Invesco Ltd. (IVZ) Q2 2015 Earnings Report, Transcript and Summary

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believe, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should, and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Welcome to Invesco's Second Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, we'd like to turn the call over to the speakers for today, Mr. Martin Flanagan, President and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, and thank you everybody, for joining Loren and myself. And those that wish to follow the presentation, it is on our website, if you are so inclined. Today, I'll review the business results for the second quarter. Loren will go into greater detail around the financials. And as our practice, both Loren and I will answer any questions that anybody might have. So, let me start by highlighting the firm's operating results for the quarter, you'll find this on Slide 3 of the presentation. Long-term investment performance remained strong during the quarter. 75% and 79% of actively-managed assets were ahead over a three- and five-year basis respectively. Strong investment performance, combined with a comprehensive range of strategies and solutions we offer to help clients achieve their desired investment objectives contributed to long-term net inflows of $5.9 billion for the quarter. Adjusted operating income was up 4.2% compared to the first quarter. The quarterly dividend is $0.27 per share, which is up 8% over the prior year. We also returned $198 million to shareholders during the quarter through the combination of dividends and stock buybacks. Turning to the summary of the results for the quarter, assets under management were $803 billion at the end of the second quarter, up from $798 billion in the prior quarter. Operating income was $390 million in the quarter versus $374 million in the prior quarter. Earnings per share were $0.63 per share, the same as the prior quarter. Before Loren goes into details on the financials, let me take a moment to review investment performance during the quarter inflows. Turning to Slide 6, investment performance remained are strong across the enterprise, in spite of the volatility later in this past quarter. Looking at the firm as a whole, 75% of the assets were in the top half on a three-year basis. 79% were in the top half on a five-year basis. I am now on Page 7. I think we all recognize that every client has a unique set of investment objectives with a desired set of outcomes that can be achieved in a variety of ways. We believe the greatest opportunity for clients to achieve those investment objectives is by using a well-constructed portfolio that is needs-based, spans asset classes and considers both active and passive strategies. One of the greatest strengths of Invesco is the broad range of active and passive capabilities we offer our clients. It's a key differentiator for us in the marketplace. Our focus on meeting client needs with a broad range of active and passive capabilities drove solid flows into our business during the second quarter. Active and passive flows we saw across the globe, reflecting continued efforts to deliver strong investment performance and provide excellent outcomes for clients. Although retail flows were impacted by the macro event, we saw strong flows in our institutional channel during the quarter. The figures on Slide 8 reflect a broad diversity of flows we saw across our global business during the quarter, which included strength in fixed income, namely investment grade, stable value, global total return, real estate, and other asset allocation products. Despite significant funding during the quarter, the institutional pipeline of won but not funded mandates remains strong and diversified across asset classes. We feel good about the results for the quarter. In spite of the late volatility we saw in the second quarter, we continue to see strength in Asia Pacific and EMEA particularly, and across the broad range of asset classes. These flows were the result of the continuing strong investment performance, and our ability to meet client needs with a range of strategies and solutions, which positions us well for long-term success. And from my perspective, this quarter really represents the value of being broadly diversified by channel, asset class, investment capabilities, and the value of the investments we have made over a number of years. Smart data in ETFs, European cross border investments, the institutional business globally, alternatives, fixed income. We have a history of advancing our business during uncertain times, whether it comes through markets or more recently the impact of such developments coming from the regulatory changes. We believe we are positioned very well. We believe we are making the investments to continue to strengthen our business, while at the same time, we recognize we are in an uncertain time, and we will be thoughtful during this period. Loren?

