IVZ
#Yes, very much, thanks, Marty
So looking at our schedule on total assets under management, we saw quarter-over-quarter, total AUM increase $23.5 billion or 2.8%
That was driven by market gains of $13 billion, positive foreign exchange translation of $8.1 billion, we saw $2.8 billion of inflows into the money market capability
Also $0.2 billion of inflows into the QQQs
But these factors were somewhat offset by long-term net outflows of $0.6 billion
Average AUM for the second quarter came in at $849.2 billion, 2.3% versus the first quarter
And then looking at our net revenue yield, that came in at 42.7 basis points and our net revenue yield, excluding performance fees, was at 41.8 basis points, so that was an increase of 0.9 basis points over the first quarter
The positive impact of foreign exchange and the change in AUM mix added 0.7 basis points
One additional day added 0.4 basis points
These positive factors were then somewhat offset by the impact of a reduction in other revenue, which acted to decrease the yield by 0.2 basis points
Moving on to Slide 12, that provides our U.S
GAAP operating results for the quarter
As usual, my comments today will focus exclusively on the variances related to our non-GAAP adjusted measures, which can be found on Slide 13. Looking at Slide 13, you’ll see our net revenues increased by $39.2 million or 4.5% quarter-over-quarter to $906.3 million, which included a positive foreign exchange effect of $9.1 million
Within that net revenue number, you’ll see that our adjusted investment management fees increased by $54.3 million or 5.6% to $1.03 billion
This reflects higher average AUM as well as an additional day during the second quarter
Foreign exchange increased our adjusted management fee by $10 million
Adjusted services and distribution revenues increased by $4.9 million or 2.4%, reflecting our higher average AUM in the quarter
FX decreased our adjusted service and distribution revenues by $0.1 million
Our adjusted performance fees for the quarter came in at $18 million, and these are earned from a variety of investment capabilities, including $7.4 million from accounts managed by our U.K
team, $6 million came from our private equity business, $2.7 million came from our Asia Pacific investment teams
Foreign exchange increased performance fees by $0.3 million
And in the last two quarters of 2017, I will just update my guidance here, we expect performance fees to decline to roughly $5 million to $7 million per quarter, which, again, is subject to my usual caveat, that forecasting performance fees is an imperfect science, and certainly one that we don’t have a huge line of sight to
The adjusted other revenues in the second quarter came in at $17.3 million, and that was a decrease of $3.5 million from the prior quarter
It was driven by lower real estate transaction fees, UIT revenues as well as other front-end load fees
Foreign exchange increased our adjusted other revenue by $0.1 million
Again, looking to guidance here, looking forward to the second half of 2017, we would expect other revenues to remain near the second quarter levels at $16 million to $17 million per quarter
Moving on down to the third-party distribution, service and advisory expense, which we net against gross revenues, that increased by $16.8 million or 4.8%
That’s consistent with our increased revenues derived from the retail-related AUM as well as the additional day count in the quarter
Foreign exchange adjusted our third-party distribution, service and advisory expenses by $1.2 million
And before I move to the expense area of the P&L, let me try to summarize the revenue guidance I just provided in terms of net revenue yield
So looking at the second half of 2017, we have two offsetting impacts
We would expect to see our net revenue yield, excluding performance fees, increase by roughly 0.5 basis points, and that’s driven primarily by the increase in day count, as well as the asset mix in the second half of the year
This increase, however, is going to be offset by the acquisition of Source assets, which will be dilutive to the firm’s net revenue yield
As we had talked about, that’s about $25 billion, and somewhere between 16 to 17 basis points
As a result, the overall net revenue yield, excluding performance fees, should remain actually fairly consistent with the second quarter level at 42 basis points for the second half of the year
Again, this guidance assumes flat markets and foreign exchange from today’s levels
All right, so let’s move to the expenses
If we move on down the slide, you’ll see our adjusted operating expenses at $549.8 million, increased by $9.8 million or 1.8% relative to the first quarter
Foreign exchange increased adjusted operating expenses by $4.3 million during the quarter
The adjusted employee compensation line item came in at $360.6 million, that’s a decrease of $0.6 million or 0.2%
This is driven by a decline in seasonal payroll taxes
That always happens first quarter to second quarter
But it was offset by an increase in variable and other compensation costs, a full quarter of higher base salaries effective March 1 and an increase in deferred compensation expenses for the awards that were granted in the first quarter
The foreign exchange impact for our adjusted employee compensation came in at $2.5 million
Looking forward, again, to the guidance, we’re assuming AUM and foreign exchange flat to current levels
