukes:

Thanks, Craig. I think, look, as we've noted all along, we've had several priorities that we've been working really hard on making parallel progress on and one of which has been improving the balance sheet overall. And improving the balance sheet is what gave us the capacity and the flexibility to be opportunistic in the second quarter and execute on those buybacks. And we were pleased that we were able to do so and to do so without any additional borrowings on our credit facility and continuing to manage our net debt down. So – those are the types of things we need to see to put us in a position to be opportunistic going forward. We were not particularly pleased with our price when we were staring at something that started with $14. And so we did have the opportunity in the second quarter to make some progress there. And I think you should expect over time that we're going to be disciplined and diligent and continuing to improve our balance sheet. But where we see opportunities to return capital to shareholders, we're going to do so as well.

Andrew Schlossberg:

I'll make a couple of comments, maybe and then Allison can jump in. We're really pleased with the growth and it was deliberate. I mean we focused on quality in the cash management, money market side, client engagement and pricing, and it paid off. We saw $15 billion in inflows this quarter. It's important to remember, 85% of our business is institutional. And we don't expect that to change. We're very strong there. We've moved into the top 10, and we're taking market share I think with high yields continuing for some time, it's going to continue to be a drive on demand, and we expect to continue to take share. Allison, I don't know.

Craig Siegenthaler:

Thank you, Andrew.

Operator:

Thank you. And our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Andrew Schlossberg:

Yes. So we're – I'll start by saying we're very focused organically. We think the spaces we're in, in private real estate and in the private debt side of the markets are the places we want to be. We'll continue to look over time, obviously, to grow that organically. And if things present themselves to extend off of that, we'll pay attention. But our focus right now is growing them organically. In addition to some of the things that Allison already covered on the recovery on the institutional side of things, which will – we think will happen in time. The real growth driver for our real estate business is going to be through the wealth management channels. We started that effort several years ago. We've seen strong placements for our nontraded REIT strategy, and we're going to be and continue to be in market with strategies like those, including on the debt side of real estate. And as I mentioned, the penetration in wealth management for the industry is less than 1% with most expectations getting it to 10% to 15%. That will take some time. So we think with an offering like we have in a pedigree, combined with our wealth management distribution strength in the U.S. and in Europe, that that's going to be an amazing opportunity. We've invested in those areas already. So the growth is going to come to us in the next couple of years, and we think it could be meaningful. So those are the areas that we're going to be focused on in addition to the institutional space.

Allison Dukes:

Well, so I would say, look, it's been a strong partnership with State Street. We've worked closely on the execution of this for the last couple of years, and we have been negotiating around the ultimate cost of this, and it is an important partnership on both sides. And I would say both parties have been responsive and thoughtful as to both the cost and the time that's involved here. So you should expect that's ongoing, not something that happens on the back end. What's gone right or wrong? I think that's harder to answer. And I guess I would say, in many respects, it is large and it is a bit unturned for both parties. And so we've been working together to try to do this in a way that's very thoughtful and provides the benefits we're looking for, for our business. So I think if I could say anything, I would say probably everything going harder and longer than you expect in large-scale technology implementations. And I don't think that's unusual, but one that we are certainly making our way through. We feel good about where we are right now. We feel good about the attention of all teams from both parties and the work that's underway. The fact that it's taking a little longer than we expected. I don't see it as a huge negative, but one that is just something that we're figuring about as we go along on both sides.

Alexander Blostein:

Got it. All right. Thanks very much.

Michael Brown:

Great. Thank you very much. In China, it looks like there's been a regulatory mandate to limit the fee rates for products there to 1.2%. Has that already begun to impact China, Great Wall? Or is that something that will kind of come through later this year? And then as you look to next quarter, can you just expand on maybe some of the puts and takes we should consider here for the fee rate when we think about next quarter, maybe that exit fee rate, if you will?

Andrew Schlossberg:

Yes. If I can just go back to China and just for – just to add a couple of comments, a couple of additional comments. I mean, certainly, market sentiment post-COVID has been a little more negative, and it's been slow. But I think the Chinese government's pro-growth reforms and the things that policies and actions underway. We're starting to see some of that demand come back. And I'll just reemphasize something Allison said, which is our strong position there and our conviction about the Chinese asset management markets growth. It is very early days in terms of investors' sophistication and asset classes. It's very early days in retirement markets and our position being there for 20 years with close to $100 billion in assets under management, good performance, a good reputation and a bit of a moat around competition coming in, really bodes well for long-term success in China, and we're looking forward to seeing that for the years to come.

Allison Dukes:

Sure. Well, some puts and takes in that line item. Real estate transaction fees were actually a little bit higher in that line item in the second quarter as compared to first quarter. But the negative, what was offsetting that was a lower front-end fees. You really just saw a decrease in some of the transaction fees that were driven by a decrease in equity sales. So puts and takes always a little bit of a lot of discrete items in that line item.

Allison Dukes:

I think that's a reasonable expectation. I mean it moves so modestly up and down. It's hard to predict that as that's kind of discrete level. But you can probably look at the average over the last couple of quarters, and that would be reasonable.

Operator:

Thank you. Next question comes from Daniel Fannon with Jefferies. Your line is open.

Allison Dukes:

Thanks, Dan. I do think over time, you start to see the decline in the fee rates start to abate. I don't know where that is exactly, but you can look at where the demand is for some of our higher growth capabilities. And those fee rates, if you look at – let's take the ETF portfolio and our passive fee rate, that has declined, and that is all available in our disclosures. And that declined to just under 16 basis points in the second quarter, which was down about a basis point. But again, that's because of what I just pointed to in the growth in some of our capabilities that are in high demand that are around a 15 basis point fee rate. If you look at some of the areas of our ETF capabilities that we're trending off in the last couple of quarters, that would be around commodity and currency ETFs that are going to be on the higher side. And once we see in more of a return to a risk on mentality, we would expect that to come back. So I think, look, our passive fee rate, I think it probably is in that 16-ish basis points over a long-term horizon. China has obviously had some pressure given the fee cuts we just talked about, but that is on the much higher side, much higher than the firm average, and we expect to see continued strong growth in China as the economy recovers there. Our private market capabilities would be on the higher side, too. You kind of take all of that, you think about the barbelling and one would think that, yes, the fee rate starts to even out roughly, maybe diminishes a bit more as we continue to see some of this mix shift, and we continue to see the growth of our passive capabilities. But over time, over a longer-term time horizon, it should start to abate and even out a bit. Scale, getting to scale and our passive capabilities has been something we've talked about a lot, something we continue to be very focused on and getting to the second part of your question, aligning our expenses around that. It takes some time to reposition an expense base that was built to support who the company was seven, eight, 10 years ago to where we think it will be seven, eight, 10 years from now. And it's really part of the methodical work we are undertaking now as we continue to simplify the organization and continue to look at how we can reposition our overall organizational structure as well as our technology and operational structure to support where the business is going and continue to really scale there and focus on the marginal profitability improvements, we think we can garner as we get to scale in some of those asset classes.

Allison Dukes:

And in that, I think the concluding comments as I would say, we feel very confident we can improve operating margin from here. And that remains our area of focus. The challenge and the really fast remixing of our asset base over the last 12 to 18 months, has been a pretty tough challenge to contend with. At the same time, we've been making deliberate changes along the way, and we think we're really well positioned to capture really start to improve operating leverage over time, and make sure that the expense structure of the business is repositioned to really support what we think the revenue environment will be for the next few years.

Operator:

I'll turn it back over to you.

Allison Dukes:

Thank you.

Operator:

Welcome to Invesco's First Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you, sir. You may begin.

Marty Flanagan :

Thank you, Greg. And I'm going to start on Page 3, which is the highlights for the first quarter, if you want to follow along. The early part of 2023, provided investors and money managers reason for modest optimism as most major financial markets gain ground in that period partially offsetting the significant declines we saw last year. Inflationary pressures showed some sign of easing and the COVID-19 pandemic are all now [ph] behind us. That said, heightened level of volatility persists in the financial markets reacted with cash in March as we experienced several bank failures during that period. Investors once again, safety and risk-off assets and net flows across the industry were pressured again. Although organic growth remains lower across our industry, Invesco supersite platform generated $2.9 billion net inflows in the first quarter, margin return to organic growth. This progress is especially significant considering the mix feature for the industry overall during the quarter. Growth this quarter was driven by areas in which we've invested for years and have been intentional in cultivating deep client relationships. Fixed income capabilities, the institutional channel, ETFs, all experienced strong net inflows during the quarter. Each of these areas has demonstrated Invesco's ability to sustain growth throughout the full market cycle. Fixed income delivered net flows for the 17th straight quarter, while the institutional channel has now been in net flows for 14 straight quarters. As we'll discuss later, our pipeline remains strong for telling well for future growth. Our solutions business helped drive the institutional business to net long-term inflows of $6.6 billion in the quarter. Meanwhile, net long-term flows in ETF vehicles have now been positive 10 out of 11 last quarters. Growth in the ETF business is broad-based with net inflows this quarter, both equity and fixed income strategies. I'm confident that investor appetite at returns to risk assets have we will see significant growth in this area. Net flows in active equities remains a headwind but improved meaningfully compared to our experience in 2022. Net long-term outflows in global equities were $2.5 billion in the first quarter including $1.2 billion from our developing markets fund, while still a challenging environment. This was the best out flow before this quarter in the asset class since 2021, with net outflows being less than half the net outflows in the fourth quarter. As we discussed on our last earnings call, the Chinese markets have continued to be unsteady for several months as the country is in the midst of transition period post COVID-19 policies and higher interest rates led to an uptick in fixed income redemptions industry-wide, consistent with that industry direction, our Greater China business experienced $2.9 billion of net outflows in the first quarter, primarily in the fixed income [ph] I just mentioned. Despite the near-term challenges, we remain extremely bullish on the opportunity in China over the long term. We ran 12 of 160 refund companies operated in China and remain the largest foreign known asset manager in the fastest-growing market in our industry. We expect to be in the market for new product launches during the second quarter, and we are optimistic for recovery inflows on the balance of 2023. Let me briefly touch on our private market capabilities. We experienced net long-term inflows of $600 million in the first quarter. We were very active in the CLO market and raised $1.5 billion from three new CLOs launched in that period. Real estate transactions slowed across the industry as markets were in turmoil and the banking sector and the higher interest rates made financing more difficult. However, our direct real estate portfolio has performed well. It is diversified across geographies, sectors and investment styles. Allison will get into great detail in just a few minutes. While we expect the growth may be more challenging real estate due to market conditions on our portfolio is well managed, and we continue to source new opportunities and are having constructive conversations with our clients, investing in growing our business, maintaining a strong balance sheet and providing a steady return capital to our shareholders, made as a top priority. I'm pleased to note that our board had approved a 7% increase in quarterly common dividend to $0.20 per share effective this quarter, which reflects our strong cash position and stable cash flows despite the uncertain markets we've been facing. Long-term debt continues to run at the lowest levels in over a decade. And we've recently renewed and increased the size of our credit facility from $1.5 billion to $2 billion, providing us significant flexibility moving forward. Lastly, as you're aware, last -- in February, we announced that Andrew Schlossberg will take over's President and CEO when I retire on June 30. Schlossberg has more than 20-year career at Invesco. Andrew has successfully led several large businesses and earn the respect of clients and employees, the Board of Directors and executive leadership team. Andrew, our highly experienced executive leadership team are well placed to lead Invesco into the next chapter. I'm excited for the future of the firm as we build on our market-leading position to further accelerate growth on our Andrew's leadership and that of the executive leadership team. This is the most talented experienced leadership team Invesco's ever had, from Andrew, Alison and the rest of ELT. I could not be more excited. I will continue to work with Andrew and the team as Chairman Emeritus from June 30 through the end of 2024. Before we turn over the call to Allison, I'd like to introduce Andrew, invite him to say a few words. Andrew?

