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, has 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 statement.
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 First Quarter Results Conference Call. All participants will be in a listen only mode until is a question and answer session. This call will last 1 hour. Call is being is 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, will be Marty Flanagan, President and CEO of Invesco and Alison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.
Thank you, operator, and thanks everybody for joining us and we look forward to the conversation. As we begin 2021, we remain cautiously optimistic with the Economic activity we're all seeing. That said, risks do remain. The good news is Invesco is off to a great start this year and as you can see in the results that we reported this morning. And if you're so inclined to follow along, I'm going to be speaking to the highlights slide, which is Slide 3.
Our investment in key capabilities and the tremendous focus on our clients continues to produce good momentum in our business. We have now achieved 9 straight months of net long term inflows. In the Q1, net long term inflows were $24,500,000,000 This is a record level of inflows for the firm. This follows net long term inflows of nearly $18,000,000,000 in the second half of last year, And this represents nearly a 9% annualized long term organic growth rate led by net flows into ETFs continue strength in fixed income and net inflows into the balance funds. And as you can see on Slide 3, the key areas that were highlighted in January will be a great day to day basis.
We have scale, investment readiness and competitive strength drove the growth in the quarter. These are areas where investment performance is strong. We're highly competitive. We're well positioned for growth. Retail flows significantly improved in the quarter and were $21,200,000,000 on the inflows of $16,800,000,000 This is also a record for the firm, which contributed significantly to the $10,000,000,000 of net long term inflows generated in the Americas.
Invesco's U. S. ETFs excluding the Qs captured 6.7% of the U. S. Industry net ETF inflows.
This is more than 2 times our 3% market share. Within private markets, we launched 2 CLOs, which raised $800,000,000 and And we remain focused on our alternative capabilities of space where we also see the benefits of our MassMutual. MassMutual has committed over $1,000,000,000 to various strategies, including providing a credit facility to one of our private market funds. We had net long term inflows of $6,500,000,000 within active fixed income and within active global equities are nearly $50,000,000,000 developing markets fund Key capability acquired in Oppenheimer transaction saw $1,300,000,000 of inflows. That said, there are still various improvements within active equities where we continue to work and remain focused on those opportunities.
Net long term inflows into Asia Pac were $16,700,000,000 in will be recorded in the Q1 following $17,000,000,000 net inflows in the second half of twenty twenty. The China JV launched 9 new funds and accounts for over 60% of our pipeline at the end of the quarter. Allison will provide more information on the flows, the pipeline, the results for the quarter, But I would note, we generated positive operating leverage producing and operating margin of 40.2% for the quarter. Strong cash flow has been generated from our operations improved our cash position, resulting in no drawdown on our credit facility at quarter end, a quarter where we experienced seasonally higher demand on our cash flow. The Board also approved a 10% increase in the quarterly dividend to $0.17 per share.
Given our historical investments in the business and our most recent efforts to further align our organization with our strategy, I'm confident with the talent, capabilities, the resources and the momentum to drive to deliver for our clients and drive further growth and success. And with that, I'll turn it over to Allison to walk through the results in greater detail.
Thank you, Marty, and good morning, everyone. Moving to Slide 4, Our investment performance improved in the Q1 with 70% and 76% of actively managed funds in the top half of peers on a 5 year and a 10 year basis, conference call is being recorded. This reflected continued strength in fixed income, global equities, including emerging business equities and Asian equities, is all areas where we continue to see demand from clients globally. I'll also note that our published investment performance now selects meeting star peer rankings for composites where a U. S.
Is the most representative AUM in the composite, whereas previously we had relied on Lipper data. This transition more closely aligns our data to the investment performance data reviewed by our U. S. Clients and is more consistent with how our peers reflect investment performance. Additionally, we've expanded the population of AUM included in performance disclosures by about $150,000,000,000 for each period presented through the addition of benchmark relative performance data for institutional AUM where peer rankings do not exist.
This approach is used by certain of our peers, and we believe it more meaningfully represents the contribution of our institutional AUM to our performance metrics. Moving to Slide 5, you'll notice we is a great day for the Q1 of 2019. We believe this will better illustrate our flows in the context of our overall AUM for each category. We ended the quarter with just over $1,400,000,000,000 in AUM. Of the $54,000,000,000 in AUM growth, approximately twenty $5,000,000,000 is a function of increased market values.
Our diversified platform generated net long term inflows in the Q1 of $24,500,000,000 is Representing 8.8 percent annualized organic growth. Active AUM net long term inflows were $7,500,000,000 or 3.4 percent annualized organic growth rate and passive AUM net long term inflows were $17,000,000,000 or a 31.3 The retail channel generated net long term inflows of $21,200,000,000 in the quarter, an improvement from roughly flat performance in the 4th quarter driven by the positive ETF flows. Institutional channel generated net long term inflows of $3,300,000,000 in the Regarding retail net inflows, our ETFs excluding the QQ Suite generated net long term inflows of $16,800,000,000 Including meaningful net inflows into our higher fee ETFs. Net ETF inflows in the U. S.