We’d expect compensation to increase ratably to about $370 million by Q4. This increase in forecasted compensation costs includes the – several factors, including: The impact of the Source acquisition in the third quarter; investments that we’re making behind some of our key strategic initiatives, including building out our institutional business, solutions, ETFs and Jemstep as well as resources that we are adding to meet the growth in regulatory and compliance requirements on a global basis
Our adjusted marketing expenses in Q2 increased by $4.7 million or 18.8% to $29.7 million
That reflects an increase in advertising and client events
Foreign exchange increased our adjusted marketing expense by $0.3 million
Marketing costs should stay roughly flat to current levels until Q4, at which point in time this could grow to somewhere around $36 million to $38 million, consistent with the historic seasonality that we’ve seen in the past
The adjusted property, office and technology expenses were $88.7 million in the quarter
That’s an increase of $3.1 million or 3.6% over the first quarter, due to higher outsourced administration and software costs
Foreign exchange increased our adjusted property, office and tech expenses by $0.7 million
For the remainder of 2017, we see property, office and technology costs coming in between $92 million to $94 million a quarter
This is due to the impact of large technology-related projects that have and are coming into service as well as the outsourced administration expenses driven by the activity within our European cross-border business which should move the activity
Next, we go to adjusted general and administrative expenses at $70.8 million
That increased $2.6 million or 3.8% quarter-over-quarter
The G&A increase was largely driven by professional services costs associated with the regulatory changes and compliance that we’re seeing on a global basis
Foreign exchange increased our adjusted G&A expenses by $0.8 million
We would expect G&A as a line item to remain at similar levels as in the second quarter or slightly elevated levels for the remainder of 2017, somewhere between $70 million and $73 million per quarter
So finishing on the topic of expenses, I’d like to emphasize that I do believe the organic and inorganic investments that we are making will serve as key business differentiators for Invesco, and therefore, are critical for our long-term success in what we see as a rapidly changing competitive environment
With that said, we will continue to be highly focused on cost optimization efforts in order to remain as efficient as possible and to help fund these investments
So finally, moving down the page, you’ll see our adjusted nonoperating income decrease $10 million compared to the first quarter
This decrease was primarily due to the gain realized on our pound sterling-U.S
dollar hedges in the first quarter
And moving to taxes, the firm’s effective tax rate on a pretax adjusted net income basis was 26.7%, which brings us to our EPS at $0.64 and adjusted operating margin, 39.3%
So with that, I’m going to turn it back over to Marty
I mean, I do think we’re still pretty optimistic about the overall story on the institutional side, for sure
The fee rate on flows are at a much higher level, continues to be sort of record highs on the aggregate basis points
And then, that weakness, as you suggest, is being offset in other locations
Europe is quite strong
So again, we – I think it’s more just an aberration around just a confluence of things that happened in second quarter as opposed to a real inflection point indicating that something’s at a whole new level of decline
So the thing that I would say is we have pretty good line of sight on the won but not funded, and that’s what I’m referring to right now
When redemptions happen, which they can, that’s harder for us to predict
And so we did get caught offsided by one large sovereign wealth outflow in the quarter, which was pretty sizable, $1.2 billion
And those are hard for us to really see
We don’t expect those to recur, but again, we don’t know
And Pat, just to remind you, I mean, we did come out, I think it was last quarter, in terms of our position with respect to the use of commissions on research, and so we said that we were going to continue to focus on, within the – of our ability within MiFID II, to use CSAs to fund <UNK>PAs, which would mean that there’s not a substantial impact on cost for us, as long as competitively that’s still, and from a regulatory perspective, that still makes sense
The other thing is, just in terms of positioning, and we have a substantial number of people on the ground, have for a long time, in Continental Europe
So the idea of what would ultimately happen, in terms of having risk and foreign oversight of capabilities in terms of this passporting topic and so forth, is another thing that I’d say we feel probably better position than most others in the region
So overall, I’m not saying there’s no cost there
There’s probably some cost, but I don’t think it’s going to be a substantial material cost at this point in time
Yes, really not going to add much more to what you said, Marty, other than, I think, quantifying
In terms of incremental margin, I mean, I think we’re probably at a level that’s more in the 40% to 50% range incremental margin, as opposed to sort of the 50% to 65% right now, just because of our imperatives to make sure that we build out the capabilities that are going to be critical to our success and trying to do that now, but responsibly in the sense that we’re continuing to find opportunities to save and to fund those
So you’re going to see operating leverage, you’re going to see margin expansion as we grow
All those things should absolutely continue to be in place, but maybe not quite at the level of lower investment type of positioning
So I think it is our capital policy and approach remains in place
