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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 reflects 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 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 statements. 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 Third Quarter Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.
Thank you, Operator, appreciate it very much. And thanks everybody for joining us. And I'll make a few comments and turn over Allison so she can review the quarter in more depth and then we'll open up the Q&A as we always do. Hoping everybody's staying safe and healthy as we continue to return to normalcy and I know we're all looking for that pace to continue in the months ahead.
We continue to have a high-level of engagement with our clients, which is even more important as we navigate the market uncertainty brought about by the end of economic and market upside surprises we experienced from the depth of COVID; helping our clients by providing insights and solutions, utilizing our broad range of capabilities. This approach has helped us deliver strong consistent growth over the past five quarters.
And as you can see on Slide 3 if you're following along on the deck, net long term flows were $13.3 billion during the quarter. This represents over 4% annualized long term organic growth for the quarter. Growth was driven by continued strength in a number of our key capabilities, including ETFs, fixed income, China solutions, alternative global equities. Strategically, we continue to invest in areas where we see client demand we're at competitive strength. And since the third quarter of last year, we've generated $86 billion of long term inflows, an average quarterly organic growth rate of 6%, five consecutive quarters of strong growth, the direct result of the investments we've made over time to enhance and evolve our business to meet client needs.
ETFs excluding the QQQs generated long term inflows of $3.7 billion in the quarter with strong market share gains in our EMEA ETF range. In private markets, we generated net long term inflows in our direct real estate business of $1.2 billion and robust bank loan product demand resulted in net long term inflows of $2 billion during the quarter. This included a launch of a new CLO.
We generated net long term inflows of $11 billion with an active fixed income across the platform and within active global equities, the developing markets fund, a key capability that came over when we combined with Oppenheimer, continue to see net long term inflows of $700 million during the quarter. That said, we remain focused and continue to work on areas where there's opportunity for improvement.
In addition, our solutions enabled institutional pipeline accounts for 38% of the pipeline at quarter end. Their quarter flows included net long term inflows of $6.8 billion from greater China. Our China business continues to be a source of strength and differentiation for Invesco. We continue to expect the Chinese investment management industry to be the fastest growing market in the world for the foreseeable future. We are an early entrant 20 years ago and we are benefiting from that commitment and investment and we expect to see continued growth in the years ahead.
Before I turn the call over Allison who will provide more information on the China business and the results, I'd like to note that the growth we're experiencing is driving positive operating leverage, producing adjusted operating margin of 42% for the quarter. The strong cash flow being generated from our business improve our cash position and helping build a stronger balance sheet and improving our financial flexibility for the future. Invesco's depth and breadth of capabilities and competitive strengths position us well as we look forward. We continue to focus our efforts on delivering positive outcomes for our clients while driving future growth.
And with that, let me turn it over to Allison.
Thank you, Marty. Good morning, everyone. Moving to Slide 4. Our investment performance was strong in the third quarter with 72% and 74% of actively managed funds in the top half of peers were beating benchmark on a 5-year and a 10-year basis. This reflected continued strength in fixed income, global equities, including emerging market equities and Asian equities, all areas where we continue to see demand from clients slowly [ph].
Moving to Slide 5. We ended the quarter with $1.529 trillion in AUM, a net increase of $3.6 billion. As Marty noted earlier, our diversified platform generated net long term inflows in the third quarter of $13.3 billion, representing a 4.4% annualized organic growth rate. Active AUM net long term inflows were $6.8 billion and passive AUM net long term flows [ph] for $6.5 billion.
Market declines and FX rate changes lead to a decrease in AUM of $18.6 billion in the quarter. The retail channel generated net long term inflows of $1.8 billion driven by positive ETF flows and inflows in greater China. Institutional channel demonstrated the breadth of our platform and generated net long term inflows of $11.5 billion in the quarter with diverse mandates both regionally and by capability funding in the period.
Regarding retail net inflows, our ETF excluding the QQQ generated net long term inflows of $3.7 billion. Year-to-date, we have captured global ETF market share. Our global ETF platform, again excluding the QQQ captured at 3.8% market share flows, which exceeded our 2.7% market share of AUM. We have also captured a higher share of the global ETF revenue pool over this period. Our market share of the revenue pool was 5.6%.
Net ETF inflows in the United States does include net long term inflows of $900 million into our QQQ Innovation Suite which crossed $3 billion in AUM, one year after its launch. Our EMEA-based ETF range generated $2.5 billion of net long term inflows in the quarter with particular strength from the IVC's [ph] S&P 500 UCITS ETF and the Gold Exchange traded commodity fund.
