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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 expectation about future events and overall operating plans and performance.
These forward-looking statements are made as of today and are not guaranteed. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations.
For a discussion of these risks and uncertainties, please see the risks described in our most recent Form 10-K 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 the question-and-answer session. [Operator Instructions]
This call will last for one hour. To allow more participants to ask questions, only one question and a follow-up can be submitted per participant. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I’d like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer.
Mr. Flanagan, you may begin.
Thank you very much, Operator, and thanks, everybody, for joining us. And as typically what we do, I will hit some of the highlights, Allison will give more details of the results and then we will open up to Q&A.
So I am going to start on slide three, if you happen to be following along with the deck. Solid business momentum continued during the first three months of the year. We did have net term -- long-term inflows of $17.2 billion in the first quarter. This is the seventh consecutive quarter of net long-term inflows and our annualized organic growth rate in the quarter was 6%, despite the market backdrop we are all experiencing.
This is a key outcome of the broadly diversified set of capabilities we go through the past decade and in this volatile market environment, we continue to be extremely focused on our clients and the strength and diversification of our business enabled us to continue anticipating in meeting their evolving needs.
In the first quarter, we continue to see strong demand for our key capability areas in particular ETFs and Fixed Income. We maintain our focus on -- an investment in several key areas including ETFs, fixed income, Factor, Index, Private Markets, Active Global Equity, Greater China and Solutions. These purchase help us generate consistent, strong and broad organic growth rate, and we ended the quarter with $1.6 trillion in assets under management.
Looking at our specific capabilities, our global ETF platform closed out a very strong quarter. ETFs generated net inflows of $19 billion in the first quarter. This includes the flagship QQQ product. We did increase market share in both Egypt assets under management and revenues and Allison is going to spend a few minutes today going more depth into the ETF platform.
We continue to see clients increasing their allocation to alternative strategies as they search for diversification and higher returns and Invesco has build a broad and competitive platform across real estate and private credit to meet these clients demand needs.
We are confident in our ability to accelerate growth in these capabilities in private real estate. Net long-term inflows were $300 million in the first quarter. This comprised of new acquisition activities of $2.1 billion and investment realizations of $1.8 billion.
In our Private Credit business, robust bank loan product demand resulted in net long-term inflows of $3.1 billion, including the launch of two new CLOs. Our Active Fixed Income business remained strong, generating long-term net inflows of $2.5 billion in the first quarter, including $2.2 billion from Greater China.
Our Active Global Equity business, our flagship products including Invesco Developing Markets Fund did see net long-term outflows of $1.5 billion due to the impact of the geopolitical environment that we are experiencing. On the institutional side, our solutions-enabled opportunities accounted for 30% of our institutional pipeline at the end of the quarter.
Within Greater China, our JV had net long-term inflows of $3.2 billion in the quarter and our business in China continues to be a source of strength and diversification and we expect continued strong growth in the year -- years ahead, while recognizing the near-term headwinds in China.
But the momentum in our businesses generated strong cash flows, improving our cash position to the point where there is some share buybacks in the first quarter, buying back $200 million in common shares during the quarter.
Our focus on building a strong balance sheet and improving our financial flexibility put us in a position to take advantage of an economically attractive opportunity to redeem $600 million in debt that matures in November, which will now be redeemed in early May.
Given the strong momentum in growth in our business, the Board has also approved a 10% increase in the quarterly dividend and as we look forward we will determine the magnitude first, excuse me, delivering consistent organic growth, together with our disciplined approach to expense management, which should enable us to generate attractive operating margins over the long-term, while at the same time, allowing us to continue investing in growth and the efficiency of our global business.
Invesco’s position as an investor and client led firm differentiates us in the marketplace, combined with the depth and breadth of our capabilities, our competitive strength we are well positioned to win in a dynamic operating environment. We continue to focus our efforts on delivering positive outcomes for clients, while driving future growth and delivering value over the long-term for our stakeholders.
With that, I will turn it over to Allison. Allison?
Thank you, Marty, and good morning, everyone. I will start with slide four. Our investment performance continue to be solid in the first quarter, with 59% and 68% of actively managed funds in the top half of peers or beating benchmark on a five-year and a 10-year basis. These results reflect continued strength in Fixed Income, Balanced Products and Asian Equities, all areas where we continue to see demand from clients globally.
Moving to slide five, we ended the quarter with $1.6 trillion in AUM, a decrease of $55 billion from December 31st. As Marty noted earlier, our diversified platform generated net long-term inflows in the first quarter of $17.2 billion, representing nearly 6% annualized organic growth.
Active AUM net long-term inflows were $800 million and passive AUM net long-term inflows were $16.4 billion. Despite the inflows, market declines and FX rate changes lead to a decrease in AUM of $85 billion in the quarter.
The retail channel generated net long-term inflows of $10.4 billion in the first quarter, driven by inflows in the global ETF products. The institutional channel demonstrated the breadth of our platform and generated net long-term inflows of $6.8 billion, with diverse mandates both regionally and by capability funding in the period.
Regarding retail net inflows, our ETF capabilities generated net inflows of $19.2 billion. Excluding the QQQ, our net long-term inflows were $18.7 billion. I will provide a little more commentary on our global ETF platform on the next several slides, but before I do, let me take a moment and touch on flows by both geography and asset class on slide six.
You will note that the Americas had net long-term inflows of $7.9 billion in the quarter. While we saw strength in ETFs and our institutional business, we did see pressure from select active equity strategies, including developing markets and the diversified dividend funds.