Thanks, Marty. So now we'll go through the asset roll-forward and operating income. So quarter after quarter, you'll see that our total assets under management increased $5.3 billion, or 0.7%. This was driven by FX translation of $8.5 billion, and long-term net inflows of $5.9 billion. These gains were partially offset by negative market returns of $6.2 billion and outflows from money market and the QQQs of $2.6 billion and $0.3 billion respectively. Our average AUM for the second quarter was $810.9 billion. That was up 1.9% versus the first quarter. However, as Marty mentioned, due to the market declines in June, our end of period AUM came in at $803.6 billion, which is in fact 0.9% lower than our Q2 average AUM. Our net revenue yield was 46.2 basis points, which represented an increase of 0.1 basis points versus Q1. The drop in performance fees quarter over quarter accounted for a decline of 1.9 basis points, which was more than offset by a variety of factors, including an improved mix, which added 0.7 basis points, one extra day during the quarter, which added 0.6 basis points, favorable FX and higher other revenue, each of which added 0.3 basis points. Let's turn to the operating results now. Net revenues increased $19.1 million or 2.1% quarter over quarter to $936.6 million, which included a positive FX rate impact of $5.1 million. Within the net revenue number, you'll see that investment management fees increased by $59.7 million or 5.8% to $1.08 billion. This was a result of higher average AUM, one extra day during the quarter, and the impact of the growth in higher yielding product. FX increased investment management fees by $7.2 million. Service and distribution revenues increased by $6.2 million or 2.9%, also in line with higher average AUM, and the increased day count. FX increased service and distribution revenues by $0.2 million. Performance fees came in the quarter at $13.1 million, and they were earned from a variety of different investment capabilities, which included bank loans, real estate, Asian equity and quantitative equity. Foreign exchange had no impact on our performance fees. Other revenues in the second quarter were $37.9 million, which was an increase of $6.7 million, and that line item benefited from a higher level of real estate transaction fees. Foreign exchange decreased other revenues by $0.1 million. Third-party distribution service and advisory expense, which we net against gross revenues, increased by $14.9 million or 3.7%, and this increase was in line with our higher average AUM and higher day count. FX increased these expenses by $2.2 million. Moving further down on the slide, you'll see that our adjusted operating expenses at $546.4 million grew by $3.3 million or 0.6%, relative to the first quarter. Foreign exchange increased operating expenses by $2.3 million during the quarter. Employee compensation came in at $351.4 million, a decrease of $11.3 million or 3.1%. The decrease was consistent with the decline in seasonal payroll taxes and a reduction in variable compensation linked to performance fees earned in the first quarter. These declines were partially offset by a full quarter of higher base salaries that went into affect on March 1. And foreign exchange increase compensation by $1.7 million. Marketing expense increased by $3.3 million or 12% to $30.7 million. FX increased marketing expenses by $0.2 million in the quarter. Property, office, and technology expense were $82.2 million in the second quarter. That was up $4.4 million. This increase was the result of higher property-related expenses, and foreign exchange increased these expenses by $0.3 million. G&A expense came in a little bit higher this quarter at $82.1 million. That represented a $6.9 million increase or 9.2%. The increase in G&A was the result of $3.6 million of additional fund and regulatory costs, as well as higher professional service expenses associated with technology initiatives, which amounted to $2 million. Foreign exchange increased G&A by 0.1 million. Moving on down the page, you'll see the non-operating income decrease $6.7 million compared to the first quarter, and that was largely driven by lower equity and earnings from unconsolidated affiliates. The firm's tax rate on a pretax adjusted net income basis in Q2 was 28.7%, which was consistent with the guidance that we provided in the first-quarter call. Looking forward, our tax rate will return to the lower level of 25.5% to 26.5%. Which you brings us to our adjusted EPS of $0.63 and our adjusted net operating margin of 41.7%. Let me just take a few minutes to discuss Invesco's financial outlook, before turning things back over to Marty. At the end of Q2, clearly negative market sentiments and risk-off behavior on the part of many clients occurred, and that was driven the situations in Greece and China. As a result, as I mentioned, we find ourselves starting the last half of the year at a level of AUM that is, in fact, lower than what we average in Q2, and roughly flat to the average AUM we had across the first half of the year. We continue to believe that Invesco is very well positioned for success, and we face many significant growth opportunities, many of which do require further investment on our part, in order to realize. At the same time, we are aware of our needs to manage our expenses in a disciplined way, especially when markets are particularly volatile and uncertain. So as of today, our expense guidance is still roughly in line with what we discussed with you in the first half of the year. Nothing has changed. However, we will be looking closely at other areas of spend and investment with an eye to prioritize and look at certain non-critical projects and initiatives to see if we can delay certain events, particularly until the market has stabilized. However, on a positive note, in the last half of July, we have seen some improvements in the markets, and a significant positive turn around in the retail sentiment in Europe and our ETF business. In fact, just in the last two weeks of July, we generated more than $1 billion of net inflows. In addition, we continue to see very strong institutional demand across a variety of our investment capabilities, and we would say that should this improvement continue, we do believe that our organic growth rate is on track to meet our plan of 3% to 5% for the year, and our incremental margin target of 50% to 65% is achievable. With that, I will now turn things back over to Marty.

Thank you, Loren. Operator, any questions?

We have a first question coming from Michael Carrier, Bank of America Merrill Lynch.

Thanks, guys. Maybe the first question, and maybe for both of you. Loren, maybe just given what you said in terms of the shifting tone and sentiment in July. You mentioned the last two weeks. I don't know if you have a full-month picture, but even more important than that, you gave some color on the institutional pipeline. Just on the retail. When you think about maybe up through April, all the momentum and the progress that you have been seeing versus some of the pull-back that we have seen in the past couple of months, we just want to get a sense on which products continue to work, where you are seeing that demand. In the cross-border, we have seen huge swings early in the quarter versus what we are seeing now. I just wanted to get an update there, since that is a big driver for you.

