Invesco's (IVZ) CEO Martin Flanagan on Q2 2016 Results - Earnings Call Transcript

| About: Invesco Ltd. (IVZ)

Invesco Ltd. (NYSE:IVZ)

Q2 2016 Results Earnings Conference Call

July 28, 2016, 09:00 AM ET

Executives

Loren Starr - CFO

Martin Flanagan - President & CEO

Analysts

Craig Siegenthaler - Credit Suisse

Ken Worthington - JPMorgan

Brennan Hawken - UBS

Glenn Schorr - Evercore

Chris Shutler - William Blair

Chris Harris - Wells Fargo

Dan Fannon - Jefferies

Robert Lee - KBW

Brian Bedell - Deutsche Bank

Michael Carrier - Bank of America

Michael Cyprys - Morgan Stanley

Loren Starr

This presentation, the comments made in the associated conference call today may include forward looking statements. Forward looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, geopolitical events and their potential impact on the company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future 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.

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. [Operator Instructions] Today's conference is being recorded if you have any objections you may disconnect at this time.

Now I would like to turn call over to your speakers for today Marty Flanagan, President and CEO of Invesco and Loren Starr, Chief Financial Officer. Mr. Flanagan you may begin.

Martin Flanagan

Thank you very much. And thank you for joining us and as was just mentioned Loren Starr Invesco CFO is on the call with me. And we'll be speaking to the presentation that's available on our website if you're so inclined to follow along.

And as we typically do, I'll give an overview of the business results for the second quarter. Loren will go into greater details on the financials and then importantly we'll open up to Q&A. So let me begin by highlighting the firms operating results for the quarter which you'll find on slides four of the deck.

Long term investments performance remained strong during the quarter, 68% to 73% of actively managed assets were ahead of peers on a three and five year respectively. Strong investment performance and our continued focus on meeting client needs will retain the impact of volatile markets during the quarter.

Strong client demand helped drive passive and institutional flows which led to long term inflows of $4.5 billion during the quarter. The adjusted operating margin was 38.6% an improvement over the prior quarter and during the quarter we returned $318 million to shareholders through dividends and stock buy backs.

Assets under manage were $779 billion at the end of the second quarter up from $771 billion in the first quarter. Adjusted operating income was $330 million in the quarter up considerably from $307 million in the prior quarter.

Adjusted diluted earnings per share was $0.56 versus $0.49 in the prior quarter. Also noted during the quarter, we've raised our quarterly dividend to $0.28 cents per share. And we also repurchased $200 million of stock during the quarter.

Before Loren goes into details in the company's financial, let me take a few minutes to talk about investment performance and flows during the quarter.

Turning to Slide seven now, our commitment to investment excellence and our work to build and maintain strong investment culture help us to deliver solid long term investor performance across the enterprise during the quarter.

Looking at the firm as a whole 68% of assets were in the top half on a three year basis and 73% were in the top half on a five-year basis. On page eight, you'll see that flows into passive capabilities were quite strong, while flows into active capabilities were flat with $4.5 billion in total long term in flows.

Flows into passive capabilities were driven by strong demands for Invesco power share capability. This was the second best quarter in Invesco power shares history with roughly $3.8 billion in net new assets, and the strong flows are helping us continue to gain ETF market share.

This reflects longevity and the breath of the power shares offering as well as our continued focus on meeting client needs. We are well positioned in the current market environment through our low volatility suite, commodity suite, fixed income and bank low ETF.

As you're probably aware, smart data strategies are growing at nearly twice the pace of the overall ETF market. Although this is prompting a wave of fund launches by competitors, our expertise in smart data and factor investing continue to differentiate us in the market and help us gain share.

Although long term flows are flat on the active side. We saw solid demand for alternatives including real estate and multi asset capabilities as well as fixed income.

Asia pacific demonstrated continued strength across retail and institutional with tremendous momentum continuing into the third quarter. A continued focus on delivering strong investment performance and bringing in our broad range of capabilities supply and contribute to the very positive results in the region.

Globally, we also saw strong institutional flows during the quarter which reflects our continued focus on this channel and results in a series of positive institutional flows going back two years.

Client demand trends remain consistent with particularly strong interest in fixed income, multi assets, real estate and our institutional pipeline remains very strong. So at the June the one, but not funded pipeline is up 15% on assets under management versus the prior quarter and the prior year.

Retail flows are flat this quarter as investors weighed their options during some of the late quarter volatility. That said, we continue to see strength in fixed income, U.S. dividend strategies as well as retail alternative capabilities specifically GTR and real estate.

Now let me take a moment and highlight the business in EMEA. Our number one position U.K. retail, our strong cross board of retail business and our robust institutional pipeline across EMEA all position us extremely well ahead of a potential Brexit.

We've positioned our business over many years to serve clients who are located in a variety of countries across the region. Our people and fund ranges are organized to meet those local needs. We are well diversified across channel with U.K. retail cross border and institutional each comprising roughly a third of our business in the region. We are also diversified across asset class with assets spread across equity bond and multi asset capabilities.

Lastly, with more than 1300 people in the region, we are well placed across the region with strong business in both the U.K. and on the continent. And our level diversification and our construct positions extremely well to deliver for our clients in EMEA.

Investors across Europe reacted thoughtfully to the market filled volatility that occurred at the time around the vote. Since then clients have taken advantage of the market movements by utilizing a full range of Invesco comprehensive fund range to achieve their long term investment objectives.

As an example we've seen strong movement in the capabilities such as our highly regarded global targeted returns fund which clients seeks to manage risks in their portfolios.

With regard to flows, our business in EMEA has demonstrated good resiliency through the Brexit topic with flows improving when compared to the prior quarter pre the announcement of the results of U.K. referendum on June 23rd. For the month of June, up to the date that the Brexit vote we saw daily average outflows of approximately $78 million. Since the referendum vote outflows have subsided to a daily average of $13 million.

Although it's still early days, we feel good about the momentum in our EMEA business and going forward were focus on staying close to our clients, managing our core business and executing our strategy while adopting to any changes that might be brought about by Brexit.

