Invesco Aktie

Welcome to the Invesco Second Quarter Earnings Conference Call. [Operator Instructions] as a reminder, today's call is being recorded.

Now I'll turn the call over to Greg Ketron, Invesco's Head of Investor Relations.

Okay. Thanks, operator, and to everyone joining us today. In addition to the press release, we have provided a presentation that covers the top plan to address. The press release and presentation are available on our website at invesco.com. This information can be found by going to the Investor Relations section of the website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclaimers on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP.

Finally, Invesco is not responsible for the accuracy of our earnings transcripts provided by third parties. The only authorized webcasts are located on our website.

Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions.

I'll now turn the call over to Andrew.

All right. Thanks, Greg, and good morning to everyone. I'm pleased to be speaking with you all today. We have built significant momentum thus far in 2026 as we continue to execute against our strategic priorities. Year-to-date, we posted record net inflows of $67 billion or a 7% annualized organic growth rate and generated record net revenue with an increase of 17% over the same period last year. Our broad product suite and global reach is resonating with clients as they seek to navigate an ever more complex market environment. Our increasingly scaled platform and disciplined approach to expense management, gives us significant operating leverage.

We increased operating income by 35% in the first half of this year, and we expanded our operating margin by nearly 470 basis points as compared to the same period last year, reaching 37.5% in the second quarter. Further, we grew our bottom line by nearly 60% in the first half of 2026 as compared to the first half of last year. This is a testament to the hard work that our colleagues across Invesco have been doing over the past several quarters to streamline our business, drive profitability and margin expansion and strengthen our balance sheet.

As highlighted on Slide 3, we are innovating for our clients, clarifying and simplifying our organization, and as a result, we are delivering for our shareholders. Product line management and innovation are key to our growth and are critical and remain relevant to our clients. As such, we have made several additions and advancements in areas where there is significant demand like ETFs, SMAs, model portfolios and private assets. We have launched more than 50 products this year across the Americas, EMEA and APAC. This includes 6 new active ETF launches and a new partnership with Superstate, where we are now the manager of our first tokenized treasury strategy.

Another way we are innovating for our clients is through partnerships. Our Barings and LGT Capital Partners private market partnerships are designed to help us accelerate growth and the high opportunity U.S. private wealth and defined contribution markets. We completed our first product initiatives with Barings at the beginning of this year, and we look forward to sharing more details on additional product launches with each firm later this year.

We have also established partnerships in India and Canada that have allowed us to redefine our position in these markets from full ownership to minority status and as a subadvisor, respectively, while aligning with strong local financial institutions. These changes have resulted in greater firm-wide focus, reduced operating expenses, increased leverage of our global investment platform, created balance sheet benefits, and enhanced revenue opportunities. To this end, during the second quarter, we successfully completed CI's acquisition of our Canadian products and we have commenced our long-term strategic partnership with them, where we are now sub-advising funds with approximately $9 billion in AUM.

Another clear indicator of the innovation aptitude at Invesco was the successful conversion late last year of the QQQ fund. In the first half of 2026, the Qs generated an incremental $130 million in net revenues for Invesco, its AUM grew 20% and it produced strong organic net flow growth in the second quarter. We have significant opportunities to continue to expand this flagship competitively advantaged product, not only here in the United States, where the traction is incredibly strong, but also in other international markets. The QQQ is now cross listed on both the Hong Kong and Tokyo Stock Exchanges with over $10 billion of AUM raised in a short period of time. Examples like these are indicators of the strength of the multi-decade QQQ brand that is recognized around the world for its innovation.

We see several avenues to continue to expand QQQ's client base, our innovation suite in general and our wider $1.25 trillion ETF complex. Beyond these and other strategic efforts, we have continued to make progress on our balance sheet recapitalization. We have significantly improved our leverage ratio over the last year from 2.7x to 1.9x and inclusive of the outstanding preferreds. We have also increased our common share buybacks by 80% year-to-date versus the first 6 months of last year.

Importantly, we have done this while continuing to invest in the business and reduce debt, including the outstanding preferreds. Allison will speak more about these efforts later in the call. We will also update you on our transformational hybrid investment platform implementation which is another strategically important priority, which will yield benefits across our organization and for our clients.

As we discussed on previous calls, our strategy continues to prioritize opportunities at the intersection of market size and secular change where Invesco is uniquely positioned to selectively drive growth across regions, channels and asset classes. We continue to execute with discipline, allocate capital and resources accordingly and improve performance.

So moving on to Slide 4. I'll discuss how our efforts drove record net long-term inflows in the second quarter. The advantages of our broad increasingly scaled, diversified global platform were evident again this quarter. Markets were supportive driven by strong equity appreciation and improving fixed income returns resulting in investor capital remaining in motion across the industry, albeit more narrowly focused and mindful of ongoing macroeconomic and policy uncertainty.

Clients continue to entrust Invesco with significant new capital across our global product set. Net long-term inflows during the period were a record $45.1 billion, marking the 12th straight quarter of net inflows and representing annualized organic growth of nearly 9%.

Additionally, we generated $13.2 billion in global liquidity inflows ending the period with $215 billion in AUM. Altogether, we reached an AUM high watermark of $2.5 trillion. Importantly, we continue to be encouraged by the breadth of our overall growth. We had solid positive flows across several dimensions, including in many of our strategically important investment capabilities across each of our 3 regions and in both our active and passive strategies. The breadth of our inflows was also demonstrated by the fact that over 30 of our products generated more than $500 million in net inflows during the quarter.

The Asia Pacific and EMEA regions again produced very strong net inflows with 10% and nearly 7% annualized organic growth, respectively. Additionally, on a gross sales basis, we had our highest volume quarter for actively managed fund. With all of this as a macro backdrop, I'd like to spend a few minutes highlighting growth drivers in each of our investment capabilities.

Starting with our ETF and index offering, where we continue to meaningfully scale and diversify our platform to meet evolving client demand. Ending AUM for these funds stood at a record $753 billion or nearly $1.25 trillion when including the QQQ. We also had a record $30 billion of net inflows during the quarter with 17% annualized organic growth. Within our ETF range, we garnered net inflows across a diverse set of products, led by our Qs innovation suite and our quality and momentum equity factor funds, which raised a record $7 billion of net inflows in the second quarter. It's also notable that nearly 1/3 of our net inflows were generated in the EMEA region, where we continue to see strong demand for our ETF range. We remain focused on innovation in the ETF space.

During the quarter, we expanded our bullet share lineup with 7 new fund launches in the United States, in addition to launching 5 ETFs in the EMEA region, including 2 new active funds. We have built a robust ETF platform globally, which continues to grow as demand has accelerated for high-quality, differentiated strategies. We currently manage $25 billion in active ETFs across more than 40 products and the AUM base increases to more than $40 billion when including index strategies that are executed by our active investment teams.

Our QQQ fund, also attracted strong interest in the second quarter with $14 billion in net inflows or 12% annualized organic growth. This reflects our competitively advantaged position supported by a very large and broad institutional and retail investor base that with unmatched liquidity with tight spreads and deep options in derivative markets built over multiple decades for this flagship product.

So moving on to fundamental fixed income. Demand for our products remained robust. While we report on this slide, net inflows of a modest $0.4 billion for the quarter, when you widen the scope to include the fixed income flows from our ETF and China JV, it expands our overall asset class net long-term inflows to $14 billion during the quarter or 11% annualized organic growth. This growth was broad with inflows from each of our regions, from both the retail and institutional channels and across both active and passive products.

Two drivers of fundamental fixed income flows were demand for individual SMAs from U.S. wealth management clients and overall institutional fixed income demand in EMEA, where we recorded net inflows of nearly $2 billion for the quarter. Our entire U.S. wealth management SMA platform which also includes a portion of equity assets now stands at nearly $40 billion in AUM. We have one the fastest-growing SMA offerings in the market, generating an annualized organic growth of 23% this quarter.

The strong results once again indicate that we are well positioned to capture fixed income money in motion by meeting client needs across the credit and duration spectrum, geographic preferences and active and passive exposures.

Moving on to our China JV. Our growth continues to be underpinned by our scale and the improving macro stability in this market. We reached a record high AUM of USD 163 billion, a 15% increase over the prior quarter. Net long-term inflows were $6.9 billion, delivering a 22% annualized organic growth rate. Net inflows were driven by our fixed income and our Fixed Income Plus strategies, which, as you recall, are a form of balanced funds. The continued growth in our domestic Chinese business is supported by a diversified product line with various style offerings, which allows us to adapt to changing client needs in different market environments.

To further support growth in our business, we launched 11 new funds this quarter, which collectively generated $1.2 billion in net inflows. These funds align with the growing demand for innovation and balanced and equity strategies. We continue to be well positioned as the Chinese asset management market develops and evolves in both the individual investor and retirement sectors.

Shifting to private markets where we posted $1.9 billion of net inflows across our alternative credit and direct real estate offering. In credit, we saw a return to demand for our industry-leading bank loan ETFs BKLN. This growth was also augmented by net inflows into our CLO products. Despite near-term volatility and heightened headline rent, credit fundamentals remain broadly intact and spillover risk into the structured loans space have been limited. We continue to see strong demand for private credit solutions from institutional investors on a global basis and the current environment has not changed our long-term expansion plans and the retirement and wealth management channels.

We have a favorable position with dry powder, diversification and extensive experience. For managers with our discipline, continued volatility may ultimately prove to be an opportunity. Our private real estate capabilities also recorded positive net inflows of $1.4 billion or an annualized organic growth rate of 8% this quarter, these results were led by INCREF, which is our real estate debt fund for U.S. wealth management clients, which continue to gain scale and assets, including leverage is now totaling over $6 billion. This fund was launched only a few years back and is yet another example of our deep investment talent, product innovation and strong distribution teams collectively driving growth. We are excited about prospects across our private markets business with organic growth opportunities amplified by our partnerships with Barings and LGT Capital to further penetrate the wealth management and defined contribution markets.

Moving on to our multi-asset capability, where we had modest net outflows for the quarter. Continued inflows in our systematic equity offerings were offset by outflows from balanced risk allocation strategies, which remain out of favor.

Finally, in fundamental equities, we continue to have positive net inflows from clients in Asia Pacific, driven by ongoing momentum in our global equity income fund, which remains the top-selling retail active fund in the Japanese market. This fund posted net inflows of nearly $3 billion during the quarter, rapidly growing to $28 billion in AUM, while generating a very favorable net revenue yield for Invesco. We also posted our second consecutive quarter of net inflows in our U.S. value equity strategies.

Furthermore, our developed markets fund continues to experience significant moderation of outflows with just $0.5 billion during the quarter. Additionally, on an overall gross sales basis, we had among our best fundamental equity flow quarters since the beginning of 2022 on the heels of an exceptionally strong first quarter. Despite these positive fundamental equity flow highlights, we remained in net outflows of $7.7 billion overall in this segment. The uptick this quarter included a few large idiosyncratic liquidations from a couple of institutional investors, making overall allocation -- reallocation positioning decisions.

We continue to focus on strengthening our fundamental equity long-term investment quality through talent, risk management and overall platform tool enhancements. We are making progress, and we are seeing improved performance, as outlined on the next slide.

So moving on to Slide 5, which shows our overall investment performance relative to benchmarks and peers as well as our performance in key capabilities where information is readily comparable and more meaningful driving results. Investment performance is integral to winning and maintaining market share regardless of overall market demand. As such, achieving first quartile investment performance remains a key priority for Invesco. Overall, 44% of our active funds are performing in the top quartile of peers on a 3-year time horizon with nearly half reaching that bar over -- on a 5-year basis.

Further, nearly 70% of our active AUM is beating its respective benchmark on both a 3- and 5-year basis. And as I mentioned, we are beginning to see improved performance in our fundamental equity lineup which now has over 40% of funds performing in the top quartile of peers on a 5-year time horizon with over half beating their benchmark.

So with that, I'm going to take a pause and turn the call over to Allison to discuss the quarter's financial results, and I look forward to your questions.

Thank you, Andrew, and good morning, everyone. I'm going to start with the second quarter financial results that are on Slide 6. Strong organic growth and positive markets drove a significant increase in assets under management during the second quarter. Net long-term asset inflows were a record $45 million in the second quarter, nearly a 9% annualized organic growth rate, marking the 12th consecutive quarter of net inflows. Favorable markets drove a $257 billion increase in AUM and net flows in the money market funds totaled $17 billion for the quarter.

AUM at the end of the quarter reached a record high of $2.5 trillion, a 14% increase over the first quarter and 23% higher than the second quarter of last year. Average long-term AUM was $2.1 trillion, a 7% increase over last quarter and 58% greater than last year. Net revenues, adjusted operating income and adjusted operating margin continued to show meaningful improvement from the first quarter as well as the same quarter last year, while adjusted operating expenses continued to be well managed.

On a sequential quarter basis, net revenue growth was 5% and while adjusted operating expenses were essentially flat, generating nearly 500 basis points of positive operating leverage and a 300 basis point operating margin improvement in the second quarter, operating margin expanding to 37.5%.

Adjusted operating income increased 14% to nearly $500 million for the quarter, and adjusted diluted earnings per share increased to $0.71 from $0.57 in the first quarter, a 25% improvement. On a year-over-year basis, net revenue growth was over 20%, while adjusted operating expenses increased 9%, generating over 10 points of positive operating leverage and a 630 basis point operating margin expansion.

Adjusted operating income increased 45% and adjusted diluted earnings per share nearly doubled from $0.36 last year to $0.71 that we reported for the second quarter. Our focus on strengthening the balance sheet continued during the quarter as we reduced net debt by more than $450 million in the second quarter. The reduction combined with improved EBITDA, resulted in a substantial improvement in our leverage ratios.

Finally, we increased common share repurchases in the second quarter as compared to prior quarters, buying back $50 million or 1.9 million shares. We also announced in April, an increase in the quarterly common stock dividend of $0.215 per share.

Now moving to Slide 7. Secular shifts in client demand continue to drive strong growth in lower fee products, such as ETFs, including the QQQ, while the demand for higher fee products, such as fundamental equity has not been as strong. This has resulted in a more balanced AUM growth file for Invesco, which better positions the firm to navigate various market cycles, events and evolving client demand. We've seen the impact of the asset mix shift moderate over the past several quarters resulting in a more modest decline in the net revenue yield and more recently approaching a degree of stabilization. Provide context, the net revenue yield was 22.4 basis points for the second quarter. While slightly down from the first quarter, it was in line with the fourth quarter. The exit yield at the end of the second quarter was 22 basis points.

Turning to Slide 8. Net revenue of $1.3 billion in the second quarter was $224 million higher compared to the same quarter last year and $55 million higher as compared to last quarter. The increase in net revenue was largely driven by investment management fees, predominantly due to higher average AUM. On a year-over-year basis, the increase was also driven by the reclassification of the QQQ to fee earnings.

Operating expenses increased $70 million versus the same quarter last year and only $2 million as compared to last quarter. The year-over-year increase was mainly driven by higher employee variable compensation related to the growth in net revenue and marketing expenses related to the reclassification of QQQ.

The hybrid investment platform implementation costs were $14 million in the second quarter, in line with our expectations and prior quarters. Incremental operating expense associated with AUM that has been moved on to the hybrid platform was $5 million in the quarter. The majority of this expense is impacting property office and technology and it will be in this line item going forward. Regarding the hybrid implementation platform cost for the remainder of 2026, we expect quarterly onetime implementation cost to run closer to $15 million per quarter in the second half of this year with the push to have implementation completed by year-end.

As we transition more AUM onto the platform, incremental expense related to AUM on the platform will build towards $10 million per quarter later this year. Expenses associated with the platform may fluctuate quarter-to-quarter due to timing. Effective tax rate for the second quarter was 24.9%, in line with expectations. And for the fourth -- for the third quarter, we estimate our non-GAAP effective tax rate will be in the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax sites.

I'm going to wrap up on Slide 9. We continue to make progress on building balance sheet strength and improving our leverage growth. During the second quarter, we reduced total debt by $343 million and net debt by over $450 million as compared to the first quarter. This included reducing the amount drawn on the revolving credit facility from $1.1 billion at the end of the first quarter to $736 million at the end of the second quarter accomplished through operating cash flow. The reduction in debt, coupled with improving EBITDA resulted in a substantial improvement in our leverage ratios.

The leverage ratio inclusive of the preferred stock declined by $0.04 turn in the second quarter to 1.9x and the leverage ratio, excluding the preferred stock declined by over $0.03 a turn to 0.54x for the second quarter.

Looking back over the past year, the leverage ratio inclusive of the preferred stock improved by nearly a turn driven by the $1.5 billion in preferred share repurchases, debt reduction and improving EBITDA. We expect further improvement in the leverage ratios for the remainder of the year as we reduce the amount drawn on the facility and simultaneously grow EBITDA.

We also increased the degree of common share repurchases in the second quarter as well dividend. We increased the amount repurchased of $50 million or 1.9 million shares. And in April, we announced an increase in the quarterly common stock dividend to $0.215 per share. We intend to continue a regular common share repurchase program going forward as we target a total payout ratio, including common dividends and share buybacks to be near 60%.

To conclude, we generated another quarter of significant organic growth and the diversity of our business, coupled with positive market trends drove AUM to a near record level. As a result, we delivered strong revenue growth for the quarter. This, combined with well-managed expenses delivered another quarter of positive operating leverage and a significant improvement in our operating margin. We also continued progress on building a stronger balance sheet.

We're committed to driving profitable growth, a high level of financial performance and enhancing the return of capital to our shareholders.

And with that, operator, if you could open the line up for Q&A.

[Operator Instructions]

Our first question comes from Patrick Daitt with Autonomous Research.

I'll start with the Qs. Now that we know kind of what the fee rates are going to be for the competitor products, I guess, I would like to get your updated thoughts on firstly, your willingness to adjust the fee for the Qs. And two, to what degree there could be an expense offset to that either from marketing or custody that you can squeeze to offset any revenue growth.

Yes, Patrick, thanks for the question. Let me start, and then Allison can pick up on some of the specifics of the second part of it. I want to reiterate a couple of things. I mean, we have a 25-year history managing the QQQ. It has a very large and entrenched position. It has a ton of brand recognition and note that it's the one-of-a-kind QQQ. And it also is part of our ETF innovation suite, which now has $650 billion of assets across a ton of products around the world.

The Qs recall, has a ton of scale, a ton of liquidity, execution benefits. It's the fifth largest ETF and the second most actively traded in the world. So I mentioned all that only to say, investors in our funds spent a lot of time looking at total cost of ownership. And that goes beyond the total expense ratio and Q -- shareholders have benefited from that and will continue to benefit given the size and scale.

What I mean by that is really tight bias spreads, deep on the screen liquidity, a really strong trading base, and $0.5 trillion of notional options associated with it. So it has a really strong ecosystem around it that's unique.

Also, switching costs are something people look at. And given the low relative tax base of so many in the QQQ, those switching costs come with the real economic impact. And then I want to also mention that we have our own test case of how these additional products around the Qs impact things. The QQM, which we launched about 5 years ago, stands at about $100 billion today. But it didn't slow down the QQQ significant growth during the period either.

Over the last 3 years, that funds up 2.5x in terms of its size and it attracted $75 billion of net new flows despite having a lower price product alongside it. And then recently, as I mentioned in my comments, there's significant ownership of the QQQ around the world and indicative of how quickly we can scale up because of our strong brand. We recently listed in Hong Kong and in Tokyo, and those AUM levels are already a $10 billion combined. So we're really going to focus on differentiating ourselves on the total cost of ownership. We're really going to accentuate the deeply rooted QQQ brand, which is both recognized here in the U.S. and globally, and we're going to continue to innovate through the Suites leadership in new markets and new channels. Allison, do you want to pick up on maybe some of the more specific questions?

Sure. Anything pricing related. I would say, we're going to focus on long-term client outcomes. We're going to continue to focus on product differentiation, the ecosystem strength. We're not going to have a short-term competitive reaction. I think we've been in this for a long time, we're going to be in it for a long time, and we're really focused on that total client experience, as Andrew was discussing.

We've got that dominant entrenched position. That's worth a substantial amount. And all of our marketing spend, as we think about that, is really going to be continuing to focus on how do we focus on promoting that Q2 brand, which arguably is probably the best-known ticker out there. And we're going to continue to focus our marketing dollars and creating that education and aid in adviser adoption. It's been incredibly effective. There's hundreds of million dollars, it's not north of $1 billion. It's already been invested against that brand over the last several decades.

And it's going to be hard to match that level of brand strength and awareness or even match the spend that we have already spent against it. And we've really got the flexibility now to choose how we want to market and where we want to market and where we want to direct that spend and in the manner that we think is best. A lot of our marketing spend right now is dedicated outside of the United States. And as Andrew said earlier, we're north of $10 billion in AUM due to the cross listing of the QQQ. And Japan and in Hong Kong so we feel very good about the level of marketing spend there.

Maybe the last part of your question, I think you mentioned custodian fees and any flexibility there. Look, I'd say, custodian fee was Bank of New York custodian. We could not have gotten the conversion done without Bank of New York's help 6 months ago. Those are long-term contracts that you enter into. So I don't think there's a lot of room on that right now, but I want to be really clear, they've been an unbelievably terrific partner, and we couldn't have done it without the Bank of New York.

Very helpful and detailed. One quick follow-up on the Superstate win. I think that fund was already managed by a firm that has arguably much more established in liquidity management. So could you expand on how that opportunity came together and why you think Invesco was chosen over the previous managers?

Yes. I mean we have a $220 billion global liquidity franchise. We're managing funds for decades. So we do have a lot of strength and capability in the liquidity side, so maybe it starts with that. The second thing is that we've made a commitment to innovate through digital assets and through establishing partnerships. And so having the opportunity to take over that $1 billion tokenized U.S. treasury fund was -- it was important to us. And I think because of our commitment to innovation, our long-term experience on the global liquidity side and frankly, the vast distribution that we have around the world institutionally and the retail space, I think, created a nice combination for the 2 of us.

Our next question comes from Bill Katz with TD Cowen.

Great. Maybe to pick up on the operating leverage, I think it came in well above most people's expectations. Andrew or Allison, sort of curious, as you think about either the incremental margin or maybe the longer-term margin targets, I was wondering if you could update your thinking for us. And I think within that, you mentioned in the deck, about opportunity to take us some more savings as you sort of migrate down the Aladdin -- I'm sorry, the AlphaGen implementation base, maybe update us where those savings could come from?

Sure. I think we've been quite consistent in saying we had an objective of returning our operating back to the high 30s and have a while there, we were focused on getting back to the mid-30s. Now we are squarely focused on continuing to improve this expansion into the high 30s and building a more durable operating margin just through any cycle. And that's the real challenge in a business like ours where you've got a high degree of beta and revenue sensitivity to the market and thus really behind a lot of the work we've been doing for several years now in trying to create the flexibility we need in the expense base and continuing to diversify our revenue sources with a better balanced AUM profile.

I think we are really starting to demonstrate some of the benefits of that. So I would say near medium-term operating margin target is to continue to expand and consistently deliver in the high 30s. That's the focus. As it relates to operating expense guidance relative to the implementation of the hybrid investment platform, I'd say our comments are consistent with the guidance we gave at the end of the first quarter.

Our focus is on really trying to deliver on the implementation by the end of this year. The implementation expenses, as we said, were $14 million in the second quarter. We're expecting that to be closer to $15 million consistently for the next couple of quarters. And then we also are continuing with the platform fees that we are paying. There's $5 million that was embedded in the run rate in the second quarter. That should be expanding to about $10 million per quarter in the back half of this year. So against that, there's a lot of work underneath trying to make sure we're managing our expenses really thoughtfully. I think you can see the evidence of that in the second quarter with the really well-maintained expenses. And as we get past implementation, we will continue to focus on driving out further operating expenses, consistent with our guidance last quarter into 2027.

And Bill, the only thing I'd add is the places where we're seeing organic growth ETFs, SMAs, fixed income at large, cash. These are all categories that scale pretty well, and we're going to continue to expect to see growth in those segments.

That's helpful. And just as a follow-up, maybe a different thread. Just want to think about your incremental thought process now on capital return, you've deleveraged pretty significantly. You're generating a lot of free cash flow. I think you mentioned payouts, so combined payout came to 60%. Maybe prioritize how you're thinking about capital return? Are you looking to do more deals now that you've gotten the balance sheet in a better spot. Is there opportunity to continue to work with MassMutual to bring down the preferred towards 0, which I think the market would like to see? Or how are you thinking about maybe the use of cash flow, that would be helpful.

Sure. Bill, I'll take that one also. I mean fairly consistent approach to capital. Yes, we are continuing to target a 60% payout ratio. We're doing that in an expanding sort of EPS environment. So it's almost a little bit hard to catch up to that. But -- we are continuing to make forward progress and expand both our buybacks and the modest increase in the common dividend that we announced last quarter. Feeling pretty good about the return of capital to shareholders and certainly have an intention to continue to improve that towards 60%.

At the same time, we still have a little bit more to go on the revolver. So we noted very substantial progress in the first quarter. We would like to continue to work that down just a bit before trying to address more of the preferred that is, as we have said before, a mutual choice between MassMutual and ourselves and a lot of the conditions and circumstances have to be there, including their willingness and the rate environment the premium that is required. Those are all negotiated conversations.

And we in position to do more. At some point in time, I think we said earlier this year, we hope to be in a position by later this year or early next year, and I still feel that's probably the right timing for us because what we are making sure we continue to reserve a great deal of capacity for us investing in ourselves. And we are doing that as we continue to launch new products, we continue to see great investment opportunities in our own product capabilities. And I think we've demonstrated the shareholder returns behind that with just the organic growth that we have been delivering consistently for several years now. That isn't at the expense of inorganic opportunity.

We are always open-minded and looking at what's out there and always evaluating the landscape. But we evaluate that against our own organic growth opportunities. And here before, we've been able to deliver better shareholder returns on our own organic capabilities but anything we have seen from an inorganic perspective. So all things are always on the table for us, and we're always evaluating the opportunity set.

I mean, organically, I think we've generated close to $200 billion of net long-term inflows over the last 2 years. Additionally, we've kind of had -- we've adopted, I think, an ethos some partnership throughout the company as well, which was long dated. What we've done, the 2 in private markets, we made changes in India and Canada, as I mentioned, we've divested from our fintech. So I mean, we've been active, and we're going to continue to be creative both for organic and different forms of inorganic growth if it presents itself.

And this question comes from Glenn Schorr with Evercore.

So there's been a lot of growth on the tax aware side of the business. I'm curious, with your brand and your distribution network, I would think it would suit very well, maybe talk about your current capabilities and where you think that market can grow. And if you can just throw in any thoughts on the recent treasury commentary on a smaller subset of that business, that would be interesting.

Yes. I mean the SMA -- retail SMA space has grown really rapidly, as you said, industry-wide, and we've outpaced that growth. We were up to $40 billion of retail SMA. A lot of it tax-oriented tax aware as you called it, a lot of that growth for us has come on the fixed income side, and in particular, in the muni space, shorter duration, but getting into a little longer dated.

So we have a real I think, competitive edge in the fixed income space, where I think others have focused almost exclusively on equities. We're also seeing growth on the equity side, both in systematic equity, a little less on the fundamental side. But I think as the pivot goes from mutual funds to other formats, active ETFs and actively manage tax aware, SMAs, we think the growth could be considerable. That $40 billion we manage today was half 3 or 4 years ago. So we've had exceptional growth and quarter-on-quarter growth. So we continue to expect that to be the case.

Most of it is coming in the U.S. I mean I think there may be some opportunity over time in other parts beyond the U.S. But the technology is really good. And so my comments before, we'll continue to invest in technology probably over people and being able to scale that business pretty extensively, we think. And we have all the investment capabilities inside the house to be able to do it.

Maybe one on real estate to maybe a lesser degree, fixed fundamental fixed income. But during the quarter, we had a switch in rate expectations. And it feels like it's paused a recovery on the real estate side. But -- so it's not broken out explicitly in your table. I wonder if you could talk about your thoughts on the real estate backlog, demand for your product and if it can continue without the help of lower rates?

