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 expectations 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 ks and subsequent filings with the SEC.
Invesco makes no obligation to update any forward looking statements. We may also discuss non GAAP financial measures during today's call. Reconciliations of these non GAAP financial measures may be found at the end of our earnings presentation.
Welcome to Invesco's 2nd Quarter Results Conference Call. All participants will be in a listen only mode until the question and answer session. This call will last 1 hour. To allow more participants to ask questions, 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 Alison Dukes, Chief Financial Officer. Mr. Flanigan, you may begin.
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 Before I begin, I'd like to take a minute to recognize the hard work of our team at Invesco. Like most everybody, our employees have been working in a work from home or 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 for 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 I was able to get back to the offices, 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 3, which is the highlights for the quarter. We achieved a new record in the Q2 for long term net inflows totaling $31,000,000,000 This follows net inflows of $24,500,000,000 last quarter and nearly $18,000,000,000 in the second half of last year.
Growth was led by net inflows into institutional ETFs, fixed income and business alternative capabilities. And as you can see on Slide 3, The key capability areas where we have scale, investment readiness, competitive strength drove growth again in the quarter. These are areas where investment performance is strong. We're highly competitive and well positioned for growth. Looking at our ETFs, excluding the Qs, it generated net long term inflows $12,000,000,000 during the quarter.
Net long term inflows from alternatives during the quarter were $4,300,000,000 including strength in our private markets business. We launched 2 CLOs during the period raising $1,000,000,000 and generated net inflows into our real estate business of $1,000,000,000 We continue to focus and invest in our alternative capabilities of space, where we also see the benefit of our partnership with MassMutual, which we highlighted last quarter. MassMutual has committed over $1,000,000,000 to various alternative strategies, materially increasing the speed which we can get to market for the benefit of our clients. We continue to innovate with strategies for retail investors through the launch of products such as INREIT and the partnership we announced with UBS, in which we will provide bespoke global property investment services for management clients of UBS in Switzerland, other parts of EMEA and Asia. We also have $5,000,000,000 in direct real estate capital available for deployment.
We had net Long term inflows of $8,800,000,000 into active fixed income and within active global equities, our $52,000,000,000 developing markets fund, a key capability that That came with the Oppenheimer combination continue to see net inflows of nearly $1,000,000,000 during the quarter. 2nd quarter flows included net long term inflows of $3,000,000,000 from Greater China and our Chinese joint venture continues to be a source of strength and differentiation for us as an organization. In addition, our solutions enabled institutional pipeline Accounts for 35% of the pipeline at quarter end, this following the funding of a large asset mandate from Australia in the 2nd quarter, which was enabled by our solutions team. Allison will provide more information in a moment on flows, the pipeline results in the quarter, including the continued progress towards Our net savings target, but I would note the growth we are experiencing is driving positive operating leverage producing an adjusted operating margin of 41.5 Percent for the quarter. Strong cash flows being generated from our business improved our cash position, We build a stronger balance sheet and improving our financial flexibility for the future.
Invesco's scale, investment readiness, Competitive strength position us well going forward, and we continue to focus our efforts on delivering positive outcomes to clients while driving With that, I will turn it over to Allison Martin for the results in greater detail.
Thank you, Marty, and good morning, everyone. Until turn to Slide 4, our investment performance was strong in the 2nd quarter with 72% of actively managed funds in the top half of peers or beating benchmark on a 5 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 $1,525,000,000,000 in AUM.
Of the $121,000,000,000 in AUM growth, approximately $66,000,000,000 is a function of increased market values. Our diversified platform generated growth inflows in the Q2 of $114,400,000,000 This is an 82% improvement from 1 year ago. Net long term inflows in the 2nd quarter were $31,100,000,000 representing 10.6% annualized organic growth. Active AUM net long term inflows were $2,100,000,000 and passive AUM net long term inflows were $29,000,000,000 The retail channel generated net long term inflows of $9,500,000,000 in the quarter, driven by positive ETF flows. This represents a $24,100,000,000 improvement in net long term inflows from 1 year ago, driven by significant improvement in equities in the Americas.
The institutional channel generated net long term inflows of $21,600,000,000 in the quarter, augmented by the funding of the nearly $18,000,000,000 Australian of this mandate. Looking at retail net inflows, our ETF excluding the QQQ generated net long term inflows of $12,100,000,000 Our global ETF platform, again excluding 2QQs, again, captures flows in excess of its market share of AUM in the second for the first half of twenty twenty one. Net ETF inflows in the United States included a continued high level of interest in our S and P 500 Equal Weight ETF, which generated $2,600,000,000 in net inflows in the 2nd quarter following $4,000,000,000 of net inflows in the first Looking at flows by geography on Slide 6, you'll note that the Americas had net long term inflows of $5,000,000,000 in the quarter. Driven by net inflows into 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 $28,300,000,000 Net inflows were diversified across the region.