Asia-Pacific saw net long-term inflows of $5.6 billion, representing organic growth of 11%. Net inflows were diversified across the region and included $3.2 billion of net long-term inflows from Invesco Great Wall, our joint venture in China.
EMEA, excluding the U.K., also delivered a strong quarter of net long-term inflows, totaling $5.9 billion, representing organic growth of 16%. This was driven by strength in ETFs and sales of senior loan products.
From an asset class perspective, we continue to see broad strength in Fixed Income in the first quarter with net long-term inflows of $4.8 billion. Drivers of Fixed Income flows include institutional net flows into various Fixed Income strategies through our China JV, global investment grade, stable value and various Fixed Income ETF strategies.
Our alternative asset class holds many different capabilities and this is reflected in the strong flows we saw in the first quarter. Net long-term inflows and alternatives were $7.6 billion, representing organic growth of 15% and was driven primarily by our Private Credit business. This included two newly launched CLOs and net long-term inflows into our senior loan capabilities.
In addition, we saw net inflows into commodity ETF in both the Americas and EMEA. When excluding global GTR net outflows of $1.6 billion alternative, net long-term inflows were over $9 billion.
Strength of our alternative platform can be seen through the flows that is generated over the past five quarters, with net long-term inflows totaling nearly $27 billion, representing a 12% organic growth rate over this time, when excluding the impact of the GTR net outflows.
Now, moving to slide seven, as Marty noted earlier, given the strong growth in our ETF and other Index capabilities, we wanted to provide a little more detail -- a more detailed view on the business.
With over 15 years of experience managing Indexed assets and a team of seasoned ETF professionals in different strategic regions, Invesco’s Index business has always differentiated itself, due to the innovative and value-added nature of our products.
Examples of this include first-to-market types of products, like the Invesco Senior Loan ETF, distinctive families of ETF, like the low volatility suite, the bullet-share ETFs and our diversified range of commodity pool. We created the fast growing QQQ Innovation Suite just a little over one year ago and it has grown to $5.4 billion at the end of the first quarter.
We managed $528 billion in ETFs and other Index capabilities. The platform is diversified in terms of strategies, asset classes and client geographies. Over the last 12 months, net inflows into ETFs and other Index capabilities were $87 billion, a 21% growth rate. Net inflows into Global ETFs over this period were $66 billion, which is a growth rate of 17% and new fees from these flows were $130 million, a 16% increase over the prior 12 months.
Now turning to slide eight. Over the past five quarters, the ETF industry has seen over $1 trillion of net inflows, a 12% growth rate. Over the same period, Invesco’s 17% growth rate has exceeded that of the industry.
In addition, our market share flows has exceeded our market share of ending AUM for four quarters of the last five quarters, increasing our overall Global ETF market share of 40 basis points over this period to 4.9%.
Moving to slide nine. Invesco is the fourth largest ETF AUM advisor globally. Our platform is much more diverse than just bulk beta. We continue to innovate our product line, focusing on specialized strategies in growth areas, such as smart beta, commodities, Fixed Income and more niche traditional beta. These capabilities carry higher fee rates compared to bulk beta fee rates. On a fee basis, we ranked fourth in the industry with a 5.6% market share of annual fees.
Given the commoditized nature of both beta products, almost 60% of the industry ETF AUM carries a fee rate of less than 10 basis points. In contrast, our ETF capabilities are anchored on strategies that help investors achieve targeted investment goal.
The value add proposition of our ETF business is expressed through sought after products. If you exclude the QQQ, over 90% of our ETF AUM has a fee rate 10 basis points or higher, with the average fee rate being 33 basis points.
Our ETF flows in the first quarter were also differentiated, with over 80% of our ETF net inflows being in products that carry a fee rate of 10 basis points or higher. Looking at net flows in these higher fee products, our market share was nearly 14% of the industry, almost 3 times our market share of ending AUM.
Slide 10 shows that the ETF industry is expected to almost double in size to $18 trillion or 18% annually by 2025. Invesco is well-positioned to continue to gain market share. With our global scale, as well as being a leader in commodities, smart beta, Fixed Income and our focus on innovative and thematic offerings such as the QQQ Innovation Suite and ESG products, we are positioned to capture client demand around the globe.
Our ability to capture flows in excess of our market share is driven by a number of factors, including our understanding of markets and clients, multi-decade ETF relationships in institutional and wealth management channel, a fast growing European ETF product lineup that is now the second fastest growing ETF business in the region and our ability to build loyalty with a new generation of retail investors.
Finally, the brand recognition of the QQQ elevates Invesco’s visibility in the global ETF market. The QQQ products have become the fifth largest ETF globally. Its popularity has spurred growth in the rest of our global ETF platform and laid the groundwork for the launch of adjacent fee generating products as part of the QQQ Innovation Suite. We launched that suite in October 2020 and it has been highly successful, growing to $5.4 billion by the end of the first quarter, as I previously noted.
Now, moving to slide 11, our institutional pipeline, with $29 billion at quarter end, consistent with the prior quarter level. Pipeline remains strong and has been running in the $25 billion to $35 billion range dating back to late 2019. Pipeline also remains relatively consistent to prior quarter levels in terms of fee composition.
Overall, the pipeline is diversified across asset classes and geographies. Our solutions capability enabled 30% of the global institutional pipeline and created wins and customized mandates. This has contributed to meaningful growth across our institutional network.