Looking at flows by geography on Slide 6, you'll note that the Americas had net long term inflows of $4.8 billion in the quarter, driven by net inflows into ETFs as mentioned, as well as our institutional flows. Asia Pacific again delivered another strong quarter with net long term inflows of $9.3 billion. Net inflows were diversified across the region, reflecting $6.8 billion of net long term inflows from greater China, most of which arose in our JV and $3.1 billion from Japan.
Turning to flows across asset classes. We continue to see broad strength in fixed income in the third quarter with net long term flows of $11 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 municipal strategies.
Our alternative asset class holds many different capabilities and this is reflected in the flows that we saw in the third quarter. Net long term flows and alternatives were $2.3 billion, driven primarily by our private markets business, through a combination of inflows from direct real estate, the newly launched CLO that Marty mentioned, and senior loan capabilities. When excluding global GTR net outflows of $1.7 billion, alternative net long term inflows were $4 billion.
The strength of our alternative platform can be seen through the flows it has generated over the past five quarters with net long term flows totaling $12 billion and organic growth rates averaging nearly 6% per quarter over this time when excluding the impact of the GTR net outflows over this period.
Turning to Slide 7, I wanted to spend a few minutes on our business in China, particularly given the level of flows we have seen from the region over the last several quarters and the high-level of interest in our business there. Invesco launched the first Sino-U.S. JV in China in 2003 as Invesco Great Wall. We've been in the market for almost two decades with a unique JV structure and relationship with our partner. How we operate in China is differentiated from others that have joint ventures.
While we have 49% ownership of the JV, our partner is a Chinese government-backed power company and has been a good partner. We've been leading the management of the JV, leveraging our global asset management expertise since the inception of this partnership. We run the business in China with Chinese management and our clients are Chinese investors. China's fund management industry is a very significant opportunity.
In 20 years it has grown from almost nothing to around $3.5 trillion. It's expected to become the second largest fund management market in the world by 2025, with assets of over $6 trillion. Also, China is estimated to account for over 40% of global net flows through 2024. Invesco as an early entrant in China have developed a strong and comprehensive platform covering all business activities, including robust domestic investment capabilities with good long term performance track records. We have very strong relationships with banks and insurance companies and digital distribution has been a major contributor in recent years in terms of bringing in new onshore business.
Key opportunities for Invesco in China include mutual funds, institutional clients and sovereign wealth funds. As China continues to open up and improve its capital markets, we also expect opportunities in pension reform, global investors increasing interest in investing in Chinese investments and cross border investment opportunities. The relationships, the unique business model we established with our JV partner and the amount of AUM we have sourced from Chinese onshore investors really sets us apart from other global asset managers who are newer entrants in the Chinese market.
Moving to Slide 8, we have built a diversified business in China with over $99 billion in AUM at the end of September. 60% of the AUM is from retail clients and 40% is institutional. We manage AUM in all asset classes and distribution is unique. Digital distribution to retail investors have become a mainstream channel along with the traditional bank distribution channels and this is not just for money market funds.
With our market position and tenure in China, we are beneficiaries of this trend. Our long term commitment and strong track record have put Invesco in an advantageous position and our strategic position and continued investment in China has resulted in a 42% annual growth rate over the last three years to-date. In recognition of the strength of business, Invesco was ranked the number one China onshore business and the number three for an asset management firm in overall China in 2020.
Before we wrap up this discussion on China, in light of the recent developments around Evergrande, I want to note that our overall exposure of the direct equity or fixed income holding across the complex, including within our JV is de minimis. Market volatility and offshore markets, of course doesn't impact AUM levels and the market has been and could be volatile for future real estate developments. We remain positive towards the fundamentals of China's economy and most of the flows in our China business come from domestic onshore clients. So if anything, we've seen a flight to quality as investors look to NAV-based products like the ones IGW offers.
And moving to Slide 9 to look at the institutional pipeline, which was $32 billion at the end of September. The pipeline remains relatively consistent to prior quarter levels in terms of both asset and fee composition. Overall, the pipeline is well-diversified across asset classes and geographies. Our solutions capability enabled 38% of the global institutional pipeline and creative wins and customized mandate. This has contributed to meaningful growth across our institutional network.
Turning to Slide 10, you'll note that net revenues increased $31 million, or 2.3% from the second quarter as a result of higher average AUM in the third quarter. The net revenue yield excluding performance fees was 34.4 basis points, a decrease of four-tenths of a basis point from the second quarter yield level. The decrease was mainly driven by asset mix shift, including higher QQQ and money market average balances. The incremental impact from higher discretionary money market fee waivers was minimal relative to the second quarter and the full impact on the net revenue yield for the third quarter was six-tenths of a basis point.
Looking forward, we expect the dynamics impacting net revenue yield will continue. The degree of which will be influenced by market direction, especially if we see a divergence and performance in areas such as developing or emerging markets where fees tend to be higher than our firm average. We do expect the discretionary money market fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels.