Nearly $18,000,000,000 was from the large passive Australian mandate that funded from our institutional pipeline in May. The balance reflects $4,800,000,000 of net long term inflows from Japan, dollars 3,000,000,000 in inflows from Greater China, of which the majority was from our China JV, $1,800,000,000 from Singapore and the remainder arising from other areas across the region. Long term inflows for EMEA, excluding the U. K, were $1,000,000,000 driven by retail flows, including net inflows into alternatives, particularly our U. S.
And European Senior Loan Funds. ETF net inflows in EMEA were $2,200,000,000 in the quarter. And finally, the UK experienced net long term outflows of $3,200,000,000 in the 2nd quarter, driven largely by net institutional outflows and investment grade capabilities. Dollars 2,400,000,000 of these net long term outflows relate to our global targeted return capability, which has $10,200,000,000 globally in AUM at the end of June. The overall U.
K. Net long term out In the Q2, we're an improvement of $2,700,000,000 as compared to the Q1 net long term outflows of $5,900,000,000 This improvement was driven by UK Retail, primarily inflows into the European Equity Fund and lower net outflows during the quarter across a number of fixed income and U. K. Equity capabilities. Turning to flows across asset classes.
Equity net long term inflows of $15,000,000,000 reflect a good portion of the Australian mandate and ETF, including our S and P 500 Equal Weight ETF that I mentioned. We continue to see broad strength in fixed income in the 2nd quarter with net long term inflows of $13,600,000,000 Drivers of fixed income flows include institutional net flows into investment grade strategies and retail net long term inflows into various municipal Funds and fixed maturity products in Asia. It's worth noting that although we did have fund launches in China in the second quarter, they were not at the pace of what we experienced in the Q1. You see this largely reflected in the $9,100,000,000 decrease in the net flows in the balanced asset class during the quarter to net outflows of $1,800,000,000 Our alternatives asset class holds many different capabilities, and this is reflected in the flows we saw in the Q2. Net long term CLOs, direct real estate, senior loan and commodities capabilities.
Included in these alternative flow results This is also the GTR net outflow that I just noted. If you exclude the global GTR net outflows, alternative net long term inflows were $7,200,000,000 quite significant in the quarter. Moving to Slide 7. Our institutional pipeline was $33,300,000,000 at June 30, reflecting the funding of the large passive indexing mandate in Asia Pacific, assisted by our Custom Solutions advisory team. Excluding the impact of the $18,000,000,000 passive mandate in the Q1, the pipeline has increased in size and remains relatively consistent to prior order levels in terms of asset and fee composition.
Overall, the pipeline is diversified across asset classes and geographies, And our solutions capability enabled 35% of the global institutional pipeline and created wins and customized mandates. This has contributed to meaningful growth across our institutional network, warranting our continuing investment and focus. Turning to Slide 11, you'll note that our net revenues increased $52,000,000 or 4.1 percent from the Q1 as a result of higher average AUM in the Q2. The net revenue yield, excluding performance fees, was 34.8 basis points, a decrease of 0.9 basis point from the Q1 yield level. The decrease was driven mainly by asset mix shifts, including higher QQQ and money market average balances, as well as the impact of the large passive Australian mandate that's funded in May.
This decrease was partially offset by the improvement in markets in the quarter. The incremental impact relative to Q1 of higher discretionary money market fee waivers was minimal in the 2nd quarter, but the full impact on the net revenue yield for the Q2 was 0 point 0 $7 of a basis point. We do expect fee waiver to remain in place for the foreseeable future until rates begin to recover to more normalized levels. Total adjusted operating expenses increased 1.9% in the 2nd quarter. The $14,400,000 increase in operating expenses was mainly driven by variable compensation and marketing.
Higher variable compensation is a result of higher revenue, offset by the reduction in payroll taxes and certain benefits from the seasonally higher levels that we experienced in the Q1. We also recognized excuse me, we also further recognized savings in the quarter resulting our strategic evaluation. Marketing expenses increased $9,800,000 in the 2nd quarter, mainly due to seasonally higher levels relative to the Q1, which is typically the low point for marketing spend annually. We also reevaluated the timing of various branding campaigns and launched targeted initiatives in the quarter across the globe. Operating expenses remained at lower than historic activity levels due to pandemic driven impacts of discretionary spending, travel and other business operations.
