Invesco Ltd.
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Unidentified Company Representative:]

Good morning and thank you all for joining us. As a reminder, this conference call and the related presentation may include forward-looking statements, which reflect management's expectation about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumptions and there can be no assurance that actual results will not differ materially from our expectations. For a discussion of these risks and uncertainties, please see the risks described in our most recent Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements.

[Operator:]

Welcome to Invesco's Second Quarter Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session. . This call will last one hour. To allow more participants to ask question, only one question and a follow-up can be submitted per participant. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.

[Marty Flanagan:]

Thank you, operator, and thank you everybody for joining us. We've reached the halfway point in the year and we're continuing to see strong momentum in our business, as you can see from the results that we reported this morning. But before I begin, I'd like to take a minute to recognize the hard work of our team at Invesco, like, almost everybody, our employees have been working in a work-from-home or a hybrid environment for more than a year now and they've achieved these results in a very challenging environment. I'd like to thank the team for their dedicated focus and adaptability during this time. And with the success of the virus, many of us have been coming back to the office and working together over the last few months and I can tell you it's good to see our colleagues once again. And we are in different stages of reopening around the globe. And one thing that I hear from everybody that is able to back to the office is how great it is to see one another and work together. And I will say, we're at our best when we're working together, collaborating and innovating. And I'm excited about the future as we continue to open our offices to more employees and welcome them back. And as always, we'll follow the status of COVID and local guidelines, as we transition back to the office, meeting client needs, helping them ensure the continued health and well-being of our employees. So now let me turn to the results. And if you're so inclined to follow the presentation, I'm going to start on slide three, which is the highlights for the quarter. We achieved a new record in the second quarter for long-term net inflows totaling $31 billion. This follows net inflows of $24.5 billion last quarter and up yearly $18 billion in the second half of last year. Growth was led by net inflows into institutional ETFs, fixed income and focused alternative capabilities.

[Allison Dukes:]

Thank you, Marty, and good morning, everyone. If you'll turn to slide 4, our investment performance was strong in the second quarter with 72% of actively managed funds in the top half of peers or beating benchmark on a five-year and a 10-year basis. This reflected continued strength in fixed income, global equities, including emerging market equities and Asian equities, all areas where we continue to see demand from clients globally. Moving to slide 5, we ended the quarter with $1.525 trillion in AUM. Of the $121 billion in AUM growth approximately $66 billion is a function of increased market values. Our diversified platform generated gross inflows in the second quarter of $114.4 billion. This is an 82% improvement from one year ago. Net long-term inflows in the second quarter were $31.1 billion representing 10.6% annualized organic growth. Active AUM net long-term inflows were $2.1 billion and passive AUM net long-term inflows were $29 billion. The retail channel generated net long-term inflows of $9.5 billion in the quarter, driven by positive ETF flows. This represents a $24.1 billion improvement in net long-term inflows from one year ago driven by significant improvement in equities in the Americas. The institutional channel generated net long-term inflows of $21.6 billion in the quarter augmented by the funding of a nearly $18 billion Australian passive mandate. Looking at retail net inflows our ETFs, excluding the QQQs generated net long-term inflows of $12.1 billion. Our global ETF platform again, excluding QQQs, again captured flows in excess of its market share of AUM in the second quarter and for the first half of 2021. Net ETF inflows in the United States included a continued high level of interest in our S&P 500 equal weight ETF, which generated $2.6 billion in net inflows in the second quarter, following $4 billion of net inflows in the first quarter. Looking at flows by geography on slide 6, you'll note that the Americas had net long-term inflows of $5 billion in the quarter, driven by net inflows in the ETF various fixed income strategies, private market CLOs and the direct real estate net long-term inflows that Marty mentioned. Asia Pacific again delivered another strong quarter with net long-term inflows of $28.3 billion. Net inflows were diversified across the region. Nearly $18 billion was from the large passive Australian mandate that funded from our institutional pipeline in May.

[Operator:]

Our first question comes from Glenn Schorr with Evercore ISI. Your line is open.

[Glenn Schorr:]

Hi. Thank you very much. Wonder if we could talk a little bit about private markets. You talked a little bit about, well, in the second quarter but curious if we could maybe get a bigger picture view of what has the highest growth potential? What specifically you're doing on the retail side to drive growth and maybe take a chance to see how -- what's your vision of how big this segment can be?

