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Edited Transcript of IVZ earnings conference call or presentation 25-Jul-19 1:00pm GMT

Q2 2019 Invesco Ltd Earnings Call

ATLANTA Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Invesco Ltd earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Loren Michael Starr

Invesco Ltd. - Senior MD & CFO

* Martin L. Flanagan

Invesco Ltd. - President, CEO & Director

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Conference Call Participants

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* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Craig William Siegenthaler

Crédit Suisse AG, Research Division - MD

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Glenn Paul Schorr

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst

* Kenneth Brooks Worthington

JP Morgan Chase & Co, Research Division - MD

* Kenneth S. Lee

RBC Capital Markets, LLC, Research Division - Analyst

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Patrick Davitt

Autonomous Research LLP - Partner, United States Asset Managers

* Robert Andrew Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Ryan Peter Bailey

Goldman Sachs Group Inc., Research Division - Associate

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Unidentified Company Representative, [1]

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This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, geopolitical events and their potential impact on the company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future conditional verbs such as will, may, could, should and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in the most recent Form 10-K and subsequent forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update information in any public disclosure if any forward-looking statements later turns out to be inaccurate.

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Operator [2]

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Welcome to Invesco's second quarter results conference call. (Operator Instructions) Today's conference is being recorded. (Operator Instructions)

Now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; Loren Starr, Chief Financial Officer; and Greg McGreevey, Senior Managing Director of Investments. Mr. Flanagan, you may begin.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [3]

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Thank you very much, and thank you, everybody, for joining us. And if you're so inclined, you can follow along the presentation that's on the website. I'll cover the business results today and talk a little bit about the combination more, and we'll get into greater detail of the results and impact of the combination and as is our practice, we'll open up to Q&A.

So let me get started. I'm on -- I'm on Page 6 if you happen to be following in the presentation. And if you saw, we successfully closed the OppenheimerFunds transaction at the end of May with $1.2 trillion in assets under management. We're now the sixth largest retail manager in the United States and 13th largest manager in the world, which puts us in a much stronger position to meet client needs. We're now just 2 months passed close, and we're more confident than ever in our ability to achieve the deal economics and the tremendous potential of the combination. I also want to point out, we are incredibly pleased that the combination has created a much stronger organization with very talented people. Our conversations with clients reaffirm our view that the expanded set of capabilities we now offer, combined with best-in-class distribution, has meaningfully strengthened our relevance in the market and will, ultimately, increase organic growth. I also want to point out there are very clear benefits to shareholders from the transaction. I want to confirm, once again, if we look at the $475 million net synergies, 85% of that will be accomplished by the end of this year. The additional scale, resiliency and stability resulted from the combination will help us achieve a greater than 41% run rate operating margin and finally, pro forma year-end EBITDA in 2020 is expected to be -- exceed $2.6 billion.

Turning to the highlights. Investment performance remained strong during the quarter. 58% of actively managed assets were in the top half of peers over both a 3- and 5-year period. I will get into greater detail in just a minute. Long-term net outflows totaled $3.9 billion, building on the improved trend over the prior quarter, reflecting stronger flows from our ETF and institutional businesses. During the quarter, we began to see the power of the combination recognizing the deals only close for 1 month. There is a 16% increase in net revenue quarter-over-quarter. The operating margin expanded 300 basis points to 35%, and a 27% increase in operating income quarter-over-quarter to $363 million. We're now operating from a position of strength, which has enabled us to invest in the growth of our business while also returning $389 million to shareholders through stock buybacks and dividends during the quarter. All of this means we're better positioned to deliver relevant outcomes for our clients, invest in future growth of the organization and provide solid returns for shareholders.

Turning to investment performance on Slide 8. As I mentioned, performance remained strong. 58% of our actively managed assets were -- were at 58% over a 5-year period. 33% of that was top quartile performance. The combination has enhanced the depth and breadth of our investment expertise across the business while further expanding the scale of our investment capabilities. Invesco now ranks top 10 in assets under management, 10 of the 15 largest asset categories in U.S. retail channel, which is the largest market in the world. Best examples are a second rank in bank loans, HY Munis, third rank in emerging markets, fourth rank in global equities. We see 3 areas where there's an alignment for market demand and strong long-term track records of our capabilities that being: global, international and emerging markets equity, fixed income and alternative. All 3 of these asset classes have significant percentage of their assets in the top quartile over all time periods. So in short, we're very well positioned in the market and the capabilities. We're seeing strong demand, which will drive organic growth.

I'll now pass over to Loren to go through the results.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [4]

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Thanks very much, Marty. On Slide 9, you'll find an overview of our long-term flows. In aggregate, we experienced net outflows of $3.9 billion in Q2, which is an improvement of $1.5 billion compared to the prior quarter and $4.1 billion compared to prior year. As you can see on the slide, the areas driving this positive change were in passive, Asia Pacific, EMEA, ex U.K. and institutional. ETF capabilities globally contributed more than $4.5 billion in net flows for the quarter. ETF flows in the Americas were diversified across our smart beta offerings, led by our S&P Low Volatility suite and BulletShares ETFs. In EMEA, ex U.K., we saw positive ETF flows across a number of our equity and fixed income ETF capabilities. Notably, our ETF flow growth has propelled us to #2 in terms of net new ETF assets in this region year-to-date.

In Asia Pacific, we generated $3 billion of net inflows. We saw growth in sales surge across many of our fixed income and balanced capabilities with particularly robust growth provided by our China Invesco Great Wall business. In China alone, we added nearly $2 billion of net flows into several of our active balanced and equity capabilities, reflecting the excellent investment performance and market positioning we have in this region. Our Institutional business continued to show signs of strength, delivering $2.1 billion in positive flows in Q2. Of note, the last time we posted positive net flows in our Institutional business was in the first quarter of 2018. Much of this change is due to the improvement we're seeing in redemptions.

On the same slide, you can see the areas driving outflows in the quarter, which included active, the Americas, U.K. and retail. The majority of active outflows were in the asset class of equities, although these were offset to some extent by fixed income net inflows.