Turning to slide 12. Market volatility had a significant impact on our first quarter net revenue. This is most evident in the $93 million decline in investment management fees from the fourth quarter, as noted on the slide.
Prior quarters leading up to the first quarter, we have been generating strong year-over-year net revenue growth, growing at a 17% rate in the second half of 2021. This was being driven by both strong markets and organic growth. As the first quarter unfolded, pressure from market volatility negatively impacted net revenues. As a result, our net revenue were essentially flat year-over-year.
We did see improvement in money market fee waivers during the quarter, a short-term rate increased and the fed rates raised 25 basis points in mid-March. The net money market fee waiver impact had been running in the $20 million to $25 million range per quarter. The impact declined to $12 million in the first quarter. We expect the impact will decline to near $5 million in the second quarter and by the third quarter, we expect little to no impact from money market waivers.
Total adjusted operating expenses were up about $10 million or 1% as compared to the first quarter of 2021. $6 million of the increase was due to certain changes to the pricing of transfer agency services that we provided -- that we provide to our funds, which went into effect in the third quarter of last year. The increased impacted property, office and technology expenses, which was offset by corresponding increase in service and distribution revenue.
Taking this into account, adjusted operating expenses were essentially flat year-over-year. Reductions in employee compensation were offset by higher marketing and G&A expenses, partly due to higher reopening activity in these areas, as compared to the first quarter of 2021 when there was no travel. Going forward, the degree of activity in these areas is expected to increase as travel continues to come back.
Moving to slide 13. We are very close to our goal of achieving $200 million in net savings this year. In the first quarter, we realized an additional $6.4 million in cost savings. $3 million of the savings was related to compensation expense and $3 million related to a reduction in property expense as we continue to right size our facilities portfolio.
The $6 million in cost savings of $26 million annualized combined with the $167 million in annualized savings realized through 2021, brings us to $193 million in total or 96% of our $200 million net savings expectation.
In the first quarter, we incurred $22 million of restructuring costs related to this initiative. In total, we recognized approximately $240 million of our estimated $250 million to $275 million in restructuring cost associated with the program.
We expect the remaining restructuring costs for the realization of the program to be up to $35 million. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Now, moving to slide 14, adjusted operating income decreased $8 million from the first quarter of last year to $495 million, driven by the factors I previously noted. Adjusted operating margin was 39.5%, slightly lower than the first quarter of last year. EPS was $0.56 a share versus $0.68 a share last year, with the main driver being lower non-operating income.
In the first quarter of 2021, equity in earnings of unconsolidated affiliates was $37 million, favorably impacted by the improving CLO valuations at that time, as compared to $4 million in the first quarter of 2022.
Other gains and losses declined $30 million from last year to a loss of $20 million in the first quarter of 2022, driven by lower mark-to-market valuations of our seed capital due to negative market performance.
The effective tax rate was 24.2% in the first quarter. We estimate our non-GAAP effective tax rate to be between 24% and 25% for the second quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax item.
Slide 15 illustrates our ability to drive adjusted operating margin expansion against the backdrop of the client demand driven change in our AUM mix and the resulting impact on our net revenue yield.
Our operating margin two years ago in the first quarter of 2020 was 36%. At that time, we reported a net revenue yield ex-performance fees and excluding the QQQ of 41.8 basis points. In the first quarter of 2022, our net revenue yield declined 5.2 basis points to 36.6 basis points, yet our operating margin has improved to 39.5%.
We have been building out our product suite to meet client demand and client demand has been skewed towards lower fee passive products as evidenced by the mix shift between active and passive AUM.
Realizing our business mix is shifting, we continue to be focused on aligning our expense base with these changes. This has enabled the firm to improve and maintain strong operating margin, despite the client demand driven decline in net revenue yields.
Now a few comments on slide 16, our balance sheet cash position was $1.3 billion on March 31st and approximately $708 million of this cash is held for regulatory requirements. The cash position improved from the first quarter of 2021, even as we deployed $200 million in cash to fund share buybacks in the first quarter.
Our leverage ratio, as defined under our credit facility agreement was 0.8 times at the end of the quarter and if you choose to include the preferred stock, the leverage ratio was 2.5 times. There is being substantial improvements in our leverage profile over the past year.
As Marty noted earlier, our stronger balance sheet and financial flexibility put us in position to capitalize on an economically attractive opportunity to early redeem the $600 million of senior notes that have a maturity date of November 30the of this year.
A short-term interest rates increase in the first quarter, the make-whole related to an early redemption of the debt, became attractive enough to provide a financial benefit to redeem the debt early and it will be fully redeemed on May 6th. This will save us approximately $11 million in interest expense over the period beginning in early May through what would have been the November 30th maturity date.
The make-whole and other fees will be approximately $5 million based on current indications, and these will be recognized at the time of redemption. Both the savings and the fees will impact interest expense.
With respect to our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. As we stated, we intend to build towards a 30% to 50% total payout ratio over the next several years.
We completed the previously announced share buybacks of $200 million in the first quarter and our Board approved a 10% increase in our quarterly common dividend. Overall, we believe we are making solid progress in our efforts to improve liquidity and build financial flexibility and our first quarter results demonstrate that progress.
We remain focused on executing the strategy that aligns with our key areas of focus, continuing to invest ahead of client demand in these areas. At the same time, we are focused on optimizing our organizational model and disciplined expense management. This approach has resulted in a stronger and more resilient operating margin.