[Marty Flanagan:]

Yeah, Glenn, thank you for that. And so obviously it's been an area of focus for much of the industry. Our principal driver right now has been real estate. It's a very strong global real estate group direct real estate. Some of the more recent developments has been trying to get that into the retail channel INREIT, which is nonpublic is now available in the US, it's early days. That was also was funded by MassMutual for about $400 million, which is really important. We think that has great potential in the next year or so as it's in the marketplace based on the -- this historical performance of our real estate group. The other was really a venture with UBS and offering same thing direct real estate with some listed real estate securities through Switzerland other parts of EMEA Asia Pac. So those seem to be really immediate opportunities. And quite frankly some of our private credit has more recently been gaining attention with institutional investors. They have a better track record and with that track record we're now seeing the follow-on. So we look at this as a very important part of our business as we go forward.

[Glenn Schorr:]

Thanks. And maybe just a quick one for Allison. Allison you mentioned about the modest uptick on the expense side in 3Q. But if we could just -- I don't know if you're able to level set us on. How much below normal are we? I appreciate we don't know when normal travel, normal spend is happening. But if you just said, right now you have very normal expenses with really short markets and flows but not so normal expenses. Can you give us a way to contextualize that?

[Allison Dukes:]

Yeah, it's a hard one, because we have to look back at where we were in the last half of 2019 to try to figure out what normal might have been and not sure that that's normal going forward. And I think that's the real challenge. I'd say we're probably $10 million to $15 million per quarter below what we would have seen in the last half of 2019 and I don't expect we'll see all of that come back just when we get back to whatever some permanent state is. And I think we're ways off from that just given the international travel restrictions that look like they're going to be in place for a while. But I do think we are certainly starting to see a resumption of domestic travel within regions that are allowing it and we're certainly seeing -- as we reopen offices some pickup and just client activity overall. So I think probably a good estimate is to think about being maybe $15 million below what normal used to be. And some element of that will come back over time.

[Glenn Schorr:]

That’s awesome. Thank you for that. Appreciate it.

[Operator:]

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

[Ken Worthington:]

Hi. Good morning. Thanks for taking my questions. Super high level maybe first for you Marty. As you look to the future maybe over the next three years to five years what do you see as the most significant factor that's influencing the direction you're taking Invesco? I think if I asked that question maybe five years ago you might have said something like factor-based investing. But what are your thoughts today?

[Marty Flanagan:]

Yes. Ken, it's a good question. And I think you've raised this before. If you look at the firm right now a number of the investments that we've made over the years are coming through in a very material way and probably first and foremost the impact of China. And you're just seeing it just continued to be a source of strength for us as an organization. And quite frankly I think by many estimates within asset management globally we've seen -- I think it could be explain half of all the flows within our industry in the next five years whether that's right or not I don't know. But what I can say it's a major factor. The other element is really how solutions has been embedded in almost all of our client engagements. Institutionally, we've called it out you see that. But by the way it was also true in retail engagements that were seen. And you mentioned factors. We talked about that five years ago. It's a huge part of our ETF business and frankly our index business and is going to continue to be an important part of what we do. And as you do know just recently in the last two years we've taken that factor capability indexing capability to institutional clients and we did it with a very strategic view with recognition that clients are using fewer and fewer money managers and they want the totality of the capabilities coming from money managers. And you've seen some of the impact most recently with the IFF win in Australia, but which you really do as you become very important to clients holistically. So those would be the biggest trends that I would point to. And I think the reality it's actually happening right now. So that's my personal perspective.

[Ken Worthington:]

Awesome. Great. Thank you. And then maybe Allison you mentioned UK outflows including some outflows from GTR. Does the decline in GTR assets lower the capital that you're either required to operate within Europe or volunteer to hold to operate in Europe, or is the growth elsewhere in Europe or the UK mitigating these declines?

[Allison Dukes:]

Unfortunately, the short answer to that question is, no. The AUM decline there does not impact the regulatory capital that we have to hold. It's a little more complicated than that and it focuses a little bit more on the P&L specifically expenses than it does AUM levels.

[Ken Worthington:]

Thanks. Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from Robert Lee with KBW. Your line is open.

[Robert Lee:]

Great. Thanks for taking my questions. Marty I had a question for you on Greater China. So some of your competitors have opened up wholly-owned or opening, I guess, wholly-owned subsidiaries. Others have been able to take on, I guess, a majority stake. I know you've talked about it for a while but can you update us on where Greater China stands with your movement to at least economically taking a majority stake in operational units you run, but just an update on some of that.