Yes, thanks. So let me start quickly and then I'll hand it over to Allison. We continue to see demand in the debt side of real estate credit side of real estate in particular. Our real estate credit fund, which I mentioned in my comments, is now up to $6 billion with leverage. It's grown kind of routinely every quarter over the last 2 or 3 years. And we haven't seen that subside really at all. I think it's gone from strength to strength. I think that's a little bit of a function of some of the demand, but also a lot less supply in that space.

On the equity side, I think the fundamentals are a bit mixed. And maybe Allison can pick up on a couple of the details around that. But all in all, for the quarter, we saw growth -- net flow growth, organic flow growth in our real estate franchise.

Yes. I mean I'd say more specifically, even where we saw really strong growth was in INCREF and that continues to be one of the fastest ramps in the wealth channel for any of our real estate credit products. So that's at about $6 billion in AUM and continues to be a strong driver of flows. I don't know that it's I don't know that it dampens demand. It's more specifically to your question, but perhaps it doesn't return us to what we were perhaps experiencing 5, 7, 10 years ago when we were in a 0 rate low rate environment for a very long time.

But I think largely, the market has been working through a lot of that. We continue now to see just better demand overall. I mean dry powder for us on the real estate side is around $7 billion. So we do still have a lot of unallocated capital we are seeing a little pickup in transaction activity overall. And so we're still modestly optimistic even with the rate outlook.

Our next question comes from Dan Fannon with Jefferies.

So Andrew, I was hoping you could expand upon your comments around the franchise and your outlook for expanding. And I think you've mentioned some of the stats around Hong Kong and Tokyo. Are there other regions or other things you're looking to do from either a marketing perspective or a product launch that should accelerate and/or pick up as the year progresses?

Yes, sure. Thank you. There's 2 big cross listings out in Asia in the last 6 to 9 months. Those are 2 really big markets for us. So not only were they important which is there, but they just amplify the recognition we already have in those markets, and it's a double benefit. We have, I think, 20 to 25 sort of Qs related or innovation suite as we call it, related products all over the world. And the full majority of those have been in the European region and the U.K. and also here in the U.S. PAUSE.

So we'll look so selectively, not just from a market's different geography perspective. But even inside where we have dominance here in the U.S., we'll look to selectively expand it. But I think given that the marketing we've done around the QQQ specifically, now it can be much more expansive across that whole innovation suite in the large, and there's just such a halo benefit given that we're the one and only QQQ. So we're probably going to leverage that more than just product launches over the coming quarters.

Great. And then, Allison, just as a follow-up on expenses, given AUM levels or I think you said record highs in some of the guidance you've given us. I was hoping you could update us on some of the ranges for comp ratio that you've given historically where you think you're tracking in terms of that as well as on the net distribution or net service and distribution ratio.

Sure. Let me take the distribution ratio first. I think, again, I would continue to point to the best relationship to think about there is third-party expenses plus integration needs provided by management fees. That relationship is really the way we think about how to forecast our own expenses there and the guidance I would give you. That was 22.7% for the second quarter, it was also 22.7% in the first. I think going forward, it's fair to think about that as somewhere in that 22.7% to 23% range, maybe even a little bit closer to 23% going forward.

The trend towards that 23% is really due to the product mix shift that we continue to see with growth -- strong growth in the QQQ, the QQM, RSP. Those products that have lower management fees and drive a little bit of that relationship. So hopefully, that's helpful as you think about the guidance there. On compensation as a percentage of revenue, we are looking at that for 2026 as likely being largely in that 40% context. And as we're halfway through the year and it's been a very strong first half of the year.

We are, again, cautiously optimistic on the second half of the year, but we all understand how this industry works. I think 40% is probably the right ratio to assume for 2026.

Our next question comes from Brennan Hawken with BMO Capital Markets.

Just a follow-up on the QQQ. So the net revenue yield came in at 6 basis points better than the prior guidance. Can you help us understand the primary factors that drove that delta? And it sounds like your outlook for that is unchanged. You're not planning on making any adjustments. Is that the right read on that? Or would you course correct?

Yes. I mean I'd say consistent with the conversation a little bit earlier around fee rate adjustments. That is a longer-term thought process that we're nowhere near just given all of the real strengths we've already been discussing on that. And so around 6 basis points is definitely in line with where we were expecting and what we've been guiding to the last couple of quarters as you think about the relationship from the effective fee rate to the custodial fees to the licensing fee to the variable expenses associated with marketing, and that all nets out to about a 6 basis point net revenue yield and then about 6 basis points to operating margin as well.

Great. And then I believe you had said that the end of period net revenue yield was 22%. Is that 22.0%? Could you maybe help us understand how that compressed so much versus the average?

Sure. It was 22.0% was the exit rate at the end of the quarter, and it's really driven by the strong run in the back half of the quarter in some of those lower fee products for QQQ, QQM, RSP, those are probably the biggest drivers to that net revenue yield. And just given both the flows and the market experience and some of those lower fee product capabilities, you saw an exit rate of 220 at the end of the second quarter.

Our next question comes from Alex Blostein with Goldman Sachs.

Just another one on the Qs. So I think all the reasons you kind of gave around the value the franchise created over time, the liquidity, the type bids spreads, all that makes a ton of sense. I think the concern is really in the growth going forward. And I really kind of want to zone in on this question from the perspective of the distribution channels. And how reliant are your gross sales in the Qs from areas that could have just more sensitivity to the actual management fee being lower, whether it's -- and if you do recapacity, advisory capacity or things like that. So how do you think about that? Because, again, the concern is really probably more on the forward growth as opposed to the back book.

Yes. No. Thanks for the question. Maybe I'll point you to a few things. One, the shareholder base is incredibly broad. And it cuts across every aspect you can imagine. So that's point one. The second I'd point you back to was in the late summer and fall when we were soliciting all those shareholders to vote. And you can look back at the experience we had at their emphasis on fee sensitivity maybe as a bit of an indicator of their focus.

Meaning how difficult it was to get them to vote for a reduction in their own fees. And we learned how broad the shareholder base is through that proxy solicitation.

So the bottom line is there's no single type of shareholder here.

Got it. Okay. Understood. Also, now that clean up on expenses for you. You gave all the kind of moving pieces for this year. But as you look out into 2027, it's still a little noisy with integration, and that's likely to pull off. So as you think about that $15 million in implementation fees, how quickly do you expect that to phase out in 2027. So does that all kind of go away in the first quarter? Or is that more gradual? And kind of what is likely to be the pace of that?

I would expect -- and we'll give some more '27 guidance as we get a little bit closer to it. But I would expect implementation expenses to start to taper off in the first quarter. But there is going to be -- it doesn't all magically go away on December 31. So there's certainly going to be some implementation that leads ended the first quarter. Beyond that, implementation and expenses should be bleeding off pretty quickly.

And then as we have noted before, there is a lot of work then to really think about how do we take advantage of the installation of the system and continue to manage our end-to-end delivery in such a way that we can get even greater operating leverage out of our overall platform and that's going to be our real focus going into '27. And of course, that will extend it to '28. As I think about expense guidance more broadly going into next year, look, we're very pleased that we're a 37.5% operating margin this quarter. And the signal of the best sense about our ability to get back into the high 30s and operate in the high 30s. So our focus is going to continue to be on positive operating leverage, how we generate profitable growth and positive operating leverage underneath that.

Our next question comes from Brian Bedell, Deutsche Bank.

Great. I just have one last cleanup on expenses. I don't not sure if I missed this, but I think in 1Q, you said $3.275 billion was the expense target for for '26, and that was predicated on $2.3 trillion in AUM. So just as the marketing trending better and that number goes up or the AUM goes up, can you just talk about the variable the overall variable component of the expenses that we should be considering to that those.

I think the most variable component I would point you to is, again, the compensation to revenue. I mean, compensation is 2/3 of our expense base. As you know, I would point you to that 40% comp to revenue guide there. Rather than a total expense base guide because I think everything else we've given you kind of pieces together the parts of that and get you to a relatively consistent relationship and expense guide. That guide we gave was because there's such a sharp turn in AUM from March 31 to the time of the earnings call at the end of April.

We wanted to make sure we cleaned up PAUSE and gave some relative expectations there. But your biggest variable driver is going to be compensation and that 40%, I think, is the right relationship as we think about this year.

Yes. Yes, that's helpful. And then just on the long-term equity flows. Can you just talk about the -- I think you mentioned the idiosyncratic liquidation. Just sort of the impact for the second quarter. And as you think about the progress that you're making on the long-term equity side globally. Any chance that you can sort of think about when you might turn positive on the equity pool on AUM on a sort of a stable basis or I should say, a more repeatable, sustainable basis?

Yes. No, thanks. It's -- look, to say the obvious improving the flow dynamics for fundamental equities is a major feature for the company, and that's going to come on the back of improved performance and product quality, of course, but also where market demand is. And I think getting to positive flows is a little bit of a function of does the market environment moderate for active equities. And we've seen that happen in several cases, and we've been able to outperform.

The idiosyncratic comment is literally a couple of large -- like 3 large institutional mandates that obviously won't be recurring left this quarter. So look, the goal is to get back into positive flows, but some of the dynamics will be what the market can deliver for us as well in terms of demand.

And I'd say, just adding on to that, we definitely see positive flows in certain strategies. We've discussed the Henley Global Equity Income Fund that has been selling very well in Japan, in particular. Flows this quarter were $2.6 billion. Our U.S. value equity fund range had a second consecutive quarter of net inflows. So where there is good investment performance and there is so the secular investor demand, we're capturing it, but that returning to positive flows on a consistent basis is a challenge for the industry, as you well know.

Yes. I mean we're focused on other things as well around active -- our active strategies, bringing them into other formats like active ETFs. So we're not going to be reliant on the mutual fund structure alone to get us into, hopefully, a positive flow trajectory in the future.

Operator, we have time for one more question.

We have a question from Ben Budish with Barclays.

Maybe just one final one on the expense side. I think you've given a lot of color there. Just one on the comp side in particular, I'm curious, I know in Q1, you had a couple of seasonal items, I think payroll taxes, and there was the acceleration of long-term awards you had called out. How should we be thinking about variable comp going to the back half of the year? Just it looks like Q2 stepped up a bit more than we would have expected, given those seasonal items in Q1. So curious if there's any incremental color you can share that the 40% quite helpful, but just how do we think about that in the context of what the market may do?

Sure. I mean I would just say from a seasonality standpoint, all things being equal, in any given year, you should expect comp to revenue to be higher in the first quarter, a little bit lower in the second quarter than tends to taper off. And that's all things being equal, of course, depending on our AUM and revenue migrate over the course of the year. The seasonality in that Q1 is associated with payroll taxes, also the way our long-term awards are recognized and the deferral. And that's always going to create a Q1 hit that's going to drive that comp to revenue ratio a little bit a little bit higher, excuse me.

And then some of that fleet into the second quarter, and a lot of that's washed out by the back half. So again, I'd point you to a full year guide of that 40%.

Thank you. And thanks, operator. So in closing, we are absolutely pleased with the continued strong results this quarter. We advanced several strategically important investment capabilities and vehicles, with many reaching record AUM levels. With disciplined focus and the benefits of scale, we're generating meaningful operating leverage, and we're improving margins. and We'll continue to stay focused on our highly defined growth strategy with an emphasis on the relentless execution, client-focused innovation and teamwork that we've been exhibiting across our firm.

Thanks to everybody for joining the call today. And as always, please reach out to our Investor Relations team for any additional questions. And we appreciate your interest in Invesco, and we look forward to speaking with you all again soon.

Thank you. This concludes today's conference. We thank you for your participation. At this time, you may disconnect your lines.

All right. We're going to go ahead and get started. Good morning, everyone. I'm Mike Cyprys, Equity Analyst covering brokers asset managers and exchanges for Morgan Stanley Research. And welcome to our fireside chat with Allison Dukes, the Chief Financial Officer at Invesco.

As you all know, Invesco is a global asset management firm with over $2.1 trillion of assets under management. The company has a significant presence in retail and institutional markets across the globe, serving clients in more than 120 countries. So Allison, thanks for making it out here to New York and joining us today.

Me here. Thank you.

I thought we could start with the current backdrop in environment. Clearly, there's a lot of volatility, which's created, potential for meaningful shifts in asset allocation decisions. So I would be curious to hear your perspectives around what changes in client behavior have surprised you the most this year? Where do you think investors are still underpositioned? And how do you see asset owner allocations perhaps evolving?

Yes. Well, again, thanks for having me. We released our flows last night for the month of May. So maybe I'll start there as we think about where investor demand is and what we're seeing.

So our flows for the month of May were $19 billion of inflows that's following a very strong April, which was also $17 billion, $18 billion of inflows. So I'd say at it's just a start, demand is incredibly strong. And we have really benefited from, I think, the diversification of our product capabilities, in particular, and you're starting to see just the strength and the power of that. We've delivered over $150 billion of inflows over the last 18 months, very consistent inflows for several years now. So we're proud of that. We're excited about that, but it also gives us the opportunity to really see the breadth of where investor demand is today.

A couple of points. I would say, one, with this cash $35 billion, $36 billion or so of inflows that we're seeing just to start the second quarter. The QQQ has actually turned back into positive flows. So that was negative in the first quarter, about $11 billion positive for the first 2 months of this quarter. So back to the volatility and your question, and where we're seeing investor demand?

We're seeing investor demand for the NASDAQ 100 Index, in QQQ product, in particular, as a way to play I would say, the AI trade in particular, and that's certainly coming through. We're seeing good strong demand for fixed income capabilities that continues to be broad-based and really across the globe, across all 3 regions. I think important to note that the demand we're seeing outside of the United States has been very strong this year and continues to drive a lot of our flows.

About 40% of our AUM is outside of the United States, pretty well balanced between Asia and Europe. Both have seen good strong demand. Very supportive overall. China continues to be a driver of flows for us, very strong inflows in China in April continued into May. Japan has been a driver of flows. This is -- it's an interesting time, because the volatility in the geopolitical landscape is very high. And yet, there seems to be an investor sort of ease with this volatility, and a lot of cash that still seems to be on the sidelines that continues to come into the market.

And then last, but importantly, our ETF franchise. So that's about inclusive of the QQQ at about $1.2 trillion now. And you're seeing really strong flows, both into the broader ETF lineup as well as the QQQ. I noted the Qs were outflows in the first quarter, but ETFs have been positive all year long.

So you mentioned a number of different products and geographic regions there. If we fast forward 2, 3 years from now, which of the growth initiatives, which we'll come back to and dig in. But which are the growth initiatives that do you think will be the most meaningful contributors to organic revenue growth at Invesco? Is it ETFs, fixed income, private, Asia, personalization?

I mean I think my answer is yes to all of those in some ways because we've got a mix of wrappers, asset class, region and kind of investment strategy and all of that. And I think they're all going to matter. I'd say all 4 of those that you mentioned, ETFs, personalization, Asia, fixed income, they're all going to be incredibly important drivers.

What I like about our particular portfolio is I don't think we're dependent on any one of those. We are a very well diversified platform today. Much more diversified than we were 5 years ago. And that is across both investment style, wrapper, asset class and region. I mean we're really able to, I think, benefit from each one of those different aspects of the portfolio, and we're not concentrated on one. And that has reduced some of the risk profile behind our financials as well.

So when I think about 2 or 3 years from now, yes. I think ETFs are still going to be a really important wrapper. We are committed to active asset management as well. We really have been focusing on our investment performance there. We're seeing the benefits of that. We're seeing investment performance improve. We've seen outflows narrow. That said, the demand for passive I don't think is going to stop. And I'm pleased with our position there and just how diversified that's.

Personalization is a really important trend. We can certainly touch on that and I think we will continue to see demand there. Will it be at the size and the scale of ETF? Probably not in 2 or 3 years. Nonetheless, it's going to be a really important driver of future flows.

So of those -- sorry, where are you going to...

Are you going to pin me down on one?

Or two or rank order.

If I had to say what's the single largest? You'd have to say ETFs just based on the scale. We're the fourth largest ETF provider, $1.2 trillion, just given where the demand is. Just a sheer quantum of flows. It'd be hard to say it'd be anything about ETF. I'd say second, and that probably Asia because of our position in both China and Japan.

Okay. Let's dig in. That's a good segue. My next question is on ETFs. So I had a hunch you probably would have say that. Active ETFs. You launched 4 new active ETFs in the first quarter, I believe it was. Talk about the active ETF strategy, the approach there, the traction that you're seeing, what the product pipeline looks like?

So yes, 4 new ETFs, active ETFs in the first quarter, a little over 1/3 of our ETF launches have been in active ETFs. So I think, look active ETFs in a lot of ways, it's built into the ethos of who Invesco is. Smart beta has always been a really important part of our overall ETF platform. And so the idea of really taking an actively run product, packaged in a passive way and that has been the ethos of a lot of what we do behind the smart beta aspect of our portfolio.

So it's just an extension of that in many respects. So we have about maybe 40 or so active ETFs, a little over 40 active ETFs today. I think they're approaching maybe $40 billion or so in AUM. So as you think about just the overall opportunity there, it's really an extension of who we are. We're going to be very thoughtful about those launches. We really are a believer in new launches. We think that's probably the best way for us to play that, trying to port active strategies into active ETFs. We don't necessarily think that necessarily gets us anywhere, or buys anything.

I know some will do those conversions. I won't say we won't ever, but I'm not sure that's really the way we're going to play this opportunity because, again, we think we can really build on the profile that we have today. We're going to not so much focus on the number of active ETFs, but rather the right ones and successful launches of those and really investing behind those as we continue to look for scale there.

And what would you say differentiates the active ETFs that succeed from the dozens that don't?

It's probably the same as what the answer would be for any other ETF, or active mutual fund, which is investment performance. First and foremost, we're focused on client outcomes. And so our thought is always lead with what's the client demand and how do we exceed client expectations by delivering great outcomes? So success is going to be on the efficient delivery of those client outcomes. So yes, they've got to be well priced. That's just table stakes. But decisions aren't made on price alone. They're made on outcomes. And so our focus is going to be on innovative strategies, innovative solutions that really exceed expectations.

Okay. While on the ETF topic, let's talk about the QQQs and beyond. How are you viewing the flagship QQQ fund, particularly in light of new competitors that are entering the space?

So the QQQ, just a level set, especially in light of our May AUM announcement last night QQQ sits at about $500 billion in AUM. When you add on the related family of products around the QQQ, you're over $600 billion today. So it's a very sizable flagship fund and related innovation suite attached to that.

We have been at this for over 20 years. So the QQQ is really benefiting from many years, decades of marketing spend behind it -- billions of dollars spent in marketing behind it because that prior structure required us to spend all that money on marketing. So it has a brand that is its own brand and the QQQ is one of the most well-known ETFs in the world now.

And is certainly an interesting place at the moment as it tracks the NASDAQ 100 and the IPOs that are coming over the next few weeks. I think you're seeing a lot of demand for the QQQ, as a way to play the AI trade. That's been there for a while now, but certainly, as we look at some of these new IPOs that's inherent behind that.

As we think about some of the new launches that are coming, I mean, look, we feel really good about the installed base we have there for a lot of reasons. One, not just the sheer quantum of size, $600 billion across the suite. But also just the tightness of the spreads there, the liquidity that's behind it. The embedded derivatives and options that are attached to it. This is a very, very deep market that we have built over 20 years.

You've got deep tax gains that are there as well. So I mean the switching costs are going to be incredibly high. So not only do we not worry about the switching costs, we also think this's the clear leader in the way to play the NASDAQ 100 and just it's really bought, not sold. It is such a well-known brand at this point. So we feel good about that.

We also think that it's a big market, and there's a lot of opportunity there. And we know that from our own case study of launching the QQQM a few years ago. When we launched that we had an opportunity to kind of really cannibalize the QQQ in some ways. We wanted to make sure we had another adjacent product that we could create revenue from when the QQQ was in its prior structure. In the time that we have launched the QQQM, it's approaching $100 billion today at that same -- over that same horizon, the QQQ tripled in size. So we didn't cannibalize the QQQ at all. There was ample market depth and capacity to support growth of both of those products.

Staying with the ETF topic. One major topic this year has been the potential for intermediary platforms to assess distribution fees or rev sharing arrangements on ETFs. So where are we in that journey? And how do you see that evolving? Is it ETF revenue share on net flows, on AUM? Does it rebase existing AUM? And I think you had mentioned it's not material to Invesco. Why is that? How is that the case?

So while it's getting some airtime now, the journey has always been there. We've been in the journey. It's just picked up a little bit of public steam. So we would say we're always in that journey. And working with our distributors on platform fees is -- that's just business and that's how business has always been done and will always be done. And it makes sense as the demand for mutual funds have been declining and the demand for ETFs has been improving, that's changed the economics for the distributors. And so, rightly so, there are ongoing conversations always around the value that's provided by those distributors and making sure that there are appropriate economics shared on both sides.

So that's always been there. That won't change. That will continue to be the way in which we do business. Those conversations aren't about existing -- about existing AUM or existing products. Those conversations are generally about new funds that are launched, new AUM that's coming and where we want support, where we need help, or we need support where we need value creation. And so that's something that when we say it's not material to us, it's because it's just embedded in the cost of our economics already today. It will be so in the future. There are always going to be thoughtful decisions and conversations with all of our distributors.

I think, again, this's where we feel good about our position as one of the largest ETF investment managers in the world. We're the fourth largest and continue to grow. We have the benefit of scale and that gives us a good position as we think about the relationship we have with all of our distributors and it's a broad -- we have a broad client list of distributors.

So not material to the P&L, because it's on new sales, new AUM arguably benefits scale providers like yourselves. But I guess, how do you think about what that cost of that new gross sale is on a go forward versus what it had been in the past. But then I imagine also the incremental margins are also significant, too?

It's a very -- that's a very hypothetical question because it all comes down to what's -- this is all the hypothetical next new product. Where is it going to be priced? I mean, it starts with how do we price it? And then how do you think about the economic sharing around that? So it all goes into the equation to make sure that they're appropriate margins for all parties there.

So I guess I'd say this way. Our objective has been, and is, and always will be to continue to improve our own operating margins. We're demonstrating that. And we can get to that later. As we continue to prove -- improve our own operating margins, we do that decision by decision, product by product, cost by cost. Everything has to make sense in the isolation of that product in that conversation. So in that next new product launch, might we have a -- look, I just want to be really clear. I mean the conversations we're having, there's nothing new happening. So there's not a real change in the way in which business is conducted at Invesco day-to-day. So these are very hypothetical sort of ideas around what could happen over the years.

I mean, could margins get more competitive? I think that's just how business is. I mean just in efficient markets, everything is always more competitive. And so you're always looking for ways to create more efficiencies to offset some of those challenges. And that's kind of inherent in everything we do.

Okay. Fair enough. Sticking with intermediary retail. We talked about ETFs. Let's shift and talk about SMAs, models, another area of success and strength for the industry here. So maybe you could update us on your SMA model portfolio initiatives. How broad-based is that offering today relative to where you would like that to be, and talk about some of the steps that you're taking to drive further adoption and acceleration there?

So SMAs for us about $40 billion or so. That would be probably 75% of that would be fixed income SMA. So our history and strength has really been on fixed income SMAs. Had very strong growth rates, I think, somewhere around maybe 18%, 19%, 20% growth rate. So nice growth rate, but at a small base. And so the opportunity we have is to continue to broaden that out. We really think personalization is a very important trend. We don't think that's going anywhere. In fact, we think it's probably going to pick up even greater demand over the years.

And so we get excited about the opportunity to be thoughtful, to be creative there, to be innovative. I think there are a lot of different opportunities. Certainly, AI is going to come behind this, yet another place where AI is going to be an enabler and giving us the opportunity to do these things at scale. Personalization at scale is always a bit of an oxymoron. So how do you do that in a way that you can do it responsibly and profitably. Those are going to be some of the opportunities that we think about models. We've probably been not as focused on in the past, and that's an area that we think we've got an opportunity to be a little more focused on our own models, not just participating in other models.

And so that's one, again, as we continue to really refine the building blocks of Invesco, and that's been our focus over the last years. We're focusing on those individual building blocks, improving them, doing them efficiently, really thinking about the margins behind that the cost to deliver. As we have these building blocks better built out. Now we've got the opportunity to bring these together, I think, and really capitalize on the trends around personalization, customization and grow that SMA lineup and model portfolio for ourselves.

You mentioned AI, as an enabler of personalization. Can we double-click on that for a moment? And how do you sort of contrast and think about the role of the asset manager in there versus the wealth manager in the intermediary? Because I imagine they would probably say something similar.

Yes. Look, I mean, AI is a -- it's a yes for all of us. It's relevant in every part of the value chain now and it's going to -- I think it's changing so fast. We're all seeing new opportunities, new ideas changing by the week, by the months. And so it's going to be in every aspect of the value chain.

For us, it's going to be a part of revenue? Does it create new revenue? Hard to say. Does it make -- does it improve outcomes to create better investment performance? It should. Does that then become normalized across all fund managers, all asset managers? Perhaps. And so then are you actually differentiating? I don't know. I mean this is -- we're playing a long arc at this point.

Fundamentally, it is the opportunity and the opportunities already here to rethink how we're doing everything and to augment humans at just about every level of the value chain. And I think certainly in personalization where we can do large task volume path more efficiently without a human. Those are some of the opportunities you're going to see in actually delivering revenue more effectively. Does it deliver the next dollar of revenue itself? I don't know, maybe. I think these are some of the opportunities that are still evolving by the week.

Private markets, major focus area for Invesco, for investors or the industry, your platform today over $130 billion spans private real estate, private credit solutions. Talk about some of your initiatives there. How you're positioning to accelerate growth? And maybe also touch upon the defined contribution opportunity set as you guys are looking at that?

Yes. So level set, our private markets business is about rough numbers, $165 billion AUM business today. So it's a fairly large private market business. As you said, primarily real estate and credit. The real estate side of that would be rough numbers, $80-or-so billion. And that has primarily been an equity business, a little bit of debt business that's growing there as well, but primarily has been institutional -- institutionally focused.

The credit side is really built off the backbone of a bank loan and CLO business and more recently augmented by more alternative credit strategies, direct lending, distressed lending. So we're in the early stages, not many, but certainly in the early stages of shifting that business from a purely institutional focused business to one that also capitalizes on the trends that are happening on the retail wealth management side.

In the real estate business, we started by launching our first open-end fund there in REIT, a few years ago. And then have built upon that with IRC, which is a 1031 exchange, open-ended Evergreen fund. And more recently FinCraft, which is the debt side of that. That has been a very good strategy. FinCraft continues to grow steady new flows every month. I think that strategy is up to maybe closer to about $4 billion in size today.

So we've now again, got the building blocks that are important for delivery into the wealth management channel. Likewise, building out through our partnerships on both the real estate and credit side the partnerships that we've announced with Barings and with LGT Capital. With Barings that is a dynamic credit opportunities fund and with LGT, that will be -- that will build on more infrastructure and equity opportunities, the capabilities that they bring to the table as well and future product launches to come with that one.

At all of these are giving us the products and the blocks that we think we need to not only participate in the retail wealth management opportunity, but in defined contribution. We've launched -- starting to launch some new products that we think actually can -- we'll be well positioned in defined contribution plans. We just launched one on the real estate side with one large partner there, and we're going to be able to, I think, continue as a Core plus fund that will be well positioned for defined contribution plans.

This -- I think it's going to take time. I think that we're going to find these really fitting and defined contribution nicely with target date funds and some of the life cycle funds. I'm not sure they're going to be stand-alone products in DC plans. They may initially at least fit into sleeves as investor comfort and education improves over time. I think it's going to be a slow build, but a really important build. We know there's demand. We're seeing the demand from plan sponsors. So as regulation continues to improve, we think we're well positioned to participate.

Asia. At the beginning, you mentioned that was an area of strength that you were seeing. Can you maybe elaborate on which parts of Asia? I think you were mentioning Japan, probably I presume China too. What types of strategies -- and talk about your initiatives there to grow that part of Invesco's footprint as you look out over the next 5, 10 years, where are you most excited?