One other area I want to note before moving to expenses are performance fees. Historically, we have realized meaningfully higher performance fees in the fourth quarter. These have been driven typically by a few funds each year that have reached the point in their lifecycle where they generate performance fees usually in the fourth quarter. This year, we do not expect to see performance fees increase in the fourth quarter. We expect performance fees in the quarter will be more in-line with our experience across the first three quarters of the year. This is due to vintages and our portfolio not being at the lifecycle stage of recognizing performance fees, which is typically near the end of the life of the fund and is in no way related to the performance of the funds.
Total adjusted operating expenses increased 1.2% in the third quarter. The $10 million increase in operating expenses was mainly driven by variable compensation and property office and technology expense. Higher variable compensation was driven by the revenue increase in the quarter, partially offset by savings resulting from our strategic evaluation.
The increase in property office and technology expenses was largely driven by changes to the pricing of transfer agency services that we provide to our funds as we noted last quarter. This change went into effect in the third quarter and resulted in a $6 million expense increase, which was offset by a corresponding increase in service and distribution revenues.
As a reminder, we anticipate that our outsourced administration costs which we reflect in property office and technology expense will increase by approximately $25 million on an annual basis, or approximately $6 million per quarter, and offsetting this will be a corresponding increase in service and distribution revenues resulting in a minimal impact to operating income.
Operating expenses remained at lower-than-historic activity levels due to pandemic, driven impact to discretionary spending, travel and other business operations. However, we did see a modest increase in client activity and business travel in the third quarter, which is reflected in both marketing and G&A expense.
As we look ahead to the fourth quarter, our expectations are for fourth quarter operating expenses to be relatively flat compared to the third quarter, assuming no change in markets and FX levels from September 30. Consistent with prior years, we expect a modest seasonal increase in marketing related expenses in the fourth quarter. And one area that's still more difficult to forecast at this point is when COVID-impacted travel and entertainment expense levels will begin to normalize. We are engaging in more domestic travel and in-person client activities and we do expect to see continued modest resumption of these activities in the fourth quarter.
Moving to Slide 11, we update you on the progress we have made with our strategic evaluation. In the third quarter, we realized $5.8 million in cost savings. $4 million of these savings was related to compensation expense associated with reorganizations and $2 million was related to property expense. A $5.8 million in cost savings or $23 million annualized combined with $125 million in annualized savings realized for the second quarter and 2021 brings us to $148 million in total, or 74% of our $200 million net savings expectation.
As it relates to timing, we expect to modestly exceed the $150 million target we had set for 2021, with the remainder realized by the end of 2022. We expect a total program savings of $200 million through 2022 would be roughly 65% from compensation and 35% spread across the other categories. In the third quarter we incurred $18 million of restructuring costs.
In total, we recognized nearly $190 million of our estimated $250 million to $275 million in restructuring costs that were associated with the program. We expect the remaining restructuring costs for the realization of this program to be in the range of $60 million to $85 million through the end of next year. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Going to Slide 12. Adjusted operating income improved [ph] $21 million to $562 million for the quarter, driven by the factors we just reviewed. Adjusted operating margin improved 60 basis points to 42.1% as compared to the second quarter. Most importantly, our degree of positive operating leverage reflected in our non-GAAP results was 1.7x for the quarter, underscoring our focus on driving scale and profitability across our diversified platform.
Non-operating income was $29 million, driven primarily by unrealized gains in our co-investment portfolios. Effective tax rate for the third quarter was 24.4% compared to 22.8% in the second quarter. The rate increase is primarily due to an increase in the reserved for uncertain tax positions. We estimate our non-GAAP effective tax rate to be between 23% and 24% for the fourth quarter. The actual effective tax rate may vary from this estimate due to the impact of non-recurring items on pretax income and discrete tax items.
Looking at Slide 13, we illustrate our ability to drive adjusted operating margin performance against the backdrop of the client demand driven change in our AUM mix and the resulting impact on our net revenue yield excluding performance fees. Our operating margin in the third quarter of 2019, which was the first full quarter following the acquisition of Oppenheimer was 40.9%. At that time, we reported a net revenue yield of 40.7 basis points.
In the third quarter of 2021, our net revenue yield had declined over 6 basis points to 34.4 basis points. Yet, our operating margin has improved to 42.1%. This chart starts at the third quarter of 2019, but in fact, our third quarter 2021 operating margin is the highest since Invesco became a U.S. listed company in 2007. This is against the backdrop of a mixed driven decline in net revenue yield. We've been building out our product suite to meet client demand and client demand has been tilted towards lower fee products.