[Marty Flanagan:]

Yes, great. So it might be some of competitors, but to remind everybody so we own 49% of the joint venture right now. Our partner Huaneng Power, we have been in conversations for two years, to take a majority stake. There has been an agreement in principle, but it has not moved forward for various reason, COVID being one of them. And quite frankly, that would be the principal reason. But it has not hurt us. And I think, this is a really important thing and to contrast our position to others, we've had management control since the beginning of the venture. And that is really has what separated our success as compared to our competitors. So we literally operate as one entity within China in the retail markets for INVESCO Great Wall, but institutionally we'll go to large institutions with the retail platform and our institutional platform. So, again, that's really what's enabling the growth. We also have a wholly-owned subsidiary focused on other elements within China. And I think, as you look at where others are, I think, what's important to look at is, separate announcements from actual has it happened. And generally, it slowed down over the last 18 months from most institutions trying to get to market with some of these new undertakings.

[Robert Lee:]

Great. And maybe my follow-up on the Intelliflo, you haven't talked about it too much for a while, but I guess a year or so ago, you launched on the Citi platform, I saw the other day, I think, it was State Farm that is going to start using the platform. Can you maybe update us on where that is, if it's meeting your expectations and if you are -- as it rolls out you do see that contributing to new product sales?

[Martin Flanagan:]

Yes. So, right now, there's about $1 trillion in assets under advisement. So you've seen some nice growth. State Farm is an important addition. Obviously, it's very early days and we have a relationship with Citi, really the focus of the past year was really pulling together the different elements of Intelliflo and creating sort of a single operating platform to go to the clients holistically and you are now starting to see the outcomes of that and will be more specific sort of events are material enough to have that conversation. But, again, we're starting to get the momentum back in the business. And, again, last year slowed down some, just with the COVID environment. But, again, we're still optimistic about the prospects of Intelliflo.

[Robert Lee:]

Great. Thanks for taking my question.

[Martin Flanagan:]

Yes.

[Operator:]

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

[Brian Bedell:]

Great. Thanks. Good morning, folks. If I can just start with --

[Allison Dukes:]

Hey, Brian.

[Brian Bedell:]

Good morning -- the organic base fee growth, as compared with your organic growth, if you can just, maybe Allison, just touch on what you think the outlook for the -- for the net revenue yield going into third quarter, given the shift -- given the strong growth in passive versus active in the second quarter? And can you benefit at all from lower money market fee waivers, given the rate and IOER rate?

[Allison Dukes:]

Yes. So, I mean, I'd say a couple of things. Just keep in mind, the biggest drivers of net revenue yield quarter-to-quarter is really going to be the mix of flows. And that's really just a function of client demand and making sure -- and again we feel like we have -- we're driving scale across a really well-diversified platform. So we're going to capture demand where demand exists. But that mix will certainly have an impact on that revenue yield. And market impact obviously is going to be always impactful in any given quarter. And then, money market waivers, as I noted, money market waivers right now this quarter accounted for about 0.7 of a basis point of a drag. And in terms of where do we see that going, it's -- IOER would be helpful, a movement in Fed funds would certainly be more impactful, but it isn't perfectly correlated as just that, because there are competitive dynamics as well. And so, we're going to be thoughtful about where we're positioned, vis-à-vis, the competition and making sure we're being thoughtful and smart about these waivers, sharing in them with our distribution partners across the institutional element of our waivers. And I'd note our money market waivers are kind of 80% to the institutional channel and at about 20% to retail. So we are able to share in some of these waivers as we work with our partners to ensure clients really getting the outcomes that they are expecting. So coming back to net revenue yield, I do think we'll probably see a modest sort of grind down, but what I'd focus you on is, some of the comments we were making as we look back at 2019, net revenue yields 6 basis points lower than it was a couple of years ago and yet our operating margin is higher at 41.5%. So, I recognize net revenue yield is something that we want to make sure we get into models. But really we don't think about net revenue yield quarter-to-quarter. We think about revenue and driving positive operating leverage across our platform. And I think our performance over the last year especially really drives -- really underscores our ability to do that.