Before I hand the call over to Loren, let me say a few words about the new DOL Fiduciary Rule. We're actively engaged with clients as they work to understand the impact of the DOL Rule on their business, you know, for the past couple of years our discussion with clients have intensified moving from clarifications and interpretations to practical application.

We are in discussions with them regarding product implications, share best possibilities and how best to leverage Robo solutions such as Jemstep. Based on our early discussions we continue to believe our comprehensive range of capability positions us very well to help our clients as a DOL Rule is implemented.

Additionally, given Invesco's tremendous expertise and experience partnering with clients to address regulatory topics. For example, our work and RDR in the U.K. we view this as an opportunity to further deepen our relationships, provide new capabilities and enhance our business overall. With that, I will now turn it over to Loren to review the financials in more details.

Loren Starr

Thanks, Marty. Okay so quarter-over-quarter you saw our total AUM increase by $8.1 billion or 1%. This was driven by positive market returns of $10.7 billion. We also saw long term net inflows of $4.5 billion. I should note, of this $4.5 billion, $0.9 billion came from IVR leverage, which is classified as our institutional passive fixed income.

We also saw the acquisition of our India joint venture get completed and that brought in $2.4 billion. We saw inflows from money market of $2 billion, these factors are offset by negative FX translation of $7.7 billion and we also saw outflows from the QQQ's of $3.8 billion.

Our average AUM for the second quarter was $784.5 billion that was up 4.9% versus Q1. Our net revenue yield came in at 43.7 basis points which is 0.1 basis points lower than the prior quarter. Although this was a small change there were a variety of factors which impacted our yield and Q2.

These included AUM mix and lower performance fees which reduced the yield by 0.7 basis points and 0.4 basis points respectively. These factors were offset by one more day in the period which increased the yield by 0.4 basis points.

In addition, currency mix and the increase in the other revenue each contributed 0.3 basis points to net revenue yield in the quarter.

Next let's turn to the operating results, Page 13. Before I begin, I'd like to point out that we've evaluated and taken onboard the SEC's new guidance on non-gap financial measures. Accordingly, you'll already noticed the changes that we made in the format of our second quarter earnings press release which now focuses primarily on the U.S. gap results.

In addition, the U.S. gap period-over-period variances are now set out in detail in our earnings release. Both our earnings release and this investment presentation contain detail reconciliations between our U.S. GAAP and non-GAAP. And importantly there is no change to how we've calculated our non-GAAP measures relative to prior quarters. But since we've already provided the U.S. GAAP narrative in the earning press release, my comments today consistent with past practice will focus exclusively on the variances related to our non-GAAP adjusted measures. So actually let's turn to the next page that's titled non-GAAP operating results.

You've seen that revenues increase by $38.5 million or 4.7% quarter-over-quarter to $856.6 million, which included a positive FX rate impact of $6.4 million.

But then within that revenue number you'll see that adjusted investment management fees increased by $32.6 million or 3.5% to $962.9 million. This reflects higher average AUM for the quarter. Foreign exchange increased adjusted investment management fees by $7.7 million. Our adjusted service and distribution revenues increased by $5.7 million or 2.9% reflecting higher average AUM for retail products.

Foreign exchange increased adjusted services and distribution revenue by $0.5 million. Our adjusted performance fees came in at $9.3 million in Q2 and were earned from a variety of investment capabilities including $5.5 million from our bank loan products.

Foreign exchange increased these fees by $0.1 million. Our adjusted other revenues in the first quarter were $31.7 million and that was an increase of $7.7 million from the prior quarter and that was the result of increased transaction fees from real estate.

Foreign exchange increased these revenues by $0.4 million. Third party distributions service and advisory expense which we net against gross revenues increased $1.3 million or 0.4%. This movement was in line with higher revenues derived from our retail AUM and FX increased these expenses by $2.3 million.

Moving further on down this slide you'll see that adjusted operating expenses at $526.2 million increased by $15.2 million or 3% relative to Q1. Foreign exchange increased adjusted operating expenses by $4.1 million during the quarter.

Our adjusted employee compensation came in at $347.9 million an increase of $7.6 million or 2.2%. This increase was driven by higher sales commissions and variable compensation cost, a full quarter of higher based salaries effective from March 1st, an increase in deferred compensation expenses for the awards granted in the first quarter.

This was offset by a decline in the seasonal payroll taxes. FX increased our adjusted compensation by $2.8 million in the quarter. Adjusted marketing expenses increased by $3.6 million or 14.2% to $29 million reflecting the seasonal increase inclined events. FX increase adjusted marketing expense by $0.3 million in the quarter.

Adjusted property, office and technology expenses were $82.8 million in the quarter, an increase of $1.7 million versus Q1 driven by higher technology cost. FX increased these expenses by $0.5 million.

Adjusted G&A expense at $66.5 million increased $2.3 million or 3.6% and this was driven by professional services expenses when compared to the prior quarter and FX increased G&A by $0.5 million.

Going on further down the page, you'll see that adjusted non-operating income increased to $15 million compared to Q1 and this difference was largely driven by higher equity earnings from unconsolidated affiliates in the second quarter, but also the 7.1 million FX loss recognized in the prior quarter.

The firm's effective tax rate on pretax adjusted net income in Q2 was consistent with the prior quarter at 26.5% which brings us to our adjusted EPS of $0.56 and adjusted net operating margin of 38.6%.

And so finally before I turn things over to Marty, I just want to provide a quick update on our capital management activities in the quarter. As you'll recall from our recent announcement in addition to our ongoing share repurchase activity during the quarter we entered into a 150 million accelerated share repurchase program on June 30th.

And as a result of this our end of period share count declined by approximately 1.7% quarter-over-quarter to 413.1 million shares.

And with that, turn it back to Marty.

Martin Flanagan

Thank you, Loren, let me just make a couple summary comments before we get to Q&A. We believe our ability to produce strong long term net flows this quarter reflects the fundamental strength of our firm.