Allison Dukes:

Thank you, Andrew. And good morning, everyone. I'll start with Slide 4. Overall, investment performance improved in the first quarter with 64% of actively managed funds in the top half of peers or beating benchmark on both a three-year and a five-year basis, up from 61% and 63% in the fourth quarter. We have strong performance strength in fixed income and balanced strategies for their solid client demand. Performance lacked benchmark and certain U.S. equity strategies, but performance is trending positively and a number of global equity and alternative strategies. Turning to Slide 5. We ended the first quarter with $1.48 trillion in AUM, an increase of $74 billion as compared to the last quarter as most market indices posted gains despite continued volatility. Market increases, foreign exchange movement and reinvested dividends increased assets under management by $65 billion. Total net inflows were $9 billion, inclusive of $8 billion into money market products. I'm pleased to note a return to organic growth as we generated $2.9 billion in net long-term inflows in the first quarter. The improvement in net flows, given the ongoing uncertainty in financial markets, further demonstrates the diverse nature of our business mix and should once again place Invesco among the best-performing asset managers in terms of organic growth. Asset capabilities generated net inflows of $5.4 billion while net redemptions and active strategies moderated with net long-term outflows of $2.5 billion in the first quarter as compared to $10.5 million in the fourth quarter of last year. Key capability areas, including ETFs, fixed income and the institutional channel, all contributed to our growth this quarter. Invesco ETF generated $2.8 billion of net long-term inflows in the first quarter, equivalent to a 4% annualized organic growth rate. Volumes have been down across the ETF industry from the record highs experienced in the first quarter of 2021 through the first quarter of 2022. But as Marty noted, our ETF business has now been in net inflows for 10 out of the past 11 quarters. The NASDAQ 100 QQQM was one of our top-selling ETFs this quarter and has now grown to over $8 billion in AUM since its launch in late 2020. We also saw strong flows into our S&P 500 Equal Weight and BulletShares corporate bond ETF. Partially offsetting growth in equity and fixed income ETFs were $2.5 billion of net outflows and currency and commodity ETFs, which are included in our alternative asset class. We experienced net outflows of $3.7 billion in the retail channel during the first quarter. Net flows were roughly breakeven in EMEA, while Asia-Pacific and the Americas were both in net outflows. As Marty highlighted at the top of the call, the institutional channel garnered net inflows for the 14th straight quarter to $6.6 billion. We were net inflows in all three of our global regions and growth accelerated to 7% on an annualized basis. After several quarters of strength in institutional fixed income, equity mandates were responsible for our largest fundings in the first quarter. Advancing to Slide 6, net flows by geography improved as compared to last quarter and turned positive for the quarter in both Americas and EMEA. This was mainly due to slower redemptions in the retail channel as well as the funding of several institutional mandates. Net flows were breakeven in Asia-Pacific and net outflows in our China joint venture were offset by growth in Japan and our Hong Kong institutional business. Looking at flows by asset class, net outflows and active equity strategies improved in the first quarter, led by moderating of redemptions in our global equity capabilities. Net outflows in global equity strategies were $2.5 billion in the first quarter, including $1.2 billion from our developing markets funds, compares to $6 billion of net long-term outflows in the fourth quarter, which included $3.1 billion of outflows from developing markets. Fixed income capabilities garner $2.5 billion in net long-term inflows despite higher redemptions in Chinese fixed income products that Marty spoke of earlier. Growth in fixed income this quarter spanned both taxable and tax exempt offerings as well as the full range of vehicle types, including mutual funds, ETFs and SMA. This reflects the breadth and depth of our global fixed income franchise, and we see opportunity in this asset class over the remainder of this year. Alternatives experienced net outflows of $3 billion in the first quarter. Private markets net inflows were $600 million, driven by the launch of three CLOs that raised $1.5 billion in aggregate and direct real estate net inflows of $600 million. Offsetting growth in these areas of private markets were net outflows in bank loan strategies. Currency and commodity ETF net outflows, as I mentioned earlier, were the primary driver of alternative net outflow. I'd like to take a moment to highlight our direct real estate portfolio, which had $73 billion of assets under management as of March 31. Through our real estate business, we offer the full range of investment styles across the risk-return spectrum, and we invest primarily in real estate equity. We also invest in real estate debt, which comprises less than 10% of our global real estate portfolio. Our direct real estate holdings are well diversified by property type. Commercial office properties comprise about one third of our assets under management. Apartment and other residential properties account for nearly one quarter and industrial properties about one fiffth. The remaining 20% of our properties span retail and specialty sectors, including mixed-use development, self-storage and medical. Finally, we are diversified by geography within each property type. By total asset value, 40% of our office holdings are in EMEA and Asia-Pacific where the market dynamics affecting demand for office space are significantly different than those in the United States and because the adoption of remote working model is much lower outside the U.S. Several of our direct real estate funds use leverage but were measured in our approach and the average loan-to-value across our direct real estate funds was approximately 30% as of December 31. These figures may fluctuate over time, and they vary across specific funds. As Marty mentioned earlier, real estate transaction activity slowed during the first quarter and we would expect activity to be muted over the balance of the year until markets find more stable footing. Longer term, we expect private markets and more specifically, direct real estate and private credit to be a driver of growth and we are in a strong position to capture that demand. And now moving to Slide 7. Our institutional pipeline was $22.1 billion at quarter end, a decrease from $30 billion last quarter. We had good pull through from our pipeline in the first quarter, which contributed to $6.6 billion of net long-term input. Our pipeline has been running in the mid-20 to mid-$30 billion range dating back to late 2019. So this is on the lower end of that range, but we view this pipeline as strong given the market environment and the significant fundings that took place in the first quarter. As we've noted previously, market volatility is causing some mandates to take longer to fund, and we would estimate the funding cycle of our pipeline is running in the three to four quarter range versus the two to three quarters prior to the market downturn. Our solutions capability enabled 14% of the global institutional pipeline as of the first quarter as well as several of the mandates that funded recently. We embed solutions into our client interactions, and we have ongoing engagement about new opportunities. The pipeline reflects a diverse business mix but has helped Invesco sustain organic growth in institutional for more than three years now. Turning to Slide 8. Net revenue of $1.08 billion in the first quarter was $32 million or 3% lower than the fourth quarter and $176 million or 14% lower than the first quarter of last year. The decline from last quarter was mainly attributable to a seasonal decrease in performance fees which were $50 million lower and two fewer days in the first quarter, which accounted for nearly $25 million in lower net revenue. This was partially offset by higher investment management fees of $25 million. The decline from the first quarter of last year was due largely to lower investment management fees driven by lower AUM levels. Total adjusted operating expenses in the first quarter were $749 million, $20 million lower than the prior quarter and $9 million lower than the first quarter of 2022. Compensation expense increased by $12 million as compared to the fourth quarter as seasonally higher payroll taxes and benefits were largely offset by the lower incentive compensation paid on performance fees. Included in compensation expense this quarter is $13 million of costs related to executive retirements and other organizational changes. We expect to recognize approximately $20 million of additional costs related to executive retirement in the second quarter. As we discussed, we managed variable compensation to a full year outcome in line with company performance and competitive industry practices. Historically, our compensation to net revenue ratio has been in the 38% to 42% range, trending towards the upper end of that range and periods of revenue decline. At current AUM levels, we would expect the ratio to continue to trend towards the higher end of that range for 2023 when excluding the cost pertaining to executive retirement. Marketing expenses of $28 million were $6 million lower than the prior quarter, coming off the seasonal highs we typically see in fourth quarter. Marketing expenses were modestly higher than the same quarter last year by $2 million. Property, office and technology expenses were $5 million lower than last quarter, primarily due to lower software costs and $2 million of property decommissioning associated with our Atlanta move that did not occur. On that note, I'm happy to share that we are speaking to you from our new global headquarters in Midtown Atlanta as we completed our move earlier this month. G&A expenses of $95 million were $21 million lower than the prior quarter partly due to lower third-party spend on technology projects. As we discussed previously, we continue to invest in foundational technology programs that will enable future scale. These expenses span G&A and property office and technology expenses and spend may fluctuate from period to period. In the first quarter, we also benefited from $10 million in indirect tax credits. We do not anticipate these tax credits will recur at these levels going forward. We maintain an extremely disciplined approach to expense management and are focusing hiring and investment in the key capability areas that are driving our growth. As Marty and I have discussed previously, optimizing resource allocation to efficiently drive growth has and will continue to be a top priority for the organization. Now moving to Slide 9. Adjusted operating income was $327 million in the first quarter, $12 million lower than the prior quarter due to lower net revenue, partially offset by lower operating expenses. Adjusted operating margin was 30.4% broadly in line with 30.6% in the fourth quarter, but lower than the 39.5% a year ago prior to significant market declines. Excluding $13 million of costs related to retirement and other organizational changes, first quarter operating margin would have been 31.6%, an increase of 100 basis points as compared to last quarter. Earnings per share of $0.38 was $0.01 lower than prior quarter and $0.18 lower than the first quarter of '22. Excluding these expenses related to executive retirements and other organizational changes in the first quarter would add $0.02 to earnings per share. The effective tax rate was 24.1% in the first quarter, lower than 26.9% in the prior quarter, primarily due to nonoperating gains on seed money investments and lower tax jurisdictions. We estimate our non-GAAP effective tax rate to be between 23% and 25% for the second quarter of this year. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pretax income and discrete tax items. I'll wrap up on Slide 10. As you heard earlier from Marty and Andrew, building balance sheet strength remains a critical priority. We're making steady progress and total debt of $1.5 billion is at its lowest level in more than a decade. We ended the quarter with $889 million of cash and cash equivalents and 0 borrowing on our credit facility. The first quarter is typically a period of seasonally higher cash fees, and we anticipate building cash in the coming quarters. Our leverage ratio, as defined under our credit facility agreement was 0.8 times at the end of the first quarter, in line with both last quarter and the first quarter of 2022. If preferred stock is included, our fourth quarter leverage ratio was 3.4 times. As highlighted earlier, we're pleased to note that our board approved a 7% increase in our quarterly common dividend to $0.20 per share, effective this quarter. This reflects the strength of our balance sheet, cash position and stable cash flows despite the uncertain markets we have been facing. We also renewed our credit facility for another five years with favorable terms as well as increasing the capacity of the facility from $1.5 billion to $2 billion. This builds additional flexibility for managing our balance sheet as we prepare to redeem the $600 million senior note maturing in January of 2024. Markets have remained volatile thus far in '23. There have also been signs that a modest recovery could be on the horizon. Overall, I'm pleased with the progress we made this quarter, returning to organic growth, tightly managing expenses and methodically building balance sheet strength. Our firm has successfully navigated market volatility in the past. We're poised to emerge stronger in a market recovery and capitalize on future growth opportunities where they emerge. There's a lot of hard work ahead of us, and I'm excited to partner with Marty, Andrew and the executive team as we lead Invesco into a new era. And with that, we'll ask the operator to open up the line to Q&A.