Were focused on in the Q1, including a high level of interest in our S and P 500 equal weight ETF, which had $4,000,000,000 in net inflows in the quarter. In addition to the S and P 500 equal weight ETF, we had 5 other ETFs that reported net inflows of over $1,000,000,000 each. These 6 ETFs represented $10,000,000,000 in net inflows for the quarter. It's also worth noting that our Invesco NASDAQ Next Gen 100 ETF,
conference call is being recorded in the QQJ surpassed
the $1,000,000,000 AUM mark in the quarter following its inception in October of 2020. This is on the heels of our successful QQQ marketing campaign and sponsorship of the NCAA Championship in the Q1. Looking at flows by geography on Slide 6, you'll note that the Americas had net long term inflows of $10,000,000,000 in the quarter, an improvement of $7,800,000,000 from the 4th quarter. The improvement was driven by net inflows into ETFs, institutional net inflows, various fixed income strategies and importantly, focused sales efforts. Asia Pacific delivered one of its strongest quarters ever with net long term inflows of $16,700,000,000 Net inflows were diversified across the region.
$9,400,000,000 of these net inflows were from Greater China, including $8,500,000,000 in our China JV. The balance of the flows in Asia Pacific We're comprised of $3,000,000,000 from Japan, dollars 1,900,000,000 from Singapore and the remaining $2,300,000,000 was generated from several other countries in the region. Net long term inflows for EMEA, excluding the UK, were $3,700,000,000 driven by retail flows, including particularly has strong net inflows of $1,200,000,000 into our Global Consumer Trends Fund, the growth equities capability, which saw demand from across the EMEA region. ETF net inflows in EMEA were $1,800,000,000 in the quarter, including interest in a wide variety of U. S.
And EMEA based ETFs. Notably, we saw net inflows of $500,000,000 into our blockchain ETF and $400,000,000 into one of our newly launched ESG ETFs in the quarter, experienced net long term outflows of $5,900,000,000 in the quarter, driven by net outflows in multi asset, institutional quantitative equities and UK equities. Turning to flows across the asset class. Equity net long term inflows of $9,800,000,000 reflect some of the capabilities I've mentioned, including the Developing Markets Fund, The global consumer trends fund and ETF, including our S and P five hundred equal weight ETF. We continue to see strength in fixed income across all channels and markets in the Q1 With net long term inflows of $7,600,000,000 this following net inflows of $8,200,000,000 in fixed income in the 4th quarter.
It's worth noting that the net inflows in the balanced asset class of $7,300,000,000 arose largely from China. In alternative, net long term inflows improved by 4.1000000 due to a combination of inflows in senior loan, commodities and newly launched CLOs during the quarter. Moving to Slide 7. Our institutional pipeline grew to 45 has a lower fee passive indexing mandate in Asia Pacific assisted by our custom solutions advisory team. This is an opportunity for us to offer solutions based differentiated passive investments to meet the needs of a key strategic client with the potential to expand the relationship over time with
sets the higher fee opportunities.
We are also able to leverage our in house indexing capabilities with this mandate. Excluding this large mandate in Asia Pacific, the pipeline remains relatively consistent to prior quarter levels in terms of size, asset mix and fee composition. While there's always some uncertainty with large client funding, we're currently estimating that between 50% 65% of the pipeline will fund in the 2nd quarter, Including the large indexing mandate. The funding of this mandate will also have a slight downward impact on our net revenue yields next quarter. Overall, the pipeline is diversified across asset classes and geographies and our solutions capability enabled 61% global institutional pipeline and created wins and customized mandates.
This has contributed to meaningful growth across our institutional network, is warranted our continuing investment and focus on this key capability. Turning to Slide 8, you'll notice Our net revenues increased $23,000,000 or 1.8 percent from the 4th quarter as higher average AUM in the first quarter was partially is set by $71,000,000 decrease in performance fees from the prior quarter. The net revenue yield excluding performance fees was 35.7 basis points, is a decrease of 0.3th of a basis point from the 4th quarter yield level. This decrease was driven by lower day count in the first quarter that negatively impacted the yield by 0.8th of a basis point and higher discretionary money market fee waivers that negatively impacted the yield by 0.3th of a basis point. These negative impacts were partially offset by the positive impact of rising markets and net long term inflows during the quarter.
Going forward, we do expect money market fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels. Total adjusted operating expenses increased 0.7% in the first quarter. The 5 Operating expenses was driven by higher variable compensation as a result of higher revenue as well as the seasonal increase in payroll taxes and certain benefits, call is offset by the reduction in compensation related to performance fees recognized last quarter and savings that we realized in the quarter resulting from our strategic evaluation. Operating expenses remained at lower than historic activity levels due to pandemic impacts to discretionary spending, travel and other Business operations that have persisted in the quarter. Moving to Slide 9, we update you on the progress we've made with our strategic evaluation.