However, we did resume some client activity and business travel late in the Q2, which is reflected in both marketing and G and A expense. As we look ahead to the Q3, our expectations are for Q3 operating expenses to be modestly higher compared to the Q2, assuming no change in markets and FX levels from June 30. We expect that the higher AUM levels driven by net inflows and market improvement in the second quarter We'll have a modest carryover impact on both revenues and associated variable expenses in the Q3. We also expect a modest seasonal increase in marketing related expenses Net spend typically increases in the 3rd and 4th quarters. One area that's still more difficult to forecast at this point is when COVID impacted travel and entertainment expense levels will begin to normalize.
We are engaging in more domestic travel and in person engagement, and we do expect to see continued modest resumption of these activities across the 3rd quarter. Additionally, our U. S. Mutual funds board has approved certain changes to the pricing of transfer agency services that we provide to our funds. As a result, we anticipate that our outsourced administration costs, which we reflect in property office and technology expenses, will increase by approximately $25,000,000 on an annual basis.
Offsetting this will be a corresponding increase in service and distribution revenues, resulting in a minimal impact to operating income. We expect this new pricing structure to go into effect in the 3rd quarter and to be fully in place by the Q4. Moving to Slide 9, we update you on the progress we have made with our strategic evaluation. As we've noted before, we are looking across 4 key areas of our expense base: our organizational model, our real estate footprint, management of third party spend and technology and operations efficiency. Through this evaluation, we will continue to invest in key areas of growth, including ETF, fixed income, China Solutions, alternatives and global equities.
In the Q2, we realized $7,500,000 in cost savings. Dollars 2,000,000 of the savings was related to compensation expense and $5,000,000 related to property, Office and technology expense. The $7,500,000 in cost savings or $30,000,000 annualized combined with the $95,000,000 in annualized Savings realized through the Q1 of 2021 brings us to $125,000,000 in total or 63 percent of our $200,000,000 net savings As it relates to timing, we still expect approximately 150,000,000 or 75% of the run rate savings to be achieved by the end of this year with the remainder realized by the end of 'twenty 2. Of the $150,000,000 in net savings by the end of this year, we anticipate we will realize roughly 70% of the savings through compensation expense. The remaining 30% would be spread across occupancy, tax spend and G and A.
We expect the total Program savings to be 65% in compensation and about 35% spread across the other categories. With $125,000,000 of the expected $150,000,000 in net savings by the end of this year already in the quarterly run rate, The degree of net savings per quarter will continue to moderate going forward. In the Q2, we incurred $20,000,000 of restructuring costs. In total, we've recognized nearly $170,000,000 of our estimated $250,000,000 to $275,000,000 in restructuring costs that were associated with this program. We expect the remaining transaction costs for the realization of this program to be in a range of $85,000,000 to $105,000,000 through the end of 2022.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non GAAP results. Moving to Slide 10. Adjusted operating income improved $38,000,000 to $541,000,000 for the quarter, driven by the factors we just reviewed. Adjusted operating margin improved 130 basis points to 41.5% as compared to the Q1. Most importantly, our degree of positive operating leverage reflected in our non GAAP results was 1.8 times for the quarter, underscoring our focus on driving scale and profitability across our diversified platform.
I'll also point out that our adjusted operating margin Back in the Q3 of 2019, which was our Q1 following the Oppenheimer acquisition, was 40.9%. At that time, we reported a net revenue yield, excluding performance fees, of 40.7 basis points. At the end of the Q2 of 2021, our Our net revenue yield ex performance fees was 34.8 basis points, yet our adjusted operating margin was 41.5%. We have been building out our product suite to meet client demand and client demand has been in lower fee products. We're focused on aligning our expense base with changes in our business mix, enabling the firm to generate positive operating leverage and operating margin improvement.
Non operating income included $42,000,000 in net gains for the compared to $26,000,000 in net gains last quarter, primarily from increased unrealized gains on seed money and co investment portfolios. The effective tax rate for the 2nd quarter was 22.8% as compared to 24% in the 1st quarter. Effective tax rate on net income is lower in the 2nd quarter, primarily due to a change in the mix of income across taxing jurisdictions. We estimate our non GAAP effective tax rate to be between 23% 24% for the Q3. The actual effective rate may vary from this estimate due to the impact of non recurring items on pretax income and discrete tax items.