Our expertise across a broad range of fundamental and factor base capabilities and our focus on helping retail and institutional clients achieve their investment objectives.

We feel good about the commencement of our business. We closed strong across the quarter as we help clients manage through the volatility we saw in June.

Strong flows have continued into July with more than $8 billion of long term net inflows across variety of capabilities and regions. This $8 billion includes $6.5 billion that is related to the 529 mandate which was recently funded.

As noted during our investor day and earlier this year, we were very well positioned to help clients be successful which in turn will enhance our market relevance strive growth and strengthen shareholder value over the long term.

And with that Loren and I would like to take any question you all have.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Craig Siegenthaler of Credit Suisse. Your line is now open.

Craig Siegenthaler

Thanks good morning everyone.

Martin Flanagan

Good morning, Craig.

Craig Siegenthaler

So it nice to see the strong rebound in your fixed income flows. Can you let us know which products were the largest contributor to the bond flows and also can you help us think about the sustainability of the second quarter results into the second half?

Martin Flanagan

Maybe I'll make a comment and Loren can talk more specifically. You know, as I just mentioned we just continue to see really strong, you know, really strong flows. And I think importantly, you're seeing as I said long term flows away from the 529 plan you saw more than $1.5 billion already. You know, the pipeline continues to be very, very strong. And the other element that we're seeing is again the power share data capabilities, the breath and longevity of the range. It's really kicking in and so this - we are right now it looks like it's going to continue quite strongly, you know, through the border.

Loren Starr

I'll just say generally the growth in our fixed income is being driven by our U.S. investment grade capability which is pretty much I think also in our institutional pipeline showing up as a large contributor. I just want to remind people that in the flows this quarter there was about $0.9 billion related to IVR leverage which shows up in the fix income column. But we also are seeing a lot of interest even in power shares, fixed income, emerging markets, sovereign debt, Chinese fixed income, so are a variety of other fixed income capabilities factor into that. And each one is about roughly $0.5 billion in size [Indiscernible].

Craig Siegenthaler

And then on Brexit, I think the client reaction is significantly more muted than anyone was thinking about 30 days ago. But how are clients reacting in both the U.K. and continental Europe today following the vote? And have you seen a lot of that initial reactive activity dying down?

Martin Flanagan

Yes. And, you know, like us, like by others, you know, very engaged with clients. I mean what was really interesting was you saw in our numbers, June, you know, that was probably the peak of uncertainty and you saw it in the flows being most negative here to date. Interestingly, a number of institutional clients were waiting until after the vote and what it really did was start to, in their mind it created clarity and the institutional mandate started a fund in quite, you know, in the 30 days past that.

And we're also seeing retail investors making decisions on where to put their assets. And again, we point out GTR has been a real beneficiary of that. So people are looking to, you know, just relook at their asset allocation capabilities. The good news is the breadth of our capabilities put us in a position that we can be helpful to them in any which way.

So, it is really days but everything we see, I frankly think its opening opportunity for a firm like us. We are positioned very strongly, you know, structurally for a Brexit. That means we're not distracted by trying to - having revamp product lines or anything along that way. And we can just really, really be focused on clients. And again it was a total over reaction in light of if you look at Invesco share price and again I take the results are making that point quite clear.

Loren Starr

And the other thing kind of worth mentioning is I mean our teams have been really good in terms of being innovative and creating new product in advance of client demand and so we would expect to see other, I think, very interesting products hit the U.K. market this year towards the beginning of next year.

I think there is an income oriented sort of GTR type of product that is being looked at, as well as some enhanced index capabilities and factor capabilities too. So I think all those are going to really help us even if we see continued sort of level of uncertainty around Brexit.

Craig Siegenthaler

Thanks for taking my questions.

Martin Flanagan

Thank you.

Operator

Thank you. The next question is from Ken Worthington of JPMorgan. Line is now open.

Ken Worthington

Hi, good morning. First, in terms of, maybe a couple questions to excess cash. What was the balance at the end of the quarter? And I've recalled that consolidation was a conceptual focus when that pool was being built. But I think product development and capital return have been higher priorities more recently. So how do you see that access cash level evolving and is a billion dollars the number you still want to migrate towards over time?

Loren Starr

Ken, total cash at the end of the quarter is $1.45 billion and so the regulatory requirement element of that was about $660 million leaving us roughly $800 millionish of sort of capital. I mean, we're certainly within sort of tolerances around that billion. And so again I won't get fixated on that billion being sort of like this bright line that we have to sort of hit.

And clearly we've been very opportunistic and we'll continue to be very opportunistic with respect to returning capital to the extent that we see our stock being valued in a way that we think is not commensurate with our true values. So, I would say look to our past sort of practices to evaluate how we're going to operate going forward. It will be very consistent.

Ken Worthington

Okay, great. Thank you. And two little questions maybe one on the Rhode Island plan how's the transitioning gone? And how much money actually came over when it was first announced? I know it was about seven billion was that about what eventually moved over?

Martin Flanagan

So, what came over was $6.5 billion and so those are combinations of your market impact and with the transition it is now completed the transitions in place. And everybody is very, very focused on expanding the capabilities through the retail channel. We think it's going to - it's a great plan and we think that we can help make it even more successful. So, we're executing as we speak.

Ken Worthington

All right. Excellent. Then just lastly active equity net outflows were pretty large this quarter. Obviously it was a big risk off quarter. There was Brexit and other things. Maybe any observations you have on sort of the nature, either the lack of money coming in or the more money coming out that kind of drove that big net outflow this quarter?

Martin Flanagan

Ken, the one thing I would just there's about 2.8 related to international growth. That was sort of the thing that we - I think we - people understand that there was one client who turned out it was a parting of ways, but that international growth capabilities performing extremely well. It's been a close capability and its one that I think is going to get filled up pretty quickly through the course of this year.

So I would do that as a little bit one offish with respect to kind of the equity - the active equity outflow. The other elements are sort of somewhat consistent with past, what you've seen in the past. So I don't think there's anything that's sort of accelerating outflow, relative to that category other than that one element.