Craig Siegenthaler :

Thanks, good morning everyone.

Craig Siegenthaler :

So my question is on China. So you're seeing bond flows improve really throughout much of the world, but not in China. And I'm guessing the comparatively low interest rate backdrop in China versus the U.S. could be one factor. But can you talk about what's driving the net redemptions in China, not just in your Great Wall JV but across the industry? And also any perspective you have on a rebound, especially given pretty strong long-term dynamics, including aging populations and retirement?

Allison Dukes:

Yeah. I would just say specifically, Craig, I mean, what you saw is the yields really increased in the fourth quarter, and that obviously drove prices lower. And that caused a bit of a spook and it really set investors to redeem and drive redemptions higher industry-wide. So I think to your point around what are we seeing in the industry, and that was really an industry phenomenon that drove that behavior. It was very pronounced coming into the first quarter. We've definitely seen it begin to moderate the first quarter unfolded and feel better as we're starting the second quarter for sure as we see what's happening there. That also drove product launches lower. And as you know, product launches drive a lot of the flow activity in China. And so in the first quarter, we only launched four products, and they were relatively low in terms of the flow capture there. And again, that was consistent with a lot of the industry dynamics. We're optimistic to see more in the second quarter. We have a pretty strong pipeline of product launches, and we're optimistic that market sentiment is improving modestly and a lot of the dynamics in that phenomenon should have played itself out.

Allison Dukes:

Sure. Let me take a stab. I'm not sure if I could answer exactly what percentage could be redeemed. I think what I would say is, in general, through cycles we see on average about 5% to 6% of our AUM and a redemption queue. You would expect it to be a little bit higher than that in times of market stress. You'd expect it to be a little bit lower in better markets. And I'd say we're probably running a little bit higher than that 5% to 6% at the moment, but it's not in a disconcerting way. It usually takes a few quarters to fully fulfill some of those redemption requests. And then we also see that in times of equity market recovery, some of those redemption requests actually get canceled. So you manage through, and we'll see where it goes, but we don't feel any sort discomfort with where it is now nor is it unusual relative to past cycles as we think about coming into COVID. I would note, we've been managing our office exposure down since COVID began in March of 2020. So when you look at where our office exposure was coming into 2020, it made up about 45% of our total portfolio. Today, that's down to about 35%. And as we noted, that's going to be even lower in the United States, and we've been managing it down more aggressively in the U.S. It's going to trend quite a bit higher in places like APAC, where you just have not seen an impact to the office enviroment. In terms of loan-to-value, I would say, generally speaking, it's about a 30% loan to value, it's not running a whole lot higher than that. I will also say in terms of our lenders and the sources of that leverage, it's very well diversified. No concerning exposures anywhere and we feel like we have a lot of diverse good sources of funding, and those have held up really nicely.

Operator:

Thank you. Our next question comes from Daniel Fannon with Jefferies. Your line is open.

Andrew Schlossberg:

Yeah. Thanks, Dan. Look, like I said at the beginning, over the whole course of my career, the last 20-plus years at Invesco, we've been continuously updating our strategic priorities and adjusting and changing where client needs are going and where we anticipate them going. And I've been a part of putting together those strategic priorities that Allison and Marty have been talking to you all about over the last year or two, and I frankly don't see any of those really changing in terms of our priorities at all. But what I would say is how do we come up with them. And they're really a function of where we believe client demand will grow and where we think we have competitive strength to build on. And so the areas that I would highlight will sound similar to what you've heard before. I'd really emphasize the barbelling of client needs between also private markets, and ETFs and indexing is a huge part of the growth and where we have strong franchises. We've talked about China as a growth market for us, and we believe in that regardless of geopolitics and ebbs and flows and cycles. We have strong franchises and active fixed income and solutions and we're going to continue to scale those. And we're going to ensure we have quality and differentiation in our active equity with an emphasis on global in particular. And we're going to continue to build scale through the back and middle office transformations we've been talking about with investments in both foundational technologies and innovation for enhancements. And I guess what I'd say is we'll continue to look at those and evolve them. The team is highly focused on executing -- we're going to continue to accelerate the pace with regard to that and continue to get sharper on our strategic execution to deliver. So that's pretty much where we are right now, and we'll continue to keep you updated.

Allison Dukes:

Sure. So yes, I noted that there was a $9 million indirect tax credit that was in G&A, and that would not recur. So you shouldn't expect that. I also noted that inside of comp expense, we have an unusual $13 million of retirement expense related to our executive changes. And we expect to incur another $20 million related to the same in the second quarter of this year. And so when you think about the $9 million that won't recur plus the next $20 million of retirement expense, I would say beyond those, we would expect we can hold expenses roughly flat for the next few quarters, adjusting for variable comp, of course, and that's roughly flat as all things being equal, but we would adjust variable comp in line with market changes.

Operator:

Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.

Marty Flanagan :

Yeah. Let me make a couple of comments, Allison will chime in here. So let me talk about outside of the United States, as I mentioned, Andrew and I were just out in Asia. The client interactions in China are very strong. We continue to expect growth there institutionally. Japan, also, we look at that as a market fixed income market, in particular, actually the equity. There's demand for equity in Japan, which has been a while since that's been the case, global equity in particular. And Australia, the client interactions are very strong and that market, in particular, is very much along the line what Andrew just mentioned have been very barbell oriented probably the most extreme that sort we sort of run into and we're positioned very strongly against that, whether it be in private credit is an area of more recent interest where historically it has been I believe real estate and you've heard of our success on the passive side in Australia. And the same thing in the UK, it's the institutional market continues to be an area for us, fixed income, in particular, actually [indiscernible]. So it's all heading to right way institutional but --

Allison Dukes:

Yeah. Adam, I just add on the fee rate. And the fee rate does tend to run from -- it ranges from mid-20s to mid-30s basis points. It has been actually holding up very nicely. If you think about the information that we shared on Page 7, you can see a large portion of the pipeline is comprised of active equities as well as alternatives and specifically, that would be private markets primarily. So it is running on the higher side. I was pleased to see the active equity component of it, recognizing we had some meaningful active equity fundings in the first quarter, and the pipeline is replenishing nicely in a really well-balanced way. It does reflect the barbelling that Andrew noted, but it's holding up nicely in terms of fee composition.

Allison Dukes:

It was on the low side this quarter, and I would expect it to fluctuate more. I don't expect that lower third-party spend would hold necessarily. But as we noted, the technology, foundational enhancements we've been making, you're going to see that show up in G&A and property office and technology. So I think my comment earlier in response to Dan's question around excluding the indirect tax benefit and excluding the retirement expense, I would expect expenses to be roughly flat for the next few quarters, all things being equal.

Operator:

Thank you. Our next question comes from Bill Katz with Credit Suisse. Your line is open.

Marty Flanagan :

Let me have a couple of comments and I'll say here. So first of all, Bill, thanks for your comments. The fundamental strength is bank loan CLOs, and that is the core of the franchise. We have been building out the same direct lending. We do see that as an opportunity. We also know some crowded space. But we have good capabilities for performance. So that is a focus for us in private credit also where we are certainly see a manager institutionally led. Frankly, Australia tends to be an area that's focused on right now on our capabilities. So we'll see where that goes. But again, those are two add-ons of our core capabilities there, and we think there's opportunity.