So let me start with China. So our biggest driver in China is our joint venture that is located in China. It's a domestic for domestic business, and it's at about $155 billion or so in size. We're the largest foreign own asset manager in China. We are the top 10 retail wealth management provider in China as well. The growth there has been pretty steady for a number of years now as that investment economy continues to improve as they are looking to create investors across their economy and the investment acumen is continuing to move out the risk profile. We're participating in that.

So in recent quarters, most of our growth is coming from fixed income plus products, which is really a balanced product. And that's been really -- that as they move out the risk spectrum from money markets to fixed income now and fixed income plus, that's been the biggest driver of our flows, but they're broad-based. Equities represent about 20% of our portfolio in China.

Flows are really driven across the asset classes, and we are seeing a real pickup in adoption of ETFs there. We just started launching ETFs in China, maybe 3-ish years ago. And we continue to launch a mix of product wrappers. But we -- there is still tremendous market opportunity there as you have hundreds millions of people that are not investing at all yet. So there's tremendous opportunity. We're well positioned to participate in that.

Japan, $100 billion or so, probably a little over in AUM. That has been a terrific market for us over the last few years. We have a very strong position in the retail wealth management side there and institutionally. A lot of demand there continue to have good strong demand for fundamental equity there. So while we see less demand in the United States, that's an area where we see steady good inflows, in particular, for income-producing products. We've had our Global Equity, an income fund has been a very strong driver of growth in Japan, steady flows there for a number of quarters now.

That's the product at Henley?

It's managed out of Henley, yes.

Okay, that one.

Henley is in the U.K., not everybody knows that.

Thank you. Let's shift gears. Investors have spent a number of years modeling lower net revenue yields at Invesco. It seems like may be nearing the end of that journey perhaps, maybe inflection ahead. So how are you thinking about that? What gives you confidence that net revenue yields are beginning to stabilize?

Sure. I'd start with net revenue yields just an outcome of the mix of AUMs today. So it's not an input. It's not a driver. We don't see fee rate pressure. So what we see is net revenue yield has been declining because of the growth in AUM in our lower fee products. So it's just the average of the fee rate of the AUM today.

So first quarter net revenue yield was, I think, 22.8 basis points. The exit rate coming into this quarter was about 22.7 basis points. We have started to see diminishment of the pressure there. We started to see some stabilization in the first quarter. But as you think about where flows are and where AUM is, I mean, you have to think about the mix there. So one thing I would point to is if you look at the QQQ and the flow release last night, the AUM in the QQQ is about $120 billion higher than the end of the first quarter. So $120 billion of growth in 2 months, about a 6 basis point net revenue yield. That would put pressure on the net revenue yield for the second quarter, but that more importantly creates massive revenue growth for the second quarter.

So you just -- net revenue yield is just a mix of the fee rates. The revenue growth behind that, both from the flows and from the growth in AUM, terrific revenue growth, terrific dynamics behind that. Our focus is always on operating margin, not on that revenue yield. So our focus has been and will continue to be on how do we create that positive operating leverage. And so I'll take this opportunity to shift operating margin. And in the first quarter, we had an operating margin of 34.5%, which was 300 basis points prior -- better than prior year.

First quarter is always our seasonally low quarter, just given some of the seasonality and compensation expense in Q1. So 300 basis points year-over-year improvement in operating margin even with declining net revenue yield. So I hate to say it. We don't really feel like net revenue yield matters, I guess, is what I would say. It's not really what drives revenue growth. What drives revenue growth is present AUM and growth in organic flows. And we want to manage our costs against that. Our stated objective had been for a long time get back to the mid-30s in operating margin on a path to high 30s, 34.5% seasonally low quarter. We're on a good path to get back to the high 30s and feel really good about the momentum behind that.

Great. You covered my next question, so I can move on. Let's talk about AI. Certainly getting a lot of attention across markets and quickly move from experimentation to implementation across the asset management industry. Invesco had spoken about some broad adoption internally. So I guess as you look across the firm today, where are you already seeing some of the most tangible benefits from AI?

Yes. It's everywhere now, and it's almost hard to keep up with the benefits because the benefits really are -- they're popping up all over the place day-to-day, week-to-week, especially as we continue to deploy licenses across our firm for our employees in training. And we're spending a lot of time on training and really monitoring the usage and thinking about those licenses, and the deployment of the licenses and encouraging our employees to be thoughtful, but also creating the right governance around that. It's really important we have the right governance and a handle around what's happening, and how we start to monetize the benefits of some of this.

There's also the effort that we and everybody must have at this point, which is as your employees are using tokens from other software providers and deploying this, there's a cost headwind that can come in. So we have to be in front of that and make sure that we couldn't build it better ourselves. And if we can build it better ourselves, we'll build it better ourselves. So we want to utilize the technology in a cost optimize way so that we get to these productivity enhancements.

And we're seeing it across the board. I mean everything from investment research, investment performance and aspects of revenue and portfolio managers and how they are utilizing it to things in the finance function, and how you think about large volume tasks that can be done very differently that are low value-add task that can be done in a way that is much more productive, and we can free humans up to be much more thoughtful and add value in different places. I think the opportunities are everywhere. Some of the other tangible benefits.

I mean, procure-to-pay orchestration layer. Those P2P layers, AI was probably at early place -- that P2P was an early place you could bring AI into your ecosystem. We did, like many others, and we really see some of the benefits of that document capture. I mean these are easy, low-hanging fruits, but you can't take advantage of that productivity everywhere. I think this is going to be another enabler to scale. And another enabler for us as we continue to really focus on great client outcomes, how do we do so by improving our operating margins rapidly along the way.

And how are you managing the token costs while also driving ROI along the way?

Yes, it's a good question. I mean, look, you have to be really thoughtful just even in your own procurement function about making sure you have the skill set of individuals who understand this and all the contract negotiations that they're doing just as a part of their job every single day. The game has changed. That's a really important thing to be in front of. And we don't want to tell an employee no to using a productivity-enhancing tool, but we want to do it in a way that we're eyes wide open around what are we getting for that incremental cost. And so you have to be really aware of the way in which it is being used inside of your own firm in order to make sure you're forcing the productivity for the increased cost.

Tokenization is another topic that's gaining some traction, including amongst traditional asset managers, launching partnering, including you guys, you recently announced the partnership with SuperState, I think it was to manage tokenized bond funds. So talk about your initiatives, your strategy and what we might see from Invesco, as we look ahead here?

Yes. Look, this is another really interesting technology, and this is a way for us to partner and learn. And we're really excited about the opportunity to partner with SuperState bring our great investment management capabilities to bear with their understanding around blockchain and the infrastructure that they have and to partner and learn with each other.

Where these products go? I think -- look, it's going to be an important offering in the product lineup. But to what end and to what size, I don't think we know yet. So this is just the beginning and an opportunity for us to really learn and benefit from a lot of what they have already built, just the transparency, the settlement dates, all of these things are going to, I think, really reshape the landscape of settlements and trades. And so this fund is about a $1 billion fund. It's an exciting product launch. This is, again, one aspect of technology, where we would say we want to find great partners that we can learn from, and that we can bring our capabilities to bear with their capabilities and grow from there. I think it's one of a number of partnerships we've launched now.

And more broadly, is tokenization in your view, ultimately like a distribution innovation? Is it operational innovation? Is it a completely new product category?

I think it's probably mostly in operational innovation. Will it be a new product capability? Sure, it is just even in the launch of this product, yet another strategy that's available to people, but through an operational lens.

Okay. Great. I'm afraid we'll have to leave it there. Thank you so much, Allison. Appreciate it.

Thank you.

Good afternoon. My name is Patrick Davitt. I'm the U.S. asset managers analyst at Autonomous. It's my pleasure to welcome back Invesco's CEO, Andrew Schlossberg. As a reminder, if you have any questions, you can submit them to the Pigeonhole app, and I will try to work them in from the iPad here. So thanks for joining us again, and thank you. Good to have you.

Thanks for having me.

So I think we're about 3 years in now since you took the role. So as you reflect on that, what do you think Invesco and yourself have gotten right? What do you see -- where do you see room for improvement? And how have your strategic priorities evolved in the last year since we last chatted here.

Yes. Well, first, thanks for having me. And yes, no, we've accomplished a lot, I think, over the last couple of years, and hopefully, we can talk about a lot of it. I think I'd probably summarize it into 3 main areas of what we've been focused on and what we've been accomplishing. The first is a big focus on innovation. The second is a big focus on clarity in our business. And the third has been on execution and delivery.

Around innovation, it's been in our product line. We've made a number of additions and changes and advancements in areas where there's a lot of demand, ETFs, SMAs, things like this around the world. The second thing has been in innovation has been partnerships. And we've established a few in the private market space, but we've also established a few more geographically in India and with the divestiture we made in Canada and created a partnership with -- and then a lot internationally. Invesco is now 40% of our client base and assets are from outside the U.S. So a lot around innovation.

The second area really focused on clarity for the business. We've done a lot around our strategic priorities getting much tighter and divesting things where they just don't make sense or deemphasizing like a few of the things I mentioned before. Also on bringing clarity and simplification to our platforms, and in particular, in the investments area, where we now have a single equity, a single fixed income and a single private markets platform. And soon, we'll have one investment technology Alpha platform across, and we've made good progress there.

And then last in delivery for our clients, we've been delivering better investment performance, and they've rewarded us with $150 billion of net new flows in the last 18 months and delivering for shareholders, not just the stock price appreciation, but the operating performance, we had 25% operating income growth first quarter year-on-year, 15% revenue growth, a delevered balance sheet and returning capital to shareholders. So we've been doing a lot. And then as you kind of look forward, more of that plus a real emphasis on personalization, whether that's through more usage of things like SMAs, I mentioned before, or retailization of private markets and into defined contribution or whether it's tokenization and digital assets in general. So a big focus now on those themes, too.

That's helpful. So moving to a more macro level, and then we'll get back to and dig in on a lot of that stuff. It seems like every year we're here, there's been a volatile spring. I think it'd be helpful to start with maybe a high-level discussion of what you're seeing in the marketplace. Firstly, could you update us on how investor behavior has evolved through the volatility? And to what extent you're seeing any meaningful shifts in client allocations?

Yes. We're starting to think the same thing, this March into April period, what's next each year. Look, one thing I would say from speaking with clients all around the world and institutions, wealth platforms, Asia, Europe, U.S., I'm not going to say there's a complete comfort with volatility, but I'm going to say there's a little more of a new normal to it and people not running from the volatility. I mean money is continuing to get put to work. Money is in motion. And in some places, we're seeing pretty meaningful growth.

It's also getting reallocated inside asset classes as well. I mean we've seen good growth in investment grade and fixed income out in Europe. We've seen expansion in China into more balanced funds. We've seen more growth in global equity in Asia here in the U.S., a lot of ETF growth, a lot of SMA growth. So there's been money still in motion, but there's still a lot of cash on the sidelines, too. So we estimate around 20% of individuals portfolios are in some kind of cash investment, and we're still seeing that. But there's inflection points.

I mean the changes in regulations and rules here in the U.S., also changes in the U.K., Japan are creating a place where more money is getting invested. And I mentioned our flow trajectory. So it's they're continuing -- we're continuing to benefit from, I think, some of that reallocation looking for global broader diversified asset managers that offer a lot of stability. So I mentioned the $150 billion we did in net flows in the last 18 months, but first quarter was around $20 billion, and we reported April at $18 billion of positive flows and May has seen a pretty good pace, too.

So on that specifically, you continue to post very, I would say, very impressive flow numbers in pretty much any kind of market at this point, which looks a lot like kind of a bigger comp that people like to look at for you and maybe you aspire to look like. What do you -- what part of your business do you think is driving such a strong and consistent flow picture relative to the group?

I think there's a couple of things beyond what I mentioned already, I think, one, having as diverse business as we have, about half the company's assets are active, about half the companies are passive. I think that helps. The international complexion of the business, as I mentioned before, which is now up to 40% of our assets has grown materially in the last few years. And it's not as if those markets aren't competitive, but I think they're less saturated than some of the -- than the markets here in the U.S.

So we've benefited from Japan really reigniting. We benefited from China reigniting U.K. and Europe as much as we don't -- most people don't think of them as growth markets. There is a lot of transformation of money flow in the insurance channel and the defined contribution channel, and we've been the beneficiary of that. And in all those markets, a common denominator is we've been there for decades, and we've never left and we never blinked, and we kept sort of our pace in those markets. And so I think that's an important common denominator.

The Qs obviously helped as well, and that was a big boost to your April flows, I think. There's been a lot more focus on increased competition there. So history would suggest that an established ETF with a liquidity advantage does have significant moats. So I think I agree with what you guys have been saying on that. But BlackRock and State Street could theoretically have significant power in the financial adviser channel, particularly through model portfolios.

I guess, with the core concern, I think, being that they could bundle their products alongside their new Q products in model portfolios or things like that and get preferential placement. So I guess -- so the idea is, I guess, that new allocation flows could bypass Q in that way. So what options does Invesco have to defend its position? And are you investing in deepening distributor relationships or restructuring your model portfolio offerings to embed the Qs more defensively into adviser infrastructure?

Yes. That's a lot of questions.

Sorry.

Where do I start? No, no, no. The -- just for context for everybody, the Qs, it's -- the main fund is about $475 billion of assets, and it's part of a suite that has over $600 billion of assets, not just here in the United States, but internationally globally as well. So there is a bit of a moat around it in terms of its size and the brand halo that comes from it. It's the only QQQ fund. So that brand will be unique.

And with that size comes really some of the liquidity benefits, tight spreads. There's about $0.5 trillion of notional options that trade off of it. So it's a very -- it's difficult to dislodge those assets with many of those starter attributes. The way that the licensing works on those products, we have an MFN. So we're licensing that index at 8 basis points. Any competitors that come in will also license it at 8 basis points. So the differential in our fees and what those competitors price their products at won't be that different.

And given some of those benefits that I mentioned, not to mention that people have very low tax basis in the QQQ, which would prevent really an economic reason not to move. We feel like it's -- we're in a pretty privileged position. We've invested a lot through the marketing into those funds, and we'll continue to do that even through the conversion that we just made from a UIT into an ETF. And we have our own example of -- we put forward another Q fund a few years ago.

And just to describe what we've seen 3 years ago, to today, the big Qs still grew by $60 billion. The funds up 2.5x in terms of assets. So there's plenty of growth there. Your comment about how we distribute that. We distribute it to every human and institution that we've met in the world, and we'll continue to do that. So we have very deep entrenched relationships. It's part of a very big ETF complex and a very big wealth distribution complex. So our penetration in model portfolios, our penetration in wealth and normal wealth platforms and with institutions is pretty high and I think defensible.

We'll continue to invest behind those sorts of things. So we feel good about where we are with the Qs, and we feel really good about the conversion we were able to do at the end of last year. We've only had 1 quarter of that benefit. So we're looking forward to seeing that through the course of the year.

What do you think changed from NASDAQ's perspective? Because on the surface, it looks like they did this as a reaction to the change in structure for the Qs. Is that your understanding? And why do you think they're opening it up to more competition?

Yes. I mean they've said publicly the same thing they said to us, which is they view the opportunities for the Qs to be really large. I mean they view it to be much bigger than the $500 billion that is currently in the asset -- in the fund, and they wanted to have the opportunity to reach that market quickly. I mean that's been their explanation. That's their decision to make. I mean we'll continue to make sure we get the lion's share of that.

We're about 60% of the NASDAQ, maybe even more index business. So we're very important to them. And they'll disproportionately work with us, I'm certain because of that.

So say those -- the 2 competitor products come in at a much lower fee, how much flex would you have to cut marketing and/or add securities lending in order to kind of match that if they come in at a much lower rate.

Yes. I mean we -- like I said, we're all going to be at 8 at least. And our products are priced at like 15% and 18%, respectively. So it's not -- there's probably not that much difference. We're comfortable where the prices for our fees are for our funds. We just reduced the fees on the Qs through the conversion. So I feel good about pricing regardless of where our competition comes out.

In terms of sec lending, one of the benefits of moving to this ETF structure is that the fund securities are eligible for lending. We have lending programs. The thing is it's a very liquid, very large securities in that 100 set. So they're not the typical ones that you get good lending against, but that opportunity certainly is there, and we'll take advantage of it, but it is not large. And then what was your other -- was that it?

I think that's it.

Okay. marketing. So marketing, as we noted in the proxy when we converted the fund, we put a range of $60 million to $100 million, and that's our expectation. We also have full discretion over how that $60 million to $100 million gets spent, meaning you can support and benefit that whole ecosystem that I just described internationally, domestically. And if we choose to relook at that, given the competitive position that we're in now, that's at our discretion.

Got it. So the other big topic that's new this year in terms of potential negatives in your business is the addition of platform fees or ETF distribution fees. You said on the 1Q call that you do not expect that change to have a material impact on Invesco. So could you unpack that statement a bit more? Is there a positive offset? Or just think that large-scale players like Invesco have more pricing power with distributors than small?

Yes. Let me do just that and unpack it a little bit. So as mutual funds, and this is a U.S. topic. As mutual funds assets in the industry decline as well as for Invesco relative to ETF assets, it's kind of natural that distribution partners and platforms would be looking to share in the economics of the ETFs just like they have of the mutual funds.

One of the points I was making on our earnings call was that natural trajectory of our mutual fund business and the amount of fee sharing that we pay is going down as the ETF ramps up. And if and as we pay fee sharing in certain instances, they could end up offsetting. And that's what I was mentioning as part of the material impact. In terms of size and scale, the benefits of being a $1.2 trillion asset manager, ETF asset manager and a $2.5 trillion overall manager with a big position in U.S. wealth is that we have a lot of irons, I guess, in the fire with our partners and those platforms.

And they and we look at that holistically, whether it's value-added things we do with them, ways we support their distribution, other products we have in the lineup. And so that's the size and scale comment. And we have several ETFs in this instance that are things that are very much bought and very much expected by RIAs or individual investors. So that's the benefit of scale point.

The last thing I'll say is we've been doing ETF. The reason why it was maybe -- there's been a lot of excitement about this topic recently and why maybe we're not as excited about it. We've been doing ETF fee sharing with certain partners for some time. And the way those work is you pay on future ETF flows, not back books. you look at the economics of the ETF after you've paid all of your fees. So think of a net fee rate all the way down after the licensing fee, after the custodian fee all the way down and then a percentage of that.

You do it not for your whole range, but maybe selectively for certain products. You don't do it for the whole platform. You might do it in select parts of the platform. So I share all that with you just to say it's a very strategic conversation and a selective conversation. And I think that's why I mentioned the materiality for our company is not that large.

Yes. Okay. Makes sense. Let's move to active equity. It seems that the average active equity manager is still not really outperforming benchmarks. It's a little bit better this year, but on the whole, not that much better. So with that in mind, how are you thinking about the path to active equity ever getting more traction with investors again? And what do you think needs to change in the industry to get this kind of stubborn trend of outflow to shift back in your favor?

Yes. I'm sparking a little bit because I've been in the industry for a long time. And one thing that absolutely hasn't changed is investors like excess return. And so if you deliver good investment quality to investors, those active equity managers are winning relative share. Maybe the demand is lower, but they're winning. And so our #1 focus on returning active equity at first out of outflows and into inflows across the whole company is investment quality.

And it's more than just performance. It's risk management. It's appropriate -- it's good fees or fair fees. And it's about having deep high-quality teams. And so over the last several years, we have been consolidating things around teams that exhibit all of those attributes. And I feel really good about how we have that set up and organized now. About half our AUM in active equity is on a 5-year basis now in the top quartile of peers. So we have better chances to win.

And our flow picture, while it's still negative in aggregate for active equities around the world, for our clients outside the U.S., which is about 1/3 of the assets, we're in positive flows. And for the parts here in the U.S. from U.S. clients, the negative flow rate has definitely improved. And so I think it's -- the game you play is good investment quality and a lot of things correct. And we're working on how to port our active equity into different formats than just mutual funds, which has been the preponderance of the assets. So ETFs, SMAs, these sorts of things.

Okay. We'll get to active ETFs. another wrench has been thrown into this conversation, right, which is AI. So how are you thinking about -- I think there's some news from Robinhood on this today. How does Invesco think about the risk of AI-driven commoditization of active management, specifically as quantitative and machine learning-based strategies become more accessible to clients?

Yes. I mean we're thinking about it back to building on my last statement, having the best humans. And if we have the best humans and that we can actually provide them with the right tools, we can do great things. And the last year or 2, we've been prioritizing getting AI tools and our teams trained very effectively. It's now accessible to everybody in the company. It's now used by 3/4 of our employees every day in some part of their work.

And I'd say the place where it's being used the most is from our investments organization. I'm impressed and proud of our investors that they're not looking at it as a threat. They're really looking at it as an opportunity. And so the use cases they're using and we're using are to get that next edge over our competitors. And so things like performance and performance analysis retrospectively and prospectively, sell signaling to get better at when to move on or just some examples, research aggregation that can reduce the amount of time that we get to combine your information and our information together.

These are all now getting built until the processes. And again, if we can just get some -- a little bit of edge there, same on the client management side. This is when you retain assets a little longer, you grow assets a little better, grows revenue over time. And I think that's what we're trying to do, much more than the expense side. And I think it's going to be a long, long time until, if not ever, where people are just completely turning over all of their investments to anything about that.

Moving to ETFs. We've touched on it a little bit. It's obviously been a big driver of your flow outperformance -- can you talk about the trends in that space more broadly, how you're growing share and dealing with, to the point on the Qs, increasing competition?

Yes. We've been in the ETF space about a little over 20 years now. And so the growth of the business mostly organically, but we've done some add-ons over time has gotten us to a place, as I mentioned before, that's about $1.2 trillion now. And we've been doing it by outflowing our market share rate and maintaining and growing our overall market share.

And I think the recipe for that, that we're continuing to do in a competitive space that's been competitive for a long time is making sure that our innovation and not just on the product side, but on the distribution side, on the structuring side stays in front of others. And we've been able to do that successfully by also not trying to be everything for everybody. And so we picked the geographies we've picked deliberately. We picked the part of the markets that we want to focus on.

And I think that intentionality has been important. And then you end up competing on things that are more than just price and you compete on value or you compete on speed. And we've done that in the U.S. We've grown quite significantly in Europe now. We're almost $200 billion of ETF AUM, and we're starting to ramp up more significantly in Asia. So I think the business should go from strength to strength.

It's a very accretive business for Invesco. It now has margins that are significantly in excess of our overall operating margin for the company. So it scales really well. It's one global platform. So we see a lot of room left.

On the Europe and Asia point, I guess people always say like Europe is 5 to 10 years behind the U.S. I imagine Asia is 10-plus -- do you see -- as you look at kind of the adoption curves, do you see it kind of catching up at some point?

Yes. I think there -- some of that's true, the statements you made, but they're very different. And I think that's maybe the way that we've been able to do well in Europe and we do well in Asia and other areas, and we'll do well in Asia on this is, I think, accepting the differences. And so in Europe, the institutional market is pretty big for ETFs. The use of active has actually been around a little longer in the ETF space. So we have some things that are introduced.

On the other hand, the fixed income side isn't as built out as it is here in the U.S., and we've been taking advantage of some of the things we've learned here in the U.S. And then in Asia and in Europe, what's actually moved faster than in the U.S. are digital platforms. And so our ETF businesses, what we're learning on digital platforms in places outside the U.S., whether that's neobanks or fully digital wealth managers, we're applying back here in the States. So I think there's advantages to actually having your eyes around the world.

Digging in a bit more on active ETFs, it feels like everyone that we talk to is launching active ETFs and trying to kind of I guess, market it as the savior for the business.

How do they say it?

I guess how are you differentiating your active ETFs versus what feels like a pretty crowded space at this point? And to what extent, if you can tell, are these products just cannibalizing existing active AUM?

Yes. I mean some of it is due to what I said a little earlier about how we differentiated our ETF business in general. We have about -- we have about 40 active ETFs globally, most of those in the U.S., but some of them in Europe. They're largely in fixed income, option income areas, commodities, and we have about $40 billion. So we've seen good uptake -- we've also been in the market for some time with a little more of an active orientation in our passive ETF lineup, meaning we're using other factors in passive than just capitalization weighted.

So we kind of have an ethos of active orientation already in our ETF franchise, which means the end client thinks of us that way. And because we have such a big passive, talking to people about active and passive is very natural for us. And having the ETF complex as large as we have allows us to use all the scale benefits that are already there with that incumbent position. So we think we're able to -- we're not -- the reason I mentioned 40 active ETFs is that it may be getting to large enough.

And so I don't think the way you're going to measure success in active ETFs is how many funds you have. I think it's going to be when you launch them to who you launch them and do you stick to what your real strengths are in active. because if you're just thinking it's going to port over bad active into another vehicle and mana from Haven is going to come, it just not -- is not what we see happening. And to that end, we're usually -- we're going to build out our active ETF business through new launches, not through conversions, probably not through share class extensions, maybe here and there, but it's largely going to be new fund launches.

So may they cannibalize our active mutual fund business over time? It's possible, but that's not really the design.

Okay. I'm going to pivot to alts. Maybe update us on the specific kind of product road map and distribution strategy to grow that business from here.

For alts?

Alts.

Yes. So just for context, private markets for Invesco is about $135 billion of assets, and it's been built over multiple decades. 95% of it's been placed with or owned by institutions, typically a defined benefit of sovereign wealth and endowment foundation. So over the last several years, we've been investing in and executing a strategy against diversifying that to become more present in the wealth space, not just here in the U.S. but internationally and over time into other parts of institutional, notably the retirement defined contribution space, again, not just here in the U.S. but internationally.

And because of our existing asset base being in real assets, real estate largely and in alternative credit, -- there were pockets of that where we wanted to have natural extension growth and have a more -- a broadly accessible product line, not everything to everybody, but broadly accessible. And we also were limited by not having infinite amount of capital to invest behind these strategies to get them launched, going and really moving. So that drew us to partnerships, which we executed on last year first, about a year ago with Barings, where we are now working together on private alternative strategies in the income space.

So using parts of our direct lending and CLO bank loan strategies and their higher-end direct lending and special situations to have a unified product that we can bring to the wealth space. And we're going to do a second one with them here later this year that's similar with a bit more octane. And then our second partnership we did with LGT Capital -- and that was a little more on the capital appreciation side, bringing some of their strengths in private equity and infrastructure with some of the strengths I mentioned before for us in real estate.

And we're going to bring that -- those products to market here this year soon, the first for wealth and the second for the defined contribution space. And in both instances, the MassMutual and LGT Capital, respectively, invested upwards of $1 billion in capital behind those strategies to incubate and have them move forward. And so we've been able to actually launch product pretty quickly compared to our competition. I think where we are right now, we have a much broader built-out product line.

I think as we look forward, there's more opportunity for us to replicate similar things in Europe and in Asia. There's probably some opportunities for us to do a few more things here in the U.S., but I think it's starting to get away from being a product thing for Invesco and much more a distribution element and really get that flywheel turning.

On the LGT partnership, can you share any more kind of on the time line of the first close? I know sometimes it can be tricky talking about these target fund sizes, fee structures for that inaugural offering.

Yes, difficult to talk about. We're really targeting to start to see some of that in the back half of the year. The fee structures are set up that these will be highly competitive fee structures. We want to be in a place where we can actually win share in the wealth space, and we want to target the defined contribution space. So these will have good fees, but competitive in the marketplace.

Fee sharing is the way we've set up these partnerships is each party is indifferent about who manages what percent of the assets, the fee sharing and splits are the same, which is a great investor outcome and shareholder outcome. So nobody is self-selecting, and it really makes a lot more sense to how we can manage the portfolio. So -- the fee sharing is going to be a function of we just want the products to be successful from an investment and size standpoint.

But this is going to take time. I mean these -- I think one of the things that I think has been a little overextended in the private market space into wealth and into defined contribution by the industry, not Invesco particularly, is that this is going to take time to get from 1% or 2% allocations to 5% or 6% or 8%. This is going to be years for this to happen, not quarters.

On that point, there's obviously been a lot of noise on the retail democratization theme this year. From your perspective, has it meaningfully impacted the retail alternatives growth outlook? Or is this more of a blip in your view? And maybe update us on how your conversations with distributors have gone on this theme.