[Brian Bedell:]

Yes. That's a good point. Thank you for that. And then, just on sustainable product flows, either Marty or Allison, can you talk a little bit about first of all how much did sustainable products, both active and passive drive flows in the second quarter, and then, what's your AUM and what would classify sustainable products? Just an update on that. And then, just in terms of the game plan for product launches going forward in this area, even if it's -- even if you can sort of generalize what the strategy is?

[Marty Flanagan:]

Let me make a couple of comments just on our sustainable ESG capabilities, and then I'll let Allison pick up. So, obviously for us we look at ESG as an incredibly important part of what we do. And we are absolutely focused on integrating our ESG capabilities across the whole organization. 75% of all our assets now have integrated ESG within our capabilities. I think as you know, it's really been driven by EMEA in the first instance. It's an absolute business necessity and we think it is throughout the totality of our organization. And if you look specifically at dedicated ESG assets under management is about $52 billion today. We continue to see growth there. If you look at our ETFs, we have one of the highest market shares of ESG ETFs given our long track record, and again, they'll continue to see flows because of that. So -- but again, if you look at this as just an absolute imperative for us to get right and throughout the organization whether it’d be how we manage money, but also the capabilities in the marketplace and literally working with clients to ensure that we're hitting what is important to them as we work through this.

[Allison Dukes:]

Yes. I think Marty hit on most of it. In terms of flows for the quarter, they were softer than in the first quarter. I think it was a little less than $2 billion. We saw quite a bit stronger flows in the first quarter, which really, I wouldn't say there's anything specific driving the lower flows in the second quarter other than perhaps some market headwinds. We certainly saw some highs in the first quarter and a little bit of pullback from that could be -- could point to just some post-election highs that were driving the first quarter and some modest shifts from growth. Overall, our ESG capabilities continue to be quite strong in terms of the performance and demand. And as Marty noted, we're capturing more than our fair share of the market in terms of flows into the ESG capabilities.

[Brian Bedell:]

Great. Hey, thank you for your update.

[Marty Flanagan:]

Thank you.

[Operator:]

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

[Dan Fannon:]

Hi, thanks. Good morning. I wanted to follow-up on your comments around balance. I think Allison you mentioned, there were fewer fund launches. That category obviously had some outflows, but performance is good. So, maybe if you could give us an update on kind of the outlook for that category?

[Allison Dukes:]

Yes. What really drove the real strength in the first quarter were the fund launches in China in particular. We had probably a high watermark just given the strength of those launches, both in terms of the size and performance overall. I think inside of shine on the JV, we have seven fund launches again in the second quarter. I think about five of them were balanced again driving about $1 billion in flows. So, it continues to be strong overall. Just some lumpiness quarter-to-quarter, I wouldn't necessarily point to anything specific beyond that.

[Dan Fannon:]

Okay. That's helpful. And then, just on the strategic evaluation and understand the targets and kind of where you sit today, but curious as you've kind of gone through this in the areas of investments that you're looking to put some of those savings in some of those buckets, if there's been any real changes from the original expectations that you're allocating more dollars to we're seeing more growth, or it seems like we're getting the same kind of message each quarter, but curious if there's any more detail around things that might be different than when you originally outlined it?

[Allison Dukes:]

I'll start and let Marty chime in there. I would say, you're getting the same message each quarter, because our strategy isn't changing. And I think it's that focus on our strategy and the continuity of that that we're -- the consistency is something I hope you'll pick up on, because there's consistency in our focus and our approach. The key areas of investment these key capabilities are things that we really do believe are the areas where we need to be invested ahead of client demand. We're seeing client demand in some of these capabilities today but we expect there to be continued demand and we're going to stay focused on those key capabilities. In terms of changes, I don't know that, I would say there's anything specific that would cause us to change. We're always going to see sentiment may soften in China a little bit. I don't think that takes away from our focus or our belief that, that is a key growth area for us despite what market sentiment or political noise may be out there quarter-to-quarter. Our solutions capability, I think we're as convicted as ever that that is a key capability for the future. And I think you really see how that is driving our growth both in the institutional pipeline and overall. Our ETF capabilities continue to be real drivers of growth as we're capturing more than our market share in terms of flows. I think our capture of flows this past quarter was somewhere around 4.2%. Our market share is 2.7%. But even more important than that is our capture of the revenue pool. We captured about 8%, a little north of 8% of the revenue pool of flows and ETFs over the last quarter which I think really points to the strength of our capabilities there how they're positioned. They are some of the higher fee capabilities relative to the ETF universe and there's real demand because they're differentiated in terms of performance and outcomes. And so I don't know that we've had any surprises as I think back over the last year. It's been a supportive market in this past year that's helpful. But that doesn't deter our focus on making sure we're aligning our cost base to deliver exactly what you've seen us deliver in this past year which is real strength in our operating margins and operating income growth.