This has also facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile, putting us in position to capitalize on opportunities such as the early debt redemption. As we look toward the future, Invesco is in a strong position to deliver value over the long run to all of our stakeholders.
And with that, I will ask the Operator to open up the line for Q&A.
[Operator Instructions] The first question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks very much. Good morning, Allison and Marty.
Good morning.
Maybe just to start with the ETF presentation and thanks for all of that detail. Just thinking about that the -- sort of the base fee organic growth potential in the ETF business and how you called out the sort of the higher fee rates and the product development about here sort of a term runway for further product development in this area, whether that’s coming mostly from the innovation side or just add-ons to other products maybe including thematic ETFs and sort of your optimism maybe for this overall ETF fee rate excluding the QQQs to potentially increase over time?
Yeah. I will make a couple of comments. Look, I mean, if you just look at the franchises, Allison, went through, I mean, has evolved enormously over the last -- from when we got into 2006 and it is an absolute source of trend and the fundamental strength really as the non-cap weighted part of the business and product innovation and development is as fundamental to success in ETF business. So, we anticipate that to continue. And -- yeah, and again, I think, the results speak for themselves and we would anticipate that to continue as we go forward. Sound if that’s helpful, Brian.
Yeah. That’s helpful. Sure. There is a lot more to come in the future. And then maybe just on the geopolitical backdrop, what you are seeing, obviously, a lot of cross currents in China, of course, with lockdowns accelerating, and then of course, the whole situation in Europe. Maybe if you could just comment on how you are seeing flow trends evolve into the second quarter now that this is going on longer and within Europe, whether you are seeing a difference in the U.K. versus the continent in terms of sales growth, in terms of whether the geopolitical situation there is affecting one region with versus the other?
Yeah. Look, it’s a great point and it is a contrast, right? But there is definitely a sentiment headwind both in China and in Europe, and I’d say, largely for different reasons, right? It is really the Russia-Ukraine situation, which is quite acute on a comment and at the U.K.
It has, I’d say, the first element was a slowdown and people sort of moving more towards risk off. We will just have to see as we go forward. It is just so hard to predict if it sort of settles into -- still a horrible situation, but you could see some sentiment sort of balance out there.
With China, routes are different. I mean, it is COVID and this is -- they are in the worst situation with COVID since the beginning and that has definitely impacted sentiment and it is impacting flows from really Equity products, Fixed Income products and we continue to be in flows there.
But again, I think it’s an economy that the leadership is very focused on and they want growth, they need growth and anticipate they are going to do what they need to support the growth in China.
And I’d say, picking up on your question do we see a difference in sentiment between the U.K. and Continental Europe, I don’t think I’d point to a difference in sentiment related to the geopolitical issues going on there.
I think if you look, it’s kind of peel back the results in the first quarter, the impact of the outflows on our GTR product are felt most acutely in the U.K., as the majority of that is based in the U.K., some headwind in Continental Europe.
But in terms of sentiment, a little bit of a shift -- a bit of a risk-off sentiment and a shift in the commodities, which is certainly driving some of the strength in our ETF flows in the first quarter, but I wouldn’t point to any major differences between the two areas.
Okay. Great. That’s clear. I will get back in the queue for a couple of follow-ups. Thanks.
Thank you.
Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.
Good morning. Thanks for taking my questions. So I am curious about the -- how should we -- how we should think about fee rate pressure. I know it’s always a tricky one to think about. But maybe something that might help a little bit is to think about it tactically. What did you see in the trends through the quarter and then based upon what we have been seeing so far, I know the markets are really volatile. So not necessarily asking for a forward look, but maybe what was the exit rate and what are the general trends here so far quarter-to-date when we think about drilling up and at least, tactically?
I will do my best, Brennan, to take a stab at that. It is rather difficult as you know. Maybe I will start with just a reminder that the net revenue drivers are always going to be organic growth mix of flows in AUM and market dynamics.
Over the last year, we have also had the impact of money market fee waivers, which as I noted, we expect that to be going away. But trying to unpack that and develop a view around where we see it going over the next quarter or two is very difficult, maybe kind of again separating what are some of the trends we see.
But if we look at, in particular, the decline in our active net revenue yield and we do provide some additional disclosures around active versus passive net revenue yield in the appendix of the presentation this quarter.
I think some of what we see there is just this divergent market beta, where both our emerging markets and China equities have underperformed relative to the developed market indices, and so that’s put real pressure on our active net revenue yield.
We have also seen outflows, particularly in developing markets and some of our other higher fee Active Equity products, while experiencing inflows into Active Fixed Income, which, of course, are going to be on the lower end of the fee range.
Then, you look at the passive net revenue yield and some of the declines there and that’s really a more, I’d say, recent impact of some of the really sizable low fee large institutional Index mandates that we put into the AUM mix last year, think IOOF, as well as some of the growth of our ETFs in EMEA and the Innovation Suite, which while the Innovation Suite is fee generating, it will be on the slightly lower end of our passive fee rate.
So those are some of the trends that we are experiencing. I think the biggest issue looking forward will absolutely be market dynamics, as I think about, what we could expect in the second quarter and third quarter.
And I’d add to it, Brennan, it’s the right question to ask and you continue to be focused on it and we as a team, too. But you have to ask the question hand-in-hand with profitability and I think what we have demonstrated is that, we have been continuing to drive profitability with this movement in Phoenix and internally, and Allison talked about it, we continue to make sure our resources are aligned are right sized against where we are seeing the profitability within the organization, and again, I think, that said, that look back from 2020 forward, I think, demonstrates that we have been able to do that and we intend to continue to do that, too.