A few comments on Slide 11. Our balance sheet cash position was $1,300,000,000 at June 30, and approximately $750,000,000 of this cash is held for regulatory Our cash position has improved considerably over the past year, increasing by nearly $350,000,000 largely driven by the improvement in our operating income. Our debt profile has improved considerably as well with no draws on our revolver at quarter end. As a result, we've substantially improved our net leverage position. During the quarter, we repaid the remaining $177,000,000 forward share repurchase In terms of future cash requirements, In the Q2, we recorded an adjustment to the MLP liability associated with the Oppenheimer purchase, reducing this liability from our original of nearly $385,000,000 down to $300,000,000 We anticipate funding this liability in the Q4 of 2021.
While we do anticipate a degree of insurance recovery related to the matter, the insurance claims process is inherently complex, and we do not have an update at this stage as to timing or size of that recovery. Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility. In summary, we continue to see growth in our key capabilities. We remain focused on executing the strategy that aligns with these areas, while completing our strategic evaluation and reallocating our resources position us for growth. And finally, we remain prudent in our approach to capital management.
We're in a strong position to meet client needs, run a disciplined business and to continue to invest in and grow our franchise over the long term. And with that, I'll ask the operator to open up the line to Q and A.
Our first question comes from Glenn Schorr with Evercore ISI. Your line is open.
Hi. Thank you very much. I wonder if we could talk a little bit about private markets. You talked a little bit about what went 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 I'll take a chance to see how what's your vision of how big this segment can be?
Yes, 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 and INREIT, which is non public That is now available in the U. S. It's early days. That was also was funded by MassMutual For about $400,000,000 which is really important. We think that has great potential In the next year or so as it's in the marketplace based on 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 the Asia Pac. So those seem to be really immediate opportunities. And quite frankly, some of our private credit There's more recently been gained attention with institutional investors. They have a very good track record. And with that track record, you're now
Thanks. And maybe just a quick one for Allison. Allison, you mentioned about the modest pickup on the expense side in 3Q. So 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 need to say, right now, you have very normal expenses with really strong markets and flows, but not so normal expenses. Can
Yes, it's a hard one, because We have to look back at to where we were in the last half of twenty nineteen 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 $10,000,000 to $15,000,000 per quarter below what we would have seen in the last half of twenty nineteen. 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 a 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 $15,000,000 below what normally used to be and some element of that will come back over time.
That's awesome. Thank you for that. Appreciate it.
Thank you. Our next question comes from Ken Worthington with JPMorgan.
Super high level, maybe first for you, Marty. As you look to the future, maybe over the next 3 to 5 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 5 years ago, you might have said something like factor based investing, but what are your thoughts today?
Yes. Ken, it's a good question. And I think you've raised this before. If you look at the firm right now, a A number of the investments that we've made over the years are coming through in a very material way and probably 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 identify many estimates Within asset management globally, we've seen things that could be explained half of all the flows within our industry in the next 5 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 Our solutions is being embedded in almost all of our client engagements. Institutionally, we've called it out, you see that. But by the way, it is also True in detail engagements that we're seeing. And you mentioned factors.
We talked about that 5 years ago. It's a huge part of our ETF business and frankly our index business and it's going to continue to be an important part of what we do. And as you do know, just recently, In the recent last 2 years, we've taken that factor capability, indexing capability to institutional clients and we did it With a very strategic view with the 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 impacts most recently with We have the IFFF in Australia, but what you really do is become very important 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.
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?
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 and L, specifically expenses, than it does AUM levels.
Great. Thank you very much.
Thank you. Our next question comes from Robert Lee with KBW. Your line is open. Great.
Thanks for taking my questions. Maury, I have a question for you on Greater China. So some of your competitors had opened up wholly owned Our opening, I guess, wholly owned subsidiaries, others have been able to take on a, I guess, majority I know you've talked about it for a while, but if you update us in what a greater China stands with your movement to at least economically taking
So it might be somewhat repetitive, but to remind everybody, so we own 49% of the joint venture right now. Our Partner of 1 on Power, we have been in conversations for 2 years to take majority stake. There has been an agreement in principle, but it has not moved forward for For various reasons, 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 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 is what separated our success as compared to our competitors. So we literally operate as one entity within China In the retail markets, we're investing a great role, 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 Slow down over the last 18 months for most institutions trying to get to market with some of these new undertakings.
Great. And maybe my follow-up on the Intelliflo, 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, you're going to start using You may be updated on where that is, if it's meeting your expectations and if you are, as a role, if you do see that contributing Yes.