Andrew Schlossberg:

And Bill, thanks for the question. What I would add to Allison's last point and then to pick up on Marty's is just to emphasize what Allison said that reallocation is going to continue. And it's going to continue towards private markets, both our real estate equity and debt and our private credit, which comprises the bank loan strategies that Marty was talking about as well as direct lending and distress that. We see demand over the long run continuing to grow there. In terms of your question about where we're seeing money come from, it's a little early to pinpoint it exactly. But a couple of things we're seeing. One, we're actually seeing people moving beyond their passive cap-weighted benchmarks and actually moving out to other forms of indexing, but also into active strategies, both on the equity and fixed income side, which we think is a real positive thing. We're also seeing them kind of reallocate across their private markets and alternative portfolios leaning more towards some of the things that we were emphasizing in credit. But again, that's early days as people are working through their private portfolio is taking a little bit longer. So those are some of the areas where we're seeing movement.

Marty Flanagan :

Yeah. Let me make comments and turn it over. So -- just at a high level, our priorities don't change. It has not changed, and Andrew and Allison can talk about it, is really reinvesting in the business. And I think we've probably done the best job that we've done as a management team of reallocating into areas of growth and sort of squeezing cost out of areas that are less an opportunity as you go forward. We've always looked at M&A as fueling a strategic gap if we can do it organically, and that really has not changed. But Andrew, why don't you pick up with your thoughts there?

Allison Dukes:

I think the only thing I would add to all of that is our strategy is to put our balance sheet in a position where we can be opportunistic. We feel very good about the capabilities we have, but we're very focused on improving the balance sheet. I'm very pleased that we were able to raise the $2 billion in the midst of this environment over the last six weeks. We've got a terrific, very supportive group of lenders. I think it puts us in a great position to be able to continue to manage our leverage profile down both at the upcoming '24 to be able to pay that off of a combination of cash and usage of the revolver. And beyond that, our next maturity is in 2026, it's $500 million. I think we'll be in a terrific position to continue to manage our capital structure down from there. So I think if anything, we feel like we're on our front foot, and we continue to put ourselves in a position to operate on our front foot.

Marty Flanagan :

Thanks, Bill.

Ken Worthington :

Hi, good morning. Thanks for taking the question. First, Marty, it's been a pleasure working with you all these years. First Franklin then Invesco. So best of luck on the next step in your career. On China and Asia, as mentioned a number of times, money coming out of fixed income, where is that money going to? Is it largely cash? Or is it some of it going into equities given the rally we've seen there? And is there a better opportunity to capture that money as it transitions from one asset class to another? And in terms of maybe what's going on in Asia outside of China, I think we sort of danced around this a couple of times. But to what extent are higher rates impacting the demand for some of Invesco's more popular yield-focused products like bank loans to real estate and CLOs? I think like you said you raised three CLOs that seems to be contrary to what we're seeing elsewhere. So you're having success there and then bank loan seems more standard with outflows. So how does this all sort of circle around the demand for Asia for these higher-yielding products?

Andrew Schlossberg:

Yeah. The one thing I'd say in the long run, Ken, to the question on China, the single biggest opportunity is the retirement market development in China. And so the notion of looking at more traditional asset allocations and a long-term asset allocations, we think is going to begin to find its way into that marketplace. Also, the digital sort of distribution and the way that digital is the primary way that retail investors invest, there is a higher turn. But that also means that they're able to kind of look at the trends and we're starting to see some of the equity movement even early on there. So that's all I'd add for now.

Marty Flanagan :

Thanks Ken.

Michael Cyprys :

Great, thank you. Good morning. So just a question on the Greater China business. Just curious how you think about the stickiness and duration of AUM in your Greater China business versus other regions of the world. I think if we look overall, your retail business has about 3.5-year duration or so for your retail customers. Just curious how different that is in China? How do you see that evolving over time? And then how does the cost of gathering new flows in China compared to, say, the U.S. business?

Allison Dukes:

Yeah. I would say, look, it's accretive to the firm margins. It's a well-scaled business, even though we think we've got a lot of room to continue to grow it, but it is accretive to the firm margins overall. And while it is a competitive marketplace, as Marty noted, we're the 12th largest asset manager in China and the -- we're the largest foreign asset manager. The 11 ahead of us are all Chinese owned. And so we are very well positioned. We are a very competitive player. We have an opportunity to really not only grow as the market grows there, but also take market share as we've been able to do in the last few years. So in terms of the cost of gathering, I think it's a very well-managed accretive business overall.

Michael Cyprys :

Great. Thank you.

Patrick Davitt :

Hi, good morning, everyone. I think this was the first quarter of meaningful UK inflows in many years. Could you flesh that out a bit more? Is there something unique or lumpy that happened? Or are you starting to sense a real positive shift is finally emerging there? Thank you.

Andrew Schlossberg:

Yeah. I mean, it's all -- we've always had a high-quality sort of active focus in the marketplace in the UK, in particular, our legacy on the equity side and the performance is getting -- has gotten stronger in those asset classes and as some demands come back, we're capturing it. So I'd say it's largely on the back of good investment performance.

Patrick Davitt:

Thank you.

Unidentified Analyst:

Hi, all. Thanks for taking the question. This is Luke on Alex's behalf. As part of Andrew's announcement, you guys highlighted a number of other operational realignments. Can you just help frame the operational benefits of these and any potential cost saving opportunities that could be realized? And over what period of time do you think that could occur? Thanks.

Allison Dukes:

Yeah. Look, I wouldn't point to cost savings just yet. There are a lot of ins and outs and puts and takes as we're thinking about reorganizing around these changes, but really chiming in on Andrew's comments. We're very focused on making the organizational -- organization simpler and more streamlined so that as we gain scale, we can generate additional operating leverage and really starting to get ourselves organized in a way that we do not have to grow expenses too much as markets improve. But more importantly, as we grow organically and create that organic fee rate growth. So I think at this point, we think these changes are going to be very helpful, and they organize the company in a more simple way. And we'll look forward to sharing more as we continue working away.

Allison Dukes:

Thank you.

Operator:

Thank you. And that concludes today's conference. You may all disconnect at this time. Speakers, you may stand by for post conference.

Operator:

Welcome to Invesco’s Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. Now I would like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations.

Marty Flanagan:

Thank you, Greg, and thanks everybody for joining us. And I'm going to start on slide three if you're following along, which is the fourth quarter highlights. The fourth quarter concluded a year of significant headwinds and volatility in global markets. Seemingly, no geography or asset class was immune to the S&P experienced the worst year since 2008, NASDAQ Composite declined over 30%, MSCI Merchant Markets Index nearly 20%, and bond markets, typically the safe heaven when equity suffer, declined significantly due to rise in interest rates with the global aggregate bond index declining by more than 15% for the year. This resulted in the worst markets we've seen in decades. Rising COVID infections in China and tax loss harvesting in developed economies as the year came to a close made for a challenging organic growth dynamic in our industry. Despite industry challenges in 2022, we're pleased to see key capabilities in areas with high client demand continued to deliver organic growth, offsetting net outflows and capabilities that experienced redemption pressure as investors express a preference for risk-off assets. Key capabilities that delivered net long-term inflows for the year included ETFs, fixed income, Greater China and the institutional channel. The firm's ability to deliver these outcomes demonstrates the strength and resilience of our diversified platform in the face of extraordinary market headwinds. Although, market showed signs of stabilization in the fourth quarter, the uncertain backdrop continued to weigh on investor sentiment and impacted client demand. Invesco separated itself from most industry peers by generating net inflows in key capability areas led by strong growth in ETFs in the quarter. Our fixed income business and institutional channel continued to build on our track record of organic growth, generating net inflows for 16 and 13 consecutive quarters, respectively. The depth and breadth of our investment capabilities that Invesco brings to market that position the firm to return to organic growth when investor sentiment improves. Invesco ETFs delivered $4.3 billion in net long-term inflows during the quarter. For the full year, ETFs brought in $28 billion of net long-term inflows, the equivalent of 11% organic growth rate. Our ETF lineup remains differentiated for most competitive offerings with a focus on higher value, higher revenue market segments like smart beta, and we continue to drive innovation in space with products such as our QQQ Innovation Suite. Fixed income capabilities in the institutional channel have been pillars of organic growth for several years now and growth persisted in both of these areas in the fourth quarter with $800 million and $900 million of net inflows, respectively. As Allison will discuss later, our institutional pipeline remains at healthy levels. And as interest rates stabilize, we have a significant opportunity to capture growth in fixed income capabilities in 2023. Our business in Greater China performed exceptionally well during 2022, building on our leading position in the world's fastest-growing market class asset managers. We experienced modest net long-term outflows of $600 million in the fourth quarter due to significantly higher redemptions in fixed income throughout the industry in China and rising bond yields stroke net asset values for fixed income securities lower. Despite these challenges, we raised over $3 billion from new product launches during the quarter in China. For the full year, our China joint venture delivered $7 billion of net inflows, the equivalent of 11% organic growth rate. Market sentiment in China will be mixed for the next few months as the country works through the transition period of higher COVID infection, stabilizing interest rates and redemptions turned to more moderate levels. That said, there are also signs that the outlook for the remainder of 2023 is improving, and I'm optimistic for a return to organic growth rate throughout 2023 in China. Although, we maintain momentum in key capabilities, the firm experienced net long-term outflows this quarter of $3.2 billion. Active global equity remains the biggest drag on organic growth with $6 billion of net outflows in the fourth quarter, including $3 billion in our developing markets fund. As we discussed previously, client appetite for these assets have been lower than in the past, but I'm optimistic, redemptions will slow this top client appetite for risk assets will eventually return. We entered 2023 with a strong balance sheet, giving us the needed flexibility to operate strategically in this environment. Long-term debt remains at low levels, the lowest in 10 years, and our cash balance increased to over $1.2 billion at year-end. As we discussed last quarter, we continue to be disciplined in our approach to expenses, tightly managing discretionary spending and limiting higher roles that are critical to support the organization and future growth. We are thoughtfully managing market headwinds while investing for the long-term. We remain focused on identifying areas of expense improvement that will deliver positive operating leverage as the market recovers and organic growth resumes. We are being extremely thoughtful about capital resource allocation in this environment, and we will be well positioned to maintain investments in areas that deliver future growth. Looking ahead, we are partnering with our clients to meet the most pressing needs in this dynamic environment. We've dedicated the past decade to build a breadth of investment capabilities and solutions mindset and operating scale at Invesco that few in the industry can match. I'm proud of our talented -- what our talent employees have accomplished in 2022 on behalf of clients and stakeholders, and I'm optimistic for return to organic growth when market sentiment eases. Market direction may be uncertain, but I'm confident that Invesco is prepared to meet challenges that will arise in 2023 and well positioned for future growth. With that, Allison, I'll turn it over to you.