In the Americas, outflows in our U.S. retail equity products were elevated against the prior quarter due to the partial-period inclusion of the legacy Oppenheimer products, which experienced approximately $2.5 billion in post-closed outflows during the quarter. The Americas were also negatively impacted by outflows across our bank loan capabilities with about $1.2 billion out as investors redeemed from this asset class on an industry-wide basis. Industry dynamics also continued to challenge our retail flows in the U.K. as risk assets remained broadly out of favor with investors in these markets, fueled by the uncertainty from Brexit.

Looking forward to the last half of 2019 for Invesco, we expect these factors that are currently impacting our flows, both positively and negatively, to largely persist. That said, while we certainly are seeing an elevated level of outflows in the legacy OppenheimerFunds products in the short term, we believe that we'll be able to improve our level of sales growth in the Americas, given the world-class distribution team and platform that we've created through this combination. It's still early days and the opportunity to drive flows through improved sales and marketing efforts have not yet been realized.

Before I leave this slide, I wanted to quickly provide an update on our expectations around AUM breakage as it relates -- as it's related to the combination. Our original deal expectations included an estimate, as you'll remember, of $10 billion in outflows in the first year after the close. As we look to client breakage, the only item that we've specifically identified at this point related to the announced transaction is the transition of the state of New Mexico 529 plan. This transition will result in a $2 billion outflow in the fourth quarter. So with this known outflow and considering expectations around potential impacts from the announced investment team changes, we believe that our AUM breakage from the transaction will, in fact, be meaningfully less than the original estimate of $10 billion.

Next, let's turn to Slide 10, which outlines our AUM. Our assets under management increased by $243 billion or 25.5%, which primarily reflects the impact of the OF/I combination and positive market returns, partially offset by total net outflows. As a reminder, the OF/I combination added $224 billion to our AUM in May. We saw quarter-over-quarter growth in AUM across both active and passive and across all channels in client domiciles other than for the U.K. The Oppenheimer AUM increased the percentage of the firm's AUM that is active, retail and Americas-based while our institutional and passive AUM grew to -- grew due to long-term net inflows and market appreciation during the quarter. As Marty mentioned, our general net revenue yield, excluding performance fees, increased 1.4 basis points to 38.5 basis points versus 37.1 basis points in the prior quarter. The addition of OF/I AUM for slightly more than 1 month added approximately 1.3 basis points to our net revenue yields and we also saw 1 additional day in the quarter, which added 0.3 basis points. These factors were modestly offset by a change in AUM mix.

Slide 11 provides U.S. GAAP operating results for the quarter. My comments today are going to focus on the variances related to our non-GAAP adjusted measures, which will be found on Slide 12. Moving to this slide, you'll see that net revenues increased by $145 million or they were 16% up quarter-over-quarter to $1.03 billion. This increase reflects primarily the impact of the Oppenheimer combination and the increase day count in the quarter. Adjusted operating expenses at $668 million, increased by $65 million or 11% relative to the first quarter. This increase largely reflects, once again, the impact of Oppenheimer combination on expenses for the period.

Next, moving to Slide 13, I'd like to comment on the progress that we've made on the integration and of -- and synergy capture recorded to date. As noted in the first quarter, we spent a significant amount of time between the announcement date and close date, defining the leadership and the organizational structure for the combined team. This has allowed us to quickly execute on a number of very important post-close activities required to increase our sales growth for the combined business. These activities include moving to a single brand, strengthening our newly combined sales organization through training and definition of go-forward client coverage and creating a client-demand framework and go-to-market strategy for the combined firm. As I mentioned earlier, when I was discussing the Q2 flows, we have not yet to fully realize the benefit of this work and the impact on our sales in the U.S. retail business.

In addition to activating the newly integrated U.S. retail sales platform, the pre-close integration work has also enabled us to make meaningful progress on cost synergy recognition. We remain on track to capture $475 million of net synergies through the first quarter of 2021. As a reminder, this $475 million amount, a bottom line cost savings, is net of investments we are making, which will allow us to drive future growth and avoid future cost. This combination is allowing us to accelerate investments in areas that strengthen our distribution and investment capabilities and processes as well as allowing us to deploy new technologies and automation to significantly increase our operational efficiency while still delivering the $475 million in savings.

In terms of timing to achieve the net synergies, we originally expected to have 52% of total expense synergies captured at the end of the third quarter of this year. Given the significant amount of progress we've made prior to the deal close, to establish, communicate and execute on our end-state organization systems and work placement by location, we were able to achieve this level of synergy capture by the end of the second quarter. With the quicker synergy capture, we remain well on track to recognize 85% of synergies by the end of 2019.

Next, let's move to Slide 14, which looks at our adjusted operating and net income. Operating income increased $79 million to $363 million, largely reflecting the increased operating earnings from the Oppenheimer transaction. Our operating margin improved to 35.2% versus 32% in the prior quarter, reflecting the positive margin benefits from the combination as well as the quicker synergy capture I discussed on the previous slide. Firm's effective tax rate came in at 21.8%, which was consistent with our prior guidance. We continue to expect our tax rate to come in somewhere between 22% and 23% starting in the third quarter.

Lastly, our net income improved by nearly 25% to $280 million, reflecting continued, strong nonoperating gains from our investments, and adjusted EPS improved to $0.65 versus $0.56 in the first quarter.

Next, move to Slide 15. This presents a snapshot of Invesco's balance sheet and capital management. As I've mentioned, we continue to execute in a very disciplined way to achieve the targeted level of deal synergies and improved financial position that the deal provides. In doing so, we expect to continue to return significant levels of the capital to our shareholders. You saw in the current quarter -- you saw this in the current quarter when we returned nearly $390 million to our shareholders through a combination of dividends and share repurchases. This represented a payout of about 107% of our operating income for the period. You'll recall that we announced a $1.2 billion share repurchase program in the fourth quarter of 2018, and we've successfully executed $600 million against that plan through the end of the quarter as we see a significant opportunity to repurchase our shares, given Invesco's stocks, depressed valuation and trading discount to peers and given our confidence in the strength of the combined organization. In addition, we executed a further $200 million forward repurchase agreement in July that will bring us to $800 million stock buybacks. Once this is completed, we expect to have repurchased some 39 million shares since the fourth quarter, which represents more than 8% of our share count outstanding as of the transaction close. While there was no preferred payment in the second quarter due to the timing of dividend declaration, we will pay the preferred dividend starting in the third quarter. Note that this third quarter payment will be elevated at $64.4 million and they will reflect the additional 8-day post-close period for May. Starting in the fourth quarter, the amount will level out as $59 million per quarter.