Michael, I'll answer maybe the first one and Marty you can add whatever. In terms of July, I would say we are roughly flat in July on net flows. So obviously those first two weeks were tough, and they have been completely offset by the last two weeks in July. The daily flows continue to be strongly positive from where we are today. That is the good news. In terms of the products that are absolutely on track and continue to be in high demand, we're seeing alternatives generally as an asset class flow very well. GTR in particular, bank loans, CLOs, alternative fixed income continue to be a very strong provider real estate. Those are going to be continued trends. We're pretty certain that those didn't even really slow down that much. Balanced also continues to be a strong area of growth for us. IBRA, we have got balanced product in EMEA and CE as well. What we really saw was equity. That took the hit from that April - May time frame, and that was around -- very much a target of domestic equity, got hurt pretty bad. UK equities also got hit. China got hit. That was the real element that took the flows away. The things that are still flowing, and we think very positively, that are going to continue to flow, also I did mentioned fixed income, which is another area where we have spent a lot of time and effort and investment to build out our capabilities, and to allow our clients to understand those capabilities. And we're seeing a lot of demand at both retail and institutional for those products. So I'd say, the themes are going to continue. Hopefully the equity element, which was really the part that hurt us is stabilizing, and now we're going to see more continued interest in those products. The ETFs as well, clearly stalled for us for a while, and that was because most of the flows going into ETFs was really centered on either the hedged, foreign exchange hedged product or the international products, which we don't have a presence in nearly to the extent to a sense that some of our competitors do. We have, as I mentioned in my commentary, seen that turn around. Our products are now selling across many of our capabilities in our ATF range.

That's helpful. And Loren, just on the expenses, it sounds like keening an eye on things, just given the volatility in the market. I think in the past you have given some guidance on the line items, and just particularly the G&A. You called out a couple of items that you have seen maybe were more elevated. But I just want to get some sense going forward where these things should be running, and I hear your comments on keeping an eye on the markets, but just anything that was maybe more noisy this quarter?

I'd say G&A did pop up. There were a lot of things that you would definitely circle as being one-time in nature. Probably somewhere you could easily circle $3 million to $4 million of stuff in G&A that was non-recurring. I think the issue is that -- other things may fall off, but other things may come on. So there is a recurring, non-recurring situation in the G&A. We are managing that line item, looking very closely at it, trying to manage through it, and I would say it's probably at a very elevated level in the second quarter generally, and we would hope to see that number decline from where it is. In terms of giving explicit guidance as to where it lands, harder for us to say exactly where that would be If I took a swag, I would say somewhere in the $75 million to $80 million range is probably the right level, but it is harder to really manage and forecast that line item, just because there are certain things that are going to be related to product launches or certain needs around regulatory situations, where we're just going to need to spend money to deal with those situations.

Okay, thanks a lot.

Thank you. Our next question coming from Glenn Schorr of Evercore ISI. Your line is open.

Thank you. Maybe we could get a little more color on the Asian franchise. I think, I heard your comments on equities in China, but in general, that is $60 billion now. $1.3 billion in positive flows, and I think there was like $7 million in performance fees from the region. If you could just get a high level, what is working, what do you still need to build across Asia, because I think it held up a lot better than people might have thought.

Two points. So we look at it as one of the fundamental strengths of the organization. Lots of commentary about China right now, but if you look three to five years, it is a very important place to be. We look at our greater China capabilities, unique. We look at our presence in mainland China as unique, both retail and institutional. And it may go through a challenged period here, but we think we are uniquely positioned there. What I would say is we talked about the institutional business. The leadership in Asia Pacific. The institutional leadership is new this year, very, very strong. We think that, and we are seeing greater results already, which is frankly hard to believe, and we're seeing it in Australia along, also Japan is a very strong institutional market for us, and historically, that's not been the case. We are seeing additional success frankly before I would have thought that was the case institutionally in the region. And again, we're looking for continued positive contributions from that region for us.

I'd say the things that are really working for us, we have seen a lot of demand for fixed income product in Japan. We're seeing a lot of institutional business generally. Australia as well is taking on our GTR product. Real estate continues to be a theme. A lot of things working for us in many different regions within that Asia category.

Thank you. Last quarter, you mentioned on the institutional pipeline, the won but not-yet funded was at an all-time high. Any color? I hear you, that the pipeline's good. I'm just curious on how good.

It's really at the same level it was last quarter, which is very, very good. I think the question for all of us, and we would -- the uncertainty, I think we'd all have to -- What will institutions do? When will they fund? I think if we're in a stable market, we're going to see the funding of those, which we would anticipate, we don't have any indication otherwise, but we have seen over the years when markets get unsettled, sometimes the institution are low slower to fund it. Won but not funded continues to be at record highs for us.

Great. Thanks very much.

Thank you. And we have another question coming from Ken Worthington of JPMorgan.

Hopefully I got this right. It looks like you won a larger series of large active US institutional fixed income mandates in the quarter. Generally not an asset class I think of first when I think of Invesco, and I mean no offense there. But can you flush out what is happening, where the mandates are being won, and any color you can provide?

We are seeing it across a broad fixed income, stable value, and we are seeing it both in terms of corporate activity, our Taft-Hartley business. It is spread across a variety of asset classes. The one that we are probably most pleased with is the growth in the corporate side, which has never been necessarily the strongest area we have played in. We continue to add resources to be more meaningful to the corporate clients that we are working with. It's really in broad fixed income and stable value, where the largest wins took place.

Ken, just adding to that, if you look add our fixed income performance, it's really very strong. And the client results are frankly sooner than I would have thought, and I think you'll see, we talked in prior years, we thought we were going to miss this whole fixed income cycle, and it was just really making sure we had the capabilities for the next one. That said I would say we're making progress before I thought what would have happened. So it's all very good from my perspective.