Sure. Look, I think -- and we have different characteristics than others. So I'll speak a little bit for the industry and mostly for Invesco. I think from an industry perspective, the conversations we've had with wealth platforms and defined contribution plan sponsors, I don't think this has changed their outlook on the importance of private markets into their clients' portfolios. So that's been our general experience.

I think the end clients, the participant maybe in a 401(k) plan or the individual investor invested through their adviser, I think has a sharper eye on what is in these strategies. And I think that, in the end, might, in the short run, be a little painful for certain firms and folks. But in the medium to long run, I think it's just going to make a much more informed investor base that knows the difference between an interval fund and a BDC or knows the difference between direct lending and distressed or knows about concentration risk or knows about a 5% redemption limit.

And I think it's not that these weren't disclosed. It's -- I just think through experience, people will learn more. And it's so early that I think there's a lot of opportunity to move forward. I actually think in the 401(k) space, I think a lot of this is actually helpful because this will end up in people's target date funds in time. And I think a lot of the liquidity challenges that we're seeing in retail just will exist less in 401(k) space.

And I think these are wonderful holdings that should be in people's retirement plans. And I think people's knowledge and experience is just going to advance that.

On that, what operational challenge -- I mean, it feels like there's some light at the end of the tunnel that's actually happening. What operational challenges still exist around daily valuation or liquidity matching and also education of the sponsors?

Yes. We did a survey which we coded with Sari and 85% of the plan sponsors said they want to see this in their plan. I think the education is going to be less with the plan sponsors and more with the participants and also more with regulators and government and others that have a responsibility to make sure that these work well for shareholders. So I think that the education is really more with the participant than it is going to be with the plan sponsor.

I think the operational challenges and the liquidity challenges again, this is where I think the defined contribution has an advantage because the preponderance of VC assets today are in target date or life cycle or some kind of mass allocation fund and where this will end up in time is a sleeve inside that. And it will be a sleeve of 5% to 20% or some appropriate amount based on your age or your risk tolerance or your asset levels.

And those things are really more straightforward on an operational basis to work through liquidity, to work through how these things -- where valuation matters and where maybe it matters a little less. Commingled trust funds are going to be probably a vehicle of choice that they'll move through. Those have really good pure economics. So I think in the 401(k) space, it's actually going to be a lot less operationally intensive. I do not think there's a world where people are going to have a single fund option that says Invesco private equity fund. It's just -- that's not -- I don't think the reality.

There's a question from the audience here that's adjacent to this, more from the insurance perspective, your relationship with MassMutual. Maybe update us on the asset management strategy through your relationship with MassMutual and maybe scaling for more third-party insurance mandate.

Yes. I mean the insurance -- first, the relations with MassMutual is very strong, and it's very deep. They're both an owner in the company's common equity. They're an owner or they have a stake where we have the preferred equity, which we talk about later, has become smaller. They're the biggest investors through their general account in many of our newer private market strategies, and we work with them through their insurance network as well.

So it's very deep. And whenever there's an opportunity for us to bring something to market or for them to work with an asset manager, of course, they have bearings, but we're the cousin. And our combinations with Barings and the relationship with MassMutual, there's plenty of opportunity. As it relates to other insurance companies, we work with many insurance partners, and there's no limitation to working with other insurance partners, whether it's at their general account or in their insurance advice networks.

In fact, some of the biggest growth that we've seen in the last year, especially outside the U.S. has been with insurance partners in places like the U.K. or in Japan.

Great. So we've talked about ETFs, active equity, alts, like you've got all of these pieces in place. It would seem to kind of compete more meaningfully in model portfolios or SMAs that kind of package all this stuff into one flavor. Update us on your progress and kind of attacking that opportunity more aggressively.

Yes. In the beginning of our conversation, when I was talking about some of our focus going forward, and I mentioned personalization, it's just that what you're asking about. We've been growing in the SMA. We think it's important to have an SMA, a robust SMA business. We think it's important to have a robust models business. We've taken the SMA business now to about $40 billion from $10 billion, maybe 3 or 4 years ago. So it's grown quite rapidly.

But it's been more narrow. It's been in fixed income mostly. We'd like to see that expand out. And then in models, the growth has been a little more modest for us. It's a place we really want to ramp up. And what we believe is the advent of models as a really good allocation source for retail, wealth and mid-market, in particular, in upmarket is the potential is very high. It scales well. Technology is much better now.

And the recipient of a lot of those assets are ETFs. And so we've been pretty robust in lots of people's models, but we'd like to see our models business where we're the asset allocator get larger.

Okay. Makes sense. I want to touch a little bit on the non-U.S. business, which you've hit a few times throughout the conversation. I think you're particularly well positioned to address China and APAC given your joint ventures there. So maybe update us on how that business has been tracking through this year's volatility and what the broader Asia strategy is at this point?

Yes. So combined, Asia and Europe for us are about $800 billion of client assets, about half-half. So our Asian business at $400 billion in assets from the region is really strong. And that's probably -- I mean, I don't have the exact numbers, but it's grown significantly. Flows have been very strong. And I think importantly, they've been now more diverse. China is about $155 billion of that $400 billion.

Japan is now over $100 billion. We now have our JV in India with a local partner where we own a minority share, but we're going to participate in that market. Broader Southeast Asia in some of those markets have been quite strong. So we now have a pretty diverse business over there that's more than one country or one product type.

With regard to China, in particular, which I think is a really unique piece of Invesco, as I mentioned, the size has gotten quite large. We're now the #1 foreign-owned or foreign affiliated JV-type asset manager in China. And we're in the top 10 of all retail asset managers in China. So we're really relevant and significant. We've been there 23 years. It's a domestic to domestic business. So it benefits from the strength of China's capital markets developing and retirement markets developing, which has been the main reason we've been attracted to China is those 2 things need and have to develop, and we're starting to see that occur.

But now with the size and scale we have and brand relevance I mentioned, the business is 50% plus operating margins, no capital coming in, dividends out every year. And it's now about 20% money markets, 40% fixed income, 20% equities, whatever the other math is for balanced. It has an ETF business that's about $15 billion growth from nothing 4 or 5 years ago. So we now have quite a diverse complex there.

And it's been growing pretty rapidly. So we did, I think -- I think around $9 billion of flows last quarter. It's a little ramped up from last year, but it's just been a very good organic growth business and we continue to be favorable about that domestic market.

Staying on non-U.S., I think you've had particular success with a growth equity strategy in Europe. Is that right? Or...

In Europe or is it in Asia? In Japan, global equity, in particular, yes.

How are you thinking about kind of replicating that kind of success with other active strategies?

Yes. We definitely want to replicate. And so that strategy is growing pretty significantly. I think importantly, that strategy, we've been in Japan for a long time, and we have many mandates with Japanese distribution platforms. This is the most recent one and probably the first one that's been as broad-based as something like global equity. It's not a cyclical category. It's a core holding for every Japanese household that's investing in markets.

And it's really benefited from this move from savings to investing that's happening in Japan. And it's happening in Japanese equities, but it's also happening in global equities. And so we still feel like we have a lot of room to grow there. But that product, while it's been successful in the last few years, we incubated and started developing that track record 3 or 4 years before that.

And so we are doing the same with some other strategies right now, U.S. strategies, emerging market strategies, European strategies. And our brand has gotten so much bigger and more recognized in Japan. We're launching an ETF in a couple of weeks, the Qs ETF in Tokyo. So we're going to broaden that business out, and I think it's pretty helpful. But global equities is a core asset class, and we're happy to have that.

Great. As we get towards the end, I want to pivot to expenses and margin. I think your favorite topic of the last few years and tends to be a key focus for most investors I talk to. It sounds like there's finally a light at the end of the tunnel for the Alpha NextGen project. What point should we expect that to become a tailwind rather than a headwind?

We're going to finish executing that platform at the end of this year. And we made a pretty important pivot last year in going to this hybrid model, and we still think we can get many, if not all, the benefits that we had expected. So first thing is getting it installed. That will -- from a tailwind perspective, we'll lose all the implementation costs. So that will be a good thing as we move forward into '27.

We also -- and I'm glad we did this platform when we did it, and we're finishing it when we're finishing it for a lot of reasons, but we now will have a single system that aggregates all of our data, allows our -- the investment engine to have single analytics, ease of delivery and all of the things that are prerequisites to apply things like AI and apply things like advanced analytics. And so I think we'll start to see that tailwind behind -- start to become a tailwind.

And then we're eliminating, I think, over 100 systems. So the ability for us now to really relook at elements of the cost base and see what we can do will become more true as we get into '27. We just had all eyes, as you would, I think, expect as shareholders or interested people in implementing. We will get this done this year.

Great. And I guess through that lens, you've made some headcount reductions. Where do you see the remaining levers to pull on the operating leverage side of technology, real estate, product rationalization? And then more broadly, where do you think that could lead the operating margin over time?

Yes. I mean, in fairness, we're -- we were 8,500 employees a year ago. We're 7,500, but most of that reduction was through 2 divestitures. We did the Indian JV and the Canadian sale of our fund range. And so in both those instances, we're keeping some revenue. We're sub-advising back the Canadian funds, a big portion or 1/3 of them. And in India, we're participating through our 40% ownership.

And in time, maybe some sub-advised relationships with India. So I think that's a perfect example of what we've been doing in Invesco, which is being thoughtful about the expense base and in this case, really keeping it flat, but realigning the expense base and investing in these growth areas to be able to do that. And I think that's a muscle we've now built and we're going to flex over the next little while.

I think there's opportunities in technology that we just mentioned with Alpha and the runoffs that we'll see there. I think there's opportunities in the real estate portfolio. As we get out of places like Canada, our leases now we're out of those. So I think that will start to pull through. And then the product line, as I mentioned before, we're going to continue to consolidate towards our top managers in our top areas.

And I think that's going to allow us to continue to keep the cost base pretty efficient. So we continue to see room to invest -- reinvest that into our business and still be very thoughtful about holding expenses -- holding the line on expenses, which has been a strength of the firm.

And then where do you see kind of all of these efforts leading in terms of like a long-term margin trend over time?

Yes. Well, we made a goal -- a near-term goal a couple of years ago to get to the mid-30% operating margin level. In first quarter, we had 34.5% operating margin from what was high 20s a couple of years ago. And we said as we kind of got -- and we still need to pull that through, our long-term goal is to get into the high 30s operating margin, all things equal, not seeing market -- major market corrections.

And I think we're on the path to that. I think some of it is going to be the built-in operating leverage that I mentioned through the expense base and some of the opportunities we have. But mostly the continued growth in these places that continue to scale well, China, ETFs, the fixed income platform and a slower attrition rate and things like fundamental equities, we're confident we can get to that level, all things equal.

That dovetails to a question from the audience here. Fee rate degradation has been a big focus, but you've been hinting, I guess that it feels like there's some stabilization occurring because of some of the reasons you just highlighted. Maybe update us on the moving parts in there and think there's a path to at least kind of flattish fee rate.

Yes. I mean a lot of times we get asked about net revenue yield, and it's slightly an unfair measure, which is what you're talking about because what's really important is, are you growing organic revenue and are you driving profitability. But nevertheless, the question about stabilizing that net revenue yield is mostly a function not of fee pressure. We really haven't seen that. It's mix shift.

And so as the mix shifts to more ETFs and less fundamental equity, the net revenue yield is naturally going to go down. But my comment about the ETF business being at the same, if not higher margin than the fundamental equity business, you just need to do more volume. And so I think what's been happening with Invesco and where it's inflected is we had one driver of what I was describing.

Now we have 3 or 4 drivers. And so I think to continue to get that net revenue yield stabilize, but more importantly, that organic revenue continuing to be positive from what was very negative a couple of years ago is going to be a function of ETFs keep growing. China keeps growing, global equities keeps growing. The fixed income business grows and then we attrit less in some of those domestic equities, all of that will contribute to organic revenue growth. But it's the mix. It's really not fee pressure.

I want to finish on capital. We mentioned MassMutual, and you've made a lot of progress delevering, working down the preferred at MassMutual. So firstly, what are the considerations for working that down further? And then more broadly, how are you thinking about the capital deployment through balance sheet improvement, buybacks, payouts, et cetera?

Well, when we wind the clock a year ago or 2 years ago, we feel a lot better about the flexibility we now have to actually even have that conversation. And just to recap, we reduced the preferred by $1.5 billion over the course of last year from this time last year. We retired another $0.5 billion of debt that matured in January of this year. So it's a very different looking balance sheet.

We've made the first priority to reinvest in our business, and I mentioned that, and we're going to continue to do that through product line through technology and some of these organic revenue and organic growth drivers. But once you get past that, -- we've also said publicly, we want the payout ratio to be about 60%, and we're very much on a path to do that. We just increased our share -- our regular share buyback to $40 million a quarter from $25 million.

We just increased the dividend. So we want to get that payout to be at around that 60% range. And then that takes us to the preferred or to other forms of debt. We do have -- at the end of the first quarter, we had about $1 billion on our revolver. Our priority is to get that back down. That was on the revolver to retire some of that other preferred debt. And so when you get into the back half of next year, assuming all kind of goes to expectations, we could be in a position to rethink do we do something more on that preferred.

But we'll see where we are in the market conditions. But the priorities are what I just mentioned right now. And then you fast forward to the end of this year, the beginning of next year, the leverage ratio for the company is there is much different than what it was 2 years ago.

And then lastly, Invesco has been quite acquisitive over the years. There's some news hitting today that a large asset for sale. But I'm curious to get an update on your thoughts of that use of capital. And if you do see using that avenue, what holes you could see filling inorganically?

Yes. I mean we worked really hard to get the balance sheet to where it is. And a lot of it's been with the discipline that we talked about over the last half hour or so. We also have a $2.5 trillion manager with as much range as we have and diversity, there's not a lot of gaps and a lot of things that are really missing. and we have scale. And we've been growing. We did $150 billion of net new flows in the last 18 months. It's kind of the size of an acquisition, and we did it organically.

So I guess the long-winded way of saying our -- that's really been what the focus is. We like partnerships a lot, and we've done a few. If we see opportunities to add things on through partnerships or other -- or acquisitions, we're paying attention, but it's not at the top of the priority list.

Got it. Thanks a lot.

Thank you. Good to see you.

Thank you.

Hello, and welcome to the Annual General Meeting of Shareholders of Invesco Limited. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Rick Wagoner, Chair of the Board of Directors of Invesco Limited. Mr. Wagoner, the floor is yours.

Thank you, and good morning, ladies and gentlemen. My name is Rick Wagoner, and I'm the Chair of the Board of Directors of Invesco Limited. It's my pleasure on behalf of Invesco, to welcome you and to express our appreciation to you for attending the 2026 Annual General Meeting of Shareholders.

As you are aware, the company is conducting this meeting virtually. This year's annual meeting, we will offer 4 proposals for our shareholders' consideration. After a brief discussion of the proposals, shareholders will be given an opportunity to ask questions regarding the proposals through the website hosting this meeting before we proceed with any online voting. We will then announce the preliminary results for each proposal and adjourn the meeting.

I would like to acknowledge Andrew Schlossberg, the company's CEO and other members of the Board of Directors who are attending this meeting. Also attending our annual meeting are members of the Invesco executive leadership team and representatives of PricewaterhouseCoopers.

Now we will proceed to the voting portion of our meeting. We have already made available to each shareholder a copy of the proxy statement for the 2026 Annual General Meeting of Shareholders and the 2025 annual report on Form 10-K, which includes the audited financial statements for the company for the fiscal year ended December 31, 2025. The audited financial statements are hereby laid before the Annual General Meeting as required by Bermuda law. Copies of these documents are available on the website hosting this meeting.

Resolutions were adopted by the Board of Directors of Invesco providing for the meeting to be held virtually at this time and directing that notice be given as provided in our bylaws. The Board also fixed March 16, 2026, as the record date for determining persons entitled to notice of and to vote at this meeting.

On the basis of the reports of the secretary and the Inspector of Elections, proper notice of this meeting has been given and a quorum is present, either attending virtually or represented by proxy. Accordingly, this meeting has been properly convened.

All resolutions put to a vote at this Annual General Meeting shall be decided upon by electronic poll. After I briefly highlight each of the matters to be acted upon at this meeting, we will open the floor for discussion regarding the proposals. At the conclusion of the discussion of these items, we will take the vote. The business of this meeting is limited to the 4 matters set forth in the notice of this meeting.

First proposal we will consider is the election of Directors. The Board has nominated Sarah Beshar, Tom Finke, Todd Gibbons, Bill Glavin, Beth Johnson, Andrew Schlossberg, Nigel Sheinwald; Paula Tolliver, Rick Wagoner, Chris Womack and Phoebe Wood, to each serve a 1-year term as Director which term would expire at the Annual General Meeting of Shareholders to be held in 2027. Information concerning each director nominee is contained in the proxy statement. No nominations may be made at this meeting. Therefore, I declare nominations to be closed.

The second proposal we will consider is an advisory nonbinding vote to approve the compensation of our named executive officers for 2025 as disclosed in the proxy statement.

The third proposal we will consider is the appointment of PricewaterhouseCoopers LLP as independent auditors for the fiscal year ending December 31, 2026.

The fourth proposal we will consider is the amendment of the company's fourth amended and restated bylaws to allow shareholders to remove a director with or without cause.

I will now open the floor to discussion of the 4 items of business under consideration. If you have a question, please submit it by clicking on the Q&A icon in the upper right side of the page. Greg Ketron, Head of our Investor Relations department, will read out any questions and the company will seek to address those questions. The company may not answer every question submitted due to time constraints or due to the question not being relevant to the meeting. Company will seek to follow-up with shareholders after the meeting with respect to unanswered questions. Greg, are there any questions for us to address regarding the proposals?

Mr. Chairman, there are no questions relevant to the proposals.

Thank you very much. We will now proceed to voting on the proposals. Please note that if you've already voted, there's no need for you to recast your vote. Any shareholders online wanting to vote and who duly signed into this virtual meeting may now do so by clicking the vote link on the website. We'll pause for a minute to allow online voting.

[Voting]

Thank you for voting. The polls are now closed. Based on the preliminary report of Mr. Chris Coleman of Computershare, the duly appointed Inspector of Elections for this annual meeting, all Director nominees have been reelected to the Board of Directors. Our shareholders, in an advisory nonbinding vote, have approved the compensation of our named executive officers for 2025 as reported in the proxy statement. Our shareholders approved the appointment of PricewaterhouseCoopers LLP as independent auditors for the fiscal year ending December 31, 2026, and our shareholders approved the amendment of the company's fourth amended and restated bylaws to allow shareholders to remove a director with or without cause.

There being no further business to come before this meeting, I hereby declare the 2026 Annual General Meeting of Shareholders of Invesco Limited to be closed. On behalf of the Board of Directors and management of Invesco, I would like to again express our appreciation to our shareholders who attended this meeting as well as those who submitted their proxies, but were not able to attend. Thank you.

This concludes the meeting. You may now disconnect.

Welcome to the Invesco's First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations.

Thanks, operator, and to all of you joining us on the call today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for the accuracy of our earnings transcripts provided by third parties. The only authorized webcast are located on our website. Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer. We'll present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew.

Thank you, Greg, and good morning to everyone. I'm pleased to be speaking with you today. Before we review this quarter's results, I'd like to reiterate our strategic priorities and our key performance drivers as highlighted on Slide 3 of today's presentation. These strategic imperatives focus our efforts guide our decisions and provide a clear framework for navigating a rapidly evolving asset management landscape.

Our strategic priorities remain grounded in a simple conviction. Regardless of broader market conditions, geopolitical events or cyclical, structural or fundamental headwinds, executing against these priorities will leverage the best of Invesco, accelerate our key areas of opportunity and drive profitable growth. And that is exactly what we are seeing in our business.

Profitable organic growth is paramount. As such, we are focusing on high demand, scalable investment capabilities like fixed income, and delivery vehicles like ETFs. We continue to drive value through our expansive global footprint with a significant and unique Asia Pacific presence, including a hard-to-replicate Chinese JV and a strong performing and growing EMEA business.

Together, these regions represent nearly $700 billion of our client AUM. We are also well positioned to generate increasing value in our private markets business where we have a strong institutional heritage in real asset and alternative credit strategies, which are now leveraging as we bring those products into faster growing wealth management space. These existing Invesco strategies are being augmented by our recently announced partnerships with Barings and LGT capital.

Each of these relationships are progressing well, and we look forward to updating you on developments with additional product launches later this year. We also continue to sharpen our focus and accelerate innovation across products and vehicles, such as active ETFs, SMA, models, customized solutions and digital assets. We are seeing momentum build in each of these areas, and we have launched several new products and partnerships this year already.

Our progress on strategic priorities also include continued strengthening of our balance sheet and efficient capital deployment, including returning a portion of it to our shareholders through increasing common share repurchases and dividends. We continue to prioritize the intersection of market size and secular change where Invesco is uniquely positioned to drive growth in the highest highest opportunity regions, channels and asset classes. This is the guiding principle by which we measure opportunities, deemphasize when needed and focus resources to drive growth across the organization.

We will continue to execute with discipline allocate capital and resources accordingly and measure progress against our key performance drivers indicated on the far right-hand side of this slide. So let's turn to Slide 4 and take a look at how our efforts translated into asset flow results in the first quarter. Markets had strong momentum coming into the quarter, but ultimately gave way to heightened volatility as geopolitical uncertainty, sharp moves in energy prices and changing interest rate expectations weighed on public markets.

It is in this type of operating environment that the benefits of our broad scale, diversified global platform are most evident. With elevated volatility, money was in motion and clients continue to entrust Invesco with significant capital across our global product set. Net long-term inflows were $21.8 billion, marking the 11th straight quarter of net inflows and representing annualized organic growth of 4%. It is also worth noting that we generated $11.6 billion in global liquidity inflows and we ended the period with over $200 billion in AUM.

We continue to be encouraged by the breadth of our overall growth. We had solid positive flows across several dimensions including in many of our strategically important investment capabilities across each of our 3 regions in both our active and passive strategies and across wealth management and institutional channels. The Asia Pacific and EMEA regions again produced very strong net inflows with 17% and 8% annualized organic growth, respectively.

We also saw our strongest quarter of active net inflows with nearly $15 billion generated around the world. Additionally, institutional demand has remained strong with our fifth consecutive quarter of annualized organic growth in excess of 5%. So let me spend a few minutes clicking into growth drivers in each of these investment capabilities.

Starting with our ETF and index capability, where we continue to meaningfully scale and diversify our platform to meet evolving client demand. Our ending AUM stood at a record $638 billion or over $1 trillion, including the QQQ. We had nearly $19 billion of net inflows during the quarter or 11% annualized organic growth.

Within our ETF range, we garnered net inflows across a diverse set of products in both equity and fixed income. Our [indiscernible] S&P 500 delivered record net inflows, and we saw strong demand for QQQM from investors with long-term horizons. We continue to see strength in our S&P quality and momentum lineup as well. We remain focused on innovation in the ETF space as we launched 4 new active ETFs this quarter, strengthening our market position in this high-demand segment as investors continue to use the ETF wrapper to access active equity and fixed income strategies, particularly in more volatile market environments like we are seeing today.

We have built a robust active ETF platform currently managing over $20 billion in assets, which increases to more than $35 [ billion ] when you include index strategies implemented by our active teams. With our Q2 fund conversion on December 20, we had a full quarter of the funds flows included in our results. The fund continues to attract the demand, but after multiple quarters of very strong inflows, we ultimately had net outflows this quarter. This reflected normal rotation and profit-taking as investors [indiscernible] exposures amidst the more volatile market environment.

However, with the [indiscernible] market volatility in April, we have seen strong demand and net inflows returned for this flagship product. Let me take a moment here to address the recent developments that NASDAQ has expanded its licensing to allow 2 additional U.S.-listed ETFs to track the NASDAQ 100. First, we see this as an evolution of a highly successful benchmark, reflecting the global importance of the NASDAQ 100, where we dominate with our flagship QQQ fund, which is one of the world's most actively traded ETFs and a core exposure vehicle globally for the NASDAQ 100.

As you know, QQQs position is supported by unmatched liquidity with tight spreads deep options in derivative markets and a very large and broad institutional and retail investor base. These critical characteristics coupled with the immense brand recognition that's synonymous with Invesco QQQ being a one of a kind and a large marketing spend and positive client outcomes built over 25-plus years minimizes the dependence on being the sole licensed product from an index provider.

Our installed base is tough to erode, and it's been proven that switching costs are higher than assumed with taxes being a major factor. By example, the introduction of our own QQQM expanded the NASDAQ 100 ecosystem without cannibalizing the QQQ. NASDAQ has historically been selective in how it licensed the NASDAQ 100 Index and that selectivity resulted in the QQQ being the primary U.S. listed ETF fracking the index for decades.

NASDAQ has publicly reaffirmed its commitment to our QQQ innovation suite as a cornerstone of their NASDAQ 100 ecosystem. Further, NASDAQ's licensing for these new NASDAQ 100 exchange traded funds is consistent with our QQQ at 8 basis points. meaning any competitor fund will pay the same amount and the existing licensing agreements are not impacted by these filings.

Our relationship with NASDAQ remains strategic and long standing. To put a fine point on it, our installed base where we have built a dominant entrenched position over decades will be difficult to displace. More so, we believe that the attention will create an increasingly large pool of assets behind this important benchmarks.

So let's move on to fundamental fixed income were regarded a very healthy $3.7 billion in net long-term inflows or 5% annualized organic growth with strong attribution across geographies and channels. This only considers the narrow view of our fundamental fixed income capability. Looking more broadly at the asset class across all of our investment capabilities, that net flow number jumps to $14 billion with the inclusion of our related ETF and China-based fixed income assets. Momentum in our fundamental fixed income capability was broadly driven by institutional inflows in investment-grade products. as well as fixed income SMAs where we continue to see strong demand.

Our entire SMA platform, which also includes a portion of equity assets, now stands at $37 billion in AUM. We have one of the fastest-growing SMA offerings in the United States, United States wealth management market, generating an annualized organic growth rate of 19% this quarter.

So moving on to China JV, where we produced another exceptionally strong quarter, demonstrating that we are well positioned in this market. We reached a record high AUM of $142 billion and delivered $8.7 billion of net long-term inflows or a 31% annualized organic growth rate. In a volatile global market environment, the China JV demonstrated the benefits of its diversified platform.

Looking at the quarter as a whole, net inflows continued to be driven by Fixed Income Plus strategies which have now reached $40 billion in AUM on our JV platforms. We have developed a diversified product lineup in our China JV, which is designed to meet varying client risk appetites and we like the position we have built and the opportunity it presents long term.

To support this growth during the quarter, we launched 14 funds with total AUM of $2.5 billion mostly aligned with the growing demand for balanced and equity ETF strategies. Shifting to private markets, we've posted $400 million of net inflows driven by direct real estate. The asset class has gained momentum led by [indiscernible], our real estate debt fund for the U.S. wealth management channel, which continues to gain scale and our U.S. core+ real estate equity fund, which is seeing strong institutional engagement.

Assets in [indiscernible] with leverage now total $5 billion after a little more than 2 years in the market. This is one of the fastest ramp-ups in the wealth channel for a commercial real estate credit product and is a reflection of how our innovation mindset is helping drive our results. Additionally, we continue to prioritize private market product development for the defined contribution channels around the world.

During the quarter, we launched the Invesco Core+ Real Estate Trust, which is a collective investment trust designed to provide U.S. defined contribution plans, access to private real estate real estate. Among the first of its kind, this CIT introduces institutional real estate capabilities that support the long-term needs of defined contribution investors. We launched this fund with a mandate from a large U.S. corporate institutional investor as the anchor client, marking a significant win for our business.

Our real estate net inflows were modestly offset by net outflows in alternative credit, which were exclusively driven by our bank loan products. BK, our industry-leading ETF experienced redemptions of $400 million in Q1, instigated by the technology-led selloff. However, the fund remains well scaled and positioned in the market. Regarding the market dynamics in private credit at large, the headlines are oftentimes drowning out the fundamentals and completing various products.

Invesco's alternative credit platform built around broadly syndicated loans CLOs and disciplined direct lending had 0 software exposure, showcasing the diversified nature of the platform that is designed precisely for environments like this one. From a product standpoint, it's important to note that we are not in the BDC space. We have dry powder, diversification and extensive experience.

