China Flows and Political Risks
Q: Given political tensions, is the China JV safe in a trade war?
A: Management explained that their China JV is a domestic-to-domestic business. All assets are managed for individual investors in China and managed within China, reducing exposure to international disputes. The partnership is very strong and resilient. They highlighted that the JV's performance relies on the Chinese domestic economy; thus, a trade war affecting the economy could pressure AUM through flows and market performance.

ETF Business Growth and Fee Rates
Q: How will you broaden ETF growth and improve fee rates?
A: Management sees growth opportunities in active ETFs, with over $10 billion in that space and $30 billion in assets affiliated with their investment teams. They plan to expand beyond the U.S., with growth in Europe now over $100 billion in AUM, and increasing demand in Asia, particularly in China and Japan. They also focus on fixed income and alternative strategies like commodities and bank loans. The ETF business continues to scale well, delivering accretive profitability despite lower fee rates.

Fee Rate Trajectory and Mix Shift
Q: What is the outlook for fee rates given mix shifts?
A: The exit rate for Q2 was 25.2 basis points, slightly lower than the quarterly average. Fee rates fluctuate with market movements and the mix of flows. Management focuses on driving organic revenue, with an organic flow rate of 6% being a testament to client demand alignment. Recent market broadening could be a net positive for fee rates.

Capital Return Strategy
Q: Is capital return now the priority over M&A?
A: Management stated they aim to be opportunistic in both returning capital to shareholders and pursuing M&A opportunities. With a healthier balance sheet, they can focus on returning capital while remaining open to filling capability gaps through acquisitions. They emphasize improving earnings and reinvesting to drive organic growth.

Institutional Flows and Pipeline
Q: Can you size the institutional pipeline and key areas?
A: The institutional pipeline remains consistent at around $14-15 billion. Pipeline accounts for about 30% of flows, but many flows come outside of it. Fee rates in this segment are on the higher side, ranging from 25 to 35 basis points. Strength is seen across regions, particularly in public and private credit, with Asia and Europe picking up pace.

Fundamental Equities Performance and Flows
Q: How are you leveraging improved performance in fundamental equities?
A: Improved investment performance is starting to occur in domestic equity categories in the U.S. and other developed markets. The sales team is working closely with product design and investment teams to enhance client engagement and grow gross sales. While recognizing industry challenges in active equities, management is focused on outperforming and narrowing outflows, aiming to return to a more stable position.

G&A Expenses and Cost Guidance
Q: What are your expectations for G&A expenses going forward?
A: Overall expenses are expected to be around $3 billion for the year. Compensation to revenue is trending above 42%, anticipated to be closer to 43% for the year. Implementation costs for State Street Alpha are around $10 million per quarter. Management notes expenses may be lumpy quarter-to-quarter but remain focused on cost management.

State Street Alpha Implementation Expenses
Q: When will Alpha integration expenses decrease?
A: Implementation will continue through 2025 and into 2026. Transitioning AUM onto the Alpha platform begins in Q4 of this year and runs through 2025. Decommissioning and parallel testing will occur through 2026. Therefore, integration expenses are expected to remain until after this period.

MassMutual Relationship
Q: How is the MassMutual partnership developing?
A: The relationship is strong, focusing on growing private market capabilities. MassMutual has 3-4x the capital invested in Invesco's strategies compared to Invesco's own balance sheet. This partnership aids in seeding and co-investing, particularly in real assets. Invesco is a leading provider on MassMutual's platform, especially in model portfolios and ETFs, where there's growing demand.

Fixed Income Demand and Flows
Q: Can you expand on the green shoots in fixed income?
A: Fixed income growth is driven by RFP volume, flow volume, and demand for longer-duration assets as clients shift from short-term fixed income. This is occurring in both retail and institutional channels. In Asia, particularly China, there's strong demand in fixed income and balanced (fixed income plus) products.

Retail Democratization and Alternative Strategies
Q: What initiatives are underway beyond INREIT?
A: Invesco launched a Real Estate Credit Fund about a year ago, now on two major wealth platforms and several RIA platforms. Focus is on real estate equity and debt funds, with strong client demand globally. They also offer alternative credit strategies.

Profitability Focus and Cost Control
Q: Is there more behind your focus on profitable organic growth?
A: Management is focusing on scaling ETFs and SMA vehicles by utilizing technology and controlling expenses as they grow. In fixed income and multi-asset, they've consolidated investment teams to improve scalability. They believe they have a complete product range to expand profitability by layering on assets and revenues.

Japan Business and Outlook
Q: Elaborate on your footprint and outlook in Japan.
A: Invesco has been in Japan for 30 years, managing around $60 billion in assets. Growth has accelerated recently, especially in retail with a global equity income strategy. They are optimistic about market reforms, inflation trends, and increased investor interest in equities. ETFs and private markets are areas of increased demand.

Distribution and Servicing Fees
Q: What's driving the trend in distribution fees?
A: There's some impact from mix shift away from products with distribution revenue components. Last quarter had an anomaly due to proxy costs, which should be disregarded. The relationship between service and distribution fees and third-party contra revenue remains consistent at 13-14% of management fees.

Organic Revenue Growth vs Asset Growth
Q: How did organic revenue growth trend relative to 6% AUM growth?
A: Management pointed to narrowed net revenue yield ranges for more precision. Organic revenue growth is trending better, almost neutral, despite challenges in fundamental equities and ETF fee pressures. New disclosures help track organic revenue growth more closely.

G&A Variability and Professional Fees
Q: Are lower G&A expenses sustainable as a tailwind?
A: Lower professional fees in G&A are not necessarily a tailwind, as these expenses vary quarter-to-quarter due to factors like legal, consulting, and project implementation costs. Variability should be expected in this line item quarter-to-quarter.

Impact of Market Broadening
Q: How does recent market broadening affect your outlook?
A: Management noted that recent market broadening is a net positive, especially as they have a diversified range of assets and investment capabilities. They are optimistic that this could improve fee rates and revenue growth.

Expected Operating Margin Improvement
Q: What's your outlook on operating margin improvement?
A: Management is optimistic about continuing to improve operating margins. They've demonstrated strength across capabilities delivering profitable growth. Focus remains on investment performance, narrowing outflows in fundamental equities, and leveraging growth opportunities in other areas.