Great. And then maybe my follow-up. Invesco made a large push in product development in marketing into alternative products in the US and Europe over the last 18 months. So the track records are still young and developing, but Q2 would seem to put these products to the test. So the question is how are the products performing? Are they meeting your expectations? And given maybe the change in sentiment, how are conversations evolving with the intermediaries to really sell the products, both in the US and in Europe? Thanks.

Very good question, Ken. Our view is that, if you are taking feedback from the clients, the feedback has been quite clear, whether it be retail or institutional, but retail in particular is relatively new, that allocations are going to go from 5% to 15% to 20%. Whether they get that high, who knows, but let's just say they go to 10%. That is just quite an opportunity. We have had the investment capabilities internally, largely for institutions. We, as you know, put probably the broadest range of alternatives into the retail market, beginning at the end of last year. Our view always was, think of no shorter than three years before you're going to get results, because of, as you say, developing the track record and the like. And every once in a while, you get some success before its time. The first one that came on was IBRA. You all know how successful that has been. It continues to be successful. The one that is an early success right now is GTR, and it's in the UK, on the continent, in the United States. Asia, the derivatives component slows that down in that region on a retail basis. So we think it's going very, very well, and it's nice to have another early surprise if you want to call it that, from a client response in GTR. With regard to your question, the volatility of the markets. Did we see disproportionate flow into the alternative bucket on the retail side? We did not. I think that's too early. I think if we continue to have a couple more quarters of this, the intention is going to be there. One limiting component continues to be the distribution channel's ability to get alternatives on their platform. There is high desire, but the mechanics of getting them on the platform are still slow. It's not a criticism, they're just being very, very cautious. Just recently, GTR has been added to a couple of very important platforms here in the United States. That should be a good development in the future.

And just on GTR. The good news is GTR is now at $6.5 billion in terms of AUM, and if you add in the won but not yet funded component, it would be at $9 billion. It really just continues to grow, and again, a very attractive fee rate on that product. Roughly 100 basis points. Good to know.

Great, thank you.

Thank you. Our next question coming from the line of Patrick Davitt of Autonomous.

In these past quarters where there was a pretty significant decline in the stock price, you have ramped up your me purchase quite a bit. Didn't really seem like that happened this quarter. Could you walk through the thought process around that, given the weakness in the stock last quarter?

Patrick, I think we have debated internally for some time about how to react to certain market dislocations, and it's always unclear when to go in big, because you have to have a real strong view on the market, and tactically, you can get in and you can do some. We did buy more this quarter than we did last quarter. At the same time, we are still feeding some large products as the large feed capital needs that we need to balance across the buy-back opportunities. And we are still looking to maintain $1 billion in excess of what we have from the regulatory capital perspective. And so there's a balancing act that continues to exist our prioritization of how to use capital. The first call on our capital is always going to be the internal one, in terms of organic needs, which would be the seeding. And so I think given the size of the seeding, this is probably the largest element, in terms of being a little bit more circumspect, doing more on the buyback. We will continue to be very systemic in our buyback. And again, the stock may go up. We're going to continue to buy. Stock may go down, we're going to continue to buy. And so, we have seen our ability to forecast markets as a challenge. And it's probably better on our part to be more systematic as opposed to trying to time the markets in a big way.

More broadly it seems every day now there is either a regulator or a press article talking about bond liquidity. And you always enter that conversation, given your size in the bank loan markets. Curious if all of that kind of noise is bleeding into your conversations with clients, and to what extent you feel like that conversation is going positively for you?

It's a good question. Look, I think when you read the public commentary generally in the papers, it's too shallow of a commentary, quite frankly, the thing to say. Money managers, including ourselves have been constructing portfolios for decades. It's the fundamental strength of what we do as an industry. In portfolio construction, you are always looking at liquidity needs and the like, and there's an assumption in the paper that if you are in bank loans, you have 100% in illiquid, hard to trade bank loans, and it is just false. So if you look at the combination of our bank loan products or others, there is a high liquidity component to it. There are back-up lines of credit. The clients absolutely understand that, it's just the public commentary doesn't. But I will say the industry is working things like shortening settlement periods and the like in bank loan markets and doing the things that we should, just to continue to make the markets more efficient, more effective for the benefit of our clients. That is our perspective on it.

Thank you so much.

Thank you. Our next question coming from Bill Katz of Citi.

So just trying to run the math a little bit, if you're feeling pretty good about the 3% to 5% organic growth rate and July is basically a push, and we know the first half of the year. It would suggest the theme here is the institutional business is doing pretty well, but the thrust of the question is, I think you have to have some pretty big numbers coming through in the second half of the year. Are you at a point now where you are starting to really take advantage of scaling some of the products? Obviously, you gave the disclosure on GTR terms. But just more broadly, one of the pushbacks has always been, oh you have a lot of small funds, but nothing that is really sizable. Do you think you're at a nice inflection point now where you are starting to scale some really scalable assets globally?