As we've noted previously, we're looking across 4 key areas of our expense base: our organizational model, our real estate footprint, is management of 3rd party spend and technology and operations efficiency. Through this evaluation, we will invest in key areas of growth, including ETFs,
will be posted on the call for the call.
Fixed Income, China Solutions, Alternatives and Global Equities, while creating permanent net improvements of $200,000,000 in our normalized operating expense base. A large element of the savings will be generated from compensation, which includes realigning our non client facing will be a great day to day job growth and repositioning to lower cost locations. The remainder of the savings will come through property office and technology and G and A expenses. In the Q1, we realized $16,000,000 in cost savings. Dollars 15,000,000 of the savings was related to compensation expense.
The remaining $1,000,000 in and savings was related to facilities, which is shown in the property office and technology category. $16,000,000 in call is being recorded. Cost savings were $65,000,000 annualized combined with the $30,000,000 in annualized savings realized in 2020 brings us to $95,000,000 is approximately $150,000,000 or 75 percent of the run rate savings to be achieved by the end of this year, with the remainder realized by the end of 2022. $150,000,000 in net savings by the end of this year, we anticipate we will realize roughly 65% of the savings through compensation expense. The remaining 35% would be spread across occupancy, tax spend and G and A.
The breakdown for the remaining $50,000,000 and net cost saves in 2022 will be similar. With $95,000,000 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 moderate going forward. In the Q1, we incurred $30,000,000 of restructuring costs. In total, we've recognized nearly $150,000,000 of our estimated $250,000,000 to 275,000,000 We expect the remaining transaction costs for the realization of this program to be in the range of $100,000,000 to 100 and The costs associated with the strategic evaluation are not reflected in our non GAAP results. Our expectations are for 2nd quarter operating We entered the Q2 with $1,400,000,000,000 in AUM driven by net inflows and market tailwinds from the Q1.
These tailwinds will have a modest impact on both will be subject to the financial results of the year. The impact on expenses will be offset by lower compensation expense is related to seasonality and payroll taxes and benefits, plus incremental savings related to the strategic evaluation. We also expect a modest increase in marketing related expenses as the Q1 is typically the low point in marketing spend annually. One area that is still more difficult to forecast at this point is when COVID impacted travel and entertainment expense levels will begin to normalize. With the rollout of vaccines, we believe we might begin to see a modest resumption of travel activity later in the Q2 and perhaps more in the Q3.
Moving to Slide 10, adjusted operating income improved $18,000,000 to $503,000,000 for the quarter, is driven by the factors we just reviewed. Adjusted operating margin improved 70 basis points to 40.2% as compared to the 4th quarter. Most importantly, our degree of positive operating leverage reflected in our non GAAP results was 2x for the quarter, underscoring our focus on driving scale and profitability
is recorded across our diversified platform.
Non operating income included $25,900,000 in net gains for the quarter compared to $31,900,000 in net gains last quarter as higher equity and earnings primarily from increased CLO conference call was recorded in the Q4 of 2018. The effective tax rate for the quarter was 24% compared to 21.7% in the 4th quarter. The effective tax rate on net income was higher in the 1st quarter, is primarily due to an increase in income generated in higher taxing jurisdictions relative to total income. We estimate our non GAAP effective tax rate to be between 23% 24% for the 2nd quarter. The actual effective tax rate may vary from this estimate due to the impact of non recurring items on pre tax income and discrete tax items.
Turning to Slide 11. Our balance sheet cash position was $1,158,000,000 at March 31, and approximately $760,000,000 of this cash is held for regulatory requirements. Cash balances are impacted by the typical seasonal increases in cash needs in the Q1 related to our compensation cycle. We also paid $117,000,000 on a forward share repurchase liability in January. In addition to using excess cash to reduce leverage, we seek to improve liquidity and our financial flexibility.
Despite the increased cash needs in the quarter, the revolver is a $5,000,000,000 credit facility extending the maturity date to April of 2026 with favorable terms. We believe we're making solid progress in our efforts is being recorded to build financial flexibility and as such, our Board approved a 10% increase in our quarterly common dividend to $0.17 per share. Call will be recorded. The share buybacks dating back to last year on Slide 11, which reflects $45,000,000 in the Q1 of this year are related to vesting of employee share awards. We remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.
In summary, Marty highlighted the growth we've seen in our key capabilities and our continued focus on executing the strategy that aligns with these areas. We're also executing on our strategic evaluation and reallocating our resources to position us for growth. And finally, we remain prudent in our approach to capital management. Our focus on driving greater efficiency and effectiveness into our platform, combined with the work we've done to build a global business with a comprehensive range of capabilities, puts Invesco in a very strong position to meet client needs, run a disciplined business and to continue to invest in and grow our franchise over the long term. With that, Sue, I'll open it up to the line for questions.
Thank will begin the question and answer session.
Concludes our
prepared remarks. Our first question is from Dan Fannon with Jefferies. You may go ahead.