[Marty Flanagan:]

Allison that's well said. And Dan it's no mistake when you look at the second quarter highlights when we call out the key capability areas. They haven't changed because that's where our heads down. We see that as the great opportunity for us as an organization. They align with some of those macro trends that we talked about a few minutes ago and it has been disproportionate investment from us and also disproportionate results. So, you're not going to see a change much quarter-to-quarter.

[Dan Fannon:]

Thank you.

[Operator:]

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

[Brennan Hawken:]

Good morning. Thanks for taking my question. When you think about the success that you've had with your solutions offering, how do you build on that strength? And how do you maintain differentiation? Are you seeing competitors try to emulate the success that you've had there? And how do you stay a step ahead? And also, is it -- how much of this business actually repeats whether that be few quarters or a few years subsequent? I know it's early but any stats you can provide or estimates or sense you have on that?

[Marty Flanagan:]

Yes. Let me -- so it's a great question. And I can't describe what competitors are doing. But our approach was a little bit different from the standpoint of we started with recognition any number of years ago that clients wanted a broad range -- broad range of investment capabilities and that's what we've been building out as we've talked about. Importantly what we did building a solutions team is it sits on top of the investment team. So it does not compete with the investment teams it uses the investment our existing capabilities. And that is somewhat unique as best we can tell in the marketplace. And so, the client engagements are such that it's literally an engagement with the clients to understand what are they trying to accomplish with the portfolios and delivering any range of capabilities along the lines. And that's what we've seen. The more recent one though, as I mentioned a few minutes ago was introducing index capabilities to institutions. And the totality of that is what creates the importance of relationship with clients and you end up expanding your mandates per client in these relationships. So it does -- it's early days but we're seeing it is persistent in time. And again as I said a few minutes ago we're seeing -- it's very important institutionally. It's also quite important in the retail channel also. So, we just look at it as quite frankly it's the way that business has been done as we look to the future.

[Brennan Hawken:]

Okay. And then second question more -- probably more for Allison. I know we've seen liquidity continue to improve. You laid out the idea that, we're going to be having the MLP liability funding later this year. So, still some calls on liquidity, but without question in a far better position and with those calls dramatically lower than they were a year ago. So with that in mind, what are your updated capital management priorities how should we think about, the likelihood of a step-up in buyback? I know we got the increase in the dividend recently. But how are all of those different calls on liquidity? How do they rank in your mind from here on?

[Allison Dukes:]

Sure. Thanks Brennan. Yes, the resolution of the MLP matter will be a terrific milestone for us to get through. That's been out there for a while now. It's something we've been anticipating and reserving for. And so as we think about the funding of that matter and the fact that the liability, at this moment does appear to be lower than what we were previously anticipating is good news. And we do look forward to the resolution of that in the fourth quarter. As we get through that, that does in fact clear out a lot of these I'll call them contingent liabilities, that were things we needed to be cognizant of and manage our cash flow for over the past year plus. And so as we look forward, beyond the resolution of that, I mean, I'd say a couple of things. One, we continue to focus on just the improvement of our balance sheet overall. Our leverage profile as I noted, continues to improve with the strength of EBITDA, depending on how you think about our leverage, but looking at the non-preferred element of the capital structure. I mean, we're below 1x now with the results in the second quarter. And that's strong improvement. We're going to continue to be focused on opportunities that we have to improve our balance sheet. And I don't know what that means just yet. But we do have maturities as you know that come up in 2022 and 2024. And those remain areas of optionality for us, as we think about balance sheet improvement. Beyond that, we are going to continue to be committed to that sustainable and modestly increasing dividend. We as you noted, increased the dividend last quarter. And we will continue to look for opportunities to increase the common dividend, concurrent with improvement in our performance and our results. And then longer term, resuming share buybacks, I don't know when that will be. As I said, we want to get through the MLP matter and we continue to be focused on the leverage profile. But share buybacks certainly remain an opportunity for us to continue to return capital to shareholders.

[Brennan Hawken:]

Thanks for that color.

