Okay. I think we're on.
Yeah.
All right. We're going to go ahead and get started. Good morning, everyone. Mike Cyprys, equity analyst covering brokers, asset managers, and exchanges for Morgan Stanley Research. Welcome to our fireside chat with Allison Dukes, the Chief Financial Officer at Invesco. As you all know, Invesco is a global asset management firm with over $2.1 trillion of assets under management. The company has a significant presence in retail and institutional markets across the globe, serving clients in more than 120 countries. Allison, thanks for making it out here to New York and joining us today.
Happy to be here. Thank you.
I thought we could start with the current backdrop and environment. Clearly, been a lot of volatility, which has created potential for meaningful shifts in asset allocation decisions. Would be curious to hear your perspectives around what changes in client behavior have surprised you the most this year. Where do you think investors are still under-positioned, and how do you see asset owner allocations perhaps evolving?
Yes. Well, again, thanks for having me. We released our flows last night for the month of May, so maybe I'll start there as we think about where investor demand is and what we're seeing. Our flows for the month of May were $19 billion of inflows. That's following a very strong April, which was also $17 billion, $18 billion of inflows. I'd say, just to start, demand is incredibly strong. We have really benefited from, I think, the diversification of our product capabilities, in particular, and y ou're starting to see just the strength and the power of that. We've delivered over $150 billion of inflows over the last 18 months. Very consistent inflows for several years now. We're proud of that. We're excited about that. It also gives us the opportunity to really see the breadth of where investor demand is today.
A couple of points. I would say, one, with this, gosh, $35 billion, $36 billion or so of inflows that we're seeing just to start the second quarter. The QQQ has actually turned back into positive flows. That was negative in the first quarter, about $11 billion. That's pretty positive for the first two months of this quarter. Back to the volatility in your question and where are we seeing investor demand. We're seeing investor demand for the Nasdaq-100 Index and the QQQ product, in particular, as a way to play, I would say, the AI trade, in particular. That's certainly coming through. We're seeing good, strong demand for fixed income capabilities that continues to be broad-based and really across the globe, across all three regions.
I think important to note that the demand we're seeing outside of the United States has been very strong this year and continues to drive a lot of our flows. About 40% of our AUM is outside of the United States. Pretty well-balanced between Asia and Europe. Both have seen good, strong demand. Very supportive overall. China continues to be a driver of flows for us. Very strong inflows in China in April, continued into May. Japan has been a driver of flows. It's an interesting time because the volatility in the geopolitical landscape is very high, and y et, there seems to be an investor sort of ease with this volatility, and a lot of cash that still seems to be on the sidelines that continues to come into the markets. Then last, but importantly, our ETF franchise.
That's at about inclusive of the QQQ at about $1.2 trillion now. You're seeing really strong flows both into the broader ETF lineup as well as the QQQ. I noted the Qs were outflows in the first quarter, ETFs have been positive all year long.
You mentioned a number of different products.
Yes.
And geographic regions there. If we fast-forward two, three years from now, which of the growth initiatives, which we'll come back to and dig in, but which of the growth initiatives do you think will be the most meaningful contributors to organic revenue growth at Invesco? Is it ETFs, fixed income, privates, Asia, personalization?
I think my answer is yes to all of those in some ways, because we've got a mix of wrappers, asset class, region, and kind of investment strategy and all of that, and I think they're all going to matter. I'd say all four of those that you mentioned, ETFs, personalization, Asia, fixed income, they're all going to be incredibly important drivers. What I like about our particular portfolio is I don't think we're dependent on any one of those. We are a very well-diversified platform today. Much more diversified than we were five years ago, and that is across both investment style, wrapper, asset class, and region. We're really able to, I think, benefit from each one of those different aspects of the portfolio, and we're not concentrated on one, and that has reduced some of the risk profile behind our financials as well.
When I think about two or three years from now, yes, I think ETFs are still going to be a really important wrapper. We are committed to active asset management as well. We really have been focusing on our investment performance there. We're seeing the benefits of that. We're seeing investment performance improve. We've seen outflows narrow. That said, the demand for passive, I don't think is going to stop, and I'm pleased with our position there and just how diversified that is. Personalization's a really important trend. We can certainly touch on that. I think we will continue to see demand there. Will it be at the size and the scale of ETF? Probably not in two or three years. Nonetheless, it's going to be a really important driver of future flows.