Ken Worthington

Great, thank you very much.

Operator

Thank you. The next question is from Alex Blostein from Goldman Sachs. Your line is now opened.

Alex Blostein

Hey, guys. Good morning. Thanks. A couple of quick questions. I guess, first around the margins. Obviously we saw the adjusted margin improve sequentially given better revenue environment, but still down pretty meaningfully every year. So if we're seeing more range bound market which obviously feels like a big if right now, but under that scenario how should we think about the trajectory of the margin for the rest of the year? And then is there anything else you guys are targeting on the expense front to help drive margins higher in today's environment?

Loren Starr

Yes, Alex, I'll take that. So I think our expectation even with markets being flat which is the way we normally forecast anyway, and even with the pounds being down where it is for the last half of the year we would expect margins to be on an upward trajectory, as we continue to grow organically and continue to work hard on the optimization work around cost.

The firm has done I think a really great job of creating capacity for investment without having to add to cost, really through using as we talked about in the past, greater use of our own shared service centers, being able to leverage technology more effectively, streamlining, simplifying, a lot of our processes. So that work is going on as, you know, and we're on track with respect to the optimization which we've discussed provide some expense relief of roughly $30 million to $45 million by the end of the year.

And to that run rate which is actually now beginning to flow through our numbers is something that has been very helpful, and just remind people, we had those acquisitions that came onboard Jemstep and Religare. And those expenses are being offset through this optimization whereas the revenues are showing up in the revenue line items. So we do think that, that's going to help further drive margin expansion.

Our increments on margin continues to be at very high level and with that sort of 55% to 60% incremental margin, and our fee rate because of the mix that's coming in particularly around institutional being at our higher fee rate than what's going out. We'll continue to benefit from that.

So I think all those factors to us that we can continue to see margins increase and, you know, get up to the levels that we've seen in the past without too much stretching. Clearly that's a factor of the market of course and what...

Alex Blostein

Sure.

Martin Flanagan

I might add a point though. I would say from my perspective where were really going to see the margin expansion is really on the organic growth. You know, we continue to be very discipline on expenses as we always have been as Loren just described. But

I tell you for the 11 years I've been here I don't know that I know a time when I've seen so many of our initiatives sitting in front of us to have such an impact. You know, you're starting to see and institutional factor base smart beta solutions.

And so our debate internally is, what is the wise move of investing in these to get the returns versus being very cautious. And again it's something we do all the time, but it's really that market relevance expansion of the business that sits right in front of us.

And it's a very exciting time quite frankly for us.

Loren Starr

I mean, just generally because I know people are quite curious. I mean in terms of guidance around expenses I mean we would see expenses sort of being roughly flat from the current level through the course of the year - based on sort of flat markets and FX. So that provides a nice back drop as we continue to grow the revenue line item.

Alex Blostein

Got it. That's very helpful. Thanks guys.

Martin Flanagan

Yes.

Alex Blostein

Second question on the DOL. I understand it's still pretty early, but it seems like there is a lot moving pieces already happening on the distribution side of things and different kind messages from various distribution partners.

What do you guys hear from some of the larger distributors out there, whether its warehouses or some of the more regional platforms and specifically as it relates to essentially payment per shelf space and how those conversations are evolving?

Martin Flanagan

Yeah, so I would say, from my perspective, which is probably naïve I thought there was going to likely be a uniform you know response, but in reality what’s happened is each of those distributors are different. Their businesses are positioned differently and so they’re all variations on the theme and that makes sense quite frankly.

And what also -- it’s -- there are ways to continue to be supportive of the brokerage business, but knowing that the movement is towards their advisory businesses. And so you know they’re putting a DOL on the place you know along those lines and again that you know plays well to an organization such as ours where we have such a range of high conviction fundamental capabilities and the factor-based investing.

And so it would be too early for us to be very specific on what the outcomes are but, as I said, it looks like you could see some changes to share classes. You could see some different changes in use of -- focus on asset classes and the like. So, that’s what we know right now. But again, I would be getting ahead of our clients if I said--

Loren Starr

And the other thing that we also changed is maybe as a team is the use of fewer providers and so it’s the ones who are probably -- have the broadest set of capabilities, good performance who will probably fare better to the extent that there’s assets in motion as a result of DOL. We think we’re probably you know as well-positioned as one can be in that environment.

Alex Blostein

Yes, understood. Thanks so much.

Martin Flanagan

Thank you.

Operator

Thank you. Next question is from Brennan Hawken of UBS. The line is now open.

Brennan Hawken

Thanks, good morning. Quick question on the fee rate here and we saw the management’s fee rate decline quarter over quarter. I know that you guys often speak to the revenue yield, but just hoping if it’s possible to ask a question, cutting out some of the other noise and just speaking specifically to the investment management fees divided by AUM.

What drove that? Was it mix and if so, should we think about that as being sustainable and I think last quarter you had given some indications saying that you expect the fee rate to improve throughout the year and is that still your expectation?

Loren Starr

Yeah, so obviously the management fee rate does have -- is impacted by FX and then there are some factors there as well as overall equity component verses non-equity. And so when the market declines, you’ll see some of that change.

There's another element around our gross management fee rate, which people should be aware of. It’s the RDR impact right, as we go to continue to bleed out the old fee rate and replace it with the net fee rate that has an impact on the gross management field.

And so I’d say that is sort of a permanent and sustained as we go forward. But it doesn’t have any impact on the net revenue yield because commensurately our -- well the pain away goes away too. So, that’s why it is -- you almost have to look at that net number to really understand the dynamic of that shifting mix

But there -- in terms of the trends around what’s driving our management fee, we still feel that it’s quite stable. Maybe, I mean to the extent that Europe is a little bit slower than it’s been in the past, its one engine that was driving that fee rate, which is probably not something you’d look to be driving forward. But we are seeing continued engines around Asia alternatives, which is helping us continue to see that fee rate increase as well as the institutional mix generally being better.