[Operator:]

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

[Bill Katz:]

Okay. Excuse me. Thank you very much for taking my questions this morning. Marty maybe a question for you, just as you think about your relationship with MassMutual. Where does that go from here, is maybe think through discuss maybe the C capital need versus maybe an opportunity to grow organically through their distribution pipe, and then, maybe any opportunity that you could see, working with them on M&A?

[Marty Flanagan:]

Yeah. Thanks Bill. So again, it has been multifaceted, as you're pointing out. So, one is, sort of a co-investor seed enabler and alternatives, that's been very, very positive, not just for the investment itself, but really the credibility of seed investor with other institutional clients. And so the retail channel is about correct me Allison about $10 billion on the retail platform right now, where the number to flowing organization within that right now. And as you know they've recently closed the acquisition of the REIT business that looks like it's going to be an opportunity for us as we move forward. So again, we just continue to work together on a very regular basis on various opportunities, as we look to the future. With regard to M&A not exactly sure what the question is, they understand our strategy very much, as an organization. And if something made sense, along the lines we've talked about in the past, that it improves our strategic position. It's complementary to our business. There's sort of if you want to call it the necessity of cultural alignment, I'm sure they would be supportive of that.

[Allison Dukes:]

Yeah. The one thing I'd say is we manage about $5 billion on the broker-dealer platform.

[Marty Flanagan:]

Excuse me. Thanks, Allison. Yeah.

[Allison Dukes:]

Secondhand flows there.

[Bill Katz:]

Okay. That's helpful. And then, just a follow-up coming back to capital management for a moment, certainly appreciate a little uncertainty, as you go to the end of the year with the liability still outstanding. But just given where the stock is trading today, against your relative positioning, I'm just surprised that buybacks would be fourth on your list. Can you talk a little bit about maybe the internal rate of return assumption you have between new business growth coming in the door versus the opportunity to buy back stock at these price points? Thank you.

[Allison Dukes:]

Yes. I mean, I don't want to imply that it's fourth on the list. And as we've said before, it's not quite as need of the waterfall as that would imply. We are being thoughtful about the timing and when we would resume buybacks. And certainly, we are thoughtful about how we think about that internal rate of return relative to other opportunities. The one thing I didn't say, and I should have said is the number one opportunity we have is to continue to invest in our own growth. And we are constantly thinking about the opportunity we have to invest in our own product launches to invest in our own capabilities, and we think that drives longer-term growth that shareholders are really looking for. Buybacks aren't fourth and last by any means but we've had a number of parallel paths we've been running over this past year and resolving some of these contingent liabilities as well as improving the balance sheet overall. We're making good progress there and we're going to continue making progress, as we think about all these opportunities we have.

[Bill Katz:]

Thank you, guys.

[Allison Dukes:]

Thank you.

[Operator:]

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

[Alex Blostein:]

Great. Good morning. Thanks for taking the question as well. I was hoping to go back to private markets discussion for a second and really zone in on the retail opportunity you see for Invesco. Maybe just a little more color on what product, specifically you're sort of aiming to penetrate the retail footprint with sort of kind of what is your go-to-market strategy there? And considering a significant amount of kind of open space and building appetite for private market solutions in the retail channel, can you get there organically, or do you think you need to acquire additional capabilities?

[Marty Flanagan:]

Yes. So it's a very good question. And I said, it was the INREIT, which is being introduced to the retail market right now to illustrate our capability. Our view is that the largest opportunity for growth for direct real estate capability is in the retail channel globally. And that's not unique to us. I think many firms have tried to figure out how best to alternative firms in particular, how to best access that channel. And it's very hard from the standpoint of those firms, if you're an alternative firm and have the capability. But you really need that retail presence with distributors, wholesalers and the like to be successful. And so there are very few firms like us that can pull that off. And so we look at this as really important development for us. So again, just what we've done with UBS and now through multiple distributors here in the United States. So we don't think that – we have the capabilities that are in demand within that channel and it's early days as far as I'm concerned for what we're going to see to move forward here.

[Alex Blostein:]

So, it sounds like organically is kind of the path here on private market all as opposed to anything inorganic?

[Marty Flanagan:]

Yes. Yes. We have plenty to give with the capabilities that we have right now in the retail channel.

[Alex Blostein:]

Got you. Great. And then just maybe a quick follow-up, Allison for you, any apologies if I missed it but can you talk a little bit about the fee rates associated with the $33 billion institutional pipeline? And then curious again within the old part of the institutional pipeline what strategies does that comprise of? Thanks.