Turning to the balance sheet. So you'll see that we have a $7 billion increase in assets during the quarter, largely reflecting the indefinite-lived intangible and goodwill assets recognized as part of this transaction. Our equity balance increased by $4 billion, reflecting the preferred issuance to MassMutual at close, and our cash and cash equivalents balance increased by nearly $200 million. With the increased earning power and cash flow of the combined firm, we expect to reach our targeted $1 billion of cash excess -- in excess of regulatory capital requirements by the second half of 2020. We repaid approximately $400 million of debt in the quarter, largely paying down our credit facility and leaving a near 0 balance, which obviously has a positive impact on our leverage ratios. We expect to be able to maintain our current level of debt going forward. As Marty noted earlier, we anticipate that the combined organization will have a pro forma annual EBITDA post-synergies of more than $2.6 billion by the end of 2020, which represents a significant increase when compared to the pre-combination Invesco. While this increased level -- with this increased level of EBITDA, our leverage ratio would be approximately 0.8x gross debt/EBITDA based on the U.S. GAAP classification of the newly issued $4 billion of noncumulative perpetual preferred as equity. Conversely, if the preferred were, instead, treated as a 100% debt, the leverage ratio would be at a 2.3x gross debt/EBITDA. This is a level that we certainly view as manageable and one that will certainly come down over time as our earnings grow.

So I'll conclude by saying that we're very confident in our ability to capture the $475 million net cost synergies and deliver the deal economics and other benefits we outlined, which include not only the targeted $1.2 billion in stock buybacks, but also strong balance sheet with little or no added debt and some $1 billion of excess cash as we get to the second half of 2020.

And with that, I'll turn it back to Marty to wrap up.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [5]

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All right. Thank you, Loren. Let me make a couple comments before we get to Q&A. And as we've discussed on previous calls, we continue to be very focused on improving our leadership position in core markets, which, of course, this combination has, while at the same time, investing those parts of the business where we see rapid growth. This approach has helped us with our best-in-class set of capabilities, which will drive sustainable, broad-based growth as we look to the future. The combination with OppenheimerFunds has meaningfully accelerated the strategy, obviously expanding our leadership position in the United States while also strengthening our business in areas where we're growing quite rapidly, as Loren mentioned, China, ETFs, digital platform solutions to name a few. So again, we're just 2 months passed close and we have all the confidence that the combination is meeting and exceeding our expectations. And with that, why don't we open up to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ken Worthington with JPMorgan.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [2]

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I think first, prior to the deal, I believe Oppenheimer was sort of running neutral-to-positive net sales. Since the deal was announced, Oppenheimer has seen a pickup in the outflows. I think you said it was $2 billion or maybe $2.5 billion since the deal was closed. I think originally, you were modeling 1% to 2% organic growth for Oppenheimer. What are you sort of thinking now for the go-forward there? And then, how quickly do you think you get the benefits from a sales perspective? I think you've suggested that the integration of the Oppenheimer and Invesco sales forces was particularly disruptive. We've got 3 months of Oppenheimer in 3Q rather than 1Q. So how quickly and maybe what does the cadence look like for an improvement in sales as the sales force is now integrated and hopefully, more stable to offset some of these dis-synergies.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [3]

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Yes. Let me hit on some of the high points and I'll let Loren (inaudible). So this is the most talented sales force I've ever seen, and it is literally made up half Invesco, half Oppenheimer that was just the outcome of the exercise that the leadership went through. It is in place. It was in place and closed. All that work was done before. That said, it's a new range of capabilities in the focused area. So I would quite -- say, through the end of the year, till things settle down, is when I think everybody has their sea legs. But that said, each and every day is a better day and so I have a great degree of confidence there. The other thing that we've talked about is just not the U.S. wealth management platform, but Oppenheimer has a number of capabilities that will be well received in the institutional market and also in the retail market outside of the United States. So literally, some of the retail capabilities will be available in October, and we're already working on getting to market with a number of the institutional teams around the world. So again, the big difference is we're up and running and executing where most transactions I've seen, this -- things start to happen after close, and from every transaction that I've been involved and I can say, this is the best that we've ever done. So I think we're in a very good spot. Loren?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [4]

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Yes, and Ken, I mean, we had an estimate of 1% to 2% organic growth scheduled to begin in 2020. So at this point, we're still hopeful that we can achieve those types of levels of growth. Again, there's an opportunity to take these capabilities into our institutional channel, into our Offshore business. There is a lot of activity going on as we speak to actually make that happen, a lot of interest in those channels for these products. We have some headwinds on certain key products in the Oppenheimer sort of capabilities, but there are other really high-performing capabilities, as well, that we think we're going to be able to leverage and sell. So I'd say, in terms of our distribution efforts, that is really being spring-loaded in terms of being able to execute really in a position as we get to the second half of this year. I mean again, there's probably some headwinds in the near term. Still, though, we're going to see, as I mentioned, we don’t think anything is going to change but ultimately, we're going start seeing the benefit of this really world-class organization coming together and being able to execute.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [5]

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Okay. And then on the institutional side of the business, you highlighted the move to inflows but you also highlighted that the drive to net sales was driven by redemptions slowing. It does look like gross sales have slowed, too. You've talked about in the past that the institutional pipeline was sort of hitting record levels. Should we see gross sales improve from here? If so, what asset classes and geographies? In terms of the decline in gross redemptions, is that sustainable? Or might that have just been a one-off this quarter?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [6]