Okay. Thanks for that. And Marty, it’s a great segue and it kind of tees up the next question, which is the environment has been challenging volatile, certainly seems like there is less risk appetite here, at least in the near-term. So, how are you guys thinking about the expense base here this year? Compensation trend seemed a little bit better than, certainly, we had been expecting, is that better than expected comp sustainable in the near-term? How should we be thinking about truing up our outlook for expenses and how are you guys thinking about managing it, given the environment?
Yeah.
Sure.
I will make a couple of comments and give to Allison. Look, I think, you are hitting out on the high points. The first thing you have to do to be successful is you can cost cut yourself to success. We have been very focused on it over the last few years, as Allison has spoken, too.
But really, we are in a position where driving the resources against things that really matter for the future. That’s what we have been doing and also in this environment of what matters of clients and employees, ensuring that we are keeping that right balance where clients continue to have confidence in us as an organization, and quite frankly, the talent in the organization to keep some energized against generating the results.
And so, that is something that we continue to be very focused on and we will continue to do it. But ensuring that we are being responsible and I will stop and have, Allison, pick up on that and make some comments.
Yeah. Thanks, Marty. So, a couple of things. One, just a reminder, our expense base is about a third variable and two-thirds fixed. So when we think about that variable component of the expense base, it just can’t react fast enough when you have a pretty strong market downdraft, like what we experienced late February and through March, and of course, we continue to experience that as we make our way through April.
So it takes some time for that variablized expense base to fully catch up to the lower revenue. And at the same time, two-thirds of our expense base is fixed, and I think, that’s an area where we have been spending a lot of time.
As you know, the last couple of years, really thinking about our overall cost structure and making some choices as we think about how to continue to shift that and lighten up some of the cost structure and we have made really good progress we believe, where the $193 million of that expense base really well addressed over these last couple of years.
Getting back to your observations on comp. Comp is well managed, because we have been just really thoughtful and disciplined around headcount over the last year or so. And so while there is seasonality in our compensation expense in the first quarter and it does tend around $20 million, $25 million higher than the fourth quarter, comp was pretty well managed against that as we look at headcount, and of course, the variable part of our compensation expense reflects the lower revenue we experienced in the first quarter as well.
As I think about the rest of our expense base, you see where we have continued to make some progress on our facilities expense. We will continue to address our facilities portfolio overall, as we just think about our footprint and the role the office plays in our future and take advantage of some opportunities there.
But the other thing I’d point to, as we have been experiencing, that’s very low to no travel environment for some time now, and as I think about our expense base going into the second quarter and beyond, I do expect we will continue to see some pickup in activity.
We saw some pickup in the fourth quarter and the first quarter. We get the start-stop as we all understand from kind of country-to-country and region-to-region. We still remain completely closed in China, as an example, but we are seeing travel really start to pick back up and clients wanting to see us again across North America and Europe.
And so, with that, I expect a little bit of pickup in activity. I do not expect us to get back to pre-COVID levels for a variety of reasons, but I do expect it to be -- to trend just a little bit higher from here.
Long way of saying, while we do think there will continue to be this market pressure and revenue pressure, we will be thoughtful and selective in managing our expense base, but not major reactive, because it’s really important that we continue to invest for the business that we expect will be here a year from now, despite from the geopolitical tension we experience right this on.
Yeah. Thanks for that. Very, very thorough response. Just one clarifying question, Allison. You made reference to reviewing the facilities footprint. Do you have any expected timeframe for when you all might have an idea about what that review will suggest for changes?
I’d say it’s ongoing, because leases are -- they are rolling and so as we have the opportunity to make decisions, we have being thoughtful and selective, just given that we work in a different environment than we would have a few years ago.
So, that’s going to be an ongoing opportunity and I point just beyond our facilities portfolio to a lot of components of our expense base as opportunities arise to address that and we are going to be very thoughtful about where we continue to invest and where we may be able to free that up to invest somewhere else.
Thanks for all the color.
Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is open.
Thank you. I am curious, we have seen different markets. I am just curious on the higher rates and the impact on flows. You have obviously mentioned and benefited from the floating rate in bank loan product. You also mentioned some flows into some Index product salespeople derisk. Can you give us the full lay of the land on where the pluses and minuses are coming impacted in the higher rates and what to expect as the fed does its thing because I think it’s always a little more on the positive side than people expect that if you take rates for impact of big outflows and there is some different moving parts? Thanks.
I will make a couple of comments, and Allison will also. So, Glenn, you are hitting on really the topic. I mean, so where we have seen flows. Allison sit in the high marketing our Fixed Income, short duration bank loans.
We have a very strong commodity suite within the ETF business. We have had that for a very long time and it’s really just, in this market has become quite popular, as you would imagine, real assets is another one, direct real estate, it will continue to be an opportunity for us.
Quite frankly, we are seeing marked improvement in our value equity capabilities and that’s sort of in an asset class over the last decade. There’s not been a lot of interest. We will have to see what the client demand is for that, but strong investment performance coming on the back of it.
So, again, what we are going to -- it’s really the breadth of this product line up that is sort of one answer to the marketplace and I think we are well suited for the environment that we are going to go into it.