So, of those, sorry, were you going to?
You're going to pin me down on one?
Or two, or rank order.
If I had to say what is the single largest, you'd have to say ETFs just based on the scale. We're the fourth-largest ETF provider, $1.2 trillion, just given where the demand is, just in sheer quantum of flows. It'd be hard to say it'd be anything but ETFs. I'd say second in that, probably Asia, because of our position in both China and Japan.
Okay. Let's dig in.
Okay.
That's a good segue. My next question is on ETFs. I had a hunch you probably would say that. Active ETFs. You launched four new active ETFs in the first quarter, I believe it was. Talk about the active ETF strategy, the approach there, the traction that you're seeing, what the product pipeline looks like.
Yes, four new ETFs, active ETFs in the first quarter. Little over 1/3 of our ETF launches have been in active ETFs. I think, look, active ETF in a lot of ways, it's built into the ethos of who Invesco is. Smart beta has always been a really important part of our overall ETF platform. The idea of really taking an actively run product, packaged in a passive way, that has been the ethos of a lot of what we do behind the smart beta aspect of our portfolio. It's just an extension of that in many respects. We have about maybe 40 or so active ETFs, a little over 40 active ETFs today. I think they're approaching maybe $40 billion or so in AUM. As you think about just the overall opportunity there, it's really an extension of who we are.
We're going to be very thoughtful about those launches. We really are a believer in new launches. We think that's probably the best way for us to play that. Trying to port active strategies into active ETFs, we don't necessarily think that necessarily gets us anywhere or buys anything. I know some will do those conversions. I won't say we won't ever, but I'm not sure that's really the way we're going to play this opportunity. Because again, we think we can really build on the profile that we have today. We're going to not so much focus on the number of active ETFs, but rather the right ones and the successful launches of those and really investing behind those as we continue to look for scale there.
What would you say differentiates the active ETFs that succeed from the dozens that don't?
It's probably the same as what the answer would be for any other ETF or active mutual fund, which is investment performance. First and foremost, we're focused on client outcomes, and so, our thought is always lead with what is the client demand and how do we exceed client expectations by delivering great outcomes. Success is going to be on the efficient delivery of those client outcomes. Yes, they've got to be well-priced, t hat's just table stakes, but d ecisions aren't made on price alone. They're made on outcomes. Our focus is going to be on innovative strategies, innovative solutions that really exceed expectations.
Okay. While on the ETF topic, let's talk about the QQQ and beyond. How are you viewing the flagship QQQ fund, particularly in light of new competitors that are entering the space?
The QQQ, just to level set, especially in light of our May AUM announcement last night, the QQQ sits at about $500 billion in AUM. When you add on the related family of products around the QQQ, you're over $600 billion today. It is a very sizable flagship fund and related innovation suite attached to that. We have been at this for over 20 years. The QQQ is really benefiting from many years, decades, of marketing spend behind it, billions of dollars spent in marketing behind it, because that prior structure required us to spend all that money on marketing. It has a brand that is its own brand, and the QQQ is one of the most well-known ETFs in the world now.
Is certainly in an interesting place at the moment, as it tracks the Nasdaq-100 and the IPOs that are coming over the next few weeks. I think you're seeing a lot of demand for the QQQ as a way to play the AI trade. That's been there for a while now, but certainly, as we look at some of these new IPOs, that is inherent behind that. As we think about some of the new launches that are coming, look, we feel really good about the installed base we have there for a lot of reasons. One, not just the sheer quantum of size of $600 billion across the suite, but also just the tightness of the spreads there, the liquidity that's behind it, the embedded derivatives and options that are attached to it. This is a very, very deep market that we have built over 20 years.