So right now, there's $1,000,000,000,000 in assets under advisement. So you've seen some nice growth. State Farm is an important addition. Obviously, it's very early days and Yes, Catharine, Weiszewski. The focus of the past year was really pulling together the different elements of IntelliFlo and creating sort of a single The operating platform to go to the clients holistically and you're now starting to see the outcomes of that and will It 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, telephone. Great.
Thanks for taking my question. Yes.
Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks very much. Good morning folks. If I can just start with the organic The growth as compared with the organic growth. If you could just Miguel can just touch on What you think the outlook for the net revenue yield going into Q3 given the shift Given the strong growth in passive versus active in the Q2 and can you benefit at all from lower money market fee waivers given The rate and IOER rate.
Yes. So I mean, I'd say a couple of things. Just Keep in mind, I mean, the biggest drivers of net revenue yield quarter to quarter is really going to be the mix of flows. And that's really just function of client demand and making sure and again, we feel like we have we're driving scale across the really well diversified platform. So we're going to capture demand where demand Exists, but that mix will certainly have an impact on net revenue yield.
And market impact obviously is going to be always impactful on And then money market waivers, as I noted, money market waivers right now this quarter accounted for about 0.7th 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 But it isn't perfectly correlated as just that because they're competitive dynamics as well. And so we're going to be thoughtful about Where we're positioned visavis 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 about 20% to retail. So we are able to share And some of these waivers as we work with our partners to ensure clients are really getting the outcomes that they're expecting.
So Okay. Coming back to net revenue yield, I do think we'll probably see a modest sort of slowing down, but what did I 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 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 underscores our ability to do that.
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 you would classify sustainable products, an update on that. And then just in terms of The game plan for product launches going forward in this area, even if you consider generalize what the strategy is.
I'll make a couple of comments just on sustainable ESG capabilities and then I'll let Alice 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 integrated initiated growth 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 out of EMEA in the first instance. This is actually a business necessity and we think it is throughout The totality of our organization and if you look specifically at dedicated ESG assets under management $52,000,000,000 today. We continue to see growth there.
If you look at our EPS, We have one of the highest market shares of ESG ETFs. This has been a long track record. 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 be how we manage money, but also the capabilities in the marketplace and literally working with clients to ensure that So we're hitting what is important to them as we work through
this. Yes.
And I think Marty hit on most of it. In terms of flows for the quarter, they were softer than the Q1. I think it was a little less than $2,000,000,000 We saw quite a bit stronger flows in the first Which really I wouldn't say there's anything specific driving the lower flows in the second quarter other than perhaps the market headwinds. We certainly saw Some highs in the Q1 and a little bit of pullback from that could be could point to just some post election high that were driving the Q1 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 these ESG capabilities.
Great. Thank you for the update. Thank you.
Thank you. Our next question comes from Dan Shannon with Jefferies. Your line is open.
Thanks. Good morning. I wanted to follow-up on your comments around balance. I think, Allison, you mentioned there were fewer fund launches. The category obviously had some outflows, the performance is good.
So maybe if you could give us an update on kind of the outlook for that category?
Yes. What really drove the real strength in the Q1 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 China and the JV, we had 7 fun launches again in the Q2. I think about 5 of them were balanced, Again, driving about $1,000,000,000 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.
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 investment that you're looking to put Some of those savings in some of those buckets, if there's been any real changes from your original expectations that you're allocating more dollars to or 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 you originally outlined.
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 best focus on our 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 Yes, 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 in the institutional pipeline and overall, our ETF capabilities continue to be real drivers Growth is 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 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 outcome. So I don't know that we've had any surprises as I think back over the last year. It's been a supportive And this past year, and 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 we'll strengthen our operating margins and operating income growth.
That's well said. And Dan, it's no mistake when you look at the 2nd quarter highlights when we call out the key capability areas. They haven't changed because Yes, that's where our heads down. We see that as the greatest 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 change much quarter to quarter.
Thank you.
Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.
Good morning. Thanks for taking my questions. When you think about the success that you've had with your solutions offering, how 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 step stay a step ahead? And also, is it how much of this business actually Repeats, whether that be a 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?
Yes, let me So it's a great question. And I can't describe what the competitors are doing, but our approach was A little bit different from the standpoint of we started with recognition a number of years ago that clients wanted a broader range Rob brings your investment capabilities, that's what we've been building out since 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 market 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 in 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 important 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 And again, as I said a few minutes ago, here 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 way but frankly, it's the way that business is being done as we look to the future.