Thanks. Good morning. Can you discuss the strength in Asia a bit more broadly? I know you gave a lot of detail around where the flows were come came from and balanced as well-being a source Of the asset flows, but curious about seasonality in that part of the world versus maybe what we see in the U. S.
At one point, it was typically the strongest. And then Kind of the outlook for that region given the strength that you just generated in the Q1.
Dan, was it Asia? I'm sorry. Yes. Yes. Let me make a couple of comments, and Allison can speak to it also.
So look, There's just a little question I think we've all talked about the strength of Asia and China in particular. China is real. China is real for us. It's is very meaningful. You've seen the recent growth over the last couple of years.
And you say the Q1 is really, really strong. There's no question. But the reality, you follow the market, it's had a pullback. You have to anticipate that that's going to slow down a little bit here. That said, it doesn't when you look at the full year, it's going to continue to be an important contributor and We're just looking for further growth in the years to come.
So that's our perspective at the moment.
Yes, the only thing I'd add, obviously, sentiments may be shifted just a little bit there in the recent months, very strong sentiment in Q4, very strong sentiment in Q1, very strong sentiment in Q1, Looking for Asia Pacific, we are starting to see flows really start to come in and a balanced profile across the region, China being very significant, as Marty said, in And as Marty said, in total, little north of $9,500,000,000 of those flows came from IDW and Greater China. But we, as I mentioned, saw $3,000,000,000 inflows from Japan and a couple of $1,000,000,000 from Singapore, dollars 2 is broadly from Asia Pacific. So I think it's I don't know that it's seasonality so much as maybe sentiment that we've got to keep an eye on there. I would note in the 9 funds that we launched in the Q1 in IGW, they generated $6,000,000,000 in flows in Not Q1, most of those were balanced equity funds and the fee rates there are very strong. They are better than the firm average has been real meaningful contributors to our growth.
Thanks. That's helpful. And then just a follow-up, Alstom, our evaluation now that you're Having progressed in several quarters in, just thinking about the $200,000,000 in aggregate, is that number would you consider to be conservative at this point and Anything above that, would that be reinvested back in the business or is there potential for some upside to those savings?
I'd say you definitely see us making good progress with $95,000,000 of the $200,000,000 we feel like achieved at this point. The $200,000,000 remains our net target. We are very focused on reinvesting savings and continuing to reallocate those savings into areas of growth. So at this point, I don't think we're we would be suggesting that the 200 is conservative. We are going to be consistently looking at how We continue to transform our business and make sure that we are spending in the areas where we can generate the most growth and really looking at allocating our expenses and reallocating our
Great. Thank you.
Thank you. The next question is from Patrick Davitt with Autonomous Research. You may go ahead.
Hey, good morning, everyone. Could Give a little more color on the kind of somewhat outsized redemption rate on the institutional side, anything idiosyncratic or a common theme you could point to in has accelerated acceleration and in that vein, any known lumpy redemption as an offset to the very strong unfunded pipeline you've highlighted?
Yes. On the redemption side, I wouldn't call it any one specific thing in the institutional redemptions, but it's is similar to when money comes in, it just really is hard to predict quarter to quarter. So I wouldn't point It's an elevated level of redemptions going forward. Again, we'll just continue to follow clients' desires on the timing of redeeming or giving us money.
Yes, I would agree. I mean, It's lumpy. There's nothing specific happening there. The gross funding out of the institutional pipeline was $21,500,000,000 And again, you're seeing the pipeline, even excluding the significant mandate, really maintain its size. And we're seeing a lot of the fundings come not just from the pipeline, but existing client augmentation activity outside the pipeline.
I think it's important to remember that the pipeline is not the only source of our institutional flows. It's certainly is a strong indication, but as we continue to grow these relationships and really deepen the relationships, they become much more strategic, which generates additional flows, but nothing specific to point to there.
Thank you. The next question is from Craig Siegenthaler with Credit Suisse. You may go ahead.
Thanks. Good morning, everyone. Good morning. I want to follow-up on Dan's question on Asia. And I heard your commentary on flows by geography, that was very helpful.
But could you also help us walk through what the product mix would have looked like inside the $17,000,000,000 of flows and any color in terms of channel mix, retail versus institutional?
So I can hit some of the high levels and Allison can add to it. So within China, it's heavy equities. And Allison Collier balance in particular, that has been historical driver. Japan continued to be fixed income during the quarter. And excuse me, the big flows were really coming from retail, although the Japan, That was institutional.
And in terms of asset class mix, I'd tell you Half of it is coming from balanced and the remainder coming across equity and fixed income capabilities. But Our balanced products there are really driving a significant amount of the flows. In terms of the retail and institutional mix, there was about $13,000,000,000 in the retail side out of the total $16,600,000,000
Great. Now super helpful there. And then just as my follow-up, I wanted your perspective on the May 24 lockup expiration for MassMutual. I'm wondering is there any thought on extending that into the future? And if it isn't, could we expect some stock sales from MassMutual later this year?
Yes.