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Great question. So I think the reduction in sales was really just the market environment that we've been in. Things slowed down in terms of findings. So there is some pause that happens. So the one, but not funded, pipeline is still its largest. It's been, in fact -- it is up 10% versus prior quarters, up 31% versus prior year. So the pipeline of one not funded has been robust, very strong, growing. So we feel confident those assets are going to come through. It's really just a matter of timing on the solar redemption side. Again, it's hard to say what is permanent and what is not. In terms of what we know, in terms of expected outflows, nothing has increased relative to prior levels. So we think that, that looks reasonably stable but there's always going to be the potential for idiosyncratic outflows that come from certain key clients. So again, what we can manage is the sales, probably more than the redemption side and we are very -- feeling very positive about that outlook into the next couple of quarters.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [7]

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And let me add, because you raised very good points. I have absolute confidence that the operating results are going to be as you would predict as we've talked about through '19 and through '20. That said, the fundamental strengths of our organization are seeing headwinds. Brexit is a headwind for us. It is incredibly -- risk off -- in U.K, in particular, and the trade wars actually do impact our position in Asia Pac. That said, we're still going to get the results that we're talking about. So if you see any benefit in that, we would expect a real strong increase in flows.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [8]

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And I didn't answer your last question. Sorry, Ken. So about more than 60% of the pipeline is in alternatives. About 23% is in equities. There's some 10% in fixed income, just to give you a sense of where it's coming from.

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Operator [9]

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The next question comes from Dan Fannon with Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [10]

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I guess my first question's on just the synergies, the $475 million. Obviously, you've expressed a lot of confidence and have some good kind of runway to start here. So Loren, you mentioned also just kind of reinvesting back into the business. And so just curious, as we think a little bit out, is there upside to the $475 million? Or if you're going to continue to kind of reinvest in growth in other areas as you achieve these synergies if there's additional things that are found?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [11]

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So Dan, we certainly have seen this as an -- this transaction is an opportunity to upgrade significantly as we've talked about. Putting the firm together, becoming and creating a stronger firm has been part of the objective. It's not just been about cost saves. It's actually about creating a stronger organization. And so we obviously view this as a fundamental part of the transaction. The $475 million should be viewed as a net number, net of investments in terms of what we're going to deliver. We're absolutely confident we're going to be able to deliver that. I think the good news is that we've been able and we expect to be able to continue to invest alongside delivering the savings into critical areas that will strengthen our distribution and our investment capabilities, invest in new technologies and automation to augment our operational efficiency, really bringing our firm to a sort of the state-of-the-art and basically avoiding sort of the need to invest in the future. So really allowing us to accelerate all this activity right now. Today, we've been able to invest a small amount, so I would say roughly $30 million. There's an opportunity, I think, to be able to invest more as we go through. But in terms of kind of the modeling and you're thinking, I would bank on the net $475 million is what to expect.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [12]

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Okay. And then just a follow-up, Marty, on your comment about Brexit. Obviously, that's -- you said risk-off, but also performance in that area has not been good for you guys and some of the, I guess, your former employees have gone through some hard times over there. And I just want to talk to just generally about the franchise you see there, the strategies you have in place, how performance is kind of ebbing through this type of environment and are there anything you guys are looking to do to proactively get in front or institute change or just kind of waiting for the macro to shift?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [13]

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Yes. It's a good point, Dan. I would say it's more broad. I mean, as you know, it has been a fundamental strength of the organization where we had 9 years of net inflow up until -- through '17. Much of that was on the back of value-biased equity capabilities. And as you know, we're in an extreme period where it's out of favor, almost the most extreme period that we've seen that's on record. That said, the investors are still very, very talented. I have great faith in them and they are going to do quite fine. So the business issue that you're talking about is the flow. It's in -- and as I keep pointing out, we're posting these results with these extreme headwinds. But now we're not just waiting for things to change. I would pay attention to the Intelliflo announcement that came out in June and it is a digital platform that will start with our model portfolios starting in the fourth quarter of this year. It uses a broad array of our capabilities, both active and passive, and we look at it as a game-changer in the U.K.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [14]

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Yes, I also should point out because it's moved quickly and there's a lot of currency going on here, as well. But pre-Brexit, our U.K. as a percentage of AUM was about 12% of total, and as we show, it is about 6%. So again, in terms of kind of the total exposure to Invesco, just by the nature of the currency and some of the market inflow dynamics, it is not as large an exposure to the firm as you might've otherwise seen just a short period of time ago.

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Operator [15]

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The next question comes from Craig Siegenthaler with Crédit Suisse.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [16]

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I just wanted to start with the $10 billion of merger dis-synergies redemption notices have actually been trending better than you initially guided to. First off, what -- when do you expect institutions to notify you in terms of pre or post-closing? And are you really kind of past that point, so that's a good sign. But then also, Oppenheimer has seen very large outflows since you announced the deal. So I'm just wondering, do you not include retail or EMEA-related redemptions in your dis-synergy number?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [17]

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So in terms of institutional notification, that's not really a factor because we really had very limited institutional relationships of any size at Oppenheimer. The 529 was the largest, for sure. So that's done. We have not seen any sort of notifications, large-scale institutionally or retail-wise that indicate we should expect outflows due to breakage, due to this transaction. There are, as we mentioned, some performance headwinds which we don't think fairly should be attributed to the deal. It's more just kind of the nature of the asset class or the performance in combination. A good example will be around kind of the international growth capability, which I think industry-wide was in -- significant outflow and so we recently saw some of that hit our capability as well. So basically, I would say, in terms of the transaction and the impact in the $10 billion, that's not -- as we said, it's going to be materially less in terms of the current headwinds around outflows. Again, some of that may persist into the Q3, Q4. We're hoping to offset some of that through improved sales efforts across, not only protecting that current asset base, but also promoting some of the other very strong investment capabilities through channels that have not previously been able to access those products where they weren't on the platform. So hopefully, that's helpful in terms of sizing it. I would say, the market has been helpful too, so offsetting some of the outflow, markets have offset that. So in terms of the overall AUM levels related to Oppenheimer, we're still exactly where we were kind of in Q1.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [18]

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Loren, do you have the Oppenheimer total flow number for 2Q '19? Not just post-closing but for the full quarter?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [19]

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No, I don't have that number, handy. I'm sorry, Craig.