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, 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 All those different calls on liquidity, how do they rank in your mind from your office?
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 and 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 The resolution of that in the Q4. 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 the 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 2024 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.
Thanks for that color.
Thank you. Our next question comes from Bill Katz with Citigroup. Your line is open.
Okay. Thank you very much for taking the question this morning. Martin, maybe a question for you. Just as you think about your relationship with MassMutual, where does that go from here? This is maybe think through discuss maybe the See capital need versus maybe opportunity to grow organically through their distribution pipe and then maybe any opportunity that you could see working with them on M and A?
Yes. Thanks, Bill. So again, it has been multifaceted as you're pointing out. So one is sort of a Co investor seed enabler in alternatives has been very, very positive, not just for The investment itself, but really the credibility of a sophisticated investor with other institutional clients. And as you said, the retail channel is about Craig, now it's about $10,000,000,000 on the retail platform right now.
We're the number 2 flowing organization within that right now. And as you know, they've recently closed the acquisition of a new 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 and A, That's exactly 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 street 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.
Yes. The one thing I'd say is we manage about $5,000,000,000 on the broker dealer platform. Excuse me. Sorry, yes. 2nd inflows there.
Okay. It'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 4th 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. Yes.
I mean, I don't want to imply that it's 4th on the list. And as we've said before, it's not quite as neat of a 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, invest in our own capabilities.
And we think that drives longer term growth that shareholders are really looking for. Buybacks aren't 4th and last by any means, but We've had a number of parallel paths we've been running over this past year in 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.
Thank you, guys.
Thanks, Bill.
Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.
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 Steve 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 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? Yes. So it's a very good question. And I started talking about was the INREIT, which is Being introduced to the retail market right now, sort of real estate capability, our view is that the Largest opportunity for growth for direct real estate capability is in the retail channel globally. And that's It'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 You know that channel and it's very hard from the standpoint of most firms if you're an alternative firm have the capability, but you really need that detailed presence With distributors, wholesalers and alike to be successful. And so there are very few firms like us that can pull that off. And So we look at this as a really important development for us. Again, just what we've done with UBS and now True. I mean, there are multiple distributors here in the United States.
So we don't think that we have particularities 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 as we move forward here. So it sounds like organically is kind of the path here on Private Market Alts as opposed to anything inorganic? Yes. We have Plenty of the capabilities that we have right now in the retail channel. Got you.
Great. And then just maybe a quick follow-up, Allison, for you, I apologize if I missed it, but can you talk
a little bit about the
fee rates associated with the $33,000,000,000 institutional pipeline? And then curious again within the old part of the institutional pipeline, what strategies does that comprise of? Thanks.
Sure. 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, that it was replenished back to $33,000,000,000 following the $17,000,000,000 funding of the Australian mandate and the composition of the pipeline itself in terms of average fee rates 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 The 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 exist in the institutional channel and our performance overall.
Great. Thanks very much.
Thank you. And our last question comes from Michael Cyprys with JPMorgan. Your line is open.
Hey, it's Mike Cyprys
from Morgan Stanley. Thanks for Excusing 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 and how that's evolving?
Yes. Thanks, Mike. Great question. So Well, needless to say, it's a very, very embedded market and success is only going to come in the retail channel if you are deeply embedded in China And have your business driven by local Chinese, which is the case for us. And you have Look, to be a little more typical, we might see in the United States where we have very important engagements with large banks, Insurance companies getting on platforms and service in that way.
I will say half of our retail flows right now on some type It started with us with Ant Financial as we begin in the early, I think the first form 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 market What you also see is the digital engagement is at a level that is the most sophisticated in the world and how 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 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 have multiple mandates based 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 Institutional clients at Very high level.
So I don't know if that's insightful, but that's what's worked for us.
Great. Thanks. And just a follow-up Question maybe more for Allison around the impact of market movement on your expense base. I think in the past, you've said maybe about a third of the And space is variable or so or moves with market. Is that still right?
And then I see you called out about $18,000,000 or so impact on the comp side from 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 18,000,000
So a couple of things. One, I'd say, yes, the A portion of our expenses that would be variable in nature and primarily driven by market, but certainly, other flows would drive it as Well, would be about a third. In terms of that market variable comp 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 drive 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?
Sure. Thank you.
Thank you. Okay.
Operator, I'm sorry, I cut you off.
Go ahead, sir.
Yes, good. I just want to on behalf of Ellis Eye, thank you very much for your time and appreciate the engagement and we'll be in touch. Have a good rest of the day.
Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.