And the only thing I’d add to that is just, not surprisingly, investors are going to be looking for more floating rate credit sensitive assets and that’s really what you see driving the strength than our senior loan flows and where we would continue to see demand. And I think it’s, again, the breadth of the capabilities we have there, well positioned to capture that demand.
Thank you. And maybe just a follow-up on -- related to MassMutual, obviously, an even bigger owner now, can you remind us what you are managing for the general account, what kind of flows you are getting out of retail and what the future holds in terms of the future synergies between the two organizations? Thanks.
Sure. I will take that. So in terms of what we are managing for them. We manage about $5 billion on the broker dealer platform. They have also committed over $1 billion to various Invesco alternative strategies. So the relationship is, I would say, mutually beneficial and have the opportunity to continue to grow and expand from here.
As you know, they are a larger owner. They continue to be very bullish on the overall profile of Invesco and our opportunity to continue to grow market share and position our product capabilities to capture the demand that’s out there.
So we are working with them really on both sides of the ledger, as we think about the opportunity we have to manage more on their broker dealer platform and also the opportunity that we have together to co-invest in various alternative capabilities and strategies. You want to add anything to that Marty, okay?
Again, it’s a very strong relationship strategically and we are both looking for ways that we continue to mutually benefit from the relationship as we go forward.
Thank you for all that.
Thank you. Our next question comes from Robert Lee with KBW. Your line is open.
Great. Good morning. Thanks for taking my questions. Maybe a question on the Great Wall JV, so just wanted to see, when you think about the economic impact of it. Obviously it’s been a strong source of about flows, the last couple of years even if it’s slowing down right in the moment. But what’s the right way to think of the economic contribution? I believe most of non-controlling interest is from the Great Wall JV or so we are trying to think of its impact is it as simple as just adjusting that for your 49% share or is there a different way that we should be thinking of it?
Yeah. Let me start with, when you look at our non-GAAP results, we look at that in terms of revenue you see 100% and then below the line we back out the 51%, we don’t know. So we can spend some time walking through that making sure that’s clear. But that’s how it’s reflected in the P&L. So you see 100% on the topline, but by the time you get to the bottomline, we reflect 49% of our ownership.
Okay. And maybe…
Is that answer your question, Rob.
Well, yeah, I guess, if I think of the 20 -- I guess my understanding was that not been $29 million of non-controlling interest was mainly the 51% that flows was mainly the Great Wall JV, right, so that be that 51%?
That’s correct.
Yeah. Okay. Great. And then…
That’s correct. So as -- yeah -- go ahead. Sorry.
No. No. That -- well, please to make sure your comment, sorry.
No. There is nothing else to add. Sorry, go ahead, Rob.
Okay. Just back and forth, but sticking with the Great Wall JV and I know this has come up in the past and I know for a while you have been looking at how do you get a majority stake and can you update us on that and more specifically, given that understanding of operational control of the JV and you run it day-to-day, year-to-year, but can you maybe update is what kind of maybe safeguards you feel like you have, you haven’t been able to get to the majority ownership still a minority ownership, even though operational control other safeguards, we should be thinking of that kind of help protect your position in that joint venture?
Yeah. Let me make a couple comments and that look you are hitting on the most important part and from the beginning we have had management control and that’s really why we have been successful and that has really been the competitive differentiator with us versus many of our competitors in the market.
The reason for not getting to majority this in and out on COVID, it’s just not helpful, right? It’s just a lockdown and every time that we start to get too. It really was geopolitical elements, I’d say probably two years ago and it’s really been more of that COVID lockdown right now and until that comes down.
I might been -- we are not going to get -- we are probably not going to get it done for a few quarters, we will just have to see how that goes. The desire is there on both parties, the pathway is something that we know what we want to accomplish and we will, in time, but I would not be worried about the risks associated with relationship. It is very strong and very well laid out for us as an owner.
Hey. Great. Thanks for taking my questions.
Thanks, Rob.
Thank you. Our next question comes from Bill Katz with Citigroup. Your line is open.
Okay. Thank you very much. Thanks for taking the questions. Good morning, everybody. So, maybe to start with the balance sheet a little bit. Appreciate the update on the debt for May. And as you think about into the second half of the year, could you talk a little bit about what your priorities might be, how much sort of residual cash you are willing to run with on the balance sheet between sort of the excess cash and required cash and then maybe the delta between incremental debt repurchase versus share repurchase, just given where the stock is trading? Thank you.
Sure. So, I’d say, in terms of priorities, just overall, our capital priorities are consistent in just, first and foremost, reinvesting in the business to support future growth. We continue to prioritize that and will and you have seen that and I think that’s what’s put us in a good position to capture the flows we did in the first quarter despite a really challenging environment. Next is to maintain a strong balance sheet and then return excess cash to shareholders.
So I actually think we check each one of those boxes nicely in the first quarter as we had the opportunity to further strengthen the balance sheet and return cash to shareholders through the dividend increase and share repurchases.
As I think about moving forward, when we get on the other side of redeeming the debt, and I will point to the fact that we will be using a combination of cash, and perhaps, some draw on the revolver to early redeem that $600 million and so it does -- we have been building cash in anticipation of paying that debt off at the end of this year.
We pulled it forward by six months and it’s a bit of a challenging environment as well in terms of just cash flow generation being slightly weaker than we would have expected or hoped for in 2022, just given the market pressure dynamics that we are experiencing through revenue.