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Operator [20]

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The next question comes from Glenn Schorr with Evercore.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [21]

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You guys touched on it on your comments on the U.K. business but maybe I could ask overall with #6, I think you said, and obviously, done the deal to be more important than the retail channel. The retail channel distribution efforts are changing to the more portfolio construction approach. Could you talk about what you have functional now? And also, how much of the market has shifted there? In other words, I get that this is the future. Is it now? Is it impacting flows now? So you're positioning, and then a statement on the overall retail channel.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [22]

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Yes. It's a good question. So we fully agree with the notion that clients, really around the world, are looking much more to sort of outcomes, which basically means, [as you say] creating solutions, portfolios of different sizes and makeups. We are seeing that in the U.S. retail channel too. I would not say it's -- I'd say that is where it's heading. It tends to be -- right now the largest teams are very focused on it. And as we've talked over the years, where that [play is] for us is really through our solutions capability, which is very strong, very talented. It's in market. It's been in market for a couple years and they do anything from building unique portfolios for organizations to analytics for various teams to help them determine how they might shift their mix. So we do think that's the future. There's no question about it. The other area where we have made a great investment is in all of our analytics around distribution. And again, it only got stronger with the combination with Oppenheimer. They had some very talented people there also. And again, we think we're, clearly, one of the top players with those capabilities. I think what it also highlights to just this conversation, you have to have size and scale to compete and the notion that you don't have the depth and breadth of capabilities, we have active/passive

(technical difficulty)

for solutions and to have additional support in your capabilities. Yes, I just think it's going to be very, very difficult for others to compete.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [23]

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That leads into maybe a quick question on the passive side. Obviously, you've had good inflows there. Could you broaden out a little bit of what's working best in passive land? And maybe even touch on average [free] associated?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [24]

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Yes. So let me -- so what you are seeing, the ETF business in Europe is now kicking off in a very strong way. We had, Loren, correct me, 20% organic growth in the quarter. It's the second largest flow in the marketplace. So sources absolutely integrated the product line. It's the way it's supposed to be. We're executing on all cylinders. And back to the United States, again, we're also starting to see our ETF flows pick up again. Very important element of that is the BulletShares. We're not done with that rollout of the BulletShares' capabilities yet, but the ones that we have put in place are very strong and again, play to just the question you were asking about earlier, a huge opportunity in the marketplace for financial advisors, in particular, with the BulletShares' capabilities.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [25]

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Yes, Glenn, just in terms of the specifics. I mean some of the largest flows were seen in terms of the S&P 500 low Volatility ETF. We also saw a significant inflows into a newly launched fund in Europe, which is our MSCI, Saudi Arabia, ETF. Physical Gold is another one where we saw interest. BulletShares in the U.S. has been and continues to be a very, very fast-growing capability. Short-duration ETFs, as well, seem to have picked up a lot of shares. So some combination of fixed income commodities and mobile.

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Operator [26]

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The next question comes from Michael Carrier with Bank of America Merrill Lynch.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [27]

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The first one, just given the flow mix in terms of more passive and then institutional versus active in retail and the impact that, that can have on the fee rate outlook versus what happened this quarter with the deal. So how do you think about the incremental margin for the business if, say, the flow trends continue like in that direction versus, say, over the next 1 to 2 years retail or active start to shift back?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [28]

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Let me make a comment before Loren does. And I think you're hitting on something that is largely misunderstood. So when you look at our business, I can't speak to others. The growth in our ETF business is a positive one, a very positive one. The profitability, the profit margins are in excess of our stated profit margins. So it's actually accretive to the business. And so the overall effective fee rate, if it drifts down, it has nothing to do with fee pressure. It has all to do with shift, the mix and shift, which quite frankly, is the areas where we have greater profitability.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [29]

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Yes. And in terms of way we're thinking about it, the incremental margin that we're seeing as we grow is in that 50% to 65% range, the one that we've historically talked about. So nothing has shifted really in terms of our ability to see margins grow as we grow, certainly delivering that net incremental number well above the firm's overall margin. As we've talked about, even though Passive continues to be a very fast-growing part of our business, the incremental margin on that business is actually extremely attractive and also well in excess of the firm's overall margin. So again, we want to differentiate the fact that we've been focused mostly on the -- some smart beta factor-based ETFs, which have generally higher prices than we've seen on the commoditized market-cap-weighted ETFs. And again, that gives those products really strong margin, incremental margin characteristics.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [30]

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Okay. And maybe just a quick follow-up for Loren. Just in terms of Oppenheimer, does that have any impact on the other revenue, with the performance fee line, when we think going forward?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [31]

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No. It really would not. There are very few places where Oppenheimer is subject to performance fees. I would say that the only caveat is to the extent that we use those capabilities institutionally in places, in the U.S. or outside the U.S, you could see some of those products potentially having some performance fees linked to them but currently, on their current asset base, no. And other revenues, as well, no.

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Operator [32]

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The next question comes from Bill Katz with Citi.

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William R. Katz, Citigroup Inc, Research Division - MD [33]

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Just seeing on one of the slides that your -- so the EPS accretion is static from the last update. What -- but the markets have moved a fair amount. How do you think about the market impact to that assumption? I'm just trying to understand the sort of sensitivity to the macro.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [34]

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Yes. So Bill, as I kind of hinted at one of the other questions, we obviously lost some assets through outflow but we actually gained those -- that assets back through market. So in terms of general accretion, we're kind of exactly where we were before. Just happen to be where -- we're right at that same level of AUM on...

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William R. Katz, Citigroup Inc, Research Division - MD [35]

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Okay. I apologize if I missed that. And then when you look out into 2021, when you're on the other side of the sort of normalized savings, does your incremental margin change or maybe another way to ask the question is, what kind of growth rate would you anticipate on expenses, assuming a relatively benign market backdrop?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [36]

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Yes. A good question. So again, I think we would expect to see some 3% inflation on expenses, generally, as you get out into those outer years. I think, again, one of the good news elements is that we are accelerating a fair amount of investment through this transaction. So our need to, sort, of substantially, sort of, redo technology and other things that other firms might have to deal with through the course of the next several years, we're kind of getting a lot of that done through this transaction.