So, I’d say the net revenue yield ex-performance fees, you know, quarter -- next quarter and going forward is kind of flattish to this quarter and so that would be -- so even with that FX, so I think with that FX down obviously that has a negative impact, but because the mix is positive, it’s probably off setting it.

So, hopefully that’s helpful in terms of the modeling on the fee rate. A lot of dynamics underneath clearly have to have some impact, but generally, we expect to see that trend in terms of improving fee rates continue, but maybe at a somewhat slower pace.

Brennan Hawken

Okay, got it. Thank you. That’s helpful. And then, I know that it’s a --it’s probably pretty hard to be -- maybe hard might even be understating it, but to be anything close to precise. But given how important the U.K. is to you all, is there a way that you could help us understand how you’re thinking about the different things that might happen to your expense base and to your business based upon the handful of likely outcomes that have been thrown out there from a post Article 50 world?

Martin Flanagan

Sure, so again take this -- reality as no one knows exactly, so let’s do the more likely than not. The more likely than not is Brexit is going to happen and that you’re going to end up with trade agreements between the continent and the U.K. that are mutually beneficial. It’s going to take time to get there.

That said let’s get down to our business. Our business, as I was trying to highlight, we are already structured for a post-Brexit environment. We’re a very strong U.K. business, very strong continental business, and we don’t see any changes there.

And for all a range of reasons and the impact on the business is going to be largely driven by the economic environment. And yeah, there is a scenario where it’s less negative than everything that you heard. I mean, with the pound depreciating, that’s actually the exporters in the U.K. are actually doing very well.

So, I think, the reality is this is going to be very hard at a political level, but I would say our business is a business that is structured for the change and there is a need for asset management services and we just really don’t -- the -- this industry being hurt to the degree that some other businesses might be where they’re literally going to have to move people to different part of -- out of the U.K., out of the continent and you know vice versa. So, it is just not part of what’s going to happen to us as asset managers.

Now there are some asset management firms that are not structured like we are, and they’re going to have to do some work to get positioned to be continually successful. But again, we’re trying very hard to point out looking at the elements we talked about earlier -- it’s a huge part of the world. It’s a strong part of the world. They’re clearly going through some changes, but I think it’s a total mistake to think that the reach will not continue to be important and that it will not continue to be an important part of our business.

Brennan Hawken

Okay. Thanks for that color.

Operator

Thank you. Next question is from Glenn Schorr of Evercore. Line is now open.

Glenn Schorr

Hi, thanks. Just a quick follow-up question on your comments on July. Besides the 5.29 [ph] funding, the bout 1.5 billion of inflows, does it have a comparable mix to what we show on the quarter, alternatives and fixed income in inequities on the out?

Loren Starr

So, of the 5.29, the 6.5 -- about 2.1 is equity, 3.5 is fixed, there’s 0.4 of money market and 0.5 of Alts. So, that’s on the 5.29 component of the flows. I’m sorry; did that answer your question?

Glenn Schorr

No, I appreciate that though. That’s a good follow-up. The 1.5 billion that wasn’t a part of the 5.29, I'm sure it's a similar--

Loren Starr

I’m sorry I thought you were -- so the 1.5 billion and that was just related to market and outflows and so I don’t think -- I don’t know how it -- where it came out of.

Martin Flanagan

No, no, the question of the $8 billion, what’s the 1.5 billion? What were the flows for the 1.5 billion?

Glenn Schorr

Does it look like second quarter with alternatives and fixed income inflowing with equities on outflow?

Loren Starr

All right, so of the 8 we have -- I don’t know if we have all the detail right now. I think it’s similar -- similar is what my experts are telling me. Okay, very good.

Glenn Schorr

Okay. And then just curious, you alluded to everyone [Indiscernible], I think performance is good. It feels to me that this is a really good backdrop for that product. Has it gone into positive flows and do you think we’re turning the corner and get positive flows just globally?

Loren Starr

The [Indiscernible] has gone positive in the second quarter, but that was -- it was largely institutionally driven. Retail has significantly improved, so it’s just very modestly in an outflow. So, I’d say both on the retail and institutional side, very good sort of indication of this product. Sort of the better position now than we than it has in the past given the very strong performance.

Glenn Schorr

Great. And just and one more follow-up, Loren if I could. The -- in the prepared remarks, you mentioned a bunch of things that are -- I wouldn’t call turning the corner, but just things that are just doing well in general outside of maybe active equity or parts of active equity. So, is the 3% to 5% organic growth rate still cool? Can it happen without U.S. equities? I mean it looks like it can given everything else that’s working. I just want to get that straight.

Loren Starr

I mean we think it’s -- I mean that 3% to 5%, obviously, is what we think we can do over time. It’s been sort of more of a benchmark. I think for this year, we would like to see us at least enter that range.

But given obviously what’s going on in Europe, it’s been a little bit of an unusual situation. So, I don’t want to sort of promise flaws because that’s always -- that’s probably even harder than the promising performance fees.

But we -- everything we say in terms of the institutional pipeline growing the fact that we have -- certain parts are business, particularly Asia is absolutely strong both on the retail and the institutional side. We see power shares hitting new records or close to records on flows. I think it's certainly reasonable for us to think that we could sort of get close to that 3% at a minimum.

Glenn Schorr

All right. Excellent. Thank you.

Operator

Thank you. Next question is from Chris Shutler of William Blair. Line is now open.

Andrew Nicholas

Hi, this is actually Andrew Nicholas filling in for Chris. My first question is on GTR. Obviously, you’ve had exceptional performance there across all time periods, particularly on a year-to-date basis and with respect to some of the strategies, largest peers. I was just curious if you could provide some color on how that pipeline is looking and that asset class as a whole?

Loren Starr

So, I think the GTR pipeline is certainly featuring in a lot of the growth in a pipeline generally. That’s the one that’s you know probably up more than 20% quarter-over-quarter. So, it’s just one that continues to be seen.