So, against that, I think, we will continue to be focused on building cash, so that we can be in an opportunistic position to reinvest in the business and to think about continued progress on the balance sheet. Our next debt maturity won’t be until 2024. So we have got some time in advance of that next $600 million maturity. I think I missed the last part of your question. I think you asked something about share repurchases?
Well, I am just trying to understand, like, as you think about in the second half of the year and you pay down debt and hopefully all should stabilize. But how much residual cash you will put on the balance sheet and then when you sort of look at the stock trading sub-20 versus your next debt payment not coming due until 2024? How to think about just sort of buyback versus further husbanding of capital?
Sure. I think, in general, we would love to see cash be somewhere around, and I mean, in generality tier, $1.5 billion or so. That just puts us in a nice comfortable position beyond our regulatory requirement to have cash for opportunistic needs and also whether any downturns.
And I do think, as we think about this year, we are cautious not knowing what the environment might hold from this point forward. We are watching closely and we are going to be -- we are going to air on the side of conservativity as we think about the impact the market might have on our overall revenue dynamics and cash position. So I don’t know if we are husbanding cash so much as being very thoughtful and prudent as we think about our balance sheet and keeping our balance sheet in a very strong position.
We are operating in a different environment than we were two years ago. When I think about the first quarter of 2020 and how much pressure that put on our balance sheet and on our profile overall, we are in a much, much stronger position two years later because of the work that we have done and because of our prudent approach to the balance sheet and this would not be the time to back off that strategy.
Understood. Just as a follow-up and apologize a bit of a two-part unrelated question. Just I might have missed your commentary, Allison, just on the sequential decline in the Equity earnings line. And then the bigger picture question, just as we look at the alts bucket, can you talk a little bit about what you have coming in terms of opportunity for growth into maybe second half of this year in flagship funds or just general new product initiations? And then could you sort of clarify how much you are sort of getting tapping into retail democratization, I thought I heard $300 million, just wanted to see if I heard something different? Thank you.
Let me take the first one. Just in terms of equity and earnings, if you think about first quarter of 2021, there was a gain of about $36.7 million. That’s because of the CLO marks at the time. So you had just CLO mark to market moving in a pretty strong upward direction in the first quarter of 2021 and compare that to this quarter, which was about $4 million. So, just modest gains there, but again, this is all just mark to market unrealized gains and losses. So, that’s the difference year-over-year.
As it relates to alternatives and opportunities going forward, I will continue to point to our private markets capabilities and what we have -- for the last couple of quarters talking about both in terms of real estate and our senior loan capabilities.
You are certainly seeing both of them be in demand right now, particularly the senior loan capabilities as we noted, just given the investor move towards short-term floating rate credit-sensitive assets that provides a really significant opportunity for growth in that asset class for the balance of the year, but also our private real estate business does, as well as we continue to grow our capabilities there. Marty, do you want to add anything there?
No. Rightly said.
Okay.
Got it.
Thank you, all.
Thanks, Bill.
Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.
Hi. Good morning. Thanks for taking my question. Different parts of the real estate market have bounced back. Others are still struggling. So, I guess, how are Invesco’s direct real estate portfolio? How is it positioned and performing here and it does look like that both Invesco Asia and Invesco U.S. Direct Fund have been in market more recently. So how is fundraising going in those products, if they haven’t yet ramped up? And I guess maybe lastly here, the outlook for real estate transaction fees. I think you called it out in the quarter as being, I think, $10 million or $11 million in the quarter, are we back to normal for those transaction fees, and if so, what does normal look like from here versus the depressed level that we saw more recently? Thanks.
All right. Let me try to take that maybe in reverse order. On the transaction fee, I think, you are pointing to that $10 million transaction fee that we noted as in other revenue and that’s really a property disposition fee within private real estate.
And so net inflows were about $300 million in real estate, but there’s, obviously, transaction activity behind that and was pretty broad across the platform. I think we commented on the acquisition activity it was about $2.1 billion in the quarter, but the realization, which is what can trigger the property disposition fees was about $1.8 billion in the quarter.
And so, yeah, from time-to-time, you are going to trigger some of those property disposition fees. I don’t know if we could point to normal, because it’s going to be somewhat episodic and nature, depending on the nature of those dispositions.
And then, I think, I will add on to that, it’s important just to remember that a large percentage of that AUM through realization doesn’t actually leave Invesco. It’s really redeployed into new properties. And so I don’t know if I’d point to that as normal or something we should expect quarter-to-quarter.
As I think about just, again, coming back then to the part of your question around our real estate portfolio, it’s pretty well-positioned and well-diversified across the different real estate classes, multifamily, office, industrial, retail.
We have obviously been quite thoughtful over the last few years, given some of the various pressures on some of those categories. It’s also well diversified across regions. It is a global business.
And so, our strategy is not to be too concentrated at any one particular area or asset class and I think they are -- we feel like they are pretty strong growth profile, growth dynamics for that one going forward.
Okay. Great. Thank you very much.
Thanks, Ken.
Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks. Good morning. So I wanted to follow up. I appreciate the comments on the balance sheet and flexibility in the capital and priorities. I guess the one area that hasn’t been discussed is just M&A and so curious about your appetite for potential M&A in this type of backdrop alternatives or private market capabilities expanding that certain areas of focus or if it’s in terms of priorities, this is just further down the spectrum and not really something you are focused on at this point?
It’s a good question and I would really point to, right now, as Allison has been talking about just on this call, really private markets is a very important area for us and we have two fundamental strengths that we have been talking about and our head is focused on growing those organically right now.