It's a good question, Bill. You get scale by doing good things for clients, and I think you start by if you look at our performance, it's really very strong. That said, you have to do something about it. We, as a firm, for the last couple of years in particular, have refocused again on taking those capabilities that can become offered globally to clients and taken to clients globally, and that is what we have done and that's what you're starting to see, whether it was risk parity, GTR, bank loans, real estate. So that is an absolute focus of the firm, where it makes sense to do that, and we have been making progress, and we are focused on accelerating that progress. And I think you're seeing that.

The opportunity around the products that have global demand, whether it's IBRA or GTR or some of the bond products, that is absolutely what we're focused on, and I'd say we're making progress. It's not something where for fixed income we said it is happening faster than we thought, actually, but we're probably not at a level where you would say we're at the same scale of some of our larger competitors. But again, we value the diversification, too. I make that point, that we don't want to be probably as large as our competitors in certain products. We like to have a series of diversified capabilities, all that work on a global basis.

That's helpful. And I think you mentioned in your prepared remarks that the regulatory pressures are building in terms of the costs. Is that idiosyncratic to Invesco, or is that more of an industry dynamic? Where are you seeing it? And then if you still feel pretty good about the incremental margin range and we know the GA, does that suggest there's a little more operating leverage on comp from here?

Let me take the first part. The regulatory thing, it is hitting everybody. Not like the banks, but we think it's quite overwhelming, the amount of regulations that have come this way. Where it's hitting the most, so again, it will depend on if the firm is global or not. If you are a global firm, the UK was probably the most dramatic in its change and its regulatory environment and the demands on a firm, the investments we have made around that are material. You also have impacts of things like RDR and what does that do. We have talked about that over the years. We thought we would be a winner. We are a winner in it, but by the way, you have to make changes along the way. The continent is another area where again, much more complex regulation impacting the business and the like. Yes, we're spending money. But what I would say too, it also increases the barriers to entry, which I think, that is fine for us. It's probably too bad for the market. But longer term, the bigger stronger firms that can make investments will, and will frankly probably do better than the mid-sized smaller firms. You come to the United States, we have had again, an awful lot of regulation come out. It wouldn't be to the same magnitude there. I think some have paid close attention to, which you have all have is, what happens with the fiduciary rule. That could have some incredibly negative consequences ultimately to all of our clients. Well-intended, but currently proposed, not very thoughtful. That said, we think we are going to be one of those firms that is quite well positioned if some version of this rule comes out. I think others are going to be at quite a disadvantage. It really is an influence on businesses like I have not seen in my career, and we do feel that we can take advantage of opportunities that emerge as business models get changed through the regulatory dynamics.

To answer the last part of your question, Bill, the answer is yes. It's leverage on all the line items. We are seeing with the now renewed strong growth in cross-border flows in EMEA, for example, that the trend on the fee rate should be more positive. FX has improved slightly as well, which is again very important in terms of getting that operating leverage in some of our most scaled products. I think those elements will help, and as you know, our compensation line item is probably most strongly driven by investment performance. It's probably reasonably stable, so there isn't sort of a sense of large needs to change compensation. For those reasons, we think that 50% to 65% opportunity on incremental margin is there, as long as the trend comes back, or it continues, where we are seeing the flows come back in the most important places.

Okay. Thank you for taking both of my questions.

Our next question coming from Eric Berg of RBC Capital Markets.

Marty and Loren, why do you think there is such a bifurcation, such a difference between the behavior of institutions and individuals during the quarter? And by that, I mean if one pieces together the different pieces of information that you are giving us, and the different tables that show the flow of assets, it looks like it was a fixed income-led, institutional-led, US-lead advance. And active advance. And there wasn't nearly as much retail activity, and I should say fixed income and alternatives. But so heavily institutional. What is your sense, obviously, you can't get into the heads up of individual investors everywhere. That's impossible, but from talking to your colleagues and distributors, what is your best sense of why there is such a difference of behavior by retail investors and institutions?

That is a really good question. I think this is something we have all studied over our careers here, and for all the education that we all try to put into the market with clients, et cetera, not just us, but distributors, consultants and the like, you continue to have different behaviors. Institutions, frankly, do a better job of being consistent in investing for the long term. And I think what you have seen on the retail side, the bigger element probably, I don't have this number exactly in front of me was not so much redemptions as much as retail investors stopping. Instead of making the decision I'm going to put more money into -- I'm committed to this monthly investment plan into my US equity capability, they are until they're not. I think they get really scared with what was going on in Greece and what was going on in China and even with advisors, and I think advisors are really, really important for our retail clients, the idea of just holding off is very, very common. And it is as simple as that, but it was pronounced.

If I could ask another high level question to you, Marty. During the course of this call, we have talked about all of the many businesses in which Invesco competes, other than active equity investing. We've talked about risk parity, global total return, bank loans, other alternatives, real estate, and so forth. My sense is that there is a view in this business by many people who follow it that somehow active equity vesting is the holy grail, it's a good business, and that everything else, especially fixed income, is not as good. What are the merits of that, whether people believe that? What is the truth about your business? By that, I mean that as Invesco transitions to these other businesses in many quarters, other than active equities, is that a good thing? Should I feel good about it, should I feel bad about it, or indifferent?