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Operator [37]

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The next question comes from Patrick Davitt with Autonomous Research.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [38]

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My first one is on the, I guess, the expected uptick in fee rates from Oppenheimer. I know it's tough to do exactly, but my rough math suggests the full quarterized uptick was something in the range of 3 basis points and I think you got it to 4.5. Am I in the right ballpark there? And is there a reason to change the expectation for that 4.5 basis point uptick on a full run rate basis?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [39]

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So we still have in the model an assumption of roughly 2 basis points being lost due to fee breakage, if you remember, Patrick. And so we still don't know if that's going to be fully the case but I'm, at this point, not able to say that it's not the case and so, I would still assume that there's -- that $45 million kind of loss going to happen at some point, particularly as we -- at some point, potentially rationalize products and so forth. So the way that I'd be thinking about it, we were 31 -- I'm sorry, 39.1 in Q2. We'd expect to see our basis points climb roughly 2 basis points into Q3 and maybe a little bit sort of higher into Q4. So that would be our thinking. So $40 million, $41.2 million to $41.5 million, in that range for the last half of this year.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [40]

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Okay. And then on China, obviously, good to see the traction there and obviously in some higher fee products. Could you walk through in more detail about what's driving that uptick in inflows? And if you see that run rate accelerating at a similar rate going forward? And then finally, any nuances to the sharing of those economics given how they're distributed?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [41]

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Yes. I'll make a couple of comments. China's a fundamental strength of ours. It has been for a long time. But what you are seeing now is, the growth is just incredible. And it was always an opportunity but now it's literally happening. It's happening at both levels: the institutional level, there where we're managing money for the (inaudible), Wall funds, et cetera, but the joint venture is an amazing situation right now: Invesco, Great Wall. The flows just continue to grow and we expect that to continue. And I -- and probably the thing that's probably most unique is, we're the only foreign money manager managing money for Ant Financial in that money fund pool and what's happened post that, it's been adding on traditional long-only equity fixed-income capabilities. So what they call the e-commerce platforms are very strong and for us there's (inaudible) nothing to partner up with to distributor in China right now. So we see nothing but ongoing success in China.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [42]

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Yes. I'd say, I mean, about half of our flows are coming from those digital distribution channels. The economics on those channels are -- some of them are to what they are for the banking channel. So there's no, sort of, free gift here but ultimately, we're very well positioned to continue to drive those types of products through and the overall fee rate in China, in particular, is well in excess of the firm's overall fee rate. So that dynamic in terms of our ability to distribute our active products into China is one that will have a positive impact, not only on margin and you can see what the margin is on our China Great Wall business because we provide great detail in our Q and, I mean, it's in excess of 50%. So you can see that it's going to have a positive incremental margin impact as we grow -- as we're successful and we expect to be, grow in China and return to business.

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Operator [43]

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The next question comes from Kenneth Lee with RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [44]

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Just a follow-up on the AUM breakage. Wondering what key factors drove the updated thought for being meaningful less than $10 billion? Was it just the transition of the state of New Mexico? Or was there anything else?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [45]

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So I think we announced some changes around our portfolio teams with respect to Oppenheimer and Invesco as we brought the 2 firms together. And again, it was relatively minor in terms of kind of the overlap, as we've hinted, but now that we've sort of fully got our arms around that, the impacted assets are really not large and so when we think about fee breakage due to those changes, the $10 billion is well in excess of what is reasonable to think about. So it's really just understanding what ultimately we were able to do around those investment teams and ultimately, there'll be a follow-up impact on some products in terms of mergers of products and product rationalization but the overall impacted AUM is not large.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [46]

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Okay. Great. And then just one follow-up. In terms of the alternative AUM, wondering what key factors drove the outflows there? I think you mentioned in the past there were some elevated outflows in the GTR product. Just wondering whether you still saw that in this quarter? And if so, could you give us a sense of what fund flows were in alternatives excluding GTR?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [47]

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Yes. So it actually wasn't GTR. It was mostly the senior bank loan. So that was a massive outflow industry-wide. We're obviously large. It was about $2.3 billion of outflow for our Senior Loan business across the ETFs and the actively traded accounts. GTR was $1.3 billion out. So there was something there but it was not the biggest piece. And ultimately, I think GTR flow picture is not one that we're hugely concerned about as there's been some strong improvement year-to-date on the performance, I mean, even though it was underperforming on a 3-year basis, it actually performed extremely well in some of the most volatile months, doing exactly what it was supposed to do in terms of protecting downside. So we feel reasonably good about protecting the GTR franchise and not seeing it, sort of, continue to be a source of significant outflow.

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Operator [48]

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The next question comes from Brennan Hawken with UBS.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [49]

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Loren, I think you had said that 41.2 to 41.5 basis points is the updated expectation for the revenue yield. Does that replace the previous 41.5? And -- and it's just so like you guys have a little bit more granular detail on it now and so that's why there's an update. And why would that rate move up from 3Q, just a little? That's a little confusing to me.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [50]

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So I think what I was looking at was net revenue yield. So excluding performance fees, it's probably more flat when you think about where the timing is. So you can think about somewhere between sort of 41, as I mentioned, 41.2, 41.5, just kind of that -- the 41.5 pickup is just the performance fee impact, which is, again, our normally sort of weird, lame approach to forecasting performance fees, which is not very accurate.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [51]

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Okay. So the 41.2 to 41.5 is not fee revenue ex performance fees but it's all-in fee revenue?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [52]

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The all-in fee revenue. Yes.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [53]

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Okay. Got it. So when we look at it like-for-like versus the previous -- because I think the 41.5 that you guys gave last time was for run rate fee revenue ex performance fees. So is...