For managers with their discipline, this volatility may ultimately prove to be an opportunity. The growth potential in private credit has not fundamentally changed, and manager selection remains key, given the wide dispersion in the sector. The current turbulence has not impacted our long-term views, and we believe we have a very favorable position. We're excited about the prospects in private markets with organic growth opportunities amplified through our innovative partnerships with Barings and LGC capital to further penetrate the wealth management and defined contribution markets.

Moving on to multi-asset capabilities. We also had a strong long-term net inflow during our -- driven by our institutional quantitative equity strategies, which generated $4.7 billion of net inflows during Q1. And finally, in fundamental equities, U.S. value equities turned to net inflows during the quarter which was matched by continued positive net flows in global, international and regional equities from clients in Asia Pacific and EMEA.

The ongoing momentum in these markets is headlined by our Global Equity Income Fund, which remains the top selling retail active fund in the Japanese market. This fund posted net inflows of $3 billion during the quarter, rapidly growing to $23 billion in AUM, while generating a very favorable net revenue yield for Invesco. Despite these positive fundamental equity flow highlights this quarter, we did remain in net outflows of $2.4 billion overall in the segment. This included the expected $1.2 billion in net outflows from our developing markets fund albeit a significant moderation from recent history.

However, it's important to highlight that our overall fundamental equity outflows this quarter were the small smallest we have seen in nearly 9 years. And on a gross sales basis, we had our best fundamental equities flow quarter since the beginning of 2022.

So moving on to Slide 5, which shows our overall investment performance relative to benchmarks and peers as well as our performance in key capabilities where information is readily comparable and more meaningful to drive results. Investment performance is key to winning and maintaining market share regardless of overall market demand, and achieving first quartile investment performance remains a top priority for Invesco.

Overall, 46% of our active funds are performing in the top quartile of peers on a 3-year time horizon with nearly half reaching that bar on a 5-year basis. Further, over 70% of our active AUM is beating its respective benchmark on a 5-year basis. So with that, I'm going to take a pause and turn the call over to Allison to discuss the quarter's financial results, and I look forward to your questions.

Thank you, Andrew, and good morning, everyone. I'll start with the first quarter financial results on Slide 6. Assets under management held up well against market volatility in the first quarter. While volatility drove a $42 billion decline in AUM for the quarter, we were able to mostly offset this with continued strong net long-term asset inflows of $22 billion and $12 billion of net inflows into money market funds.

AUM at the end of the quarter was $2.2 trillion nearly the same level at the end of the fourth quarter. Average long-term AUM, which included a full quarter of the QQQ reached nearly $2 trillion, an increase of over $400 billion or 26% and over last quarter, largely due to the Q2. Average long-term AUM is up nearly 50% over the same quarter last year due to the QQQ as well as organic growth of 6% over the last 4 quarters and higher market levels.

While we did see market weakness that negatively impacted our AUM levels later in the first quarter, we subsequently saw a strong rebound. As markets have recovered so far in April, with both key domestic and global equity indices and bond entities holding at recent levels. This has led to our AUM growing into the $2.3 trillion range more recently, an increase of over 5% versus quarter end, with growth across nearly all of our capabilities, led by ETFs in the QQQ and, to a lesser degree, fundamental equity, the China JV and fundamental fixed income.

Net revenues, adjusted operating income and adjusted operating margin all showed significant improvement from the same quarter last year. While adjusted operating expenses continue to be well managed. This drove 500 basis points of positive operating leverage and a 300 basis point operating margin improvement year-over-year with operating margin improving to 34.5%.

Adjusted diluted earnings per share was $0.57 for the first quarter versus $0.44 for the same quarter last year, a 30% improved mix. Our focus on strengthening the balance sheet continued during the quarter as we redeemed a $500 million senior note that matured in January. Finally, we increased the amount of common share repurchases in the first quarter compared to prior quarters buying back $40 million or 1.6 million shares. Also in February, our Board authorized an additional [ $1 billion ] in common share repurchases.

Moving to Slide 7. Our net revenue yield increased over the fourth quarter, largely due to the QQQ reclassification to fee earnings, partly offset by the impact of the divestitures that occurred in the fourth quarter. Client demand continues to drive diversification of our portfolio with strong growth in lower fee products such as ETFs and fundamental fixed income capabilities, while the demand for higher speed [indiscernible], such as fundamental equities, particularly global equities, has been weaker. This has resulted in a more balanced AUM profile, which better positions the firm to navigate various market cycles, events and shifting client demand. We've seen the impact of the asset mix shift to moderate over the last year, resulting in a more modest decline in the net revenue yield and more recently approaching a degree of stabilization or an inflection point, which we experienced in the first quarter.

To provide context, the net revenue yield was 22.9 basis points for the first quarter and the exit yield at the end of the first quarter was 22.8 basis points. The future direction of asset mix shift will dictate the net revenue yield trajectory.

Turning to Slide 8. Net revenue of $1.3 billion in the first quarter was $155 million higher as compared to the same quarter last year. The increase in net revenue was largely from investment management fees mainly driven by higher average AUM and the reclassification of QQQ to fee earnings. Operating expenses increased $69 million versus the same quarter last year. mainly driven by higher employee compensation and marketing expenses.

Employee compensation was $43 million higher than the same quarter last year, largely due to a factor that we noted on our prior call. We made incremental changes to our retirement eligibility criteria for long-term awards that will result in a timing change in how retirement-related expenses will be recognized going forward. and this resulted in a $33 million increase in compensation expense in the first quarter.

Marketing expenses were $21 million higher due to the marketing associated with the QQQ now being recognized in marketing expenses upon reclassification. The hybrid investment platform implementation costs were $12 million in the first quarter, in line with our expectations and prior quarters. The incremental operating expense associated with AUM that has been moved on to the hybrid platform was $4 million in the first quarter. We continue to make progress in implementing the hybrid approach with expected completion by the end of 2026.

Regarding the hybrid investment platform cost for 2026, we expect onetime implementation quarterly cost to continue in the $10 million to $15 million range per quarter going forward with the push to have implementation completed by year-end. As we transition more AUM onto the platform throughout the year, the incremental expense related to AUM on the platform will build towards $10 million a quarter later this year. Expenses associated with the platform may fluctuate quarter-to-quarter due to timing.

Looking ahead to the impact the hybrid investment platform will have on operating expenses in 2027 and beyond. We expect the cost saves to be at least $60 million in calendar year 2027, including the implementation costs that will roll off after 26 when the project is complete with run rate savings that should build as 2027 unfolds. We'll provide further updates as implementation progresses. Regarding the overall operating expense outlook for 2026.

With the impact of the divestitures and the QQQ related marketing expenses now in our expense run rate, we expect operating expenses for 2026 to be in the $3.275 billion range, under flat markets from the higher April AUM level that we indicated is in the $2.3 trillion range. We still believe that our operating expense base is approximately 25% variable in relation to changes in net revenue. The effective tax rate for the first quarter was close to 24%. For the second quarter, we estimate our non-GAAP effective tax rate will be in the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items.

[indiscernible] on Slide 9, we continue to make considerable progress on building balance sheet strength and improving our leverage profile. In January, we redeemed the $500 million senior notes that matured. We did in the quarter with $1.1 billion drawn on the revolving credit facility as expected, driven mainly by repurchasing $500 million of preferred stock back in December and the senior note redemption in January. The benefits gained in financing these transactions through the credit facility are a lower floating interest rate and flexibility to pay down the facility as cash flows beyond our capital priorities allow without prepayment penalties. We expect to reduce the amount drawn on the revolver as the year progresses.

Leverage ratios in the first quarter ticked up very slightly due to the higher balance on the credit facility but we expect the ratios will improve the remainder of this year as we reduce the amount drawn on the facility and simultaneously grow EBITDA. We also continued common share repurchases in the first quarter, increasing the amount repurchased to $40 million or 1.6 million shares.

We intend to continue a regular common share repurchase program going forward as we target a total payout ratio, including common dividends and share buybacks to be near 60% for 2026. And as I noted previously, our Board authorized in February an additional $1 billion in common share repurchases. We will continually evaluate our future capital return levels in line with our capital priorities.

To conclude, the strength of our net flow performance and diversity of our business continued despite a volatile market environment, and we delivered strong revenue growth as a result. This, combined with well-managed expenses delivered significant operating leverage and a sizable improvement in our operating margin over the prior year. We will also continue making progress in building a stronger balance sheet throughout 2026. We're committed to driving profitable growth, a high level of financial performance and enhancing the return of capital to our shareholders. And with that, operator, let's open up the line for Q&A.

[Operator Instructions] Our first question comes from Brennan Hawken with BMO Capital Markets.

Andrew, thanks for that color and the K study with the QQQM. I think it was really helpful in contextualizing now that you've managed the Qs in the new structure for a while, what's a reasonable expectation that we could have for securities funding that you might be able to generate from that product?

Securities lending is definitely something we have eligible for the Q2. I mean, given the size and the concentration of some of those positions, the opportunities are there, but they're not super large. And we'll continue to evaluate ways, but that's not -- we don't see that as a huge opportunity.

Okay. Fair enough. And then, Andrew, just hoping to maybe take a step back and ask a bigger quick picture question. 2025 was an eventful year for Invesco for sure. We have the first preferred paydowns, the Q restructuring notable callouts. When you turn the page and look here at what you'd like to achieve in the coming years? What are some of the strategic priorities that investors should be thinking about?

Yes. No, thank you. And we did we did get a lot done last year in 2025, and I think really set Invesco increasingly on a course for continued future growth, a much better improved balance sheet and ability to return capital to shareholders, we do still have a lot more to do and execute against. I think there's 4 principal areas that we're focused on to continue the organic growth that we've been seeing and hopefully accelerate it. I mean one is the enormous shift in personalization that's going on around the world, but in particular, in the wealth management channels and then even more in particular, in the United States. And so we feel like our $1 trillion ETF platform really sets us up well as that personalization theme continues. The growth in our SMA platform has been exceptional, but we view that as another winner in the personalization and tax optimization team. And then lastly, we have a models business that we're going to lean into even more so. So all of those things around personalization. We think the demand for income isn't going away around the world. And as I highlighted in our remarks, we continue to grow quarter after quarter exceptionally. We have an over $700 billion platform that spans geography and all duration. And as you see income needing to be generated in different formats, whether that's ETFs or whether that's SMAs, we'll be there to participate. The other area is the flow growth expectations that we have because of money in motion, demographic shifts and the like in Asia and in Europe, in particular. And we've been seeing outsized growth there and we continue to have a really favorable position with now something like 1/3 to 40% of our AUM out in those markets. And then we've been talking about private markets into wealth management, but I think the less discussed industry-wide, it's been the opportunity in retirement and defined contribution, not just with some of the things happening in the United States, but what's happening around the world for wealth and DC for private markets. And then, of course, technology and what it's going to do to innovate and move at a different pace. All of those things are opportunities we've been leaning into, and we're going to lean into even more in 2026.

Our next question comes from Dan Fannon with Jefferies.

I appreciate all the comments around expenses for this year and some of the savings into next year. I was hoping to get a little bit further in terms of detail as we think about this year and as it progresses maybe the sequential changes or other things to think about to get to that [ 3 2 7 5 ] as we exit 2026?

Sure. I mean, let me see if I can give you a little bit of color. I think that [ 3.275 ] again, I'll just make sure that's clear, that's kind of based on that AUM level of around excuse me, $2.3 trillion towards the end of April, and that's kind of all things being equal, and we don't consider market in any of that. So you think about that, I would say to start -- from a compensation standpoint, I'd say -- as we think about our target has historically been in that 38% to 42% range. I think this year, we're expecting to be kind of in the midpoint of that range. So maybe that gives you some idea around comp as a percent of revenue and what that could look like. Keep in mind the seasonality that we have in the first quarter. So we noted some of that seasonality already in terms of the change in our retirement provisions and what that did in terms of the acceleration of long-term awards that was about $33 million in the quarter. We always have about a $15 million seasonality in payroll taxes in the first quarter. We think about comp to rev on a full year basis, not quarter-to-quarter. So hopefully, that gives you a little bit of color. I gave you some of the context around the hybrid investment platform, and we think implementation will continue in that -- excuse me, $10 million to $15 million range per quarter, maybe kind of trending towards the higher side as we get closer and closer to full implementation by the end of the year. The incremental cost of running the platform. We noted that's $4 million in this quarter. We think that will be kind of fully phased in to the tune of about $10 million incremental by the end of this year. And then, of course, marketing, you've got the QQQ fully in this quarter. So there's not a lot of change there. So this -- I know there was a lot of noise coming out of the fourth quarter, but the first quarter is relatively clean with the exception of the seasonality. The only other thing I'd point to is just a reminder that we are entering into our partnership in the Canadian business. We expect that to close with CI at the end of the second quarter. And that is a transition of about $19 billion in AUM, and that has a modestly negative operating income impact for the last -- the third and the fourth quarter of this year is that will be a loss of operating income to the tune of kind of $5 million to $10 million, which we expect to improve over time as we continue to really execute the sub-advisory relationship with CI and grow that relationship overall. And the guidance I gave is inclusive of Canada, inclusive of everything I just mentioned. So hopefully, that gives you a little bit of color and context underneath the full expense guide.

Yes. That's helpful. And then just in general, for the industry, you're seeing shelf space on platforms like Schwab or other third parties getting more expensive for ETFs and other products. So can you talk about the economic impact you see as you think about this year and next in terms of operating on some of these third-party distribution platforms.

Yes. Maybe I'll start, and Allison can add to it. I don't want to -- we don't want to comment specifically on any discussions with any particular wealth platform. But what I can say is that platform fees as a whole, we always look at them as the value of the distribution and the growth that they provide. And I'll say industry-wide, it's logical that as continued vehicle shift happens from mutual funds to ETF we're going to see overall mutual fund platform fees declined. And an element of this shift in some ways is going to go to other product types. But all of that said, any new platform fees.

[Technical Difficulty]

Please continue to standby.

Dan, did you catch that on the rest of Andrew's answer? Or do we need to go over that one again?

It cut out about midway through, I think.

All right. Well, Dan, let me start at the beginning a little bit and just make sure everybody caught it I definitely don't want to comment specifically on any one particular wealth platform. But absolutely, what I can tell you is that we look at the value of distribution and the growth provided. And what I was saying was industry-wide.

There's really been a vehicle shift going on that we're all familiar with from mutual funds to ETFs. And so essentially, it's logical that you're going to see overall mutual fund platform fees decline and an element of that is going to shift to some other product types. What I was also saying is that new platform fees that we would consider are really going to be focused on new assets, not assets that are on the platforms today and that we're also going to have to account for the composition of the ETF and the relevance of the legacy services that are very much associated with mutual fund sharing that don't exist in ETFs.

And then, of course, the overall cost of ETFs in general. There's a lot to look at when this is discussed. But all of this said, to your specific question, we don't see this having a material impact at all, and we'll continue to evaluate any changes case by case at the firm levels, at the product positioning levels for outcomes we expect with clients and also long-term economics. Sorry about the technology.

This question comes from Glenn Schorr with Evercore.

I'm curious if we could drill down a little bit more on your non-U.S. platform. You saw a good growth, you talked about the growth in both Asia and EMEA. But maybe we could drill down on assessing the durability of it by getting you to talk about what changes additions you've made on the product lineup and distribution investments that you're piecing together as we think about growth going forward?

Yes. No, thanks for the question. As I mentioned, the non-U.S. profile has just continued to go from strength to strength over several quarters always been a legacy strength of Invesco, but the acceleration has been meaningful over the last few years. I think part of the testament to our strength is that we've been in those markets for decades, we never left the markets when there's been challenges, and that long-standing nature, I think, is really, really critical. We're also pretty focused on the markets in both Asia and EMEA that we choose to compete in. In Asia, China Japan and Southeast Asia, parts of Greater China are all huge priorities for us, and we've made them those priorities. And in a market like India, we chose to enter into a JV through the partial sale that we made last year. The product development is pretty critical. We continue to innovate. I mentioned some of those innovations in China, but the strength we're seeing in global equity is innovation we put in place in Japan 5, 6, 7 years ago is starting to pay off the last few years. The distribution is really strong and diverse. It cuts across institutions and private banks. And then in EMEA, same kind of thing. The slower overall growth in the industry and in the economies and parts of Europe and the U.K., we're not seeing it necessarily flow through into our business meaning we're taking advantage of some real secular changes that are happening with regulatory reforms in the United Kingdom, more emphasis on retirement in those markets. And so we're winning really meaningful mandates in parts of fixed income that are very solution-oriented continue to see growth in that ETF platform, where we planted seeds over a decade ago plus. And also in those markets, the distribution is really strong and really diverse. So they continue to be places where the long-term applications we put in place, coupled with the investments we continue to make there. We believe these markets have outsized growth in terms of asset flow and money and motion for demographic reasons and the regulatory and some societal topics that I mentioned before. We're really uniquely positioned. And so we're going to continue to focus there.

Maybe one quickie that kind of goes hand-in-hand with that is I think I saw an article this week on a potential QQQ on the international side. I just got me thinking it was like bottled water, you're like, well, how didn't I think of that before? Just curious on where that is in development and how you're thinking about the rollout and marketing plan.

Yes. So we extended the Q lineup last year in Hong Kong, and this year, it's going to be in Japan. And that's just one of the innovations that we're putting forward. I mean, Qs is a very important and asset class and product for us. But also, we're putting other extensions around the ETF business out in Asia, both last year and this year. So the Qs will be a big flagship in those 2 markets, but it will be the start of even more to come with ETFs in Asia for us.

I'll just underscore the marketing behind that, starting over a year ago has been significant. So getting back to some of the earlier comments, the brand awareness around the QQQ extends far beyond the United States. It's deep across Europe, but now across Hong Kong and soon to be Japan. And so we put quite a bit of firepower behind that. We feel very good about our competitive positioning there.

Yes. I mean we often talk about the QQQ in and of itself, but the broader ecosystem around the QQQ is something like $550 billion of AUM around the world. So that's what we call our innovation suite, and we'll continue to look for extensions globally.

Our next question comes from Alex Blostein with Goldman Sachs.

Just another one around the competitive dynamics in the Qs and also, Andrew, thank you for the color and the background there. I guess the question is less about the back book and more about the forward growth algorithm if competition begins -- starts to become more intense. So when it comes to fees, anything you guys would be willing to share and how you would potentially respond if competitors come in at a lower price point? Or you think the product has enough competitive moat around it to sustain the current fee structure?

Yes. Just to be super clear, the 8 basis point index licensing fee that we pay for the funds are the same index licensing fee that others will pay. We have a contract around that. So the fee differentials that could get put on these funds, we'll look at when those funds get launched. But I really want to emphasize what I was saying in the prepared remarks, that the way that ETF owners look at this as sort of a total cost of ownership. And that includes the tightness of the spreads. It includes the liquidity and I think what we've learned over time, marginal fee rate differences at the headline level, oftentimes don't relate to changes of people's conviction around where to invest. And then I wouldn't underestimate that at all the 25-year history and the brand recognition that's had hundreds of millions of dollars invested in it in the last couple of decades, really, we're synonymous with it. So of course, we'll pay attention. And of course, we'll make sure we remain competitive. But I think some of those extra facts really give us the confidence.

Yes. Totally, that makes sense. I wanted to ask a question about China. Really good growth there. Now for a couple of quarters. Those markets seem to be coming back more and more as you sort of look at your pipeline of additional new products that are out there, what does that look like today? And is there enough there to move the needle on the blended fee rate when it comes to that bucket as well for you guys?

Yes. No, thank you. And as we've been saying over the last couple of years, because of the growth and the maturity of the platform and because of our leadership, we have a very full product line. But that doesn't mean that we're not continuing to innovate. And much of the flow from the last several quarters has come from our existing products, which really wasn't the feature several years ago. This quarter, just as an example of we're continuing to innovate we launched 14 new products this quarter, mostly were in ETFs and balanced funds. And those products generated $2.5 billion in flows in the quarter but still 75% of the flows came from our existing product line. Fixed Income Plus has been the key driver. Remember, that's kind of like a balanced fund in American terms. And that kind of is a precursor, we think, for people getting -- continuing to get more interested in the equity markets. And so as they -- and graduate into the equity markets, gain more confidence, these are retail Chinese investors into their domestic market. We have a product line that's really well set to take advantage of that. But we'll continue to innovate.

And Alex, I would just say, I mean, relative to the fee rates in China and just kind of the range that we see there. As that market continues to evolve and as it continues to be very fixed income and fixed income plus heavy, as Andrew noted, the fee rates of products we launched tend to be probably slightly lower than the range that we disclosed in the presentation as to where the fee rates are running right now. But what I would point you to is the fact that the margins continue to improve there. So as we continue to evolve that market and it matures and the fee rate caps that went in several years ago that you'll recall it kind of totally washed through. The market becomes more and more mature and the fee rates start to look a lot more like fee rates look around the world as there continues to be real strength and demand for ETFs as an example, as opposed to mutual funds, you see the expected fee rate being a little bit lower than it would for a mutual fund. So we see fee rates just slightly lower, and it wouldn't surprise me if that continues to compress a bit over time. But I think our margins, which have been in the high 50s to low 60s, that's the real -- a proof point to look to is to the strength of the overall platform. We have a very scaled business. We've got a very hard to replicate business, as we've said. And we have the opportunity now to continue to innovate with products across the fee spectrum. And as demand continues to evolve and perhaps as they start to ever move more into equities, which right now, it's just not a market where the uptake of equities is very high, perhaps you see fee rates move. It's going to be very much a mix shift kind of story over time, but with really strong margins.

Our next question comes from Brian Bedell with Deutsche Bank.

Maybe just back on the QQQ another angle on this. Can you talk about the institutional usage versus the retail usage. It's very different dynamics, obviously, and you mentioned, Andrew, the really powerful liquidity that you've got in the QQQ product. And I guess what's the thought around potentially in the future having different price points for institutional versus retail flavors of the QQQ. And on the marketing budget, I think, Allison, the latest guidance was $80 million, something in the midpoint of that $60 million to $100 million range for the marketing budget. Is that still the same? And it sounds like you're mixing that a little bit more towards international growth in terms of the marketing spend. If you can comment on that.

And let me start, and Allison can pick up. With the first part of your question, it's well owned institutionally, and it will continue to be a focus for us. I mean every single one of our hundreds of Salesforce members carry the QQQ in their bag, so to speak, and they're going to continue to do so. We think demand in the institutional market is growing both not only here in the U.S. but around the world, and there's access to it. with people owning it in the U.S. We also have a UCITS version of it where they can own it on that platform. And then some of the things I talked about earlier where we're listing it into those couple of Asian markets. So there's plenty of places for institutions to own it. A lot of times, these are not institutional buy-and-hold investors. These are institutional traders that are using it to take a position. But increasingly, as [indiscernible] comes will be there to participate. In terms of your question on price points, not possible in the ETF space per se, but separate accounts that invest in the QQQ index are things that we have today that could be at different price points for individual institutions. And that's something we capture and we can continue to capture over time.

As it relates to the budget, I mean, yes, I'd say, look, the same guidance that was out there and the proxy that was filed last summer that it's fully discretionary. We expect marketing to be in the range of $60 million to $100 million, it's fully in our run rate today. So you've got the full marketing run rate not inclusive of the QQQ and the marketing line item for the first quarter. And we expect that to be pretty consistent throughout the year. There may be a little bit of timing differential quarter-to-quarter, but for the most part, that's pretty much the range that we expect for both the QQQ and our entire marketing budget. I would say in terms of the mix between the United States and the rest of the world, [indiscernible] in the run rate now for a while even when marketing was classified somewhere else, we have been spending quite a bit of marketing money outside of the United States and marketing the QQQ. And we expect to continue to do so as we see demand. We've got the flexibility to choose to market how we want, where we want and what we think is best for the product now, and we feel very good about the opportunities we have from here.

That makes sense. And then just one modeling question on the ratio of servicing and distribution fees to average AUM and also third-party distro distribution expense relative to average AUM. It looks like it went down on the servicing additional revenue side went down to about a little less than 6 basis points from 7% in 4Q, and then the expense went up to around 12 basis points from 11 in 4Q. And I suspect this is the dynamics around the QQQ adjustments. But I don't know if there was anything onetime-ish in those numbers or seasonal in the 1Q numbers? And do you think those ratios that relationship is a good run rate to be modeling for the rest of the year?

The relationship I'd point you to is third-party plus distribution fees divided by management fees. That's your best relationship to look to, given the pass-through nature of some of those third-party and distribution fees. And that one, consistent with the guidance we gave last quarter, we expect to be in the 22% to 23% range with the full impact of the QQQ going forward. So this quarter, it was 22.7% and we expect that relationship of 22% to 23% to hold with the full impact of the QQQ. The one thing I'd point to, just as you see some of the quarter-over-quarter noise and the service and distribution fees is, yes, we had the reclassification and change with QQQ marketing coming out of service and distribution fees and going into marketing also came out of third-party contra revenue. The other thing to just note in service and distribution fees in the first quarter is you had a little over $11 million reduction that was related to the sale of Intelliflo. So this being the first full quarter without Intelliflo you saw that have a negative impact on service and distribution fees, but also importantly, an even higher magnitude, better impact on expenses. As that was the operating income headwind is now a bit of a tailwind that is fully in the run rate from here. But hopefully, that helps with the relationship on the third party and distribution fees.

Our next question comes from Bill Katz with TD Cowen.

I got disconnected, I think, from the call, so I apologize if some of this was already asked. So just coming back to expenses, Andrew, here a lot of good things around incremental margin outlook, non-U.S. scaling nicely. Seems like all the kerfuffle on the QQQ is not really that bad at the end of the day, the expense guidance you gave today is very good in terms of incremental margin. Can you give us an update on how you're thinking about maybe the intermediate to longer-term opportunity for margins at this point in time?

I'll take that. I mean, I would say, look, you continue to see the operating leverage that we're generating quarter after quarter, and we feel very good about the momentum behind that. Just given the work we did last year and the simplification of our portfolio really focusing our efforts on our higher growth, higher profitability aspects of our portfolio, the conversion of the Q. We've got a lot of momentum behind that. So we feel like we've got the opportunity to continue to generate positive operating leverage. There'll be some seasonality quarter-to-quarter. You saw a little bit of seasonality as you always do in the first quarter. But absent seasonality, we think there's pretty significant momentum. We said all along, we needed to get the margin back to the mid-30s on a path to high 30s. And we feel like we're starting to see mid-30s here and now we've got our sights focused on how do we get back to the high 30s. And we feel good about the momentum behind that. we're going to continue managing expenses in a really disciplined way. I think I'm glad you found the expense guide helpful today. We know there's been a lot of noise with the divestitures. We think we've got a fairly clean outlook from here. I think it's really important to note that underneath that, we're investing in the firm. So it's not just through the hybrid investment platform, and we're looking at constant opportunities of where we can invest where we can drive productivity, how we drive efficiency really with an eye towards scale and positive operating leverage. So it's a collective effort across our management team, and we think it's really going to deliver the momentum we need to get the margin back to the high 30s.

And maybe just to add to Allison's comment, I mean, the areas where we're seeing the greatest growth, and we expect to continue to see the greatest growth, ETFs in China, just as 2 examples. As Allison was noting earlier, these businesses scale well. And we'll continue to see that growth, I think, translate to strong profit growth.

As a follow-up, one of your peers earlier in the quarter sort of described the retail opportunity. So I think the language shifting to now after tax return as a focal point. I think you've a little bit mentioned that in some of your commentary. I was wondering wonder if you could expand on that a little bit. And a, how do you sort of see Invesco position as we move from pretax after tax. And b, is there anything in the legislative area or in the tax code that could potentially impair the opportunity to migrate after-tax returns.