So look, let me just start by, the relationship continues to be very, very strong. And we continue to Do more and more together as I mentioned just in particular around alternatives for us. There's Obviously, not just with Equity, but also with the preferred. And I can't speak for them, but what I can tell you They've told us that they are very happy with the relationship. They're very happy with the investment and we just anticipate that would continue.
Is
open. Thank you. Yes.
Thank you. The next question is from Ken Worthington with JPMorgan. You may go ahead.
Hey, good morning. So capital gains and dividend tax rates seem poised to will rise materially for the wealthy. What do you think are the implications for wealthy investors in in terms of their investments, do you think this drives any meaningful reallocation, as these new taxes go through? And are there opportunities for Invesco and product development, to help these wealthy investors adapt to a much higher U. S.
Tax rate and probably higher taxes globally.
Ken, great question. If I knew the answer, I would have this job probably. But the reality, it's like we're very, very focused on it. And I'd say where the firm's gotten to right now, even with The individual investors as you're talking about the way that we have moved our business is quite frankly focus on a lot of high net worth Individuals within the wealth management channels and really supported by the solutions capability that we've developed over the last number of years. In fact, that's where it started.
And so if tax manage was a focus before, surely going to be continue to be a focus now. The good news is things like municipal bonds are going to continue to be very, very important. We have a very strong franchise is there, but needless to say, people are going to want access to equity for growth and we'll continue to See what we can work on, but I don't have anything very specific beyond that.
Okay. Thank you. And then for a follow-up, dividend and capital management, So you paid off or paid down a number of obligations through April 1. Balance sheet is in much better shape than it was a year ago. So how do we think about the balance of capital return and further strengthening of the balance sheet as we look through to the rest And how are you thinking about a payout ratio for 2021?
Sure. Thanks, Ken. Yes, so I'd say our capital priorities are consistent with what you've heard us say repeatedly for the last several quarters. And I'm very pleased to say we're making good progress against those and you can really see the evidence of that progress and some of what we've announced today. We remain committed to financial flexibility, which gives us the opportunity to really reinvest in the business and support our future growth.
And that is our priority 1st and foremost is creating that financial flexibility to reinvest In the business and growth capabilities there. We also want to improve the strength of our balance sheet and continue to return excess is stable and modestly increasing dividend in terms of a payout ratio and we're being thoughtful about how we continue to improve the payout The decision we made a year ago to cut the dividend was not one that was made lightly as you know, it was not an easy decision, but absolutely, I think we would reflect and say it was a good decision because it's given us the opportunity to continue to improve that financial flexibility through the more than certain times last year. As we have made progress so far in some of those liabilities with the forward share repurchase liabilities, but now completely paid is being recorded and are leveraged well managed. It does give us the opportunity to continue to think about modestly increasing that dividend. We felt like 10% was the right level for where we are today and the earnings profile we have today, but we think we have an opportunity to continue to improve that over time.
We just want to be thoughtful and measured in our pace there.
Okay, great. Thank you very much.
Thank you. The next question is from Brian Bedell with Deutsche Bank. You may go ahead.
Hi, good morning folks. Maybe, Allison, just to stay with you on the topic of expenses. If you can talk a little bit about the outsourcing deal with State Street. I know that's a longer term endeavor and I I believe that's over and above the $200,000,000 I know if it's too early to frame the potential net savings from that, but maybe just to characterize The timing of that and whether the vast majority of the assets of Invesco that are serviceable By State Street are moving to that platform and whether that in a normal market environment, Whether you feel that you have confidence that you can save up to 40% operating margin level.
Sure. Thank you for the question, Brian. Yes, I mean, as you know, this is definitely a longer term installation. You did see the announcement via State Street a couple of weeks ago, the installation is going to have benefits that will be realized in a time horizon that really extends beyond our Existing cost transformation program. So as you know, that really runs through 2022.
And as we think about the benefits that we we could generate from Alpha, those are going to be things that actually won't be realized until 2023, 2024 and beyond. And so it's is too early at this point for us to put any contours around what we think it could generate for us. We do expect to be able to do that at a later date. I would say broadly speaking, we absolutely expect there to be operational efficiencies and risk mitigation, elimination of redundancies. I mean, all of these things are is going to create real benefits as we scale over the coming years, but too early just yet to point to what that could look like.
Anything you want to add, Marty?
Look, I think it's going to be it's a very important undertaking for us and to have a front Back investment all of our investment platform on it is going to be very beneficial to the firm. Yes.
Okay. That's good color. And then Marty, just on ESG, I think it's a topic you talked about quite a bit. Just I guess first question is, are you able to size, ESG flows to the franchise in the quarter and the level of what you considered Yes, ESG AUM. And then secondly, maybe if you can just talk more broadly about what you're seeing in demand for those products and any date on the integration of ESG throughout the investment process firm wide.
Yes. So let me make a couple of comments and Allison can talk. So right now, 75% of all our investment capabilities have ESG inclusion. Obviously, our intent is to be 100%. Right now, that's up to 2023.