I think it also with respect to some of the continuing products that it’s sort of distancing itself even further, relative to other products. So, it had the ability to grow far beyond its current level, we would expect. And certainly is looked at I think and reviewed in the U.S. by consultants and then taken on as well.

So, that’s the important component of getting that completed for us to really fulfill, ultimately I think what could be the full potential as well as on the retail side in the U.S. where I think it’s about 0.5 billion or maybe a little less, only 300 million or something like that. But it hasn’t really been launched fully and it hasn’t hit its two-year track record yet and so once it does that I think it’s really going to have an opportunity to do a whole lot more than what we’ve seen in the U.S.

Andrew Nicholas

Great. Thank you. That’s helpful color. And then on the DOL rule. I think general expectations are that the rule will drive flows to products that either have lower fees, very strong relative performance and/or a combination of both. I’m just wondering if you have any thoughts on which of those two factors will play a bigger role in driving flows in a post-DOL world and how you think your product suite is positioned to compete on each front.

Martin Flanagan

So, our view is this is that it's by less simple than your perspective. What our financial advisors are trying to do, they’re trying to generate excess returns, risk adjusted returns over time and you cannot get there with cap weighted indexes. And so it really is a combination of high [Indiscernible] fundamental, good performing active as you’re describing in combination with passive and where we think the combination is, is in smart data.

And when you combine those together you get an overall -- the total cost is less and so that’s why this element of being strong in solutions really matters for an organization. So, we just look at the position of the firm and having the whole range of capabilities and the ability to help with solutions and that’s at a retail level, we take our position very well. I think the firms that are disadvantaged are those that are very, very narrow in scope and clearly, if you’re a high class, narrow in scope, moderately performing organization, you’re in trouble.

Andrew Nicholas

Thanks for taking my questions.

Operator

Thank you. Next question is from Chris Harris of Wells Fargo. Line is now open.

Chris Harris

Thanks. Hey, guys. Hey, so a few quick questions on your U.K. pound hedge. Obviously, this position is significantly in the money. Regarding the accounting of that, is that a mark-to-market methodology or are we going to see gains as you start exercising that position? And then part two of the question is, given where the pound is today, how big of a step down in income can we expect when you have to roll that hedge?

Loren Starr

So, I mean in terms of the U.S. GAAP, it’s mark-to-market and then that’s -- you’re going to see that flowing through the P&L and you are seeing it flowing through the U.S. GAAP P&L currently. In terms of our non-GAAP disclosure, what we’ve done is we’ve backed out that mark-to-market and we are only bringing in what has been actually realized. And so this quarter that was a very small amount of money in terms of the impact.

For the next couple of quarters, just based on the current rate, that’s probably close to a penny EPS for each of the quarters going forward. So, in terms of what we would do if we were going to roll it, because we have it out through the Q1, I think we’re going to be patient and think about whether we need to or want to.

But I, obviously, again have to look at the cost first to sort of lock-in right now at current rates, or a discount to current rates because we’ve been using out of the money puts. I’m not sure if anybody would be too excited about a hedge 1.25 or something like that.

So, it is something that we’re going to continue to look at and evaluate as to whether we continue to roll this thing. But certainly we’re going to hold on to what we’ve got right now and continue to benefit at least from a cash flow and EPS perspective from the protections provided.

Chris Harris

Great, okay. Thanks for clarifying that. And then a quick follow-up on comp. It sounds like there are a few discreet items that impacted the number this quarter. How should we be thinking about comp in the back half of the year? And I apologize if you addressed this in the comments earlier.

Loren Starr

No, I think it’s going to be roughly flat to current levels, so I think that’s the way you can think about it, sort of flat. There’s a little fluctuation here and there, but generally flat.

Chris Harris

Okay. Thank you.

Operator

Thank you. Next question is from Dan Fannon of Jefferies. Line is now open.

Dan Fannon

Thanks. Good morning. Appreciate all the color from Brexit and the kind of commentary around flows thus far. I guess, is there any kind of negatives fall-out that you’re seeing institutionally or certain regions whether you actually are seeing maybe some changes more to the negative that might be longer term or has it generally been kind of consistent across the board?

Martin Flanagan

Yeah, I mean, it really has been consistent. And as I said, in the -- and let me make sure, this is in response to sort of the Brexit impact. Is that right?

Dan Fannon

Correct.

Martin Flanagan

Yeah. I mean, no, I mean it really did unleash, in particular, in the U.K. and on the Continent, people decided to move forward with the -- their intention to fund different institutional capabilities.

And then if you -- as Loren said, if you just go to Asia-Pac right now, it’s just very strong for us. And so there really has not been any impact that you could tie to that event or other uncertainty in the world. In fact, for us, much differently than that, it just the pipeline as we keep saying, it just keeps getting stronger and stronger and -- so, no we’ve not seen that.

Loren Starr

The only thing that I’d say is probably around the DOL, there’s probably more question marks just generally.

Martin Flanagan

Yes.

Loren Starr

And I think it was so the comment that was made are people -- certain clients going to sort of gravitate to using exclusively low fee product as opposed to active product and so whether insurance companies or others may choose to do something like that in the future, unclear. But if it happens, it happens obviously to industry-wide. As we said, I think we’re well-positioned to operate in that world as we do have low fee tax deposits.

Martin Flanagan

Yeah, but I would add though is that what is happening is the financial advisors want to generate excess returns -- adjusted excess returns that you just can’t get in cap weighted indexes and so active is here to stay. And if you’re good investor, you’re going to do well.

Dan Fannon

Okay, that’s helpful, and I guess wondering if there has been any benefits from the Rhode Island win that you can talk about as that’s been helping your pipeline or if that’s kind of raised the profile for your firm within that channel and if there’s been any benefits.

Martin Flanagan

There’s no question it raised the profile and it is helping very much and as I said, we’re actually, it’s a two different levels the solutions element, it’s starting to kick in. Frankly, you would imagine, but it -- at the retail level and also in Asia-Pac, there is actually, Mainland China in particular just really growing opportunity. So, again, we’d say its early days for us in that area, but again, we feel a very, very strong capability and there’s an awful lot of activity around it.