Yes, we agree.[indiscernible] or tax return focus of individual investors has always been there, but it's really been heightened. And I think a lot of the tools that are available now to individual investors have increased. And those were the ones I was mentioning earlier, we're really well positioned to compete in, and those are going to be areas we continue to invest behind to grow. So specifically, ETFs have that feature just built in inherently to be very tax aware and tax efficient we're a major player, as you know, and we'll continue to build out the active side of that ETF business. SMAs have been the other way that people have played that. And you've seen our growth. We now have nearly a $40 billion platform that's a major feature of that is tax optimization. And we're really winning in fixed income there. And that's a place that has been smaller historically in the industry. and then model portfolios are taking hold and they're going to be a way -- another way for people to tax optimize. The thing I'd say is this is largely a feature in the United States. And to your question about regulatory changes, nothing that we see specifically on the horizon. But I think the individual investors are are just sort of speaking with their wallets by being hyper focused here, and we think that's a good thing for Invesco.

Our next question comes from Ben Budish with Barclays.

Just one for me this morning. I appreciate the sort of clean expense guide, so at risk of upsetting that. I just wanted to ask, you've kind of narrowed and trimmed the portfolio a little bit Intelliflo the India JV. Just curious as you look across the business, is there anywhere else that might make sense to trim and continue to focus? Or are you kind of happy with this that you have right now and we can continue to enjoy this cleaner expense guide?

The only thing I'll point back to, and I said it earlier in my comments, just a reminder that our partnership on the Canadian business is set to close at the end of the second quarter, and that's about $19 billion that was all built into my expense guidance, but that is a part of that, and there's a modest negative impact to operating income of about $5 million to $10 million per quarter that will improve over time as we grow that sub-advisory revenue. I would say beyond that in terms of our overall portfolio and profile, no, we feel like we've actually done a lot of hard work in simplifying where we operate, and we think we've got a lot of opportunities to grow from here. So I don't know that there's a lot more pruning to be done. We're in a lot of the high-growth markets where we want to be, and we've got a well-built outset of investment capabilities as we've been talking about today. So I think we're very well positioned to continue to grow from here. And the simplification efforts are going to be continuing to focus on more than anything, just the remixing of our expense base being really disciplined behind that expense base and continuing our efforts around the balance sheet and improving our leverage profile is improving our capital return. I hate to say it's all [indiscernible] from here, it won't be. We think what we're doing is making sure we're built to operate in any environment and create the momentum and the leverage we need behind that, and we feel good about the efforts that are already underway.

The only thing I'd add, and this maybe takes it back to the beginning of the call, where we really emphasized our strategic focuses in addition to the things. The headline things that we did last year around repositioning the portfolio, divesting and reinvesting we've really simplified the company over the last few years, meaning we have 1 fixed income platform now around the world, 1 equities platform around the world, one private markets platform around the world. and really clarify for the organization internally how to operate in a simpler, cleaner way for us to be able to do the things that we did last year. It's just an example of the benefits from it. So just to echo what Alison was saying, now we can put even more of our focus on growth.

And that question comes from Craig Siegenthaler of Bank of America. He's not responding. So we go ahead to Michael Cyprys with Morgan Stanley.

Just a question on AI. I was hoping you could update us on how you're using AI across the organization today, what use cases have been most impactful so far as well as some of the key learnings you've had how you might quantify any of the benefits that you're seeing? And as you look out over the next couple of years, can you talk to some of the steps that you're taking to further embed AI throughout the organization and how you're thinking about the longer-term opportunity set and benefits?

Yes, thanks. It's an important question. We're really treating AI across the firm as a way to accelerate capabilities that we have today. And it's really been a focus of augmenting the teams that we have, and we're applying it in data analysis, things like content creation and of course, creating operational efficiency. One of the main things we've been focused on the last year or 2 has been investing in tools for all of our teammates, the 7,500 people that we have around the world, not just investing in the tools but in education and how to apply to process adoption across AI, Gen AI. And it kind of gets then applied to large-scale applications, but also to people's BAU. We estimate that close to 80% of our employees some way, shape or form are using these tools every day in their business activities. To your specific question about big use cases, they're either in use are in development really across the entire company with an emphasis on enabling outputs. And so we've got use cases in the investment process. We've got use cases around client growth things like investment, research, aggregation, cell signal, adaptation, performance analytics, client communications, all those sorts of things. But we're really trying to couple that with all the things that our clients expect from us, which is to protect their data, to protect the integrity around it. So we're moving fast but cautiously, too.

At this time, I'll turn the call back over to the speakers.

Okay. Well, thanks, operator. And what I'll say in closing is that we're absolutely pleased with the continued strong results this quarter. As we discussed, we advanced several strategically important investment capabilities and vehicles with many reaching record assets under management. We did this with discipline with focus and the benefits of scale, and we're generating meaningful operating leverage and improving margins. We will continue to stay focused on our highly defined growth strategy with an emphasis on relentless execution, client-focused innovation and teamwork across the firm. So thanks, everyone, for joining the call today, and please do reach out to our Investor Relations team for any additional questions. And we absolutely appreciate your interest in Invesco and look forward to speaking with you all again very soon.

This concludes today's conference. We thank you for your participation. At this time, you may disconnect your lines.

Welcome to the Invesco's Fourth Quarter Earnings Conference Call. [Operator Instructions]

As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations.

All right. Thanks, Shirley, and to all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP.

Finally, Invesco is not responsible for the accuracy of our earnings transcripts provided by third parties. The only authorized webcast are located on our website.

Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer, will present our results this morning, then we'll open up the call for questions.

I'll now turn the call over to Andrew.

Okay. Thanks, Greg, and good morning to everyone. I am pleased to be speaking with you today. 2025 marked a year of significant milestones for Invesco. We focused on our clients, transformed key aspects of our business, unlocked value across the organization and accelerated strategic priorities to position the firm for continued profitable growth in the evolving global asset management market.

Slide 3 of our presentation highlights several of our most impactful initiatives, which are allowing us to streamline our business, drive profitability and margin expansion and strengthen our balance sheet. Significant among these accomplishments is the recapitalization of our balance sheet. We have now pulled forward a total of $1.5 billion in preferred stock that was otherwise noncallable, enabling us to further deleverage, increase our balance sheet flexibility and free up earnings available to common shareholders. Allison is going to provide more details on the progress we have made recently with debt repayments thus accelerating the earnings accretion of these transactions.

We have also made substantial progress in our efforts to narrow our organizational focus. Following our April 2025 announcement that we were moving to a hybrid alpha investment platform, we have onboarded several waves of assets and are now on pace to finish by the end of this year. The hybrid platform will drive simplification, improve investment systems consolidation and future cost avoidance. Also in 2025, we took several strategic actions to focus and realign our resources across the company. In the fourth quarter, we completed the sale of Intelliflo to Carlyle as well as the sale of a majority interest in our Indian asset management business to the Hinduja Group, establishing a local venture -- joint venture in India. Our ongoing minority ownership structure in this JV will allow us to participate in the growth of the market and utilize the strength of our local partner while refocusing our resources accordingly.

Earlier this month, we also announced the decision to transform our Canadian business through a strategic partnership with CI Global Asset Management. Through this transaction, CI GAM will acquire our entire Canadian mutual fund and ETF complex, which is comprised of 100 funds, totaling approximately $19 billion in AUM. Importantly, we will continue as an investment sub-adviser for 63 of the funds, totaling approximately $10 billion of the AUM. We're excited about the prospects of this ongoing relationship with CI. The Canadian market has become increasingly concentrated and more vertically integrated, and we believe that CI is the right partner to address these market dynamics. As an ongoing investment sub-adviser and strategic partner to CI, we will participate in the success of their growth, larger platform and strong presence in the Canadian market.

Allison is going to detail the financial implications of these transactions later in the call, but I will note that these strategic actions are clear examples of how we are rethinking, refocusing and unlocking value in innovative ways across Invesco. One of the key pillars of our strategy is to accelerate the growth of our $130 billion private markets platform. To that end, in 2025, we announced 2 strategic private markets partnerships targeting both the U.S. wealth and the defined contribution markets. In the second quarter, we announced our partnership with Barings to launch 2 jointly managed credit strategies with $650 million in capital committed by MassMutual. We're pleased with the progress of this partnership as we recently brought our first co-managed product to the U.S. wealth management market. A second co-managed product is currently in development and expected to be launched later this year.

In December, we also announced our second strategic partnership with LGT Capital Partners, who is a leading private market specialist. We're developing co-managed total return growth-oriented multi-asset products that are targeting U.S. wealth and defined contribution investors. LGT Capital is also committing seed capital to support these new launches, which will begin later this year. These 2 partnerships complement our investment strength and real estate and alternative credit capabilities, and the progress we have made with our existing evergreen funds in the market, such as our rapidly growing real estate debt fund. These partnerships and new product offerings are indicative of our commitment in private markets and our objective to bring more innovative solutions and education to wealth management and retirement investors, both in the United States and globally.

Finally, our 2025 transformative growth initiatives were capped off in late December with the modernization of our sizable QQQ ETF. We received the necessary votes and completed the conversion of the fund on December 20. Fund shareholders are now paying a lower fee, and we are earning revenue on the more than $400 billion of AUM in the fund.

I hold deep gratitude for our team. What we collectively accomplished this past year was remarkable in bringing so many of these large-scale initiatives to fruition while also delivering exceptional operating performance. And I feel all of this bodes well for the future of Invesco.

So turning now to Slide 4 for a snapshot of our financial progress in 2025. We performed extraordinarily well against our key performance drivers, leveraging Invesco's unique position to deliver profitable growth in the highest opportunity regions, channels and asset classes. We grew net revenue 6% in 2025 with several encouraging signs for the future trajectory of our top line results. Our ETF and index investment capability produced record revenues and grew the top line by 22% as we continue to scale this business. We also generated considerable revenue growth from our Asian and EMEA regions where combined revenue was up 13% for the year.

Fundamental equity revenue was flat to the prior year, but up 4% from 2023. This is an encouraging data point as we consider the headwinds of client demand for fundamental equities and our work to stabilize this trend and focus on investment performance.

On the expense side, we continue to be disciplined, maintaining a relatively flat expense base while continuing to redeploy resources and invest in our business. This revenue growth and well-managed expenses translated into a significant operating leverage and a 230 basis point increase in our operating margin, 14% growth in our operating income and 19% improvement in earnings per share in 2025 as compared with the prior year.

Further, our clients continue to demonstrate that we have the right products in the right markets at the right time. We generated over $80 billion in net long-term inflows in 2025 or 6% organic growth. Importantly, nearly 40 products, each generated at least $1 billion in net inflows, reflecting the diversity and breadth of our client offering. Considering the work we have done on the balance sheet, our leverage ratio over the past year has also significantly improved. We will continue to see progress here as we actively manage our balance sheet while continuing to return capital to shareholders. Allison is going to outline our expectations in this regard for 2026.

Finally, the advancements we have made on our strategic initiatives and our efforts to unlock value across the organization have yielded a significant increase in our total shareholder returns and resulted in Invesco having the highest TSR among our publicly listed peers. We're pleased with the overall strong results in 2025, and we will continue to stay focused on our highly defined growth strategy with an emphasis on relentless execution, client centricity and teamwork across our firm.

So let's now pivot to Slide 5, focusing on fourth quarter flows. We delivered another strong quarter of broad-based net inflows, resulting in an annualized long-term organic growth rate of 5%. Markets had strong momentum coming into the quarter, which continued as U.S. and global capital markets remained resilient. Equities were robust through year-end, fixed income rebounded with clearer rate cut expectations, and we began to see broadening investor demand beyond technology stocks. Against that backdrop, we reached a record AUM of $2.2 trillion with strong net long-term inflows of $19 billion in the fourth quarter. Even more encouraging was the breadth of this growth, reflecting our diversified scale and global platform. We had solid positive flows across several dimensions including many of our strategically important investment capabilities in both our active and passive strategies in equity and fixed income and across wealth management and institutional channels. Specifically, we were pleased to see continued strong flow growth in EMEA and Asia Pacific regions, which together account for nearly $700 billion of our long-term AUM. We continue to scale our ETF and index capability, which now stands at a record $630 billion in AUM ex the QQQ. We had nearly $12 billion of net inflows during the quarter or 8% annualized organic growth. Within our ETF range, we garnered net inflows across a diverse set of products in both equity and fixed income despite a nearly $4 billion headwind from the bullish share redemption that happens annually in the fourth quarter. We also continue to build out our active ETF suite. With our most recent launches, we now have nearly 40 active ETFs across a range of asset classes. Bringing the depth of our active investment capabilities into the ETF wrapper has long been a part of our overall strategy and will continue to be as we innovate to meet evolving client demands.

With our QQQ fund conversion on December 20, flows are now included in our long-term view. However, for the fourth quarter, that means we just had a fraction of the $13 billion in total QQQ net flows counted into our overall long-term flow number presented here. The fund continues to attract strong demand, reaching a record high of $407 billion in AUM at quarter end.

Moving on to fundamental fixed income where we garnered $2.2 billion in net long-term inflows. However, this only considers what is included in our fundamental fixed income strategies. If you look more broadly at the asset class across all of our investment capabilities, that net flow number jumps to nearly $12 billion of inflows in the quarter with the inclusion of related ETF and China-based fixed income products. Fundamental fixed income flows were driven by continued strength in investment grade with institutional interest particularly strong from EMEA and Asia Pacific. We also saw ongoing demand for our leading stable value product in the U.S. defined contribution market. Additionally, our SMA platform in the U.S. continued to help drive flows, particularly in municipal bond strategies. Our entire SMA platform, which also includes a portion of equity assets, now stands at $35 billion in AUM. We have one of the fastest-growing SMA offerings in the U.S. wealth market, generating an annualized organic growth rate of 7% this quarter.

Moving on to our China JV, which now only reflects our domestic Invesco Great Wall business. Here, we produced another exceptionally strong quarter, demonstrating that we are exceedingly well positioned for the shifting dynamics in this market. We reached a record-high AUM of $132 billion, delivering a robust $8.9 billion of net long-term inflows, marking one of our best quarters to date and representing a 36% annualized organic growth rate. Flows of the China JV were led by fixed income plus demand from both retail and institutional clients. This product line has industry-leading investment performance and is benefiting from increased client risk appetite as these funds provide an effective means of balancing fixed income with enhanced equity exposure.

We're also seeing interest in pure equity strategies via passive funds as demand for stand-alone active equity has been slower to regenerate. We continue to innovate in our China JV to meet evolving client demand across active, passive and multi-asset capabilities. We launched 4 new products in the JV this quarter, but it's important to note that existing products remain the predominant driver of organic growth, an indication of the breadth of our platform. We expect to continue to benefit in the China JV as both the secular and now cyclical tailwinds develop.

Shifting to private markets where we posted $300 million of net inflows driven by direct real estate. INCREF, which is our real estate debt strategy targeting the U.S. wealth management channel continues to generate net inflows and be onboarded with new platforms and clients. INCREF is now on 3 of the 4 major U.S. wealth management platforms. Assets in this fund with leverage now total $4.7 billion after just over 2 years in the market.

In private credit, we had good activity during the quarter. We closed another U.S. CLO, bringing our issuance total to $2.5 billion across the U.S. and Europe in 2025, as these products continue to offer meaningful value versus corporate bonds.

In direct lending, we launched our first European long-term investment fund or LTIF. This European upper middle market income fund was launched with the support from several anchor clients.

Private Credit remains in a strong position. Despite a lower M&A environment, fundraising continues to be robust. However, deployment challenges persist due to fewer transactions in the current environment. With rate cuts pending this year, it's anticipated that deal activity will pick up, particularly within direct lending. CLOs are expected to benefit from increased allocation to broader fixed income even as [ carry ] compresses. Furthermore, our real estate team remains well positioned in the institutional markets with $7 billion of dry powder to capitalize on emerging opportunities.

As we look ahead, we are excited for our prospects in private markets driven by our organic growth opportunities and amplified by our partnerships with Barings and LGT Capital to further penetrate the wealth management and defined contribution markets.

Finally, in fundamental equities, we continue to see aggregate positive flows from our clients in EMEA and Asia Pacific, specifically for global and regional products. Ongoing momentum in these markets is headlined by our Global Equity Income Fund managed out of the U.K., which remains the top-selling retail active fund in the Japanese market and is gaining increased interest more broadly. This fund posted net inflows of $3 billion for the quarter, rapidly growing to $23 billion in AUM while generating a very favorable net revenue yield for Invesco.

Despite these positive fundamental equity flow highlights, we did record $5.5 billion in net outflows overall in this segment. Our results partially reflect the broader secular outflow trend in actively managed equities, particularly in the United States. This was compounded by the expected net outflows from a developing market funds, which totaled $1.5 billion for the quarter. This was partially driven by our strategic decision to reposition this fund with a new internal portfolio management team this past summer. The outflow rate in this fund has moderated from the recent high we experienced last quarter. I will also point out that on a gross sales basis, we had our best fundamental equity flow quarter since the beginning of 2022, giving us optimism of future prospects.

Moving to Slide 6, which shows our overall investment performance relative to benchmarks and peers as well as our performance in key capabilities where information is readily comparable and more meaningful to driving results. Investment performance is key to winning and maintaining market share regardless of overall market demand. As such, achieving first quartile investment performance remains a top priority for Invesco. Overall, 44% of our active funds are performing in the top quartile of peers on a 3-year time horizon with nearly half reaching that bar on a 5-year basis. Further, 70% of our active AUM is beating its respective benchmark also on a 5-year basis.

With that, I'm going to take a pause, and I'm going to turn the call over to Allison to discuss this quarter's financial results and I look forward to your questions.

Thank you, Andrew, and good morning, everyone. I'll start with the fourth quarter financial results on Slide 7. Strong markets and net asset inflows drove assets under management to $2.2 trillion at quarter end. This was $45 billion or 2% higher than at the end of the third quarter, and $324 billion or 18% higher than the end of the fourth quarter of 2024.

With the QQQ conversion in late December, long-term AUM now includes the QQQ ETF. Ending long-term AUM increased significantly over prior periods due to the addition of the QQQ. Average long-term AUM, which includes the 12 days that the Q was classified as long term reached nearly $1.6 trillion, an increase of 8% over last quarter and 21% over the same quarter last year.

Growth in total assets under management during the quarter was driven largely by net long-term inflows of $19 billion and market gains of $11 billion. Net revenues, adjusted operating income and adjusted operating margin all significantly improved from last quarter and the fourth quarter of 2024, while adjusted operating expenses continued to be well managed. This drove meaningful positive operating leverage on both a sequential quarter and year-over-year basis.

On a sequential quarter basis, positive operating leverage was 340 basis points, delivering a 220 basis point operating margin improvement in the fourth quarter improving to 36.4%. On a year-over-year basis, positive operating leverage was 440 basis points, delivering a 270 basis point improvement in the operating margin. Adjusted diluted earnings per share was $0.62 for the fourth quarter.

Our focus on strengthening the balance sheet continued during the quarter. We repurchased an additional $500 million of preferred stock in December, bringing the total amount repurchased to $1.5 billion in 2025, and reducing the outstanding preferred stock from $4 billion to $2.5 billion at year-end.

We also repaid the remaining $240 million of the 3-year term loan used to finance the preferred stock repurchase in May, meaning $500 million of the term loans used to finance the May repurchase are now repaid. The $1.5 billion of preferred stock repurchased in 2025 is expected to generate a $0.20 EPS benefit once the associated debt to fund the repurchases is repaid. Given that we've repaid $0.5 billion of the $1 billion in term loans earlier than projected, coupled with the benefit of replacing the higher cost preferred stock with lower-cost floating rate debt, we've now captured $0.11 of the EPS run rate benefit on a go-forward basis.

The magnitude of the potential reduction in the remaining $500 million term loan that matures in 2030 will depend on the level of cash flow we generate going forward. Additionally, as our focus on deleveraging continues, we recently redeemed a $500 million senior notes that matured on January 15. Finally, we also continued common share repurchases, buying back $25 million or 1 million shares during the quarter.

Moving to Slide 8. The decline in our net revenue yield continued at a slower pace than a year ago. Client demand continues to drive diversification of our portfolio with strong growth in ETF and index and fundamental fixed income capabilities, while demand for fundamental equity, particularly global equity, has been weaker. While the concentration of higher fee fundamental equity per product has been reduced, our asset mix has shifted towards a higher degree of lower fee products, namely ETFs and index and fundamental fixed income capabilities. The more balanced AUM profile better positions the firm to navigate various market cycles, events and shift in client demand, but this has also resulted in a decline in the net revenue yield over time.

To provide context for the net revenue yield trend during the fourth quarter, our overall net revenue yield was 22.5 basis points. This is similar to the sequential quarter decline that we have experienced in the prior 2 quarters and the magnitude of the last 3 quarterly declines is notably lower than prior quarters, a sign we're closer to reaching a degree of stabilization in the yield. The future direction of asset mix shift will dictate the net revenue yield trajectory. The exit net revenue yield at the end of the fourth quarter was actually higher than the yield for the quarter at 22.7 basis points, partly driven by the QQQ reclassification in late December.

Turning to Slide 9. Net revenue of $1.3 billion in the fourth quarter was $102 million higher compared to the same quarter last year. Increase in net revenue was largely from investment management fees, mainly driven by higher average AUM and augmented by the QQQ reclassification in late December. Operating expenses continue to be well managed with an increase of $34 million versus the same quarter last year, mainly driven by higher employee compensation. The $17 million increase in G&A was largely due to a $13 million insurance reimbursement recognized in the fourth quarter of 2024.

On a sequential quarter basis, the increases in net revenues and operating expenses were driven by similar operating dynamics. The net result was a substantial increase of positive operating leverage on both the year-over-year and sequential quarter basis. The hybrid investment platform implementation costs were $13 million in the fourth quarter, in line with our expectation and prior quarters. The incremental operating expense associated with AUM has been moved on to the hybrid platform was $3 million in the fourth quarter. We continue to implement a hybrid approach with expected completion by the end of 2026.

Regarding the hybrid investment platform costs for 2026, we expect onetime implementation quarterly costs to start in the $10 million to $15 million range and trend more towards $15 million per quarter as implementation continues with the push to have implementation completed by year-end. As we transition more AUM onto the platform throughout the year, the incremental expense related to AUM on the platform will build towards $10 million per quarter later this year. Expenses associated with the platform may fluctuate quarter-to-quarter due to timing.

Comparing 2026 to 2025, we expect incrementally higher costs related to the hybrid platform the combined implementation costs and expenses associated with AUM on the system to be $25 million to $30 million higher in 2026 versus 2025. We'll provide further updates as the implementation progresses.

Regarding our overall operating expense outlook, level setting to fourth quarter AUM, annualized operating expenses would be $3.2 billion, which is a good base to start with for 2026. We still believe that our operating expense base is approximately 25% variable in relation to changes in net revenue, and this still holds true with the QQQ now earning revenue.

There are other factors that will impact the 2026 operating expenses to consider. While the transactions that were completed in the fourth quarter, namely the creation of the India JV and the sale of Intelliflo have de minimis impact on operating income, there will be an impact from these transactions on net revenues and operating expenses in 2026. On a combined basis, the 2 entities contributed net revenue and operating expenses of approximately $100 million in 2025. Going forward, India's operating results will no longer be reported of Invesco's operating income, including the associated revenues and expenses. Our 40% share of the JV's net income will be reported in equity and earnings of unconsolidated affiliates. As for Intelliflo, the results from operations no longer impact Invesco's operating results.

Andrew noted the benefits of transforming our Canadian business through a strategic partnership with CI Investments. This will have a nominal impact on our operating results after the expected closing towards the end of the second quarter. Beginning in the third quarter, operating income will be negatively impacted by $5 million to $10 million per quarter initially, comprised of a $15 million to $20 million -- excuse me, comprised of a $15 million to $20 million reduction in net revenue per quarter and an operating expense reduction of $5 million to $10 million per quarter. We expect this will improve as the long-term growth benefits of the strategic partnership are realized with net revenues growing while the operating expense benefit moves closer to $10 million per quarter in the future.

As we've outlined, marketing associated with the QQQ will now be recognized in marketing operating expenses starting in 2026, and we expect marketing expenses related to the QQQ will be near the midpoint of the $60 million to $100 million range we have previously disclosed.

We're also making incremental changes to our retirement eligibility criteria for our long-term awards in 2026 that will result in a timing change on how we recognize retirement-related expenses. We expect the net impact of these changes will be an increase of approximately $10 million in compensation expense for the full year 2026, with compensation expense being approximately $30 million in the first quarter -- excuse me, with the compensation expense being approximately $30 million higher in the first quarter than fourth quarter of 2025 and then offset by lower compensation expense for the remainder of the year, netting to the total $10 million impact for the year.

As a reminder, we typically see seasonally higher compensation expense in the first quarter due to payroll tax and other compensation-related expense, with other compensation-related expense resets that total approximately $20 million. And as I noted earlier, hybrid platform expenses are expected to be $25 million to $30 million higher in 2026.

Effective tax rate for the quarter was 21%, below our expectation due to the gain on sale of India being tax-free and other discrete items. For the first quarter, we estimate our non-GAAP effective tax rate will move back to the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items.

Now I'll wrap up on Slide 10. As I noted earlier, we continue to make considerable progress on building balance sheet strength and improving our leverage profile. In December, we repurchased an additional $500 million of preferred stock held by MassMutual, bringing the total preferred stock repurchased in 2025 to $1.5 billion, which will ultimately create a $0.20 run rate EPS benefit. And as I noted, we also repaid the remaining $240 million of the $500 million 3-year term loan used to fund the first repurchase of preferred stock last year, leaving only $500 million in the 5-year maturity term loan.

By repurchasing $1.5 billion of preferred stock, we have reduced the preferred dividend by $88.5 million annually, and this will now become earnings available to common shareholders in the future. We also continued common share repurchases in the fourth quarter, buying back $25 million or 1 million shares during the quarter. We anticipate to continue a regular common share repurchase program going forward and expect common share repurchases to increase to $40 million in the first quarter. We will continually evaluate our capital return levels as we target a total payout ratio, including common dividends and share buybacks to be near 60% for 2026.

The repurchase of the preferred stock and repayment of the 3-year term loan improved our leverage ratio from 2.8x a year ago to 2.2x for the fourth quarter. The leverage ratio, excluding the preferred stock remained well below 1 at 0.73x. We also redeemed the $500 million senior notes that matured on January 15. Going forward, we expect further progress in our leverage profile as we repay revolving credit and term loan debt through operating cash flow.

To conclude the strength of our net flows performance and diversity of our business is evident once again this quarter, and we delivered strong revenue growth. This, combined with well-managed expenses resulted in significant operating leverage and a sizable improvement in our operating margin. We also continued to make progress on building a stronger balance sheet. We're committed to driving profitable growth, a high level of financial performance and enhancing the return of capital to our shareholders.

And with that, Shirley will open up the operator -- sorry, will open up the line for Q&A.

[Operator Instructions] Our first question comes from Bill Katz with TD Cowen.

Just maybe picking up where you left off, Allison, on the capital return. Clearly, the extra $500 million of pay down with the MassMutual was a bit earlier than most people expected. As you look ahead, can you talk a little bit about the priorities to bring down the remaining preferred and how you're sort of thinking about capital deployment more broadly? And now that your balance sheet is in a better spot, would you start to think about M&A as a potential use of capital rather than continue to repair the balance sheet?

Sure, Bill. So yes, as we think about our capital priorities from here and the [ prep, ] I mean, look, we have $1.5 billion repurchased in 2025. We were very pleased with that progress, $2.5 billion remaining. We did end the year with some balance on the revolver and of course, then redeemed another $500 million note in January.

So as we think about the balance sheet from here, we've definitely got continued opportunity to, as I noted, using operating cash flows to work that revolver down and then we've got the 5-year term loan that matures in 2030. I think with that, we're going to continue to make really good progress, and we're getting the balance sheet into a place where we're quite pleased. We do have the opportunity to continue discussions with MassMutual on repurchasing more of the preferred at some point. But we've got these near-term maturities that we want to focus on as we continue to make good progress. And I think freeing up nearly $90 million in capital that's now available to the common shareholder we're very pleased with.

So with that in mind, and as we think about our capital priorities from here, and I'd start with, one, the increase in our share buybacks on the common side to $40 million this quarter as we seek to get our payout ratio up closer to 60% this year. We want to make sure we are balancing our capital priorities with returning capital to our common shareholders.