Operator:

[Operator Instructions] Glenn Schorr with Evercore, your line is open.

Marty Flanagan:

Yes. Glenn, let me start and Allison, please chime in. So look, it’s very -- that’s really how that market is operating right now. In time you had to get a little mature to something more similar to the United States where you’ll have your launches, there will be fewer of them and you’ll have the ongoing flows into those capabilities. But there are follow on inflows, but really the bulk of it comes through these launches. And again, it’s just unique to the market. That said, I think it’ll evolve over time. But I just want to -- again, Allison hit on this, I did. It’s a really volatile time over the next few months here, but we just think the future is very, very bright in China for us. And when the COVID transition completes itself, we anticipate 2023 being a very strong year in China.

Glenn Schorr:

Okay. Thanks, Allison. Maybe one quick one for you on expenses, so the -- or I guess margins in general. Market was up -- your AUM was up 6.5% in the fourth quarter, so some of that’s going to flow through into the first quarter revenue. So maybe you could start, just help us with the jumping off point on starting the first quarter. Because sometimes there’s some seasonal items on the expense side, so just how to think about the jumping off point in Q1? Thanks.

Operator:

Thank you. And now Brian Bedell with Deutsche Bank.

Allison Dukes:

Sure. Let me do my best to try to walk through a few of these. On property office and technology, a couple of points on some of, what we’re experiencing really specific to our Atlanta headquarters. As a reminder, we’re carrying the cost of two headquarters right now. That will persist for a few more quarters. That’s somewhere between $2 million to $3 million of incremental expense. We had a $2 million non-recurring charge in the fourth quarter related to decommissioning the existing, or I’ll say outgoing headquarters we are in. We also pointed to some uncertainty, because we had a pipe burst in our new building on Christmas Eve and that happened around Atlanta and that will cause some delay in moving. And so there is a little bit of uncertainty right now as we try to work through what all of this means. That combined with G&A, in G&A, we pointed to a lot of FX revaluations and higher VAT taxes in the fourth quarter obviously FX has been a pretty meaningful driver in some of the significant movements we saw over the last few quarters there. I would say, overall as we think about property office and technology, and G&A, I will just continue to underscore a lot of these key foundational projects that we are working on and they really spam those two categories in terms of both technology and professional services. We have been -- we are working on installing in a new HR environment. We are wrapping up moving all of our financial systems to the cloud, and we are in the early stages of Alpha NextGen. And so as these projects are rolling off and rolling on there is quite a bit of investment and focus right now and really creating scale for the future. Overall, as I think about G&A for the year and the fact that we do expect to be back in a full travel mode this year, and we do expect the reopening of China to allow us to get back to a really important region that we have not been able to get to for the last three years. I expect G&A this year on an average basis is somewhat consistent with G&A last year on an average basis, when you think about some of the efficiencies and our -- discretionary expense management we’re trying to manage, but at the same time, the reopening of travel as well as some of these foundational investments we are making.

Marty Flanagan:

Yes. I’ll make just a comment. The contrast is dramatic, right? If you went through last year there was really no interest at all in emerging markets in particular very much risk off and the like, it’s too early. But what we are seeing is, starting to be some early interest in emerging markets in China, driven by China, quite frankly. And developing markets in Q4 had some very, very, very solid performance, which needs to have, and it’s a really talented team. So the answer is, if the client appetite is there we should do quite well, which would be a nice change from this past year.

Operator:

Thank you. Our next Dan Fannon with Jefferies.

Allison Dukes:

Sure. I’ll start, Marty, chime in. I mean, I would say a couple of things as we look at alternatives, again, a lot of what we saw in terms of outflows would be the liquid alternatives. So commodity ETFs in particular, currency ETFs. So, I think from that perspective that would be -- those would be lower fee alternatives that were flowing out. Boiling that down to private markets that also was an outflows at about $1.6 billion, but that was largely driven by global bank loans, direct real estate, we were an outflows to the tune of about $200 million there. So that’s really, again, realizations net of acquisitions there, negative $200 million. Continue to gather commitments and have a fair amount of dry powder and direct real estate about $7.5 billion coming into the year overall on that side. On a private credit perspective, I think it’s been a -- it’s an interesting environment. It was an interesting year for private credit overall, just the floating rate nature of loans and some of the attractive fundamentals there have helped mitigate losses, but certainly as recession fears kind of persist and trying to navigate what that may or may not look like, that certainly impacts credit appetite overall. And so we continue to navigate that. I think we, coming into this year, we’re bullish on all of our private market asset classes. We feel like we’re really well positioned. We feel very good about the funds that we have launched and will be launching and that they’re going to be well positioned for where we expect to see client demand this year. But certainly your perspective on higher yields and what the attractive entry point is going to really dictate how our flows come together as we make it quarter-to-quarter through thus. So, overall I think we’ll continue to see good strong demand there. But the liquid alt and some of the movements and currencies and commodities have put overall downward pressure on the flows there.

Marty Flanagan:

Yes, absolutely. So, look, I think that’s true of equities also, right? Some certainty to the future is going to be a really, really important thing for how investors react this year. But for fixed income, absolutely that’s going to be the case. It’s on the back of a broad set of capabilities, very good performance. And I’ll just follow on to Allison’s point in REIT, which we’ve talked about over the last year. It is now being launched on a very important Wirehouse, which is one of the things we’re waiting for. And we’re also in development of some follow on capabilities in our private markets that will end up in the wealth management channel. But again, that will be a multi quarter introduction. But we’re now underway. So it’s again, this won’t be immediate, but we’re now moving forward, which is a really important thing for the firm.

Operator:

Thank you. Now, Brennan Hawken with UBS.

Marty Flanagan:

Yes, look, I think that’s a rational line would get you there, right? But as I say, we’re, from my perspective, we’re a lot closer to the end of the uncertainty than the beginning. And what we point to is just look at our relative flows, vis-à-vis our competitors how we’re positioned. There’s a lot of things that are going well and you don’t need a lot of change and sentiment to really start to make a really meaningful impact in our flows. And so as they say, they don’t ring the bell at the bottom, but we’re a lot closer to that, and I think that’s going to be a really positive development for Invesco.

Brennan Hawken:

Thank you for that all that color. That is very, very helpful. Shifting gears a little and thinking about real estate and your capabilities there. Allison, I believe you made some positive commentary on how the year shook out there on the real estate front. And I think, Marty, you referenced that you’re getting close to a warehouse launch on a product. I guess, number one, on the wealth management side, have you been looking at what some other products and some of the struggles and the gates that we’ve seen in some of these products on the retail side? And how are you making adjustments? How you’re thinking about structuring your own product in light of some of the lessons learned there? And then, on the institutional side, there’s been some press around the queue building on redemptions and yet prioritization sort of given to the not addressing the queue, but rather addressing the needs of sustained investors, which makes perfect sense. It’s just how are you managing maybe that delicate customer service dance in order to make sure relationships aren’t damaged?

Brennan Hawken:

And then on the institutional side?

Brennan Hawken:

Yes. There was some press coverage around the institutional -- your institutional capabilities on commercial real estate and the fact that you -- there’s a large queue rather of redemptions, but they’re -- given the illiquid nature, it’s going to take time to work through that. And there’s prioritization given to the existing investors in the actual strategy. And so just it’s an understandable dance to try to balance, but how are you sustaining and maybe limiting damage control as far as relationships go around that inherent friction?

Brennan Hawken:

Okay. I’ll follow up later. Thanks.

Operator:

Thank you. Now, Craig Siegenthaler with Bank of America.

Allison Dukes:

Craig.

Marty Flanagan:

It’s a great question and I’ll give you an answer. I’m sure it’s wrong. But net-net I think getting, the rise in interest rates get into more natural interest rate levels is healthy for the marketplace. I think it’s healthy for active equities over time. And again, as I said before, once it sort of hits its stability level, I think it’s good for different types of asset classes and fixed incomes say. I really don’t know what the relative allocations are, but it’s been a long time that you’ve had a market where it’s positive for stock pickers and active equity. And yes, my personal view, once you get relative outperformance, you’ll start to see money go back to active equities and various elements of it. And that would probably not be a popular view. And history suggest that that’s not been the case. But that’s how I think about it.

Marty Flanagan:

Look, I don’t have a specific performance in front of me, so hard to answer the question. What I will say it’s a strong -- a very, very strong team. The core capability is, it’s just a fundamental strength to the organization and the client relationship has been very, very strong over an exceeding long period of time. So again, I’m sorry, I don’t have the specific performance that you’re asking about.

Marty Flanagan:

Appreciate it.

Alex Blostein:

Hey Marty and Allison. Quick, maybe just a quick follow-up to Craig’s question around fixed income. I was hoping you guys could give some details around Invesco’s position with some of the specific products that you feel most kind of optimistic about if the recent recovery and fixed income flows from the industry continues. And how are you thinking about your ETF positioning in fixed income versus the active book in fixed income?

Allison Dukes:

No, I mean, I think, whenever it is that inflation at least -- well, inflation declines and you start to see some pausing with the Fed and rate movements, I think we expect total returns to be strong overall. We would expect that to be sometime in 2023. I think Marty hit on the areas of real strength. Munis, certainly, we see that as our customers continue to focus on taxes as being an area that we expect to hear even more bullish sentiment over the course of this year. Our global liquidity is held up very nicely and we expect demand to continue there. Fixed income SMAs that’s been a very strong area for us that continues to be a wrapper that’s in real demand. Stable value has been a leading capability for us for a very long time. So, I think, it really does depend on your perspective on rates and credit of course. But we do expect there to be an inflection point and continued demand across a lot of our capabilities this year. I think overall net flows are still favoring ETFs over some of our active strategies, but we feel well positioned in both.