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [54]

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Right. So again, we've had some outflow. We've had some mixed dynamics that worked against us. So this is kind of where we're landing right now based on today.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [55]

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Okay. Okay. I got it. That's helpful. And then, just definitionally understanding some the deal-related breakage in the $10 billion that you guys updated, is this just when a client indicates that the reason they are redeeming is due to the deal and, therefore, it's a -- it's sort of a high-barred (inaudible) in order to get that notification? Because it certainly seems like, from the outside and if you guys -- if there -- if I'm misunderstanding this, I'd love to hear a clarification, but it definitely feels like flows have deteriorated since the deal got announced. It doesn't -- it feels like that's -- I recognize 4Q was really tough and volatile and it's been a tough time but it also feels like, especially versus where the run rate was previously on an asset flow basis, it's deteriorated. And so isn't some of that probably deal-related and the clients just aren't telling you? Maybe you can help me understand that a bit.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [56]

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Yes. So we -- I mean, it's impossible to really know, but we look at our outflows relative to the industry outflows and we try to explain how much of the outflow is due to the industry. And we also, obviously, look at our performance and we can explain some of the outflow due to performance. We can explain 80% to 90% of the outflows we're seeing in the Oppenheimer deal due to industry flows and due to performance. So we're not having to attribute in order to -- be fair to attribute it to the deal. Again, if anyone tells us it's deal-related, we'll put it into that $10 billion, but we do think that mostly what is happening is due to industry kind of outflows and the performance on certain key, large products.

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Operator [57]

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The next question comes from Alex Blostein with Goldman Sachs.

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Ryan Peter Bailey, Goldman Sachs Group Inc., Research Division - Associate [58]

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This is actually Ryan Bailey filling in for Alex. Marty, I wanted to come to back to your comments around the divergence between margins and fee rates and how it flows into ETFs. They're actually supportive of the incremental margin. Can you give us sort of similar color around the margin impact for the active equity book and the active alternative book? Because I think what we're trying to do from our seats is, marry the idea that if you have outflows from what we would -- what we see as [highest] fee buckets what impact that would have on the margin?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [59]

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Yes. I can answer that, Brian. It is -- it's actually very similar. I think there's always been this perception that lower fee rate products must mean lower margin. I mean that's been sort of the knee-jerk on most people when they're bemoaning the dropping fee rate. But the reality is, the incremental margin, if you are able to grow often existing portfolio team, I mean, you're not having to add a lot of resources to be able to do that so the economics are similarly excellent and higher than the firm's overall average. So as long as we can sort of grow assets, both in Active and in Passive, we're going to see the fee rate and the incremental margins in that 50% to 65% range. I mean again, it varies a little bit team-to-team, region-to-region but overall, it's fair to say that it's very similar.

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Ryan Peter Bailey, Goldman Sachs Group Inc., Research Division - Associate [60]

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Got it. Okay. And then maybe just one more. We've talked a fair amount about the U.K. business but if we could come back there for a second. There -- it feels like now all of a sudden, there is potential for increased regulatory pressure there, potentially around some of maybe the way funds are structured. Can you give us a little bit of color on what's been the potential impact on your fund flows for the quarter, particularly in U.K? And then, if any of that was related to some of the issues that were associated with Woodford funds?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [61]

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Yes. No, Look I -- we don't see that sort of conversation about the regulatory. Where it might end up is that they're impacting our flows. I mean it really has been, as we spoke previously, it's a risk-off environment and people, in particular, hate U.K. equities, just with Brexit overhang and again, what we see is the real opportunity for us in the U.K, it's a very important market for us, will continue to be. There have been obviously important headwinds because of Brexit and as we've said, we really saw it come to light just really last year. It seems real in the marketplace and that's where the reactions are. But again, I think what we've done, our competitive positioning with Intelliflo and the impact on flows now, it's going to probably kick in much more Q1 next year but we'll start to see probably in Q4, the beginning of inflows through the various models on Intelliflo and it -- again, it just puts us in a very different place competitively than the other organizations we compete with there.

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Operator [62]

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The next question comes from Brian Bedell with Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [63]

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Maybe if I could just go back to the Oppenheimer flow situation really from the sales side in terms of just the trajectory of what you're doing there and whether we can see that potentially reversing the outflows. And if you can talk a little bit about the distribution, actually the sales force, just the size of that sales force now versus before the deal, how much that's expanded? And whether there's been any change in composition either across geography footprint or greater strength in any particular distribution channel? And then the status of the work on launching the Oppenheimer products institutionally as well as listing in Europe?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [64]

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Let me start. As I mentioned just a few minutes ago, we anticipate the retail products be available outside the United States in October. Institutionally, we're just going through, what we call, market readiness right now with a number of the Oppenheimer teams. So we'll be in markets very shortly here. Already there's been some meetings out in Asia with the teams. So that's all underway. I'll make a comment and Loren can speak more specifically to the size. But the U.S. retail distribution forces, as I said, it's the most talented group of individuals that I've ever been associated with. They're very focused. They're in market and focusing on different channels than what we had in the past, within it high net worth being one of the areas. And again, we've just think we're positioned very strongly in that market.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [65]

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Yes. I mean I'd say, I mean, it's been a huge effort. Obviously, the amount of training that's had to happen has been significant. I mean, there've been tens of thousands of hours of in-person and sort of training to get everyone up to speed on the products and the regions and kind of how things work in a combined organization. There's been significant work on the brand and sort of positioning and the digital campaigns with respect to our products and having people understand the combined organization, versus what the 2 -- the 2 -- what is was previously, the 2 separate ones. And we are beginning to really get real connection with placements and investment wins, particularly where consultants historically had missed the opportunities of previous firms because of the gaps we had in product capabilities but combined we have now sort of the full set of capabilities. So again, I think it's still, as we said, early days and so we really think we're going to see the -- our ability to grow our sales number off of maybe what you'd see as a second quarter level, just how successful we're going to be, is -- we'll see it when we see it but we do think it's material and we do think that there's far more upside off of the level that we're currently seeing. In terms of the other part that we're excited about is the European opportunity of those products. I think are ready to go at the end of September, sometime in September. So that's something that you'll actually begin to see some activity inflows coming off of those products, hopefully, this year.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [66]

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And how big did the sales force increase on the wholesaling side?

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [67]

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Just -- I mean, it was a modest increase. I think there was some change in composition with more use of hybrids, sort of, crossing between regional and -- I'm sorry, internal and external or where the hybrids are coming in. But, I mean, there wasn't a dramatic increase in net size. It was really just the talent and the skill set of the people that we retained.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [68]

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Great. Okay. And then maybe just lastly, Marty, on -- just your view on the Precidian active nontransparent ETF. Maybe first of all, just holistically, what do you think of the ability for that product to significantly help active flows through the industry? And then you're in a position at Invesco, whether you're ready to launch those products as early as by year-end or early next year?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [69]

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Yes. Look, I think the excitement around it is ahead of the reality of the impact and I think you're starting to pick that up. I think it's a very interesting vehicle and, again, we will end up participating in our own way in that but we don't anticipate it being, frankly, a big change in the industry anytime soon.