But if there was an opportunity in the alternative space that complemented our current portfolio, we would surely be very open minded to it. That would be the priority as we thought about M&A. But it’s -- we are not waiting to continue to build that business, we are continuing to invest in it.
Got it. And then a follow-up on just the institutional pipeline, I am curious just the solutions business, if you could talk about the kind of client profile that you are typically having success with and expand upon that? We know some of the larger mandates last year, but kind of on the ongoing business? And then within active equities, which also is a little bit larger slice of the pie. Can you talk about what strategies are driving, or whether demand is on that front from the institutional pipeline that you guys disclose?
Yeah. Let me talk about solutions. So it’s -- the client practice is very, very broad. It’s from corner office wealth management teams in the United States using the solutions capability to large sovereign wealth funds around the world.
So it really serves all different types of clients in doing various different services for them. But as we said, it’s been fundamental to our success institutionally and very supportive of our wealth management business also.
And I think, Dan, maybe coming to the other part of your question there, part of what we are seeing in terms of the growth and active equities in the pipeline would be driven by China and some of the institutional mandates that we are seeing through our JV there.
I would point to, I mean, you note the pickup and just the overall component of active equity, not surprisingly. As a result, I’d say, the average fee rate of the one non-funded pipeline, well, it continues to be within a range of high 20s, low 30s. It’s on the high end of that range as you would expect and our alternatives mandates continue to grow there as well.
So the pipeline is shaping up quite nicely. It’s certainly a leading indicator, we believe, of future AUM growth and we are pleased with how that’s shaping up. The pull-through this quarter was a little bit lower than usual, somewhat in the normal range, but lower as we just saw some pushing of those mandates out, given some of the geopolitical risks and a little bit of a pause on that, but the pipeline itself is shaping up quite nicely.
Great. Thank you.
Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.
Hey. Good morning, guys. Just one on the ETF disclosure, the fee premium, obviously, that you highlight in the deck is a great position to be in. But I think there’s a question if that doesn’t just mean that those funds are lagging the broader ETF industry in terms of seeing more compression. So, first, to what extent are you seeing pressure from competitors on those higher fee products in the ETF side, and second, what gives you confidence for those higher fee rates are defensible in the long run through the lens of what we have seen with other ETFs, more passive like ETFs?
Yeah. It -- so, look, where the fee pressure really comes in bulk beta, right? Where there’s any number of competitors and it’s easy to get into. Obviously, it’s dominated by a few. There’s just been less of that across the industry once you leave that and it’s largely, because there aren’t many dupilcative ETFs and they are generating the returns and the results that clients want, and I would say, as long as clients are feeling they are getting value for the ETFs, the fees will stay in place.
And in the bulk beta side, there’s just very little -- there are very few ways to compete other than through fees and in the states in which we operate, there is the opportunity to differentiate. And so, I don’t know that we would say the fee pressure is lagging, because you really can’t create a differentiated product offering there.
Thanks.
Next question comes from Michael Cyprys with Morgan Stanley.
Hey. Good morning and thanks for squeezing me in. Just maybe coming back to expenses, I think, Allison, you mentioned the expense base as one-third variable, two-thirds fixed. I guess, where would you like to see that over time and what’s the opportunity to shift more of the expense base to variable and what actions might be -- might you be able to take?
I would always love to see it go more towards variable and if we had that opportunity, we will push everything we can. But it’s not totally realistic. So, I think, the opportunity we have is just really longer term and it’s broader based.
As we think about the fact that our business continues to shift and you see that through everything we have discussed this morning and the real demand for our passive capabilities, it’s creating a fundamental shift and just the revenue dynamics of our business, aand against that, we have got to be very thoughtful about positioning the chassis of our expense base.
And so some elements of that are going to be fixed, but we have got to address even the fixed components to really reflect where demand is today and where we expect it’s going to continue to be three years, four years, five years from now and where we have the opportunity to variabilize the expense base, we will.
Compensation is a pretty highly variable component of our expense base. We are a people driven business and we will continue to be a people driven business. And so, that gives us opportunity, but we are thoughtful about how we use that opportunity as well.
So it’s hard to say exactly where else we can go, but I think the biggest thing we can do is continue to address some of our fixed costs. I will point back to the property portfolio as an example of that as we think about facilities and the opportunity we have to take some fixed cost out. That’s how we are thinking about really adjusting the operating expense base going forward.
And just given some of the changes that you have made to the expense base already, I guess, what would you expect the pace of expense growth to be over the next few years assuming flat markets?
That’s hard to say, of course, given the inflationary environment we are operating in. I think in a lot of ways inflation doesn’t hit us in quite the same way it hits other industries. But I am not sure we felt it entirely yet either.
I will point to travel as an example of that. I think the inflationary pressure on travel is going to find its way back into our expense base and that of others. I just don’t know how long that environment might persist or whether or not it resets to some new level that we have to contend with.
I think we can manage our expense base reasonably well, again putting aside market, and the real unknown is just the overall macroeconomic environment and the inflationary impact on the expense base. I think that’s the bigger, probably, pressure, I am not going to call it risk, but upward pressure on our expense base as we think about just managing our business going forward.
Great. Thank you.
Okay. Well, thank you very much. I appreciate the engagement in the discussion and have a good rest of the day. Much appreciated.
Thank you. That concludes today’s conference. You may all disconnect at this time.