In fact, the growth of the QQQ over this period is remarkable, almost tripling in size and going from 6% of our AUM mix in the third quarter of 2019 to 12% at the end of this quarter. Even though we do not earn a management fee of sponsor to QQQ, we manage the over $100 million annual marketing budget generated by the product. The marketing budget has allowed Invesco to further raise awareness about the QQQ. That increased awareness has resulted in its ability to significantly increase our market share in the ETF space. Invesco is today the fourth largest ETF provider in the world.
Growth in the QQQ accounts for 2 basis points of the net revenue yield declined over the period shown on this chart. And as I noted earlier, discretionary money market fee waivers account for 6 basis point decline in the net revenue yield. These two factors alone account for over 40% of the decline in the net revenue yield over this period. Realizing our business mix is shifting, we continue to be focused on aligning our expense base with the changes in our business mix, which has enabled the firm to generate positive operating leverage and operating margin improvement.
Now, a few comments on Slide 14. Our balance sheet cash position was $1.8 billion on September 30, and approximately $725 million of this cash is held for regulatory requirements. The cash position has improved meaningfully over the past year, increasing by nearly $700 million, largely driven by the improvement in our operating income.
Our debt profile has improved considerably as well with no draws on our revolver at quarter end. As a result, we have substantially improved our net leverage position as shown in the top right chart on this slide. Our leverage ratio as defined under our credit facility agreement decline from 1.43x a year ago, to under 1x at 0.86 turns at the end of this third quarter. If you choose to include the preferred stock, leverage ratio has declined from just over 4x to 2.67x at the end of the third quarter.
Regarding future cash requirements, we recorded an additional downward adjustment to the MLP liability in the third quarter, reducing the liability from our previous estimate of nearly $300 million down to $254 million. We anticipate funding the liability this quarter and we have ample cash resources to do so. While we anticipate a degree of insurance recovery related to this, the insurance claims process is inherently complex and we do not have an update at this stage as to the exact timing or sides of the recovery.
Regarding 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 look towards 2022 and beyond, we will be building towards a 30% to 50% total payout ratio over the next several years as we continue to modestly increase dividends and reinstate a share buyback program in the future.
Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility. In summary, we continue to see growth in our key capabilities. We remain focused on executing the strategies that aligns with these areas while completing our strategic evaluation and reallocating our resources to position us for growth.
And finally, we remain prudent in our approach to capital management. We're in a very strong position to meet client needs and run a disciplined business and to continue to invest in and grow our franchise over the long term.
And with that, I'll ask the operator to open up the line for Q&A.
Thank you. [Operator Instructions] Our first question is from Glenn Schorr with Evercore ISI. You may go ahead.
Hi, thanks very much. So, interesting comment about the driving towards 30% to 50% payout [ph] ratio eventually. I guess it brings up the strategic question of what's left to do? Meaning you've scaled up, you've gotten a lot more global. You brought in the board, you have China ETFs fixed income, solutions, everything that's working. So, what else would you be using your cash flow in the future besides capital return? Is that for broadening things like alternatives? I'm just trying to put that numbers question in a more big strategic question. Thanks.
Thanks, Glenn. Let me make a couple comments and Allison can chime in, too. Look, we've had the conversation. The industry is increasingly competitive and reinvesting the business is a high priority for us. And as you say, whether it be product extensions, for us, to buy more in private markets continue to focus on that business and grow there. But the investments in technology digital, they're really endless. So again, there's just a lot of demand that we would have internally and we continue to make those investments to just increase our competitiveness and continue to evolve the business in-line with the client demands.
I would just add. I think you could sum that up with just -- we seek to improve and increase our strategic optionality. We want to have the ability to continue to invest in the business, we want ample cash resources for any downturn, or any sort of market volatility that could lie ahead. We want to be in position to continue to pay down our debt and we have a $600 million note that comes due next year. We do have the remaining MLP liability, which I noted has been lowered to $254 million, which is very good news. Nonetheless, that is the cash obligation in the fourth quarter and we have ample cash resources to handle that. So really, as we think about the balance sheet -- and you've seen the progress we've made over the last 18 months or so -- we really are trying to put our balance sheet in a very strong position. So we have the strategic optionality. That will include returning capital to shareholders, but we want to be in a position to really balance our priorities, which does include improving the balance sheet, investing in the business, maintaining strategic optionality and returning capital to shareholders.
Okay, thanks both for that. Thank you.
Thanks, Glenn.
Thank you. The next question is from Brennan Hawken with UBS. You may go ahead.
Good morning. Thanks for taking my questions. First, I wanted to do just start on waivers. Allison, you flagged 0.6 [ph] six basis points, the fee rate is there. By your estimate -- I know it's going to depend upon some competitive dynamics and whatnot. But how many hikes do you think we would need before those go away? Because as the forward curve tells us, we're getting closer to that. So, I want to sharpen up the model there.