Dan Fannon

Great. Thank you.

Operator

Thank you. Next question is from Robert Lee of KBW. Line is now open.

Robert Lee

Thanks. Good morning, guys.

Martin Flanagan

Good morning.

Robert Lee

I guess my first question is just maybe any update you may have or thoughts you have around the -- obviously the SEC’s proposed different liquidity rules on 40 Act products and certainly that impact, ETFs. And I know you’ve talked about this in the past, Marty, but current thoughts as maybe you’ve been part of any interaction with the SEC on kind of what’s likely.

And given the explosive growth in smart data, ETF products and other products, do you think it -- there’s any risk that it kind of inhibits some of the -- and then liquid Alts to some of the strategies that you’re running out there?

Martin Flanagan

I get if -- so, how is smart data inhibiting some of the strategies we’re running to this -- can you help me?

Robert Lee

Well, I meant just that if you have different liquidity or derivative requirements and different strategies, as proposed, is that going to inhibit how you run things?

Martin Flanagan

Got you. Yeah, so, look as we said in the past and I think we all just saw it, so anticipate something coming out of the liquidity rule. The involvement that the industry has had is that we think there’s going to be a commonsensical outcome, which would be a good thing. And if that is the case I -- it’s going to be quite frankly an awful lot of work, but it’s something that’s very manageable for the industry.

The derivatives rule, again, it’s -- it is I would say the first notion of it was -- it would’ve gotten in the way of a number of products for the industry and in particular, for us at a retail level, GTR probably would’ve been very, very challenged in the proposed rules.

We’re sensing that we’re going to end up with a better outcome, which will not get in the way of a number of our products. I don’t want to be so definitive yet because it’s not there. But I’d say very good progress and being very thoughtful on really trying to help the SEC get to what they need and so the dialogue has been constructive. And so again I -- we’ll see what ultimately comes out, but at the moment I’d say it’s trending to a commonsensical good, thoughtful outcomes on both levels.

Robert Lee

And great, and maybe sticking with the regulatory theme, I mean, the business that we never really talk about is your money fund business. But come October you've got changes taking effect, the -- you have predominantly an institution business there.

So can you maybe -- any update on how you think come October any sense of how clients are going to you know behave? I mean, obviously, you've seen prime to govi kind of movement anyway within the industry. But any concerns that that’s going to -- I don't know, shrink that business and then in that context any rethinking of its strategic positioning within Invesco?

Martin Flanagan

Yeah, good question. So, you’ve already seen the number of money fund providers have over the last couple of years. You’re probably going to see it again. And it’s going to be a smaller number of firms that are committed to and successful in that area.

So, we’re actively committed to it. We’ve done a bunch of work on the product line-up and you’re going to see us, I think -- you’re going to see the -- a very strong part of our business in growing and that, I think just in July there’s been $4 billion of money fund in-flows already. So, yes we’re anticipating that it’s going to be a stronger part of our business going forward.

Robert Lee

Great. Thanks for taking my questions.

Operator

Thank you. Next question is from Brian Bedell of Deutsche Bank. Line is now open.

Brian Bedell

Great, thanks very much. Hey, Marty, just to start-off with a question on the smart data franchise, obviously, you’ve have a good you know relatively good first mover advantage in that. But as you do see more competition coming in to that market given the attractiveness of the product, what kind of steps are you taking to leverage that first mover advantage? And talk about to what extent you see that improving within DOL and can you leverage the -- I guess traction and leveraging the Jemstep platform with that as well.

Martin Flanagan

Good question. So, we look at smart data as a subset of factor investing and again, I think very importantly I’m repeating myself, but we’re one of very few firms that have a factor-based capability that’s been in business 35 years and the fundamental investing that we have.

And so that combination of those around the world for us that put us in a unique position. So factor investing outside of the United States is much more an institutional business and it’s growing in demand, both in the Continent and Loren mentioned that we’re looking -- doing some things in the U.K. at the retail level. Actually, there and Asia-Pac is actually growing in demand.

In the United States, it tends to be a retail focus and expressed as smart data through ETFs. And where we look at our strategic positioning and I think very importantly, then differently than a mutual fund where you can have 200 of the same XYZ funds competing it’s very hard to see beyond really three ETFs of sort of the same color would be successful just because of the nature of the ETF with market makers and the like.

So, first mover advantage matters a lot. The other thing that really matters, too, is the longevity of, so think length of track record. And if you look at the power shares line-up of smart data, any number of funds are 10 years old.

And so when people are looking to invest or looking at the length of capability also look at the liquidity within it. And so those are very different dynamics than you would have with a mutual fund. So, the good news is people are coming in so it sort of -- it confirms the attractiveness of smart data.

That said, it’s going to -- it’s a very, very competitive space to enter into to say nothing of how do you work in conjunction with active management within your organization. So, we think we’re in a pretty good position.

Loren Starr

I think, again, like any -- like you’d imagine, I mean if we continue to launch very innovative and products in advance of competitors, so that’s also part of our strategy is making sure that we have that first mover advantage. And just given the depth of our team and our connection to our clients, I think we’re achieving that quite well.

Brian Bedell

And is Jemstep part of this process. Is that maybe just an outlook for the new term or intermediate term horizon for the traction there?

Martin Flanagan

It’s a good question. I'm sorry. So, yes, still early days with Jemstep. It’s proving to be a very constructive addition to the firm. It is an application so the -- if you want to call it the sales cycle is longer. There is a tremendous amount of interest in it and I think you said it right; it’s sort of looking into mid next year that type of thing before you start to see an impact.

But again, it’s very much positioned to be helpful to our clients, not competing with our clients. So, it is direct-to-consumer and it is -- as I said earlier, it is -- we’re having deeper conversations with clients because of the capability that we have to help enable them deal with the range of things that they’re dealing with coming through DOL and the like.