[Allison Dukes:]

Sure. We – if I look at the pipeline and look at the fee rate, I think what we've disclosed previously is the fee rate for our institutional pipeline tends to be – it's below the firm average but it tends to be in the kind of high 20s, low 30s basis points. And as I look at the fee rate of the pipeline at the end of the second quarter, it's the highest I've seen since I've been at Invesco. And so I'm quite bullish as I look at the pipeline both in terms of the size, but it was replenished back to $33 billion following the $17 billion funding of the Australian mandate. And the composition of the pipeline itself in terms of average fee rate and the balance across those regions and asset classes, it's pretty balanced across the United States, Asia Pacific and EMEA. And in terms of asset classes kind of coming back to the second part of your question, it's actually a little bit higher on the alternative side than it has been in the last few quarters. And that's really I think again points to our private markets capabilities both our real estate capabilities as well as our senior loan capabilities. And, I think, again speaks to just the strength of those capabilities, the demand that exists in the institutional channel and our performance overall.

[Alex Blostein:]

Great. Thank you very much.

[Operator:]

Thank you. And our last question comes from Michael Cyprys with JPMorgan. Your line is open.

[Michael Cyprys:]

Hi. It's Mike Cyprys from Morgan Stanley. Thanks for squeezing me in here. Just a question on China given the success that you guys had over there. Just hoping you could talk a little bit about your approach to distribution in China. What's worked, what hasn't worked as well? What lessons do you take away from your deep experience in the region as it relates to distribution? And maybe you could also touch upon some of the digital distribution initiatives as well how that's evolving?

[Marty Flanagan:]

Yes. Thanks, Mike. Great question. So needless to say, it's a very, very competitive market and success is only going to come in retail channel if you are deeply embedded in China and have your business driven by the local Chinese, which is the case for us. And you have to be a little more typical that we might see in the United States where there are very important engagements with large banks insurance companies getting on platforms and service in that way. I'll say half of our retail flows right now on some type of digital platform. And it started with us with Ant Financial as we came in early I think the first foreign money manager to their very large money fund and it then expanded from that into other capabilities and then on to other platforms within the marketplace. What you'll also see is the digital engagement is at a level that is the most sophisticated in the world and how you engage with clients the demands on the organization are quite extraordinary. But by the way the benefit is it just has helped us in other parts of the world as we think of those types of engagement as they continue to evolve in different marketplaces. So from the retail channel institutionally same thing some of the most sophisticated institutional investors in the world and it is -- you just have to bring the best and brightest within the organization representing the full range of capabilities. And this is another example where some of the largest penetrations with those institutional clients multiple mandates is in China for us and it just really reflects the necessity of the depth and breadth of an organization and to be able to serve the institutional clients at a very high level. So I don't know if that's insightful, but that's what's worked for us.

[Michael Cyprys:]

Great. Thanks. And just a follow-up question maybe more for Allison around the impact of market movements on your expense base. I think in the past you've said maybe about one-third of the expense base is variable or so or moves with market. Is that still right? And then I see you called out about $18 million or so impact on the comp side for market movements on slide 9. Should we think about that being driven by the 5% market appreciation in your AUM in the quarter translating into that $18 million impact so $72 million annually. How should we be thinking about that?

[Allison Dukes:]

So a couple of things. One I'd say, yes, you're -- the portion of our expenses that would be variable in nature and primarily driven by markets, but certainly other flows would drive it as well would be about one-third. In terms of that market variable comps on slide 9 there's FX in there as well. So do keep that in mind. But, yes, you can really kind of look at that relationship of just comp to revenue even and see there's some consistency, but as revenue increases. AUM performance all of these things drive compensation and drives the increase in variable compensation. I don't -- I wouldn't point you to any break in the historical relationship there. It's still consistent with what we've guided to in the past. And, yes, so I'll leave it at that. Did that answer your question?

[Michael Cyprys:]

Sure. Thank you.

[Operator:]

Thank you.

[Marty Flanagan:]

Okay. Yes. Operator, I'm sorry. Did I cut you off?

[Operator:]

Go ahead, sir.

[Marty Flanagan:]

Yes. Good. I just want to -- Allison I just -- on behalf of Allison, I thank you very much for your time and appreciate the engagement and we'll be in touch. Have a good rest of the day.

[Operator:]

Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.