Hard to say how many. I do think just the single first hike will certainly be helpful to starting to reduce those money market fee waivers. It will certainly help on the institutional client side for sure. It does depend on a lot of supply demand dynamics, which will just impact the overall availability of the securities to purchase. So, the change in said [ph] funds will be helpful. It won't be the only factor that will determine how quickly it goes away and just an increase in short term rates overall will help on the retail side as well.
Okay. I guess following up on that, was when you had waivers in the past, was there a certain threshold for short term rates where they were eliminated? I would assume something like 50 basis points would be sufficient. Is that fair?
I think that's right. I'd have to go back in the cobwebs and remember, but that sounds about you're in the right zone. And I'd come back to Allison's comment, though, too. It's going to depend on the competitive dynamics.
Of course.
But usually, all figured out [ph].
Probably not an unreasonable expectation. It's just how quickly when we get there, can we can we unwind it.
Okay, fair enough. Fair enough. Okay, thank you. And then there's been some speculation in the news about a potential tie up with you all and another large financial services firm that has a big asset manager. Curious what you can say about that and then separately, you guys have been very clear that M&A, when it's done right, is definitely a strategic consideration for you and it's something that is important and can be value created when done right. Can you maybe walk us through your priorities on the M&A front and whether or not Invesco is interested in being a seller?
I can assure you that we're not interested in being a seller. So, let's start there. But let me back up and put in context. As we look at our capital priorities outside, I spoke in a second ago about that, it's first reinvesting the business to sort of increase our competitive positioning. But then strategically, what we look at is, we look at where client demand is and if we can't fill the gap internally, we would look externally. So, it has to make strategic sense. It has to be complementary to our business. It can't be duplicate to our business. That never works. Clients don't like it, employees don't like it, and by the way, shareholders don't either. And I've come back to the point time and time again that you have to have the wherewithal to ensure you're protecting what you bought while creating a better organization. And also, very importantly, the cultural alignment matters a lot. If there's misalignment, then you're going to have a problem at some point. So, as we look at it right now, the priority is, again, continuing to build on what we have. As I mentioned a few minutes ago, it is our private markets business where we're spending no specific amount of time as we're seeing client demand in credit and particular, that's been an area in some extensions in our real estate area. So, not much different than we've talked about in the past.
Thanks for taking my questions.
Thanks, Brennan.
Thank you. The next question is from Dan Fannon with Jefferies. You may go ahead.
Thanks. Good morning. Just wanted to follow up on the momentum in China. You guys have been highlighting this for several quarters. The numbers have been good. Curious about the retail distribution and kind of how I guess diverse and entrenched you are with the third party, the banks and others in there, and maybe talk about if there's certain concentrations in the regions or partners? Or just a little more color on the distribution breadth that you have there.
Yes, I'll make a couple comments and then Alison will add. So, as you looked in the materials that Allison referred to, it's 6% retail, 40% institutional. The retail comes through the joint venture and it's very, very broad. Just the sheer size of the country, you end up with any number of distributors, yes, but there's the obvious banks and insurance company. But an area of real strength and growth is really that you have e-commerce distribution channels and there's many different avenues there beyond and financial where one of the firms has been quite successful. So, the concentration risk is not an issue for us and we just looked at the whole distribution landscape to continue to open and broaden. But again, it is a very competitive landscape. So don't misunderstand my comments.
I don't know that I have a whole lot to add to that. I think the online distribution channels have really overtaken the banking distribution channels in terms of market share overall in China and just given the time we've had there and the strength in the tenure, we've got very strong relationships, not just across those traditional banking distribution channels, which continue to be very good. But also and that's emerging online trend and also very strong institutional relationships there, which are going to continue to be important drivers of long term growth in China.
Got it and then as a follow up, Allison, could you expand a bit on the performance fee outlook for fourth quarter? Just understanding there was basically an investment gap for some period several years ago where you didn't put money to work. And so, the vintage like the timing is just off. I'm just curious how that doesn't tie to performance. Just making sure I understand the dynamics of this quarter and why before the fourth quarter of 2021 and how we should think about that maybe for fourth quarter 2022 assuming performance holds here and we would see that and would come back or normalize again next year.