Obviously, we smartly, I think, are pausing on the buyback just so we can fund this acquisition
The opportunity set for things in this industry around consolidation is at a high level, too
So I’ll just generally say that we’re seeing probably more inorganic opportunities than we have in the past
Certainly, that doesn’t mean we’re going to do something else other than Source
But I think our general position is one of this is a unique and extraordinary time, and so we may continue to be thinking about the balance of cash to return, versus opportunities in the market that might not show themselves again, so
And again, it’s a little bit hard to say exactly, but we are generally, I’d say, back in our normal return mode post-Source
Well, I tell you, I mean, into the second half, certainly a substantial part of the expense pickup is just related to Source
Again, you probably have a reasonable sense of kind of the revenues and expenses for that business based on what you know about that business, so you can kind of do the math and see where that’s breaking out
The optimization impact is going to be most felt in 2018, because we have some very large-scale projects that are not going to get completed until 2018. And it’s only until that happens will we see sort of the remainder of the – to the full 50 run rate show up
So I’d say, through the second half of this year, there’s definitely some offset of the investments through optimization efforts, but not incrementally a lot
So I don’t know if that fully answers your question, but I’d say at least half of the expense pickup is due to Source and the other half is just due to the investments that we’ve been making, generally
Marketing’s going to be roughly flat to what it was in the second quarter, and it’s really just in Q4 where it goes to that higher level
I think this is not a structural topic
I think it’s more building around what we see as absolutely key points of differentiation in growth that we want to be ahead of as opposed to sort of running behind competitors and the industry trends
So I think we’re doing a lot and we’re really, I think, getting through the bulk of what we need to get through
It will probably persist into 2018, I’d say, for us to get to sort of an equilibrium point, but I don’t think it’s a structural ongoing theme in terms of incremental margins for us
Yes, I think the 50% to 60% is probably post-2018, based on what I just mentioned in terms of the higher level of investment and we’re probably setting expectations, realistically, that would be in the more 40% to 50% for this year, next year
So that is kind of where we are right now
We haven’t, obviously, fully completed our plan around what we’re doing in 2018, and a lot obviously will depend on where the markets go and where the mix of products go
We’re definitely, I’d say, it’s a good thing that’s very helpful for us is the fee dynamic is working in our favor, with the strength that we’re seeing in the cross-border business, and as Marty said, it just continues through July, very strong flows, that is very helpful
And the fact that the pound is now at 1.31 and strengthening, also is going to be extremely helpful for our yield
So that could actually help our net – my incremental margin discussion
But assuming flat markets and flat FX is what I’m referring to
Yes, we have not provided a lot of transparency into the synergies topic
Again, in terms of the materiality, it’s all going to be within our guidance that we’ll obviously provide for 2018 and beyond
And certainly, some of it is already baked into the estimates that we provided you
It’s mostly a growth topic for us, as we said in the past
There’s definitely some overlaps that will allow for some cost take-out, but the real benefit for this platform is us growing through flows, and as Marty mentioned, it is flowing beautifully, right, very nicely
And so we think we can actually significantly improve flows out of that business
We are looking at a lot of new product launches, so really, the – it’s going to be more of investing behind the business than taking cost out
So that’s why we really have been focused on it
Yes, and the only I would just say is when I was talking about – I wasn’t necessarily referring to large-scale opportunities, because I think we’ve talked about those are hard to do, there’s a lot of risk, there’s a lot of complication
So I think the types of things that are most attractive to us would be things like Source, that are smaller, that we could plug in, gives us a platform or capability that we didn’t have before and that we can grow quickly
So that’s really, I think, in terms of what we would be thinking about more, than large-scale
Yes
So I mean, and Marty, you can pick up on the theme, building our institutional business is something that we’ve been talking about in the past
You know, I think we have been more retail-focused as a firm and for us, in terms of getting to being seen as a premier institutional player, requires a lot of dedicated support and infrastructure, risk and analytics and reporting and a variety of infrastructure that we just didn’t have in the past
That really, [indiscernible] manager, there’s a whole infrastructure around building that out
Thought leadership is another kind of element
So that’s – handful of the people, but very capable and good people, that help drive that cost
Solutions is another area that we talked about and that is, again, a very – an area we’ve been in, but really haven’t built a lot of strong capabilities around, particularly around the technology, and as I mentioned, the analytics for us to be able to sort of go off and really, almost like in a lab, figure out how to solve our clients’ problems through a variety of folks that are a lot smarter than me, PhDs and others, that are thinking about those issues