Our goal is to pull it in closer. If you look very specifically at ESG specific mandates assets under management just about $40,000,000,000 And so to be clear, that's excluding that's not counting ESG inclusion. I mean that's is really the way of the world. This is really dedicated ESG product offerings, where there has to be some ESG consideration within it. And the flows have been quite strong.
It's really some of the historical things that within our ETF lineup. That said, what we are seeing with institutional clients in particular working with our solutions group is Really creating bespoke outcomes to meet their ESG goals and we're also leveraging Our self indexing capabilities with a number of these institutions to meet their ESG goals. So it really no different to us and it's quite pervasive. I'd say the strongest area right now is U. K, Europe, the U.
S. Is following, quite frankly, in Asia, it's also very, very is strong. So needless to say, if you don't have the wherewithal or the capabilities to be on your front foot with ESG, you're going to be at quite the disadvantage. Yes,
I'd say our the flows that would be specifically attributed to our ESG capabilities in quarter were around $4,000,000,000 I'd say notably, we are the 2nd largest ESG ETF provider in the United States. We have 9 ETFs right now that are dedicated ESG ETFs in the United States where we have about $9,500,000,000 in AUM there. The $4,000,000,000 was a global number and flows over the Q1. So we are absolutely seeing real strength, is just underscoring the importance we all understand around ESG capabilities.
The other area where the bulk of it is, it's been direct real estate where You could imagine clients and the other is really through our quantitative team, the other area where you have The balance of the dedicated ESG capabilities. Great, great color. Thank you so much. Yes.
Thank you. The next question is from Robert Lee with KBW. You may go ahead.
Great. Thanks and good morning everyone. Thanks for taking my questions. Maybe Marty, I think, has caused in a while. But if you think back over the years, Some technology investments, which I believe you've put under the banner of Intelliflo in Okay.
So you can maybe update us on that on strategically where that is fits within the organization and maybe how you
Yes, good. So as you point out, we've had a number of smaller bolt ons around that technology And it has all been pulled together over the past year. That was the effort last year. It's now the banner is in Teleflow. And Where the success has really been is more immediately is through something called Vision, which is a technology that is an An analytical tool that we work through our solutions team with our institutional clients.
The Next area where we are looking to expand outside of the UK is in direct to the financial advisor channel. That again is where we're turning our attention beginning this year to expand that. So we did take a year to Pull the rest of the platform together and it will frankly be focused on the RIA channel in particular.
I mean, is it possible to attach any type of demand?
Yes, right now there's about $900,000,000,000 of AUA within that platform And the core capability continues to grow. And again, the has not changed and we think that's again going to be where The future is for that platform.
Great. That was my question. Thanks for taking care.
Thanks, Rob.
Thank you. The next question is from Brennan Hawken with UBS. You may go ahead.
Thank you and good morning. This is Adam Beatty in for Brennan. I wanted to follow-up on the fee rate, which has trended fairly well recently. How would you characterize the exit rate, if you will, from the quarter versus the blended average through the quarter? Was it kind of trending upward, Trending down or what?
And also, in terms of the pipeline ex the large low fee mandate, Is the fee rate on that pipeline higher or lower than the current blend for the firm? Thank you.
Yes. Thanks, Adam. Hard to decompose the trending of the fee rate exactly just given the puts and takes of how the calculation is done throughout the quarter. But I would Tell you just generally speaking, it probably the puts and takes, I would say, were Probably made the trending relatively stable. So if you think about what the fee rate sort of the change in the Q1 fee rate net revenue yield ex performance fees relative to the Q4, lower day count in the quarter, as I mentioned, impacted net revenue yield by 0.8th of a basis point.
So That was meaningful. And money market fee waivers were pretty consistent through the quarter and that would have been about 3 tenths of a Downward impact overall in the quarter. Now I would say baked into that was what we were experiencing in money market fee waivers in prior quarters. So it's probably About a 6 tenths of a basis point impact overall in terms of the fee waivers in the quarter. It was just 3 tenths higher than the prior quarter.
Those were largely offset, however, by the positive impact of rising markets and net long term flows. So That's why I say, I'm not sure the entry rate and the exit rate were that dissimilar given the nature of the puts and takes inside of the quarter. And so I think as you think about it going forward and getting to I think probably where you're going with the pipeline as well, there are going to be a couple of things that we think about We think about the fee rate moving into the next quarter. One day count is less of a drag going into the Q2. It's a very modest and I'll say very modest help with just an additional day.
As I mentioned, I think money market fee waivers, I think that impact will be consistent through the quarter. And so I think that's going to be a bit of a neutral, but negative impact On an absolute basis. And then looking at the pipeline and the pipeline being very significant, obviously, in absolute size. If I exclude this large significant Asia Pacific index mandate. The remaining pipeline actually looks pretty consistent with prior both in terms of absolute size and the fee composition.