Yes. I wouldn't say there was an investment gap and the nature of just performance fees and how they are structured into various contracts just remains. It's very bespoke and it can be somewhat chunky and difficult to predict. There wasn't an investment gap, but as we do look at just the vintages of what has performance fees in it, that would be eligible there. It is not the typical year-end spike of what we would typically see. So no performance misses, just the way these vintages are kind of cycling through in what we see in the fourth quarter of this year. We continue to have about $58 billion of AUM overall that is performance fee-eligible. We just don't have strike dates, if you will, of 1231 [ph] or at least at the end of this year that would incur or recognize performance fees in the fourth quarter. So, our expectation is that fees in this quarter will be consistent with the experience we've had in the first three quarters of this year rather than a spike at year-end. And you shouldn't read anything into that in terms of what that means for 2022 or beyond. It's just simply a function of timing with the vintages this year [ph].
Okay. Thank you.
Thank you. The next question is from Patrick Davitt with Autonomous Research. You may go ahead.
Hey. Good morning, everyone. You touched on this briefly in the prepared remarks, but China phones are obviously remarkably resilient, given the increased volatility we saw there last quarter. Could you give a little bit more detail on kind of the flow and investing trends you saw through that volatility? Was there any kind of drop-off in activity as the volatility got worse later in the quarter? As in short, what I'm trying to get to is do we need to worry about these flows slowing or even reversing if Chinese volatility continues to get meaningfully worse? Or do you think QQQ suggests they could be resilient through that?
I'll make a couple of comments. So, if you rewind the tape to the beginning of the year, Q1, we thought was such an incredibly strong quarter that it couldn't be repeated and slowed Samba [ph] continue to be very, very strong. Just what we're seeing is there was just movement of investor behavior from really equity capabilities that were sort of growth-focused to value-focused and just continuing to work through the broad range of capability. So, it's hard to predict what's going to happen, but we're just not seeing that fall off to the degree that you would imagine in those very volatile periods as you saw if you went back to 2015 or something like that. What's really important is the market continues to evolve in a very positive way and the regulators have been very focused on providing a greater investment and retirement savings market and you're seeing that. So, I'm not going to say that we'll never peak in [ph] that redemption, but it's been very resilient through this year, even with the volatility that we've seen.
The only thing I might add, if I look back over the last five quarters, this was our second highest quarter for flows in China. And I think the volatility, no, we didn't necessarily see it trend down inside of the quarter. And in some of that volatility, you started to just hear -- I'll call it softening and sentiment really in the second quarter and you see that more in the second quarter flow results. If I look at the flows into the joint venture, in particular, it's about $7 billion, which of that product launches drove a couple billion dollars. The remainder was really through existing products, particularly fixed income. There was a lot of strength in our fixed income capability. That's different than what we saw in the first quarter where it was new product launches that drove the majority of the flows. And this quarter, it was really from our existing products. And I think that not only speaks to just the strength and the sustainability in the market, but also the breadth of the capabilities in our platform that we're able to continue to gather assets without large new product launches, just given the breadth of capabilities we offer.
Great. Thank you.
Thank you. The next question is from Ken Worthington with JPMorgan. You may go ahead.
Hi, good morning. The next sales picture continues to be quite solid and the pipeline continues to be strong. An area of weakness seems to be the UK. It seems like outflows are persisting in the UK, but getting better. So, a couple questions. You mentioned GTR. I think you said $1.7 billion of outflows in the quarter. How much does GTR still manage and is the expectation for continued outflows given the performance there? And then what products and businesses are working best in the UK? And what is the outlook for the UK to sort of move back broadly to positive flows in the future?
Why don't I start with GTR and I'll let Marty chime in. So, in terms of where GTR is today, at the end of September 30, it was down to $8.3 billion. That was down from its peak of $30 billion. The outflows in the quarter were $1.7 billion. Now, that $8.3 billion is not entirely in the UK, but it is largely in the UK. In fact, what is reflected in the UK is about $6 billion. So, we are down to a point of at least diminishing headwinds. We do have an expectation that it will continue to decline, so I don't think we have seen a bottom there. We do expect it will continue to decline. But the headwinds are diminishing. And I think you see that just in terms of the improved outflows for the UK this quarter with $1.8 billion in outflows, which is an improvement from $3.2 billion in the second quarter. So, despite some of those outflows, we do see retail overall improving and we see good demand for active European equities and really improving redemption rates for our UK equities. So there are, I will call it 'right spots' [ph] and 'green shoots' [ph] as we continue to work through these GTR headwinds.
Yes. I'll just add a couple of things. So, I think also important when you look at the period we've been through with UK equities in particular and underperformance and sort of sentiment was quite negative in the sector, too. The combination is not very positive for results. The short term performance has improved quite dramatically in the UK equities, which is important. The ETF flows are the other area where we're seeing demand and also the institutional business. As we look forward, as Allison said, we're having some good expectations of being back in flows in the UK here.
Okay, great. Thank you.
Yes.
Thank you. The next question is from Robert Lee with KBW. You may go ahead.