Marty Flanagan:

Yes. Let me make a comment then Allison can pick up. So, what we’ve been using our balance sheet for right now, and we’ve talked about it in different ways are really investment that are going to continue for any other company to grow in the future. So the alternative capabilities, this scenario, where we’ve been using the balance sheet. Yes, we’ll continue to do that. And you’ve heard us talk over time. MassMutual has been an amazing partner helping us to really augment our balance sheet to a very material degree. So that’s really been the more specific we’re talking about now in some of these foundational enterprise programs that Allison was referring to. They might not be “interesting” if they’re necessary, but that’s what creates scale within an organization. And so that’s the other way that we’ve been using very, very short term. But Allison, you want to pick up more on the other elements of the balance sheet?

Alex Blostein:

Yes. Thanks so much.

Bill Katz:

Terrific. Thank you very much for taking the questions. Appreciate all the colors so far. Marty and Allison, you both mentioned sort of the longer-term outlook for China does sound very strong. Could you help unpack a little bit about where you have a queue for product launches for 2023? And if you could break down the mix between equity and fixed income and other assets in the region? That’d be super helpful.

Bill Katz:

Okay, thank you. And just to follow-up certainly hear you on sort of all the different drivers for flows. When you think about the base fee rate exiting the year entering 2023, where does that sit today and should we presume sort of a gradual decline just given the ins and outs between across geographies products and distribution channels?

Bill Katz:

Thank you very much.

Patrick Davitt:

Hi, good morning everyone. Most of mine have been asked, just one quick one on credit ratings. I think S&Ps on record is saying their ratings and outlook are based on the expectation that your leverage ratio with the preferred will be in the two and a half times to three times range, which you went over in 4Q. I suppose the market recovery could already have that back below three times, which could you speak to any potential risks to your capital return or new investment outlook around that issue? And based on your past experience, how much of a grace period can we expect from the ratings agencies after kind of breaching that three times bogey for one quarter?

Patrick Davitt:

That’s helpful. Thank you.

Mike Cyprys:

Hey, good morning. Thanks for squeezing me again here. Just to follow-up on expenses, Allison, just coming back to the transformational project that you were mentioning earlier. I guess just how much might that lower run rate expenses as you kind of look out over the next couple of years, and as you think about expenses for this year, how are you thinking about the bookends for growth rate and expenses?

Mike Cyprys:

Great. And just a follow-up question on the cash position, $1.2 billion, how much of that is discretionary? And how do you think about the scenario where buybacks might resume? Thank you.

Mike Cyprys:

Great. Thank you

Marty Flanagan:

Yes, excuse me. I get off mute. I do want to follow-up just on this conversation on expenses. So there’s some longer term investments that Allison was talking about, which we’ve talked about some, and then the obvious elements around discretionary. But as a management team, we are absolutely focused on what we call, driving scale within the organization against capabilities that are in client demand. And we’re deeply into that process and we’re constantly doing it. And from that, you get the opportunity to make a decision to invest in a capability for a client, let’s say, or have it dropped at the bottom line. So that’s another element that we have been working on very, very diligently. And it’ll make us a better company, but at the same time, at some point the markets recover, you’ll get further operating leverage with, from the organization. So, I think you should look at it as three different elements, and that’s nothing new. You’ve seen us do it, time and time again. And it’s a normal practice from us and again, it’ll just create better outcomes for sure, shareholders and clients.

Mike Brown:

Great. Hi, good morning. I wanted to ask you a couple follow-up questions on the real estate business. So, I believe the total real estate exposure for Invesco is around $92 billion and $75 billion or so is in the direct real estate side. So within direct real estate, how much is tied to the U.S. and then how much is tied to office and retail?

Mike Brown:

Okay, great. Thanks Allison. And then just specifically in terms of some of the line items here, how much does real estate contribute to performance fees? So of the $68 million, how much was from real estate, and then how much do real estate transaction fees contribute to other revenue?

Mike Brown:

Okay, great. Thanks for the color there.

Allison Dukes:

Thank you.

Operator:

Welcome to Invesco's Third Quarter Earnings Conference Call [Operator Instructions]. As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you. You may begin.

Marty Flanagan:

Thank you, Greg. And those so inclined to follow along, I’ll start on Slide 3 and the highlight page. So the challenging backdrop continued in the third quarter as most major equity and bond market indices moved lower. Investors continue to behave cautiously seeking risk-off trades that impact industry flows as well as the level and mix of assets under management. The dynamic environment we are in favors money managers that have a broad diversified range of capabilities that meet the client's demands in this market. Invesco continues to prove to be one of the few global investment managers that can do that, with net flows momentum in market leadership positions in areas of high client demand. Despite historic market declines, the firm generated net long-term inflows this quarter in active fixed income, Greater China, and our institutional channel. All three of these areas have also garnered net long-term inflows on a year-to-date basis, along with our global ETF business and the private markets capabilities. I'll begin with our active fixed income capabilities, which has been a steady source of growth this year and is a testament to the diversity of the investment platform. The asset class generated net inflows of $3.7 billion in the quarter with strong demand from clients of Asia Pacific. We managed nearly $380 billion back to fixed income across the full spectrum of investment offerings, vehicles serving retail clients as some of the world's largest institutions. Our Greater China Business delivered $2.1 billion of net long-term inflows this quarter, Invesco Great Wall, our China joint venture, has fueled our growth and we continue to successfully launch new products, most notably in fixed income. We've grown consistently in the last several quarters despite the recent difficulties faced by the Chinese economy as a result of our strong local partner and our long-standing reputation as one of the top global investment managers in China. Our leading position in China is a result of many years of investment and hard work. As China and the global economy eventually recover, we expect our growth to accelerate in the fastest-growing market in our industry. Our institutional channel generated net inflows for the 12th consecutive quarter with $3.9 billion led by clients in Asia Pacific. The business has proven resilient throughout COVID-19 pandemic in the market downturn we're experiencing in 2022. Growth in institutional business as a result of investment our distribution team, the range of capabilities we bring to market and the build out of our solutions capability over the last several years, which is increasingly becoming a differentiator for Invesco. Despite volatility in the risk-off sentiment impacting global markets, we continue to win new mandates and our pipeline remain solid. We look forward to continuing our partnership with many of the world's leading organizations to meet the challenges of this uncertain time. While net inflows into ETFs are relatively flat in the third quarter, demand for ETF slowed industry-wide -- despite the slowdown, we maintain the leading position in ETFs and we expect to see growth rebounds as market volatility eases. On a year-to-date basis, we have generated strong organic growth and gained market share. We have continued investing in our private markets capability and we have experienced net outflows in the third quarter. Over the past year, we have generated organic growth against a very volatile market demonstrating the strength of our alternative platforms. Key to our alternative strategy is our strategic relationship with MassMutual, which is meaningful and continues to strengthen. In addition to managing over $10 billion in broker dealer, variable annuity and self-advice assets prior to this decline, we have over $3 billion in other investment relationships with MassMutual. This includes nearly $2.5 billion in commitments to various Invesco alternative strategies. The commitment for MassMutual has been growing over time and work on various strategies, including $400 million committed to our INREIT product. Having a partner like MassMutual as an investor adds significant reputational impact to our third-party investors. Considering the combined investment we haven't seen in co-investment vehicles, which totals $900 million, along with $2.5 billion in commitment from MassMutual in various alternative strategies is compelling partnership that enables us to bring products to market more quickly and brings with it the strong reputational backing of a world-class financial institution. While growth continued in key capability areas I mentioned, the firm experience net long-term outflows of $7.7 billion during the quarter, equity strategies would have been under pressure industry-wide, were the largest contributor to net outflows totaling $7.4 billion for the quarter. Client demand for emerging markets remain subdued and our developing markets fund had $2.8 billion in net outflows in the third quarter. While near-term headwinds persist, we have confidence that the equity global capabilities will be a driver of growth in the future when global markets recover and client demand for this important asset class returns. As we discussed last quarter, significant progress has been made building a stronger balance sheet position to help us weather this market downturn. We ended the quarter with a zero balance on over revolver and total debt outstanding is at the lowest level in years. Our cash balance increased over $1 billion and we maintain the flexibility we need to sustain investment in key growth areas. Last quarter, we mentioned that we met our target of $200 million in annual cost savings from our strategic evaluation. As market volatility continues, the need to maintain a disciplined approach to expense management is paramount. We are re-examining all aspects of discretionary spending relative to the environment we are in and we will be focused on near-term hiring and critical growth initiatives. We continue to thoughtfully balance managing through near-term market headwinds while investing for long-term growth. As always, we remain focused on helping clients meet their investment objectives invested in areas of strategic importance, scaling our operating platform, and efficiently allocated resources. By executing our long-term strategy, I'm confident Invesco will maintain this position as one of the leading firms in the industry while delivering compelling returns to shareholders. With that, I'll turn it over to Allison.

Operator:

Thank you. [Operator Instructions] And our first question comes from Brian Bedell with Deutsche Bank. Your line is open.

Allison Dukes:

Sure. Good morning, Brian. Let me take the first one. So on the transformational projects, I'm not ready to provide any further estimates on what that could do in terms of lower expenses. The way I would think about it, and I wouldn't even say not ready, I'm not sure it's just the right way to think about why we would be doing it. A lot of this is to avoid, I would say future costs and it's also to create scalability. So some of the things we're doing in these enterprise systems, with our financial systems, with our human capital systems, moving our data into the cloud, it will reduce tech debt over the future. It will also give us the opportunity to scale as we just moved more data into the cloud and just have a more nimble infrastructure and continue to globalize the corporate functions that support our large operation. We've talked about Alpha NextGen in the past, and we'll talk about it a whole lot more I'm sure in the future. Those are some early foundational investments that we're making in the middle and back office that will streamline and harmonize our operations and create efficiencies over time, but not necessarily from a P&L perspective that you'll see just yet. And there's quite a bit of investment that's going in along the way. On the comp-to-revenue side, our range is typically 38% to 42% on a full year, and we really don't look at it quarter-to-quarter. The quarter-to-quarter fluctuations are always there just as revenue fluctuates, but also as you have seasonality and things like payroll taxes and FICA. So we really look at it and manage to a full year basis, we're on an annual comp cycle and year-to-date, through the third quarter we were at about 40%. So as we think about what the full year look like, I'd say it'll be on the higher end of that range, not the lower end. And as we noted last year, full year 2021, we were closer to 38%.