You have got deep tax gains that are there as well. The switching costs are going to be incredibly high. Not only do we not worry about the switching costs, we also think this is the clear leader in the way to play the Nasdaq-100 and just, it's really bought, not sold. It is such a well-known brand at this point. We feel good about that. We also think that it's a big market and there's a lot of opportunity there, and we know that from our own case study of launching the QQQM a few years ago. When we launched that, we had an opportunity to kind of really cannibalize the QQQ in some ways. We wanted to make sure we had another adjacent product that we could create revenue from, when the QQQ was in its prior structure.
In the time that we have launched the QQQM, it's approaching $100 billion today. Over that same horizon, the QQQ tripled in size. We didn't cannibalize the QQQ at all. There was ample market depth and capacity to support growth of both of those products.
Staying with the ETF topic, o ne major topic this year has been the potential for intermediary platforms to assess distribution fees or rev sharing arrangements on ETFs. Where are we in that journey, and how do you see that evolving? Is it ETF revenue share? On net flows, on AUM, does it rebase existing AUM? I think you had mentioned it's not material to Invesco. Why is that? How is that the case?
While it's getting some airtime now, the journey's always been there. We've been in the journey. It's just picked up a little bit of public steam. We would say we're always in that journey, and working with our distributors on platform fees is, that's just business, and that's how business has always been done and will always be done. It makes sense, as the demand for mutual funds have been declining and the demand for ETFs has been improving. That's changed the economics for the distributors. Rightly so, there are ongoing conversations always around the value that is provided by those distributors and making sure that there are appropriate economics shared on both sides. That's always been there. That won't change. That will continue to be the way in which we do business. Those conversations aren't about existing AUM, or existing products.
Those conversations are generally about new funds that are launched, new AUM that's coming, and where we want support, where we need help, where we need support, where we need value creation. That is something that when we say it's not material to us, it's because it's just embedded in the cost of our economics already today. It will be so in the future. There are always going to be thoughtful decisions and conversations with all of our distributors. I think, again, this is where we feel good about our position as one of the largest ETF investment managers in the world. We're the fourth largest and continue to grow. We have the benefit of scale. That gives us a good position as we think about the relationship we have with all of our distributors. We have a broad client list of distributors.
Not material to the P&L because it's on.
Because it's not a change.
New sales.
Yeah.
It's on new sales.
Right.
New AUM.
Right.
Arguably benefits scale providers like yourselves.
Right.
I guess, how do you think about what that cost of that new gross sale is on a go forward versus what it has been in the past, but then I imagine also the incremental margins are also significant, too?
That's a very hypothetical question because it all comes down to what this is all, the hypothetical next new product. Where is it going to be priced? It starts with how do we price it, and then how do you think about the economic sharing around that. It all goes into the equation to make sure that there are appropriate margins for all parties there. I guess I'd say it this way. Our objective has been, and is, and always will be to continue to improve our own operating margins. We're demonstrating that, and we can get to that later.
Yeah.
As we continue to improve our own operating margins, we do that decision by decision, product by product, cost by cost. Everything has to make sense in the isolation of that product and that conversation. In that next new product launch, might we have a, l ook, I just want to be really clear, I mean, the conversations we're having, there's nothing new happening. There's not a real change in the way in which business is conducted at Invesco day to day. These are very hypothetical sort of ideas around what could happen over the years. Could margins get more competitive? I think that's just how business is. Just in efficient markets, everything's always more competitive, and so you're always looking for ways to create more efficiencies to offset some of those challenges, and that's kind of inherent in everything we do.
Okay. Fair enough. Sticking with intermediary retail, we talked about ETFs. Let's shift and talk about SMAs, models, another area of success and strength for the industry here. Maybe, you could update us on your SMA and model portfolio initiatives. How broad-based is that offering today relative to where you would like that to be? And talk about some of the steps that you're taking to drive further adoption and acceleration there.
SMAs for us, about $40 billion or so. That would be, probably, 75% of that would be fixed income SMAs. Our history and strength has really been on fixed income SMAs. It's had very strong growth rates, I think somewhere around maybe 18%, 19%, 20% growth rates. Nice growth rates, but off a small base. The opportunity we have is to continue to broaden that out. We really think personalization is a very important trend. We don't think that's going anywhere. In fact, we think it's probably going to pick up even greater demand over the years. We get excited about the opportunity to be thoughtful, to be creative there, to be innovative. I think there are a lot of different opportunities.