Good question. So here's our answer. So it gets to the comment that I made earlier. Every single client, whether retail or individual, has a unique set of investment objectives, and you can get there through a variety of ways to meet their outcomes. What we are committed to, and how we have built the firm is having a broad range of investment capability to meet those needs. High conviction capabilities, whether they are active or passive. So when we talk about passive, we believe in smart data. It is a better data, and you get better information for your clients. The combination thereof is how we think we can generate the results for our clients over time. I can't pass on my individual judgment on how somebody should build their portfolio. That said, I'll put on my personal advice. Over time, always, active management will give you the greatest returns for the level of risk of investment. That is a fact. That is not common wisdom right now, because the period we have come out from 2009 on, and the bounce off the bottom, three rounds of QE, et cetera, et cetera. It is an absolute mistake to be giving up on active equity investing. And I will say you go cap weighted passive investing, the best you can do is an average, minus fees. I don't think that is how you serve your clients best.

And Eric, just on the purely Invesco-specific financial point, the margins on those capabilities, fixed income or alternatives, are certainly as good as what we have seen in active equity. So there isn't a financial give-up in terms of us moving from one active class to another, particularly as long as we have scale and those capabilities.

I come back, Eric, just to make the point. Our view is if you are looking to invest in Invesco, our absolute focus is on our clients first, and we think if you do a good job for clients and you run a disciplined business, Invesco is going to do really, really well. I think that is really an important thing to understand, too.

Thank you.

Thank you. Our next question coming from Daniel Fannon of Jefferies.

My question is again on the institutional side. Just curious with the strength you are seeing there, are you having success cross-selling to existing institutional clients, or are these new relationships mostly? Just trying to get a sense of kind of the breadth?

Quite frankly, many of them are new. And frankly, an area that we are focused on to improve is having a greater number of relationships with each of our institutional clients. Not just what's in, but a number of them are multinationals and just doing a better job of serving them around the world. And again, we think we are one of very few organizations that can do that, so we look at that as an opportunity for us.

Great. And then just also, just thinking about the backdrop, volatility, and what that presents potentially opportunistically for you. Has your views around M&A changed at all? Do you think about potentially being more aggressive in a market like this, where maybe some peers or others aren't in as good a position as you are?

Our views haven't changed. The criteria is still focused on what are the skill gaps, or product gaps that we are missing, and that is the first criteria. We try to build them first internally, but again, I wouldn't say we're there. In challenged markets, it's amazing what presents itself, and again, we're not there, but we're not -- we'll just have to see what happens.

Got it. Thank you.

Thank you. Our next question coming from Luke Montgomery of Bernstein.

So coming to the ETF business, you have got a foothold there. It's a number four position. Still a small fraction of the overall market, and fairly concentrated for you by AUM flows in a few products. But you have talked a lot about growing the platform with smart data. Seems like more and more of your competitors are talking about it, too. I thought perhaps you could speak to whether you feel, if you have a comfortable lead in the race here. What your competitive advantages are, and whether you think there's a first advantage in some of these product ideas. Any thoughts on that competitive landscape?

I think others coming into it, just verifies that it's a good idea, and that there is -- that it's a good thing for clients. So the others coming in, we think that's a good thing. There is absolutely, in the ETF market, in particular, first mover advantage. Very differently than institutional mandates or another retail mutual fund. So product development becomes very important and it's really, what, two or three of the same products, and that really takes up the shelf space. And so being first or second really matters in that. And we also think our competitive advantage in smart data is that if you look at our product range, it's the broadest smart data product range out there. It's also the oldest. When you start to look at track records, you're not doing models and looking backwards, it is the product range that has the longest experience in the marketplace, and that is valuable over time. So coming new into the market, you are disadvantaged by those facts.

Thanks, and then coming back to the fiduciary rule, I think most of the focus has been on how this impacts intermediaries. There's been a little bit of talk about how this could be more challenging for bundled defined contribution providers, but at least in my view, it seems rarely supported by anything specific in the legislation, that would accelerate any of the pressures that already existed or introduce any new pressures. As you think about the opportunity in DCIO, any thoughts on how the rule changes the competitive landscape for the legacy providers?

Yes, it's a good question, and I think everybody is searching exactly for what the right answer is. I think if it does go through in its current form, which I doubt, because it is absolutely unworkable and it does any number of things, but if it did, I think it would be quite unsettling to the whole marketplace. It would put a value on size, which could be, quite frankly one of those catalysts for combinations that you would not have imagined previously. It also, in some of the support commentary, it is very specific in sending people towards types of investment strategies, types of investment products, types of vehicles, that will clearly have unintended consequences for investors. We have the unique position from being in the United Kingdom, and with RDR and there's corollaries there. So trying to create purity is a wonderful goal, but what you have seen in the United Kingdom is individual investors. There are more people not taking advice right now because of RDR, and their total cost has gone up. I believe you're going to have that same type of thing here. The people that most need advice won't get advice, and they'll be disadvantaged by the whole process. So it's hard to answer the question until we know what comes out at the other end. But as currently, I think it would be quite disruptive.

Okay, thanks so much.