So that’s really that group and that appeals to both the institutional side, but also the retail side
And then they are very helpful, in terms of thinking about Jemstep as well, in terms of providing models and solutions to the retail clients
ETFs was the other area that you – we mentioned, and that’s more inorganic, and obviously Source, for us, but certainly, the ability to take some of those capabilities and port them over to the U.S
and think about the digital platform and being the best-in-class provider of smart beta and differentiated ETFS is still kind of what we’re trying to do and being – not be a distant fourth but be a strong fourth, at least a bit in that space
And Jemstep, they’re really savvy in digital advice, which I think is going to continue to be a major opportunity and certainly, firms that have it are going to being differentiated from those who don’t
So we need to have a state-of-the-art capability and it’s one that requires a whole different set of skill sets, and so that’s kind of the other big bucket
And the other one I mentioned, which you know, is the regulatory and compliance, which is just never-ending
That’s all, I mean, really, the biggest detractor from that category has been stable value
So that was substantial outflows this quarter
So it’s a very low fee, 10 basis points kind of -ish
So again, when I think about the flows in versus out, our net revenue yield is, by far and away, moving up in that category
So I wouldn’t take too much out of that stable value outflow
ETFs will be almost immediate, right, because we have Source coming online
<UNK>eally, a result of these two dynamics
One, we’re seeing the fee rate improve due to the mix and foreign exchange, so that’s like a 0.5 basis point upward tick, which has been getting flattened out, just purely from the consolidation of the $25 billion, at 16 to 17 basis points of Jemstep – I’m sorry, of Source
So based on what we understand in Europe, which is where this conversation has been most focused and relevant, client reaction has been pretty much absolutely accepting of that perspective
We’re not alone in terms of the global – a lot of the global managers have come out with a very similar statement
So it’s actually been pretty much accepted
Ultimately, I think, when – the real trick will be in terms of the actual disclosures
And when it will ultimately get implemented, we’ll have to see how all that goes
But certainly, in terms of the position, it’s been accepted without much of a, any pushback
In terms of the global side, I don’t know, Marty, if you think that we’re thinking about doing that globally? I don’t think at this point we’re in a position to say what we’re doing in the U.S
different than normal
Penalties, like I mean, that privacy rule, where, if you get it wrong, it’s 2% of total revenues could be your fine, right
Pretty substantial element
So I think it is the regulatory – the number of regulatory changes plus, I think, the amount of resources that regulators are putting behind the asset management business now relative to two years ago has also increased, and so the level of being absolutely on top of it is – the bar has risen across the globe in terms of what is required
Yes, and probably even with some of the rules around MiFID II and the transparency on fees, and whereas there maybe not has been as much, and certainly, the idea of no inducements provided for manufacturers, distributors and how that gets implemented, feels sort of like <UNK>D<UNK> part two
In Europe in some ways, and we know that that’s focused on just pure management fees
It will probably drive more adoption of lower-fee products, still within the hands of European retail clients as opposed to institutional clients who are using ETFs predominantly
When you talk about outside systems, are you talking about
Well, the commission side, again, that’s the part that we’re saying would probably stay in terms of being paid through these <UNK>PA accounts funds and clients paid for, and transparency for research
So that’s the current approach
So that would be largely sort of a continuation of existing P&L and practices other than sort of having those structures in place
So there would be no significant P&L impact to Invesco
Yes, positive
So the net revenue, the flow mix dynamic, given the headline was kind of not great in terms of the net flow number, I was actually really pleased
If you peel that back and you understand what’s flowing in terms of the strong flows coming into cross-border – into alternative opportunities which are certainly at a higher – being very active capabilities
So yes, when we were talking about sort of a 0.5 basis point pickup into next, the last half of the year, that’s all due to the positive trend around the flow dynamic that we’re seeing, even though it didn’t really show up in terms of the headline flow number
The big outflows, as I mentioned, stable value, which was single – 10 basis points, and we had the individual real estate passive outflow, which was a single point kind of – UITs as well, which is something that, I think we all understand that dynamic
It’s something that continues to be a bit of a detractor to the flow story, but not one that I think materially impacts our yield
So overall, I’d say that people should be looking beyond that headline number and focus on what’s going on, in Europe in particular, because that is going to have the biggest impact on our net revenue yield