Great. Good morning. Thanks for taking my questions. Maybe Marty and Allison, I'd just like to go back to the greater China business. You've talked for a while, it seems like a few years, almost with the JV and maybe bringing it up to majority ownership. But I guess one question would be that since you operate it, does it really even matter getting to majority ownership? Is that even something that at this point is even possible? And then I have a follow up question after that.
Yes. You hit it right on the head. The fundamental difference that we've had as opposed to every other joint venture that we know of, there could be someone similar to us, I don't know who that is. But having a sort of management control has been the separating factor. I think most people use majority control the shorthand for management control, but we've had that. We continue to be in discussions with our joint venture partner. It's likely we'll end up with the majority, but it's not going to be a huge change in the ownership, but it's not going to get in the way at all of our development in China and the success that we've had. So, you really hit the point that is most relevant for our success there.
The only change if we were to do that would be an accounting change in terms of how we recognize the joint venture on the P&L. It wouldn't change anything day-to-day in how we operate it or the success of the venture.
That's great. And then maybe the follow up, shift gears a bit. I haven't really talked about it too much, I think in recent quarters, but there was a time where you made some acquisition, made investments in different technology platforms and I know bringing them all under the Intelliflo umbrella. But can you maybe give us a quick update on kind of the strategic positioning or importance of that? And maybe to what extent those platforms you're starting to see some positive impact and how they're maybe helping the flow picture, if at all?
Yes, you're right. It was a combination of five smaller acquisitions to create the platform. Last year was a year of pulling it together under the Intelliflo banner. The largest and most developed of is in Intelliflo in the UK, which still has a 40% market share. We continue to look at ways to not just advance the technology, but how can we advance flows in that market. We've not seen great success with that right now, but we're continuing to challenge that. Here in the United States, the same thing where we think the opportunity is serving the all-ready [ph] market. And again, we're now just frankly turning our attention to it after really the consolidation last year. If you just look at the way digital technologies are being used in a place like China, that's really what gave us the impetus to spend time and energy there. It is proven to be stunningly successful in China. There's different regulatory barriers here in the United States in structures and the like, but we still think there's an opportunity for success there. And we'll see in the quarters ahead if we're right.
Great. Thank you for taking my questions.
Thank you.
Thank you. The next question is from Bill Katz with Citigroup. You may go ahead.
Okay. Thank you very much for taking the questions this morning. So, first question is just on the opportunity to take advantage of the democratization of retail alternatives. Could you maybe expand a little bit strategically what you're doing there to gin up the volume? Certainly, the billions or so is favorable in the $4 billion [ph] overall, it's very good. But we're seeing some very big numbers elsewhere. I'm sort of wondering what you're doing to leverage both the product and distribution relationships you have?
Yes, Bill, great question. It's where we see the immediate opportunity for us as with our direct real estate business. Earlier in the year, we actually entered into a partnership with UBS using real estate capability that's being distributed in Switzerland, Asia and EMEA. We now have an in-reach [ph] product here in the United States and we're just working with our distribution partners right now to get it on the platform. It's probably going through the end of the year to get to all the platforms that we're hopeful to get on. But we look at it as a huge opportunity, just because there are very, very few competitors there. And if you look at the success and pedigree of our real estate team, it's very, very strong. But it's traditionally been in the institutional market. It has not been in the real estate market and that's really [indiscernible] going as a combination of having an alternative capability, but also that the ability to distribute into the wealth management platforms and that's what we're looking forward to, hopefully taking advantage of.
Great, thanks. And maybe one big picture question as well, just a follow up. Some of the distributors are talking about accelerating the direct indexation opportunity, so they'll customize thought process. How would that affect Invesco good or bad?
Well, it's hard to know. It all depends on where it could go. What we do have is we have a self-indexing capability ourselves. And I can tell you the experience we've had in building models. We use that in those model creations, so you can see that to continue to be an extension there. Also, with our institutional clients, again, we're using that self-indexing capability to build customized indexes for our institutional clients. So, we look at it as we're probably one of very few institutions that have that capability and we expect that we'd use it probably in partnership with a number of our clients and wealth management partners.
Thank you.
Thanks, Bill.
Thank you. The next question is from Brian Bedell with Deutsche Bank. You may go ahead.
Great, thanks. Good morning, folks. Maybe just back on indexing and on the M&A front in terms of the strategic optionality that you mentioned, Allison in the comments. You mentioned, Marty, as well. How important is having a beta index franchise? As opposed to smart beta and beta ETF capability, is that a strategic imperative for you? Or do you think you can grow organically in factor-based or self-index based strategies on your own? And then also, I guess, would you consider a joint venture as an option in doing that if you had -- I assume you'd want management control of that, just like you have in China.