And as we've noted in the past, the average fee rate on the institutional pipeline is below the firm average, not significantly below, but I'd say modestly below the firm average and it's been it's held quite steady for the last 3 or 4 quarters. And so I don't expect that to be a different impact, but this very significant sizable win, Which will fund sometime in the second quarter will be a modest drag on net revenue yield in the second quarter, more so going into the third quarter when it is fully realized on the run rate.
Excellent. Makes sense. Thank you for the detail. Turning to alternatives and the flow outlook there. There's a few different crosscurrents.
You had the COO issuance. Last quarter, you pointed to some kind of routine dispositions in real estate, But the pipeline looks pretty solid. So just wanted to get your thoughts on how that looks going forward. Thank you.
I'm sorry, I missed the very beginning of it. Alternatives. On alternatives on the pipeline. Yes.
So it continues to be real estate continues to be very, very strong. Bank Loans have come back after being challenged last year for sure. And GTR is really has been headwind within alternatives. Otherwise, it's been continuing to build out that pipeline quite strongly.
Super. Thank you. Yes. I
don't think we put anything notable or sizable in terms of the pipeline or any real differences as it relates to alternatives.
Great. Thank you, Allison. Appreciate it.
Thank you. Our next question is from Mike Carrier with is Bank of America. You may go ahead.
Hi, good morning. Thanks for taking the question. Just given the expectation for rising rates And potential inflation, just wanted to get your sense on how the fixed income and balance platforms are positioned for that backdrop, both in terms of potential performance impact On an inclined demand.
Yes, look, it's a great question. I think rising rates here probably helps Our fixed income outside of the United States, obviously, from institutional investors from that perspective, I think it's really going to be the pace and the magnitude of The rise of interest rates, if it's slow and steady, I think we'll be fine. Some of the areas that will be Things like bank loans and the like things that reset. So right now, we've really not You had a headwind emerge from the rising rates, but needless to say, we're paying close attention to it, the Recent increase.
That sounds fine. You got it.
All right, great.
And then just a quick follow-up, some of the institutional pipelines, Trying to get a sense of what changed to drive such a robust pipeline, whether it was this quarter last quarter or over the last here has been investments in distribution, like geographies, strategies, pricing, shift Relative to the past.
Yes. Look, the reality is sort of overnight is a success after multiple years of investment. And it really is a combination of the capability that is just how we're matching clients around the world. And really, this capability is just really, really important. But You need solution indexing, you need the range of capabilities and you have to have deep relationships with institutional clients and that's all coming through.
The other thing I want to maybe connect the dots. So we started talking about institutional is being a passive mandate and that's very consistent with what we've been talking about strategically where every client that we deal with around the world, again, not unique to us, They're deal managers, they want more from us. And so that also includes a range of asset classes to create the outcomes. So historically, we did not take our indexing capability to institutional clients. Let's say, we've changed that recently and it just creates is a relationship with the clients.
The reality is large and still are going to use passive capabilities And we want to be able to provide that along the rest of the range of capabilities we have all the way
is open. Yes.
Thank you. The next question is from Bill Katz with Citigroup. You may go ahead.
Thank you very much for taking my questions this morning. Maybe Marty, one for you,
about M and
A a little while. So what's your latest thinking on when you look at your footprint? What if anything would make sense that you don't have and maybe More aggressively leveraging the platform as you build more.
Yes, you're right that we haven't talked about since last So, hey, just look, our thoughts have not changed. I think it was really important for us to complete what we did with Oppenheimer last year. Obviously, the patent didn't help getting off on will start after that. But if we look at the firm right now, we feel like most Everything we need and the things we probably pay attention to, areas where there could sort of be bolt on capability, obviously probably In areas that we understand that could be around credit, it could be around infrastructure.
Yes, that's helpful. And then maybe just my second question leads into that maybe expand your comments a little bit on what you're doing Today, we're in the private markets.
Yes. We've been extending the real estate capability into infrastructure, but it's very early days for us, right? So it's an area that's very competitive and it's one that we want to be competitive in off of the bank loan capabilities that continue to build out private credit, direct lending capabilities. Private credit has gone has been building a nice track record is one to get to So that's the areas that we've been focused on.
Thank you.
Yes. Thanks, Bill.
Thank you. The next question is from
may be how much Sorry, how do you think about that in terms of points on the margin? And how would you characterize that pace of investment spend today versus what you has been doing, say, 2 to 3 years ago, pace be as you look out over the next 2 to 3 years?
Let me start with we're not quantifying what we've put forth tracking too and as we think about it really is, one, it can be rather difficult to trace and track That absolute level, because we were always investing in the business. Changes that Our discrete line items of costs that we can take out and again create more than $200,000,000 so that we do have some gross Savings to be able to reinvest back into the business. And the way we're thinking about it is really about driving operating margin. I can Let Marty comment on the past and some of how the thinking
is going to be a little
bit scattered. I would tell you our focus really is on delivering that profitable growth. And so as we think about reallocating, we're really thinking about how do we reallocate some of those savings into areas where we think We get the fastest growth and really drive that margin enhancement. And I think you see some of that margin enhancement and what we've been able to deliver over the last 2 or 3 quarters. And I don't know that we can deliver that margin enhancement of that magnitude quarter after quarter into perpetuity.