Certainly, AI is going to come behind this as yet another place where AI is going to be an enabler and giving us the opportunity to do these things at scale. Personalization at scale is always a bit of an oxymoron. How do you do that in a way that you can do it responsibly and profitably? Those are going to be some of the opportunities that we think about. Models, we've probably been not as focused on in the past, and that's an area that we think we've got an opportunity to be a little more focused on our own models, not just participating in others' models.
That's one, again, as we continue to really refine the building blocks of Invesco, and that's been our focus of the last years is focusing on those individual building blocks, improving them, doing them efficiently, really thinking about the margins behind that, the cost to deliver. As we have these building blocks better built out, now, we've got the opportunity to bring these together, I think, and really capitalize on the trends around personalization, customization, and grow that SMA lineup and model portfolio for ourselves.
You mentioned AI as an enabler of personalization. Can we double-click on that for a moment? How do you sort of contrast and think about the role of the asset manager in there versus the wealth manager and the intermediary? Because I imagine they would probably say something similar.
Yeah. Look, I mean, AI is a yes for all of us. It's relevant in every part of the value chain now and it's going to, I think it's changing so fast. We're all seeing new opportunities, new ideas changing by the week, by the month. So, it's going to be in every aspect of the value chain. For us, it's going to be a part of revenue. Does it create new revenue? Hard to say. Does it improve outcomes that create better investment performance? It should. Does that then become normalized across all fund managers, all asset managers? Perhaps. Then, are you actually differentiating? I don't know. I mean, this is, we're playing a long arc at this point. Fundamentally, it is the opportunity, and the opportunity is already here, to rethink how we're doing everything and to augment humans at just about every level of the value chain.
I think, certainly, in personalization, where we can do large task, volume task more efficiently without a human, those are some of the opportunities you're going to see in actually delivering revenue more effectively. Does it deliver the next dollar of revenue itself? I don't know. Maybe. I think these are some of the opportunities that are still evolving by the week.
Private markets.
Yeah.
That is your focus area for Invesco, for investors, for the industry. Your platform today, over $130 billion, spans private real estate, private credit solutions. Talk about some of your initiatives there, how you're positioning to accelerate growth, and maybe also touch upon the defined contribution opportunity set as you guys are looking at that.
Yes. Level set, our private markets business is about, rough numbers, $165 billion AUM business today. It's a fairly large private markets business. As you said, primarily real estate and credit. The real estate side of that would be, rough numbers, $80 billion or so . That has primarily been an equity business, little bit of a debt business that's growing there as well but primarily has been institutionally focused. The credit side is really built off the backbone of a bank loan and CLO business, and more recently augmented by more alternative credit strategies, direct lending, distressed lending. We're in the early stages, like many, but certainly in the early stages of shifting that business from a purely institutional-focused business to one that also capitalizes on the trends that are happening on the retail wealth management side.
In the real estate business, we started by launching our first open-end fund there, INREIT, a few years ago, and t hen have built upon that with IREX, which is a 1031 exchange open-ended evergreen fund, a nd more recently, INCREF, which is the debt side of that. That has been a very good strategy for us. INCREF continues to grow steady new flows every month. I think that strategy's up to maybe closer to about $4 billion in size today. We've now , again, got these building blocks that are important for delivery into the wealth management channel. Likewise, building out through our partnerships on both the real estate and the credit side, the partnerships that we've announced with Barings and with LGT Capital.
With Barings, that is a Dynamic Credit Opportunities Fund . With LGT, that will build on more infrastructure and equity opportunities, the capabilities that they bring to the table as well, and future product launches to come with that one. All of these are giving us the products and the blocks that we think we need to not only participate in the retail wealth management opportunity, but in defined contribution. We're starting to launch some new products that we think actually will be well-positioned in defined contribution plans. We just launched one on the real estate side with one large partner there. We're going to be able to, I think, continue the Core Plus Fund that will be well-positioned for defined contribution plans. I think it's going to take time.