Allison Dukes:

Hopefully that helps.

Marty Flanagan:

It's a great question. Look, where rates are going, you've seen what's happened, everybody's shortened, gone, very conservative. You are -- you've not seen that move yet, but the conversations are brought in very, very much looking at the full spectrum of a fixed income with a race where they are making fixed income, longer data capabilities much more attractive. That's on the institutional side. As you know, institutions tend to be much less volatile, but they will make tactical allocations accordingly. On the retail side, again, I'd say it's too early. But all indications are -- it's - I would anticipate a broader range of investments into fixed income because of where the yields are moving.

Operator:

Thank you. The next question comes from Brennan Hawken with UBS. Your line is open.

Allison Dukes:

It's a great question and it's a hard one to answer exactly and certainly not going to give firm expense guidance just yet. We are deep in the budgeting season. But let's just talk maybe, generally about how we think about the expense base and what we can manage and what we can't manage. There is some variability in our expenses. As you know, we've always guided to that about a third of our expenses are variable. It's -- you see it primarily on the compensation side, you're certainly seeing that this year. I think I'd point to a couple of things. One, despite this really challenging environment, we are managing to keep expenses kind of flat to down on most line items relative to last year. And that's because we are continuing to invest in a lot of these growth areas that we don't think it makes sense to pause on. It just simply wouldn't be good business for us to pause on key foundational transformational projects that really puts the firm in a position to grow and to scale and to be where we need to be to support our clients. So as I think about how stubborn or not our expenses, I think a couple of things, I'd reiterate the comments I made around discretionary expenses. There are elements of discretionary expenses that we're looking at very rigorously. We're being very thoughtful about hiring. We're really focused on our key growth areas and managing our hiring against that. You've seen us, I think, do some pretty good work on facilities and some of the fixed costs that we have that we think we can continue to unlock and reallocate into areas of more transformational growth. And we'll continue to make progress against some of those areas as well. I don't feel like these investments hamstring our ability. I really don't. I think it actually puts us in a position to scale and recover faster when markets do turn and they will.

Brennan Hawken:

Sure. I recognize it’s a balance, which is how I tried to position the question. Okay, transitioning to revenue, fee rate was under more pressure than I had actually expected. Should we expect that fee rate to continue? Maybe could you give us an idea about what the exit rate or the October rate kind of look like? Is that that showing continued pressure just given the general profile of markets through the quarter? And just as sort of a more nitty item, the other revenue has been under some pressure. I know there is a transactional volume there. Is this sort of a floor - reasonable floor to think about for the other revenue? Or could this continue to come down?

Brennan Hawken:

Thanks very much.

Glenn Schorr:

Thanks, appreciate it. I'm curious on your comments on the retail side. Obviously, in an environment like this retail is going to outflow That's unfortunate, but it's going to happen every time. But as they transition towards low risk exposures as they try to capture yield, I'm curious on what you can specifically do to capture that demand, your presence obviously is huge in the channel, your product mix is great. There's rising demand on fixed income ETFs. I'm just curious on what can be done on the education front, how can you hold the channel's hand so to speak and do a better job of capturing some of those outflows?

Glenn Schorr:

A part of on-going processes I guess.

Glenn Schorr:

So I heard the comments on what outflows on the alternative side, again, product of the environment. But can we focus a little more on your private market side what it may be just refresh. What investments are being made now and where you're seeing client demand, and if that could be an offset going forward as well?

Glenn Schorr:

Okay. Thanks, Marty.

Operator:

Thank you. The next question comes from Ken Worthington with JPMorgan. Your line is open.

Allison Dukes:

Let me start with the first one around, where should we see the most scalability. And I think you're right, it would be the G&A and tech line items. But I'd also point to marketing; marketing is a pretty scalable line item as well. And one that, it's also a little bit, you can pull back on some of the discretionary expenses and marketing, but we're not going to pull back on travel and being in front of our clients at precisely the time when they need to see us and we need to be in front of them. And we need to be actively talking to them. And so I do think is, is I think about what that looks like on the upside. It doesn't budge quite as much on the way up, and there's some benefits there as well. In terms of and maybe I'll let Marty chime in on sort of relative to the past, since mine is only a couple of years back. But I would say in terms of the expenses, where the investments we're making and some of these technology projects doesn't give us even more scalability. I think perhaps, it's really necessary to think about where the firm's been and where we've come from. We closed the Oppenheimer acquisition just on the eve of COVID. And so you started to see, you saw a material increase in the size of the firm, just on the eve of what has now been a few rather volatile, challenging years. But what we are doing in terms of just further integrating all the various aspects of the firm and creating a unified system and platform across many different parts of the overall enterprise framework, all of this will allow us to just grow and scale from here, I think in a more seamless fashion because you just don't have the redundancy and systems that are very difficult when the data is not in the cloud. And so it gives us flexibility to adjust our platform and to serve our clients in ways that would have just been much more difficult. Said differently, without doing this we'd be spending a whole lot more to make any nimble shifts in the environment.

Ken Worthington:

Great. Thank you. And then maybe just following up U.K. pensions, to what extent did you see stress in the U.K. pension market. Did that flow through to impact Invesco either in 3Q or as we began 4Q? And given that Invesco has been building out fixed income and solutions globally, might there be a change to the U.K. LDI pension market? And does that make for an opportunity for Invesco?

Ken Worthington:

Thank you.

Marty Flanagan:

Actually, that's a good point. So it's analogous to when there's pressure on money funds or in the financial crisis, if you had a very liquid money fund portfolio, you became a source of funds. And that's a little bit what happened with some of these LDI situations.

Operator:

Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.

Marty Flanagan:

I'll make a couple of comments, and Allison can chime in. So it's a broad suite of capabilities, and it's really highly performing across the fixed item team. So that's really good news. And it's not all is available in retail and institutional simply because of demand within that marketplace. So -- we have the long-term record stability of team and demand coming. So we look at it as just a real opportunity for us over the next few quarters.

Marty Flanagan:

Anything from short duration core, core plus bank loans, credit, it's the whole suite, Dan.

Marty Flanagan:

Munis is a very strong capability. That was outflow last quarter.

Marty Flanagan:

Not every single asset -- fixed income asset class is not a scale, which we've talked about. So direct lending is not at scale, some of the distressed credits not at scale. So -- we have a number of them at scale with performance backers and talented managers.

Allison Dukes:

Hard to quantify that exactly. I mean, yes, just to reiterate, we saw about $2.1 billion in inflows into our China JV. And of that about $1.8 billion came from new product launches. Those were mostly in fixed income asset classes, which -- it makes sense in this environment. We do tend to see a lot of fixed income and balanced interest less so equity at the moment, though historically, we certainly benefited from some of the equity funds that have been launched in more risk-on environment. That is -- it is just a function of a dynamic of that market. Hard to point to a backlog, but I guess I would say it differently and say this is kind of the way that market functions. And I don't expect that to change in the near term. I do think the overall $2.1 billion just really, again, speaks to the resiliency of that market. And the fact that we invested quite early ahead of many of our competitors in that market, and we're really well positioned to capture some of the flows there in both challenging markets and better markets. This has certainly been a more challenging year for China, though.

Operator:

Thank you. And our next question comes from Bill Katz with Credit Suisse. Your line is open.

Marty Flanagan:

Bill, it's a great question. And the reality is every client is different. So -- but what I would say just as a general comment, if you look in wealth management platforms, in particular, cash levels and you'll notice and everybody on the phone to this cash levels are very, very high. And I think allocations in equities and fixed income, the first quarter call is going to be cash levels. I can't speak for how the other movements would happen, just again, as every individual and every institution is very different than their profile. But I'd start with very high cash levels as a funding source.

Marty Flanagan:

Yes. It's a really good question, Bill. And it is a different market than the United States and just a couple of comments. It's extremely competitive. And performance matters. There's a lot of alpha there. So the vast majority of all the capabilities in the marketplace are active, whether it be equity or fixed income, balanced products there also. But it has profile of fund launches, which is not atypical, Korea was the same way for a good period of time. I think it will mature to on-going investments into the products in the marketplace, but that that's going to come with time. And just the sheer size of the market, you're going to realize at some point, they're going to be very, very, very big portfolios. And I'd imagine starting to move away from product launches as the primary element of raising assets under management but that's probably 2, 3, 4 years before it starts to happen.

Marty Flanagan:

Yes. Good question. The story has not changed. Every next dollar is reinvestment back in the company right now. And if you look at what we've just talked about today, the key capabilities that we highlight, we see great opportunities very much in those areas, and that is where our focus is. We don't see a whole lot of gaps in our capabilities back to the conversation Dan had mentioned are we at scale in all the areas that we want to be now. And if we don't have the capability, and we don't think it would take too long for us to build it, that's when we would go to the market. So our view would be consistent of -- it has to be strategic, it has to be something client demand. It has to be something that's complementary, little overlap with the organization, financials have to work and this got to be cultural alignment. So that's just not change. This is how we think about it. That might lead you to more bolt-on acquisitions in sort of the alternative space. But right now, I don't see a whole lot moving as best we can tell public market prices versus the view of a seller are not aligned right now. So -- but it's not a focus. It's the focus on the organization.

William Katz:

Thank you so much for taking all the questions today.

Allison Dukes:

Thanks, Bill.

Michael Cyprys:

Hey good morning. Thanks for taking the question. I wanted to circle back on the private market alternatives. I was hoping you might be able to update us on the progress of the private REIT product that you guys have, just in terms of the traction getting on platforms. And then in private credit, I hear are the comments around maybe not at the scale where you'd like it to be, but maybe you could talk about some of the steps you're taking to more meaningfully scale your private credit initiatives.