And then as we think about M&A, I mean, look, we've always said that we -- our best opportunity is to continue to invest in ourselves and grow our own business. And I think you see the results of that over the last year. With the organic flows that we had and the base fee growth that we demonstrated in 2025, we've got tremendous opportunity within our own business profile to grow organically and to do so in a really shareholder-friendly manner. And we still see a lot of momentum behind that, and we're going to continue to invest behind our own capabilities. And then we're leveraging that with the partnerships that we discussed today as well, and it gives us, again, a very capital-efficient and shareholder-friendly way to continue to grow our capabilities.

So as we've always said, we'll never say never to M&A. It's just got to be the right fit, and we have a very well diversified and broad set of capabilities. And so where there might be opportunities to tuck other capabilities in, we're always opportunistic there. But we're very pleased with the opportunities that we've had to invest in ourselves and just balance our capital priorities.

Yes. The only -- Bill, the only thing I'd add, picking up where Allison left off, not just the private market partnerships that we structured last year, but also the Canadian and Indian partnerships or JVs in the case of India that we set up. We feel really good about those as additional growth levers for the company.

Great. And just one follow-up. Thanks for the extra detail on the expense outlook. And I appreciate, we're sitting here in January of 2026. As you look into next year, can you talk a little bit about just the off-ramp on the implementation costs? I presume that should trend towards 0. And then how do we think about maybe the incremental spend on the platform cost? And I would presume that will be more related to the equity book. Any color there as we think about '27 would be helpful.

Sure. So yes, you're correct that you should expect the implementation cost to trail off and then go away over the course of 2027, unless we get deeper into 2026, we'll give you further guidance on that. But it is reasonable to assume that those implementation costs do appear over time. And there will be additional savings as we decommission existing systems and continue to streamline processes. That is, you are correct, somewhat offset by the quantum of AUM as we continue to progress with moving AUM onto the hybrid platforms. We will be giving additional guidance to that as we get deeper into '26 and move into '27.

And next question comes from Brennan Hawken with BMO Capital Markets.

Would love to start out with the net revenue yield. Allison, you spoke to the exit rate at 22.7. There were some moving pieces in the quarter for sure, not the least of which was the Qs that came in late. So what's the right way to think about all those moving pieces and the impact to net revenue yield on a go-forward basis? I know it's a hard one to try to predict, but maybe based upon what you know today, what would you say would be the further impact as we average in some of these factors that happened in the quarter?

Sure. You're absolutely correct. With the addition of the Qs of revenue, it does create some different dynamics. I think, namely, it does create some level of stabilization in the net revenue yield. So as you start to see just given the size of the QQQ, and that converts into 6 basis points of net revenue yield, you will start to see that stabilize. I think the overall average and the mix there a bit more. It's very difficult to forecast that revenue yield, as you know, and it certainly has lots of quarterly dynamics, including things like day count and the market impact.

All things being equal though, we do think we're starting to see more and more stabilization and the Qs will offer even a further level of stabilization. I think as you're thinking about just how you model revenue overall and how you think about some of our revenue dynamics, I do think it's important to look at third-party plus distribution fees as a percentage of management fees, which we've talked about a lot in the past, and that relationship is certainly changing with the addition of the Qs. You've got 18 basis points of Qs revenue that will run through management fees, the licensing and custodial fees of 12 basis points run through third-party contra revenues. And so that relationship is really moving higher, probably closer to the 22% to 23% range per quarter in 2026, which is quite a bit higher than where it previously been around 13% or 14%. So I think those are all important factors as you think about some of the dynamics that could change now.

Brennan, it's Andrew. The one thing I'd add is that beyond the revenue yield, if you look at things like ETFs, fixed income, our cash business, these are all very at scale. And so thinking about the drive-through to profitability is also pretty critical.

Got it. Okay. And then sort of related, I know there's a lot of moving pieces with the expenses. A little tricky to follow all those parts. But just focusing in maybe on one part to start out here. You've historically talked about a 38% to 42% comp ratio, and it looked like you were starting to get back into that. But how should we think about the impact of the Qs and all the other moving pieces potentially impacting the comp ratio outlook? I would think moving to the lower end or maybe even adjusting the historical frame of reference of the 38% to 42% might make sense, but I would love to hear your thoughts on that and how we should think about the comp ratio going forward.

Sure. Good question. And there are a lot of moving pieces to the expense guidance. We recognized that and tried to be as clear as we could. But there are a lot of ins and outs as we continue to transform the business.

As it relates to the comp ratio, the comp ratio that we point to is always a full year comp ratio. We really don't manage it quarter-to-quarter. We're always managing on a full year basis. And in 2025, the comp ratio ended at 42.7%. So again, above our historical guide of 38% to 42%. As I think about 2026, I think we will come back within that range. I think we'll be at the high end of that range. But with the addition of the Qs, it does help and it does start to stabilize the revenue base. The reason we got out of line with that guide in some recent years is really as we saw a real pullback in revenue. So that stabilization and growing revenue back to where we needed to be, I think gives us the opportunity to pull the comp ratio back down, but it will be on the high end of that range.

As we think about long term, look, we want to continue to invest in our business. We are continuing to remix our expense base. We are hiring in areas of growth and not really -- I think the addition of the Qs revenue gives us the opportunity to continue to make selective and strong investments in our hiring.

Next question comes from Glenn Schorr with Evercore ISI.

I guess a big picture question on your private market strategy thought process going forward. You did a couple of interesting, what I call, capital-light partnerships, get you into other geographies, other asset classes. So is the big picture game plan to piece together a full across asset classes offering and maybe through capitalized JVs for now? And then if that's the case, I'm very curious on how branding is going to work in the wealth channel as you piece that together.

Yes, let me start. Thanks for the question. Yes, the partnerships are meant to complete and build out the product capability set. The ones with Barings, we're focused on income and the partnership with LGT, a little more towards total return and growth. That leaves us with other opportunities that we could look at with other partnerships to fill that out. But we're starting to get a pretty complete product lineup in particular trying to reach the wealth management markets in the U.S. and around the world in the defined contribution market, in particular, here in the U.S. Those partnerships did come, as you said, with capital committed by our respective partners. And that's a really great way to get these strategies launched into those markets.

So I think the combination of them plus our real estate offerings, our existing real estate offerings and our existing alternative credit offerings do give us a pretty complete picture. We don't want to oversaturate our product line either. We want to stay focused. But you -- we really like this partnership model and structure. They're going to be co-managed both by us and our partners, which is really critical, and they're going to be singularly distributed by us in those markets in the U.S. as we announced. The branding will be pretty straightforward. It will be our brand, coupled with theirs where it makes sense. But given that we're the exclusive distributor, we're really trying to avoid and will avoid any kind of channel conflict whatsoever, that's critical to us, too.

Our next question comes from Alex Blostein with Goldman Sachs.

Just maybe another cleanup on expenses before I have my follow-up more on the strategic side. But Allison, I appreciate lots of moving pieces here. Maybe it would be helpful just to kind of level set where you guys expect the total dollar amount of expenses to be for 2026, assuming sort of flat markets. I heard you on the $3.2 billion jumping off point, but that's really just kind of annualizing Q4. There's a bunch of things that's going to come out. There's a bunch of things that's going to go in. So just to kind of level set, it might be helpful to get your sense of where '26 expenses could shake out again ex beta.

I think given all these moving parts and trying to land, that would be probably not wise at this stage. I do think it's best to look at some of the moving parts, given there's so much quarter-to-quarter fluctuation. I recognize it's rather frustrating. I find it rather challenging myself.

But I'll say a couple of things. One, it's the right jumping off point, I do think it's important to remove the right revenues and the right expenses as we guided to as it relates to the sale of India and the sale of Intelliflo. Of course, we add back in 40% of India, but that's below the line. Important to look at some of what we were guiding to beginning in the second half of the year, beginning in the third quarter as it relates to Canada and the repositioning of that market, there will be impacts to both revenue and expenses. And then, of course, there are some, all the alpha and the hybrid platform expense guide, those will fluctuate quarter-to-quarter. I do think the 25% sort of variable expense assumption is the right one on the comp to rev again, kind of in that 38% to 42% range. But probably closer to 40%, 41% is where I would be thinking about that.

I think it will get you pretty close to where we need to be, and we'll continue to give you guidance throughout the year. The one thing I want to point to is everything we're doing is with a focus towards operating margin expansion. And we have every expectation we will continue to grow operating margin this year. Everything we are doing is with an eye towards creating that positive operating leverage and expanding operating margin. And I feel very confident we are on a good, strong trajectory to continue to expand operating margin this year.

On a full year basis, there will be some quarter-to-quarter fluctuations. We said all along, our objective is to get our operating margin into the mid-30s on a path back to the high 30s. And I think we will continue to make really good progress this year in our operating margin expansion objectives.

Great. No, that's super helpful. And I appreciate all the moving pieces as well. Strategically, just one for you guys as well. So incredible year really over the last 12 months, a number of big steps you guys made. As you look forward, do you still see parts of the business that are sort of subscale where you could do something similar where you exit them or JV them or kind of try to maneuver them to where sort of it makes sense? Or the sort of future strategic moves are likely to be more of kind of growth-related partnerships like we've seen you guys do with Barings and perhaps some of the others.

Yes, let me start and Allison should chip in as well. Look, we made a lot -- thank you for your comments. We made a lot of moves this year. I think it also presents or describes a lot of the creativity that I think is in the company to look for alternative ways to grow, all different ways to grow. And I think we exhibited that.

I would say from here, a lot of that foundation work has been done, and the execution now is, I think, more clear. And the resource alignment that we have towards these growth initiatives organically, I think, is more set. Things like expanding out our ETF business and our SMA business and our models business as personalization takes hold. We're taking these private market partnerships and really starting to generate the organic growth in the retail markets in D.C. that we expect or the shift to fixed income as cash comes off the sidelines, the real growth that we've established in Asia and EMEA now that those are 40% of the long-term AUM base.

So just a few examples of we have a lot to build off of the foundational work that we did. If we see opportunities to align with others and partnerships or other JVs, we will. But we've really laid a lot of that foundation, I think, thus far.

I think that's right. I mean there's not a lot that's obviously subscale, but there's still a lot of opportunity, I think, for improvement in our performance overall. And that's really our focus in 2026, around execution and continuing to drive a lot of these strategic initiatives all the way through. Some of these things are kind of announced, but not yet executed, and we've got a lot of work to do to bring these partnerships to life and to close the partnership with CI in the second quarter of this year and to really then drill even deeper into the opportunity we have to improve execution overall.

Andrew noted some of the strategic highlights that we see in our platform, but I don't want to leave anybody with the impression we kind of got all the fun things behind us. We now -- we got a lot of big rocks done, and we cleared a lot of ground for us to now focus I think even deeper into the firm this year and really refine our execution from here.

And our next question comes from Dan Fannon with Jefferies.

So really strong flows from the China JV in the quarter. I was hoping you could discuss the outlook as we think about 2026, and maybe the diversity of some of the products that are driving that growth.

Yes. Dan, the growth in the China JV really persisted throughout the entire year. I think we did north of $20 billion in flows. And it was each quarter got successively better. A lot of that growth this year came in the balance strategies. They call it fixed income plus. Those strategies, I think, really demonstrated people starting in China to get a little more confident in both the fixed income markets, but in this case, getting into the equity markets through these balanced funds. The stimulus and reforms that have happened in China continue to, I think, stimulate investors' interest in the markets. They're pushing up consumption. There's less emphasis on the property sector. There's continued to be programs, emphasizing market participation, long-term retirement growth. And then the easing trade tensions with the U.S., I think, has helped interest grow domestically, but also by foreign investors, in particular in Europe and Asia into those markets.

So the growth has been good. It's been pretty focused in those areas I mentioned. And we're seeing our passive ETF business also pick up, which is good to see.

Great. And then just as a follow-up, Allison. One more just on expenses and the hybrid investment platform. Obviously, those costs you said will roll off as we get into next year. But could you remind us, is this more about cost avoidance or we should actually see savings as we get into 2027?

That will be -- relative to 2026, yes, we will see savings in 2027. Cost avoidance, if we take it all the way back to the beginning of this over multiple years, I mean, look, Invesco is an entirely different Invesco than we were 5 years ago when we started this. And the opportunity was always about simplifying the overall operating system and really try to create future cost avoidance. So it's hard to point to year-over-year savings going back to the beginning because our AUM is going to be almost double when we finish this from where we started. But the cost avoidance in the future as we think about the opportunities to garner the benefits of scale and the size of our AUM, I think we will be pleased in the long run.

But '27 relative to '26, yes, there will absolutely be savings, namely the implementation expenses that have been running in that $10 million to $15 million range per quarter. Those will taper off as effectively construction costs go away. And then as we move AUM fully onto the hybrid platform and have the opportunity to decommission systems on the other side, I think some of the operating expenses will improve in '27 relative to '26 as well. We're focused entirely right now on completing implementation in '26. As we get closer to that, we will also begin getting more and more focused on how do we make sure we start to really drive the cost curve down in '27 and beyond.

Our next question comes from Brian Bedell with Deutsche Bank.

Great. Maybe just one more on expenses, just to clarify. So Allison, I think if I could tally the things that you mentioned that have discrete impacts to that $3.2 billion expense base in '26, I think of kind of 5 different things. But they look like they mostly offset from things that you know. I know the timing is going to evolve throughout the year. So you did start that part in your commentary about $3.2 billion being a good starting point. It sounds like with those specific impacts, $3.2 billion is also a good starting point for 2026. Obviously, we're going to be layering in variable expenses and investment in the business on top of that. But I just wanted to make -- I just wanted to clarify if that $3.2 billion is the right number to start with, given the isolated impacts that you mentioned for the different businesses, including the QQQ marketing budget?

It's the right number to start with. But you just highlighted a great one, yes, with the QQQ marketing budget getting fully layered in, in 2026, which was not present in 2025 or in the fourth quarter of that run rate that we start with. So it is absolutely the right number to start with. And then as you think about the puts and takes, I think it will get you to something a bit higher than $3.2 billion, but also with revenue that's quite a bit higher than 2025 as well.

Yes. Okay. Great. And then more strategically, can you talk about traction? Maybe Andrew, talk about traction in the defined contribution channel, what are you hearing from different potential plan sponsors in terms of their warming up to adding private markets to 401(k) and how do you view that positioning? And I know it's a great long-term opportunity, but are you seeing actual traction building here this coming year?

Yes. I mean we've seen a lot of discussions, a little bit of traction in the United States, but where we're actually seeing more traction is in the United Kingdom and in places across Europe where there's also retirement reform going on and more private market participation and things like defined contribution plans. So we do think this is a long-term trend private markets into DC. We also would point out it's not just a U.S. trend. And I think owing to the fact how diverse our portfolio is and how strong we are outside of the U.S., too, that we view this as kind of a multilayer proposition.

We certainly have the product offering to start to fill that out for institutions and plan sponsors. But we're also going to be, with the addition of the LGT partnership, focusing on that with them as well. And they have a very strong reputation in the institutional markets.

Operator, we have time for one more question.

Our next question comes from Ben Budish with Barclays.

Maybe just a couple more housekeeping questions on Canada and some of the moving parts from this quarter. So Allison, you mentioned that we should see an operating income drag starting in the third quarter, but you expect it to ease over time. Any more color in terms of what assets we -- what sort of asset groups we should see that come out of? Any other sort of geography impacts we should be aware of? And then just what's your thoughts on the time line for when you expect that to start to grind more closer to breakeven or positive?

So again, we don't expect to close that transaction until late in the second quarter. So we believe this will start to impact results in the third quarter. From a revenue perspective, you would see revenue on a quarterly basis declined by $15 million to $20 million net on a net basis for the sale of those mutual funds, net of the sub-advisory revenue that we expect to garner there.

On an expense basis, we expect expenses to kind of start in the kind of $5 million to $10 million range in terms of $5 million to $10 million lower beginning in the third quarter, but trending higher towards that $10 million range over, call it, 2 to kind of 4 quarters as we get into 2027. So that net operating income impact of $5 million to $10 million starting on the high side of $10 million lower quarter, kind of trending lower as we get into 2027.

When you think about those expenses and the $5 million to $10 million of expenses, a majority -- half to more of that is going to be on the compensation side. So that will actually take a little bit of time to work down as we continue to really reposition our overall workforce in Canada related to this transaction. But there's also some impact to property and office as we will have some reduction in locations in Canada and some impact to G&A as well. So it's split between those 3 categories with the majority in compensation.

Yes. I mean when you look at the strategy behind what we did in Canada and partnering with CI, we'll be managing, as I mentioned, the sub-advised portion of the assets for all the global strategies, all the non-Canadian strategies with all of our existing teams. And as those -- as demand and flows grow through CI, that will give us a good opportunity to continue to grow revenue through our existing investment teams. We'll no longer manage the Canadian portion of those funds. That will stay with CI.

So while there is some short-term operating income impact, we absolutely believe this is the long-term right strategic move for Canada, and that as we get into the latter half of '27 and beyond, that this will absolutely have been the right move. We really do feel strongly that this partnership positions this business for better growth than we were going to be able to deliver on our own. And in doing so, we're going to take the opportunity to really look at our expense base and see where we can go even further as we get into 2027 related to all of our operations in Canada that gives us that opportunity to turn this into, I think, a long-term really positive move for the firm.

Understood. If I could just double check. Are there any cash flow implications and any proceeds from the sale? Or has that not been disclosed?

It's pretty negligible relative to the cost that we will incur with some of the repositioning that we're referring to. So it will be immaterial.

Okay. So just in closing here, we really want to stress that we're unlocking value across the organization for the benefit of our clients and for our shareholders. And as you can see, we made significant progress in 2025. This includes looking at how we fundamentally operate and evaluating every opportunity as we strive to improve client outcomes, generate operating leverage and profitability, continue to build a strong balance sheet, enhance our ability to return capital to shareholders.

We have resilient operating performance across many key value drivers and our global platform has a significant and unique Asia Pacific presence and a strong performing EMEA business, coupled with our scale and breadth of products positions us really well to perform through shifting market dynamics. We continue to demonstrate that we have durable performance and reason to be optimistic about the future.

I want to thank everybody for joining the call today, and please do reach out to our Investor Relations team for any additional questions. And we really appreciate your interest in Invesco, and we look forward to speaking with all of you again soon.

And this concludes today's conference. We thank you for your participation. At this time, you may disconnect your lines.

Okay. All right. Well, to give us some time. Let's get going. All right. Good afternoon, everybody. Thank you for joining our next session. I'd love to welcome Invesco's President and CEO, Andrew Schlossberg; and CFO, Allison Dukes. Invesco is a $2.1 trillion asset management business with broad capabilities across equities, fixed income, ETFs, private markets and multi-asset solutions. Over the course of 2025, the firm has made material progress in several important fronts, including further accelerating organic growth, improving operating leverage and strengthening the balance sheet position as we obviously learned more about earlier this morning. Lots of momentum in the business, a lot to talk about. So thank you both for being here.

Thank you.

Always great to see you. So why don't we jump in?

Thanks.

Of course.

So first, I would love to start by talking a little more on organic growth and really the nice momentum you guys have seen over recent years, really driven by obviously flows into your ETF franchise, that's been powerful. Active equities continue to be a little bit of a drag, but hopefully that's starting to normalize a bit as well. So looking across sort of the breadth of products that you guys have out there, where are you focusing your resources in terms of driving organic growth further as you look into 2026 and beyond?

Yes. First of all, thanks for having us. We announced asset flows for the month this morning, and that takes us up to about $75 billion of net long-term flows in the first 11 months of 2025. So the flow number has been quite strong. I think what's also been gratifying about it is it's quite broad. So whether that's across geographies, active passive and many of the asset classes were in positive flows. So the size and the depth and breadth.

In terms of where we've been focusing our resources and we'll continue to focus them is obviously where some of these big demand trends have been and where we anticipate they're going. To name a few, I'd say one is around personalization in the wealth space, and that's not just a U.S. thing, that's around the world opportunity. So that's ETFs in the passive format, but increasingly in the active format as well. So we'll continue to grow out our active ETF business, which is around $30 billion of the $1 trillion of ETF assets we have today. But it's also this personalization theme playing out in SMAs. And so we're continuing to invest behind our SMA franchise, which is now around $35 billion in assets, and it was about half that size just 3, 4 years ago.

The second area or theme, I'd say, is around income continues to be a major focus of our clients around the world. So our fixed income franchise is about $680 billion in assets, and it's been growing quite rapidly. So $30 billion of positive net flows this year, and that's from institutions and wealth. So we're going to continue to focus on income and scaling that business. The move into private markets in wealth. We announced the second of our partnerships that we've done this year earlier this week, and that's building from our organic base of $130 billion in assets. So private markets into wealth and defined contribution. And then last thing I'd say is the international profile of Invesco. So about 40% of Invesco's long-term assets are held by -- with clients outside of North America, and it's been about 70% of this year's flow. So we're going to continue to try to take advantage of our local position in Asia and in Europe.

Great. All right. Well, lots to cover there. Got lots to cover. So why don't we start to kind of unpack some of this? First, let's talk about the Qs. Obviously, a very important development for you guys announced several months ago. Maybe give us a mark-to-market on where you are in the process with the fee change. Obviously, we saw some headlines a few days ago earlier or last week, I guess, at this point. The deadline has been, I guess, extended. So where are you now? How close you are to kind of finalizing this process? And I guess more importantly, aside from the financial impact that, that's going to have just on the P&L of the business, any other knock-on effects we could think about from this transition for the franchise?

Sure. So we did not -- we had a meeting scheduled for last Friday. We did not have the 51% of the votes that we needed by last Friday, so we adjourned that meeting, and we announced that we'll be reconvening the meeting next Friday on December 19. We also announced with that adjournment that over 50% of the fund holders have voted and over 92% of those that have voted are voting in favor of the proposal. So you can do the math. We are on our way. We are making progress. It is cumulative. So every time we adjourn the meeting, set a new date, the votes just continue to come in. The proxy solicitation effort is a pretty strong undertaking. Many of you have been on the receiving end, I know of the phone calls and the solicitation.

So we do hope that we get to the 51% next Friday. If we do reach that 51%, we will then convert the structure over the weekend from a UIT to an ETF. And on Monday, December 22, we will open trading as an ETF. At that point, the new revenue economics, and I can walk through those would convert. If for any reason, we still don't have 51% by next Friday, we will adjourn the meeting again. We will announce a new meeting date. You've got a settlement at least 2 weeks and we need at least 2 weeks to get all the mailings out again, so that would take us into January, and we will keep going, but we are making good progress.

In terms of the economics, yes, just to maybe touch on that very quickly. Again, 18 basis points management fee, the fee on the fund will be 18 basis points. That will be a revenue -- excuse me, a management fee, 12 basis points of third-party expenses against that for about a 6 basis point net revenue yield. Marketing is discretionary. And the proxy we disclosed, we anticipate spending between $60 million and $100 million that nets out to roughly 4 basis points to operating income. Where do we see it going from here? Look, I think the fund is well known, well marketed and one that's of high interest to our investors. We are very optimistic about the opportunity to continue to grow that fund. I think the marketing budget that we will have to support it, which is an operating expense combined with our existing marketing budget. It's a pretty significant marketing budget to continue to invest behind that fund and all of our capabilities.

Great. And the easiest way to stop the phone calls and stop the mailing is just a vote.

Yes. That is right. The phone call is to stop once you voted.

Yes. Public service announcement. Okay. All right. Let's talk a little bit about private markets surge. You mentioned that is obviously one of the key pillars you guys are focused on as far as the firm's organic growth goes over the next several years. Obviously, a big focus, not just for you but really for the whole industry. Talk just a little bit about the plans to expand your footprint here. You have a number of different solutions here, real estate being one of them. It feels like the momentum in private real estate is starting to show some green shoots and starting to get a little bit better. So talk to us about how you envision growth in the liquid parts of your alt private market solution expanding over the next few years.

Yes. So our private market solutions that we have today are around $130 billion in assets. It's about $85 billion in private real estate made up of equity and debt and $45 billion in alternative or private credit. Historically, those strategies have been owned for decades and marketed to institutional investors around the world. Over the last several years, we've been taking those capabilities to wealth management platforms, in particular, here in the United States. And so our real estate equity and our real estate debt strategies, are now well placed on most major wealth platforms here in the U.S. And we're continuing and starting to see momentum build.

Alex, as you mentioned, in particular in real estate debt, we're seeing those strategies in the wealth platforms really starting to spin. What we've been doing over the course of the past year is adding to that. And so starting in April, we announced the partnership with Barings where we would co-manage private credit strategies together launched by Invesco and distributed by Invesco's wealth platform. We brought that first product to market now in the fourth quarter, and we'll have a second product with Barings that will bring sometime in the beginning of next year to kind of build out that income offering inside our private market suite to sit next to real estate.

Additionally, we announced yesterday a second partnership that sort of mirrors a bit the structure of Barings with LGT Capital. And LGT is $125 billion private market asset manager, a very strong institutional investment reputation and focused on private market solutions, secondaries, private equity credit, and we're going to be working with them also in 2026 to launch at least 2 new strategies focused on that part of the private markets disciplines, both for wealth managers and for the defined contribution market in the U.S.

So this is starting to build out the suite of products that we have in real estate, in income and in capital appreciation, same Invesco distribution with specialist, same product chassis that we've built and same reputation we're starting to develop in the wealth channels. Ultimately, we see that as an opportunity, not just in the U.S. but to continue to grow in wealth in D.C., in Europe and in Asia as well. So we think it's all very early.

Yes. Let's maybe dig into that a little bit more, both with respect to the partnership and the products you guys are designing with Barings, as well as announcement with LGT and the two new strategies that you mentioned you guys will be launching in '26. Just help us understand, I guess, what capabilities Invesco brings to these relationships? Obviously, you have a very broad distribution footprint and we've seen other alternative managers who wanted to partner with traditional firms really to tap into that sales force. But help me understand a little more like how the economics and the commercial model looks like with these products for you guys?

Well, first and foremost, when we decide to partner with somebody, we have some very careful criteria. And both Barings and LGT fit this criteria. I mean the first is we really want to partner with people that are long-term minded, have a real client focus, partnership ethos, not transactional. We want these to go on for decades. We want to have partners that have complementary capabilities to Invesco. So we're not utilizing just our distribution, it's our capabilities with their capabilities and our distribution. Both of these firms complement what we do in real estate and alternative and private credit.

And then lastly, and I didn't mention it before, we want partners that can show up with capital, too. And in both cases, there's going to be above $1 billion of capital, not just behind the products that we launched, but continuing to allow those products to be impactful in the marketplace. So it's all of those things in combination that we're looking for when we set up these partnerships. We didn't disclose the economics, but the way that it works is that as mutual investors in bringing these capabilities to market, we want best ideas to end up in those portfolios. And so we share economics equally in terms of the part of the revenue stream that we apply to investments. And then as the distributor and as the product creator and the operator, we get part of the revenue for that as well. But we really want to make these presentable to clients where they're really connected to their best interest.

Got it. Okay. Makes sense. And that will be a combination of both Invesco's liquid capabilities as well as private capabilities underneath that [indiscernible].

Thanks for clarifying. It's going to be Invesco's private capabilities and their private capabilities. There could be opportunities for our public capabilities but these are going to be largely private markets.

So these are not like hybrid funds?

These are not hybrid funds.

Okay. Thanks for clarifying that. Okay. Cool. Let's talk about some of the other products. Let's talk about fundamental at least for a couple of minutes. Obviously, that's been a challenging area for the space from a growth perspective for quite some time. You guys recently announced a number of realignments to that business.

Maybe give us an update on how you position this business on a go-forward basis. Any flow implications from some of the changes you've made? And ultimately, are there any savings we should be thinking about related to that business on the back of the change in that?

So earlier this year, we took the decision to bring together our international, global and emerging market fundamental equity strategies to a single complex, a single platform. Theretofore, it had been separate platforms. We also took the opportunity to bring the talent together and consolidate around the top talent that we had. And all of that happened in June. We've taken that forward to clients we've seen pull forward of flows, in particular in emerging markets where we were seeking to make some changes. And we can talk a little bit about the stabilization of that picture.