But again, it gives us the opportunity just and really leverage the scale that we think we are starting to create across a real diversified platform and making sure that our investments are in those key capabilities that really drop profitability to the bottom line.
Yes, Michael, so look, it will be quite simple. So if you there is on the highlight slide, We talk about the focus on Investment Solutions, China, active equity, active fixing and private markets factors indexes. Those have been the areas where we've been just laser focused and they have been the net beneficiaries of that. Also underneath it really everything digital as you would imagine. So All of our digital capabilities as we face off against client that is just clients has just changed quite dramatically for everybody.
Last year Faster just advanced it quite dramatically. And I think also what you're seeing really in the platform to make it much more efficient and effective and Alpha Next Gen is an example of that and is beyond just more efficient, more effective. It's really moving everything to the cloud and also created a data capability that really enhances our ability to get to all of the information we need to make better decisions. So it really is quite focused And I think it's showing up in the results.
Great, thanks. Just a quick follow-up with The improving performance trends that we're seeing, maybe you could just remind us on how much AUM is eligible to earn on performance fees, which strategies would you say the largest contributor there, if I remember, I think in the past maybe with real estate. And just given the improving performance trend, how are you thinking about performance fee revenues for this year compared to what we've seen in prior years?
Sure. I'll take that. Our AUM that's eligible to earn a performance fee is around $58,000,000,000 and we tend to In terms of what comprises that AUM, it is largely real estate. A number of contracts that would relate back to China, Asia Pacific, broadly speaking, but specifically China. And so as I think about it going forward, it is just is inherently difficult to predict the level of performance fees given it varies by contract and by client relationship.
So I really can't give you a lot of guidance there. I would point to the fact that 4th quarter performance fees were north of $70,000,000,000 as you know. As I look at performance fees this quarter, pretty consistent to what we saw in the second and third quarter of last year. I wouldn't necessarily suggest That is what you should expect every quarter because it is so difficult to predict. But I do think looking at some of those historical trends is at least is factual and somewhat helpful.
Great. Thank you.
Thank you. The next question is from Chris Harris with Wells Fargo. You may go ahead.
Has improved in a lot of different areas. I guess the one area that was a bit of a headwind was the UK. I'm wondering if you can talk a little bit about what drove the weakness in the UK this quarter and how you're feeling about the outlook?
Yes. So look, U. K. Equities continues to be a headwind. It's been a period of that one Just the asset class, which were historically a larger manager within the asset class and historical performance.
The performance is still a headwind. That said, we've made the changes to the portfolio managers. I feel really good about team is there. It's still early days for them, but that is really the main focal point there.
Okay, got you. And one quick follow-up for Allison. Other revenue was up quite a bit in the quarter. What drove that? And how should we be thinking
Yes, it was up quite a bit. It's largely due to higher UIT and front end transaction fees. It is It is almost all of other revenue is transaction based as opposed to AUM or volume based. So it can be, I would say, as you think about a run rate, a little bit more difficult to predict. I'm just Double checking that.
Yes, I mean, I think we had an unusually large quarter, and there were some specific items in there as it relates to some of the UIT and transaction fees, I don't know that you should expect that same level of revenue quarter to quarter.
Got you. Thank you.
Thank you. And our last question comes from Glenn Schorr with Evercore. You may go ahead.
Thanks so much. I just want to ask an industry level follow-up on the M and A backdrop. Marty, you guys obviously have done much, much better. The industry flows have been better. Margins have been done better.
The markets are up and valuations have recovered some. I'm curious if at all if that changes the industry narrative and consolidation theme, takes any of the pressures for that need for scale or if you've seen a continuation of what we've seen so far in terms of bigger is better.
Yes, look, I don't think it does. It provides relief for the sector, if you would say, Rising tide rises all boats, but the reality of where the industry is, it's not changed. I mean, has all the characteristics of a maturing industry where, Again, fundamentally, I mentioned a couple of minutes ago, every client is expecting more from money managers. They are is working with fewer money managers around the world and you really need scale in multiple levels across the organization, whether it be in Investment capabilities, operational scale, the ability to invest in technology, that's just not going away. And so Yes, there's going to be consolidation, but it's going to be 2 ways as we talked about in the past.
It's going to be inorganic, but also organic, literally just money leaving to go to Those firms that are performing better for the clients and still the other reality of M and A within the sector, it's hard. I mean, you really need a skill set to be successful at it and that's still even if you do have those skills, it's just hard and you got to be really focused and be able to So I don't think the strategic dynamic has changed, quite frankly.
I appreciate that. Thanks, Marty.
Yes.
And that was our last question.
That was it, operator. Sue, thank you. And on behalf of Allison and myself, thank you very much for participating. Thanks for the questions, and We'll talk with everybody very soon. Thank you.
Thank you. That does conclude today's conference call is being recorded. You may now disconnect.