Thank you. Our next question coming from Brennan Hawken of UBS.

First off, congrats on the quarter, particularly in what has proven to be a really difficult and challenging environment for a bunch of your peers. So I just had one question left at this point. You highlighted that towards the tail end of July, volatility in Europe is subsiding. Now that you are seeing flows and trends come back, what is different in recent experience versus earlier in the year, or is it just a return to the products that were popular, and working before? And is there any difference between retail and institutional. Just some color from there would be helpful.

It feels largely like a return to the previous part of the year as opposed to some new trend emerging that is different from what we saw before. Maybe there's a little less interest in corporate bond product than we saw before still, but that is being offset by some other products, that fixed income, long-dated corporate fixed income, maybe less so. That is about the only thing that I can point to that feels a little bit different.

And then one small one. There was a little noise around New York tax in the quarter. Is that going to have any impact on the tax rate going forward?

No. It was just a one-time situation that is no longer going to affect our P&L.

Okay, thanks.

Thank you. Our next question coming from Michael Kim from Sandler O'Neill.

A little bit more about the opportunities you see to leverage the breadth of product across the franchise, to build customized offerings across both active and passive strategies, as well as maybe other alternative quantitative or allocation services, and I know it's still relatively early days, but any early read into relative economics of what I would assume would be chunkier mandates, if you will?

And you got cut off at the beginning, but I think I got the gist of it. It's really -- the question around solutions and how do you put together the various capabilities. It is an area that we are very, very focused on. I would say we're early days of success. It depends on where in the world, probably -- opportunities are probably greatest at the moment for us in Asia, probably in China in particular. We're also seeing it on the continent. We also believe there should also be an opportunity here in the United States. It has just been relatively slower in those two regions.

And early read on relative economics of chunkier mandates. We have seen no change in terms of the attractiveness of the mandates that will stay around stable value. The broad fixed income was one where we don't have as much scale, and so it's improving significantly as we generate more AUM in that category. So that's the two big movers. In terms of GTR, the economics are excellent, similar to what we see across the cross-border range, so rates tend to be at the high end. So other than that, I think we have sort of discussed the other elements. They are all at margins that are very attractive to -- should be attractive and accretive to our margin overall.

Got it. That's helpful. And then, just in terms of some of the newer vehicles we are seeing on the actively-managed ETF front, just given your market presence with power shares and as you communicate with your client, how important is non-transparent actively managed ETFs? Is that something that investors are really looking for, or is transparency in terms of portfolio holdings not really that high on the list for your clients?

The conversation has been going on for some period of time. And if you remember, we have introduced two or three active ETFs five or six years ago. We were one of the firms ahead of the exemption. And I think I have said in the past, we still have them. They might have $3 million in them across the board, and it's probably our CTFO.

And those are transparent.

Those are transparent. So again, I'm just a big believer that at the end of the day, people don't invest in vehicles, per se. They invest in investment strategies first to meet their desired outcomes. The mutual fund vehicle is a spectacular vehicle for a long-term investors, and we all know the disclosure period on and the like, we have just not seen a lot of demand for non-transparent ETFs from our client base. And some of the things that we look at, the things we are pointed to of the advantages, we think that you can solve any of those through share classes within mutual funds, too. That said, we are indifferent because we could do active ETFs ourselves, we have our existing ETFs and mutual funds. So we're just really -- we study it, and we're capable, but we're just not seeing demand, which is very counter to the commentary that you might be reading in the papers.

Got it. Thanks for taking my questions.

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

Thanks. Most of my questions have been asked, but I did have one. This hasn't come up on your calls in a while, but relating to a potential M&A. You have done most of your product building in house for the last several years post the -- I can't remember the name of the acquisition. The Morgan Stanley acquisition. Haven't really done much, and you have talked about it being a low priority. But I am just curious as you went through the product build-out cycle, have a lot of oars in the water, so to speak. Is there anything that as you've gone through that, you've said, gee we would have liked to have built this, and we just, for whatever reason, maybe it wasn't a capability we thought we could do, and does that at all kind of shape your thoughts about maybe going back and looking at some M&A here and there? Obviously maybe nothing large, but just your updated thoughts on that.

Good question. They have not changed too much. I think you're right, and as Loren has said and we have said, we first look to advance the business looking internally, organic development, and that is what we have done. If you look at the range of capabilities right now, we don't see a lot of gaps, and during that process, we thought the gaps we had, we did solve internally so we don't see gaps right now. That said, that's continuing why it puts M&A on the back burner, because we look to M&A when we can solve the problem with the capabilities that we have. Where we have done it though, Rob, it's more in India, that was a market that look over at a very long term, a good thing to do when we saw a way to get into India, and a relatively small investment, and we think it's a good investment over the long term. So it was more country than capabilities. But as I said earlier on the call, nothing looks obvious at all right now. That said, if the market does get very challenging, it's amazing what pops up in those periods, but it's not apparent at this time.

All right. That was all I had. Thanks for taking my question.

Thank you. And we have another question coming from Betsy Graseck of Morgan Stanley.