I think that we're going to find some of these really fitting in defined contribution nicely with target date funds and some of the lifecycle funds. I'm not sure they're going to be standalone products in DC plans. They may initially at least fit into sleeves as investor comfort and education improves over time. I think it's going to be a slow build, but a really important build. We know there's demand. We're seeing the demand from plan sponsors. As regulation continues to improve, we think we're well- positioned to participate.
Asia.
Yes.
At the beginning, you mentioned that was an area of strength that you were seeing. Can you maybe elaborate on which parts of Asia, I think you were mentioning Japan, I would presume China too, what types of strategies? And talk about your initiatives there to grow that part of Invesco's footprint as you look out over the next five, 10 years. Where are you most excited?
Let me start with China. Our biggest driver in China is our joint venture that is located in China. It's a domestic for domestic business and it's about $155 billion or so in size. We're the largest foreign-owned asset manager in China. We are a top 10 retail wealth management provider in China as well. The growth there has been pretty steady for a number of years now as that investment economy continues to improve, as they are looking to create investors across their economy, and the investment acumen is continuing to move out the risk profile. We're participating in that. In recent quarters, most of our growth is coming from Fixed Income Plus products, which is really a balanced product.
That's been really that as they move out the risk spectrum from money markets to fixed income now and Fixed Income Plus, that's been the biggest driver of our flows. They're broad-based. Equities represent about 20% of our portfolio in China. Flows are really driven across the asset classes, and we are seeing a real pickup in adoption of ETFs there. We just started launching ETFs in China maybe three-ish years ago, and w e continue to launch a mix of product wrappers. There's still tremendous market opportunity there, as you have hundreds of millions of people that are not investing at all yet. There is tremendous opportunity. We're well-positioned to participate in that. Japan, $100 billion or so, probably a little over in AUM. That has been a terrific market for us over the last few years.
We have a very strong position on the retail wealth management side there, and institutionally. A lot of demand there. Continue to have good, strong demand for fundamental equity there. While we see less demand in the United States, that's an area where we see steady, good inflows, in particular, for income-producing products. We've had our Global Equity Income Fund, has been a very strong driver of growth in Japan. Steady flows there for a number of quarters now.
That's the product out of Henley?
It's managed out of Henley, yes.
Okay. That one.
Henley is in the U.K. Not everybody knows that.
Thank you.
Yes.
Let's shift gears. Investors have spent a number of years modeling lower net revenue yields.
Yeah.
At Invesco. It seems like maybe be nearing the end of that journey, perhaps. Maybe, inflection ahead. How are you thinking about that? What gives you confidence that net revenue yields are beginning to stabilize here?
Sure. I'd start with net revenue yield's just an outcome of the mix of our AUM today. It's not an input. It's not a driver. We don't see fee rate pressure. What we see is net revenue yield has been declining because of the growth in AUM in our lower-fee products. It's just the average of the fee rate of the AUM today. First quarter net revenue yield was, I think, 22.8 basis points. The exit rate coming into this quarter was about 22.7 basis points. We have started to see a diminishment of the pressure there. We started to see some stabilization in the first quarter. But as you think about where flows are and where AUM is, you have to think about the mix there.
One thing I would point to is if you look at the QQQ and the flow release last night, the AUM in the QQQ is about $120 billion higher than the end of the first quarter. $120 billion of growth in two months. It's about a 6-basis-point net revenue yield. That would put pressure on the net revenue yield for the second quarter, but that, more importantly, creates massive revenue growth for the second quarter. Net revenue yield is just the mix of the fee rates. The revenue growth behind that, both from the flows and from the growth in AUM, terrific revenue growth, terrific dynamics behind that. Our focus is always on operating margin, not on net revenue yield. Our focus has been and will continue to be on how do we create that positive operating leverage.
I'll take this opportunity to shift to operating margin. In the first quarter, we had an operating margin of 34.5%, which was 300 basis points better than prior year. First quarters always are seasonally low quarter, just given some of the seasonality and compensation expense in Q1. So, 300 basis points year-over-year improvement in operating margin, even with declining net revenue yield. I hate to say it, we don't really feel like net revenue yield matters, I guess is what I would say. It's not really what drives revenue growth. What drives revenue growth is growth in AUM and growth in organic flows. We want to manage our costs against that. Our stated objective had been for a long time get back to the mid-30s in operating margin on a path to the high 30s. 34.5%, the seasonally low quarter.