Michael Cyprys:

Great. Thanks and just a follow-up question maybe on the balance sheet and capital management. So you paid down the credit facility in the quarter. I guess just what are the opportunities here that there might be for incremental debt reduction before, I think the next maturity is in 2024. And then more broadly, how are you thinking about capital management priorities into 2023? And what do you need to see before buybacks could resume?

Michael Cyprys:

Great. Thank you.\

Craig Siegenthaler:

Thanks, good morning everyone. I wanted to start with a longer-term question on China. You used to highlight a McKinsey target for 40% of global industry net flows from China over the coming years. Currently, do you think China can drive about half of flows or 40% of flows? And also any perspective on the mix between domestic and then foreign players like your Great Wall JV would be helpful, too. Thank you.

Craig Siegenthaler:

Also the mix between domestic businesses there and then also the foreign managers and foreign JVs like your Great Wall joint venture.

Allison Dukes:

It's a presentation from last summer that had some disclosures, yes.

Craig Siegenthaler:

Thank you, Marty. And just for my follow-up, I’ve a more short-term question probably for Allison. But other revenues declined by $9 million sequentially on an adjusted basis. I think most of that was probably real estate transaction fees, but -- can you talk about the drivers of that decline? And then just given sort of a muted backdrop, I wanted your perspective on if $48 million is roughly a floor given that 3Q was a bad backdrop and those fees probably were low? Or do you think there could be incremental downside risk from 3Q levels into 4Q or 1Q?

Craig Siegenthaler:

Thank you very much.

Patrick Davitt:

Hey good morning guys. Most of my questions have been answered, but just a quick follow-up on the tax guidance. Is it fair to assume that the 4Q guidance of 26% to 28% is kind of a good run rate for the quarters beyond?

Patrick Davitt:

Thank you.

Allison Dukes:

Thank you.

Operator:

Welcome to Invesco's Second Quarter Earnings Conference Call [Operator Instructions]. As a reminder, today's call is being recorded. Now I'd like to turn today's meeting over to your host, Mr. Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin.

Marty Flanagan:

Thank you, Greg. And I'll start on Slide 3, which is the highlights of the quarter. So let me start on that page, if you will. So the market environment we have experienced for the first half of this year has been one of the most challenging in decades, global equity and debt markets delivered the worst first half returns we've seen in decades as investors reacted to uncertainty associated with rising fears, recession fears, higher inflation, interest rate hikes and geopolitical tensions. Against this backdrop for the industry and despite seeing the first net long term outflows quarter in two years, our diversified product line has maintained net inflows in key capability areas, notably ETFs, active fixed income, Greater China, where we maintain leadership positions. Our global ETF platform generated inflows of $4.8 billion in the quarter, the equivalent of a 7% annualized organic growth rate. Our ETF product suite remains differentiated from competitors with a strong presence in higher revenue, higher growth segments such as smart beta, and we continue to gain market share during the quarter. Our active fixed income business generated net inflows of $2.2 billion with strong flows into shorter duration strategies given the market backdrop. Our business in Greater China delivered $1.8 billion in net [volume] long term inflows this quarter. Growth was driven by our China joint venture, where we saw strong demand for fixed income capabilities as investors saw risk of assets. As we showcased previously, our business in China is uniquely positioned as a result of many years of investment and hard work building relationships with our clients and key stakeholders in the region. Growth in China continued despite difficult business conditions, which included COVID lockdowns in major cities. We are optimistic that the economic outlook in China is beginning to improve as COVID shutdowns ease and the government takes steps to boost the economy. As markets recover, we are well positioned to capture future growth in the fastest growing market for asset managers in the world. I also wanted to highlight our institutional business, which was in net inflows for the 11th consecutive quarters with $1.5 billion. The channel has been a steady source of growth, and we have made tremendous progress in building the business to nearly $0.5 trillion in assets under management. The channel is well diversified by asset class, led by fixed income and alternatives as well as geography where we have a significant presence in each of the three global regions. We're proud to serve a broad range of client types and our pipeline continues to be solid. Our solutions capability remains integral to the success in this channel and enable a third of our pipeline this quarter. We expect our institutional business to remain a key strength for us in the quarters ahead. Despite broad based growth and key capabilities and net outflows and equity strategies were $7.7 billion in this quarter and drove overall net negative outflows in active global equities, in particular, we experienced net outflows in investor preference for risk off trades, led to higher reductions in the quarter, including our developing markets fund, we saw $2.6 billion of net outflows. We look at Invesco's ability to weather this volatile period, and our focus on building a stronger balance sheet has resulted in much greater flexibility. As I mentioned last quarter, we took advantage of the economically attractive opportunity to early redeem $600 million of long term debt. As a result, the total debt outstanding at the end of the second quarter is at the lowest level since 2015, and our leverage profile has been steadily improving. We've increased cash return to shareholders this year via share buybacks along with a 10% dividend increase we announced in April. The progress we've made on the balance sheet will allow us to take advantage of future opportunities and continue to invest in our business and increase return to shareholders over the long term. We met our target of $200 million in annual cost savings from our strategic review. Our focus will now shift to ongoing expense management discipline and we will be deliberate as a management team in continuing to scale our business platform, global business platform, and invest in key areas of growth. In this uncertain environment, clients seek an investment manager that can partner with them to meet a comprehensive range of constantly evolving needs and solve their most challenging problems. Our broad set of investment capabilities and a differentiated platform we've built positions us well to continue to meet our client needs and compete in a dynamic market environment. Looking ahead, we will balance managing through near term volatility while continuing to build a business that can compete and win over the long term. When the global industry growth resumes, we are well positioned to capture demand across a wide range of client types and investment capabilities. Challenging times truly separate great companies from the pack, and we are confident that our unwavering commitment to client needs will distinguish Invesco as one of the top firms in our industry. With that, I'll turn it over to Allison. Allison?

Operator:

[Operator Instructions] Our first question comes from Ken Worthington with JPMorgan.

Marty Flanagan:

Let me make a comment, and Alison can pick up, Ken. So we did see, obviously, a slowdown in net inflows in Mainland China, as we've highlighted. But in fact, we continue with net inflows there. I would say the sentiment is turning somewhat more positive from where it was and still challenged, the COVID lockdowns really is a negative sentiment impact in the area, but we are having a greater confidence in sort of the economic rebound and quite frankly, the the consumer response to back to investing in the region. But Allison, do you want to make some more specific comments?

Ken Worthington:

And then just on the balance sheet. The way you've pitched it is from a position of strength, you've delevered somewhat or even meaningfully. I think the stated goal, $1 billion of cash in excess of regulatory requirements, which gives Invesco the flexibility sort of when it needs it. How flexible is the balance sheet right now? It looks like the cash is pretty small over that regulatory requirement, but you've got a huge revolver that you can tap. Given you've pursued deals in more challenging times in the past, just walk through how you see the flexibility of the balance sheet right now for your ability to do transactions, if interested?

Marty Flanagan:

Allison, that was well said. I don't have anything else to add. And can I just sum it up with the highlight that we're focused on reinvesting in the business in the areas of growth. We continue to look to reallocate resources where we are growing. Easy deciding harder to do, but we continue to make progress there. And we've -- right now, we have the greatest flexibility we've had in a good number of years. So we feel like we are in a position of strength.

Brennan Hawken:

Curious, a few comments on being focused on expenses. Allison, you gave some color on T&E normalization and sort of calibrated for what the experience has been so far. But when we think about how much flex there is in the expense side, you guys normally talk about a 30% component that's variable. But is that still the right way to think about the rest of the year? And how much are you thinking about trying to do more given the challenging environment? And would that be more of a back half of the year event, or would it be more like a well, the budgeting process for 2023 starts in probably just a few months and so it’s better to focus there so as not to be disruptive to investments and try and balance the competitive dynamics? Could you maybe help us think about how you're framing that at this point?

Allison Dukes:

I mean, I'd say a couple of things. As you think about our overall compensation expense, about a third of that is variable. So that obviously flexes pretty quickly with the change in revenue for the most part. It's not a perfect relationship, but it's fairly quick given just a variety of incentive compensation plans that we would have driving overall incentive comp. It's much more difficult to adjust overall compensation nor would we necessarily want to. We want to be really thoughtful about positioning our expense base not just for the short term but the medium term as well. And I think that really underscores a lot of Marty's points. So I think probably the essence of your question is where do we go from here. I would say a couple of things. On compensation, compensation tends to fluctuate in that 38% to 42% as a percent of revenue range. You should expect us when revenue draws down as quickly as it has, and we expect it to be under pressure this year that we'd be on the higher end of that range. Underneath that, we're going to be really thoughtful about making sure we're allocating resources and being very thoughtful about just hiring overall and where we position that next hire and how we really manage against the opportunities we have and what's critical versus not critical. I think that's the essence of how we manage in the short term from here. Certainly, a challenging quarter to have revenue under so much pressure and a return to that kind of wide open travel environment at the same time. I don't think we ever would have expected those two events to occur in the exact same quarter and it put enormous pressure on the top line and the expense line at the same time. We do expect that travel normalizes from here, again, the new normal that I talked about earlier. And we'll be really thoughtful about travel in this environment as well. When our clients want to see us, we want to stay in front of our clients as it's as important now as ever in times of real volatility to be in front of our clients, but we can also be very thoughtful about our internal gatherings and some of the discretionary spend we have from there. So it's hard to give you exact answers on all of this, but hopefully, that gives you a little bit of color as to how we're thinking about operating and how we're managing in this environment. We do think we're managing from a position of strength, but we're going to be very thoughtful about all of our actions and decisions.

Marty Flanagan:

The thing to look at is they increase our ownership stake in the company. And they have great confidence in the organization. We continue to have very good strategic conversations. We're extremely wide ranging, and it's just a constant dialog of where can we opportunistically work together and that continues. So again, I just plan on seeing a deeper, broader relationship in the quarters and months ahead in years end.

Brennan Hawken:

Has there been any corresponding adjustment to the positioning on their platform or any shift in how you guys are ranking as far as flows on their platform go or anything like that?