A couple of quick questions. One is on the alt and distribution. You mentioned earlier in the conversation that there is a high bar on the distributor side to accept alts. At least, that is my read of what you said. I am just wondering what is there for it, and is it simply a matter of time and performance over time to prove out, to get on platforms, or is there other things going on?

So I think it's a good question. The reality, is although the desire is there, it's complicated; right? So really the distributors are working through a mechanism of what do they want on the platform? How do they get it on the platform? Education into the sales force is critical. There's a lot of focus on making sure -- suitability and so these are -- to me, those will all really good developments. We don't want to be on a platform, and none of us want a bad outcome for our clients, so it has really been educating sales force. What are they trying to accomplish? What are the distributors saying? What capabilities do we have confidence in from the money manager, and so that's really what slowed it down. There are just a handful of alternative capabilities on the various platforms. We probably have as many as anybody in the market.

Right.

I think it will change though. I think it will pick up the pace as people get more confident.

So it's dedicated sales team into distributors, as well as just helping them understand the various products?

Yes. To be clear, I am also saying the distributors themselves, like a Morgan Stanley are spending a huge amount of time on education for the sales force there.

Right.

They want them very focused on suitability. It's jointly solving that problem. That is really the element where it's taking an awful lot of time.

I got it.

I think it's appropriate, by the way.

Right, okay. And then separately. There has been -- a know your customer requirement, regulatory requirement in the asset management community as well. I think it's called FATCA. I'm wondering if that had any implications for flows, not only in this quarter but into the next couple of quarters, because I thought it went live July 1, and I was wondering if that was something that you could benefit from?

As far as I know, we have been working on FATCA for two years now. It has not been anything that has surfaced in any of our conversations with any of our distributors or regions about clients being somehow disturbed or displaced or acting differently than they otherwise would. So at least from where I sit today and what I have heard, it's sort of been a non-event. It's probably been a lot of work, but it's not created a different demand behavior.

Okay. Thanks.

Thank you. Our next question coming from Chris Shutler of William Blair.

The long term net inflows continued to average somewhere in the mid to upper single digit billions per quarter, so quite encouraging. Just looking out over the next couple of years, recognizing it's tough to predict, but what do you think are the biggest opportunities and risks to that range from an asset class product perspective? I certainly recognize that part of your value proposition is having that diversification to be where the demand is, but I just wanted to get your take there.

I think the biggest opportunity for us is people coming back to equities. It has been a long time, and I think they will. You can go back to the same percentages because of demographics, and et cetera, et cetera. That said, if you look at us as a firm, it's the historic strength of the firm, it is the broadest range of capabilities. When you get any active movement back into active equities, it is going to be quite a difference for us. What is the risk? You get into a very difficult bear market right now, and that could extend that outcome for quite a period of time. That said, everything we have been talking about today is the other side of -- it's a broad range of capabilities that puts us into an easy position.

And Loren, you mentioned that, it sounded like maybe you are pulling back on a little bit of spending here. What are you maybe delaying in terms of project spending, and what magnitude of dollars are we talking about? Thanks.

It's an active discussion right now, so we are not at a point where I would say we would provide any different guidance than what we have in the past. As I said, our current guidance is pretty much in line with what we said before. It's going to be more of a discussion as we continue look, are we in a really turnaround, where flows are coming back. I'd just say it's one that we are looking at day-to-day. In terms things that you could be delayed, there's certainly things that are prioritized and delayed, relative to other things you absolutely have to do because of client need or a regulatory need. That is the kind of thing that we are looking at, is could you delay three months or six months and not really affect clients in a regulatory situation.

Okay, thank you.

Thank you. And we have a last question coming from Gregory Warren of Morningstar.

Yes, thanks for taking my questions, although a lot of them have already been asked here. I may have missed it, but we talked about the fixed income flows being heavily influenced by some institutional mandates. Was that the same case for the balance, because that looked to spike up during the quarter?

Well, the balance -- we saw a lot of interest in balance. That was really a continuation of interest in Europe. We have a very well-performing balance product that is managed out of our industrial perpetual team combines the capabilities of our equity teams and our fixed income teams. We also saw a lot of interest in balanced product in China. And in the balance category, we also have IBRA, which we have talked about institutionally has been of great interest and we're winning some good interest there.

You had mentioned the fact that the organic growth target on long-term assets is between that 3% and 5% range for the year. Do you just have a bit more clarity? Is there more institutional stuff in the pipeline? I think right now we are sitting in the 2% to 2.5% range.

I think we absolutely see interest in the big institutional pipeline, as Marty said, all-time high plus, with retail coming back. Obviously, July was a bit of a lost month, and we are making good headway, but if we stay -- even if we stay at this $2 billion a quarter, sorry, $2 billion a month type of rate, we're going to be at that -- probably at 4%, just doing the math myself. So I think we're -- and I also think we can do better than that.

That's good to hear. Thanks for the color.

Thank do you. As of right now, we don't have any more questions on queue.

Thank you very much, and thank you, everybody for joining Loren and myself, and have a good rest of the day. Thank you.

Thank you. And that concludes today's conference. Thank you all for joining. You may now disconnect.