Brian Bedell

Great. And then, just lastly Marty, maybe just your perspective on this rising speculation of consolidation and the asset management industry broadly if active management continues to underperform and products need to be rationalized. Maybe just to review on whether you think that that will happen? And then to what extent you think you may participate either in acquisitions or even combining with other firms?

Martin Flanagan

So, I’ve not been in the industry for quite a long time. And it’s been declared to consolidate for every five years it seems it really hasn’t for various reasons that we all know. I would be in a camp consistent with others that it does seem very different this time and I -- one of it -- you could look at it as a maturing industry. But you talk about active management. My view is you go in cycles and we’ve had this beta run from 2009 on with government intervention, which aligned the stars for cap weighted indexes, that’s not sustainable.

So, I think that’s been overdone. That said it’s here to stay. I think you’re going to see greater growth of factor investing as we said. But active management you’ll actually -- it will thrive. I think those individuals that are calling it dead asset class are making a mistake.

So, that said, I think the other element that’s really driving the notion of consolidation. It’s the regulatory landscape; it is so costly to keep up with all of these, to say nothing of Cyberspace. So, its rising cost in a competitive environment and I think those are the dynamics that are going to you know also be changing -- be forces to drive consolidation.

And luckily we’re fortunate enough to be positioned extremely well. As we’ve just been talking about on this call. I’d say the business here has never been stronger. It’s seemingly getting all engines are kicking in quite nicely and matched against the trends that are in place and I think that people that try to catch up with the trends, it’s going to be very hard. You need to have started three years ago, five years ago, seven years ago, honestly.

That said, we don’t see a lot of gaps, but we will continue to pay attention to the marketplace, as we have in that past, selectively as things can -- if we can become a stronger organization by teaming up with another organization, we’ll continue to do that. That’s said, that’s not our focus right now.

Brian Bedell

Great. That’s great color. Thank you so much.

Martin Flanagan

Thank you.

Operator

Thank you. Next question is from Michael Carrier of Bank of America. Line is now open.

Michael Carrier

All right, thanks guys. Hey, Loren, just two quick follow-ups. One is, just on the management fee you mentioned on the net basis given RDR, that that that’s kind of shifting. I just wanted to get a sense on timing, meaning how much of that’s played out verses how long we can expect to see that?

And then I don’t think you mentioned it, maybe just because there’s no real clarity right now, but sometimes you give a little color on the performance fees in terms of the outlook. So, just any color there.

Loren Starr

So I think the RDR impact is going to be largely completed by the end of this year. That would be my guess. So, you can expect that to be completely sort of played out. In terms of performance fees, you’re right; I don’t have you know full clarity. I think I would still say sort of roughly $5 million a quarter and for the other revenues, which is another element I think sort of again hanging roughly around $30 million a quarter is the right way to think about it.

Michael Carrier

Okay, thanks a lot.

Loren Starr

Sure.

Operator

Thank you. Next question is from Michael Cyprys of Morgan Stanley. Line is now open.

Michael Cyprys

Hi. Thank you. Good morning. Just curious how you’re thinking about the next phase in evolution of ETFs as a wrapper, particularly active ETF, both on the non-transparent side, which I think so far only make sure it has approval from the SEC. But also if more can be done on the transparent active ETF side as well.

Martin Flanagan

So, we’re one of the first firms to have exemptive relief or active ETFs and we launched them, I’m going to say, in 2007, two of them. And I think what’s in them is basically our C capital. So, there’s a lot of conversation about active ETFs. They just really have not taken off.

So, we have the capability to do it. We keep analyzing it. We’ve just not seen that as a big -- lot of demand for it. Now, if you read the papers, you would think that’s all that anybody cares about, so that’s been our experience, so maybe we just have it wrong but that’s our experience.

With regards to different wrappers, I -- the -- if you look at net shares, it’s interesting, but it can be 100% achieved by a share class and a mutual fund. If you use an R6 share class, you get the exact outcome via without the challenge of -- a different vehicle trying to get launched within a channel. And although it’s creative, I think that’s been the head wind for it.

So, it could ultimately be successful, but again I think there’s an easier way to get there. And you really need to do it in conjunction with your clients, i.e., think distribution partners. So, things will continue to evolve.

I personally think the area that will continue to grow the most for IB, most additive is smart data because it is -- you get better outcomes with smart data than you do with cap-weighted indexes. So, I think that’s really going to be where the gravitational pull is when you look at these ranges of capabilities that you just highlighted. So, that’s our view. We could be wrong, but that’s what we’re thinking right now.

Michael Cyprys

Okay. Thanks. And then just coming back to the flow side, active flow was a bit soft in the quarter. I know you mentioned meaningful redemption there, but if we just look at the gross sales, that’s been just a bit weak. So, just curious how you’re thinking about reaccelerating the pace of gross sales on the active side, what sort of strategies or actions can you take, whether it’s with distribution partners or with investments in sales teams and so forth?

Martin Flanagan

Yeah, look, the reality is we’re still in an uncertain market. If you just play back the year, look at January, February, what happened -- you look around at what’s happened with Brexit and the knock on, that tends to be the big driver.

If you look within our flows, we’ve had tremendous flows in U.S. dividend stocks, which is consistent with this sort of -- I want yield, I want some growth, but I’m somewhat concerned about the environment.

If you look at the value capabilities, I feel really good about the teams and how their managing, what tends to be in those are you know energy and financials, which had been hurt again in the volatility.

So, my basic view is that you continue to ensure that you have high quality teams that can deliver over a market cycle and I think that’s really the important thing. You can’t look quarter-to-quarter or year-by-year calendars don’t matter, market cycles matter. And you’re going to get excess returns with strong active management and I think when the psychological environment moves, I think that’s where you’re really going to see the gross -- the net flow has actually pick up in those active capabilities. So, again, I think you have to segment them to the different styles. I think that’s really what’s driving it right now.

Michael Cyprys

Okay. Thank you.

Operator

Thank you. And that’s the last question in queue.

Martin Flanagan

Well, thank you very much. On behalf of Loren and myself, I appreciate the engagement and the questions and we’ll be speaking with you next quarter. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!