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Operator [70]

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The next question comes from Michael Cyprys with Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [71]

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Just wanted to circle back on some of your commentary around retail solutions. I guess maybe more broadly, as you think about retail solution, modeled portfolios, Jemstep, Intelliflo if you could just update us today on how meaningful those are in terms of AUM flows and revenue at Invesco? What the pipeline looks like? And can you talk about some of the actions that you're taking over the next 6 to 12 months for those initiatives to accelerate?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [72]

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Yes. So let me start with Jemstep. So still being channel focused, we're now, as I've said in the past, it's literally an application that you install. Literally is integrated into the client's infrastructure so it does take longer to do that. So that's starting to happen right now. We're anticipating probably into next year when we'll start to see something more material there. Intelliflo is further ahead. 35% market share in the United Kingdom between Intelliflo and Jemstep. There are opportunities outside of the United States and the U.K. that we're looking at right now. So again, I would say, 2020, you're going to start to see flow impact from the combination of those 2.

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Loren Michael Starr, Invesco Ltd. - Senior MD & CFO [73]

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Yes. And -- I mean, so most of the revenues are coming from Intelliflo. It's showing up in our service and distribution fee revenue line. I mean so those numbers are becoming larger as the business is growing $10 million-plus kind of levels. It is one that we have not really viewed its MPS capability yet, where you could actually see the Invesco products find their way in these model portfolios. The total AUA for Intelliflo is about $450 billion in assets right now and it continues to grow, just in the U.K. So we -- so obviously the impact for us being successful with that activity would be material in terms of assets under management and revenue. So there is a reason to be excited about how this is going to roll out.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [74]

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Okay. Great. And just as a quick follow-up on the MassMutual relationship. What sort of conversation and dialogue are you having with MassMutual regarding the cross marketing and synergies from that relationship? And in your view, what would success look like, say, 3 years from now with respect to that relationship and the revenue synergies? How meaningful?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [75]

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Yes. A very strong relationship and the teams are -- both teams are working very diligently on probably half a dozen different initiatives right now. They range from the obvious with their sales force of 8,500 here in the United States and opportunities, they are co-product development, things in the general account we're having a conversation with and also looking at -- there's some related things we can do with their insurance capabilities and our money management capabilities. So we're well into it. And how big could it be? We'll just have to see. But they're a great partner and they're absolutely dedicated to success of -- between the 2 organizations and we're, frankly, very excited about it and you'll hear more specifics in the not-too-distant future.

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Operator [76]

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The next question comes from Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [77]

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I just want to talk a little bit about the leveraging of Oppenheimer. I know historically, it had -- mutual fund track records, [imagine having to always] translate it into the Institutional business or the SMA business. So I mean, how do you feel about [things that] you're trying to leverage that platform through other channels. I mean, is it really that transferable to other strategies and other markets? Where do you think the -- do you think the real leverage is? Is it kind of retail outside the U.S?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [78]

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No. Not just retail. I think it -- [right] with this -- what has our experience been in things that will transfer and be successful. It really depends on the long-term track records but really not just that but the asset class itself. And as I was saying, from the beginning of this, if you look at the capabilities that came over, they are in-demand capabilities. You -- so they've had a great global equity capability. Global equity is not that attractive here in the United States. Outside of the United States, it's very attractive at the institutional level and that is one of the areas we're having conversations. There's emerging-markets equity, emerging-markets debt, 2 other areas where there's institutional demand and, frankly, there's not enough high-quality managers in those areas. And so if you look at the combined firm right now, we're very, very strong there. And emerging-market equity, obviously, being one of the most important franchises in the industry there. You look at things -- if you want to get sort of basic, the bank loan capabilities with ours, it is, arguably, the top of industry and those are things that are not just in the United States but outside of United States, too. So you really have to look at -- we keep talking about the makeup of the asset classes that came over. They're really important asset classes that many institutions are interested in them also. And not just the retail channel outside of the States. So again, for us, it's not if it's going to happen. It's just when is it going to happen and just from my past experience, we're further ahead than we've ever been in a combination. And at this time, we're literally in market, trying to make things happen where more often than not you don't start something like that till 6 months after a close in a combination this size. So I can't tell you what quarter we're going to start to see the flows but we've done everything possible to be in market, making an impact right now.

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Operator [79]

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And our last question comes from Chris Harris with Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [80]

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If we look at retail investor behavior here in the U.S., as you know, the stock market is going up a lot but equity flows in the industry are pretty weak. As you know, a lot of flows going into bonds. In your judgment, why are investors behaving this way? And really more importantly, is your commentary about U.S. sales picking up predicated on investors increasing their risk appetite from here?

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [81]

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Let me hit the last. So no, it's not predicated on investors changing their appetite. I mean I can say that simply because of the depth and breadth of our capabilities. There are very few asset classes that we don't have strong capabilities in and so regardless of market, that's a topic. You're asking the very important question of what's happening. Why are investors staying away from U.S. equities buy in particular. Look, it's 10 years after the market bottom. I still think investors have been, retail investors, in particular, focused on cap-weighted indexes. Quite frankly, I think, they have too much exposure to it and retail investors, that is. And you saw what happened in Q4 last year and I think you just, again, have to look at the narrowness of the equity market and the difference in the value growth trade and that's really where the money's going right now and as we've said and I'm sure you have, too, we hope retail investors understand what they own. It will change and -- but when it will change? Probably after a correction, in my estimate.

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Operator [82]

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And that was the last question.

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Martin L. Flanagan, Invesco Ltd. - President, CEO & Director [83]

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Okay. Well, thank you, everybody, for the questions and I look forward to talking to you next quarter. Have a good rest of the day.

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Operator [84]

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Thank you. That does conclude today's conference. All participants may disconnect. Thank you for your participation.