Yes. Look, if you just follow the flows, there continues to be demand, cap-weighted indexes and also in in smart beta. Our history really started in sort of the smart beta category and you're seeing just ever-increasing demand there. So, it's really the answer is both is what's happening in portfolios and you want to be relevant in those marketplaces. And our focus has been heads-down and continues to grow. Allison talked about the queues in particular, recognizing it's the limitation we have from a fee generation point of view, but it's been very, very important for building out our ETF platform and the reputation of the firm. So, again, we'll just continue to challenge our competitive positioning and determine which is the best way forward. But so far, I'd say our success has been quite good.
If you did want to enter into an arrangement, would you consider a JV in that type of structure? Or is that not even doable?
It's hard to know. It's all facts and circumstances, so I wouldn't want to speculate on that.
Okay, great. And then just on sustainable flows for QQQ and total dedicated sustainable AUM. And if you want to comment [ph] off on the Bitcoin ETF strategy between physical and futures for that option.
Yes, why don't I start on what we're doing in Bitcoin and the like. So, we've entered into a partnership with Galaxy Digital. That's who we're going to work with to build out our whole suite of ETF capabilities, underlying blockchain technology, digital assets and crypto. Our focus is on a physically-backed current -- it's going to be some time, I think, before we get into the market, right? It's at the SEC right now and we've all known that they are still working through that as a topic. We've introduced two ETFs into the markets that sort of invest in companies that build off and play on the blockchain technology and the like. We did back away from doing [indiscernible] futures back product, because we think the best alternative going forward is really the physically back route.
On your sustainability question, our flows and the ESG capabilities in the third quarter was a little bit talked about $300 million positive inflows in the quarter. We continue to have about $51.5 billion of AUM that we would consider to be ESG, funds and mandates, and that really spans across 160 ESG funds and mandates in a variety of asset classes. Importantly, we remain the second largest ESG ETF player in the world. Flows were a little bit softer in the third quarter relative to what we've seen in the first half of the year. Nothing to point to one way or the other there, but our expectation is to continue to see demand for those capabilities.
Great, great. Thanks for all the color.
Thank you. Our final question is from Alex Blostein with Goldman Sachs. You may go ahead.
Good morning. Thanks for taking the question. I wanted to shift gears a little bit, maybe go back to Slide 13, Allison, and you highlighted in the prepared remarks. So, definitely impressive to see the margin expansion despite the headwinds that you've seen in the theory. But I'm curious how you're thinking about the margin trajectory, longer term, assuming a more-normalized market, which 'normalize' is always a question mark, but clearly, market tailwind has been pretty significant over the last year or so. So, with the cost-cutting program, I think most of the way through, is it still likely for Invesco to see operating leverage off of this kind of 42% level over time? Assuming, again, kind of a more normalized market spectrum?
Yes. I would say a couple of things. One, in terms of outlook for net revenue yield, just how we think about the fee rates from here, the biggest driver is always going to be the mix of flows that we see. That's going to have a huge impact and as we continue to seek client demand for all of our capabilities, but certainly increasing demand for our passive capabilities, you see that downward pressure. At the same time, you can market impact and work in either direction and it doesn't work consistently across those different asset classes and capabilities. And so, it's inherently difficult to predict for that reason. In terms of though, just bigger picture, how do we think about it, I do think we'll continue to see some modest downward pressure on it just as we continue to grow our passive capabilities and we see demand for those capabilities. Hopefully, it was also helpful to kind of understand the impact that the QQQ has on that. And so while it puts downward pressure on that revenue yield, it creates a tremendous benefit for us through the marketing, support budget it provides us. And I think, really, most importantly, we are able to generate that positive operating leverage and really improve margins against us. So, where do I think it goes from here? I'd say a couple of things. One, as we come towards the end of this expense management effort that we put in place last year and we expect to complete that next year, I don't think we have to continue to do things like that in order to sustain these strong operating margins. We've got an expense base that's over $3 billion. That's a significant budget to work with. And so, how we think about it is really how do we deploy that expense base? How do we continue to reallocate where we invest against our areas of highest demand and as we build out the breadth of capabilities, that scale and the volume of flows is what continues to generate really the positive operating leverage that we're looking for and gives us the opportunity to sustain these 40% plus operating margins even with some of that downward pressure in net revenue yield. And I appreciate you asking the question, because I think it's a really important point that we wanted to drive home and we wanted it to come through today because this didn't happen by accident. It really reflects a lot of deliberate work by the company over the last couple of years in an operating expense space that really gives us the leverage we need to continue to invest in the areas of growth that we see ahead.
Perfect, great. Thank you very much.
Thanks, Alex.
On behalf of Allison and myself, thank you very much for joining. I appreciate the questions and engagements and I look forward to talking with everybody next quarter.
Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.