We're on a good path to get back to the high 30s and feel really good about the momentum behind that.
Great. Well, you covered my next question, so I can move on. Let's talk about AI. Certainly, getting a lot of attention across markets, and it's quickly moved from experimentation to implementation even across the asset management industry, and Invesco has spoken about some broad adoption internally. I guess as you look across the firm today, where are you already seeing some of the most tangible benefits from AI?
Yeah. It's everywhere now. It's almost hard to keep up with the benefits because the benefits really are, they're popping up all over the place day to day, week to week, especially as we continue to deploy licenses across our firm for our employees and training. We're spending a lot of time on training and really monitoring the usage and thinking about those licenses and the deployment of the licenses, and encouraging our employees to be thoughtful, but also creating the right governance around that. It's really important that we have the right governance and a handle around what's happening, and how we start to monetize the benefits of some of this. There's also the effort that we and everybody must have at this point, which is as your employees are using tokens from other software providers and deploying those, there's a cost headwind that can come in.
We have to be in front of that, and make sure that we couldn't build it better ourselves, and if we can build it better ourselves, we'll build it better ourselves. We want to utilize the technology in a cost-optimized way so that we get to these productivity enhancements. We're seeing it across the board. Everything from investment research, and investment performance, and aspects of revenue and portfolio managers and how they're utilizing it, to things in the finance function, and how you think about large volume tasks that can be done very differently, that are low value-add tasks that can be done in a way that is much more productive, and we can free humans up to be much more thoughtful and add value in different places. I think the opportunities are everywhere. Some of the other tangible benefits, I mean, a procure-to-pay orchestration layer.
Those P2P layers, AI was probably an early place, or that P2P was an early place you could bring AI into your ecosystem. We did, like many others, and you really see some of the benefits of that document capture. These are easy, low-hanging fruit, but you can't not take advantage of that productivity everywhere. I think this is going to be another enabler to scale and another enabler for us as we continue to really focus on great client outcomes. How do we do so? By improving our operating margins rapidly along the way.
How are you managing the token cost while also driving ROI along the way?
Yeah, it's a good question. Look, you have to be really thoughtful, just even in your own procurement function, about making sure you have the skill set of individuals who understand this and all the contract negotiations that they're doing just as a part of their job every single day. The game has changed, and that is a really important thing to be in front of. We don't want to tell an employee no to using a productivity-enhancing tool, but we want to do it in a way that we're eyes wide open around what are we getting for that incremental cost. You have to be really aware of the way in which it is being used inside of your own firm in order to make sure you're forcing the productivity for the increased cost.
Tokenization.
Yeah.
Another topic that's gaining some traction, including amongst traditional asset managers launching, partnering, including you guys. You recently announced a partnership with Superstate, I think it was, to manage a tokenized bond fund. Talk about your initiatives, your strategy, and what we might see from Invesco as we look ahead here.
Yeah. Look, this is another really interesting technology, this was a way for us to partner and learn. We're really excited about the opportunity to partner with Superstate, bring our great investment management capabilities to bear with their understanding around blockchain and the infrastructure that they have, and to partner and learn with each other. Where these products go, I think, look, it's going to be an important offering in the product lineup, but to what end and to what size? I don't think we know yet. This is just the beginning and an opportunity for us to really learn and benefit from a lot of what they have already built. Just the transparency, the settlement dates, all of these things are going to, I think, really reshape the landscape of settlements and trades. This fund is about a billion-dollar fund.
It's an exciting product launch. This is, again, one aspect of technology where we would say we want to find great partners that we can learn from and that we can bring our capabilities to bear with their capabilities and grow from there. I think it's one of a number of partnerships we've launched now.
More broadly, is tokenization, in your view, ultimately like a distribution innovation? Is it operational innovation? Is it a completely new product category?
I think it's probably mostly an operational innovation. Will it be a new product capability? Sure, it is. Just even in the launch of this product, yet another strategy that is available to people, but through an operational lens.
Okay, great. I'm afraid I'll have to leave it there. Thank you so much, Allison. Appreciate it.
Thank you.