The reason we did it was to drive investment quality up. This was not about expenses. I mean there is an expense impact, but this was about improving investment quality. We fundamentally believe in those categories in order to punch above our weight in terms of flow rate in any environment, you've got to be in the top quartile at least. And we've seen improvement over the last few years. We have about half our assets in fundamental equity over a 3-year basis now in that top quartile. We've seen positive flows in Europe and in the Asian regions in fundamental equities. And we'll see how we develop here over the next few years with the U.S.-based strategies, but this was really about creating a rock-solid investment platform in these highly competitive spaces so we can win in the future.

I would say on the expense side. I mean, there were some modest expense savings, but those are in the run rate. Those teams were combined in the second quarter. And so in the third quarter, you could see any savings that were there really fully phased into the run rate, just continues to create that streamlining opportunity for us.

And all the flows that we've been producing since then as an overall business, despite some of the challenges have obviously been overwhelming that in a positive way. So we continue to grow through some of these challenges.

Yes. And it sounds like the good news is that global equities as a category, particularly outside the U.S. from outside U.S. investors are starting to get a little bit of momentum. I mean, it kind of resonates again with your comments around Europe and Asia as well, right?

Yes. I mean the flows, in particular, in places like Japan where we have a global equity strategy there. It's the top-flowing global equity strategy or equity strategy in the Japanese market, and that's been continuing for the last few years. And we are seeing more demand come from European and Asian clients in general, not just in global equity.

Yes. Great. Let's talk about non-U.S. a little more, just zoning on China, obviously, an important segment for you guys. Over $125 billion in assets. It's been a notable differentiator for Invesco for quite some time. Also seeing accelerating growth recently, which has been obviously a welcome move. Maybe help us understand what are the key kind of fundamental trends you're seeing on the ground in that market and your expectations for kind of future organic growth in that part of the business?

It's a domestic to domestic business. It's at -- we were -- in our release this morning, you could see it. It's over $125 billion in assets, high watermark. It's been flowing quite well, about $15 billion in flows through the first 9 months, which has been incrementally improving quarter-on-quarter. So we do feel like some momentum back in the domestic Chinese investment market and economy we're seeing. I think we're seeing disproportionate benefits because we've been there for 22 years in this JV that we've had. We're the #1 JV in the market. We're cracking the top 10 of retail asset managers, and we believe in the long run in China needing to develop its capital market and its retirement market, and we're well positioned.

From an on-the-ground perspective, it's been a stimulative kind of environment. The market has been strong this year in that equity market. I'd say Chinese retail investor confidence is improving but not nearly where it had been. And most of our flows we're seeing is in sort of balanced strategies, so they're coming up from fixed income tiptoeing into equities but not fully there. But the business has continued to grow pretty well.

I'd think notably, too, there -- historically, if you rewind several years ago, a lot of the flows were coming from fund launches, and that's not the case today. Less than 20% of the flows would be coming from new fund launches in any given quarter. So it is really a well-built platform at this point in terms of the breadth of funds and capabilities that we have. When we do launch new funds, more and more so, their ETF, as ETFs are still in the earliest stages in China.

And I'll just say it's a very digital-oriented client base. And so about 1/3 of the client engagement is through digital platforms.

Got it. Great. Okay. Andrew, one of the other growth initiatives you talked about earlier on is fixed income, just leaning into again the kind of income-oriented part of the structure. You guys made a lot of progress there. I mean I can think about your offering over the last couple of years, and I know it's been an initiative. It's great to see the kind of flows that you've been delivering over the last 12 months or so. Talk to us a little bit about how you guys are positioned for maybe some of the eventual rotation into fixed income assets. It's starting to happen finally but presumably with lower interest rates, there's more to go. How are you positioned with strategies that have the right track record in place correctly and really have enough capacity to pick up a more sizable chunk of those flows?

Yes. So there's plenty of capacity. Like I said, it's about close to a $700 billion platform that ranges from money market funds, short duration, all the way out to loans and eventually, the private credit. So there's plenty of opportunity. I think one of the things we've been seeing is it coming in all different chassis or product vehicles. So places where we've seen beyond just moving from shorter duration to longer duration is seeing it in different formats than we've seen in the past.

So I mentioned SMAs before. That's almost all been fixed income growth. Again, some short duration, but mostly moving out the duration curve. Institutional investors, in particular, in Europe and the U.K., bringing more investment-grade strategies and more en masse and in bulk. And we're really starting to bring together the consolidation of their fixed income mandates towards us because of the breadth of that platform. ETFs, we're seeing it get delivered, not just through active but through passive. And then I mentioned China before. We're seeing it flow through China. Anything else you'd add? Yes. So it's pretty broad-based. And we are seeing money start to come off the sidelines. But cash balances, especially in wealth and retail, as you all know, are still close to 20%. So there's room.

Look, still obviously clear a lot of cash on the sidelines for sure. Okay. Why don't we get it to a couple of P&L dynamics. Just talk about expenses and margin for a couple of minutes off. And I think this one is probably for you. So when we kind of do out, expenses have been really well managed in the last several years now, despite the fact that revenues have obviously been improving both from beta and organic growth. So that's been really encouraging to see. What in your view is kind of longer-term philosophy around expense growth? Maybe perhaps the breakdown between fixed versus variable and how that might evolve over time?

And then I guess, looking a bit closer into 2026, you also have a couple of divestitures that are going to impact both the margins and the expense growth. So I know there's a lot packed in there, and we can help by double-click on a few of these things. So however you want to take it, but that's the general direction.

Let me start maybe, a little more zoomed out. So one, I just -- I'll start with our focus is on continuing to improve our operating margin. We've been on a journey to get back into the mid-30s with a real goal of getting back into the high 30s. So I'll start with our objective is to really continue to create this positive operating leverage. You've seen us demonstrate that the last couple of years. We're pleased with the progress, but we're not where we want to be yet. So still a lot of opportunity before us.

With that in mind, the expense discipline that we've created in the firm with that remixing of the expense base, that's going to continue to be important. As we continue to drive this organic revenue growth, we're going to be very thoughtful about that expense base. We have been able to make real progress as we continue just to simplify the structure, really streamline our operating platform, look at places where we can unlock expenses. You noted some of the fundamental equity changes earlier this year. We remixed that into some other places. You can't really see the expenses go up or down because we're being very thoughtful about unlocking expenses and driving the expense -- driving investment in other places where we think we can get faster revenue growth. We'll stay on that path.

Maybe double-clicking into a few of the drivers. One, Alpha. We are on a journey to complete our implementation of both our hybrid approach next year of Alpha and Aladdin with the goal of finishing that implementation by the end of 2026. We've been disclosing our implementation costs every quarter. We've been running in that $10 million to $15 million range. I anticipate that continues, at least for the first half of next year. As we get closer and closer to fully migrating all of our AUM over, I think we'll have the opportunity to continue to look at that expense base. Where might there be some opportunity to take some expense out and/or reinvest those expenses against other future opportunities we have as we think about other future tech investments. And the never-ending need to modernize our tech stack as we all have.

So I think that at the highest level, is how we're going to continue to think about really maintaining a well-managed expense growth -- expense base. There's going to be some modest inflationary growth in there. Our variable component is around 25% right now. It's largely compensation. There is some AUM-driven growth there. That's on an unmanaged basis. If we had to go really take cost out, we'd go further than that. Then let's talk about maybe a couple of the divestitures. Both the sale of Intelliflo that closed November 1, and we sold 60% of our Indian asset manager that closed on October 31. So inside of the fourth quarter, we've got a lot of changes. We'll have an opportunity in January to probably disclose even more going forward. Intelliflo, that was about a breakeven business. It's not losing $2 million a quarter. So a little bit of a margin improvement there. Geography change really as India now becomes a minority interest for us. So you'll still see 40% below the line there.

Yes. If you think about that fixed expense base because that's where you were really kind of trying to both reinvest but also reengineer and kind of find efficiencies. What inning do you think we're in there, right? I mean it feels like -- and it sounds like it's a continuing journey for you guys. And is the goal to go and get this to say, "Hey, look, this is going to be like a 2%, 3%, 4%, kind of what is the sweet spot for that fixed expense base to grow over time for Invesco?

Look, I think with just general inflation and we all deal with it whatever your fixed expense base is and that looks like everything from your properties around the globe, where you've got 2% to 3% sort of inflationary pressure, all your third-party expenses. I mean you tell me what inflation is going to be and I'll tell you probably about where that expense growth is going to be, but let's call it 2%, 3%, 4%. I don't think that's an unreasonable range over the kind of medium term.

Underneath that, though, it really is a journey as we continue to scale our capabilities of holding some of those fixed expenses constant. I mean, I'll point to our passive AUM, including the Qs. That's over $1 billion -- excuse me, over $1 trillion now. The fixed cost against that, there's very little. We need to continue to the fixed cost against that. So it's really driving scale over those installed platforms, and we think that's where we've got the opportunity to continue to create this positive operating leverage.

Yes. I mean the simplification efforts that we've been on over the last couple of years, as Allison was saying, we've been reinvesting for growth. And a lot of the growth we're seeing right now is a function of things that we replotted while keeping expenses pretty moderated. And I think that's become habit in the culture of the company. And I think your point about we're going to continue to just keep recycling towards growth areas while being thoughtful about the expense base, like that's going to be every year.

I'll say this and we move on. If you look at our AUM relative to our headcount, we've almost doubled our AUM on the same head count as to where it was 5 years ago. That's before you're going to see headcount come down with a couple of divestitures we just talked about. But like-for-like, we've been able to do that. Now could we double AUM again on the same headcount? I don't think so. But that's where we've been really thoughtful around what are the productivity enhancement that are out there. How do we take things that were done 3 different ways around the globe and do it one way, one time. Where are we on that journey? I do think it's continuous improvement. I don't know that there's a destination. I think it's an installed way of working now.

That's great. Awesome. All right. Let's move on to capital and balance sheet for the next couple of minutes. That's been also really another great part of the story for the last few years with a little bit more from this morning on the announcements of the pref redemptions. So why don't we spend a couple of minutes on that? A, maybe discuss what you guys have announced this morning, timing around that would be helpful as well. And then secondly, as you look forward, maybe help us kind of outline capital priorities now that the prep has been redeemed to a substantial amount, plus you guys have reintroduced the buyback, where does kind of the capital return priority sits from here?

Sure. So this morning, we announced that we've entered into an agreement with MassMutual to repurchase another $500 million of the preferred. That is on the back of the $1 billion that we repurchased in May of this year. So we anticipate closing that next week. We will repurchase this one with a combination of cash and a draw under our revolver. Today, we have a $2.5 billion revolver that is unfunded. The $1 billion that we repurchased in May, we financed that with 2 term loans. One of which we've already repaid. So that $500 million 3-year term loan, we fully repaid that at the end of October, leaving $500 remaining. This next $500 million will be a combination of cash and revolver.

And then in January, we actually have a $500 million note that comes due, and we'll be redeeming that note in January. So we will have eliminated over $1 billion of debt by the time we get to the end of January and about a 6-month time frame, 7-month time frame. So we are making meaningful progress. That will leave $2.5 billion on the preferred, puts us on a path next year to start to get closer and closer to 1x leverage. And that starts to feel like a more comfortable place to be. Maybe not the final destination, but as I think about next year, certainly gives us plenty of breathing room while making sure we still have ample opportunity to reinvest in the business. So I think it's important, even with the leverage profile we were carrying, we never stopped investing in the business. So we were really balancing our capital priorities of investing against our products, investing against CapEx, making steady progress on the balance sheet, returning capital to shareholders. As we move into 2027, we certainly have made progress on the balance sheet.

I think you'll see us continue to invest in our own capabilities. We've got in addition to the product capital that's coming with these partnerships. We've got our own opportunities to continue to invest against some of our product launches. And on the capital to shareholders, we did restart buybacks on a pretty steady basis about 6 quarters ago. We've been buying back $25 million a quarter, about a 60% payout ratio in 2025. We would anticipate targeting about a 60% payout ratio going into next year. So again, giving us the opportunity through modest increases in the common dividend. Continuing on this buyback path, I think we'll make some good progress there, too.

That's great. No, it's definitely great to see. Why don't we talk about M&A little bit? Obviously, you stabilized the balance sheet or improving really the balance sheet. Capacity there has been important as we've seen for the last couple of years. You guys really weren't involved in really much M&A for the last several years for the right reasons I would argue. Given where you are today, given some of the momentum you're seeing in the business, particularly within the OIL franchise, how do we think about M&A? How important it is, how critical is to grow over the next few years? Or should we be thinking about more of these similar type of partnerships as opposed to full out acquisitions as kind of the way to kind of branch out into newer things?

Yes. I would say, look, we've got a pretty well built-out suite of capabilities at this point. And in addition to the capabilities, we're really in all of the markets and the regions we want to be in. So we're starting from a place of real strength we didn't participate in a lot of M&A in the last few years. We didn't really need to do a whole lot. So as we look at our strategy from here, we're not opposed to it, but we also think we've got a lot of opportunities to continue enhance our capabilities with some of these product partnerships that we've announced with Barings and LGT, namely and the opportunities that are out there. I think we can do that in a very capital efficient way in a shareholder-friendly way.

We also, I think, have demonstrated really the opportunity you have with our platform, just the organic revenue growth, the flows that we've been able to demonstrate with the capabilities we have. We feel pretty good about the comprehensive suite of solutions we have. So from here, I think, look, it's great to have our balance sheet in a better place. It gives us a leverage profile where we could be more opportunistic. Our currency is improving at the same time. That was part of the objective. I'm not sure that there's anything high on our list, but we've got ourselves in a much more offensive position now.

And we really view these partnerships as strategic, both the 2 product ones that we announced and not to mention the new JV we have in India and the existing JV we have in China. So this route, a partnership for us is not transactional. It's strategic.

Yes. Great. Look, with a couple of minutes left on the clock, maybe zooming out a little bit. We talked about a lot of things. Andrew, would love to get your thoughts on the 2026 priorities. Again, you guys have accomplished a lot. '25 in particular, I feel like has been a really phenomenal year for the firm.

It's been a long year.

On multiple fronts. So if you deliver in '26, what you did in '25, I'm not sure too many people will complain. But what's top of mind for you for next year?

So we put a multiyear strategy in place a year or so ago, a year or 2 ago. In '26, we need to continue to carry out that strategy. So it's going to be a focus on a lot of the news we just talked about over the last half hour and that you've seen us do this year pointed into those key areas. It's also taking advantage of the work we've done in the last few years, simplifying the company so we can pull through. A lot of what Allison was talking about, improve the operating leverage -- continue to improve the operating leverage for the company. Use the balance sheet flexibility that's now being created to return -- to generate returns and return capital to shareholders.

In terms of the key initiatives I kind of clicked down on at the risk of being redundant, we really see an opportunity to continue to improve investment quality in the fundamental equities and continue to improve the retention rate and in some areas, the growth rate. Those are key capabilities in fundamental equities, and that's something we want to pull through, continue to get scale in the capabilities that are where there is sort of secular change that's going on and where we have enormous strength, ETFs, SMAs, models, fixed income, just to name a few. We've done a lot of the work to set ourselves up for success in the private markets platform into wealth in the U.S. We want to pull that through. We're going to start to find those opportunities internationally as well, not to mention defined contribution.

And then we want to complete the Alpha work in '26 that we've stated that we're intending to complete partially because we want to get that work done and mostly because we want to start to get the benefits out of it, not the least of which is continuing to advance in our innovation work and in our technology benefits, not so much just for efficiency but for effectiveness, too. So we hope we have -- we expect to have the kind of momentum that we built in '25 into '26. And we have a lot to execute, and I'm super thankful for all of your interest in the company, but all the work that our employee base did this year has been pretty phenomenal.

Yes. Well, lots to do on that list still, but we're excited to watch you guys continue to execute. So thank you for joining. Thank you for sharing your thoughts for us. Appreciate it.

Thank you.

Thank you.

Thank you for standing by, and welcome to Invesco's third quarter earnings conference call. [Operator Instructions] As a reminder, today's call is being recorded. Over to Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin.

All right. Thanks, Cedric, and to all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for the accuracy of our earnings transcripts provided by third parties. The only authorized webcast are located on our website.

Andrew Schlossberg, President and CEO; and Allsion Duke, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew.

Okay. Thank you, Greg, and good morning to everybody. I'm pleased to be speaking with you today. We continue to perform remarkably well against our strategic priorities, which are centered on emphasizing the intersection of market size and secular change while leveraging our unique position to drive growth in the highest opportunities, regions, channels and asset classes.

We delivered another strong quarter of broad-based progress, and we continue to generate significant operating leverage while executing on initiatives to unlock value across the organization to deliver for both clients and shareholders. If you turn to Slide 3 of the presentation, which highlights some of our most recent high-impact initiatives over the past several months.

In aggregate, these initiatives will help to streamline our business, drive profitability and margin expansion, build a stronger balance sheet and continue to enhance shareholder returns. Significant among these efforts is the strengthening of our capital management through the recapitalization of our balance sheet. Here, we have improved flexibility, enabling us to continue to further deleverage.

We have already repaid approximately 25% of the term loans used for the $1 billion preferred stock repurchase announced earlier this year, accelerating the expected earnings accretion from that transaction and paving a path for future redemptions. We have also made substantial progress in our efforts to simplify and hone our organizational focus. Of note is the implementation of our hybrid investment platform which we announced in May, would be shifting to a combined Alpha and Aladdin program.

Progress continues in our conversion. During the third quarter, we launched the second wave of significant equity AUM onto the Alpha platform. This entire hybrid implementation, which is on track to be complete by the end of 2026 will drive simplification, improved investment system consolidation and future cost avoidance. Also under the banner of simplifying our business and focusing on improving performance, earlier in the quarter, we realigned our fundamental equities, global international and regional investment teams.

We have consolidated capabilities under a single CIO for these particular asset classes and made portfolio management changes to our U.S. developing markets and aspects of our international and regional equity strategies. This consolidated global related equity platform mirrors our already established global fixed income structure and as part of our ongoing efforts to strengthen our investment returns in this important area for the firm. The single platform also allowed us to elevate our top investment talent and use our scale advantages to gain efficiencies.

Investment performance does take time to turn around, but we are beginning to see progress on this front. Further advancing our efforts to simplify and streamline our focus, we announced in late summer, our decision to sell Intelliflo, which is our cloud-based practice management software subsidiary. This sale will generate net cash of approximately $100 million at closing, which is expected in the fourth quarter, and it could also generate up to $65 million in additional future potential earn-outs.

Finally, we are accelerating growth through a number of recently announced business development initiatives noted on the bottom of Page 3. I'm pleased to report that we have made significant progress with our Barings private markets partnership, launching our first joint product together earlier this month. The speed at which we have been able to execute is notable. Together, we have come to market with the jointly managed Invesco Dynamic Credit Opportunity Fund within just a few months of our announced partnership.

This product strategy is an interval fund targeting the U.S. wealth management market that dynamically allocates across the full spectrum of private corporate credit. By combining our 2 firms complementary strengths, we're accelerating our ability to meet client demand for income-oriented solutions in this rapidly evolving market. This represents the first milestone of the broader private market strategic product and distribution partnership with Barings, which MassMutual will intend to support with a total of $650 million of capital.

A second co-managed fund is currently in development and is expected to be in market at the beginning of next year. These new strategies will complement our existing private real estate offerings that are targeting U.S. wealth management clients and have seen significant organic traction over the past several quarters. Also in the category of accelerating our growth, we are in the final stages of selling a majority interest in our Indian business to the Hinduja Group and jointly establishing a local joint venture. We believe that the combined benefits of our existing Indian asset management business with Hinduja's domestic financial institution and local expertise will enhance the growth of that business.

Our ongoing minority ownership structure will allow us to participate in the Indian market development, while also refocusing our resources accordingly. We expect this transaction to close in the fourth quarter and Allison will detail the financial implications and anticipated timing of these transactions later in the call. Finally, as you are all well aware, a significant transformative growth initiative is underway as we seek to modernize the structure of our sizable QQQ ETF.

We are in the process of soliciting shareholder approval, and we are pleased to report that we have seen strong participation and momentum in the proposals outlined in the proxy and votes casts are overwhelmingly in favor of the proposals. We are getting close to the vote totals needed and to allow for additional time to solicit the votes needed to pass the proposals.

Last week, we announced that the special meeting of the QQQ shareholders has been adjourned until December 5. Our scheduled time to complete the solicitation process is not an all uncommon. And given the sheer size of this fund and its large retail shareholder base, it is not unexpected. We are proud of the progress on these significant initiatives highlighted on Page 3.

We believe they are indicative of the exceptionally hard work of our Invesco colleagues to drive these and other efforts to completion, while continuing to seek incremental opportunities to unlock value. I am grateful for all that has been done and the ongoing disciplined focus on delivering to our clients and our shareholders.

So let's pivot now to Slide 4 for our third quarter business highlights. We had strong momentum coming into the quarter, which continued as key market indices reached new highs and increasing investor confidence was bolstered with the Fed rate cut in September. These dynamics are leading to some broadening out of investor demand, which is a welcome shift in the asset management landscape and one that we are beginning to see reflected in our results.

We reached a record AUM of $2.1 trillion with exceptionally strong net long-term inflows of nearly $29 billion or an 8% annualized organic growth which is our best flow quarter since 2021. Even more encouraging with the breadth of these flows, reflecting our diversified scaled global platform. We had strong growth on many dimensions, including across most of our strategically important investment capabilities. It also included positive flows in aggregate in both our active and passive products, the retail and institutional channels and across the Americas, EMEA and Asia Pacific regions.

Nearly 40% of our long-term AUM is now from clients outside of the U.S. and 2/3 of our net inflows this quarter were from EMEA and Asia Pacific regions. In the quarter, we continued to scale our ETF platform, gaining market share and launching products to meet client demand. When considering the entirety of our ETF and index offerings across all investment capabilities and including the QQQ, we recently reached an important milestone of $1 trillion in AUM.

This was among our best-performing quarters for our increasingly profitable ETF and index investment capability with an annualized organic growth of 15%. We garnered record net inflows in a diverse set of products for our U.S. range, including the QQQ M,several ETFs within our S&P Factor suite, the China technology ETF. And in EMEA, we generated strong flows in our use of QQQ ETF and our synthetic product suite.

We continue to innovate and evolve our ETF lineup to offer investors new ways to access our in-house, high-quality active strategies. Notably, 65% of our ETF launches this year have been active. Our 5 new active ETFs launched during the third quarter brings our total to 36 months. The development is not only a U.S. trend. We now have 10 active UCIT ETFs, extending our smart beta range of products in the EMEA region.

Our ending active ETF AUM firm-wide stands at $16 billion. However, when including our active teams engaged in our passive and index capabilities, it elevates that total AUM to nearly $30 billion. Bringing the depth of our investment capabilities into the ETF wrapper has long been part of our overall strategy and will continue to be as we innovate to meet client demand.

Shifting to fundamental fixed income where we garnered over $4 billion in net long-term inflows in the third quarter. However, this only considers what's included in our fundamental fixed income capability. Looking more broadly at the fixed income asset class across all of our investment products, the third quarter net long-term flow number jumps to nearly $13 billion with the inclusion of our fixed income ETFs and China JV-based fixed income assets.

Here again, the strength of our geographic profile is evident with more than half of our overall fixed income inflows coming from clients outside the United States. Though overall recent client demand trends remained largely intact this quarter in fixed income, we did begin to see a measured extension from ultrashort and short-term fixed income to the intermediate and longer end of the curve. We saw institutional interest for investment-grade bonds with strong demand in Asia, driving net inflows.

Further, we saw demand for our leading United States defined contribution focused, stable value capability, and we are exiting the quarter with a healthy pipeline for this product. Additionally, our U.S. Wealth Management SMA platform continued to help drive fixed income flows, particularly in municipal bond strategies. Our entire SMA platform which also includes a portion of equity assets continued to capture market share, and it now stands at nearly $34 billion in AUM.

We have one of the fastest-growing SMA offerings in the U.S. wealth management market with an annualized organic growth rate of 19%. Moving to our China JV and Indian capabilities where we produced exceptionally strong results this quarter. Our broad product suite and scale position in China is empowering us to perform as well as dynamic shift in this market. We reached a record high AUM in our China JV of $122 billion, reflecting a 16% increase over last quarter. We delivered a robust $8.1 billion of net long-term inflows in these capabilities, marking one of our best quarters to date, $7.3 billion of that total came from our China JV which represents a 34% annualized organic growth rate.

Flows during the quarter in our China JV were led by Fixed Income Plus and our ETF funds. Institutional investors are favoring fixed income plus strategies as they provide an effective means of enhancing equity exposure. We are also beginning to see interest in pure equity strategies, particularly in passive funds, as demand for active equity is slower to regenerate. We are exceedingly well positioned for the near and longer-term trends developing in the onshore China market.

We continue to innovate to meet client demand across both active and passive capabilities. Of note, we launched 12 new products this quarter in our China JV, including our first fixed income ETF. We believe that in time, demand for fixed income products will shift towards those offered in the ETF wrapper. We also launched equity index funds to capture increasing demand for these growth-oriented products.

While we continue to launch innovative products to meet current and future client demand in our China JV, existing products have been the more significant driver of our organic growth, an indication of the strength of our platform. We expect our China JV to continue to benefit as both the secular and now cyclical tailwinds develop in the world's second biggest economy.

Shifting to private markets where we posted $600 million of net inflows driven by private credit and direct real estate. Private credit had nearly $1 billion of net inflows with strong CLO demand during the quarter in both the U.S. and EMEA as these products continue to offer meaningful value versus corporate bonds. We launched 3 new CLOs during the quarter, 2 in Europe and 1 in the United States.

Direct real estate contributed nearly $100 million of net inflows. INCREF, which is our real estate debt strategy targeting the U.S. wealth management channel continues to generate net inflows, and we continue to onboard platforms and clients. INCREF is now on 3 of the 4 major U.S. wealth management platforms. Assets in this fund with leverage now total over $4 billion after just 2 years in the market.

Our real estate team also remains well positioned -- the institutional markets, with $7 billion of dry powder to capitalize on emerging opportunities. And as I outlined earlier, EMEA and Asia Pacific, specifically for global and regional equities and headlined by our Global Equity Income Fund managed out of the United Kingdom. This fund posted record net inflows of $3.8 billion during the quarter predominantly from clients in the Japanese market, where it ranked first among retail active funds and has rapidly grown to $20 billion in AUM and has a very favorable net revenue yield to the firm.

This is a compelling representation of our ability to have the right products in the right markets at the right time. Despite these positive flow highlights, we did record overall net outflows in fundamental equities of $5 billion in the quarter. Our results partially reflect the broader secular outflow trend in actively managed equities, particularly in the United States. This was compounded by the expected acceleration of net outflows from our developing markets fund, which totaled $4.5 billion for the quarter.

Given our strategic decision to reposition the fund to a new internal portfolio management team, this wasn't wholly unexpected. We are confident that the aforementioned fundamental equity platform changes that have been recently implemented sharpen our focus on investment performance and risk management as we continue to identify areas of demand within fundamental equities and mitigate redemptions at a better rate than the market.

Moving on to Slide 5, which shows our overall investment performance relative to benchmark and peers as well as our performance in key capabilities where information is readily comparable and more meaningful to driving results. Investment performance is key to winning and maintaining market share despite overall market demand. As such, achieving first quartile investment performance remains a top priority for Invesco. Overall, more than half of our funds are performing in the top quartile of peers on a 3-year time horizon with 45% reaching that bar on a 5-year basis. Further, nearly 70% of our AUM is meeting its respective benchmarks over those measurement periods.

Of note, we saw significant improvements in some of our fundamental equity performance with more than half of our funds beating benchmark on a 3-year basis and 39% in the top quartile on a 5-year basis. Continuing to strengthen our investment performance is key to reducing redemption rates in these critically important equity strategies. Fixed Income continues to have strong performance with nearly half of our funds performing in the top quartile on a 3-year basis and nearly 2/3 beating their benchmarks.

So with that, let me turn the call over now to Allison to discuss the quarter's financial results, and I look forward to your questions.

Thank you, Andrew, and good morning, everyone. I'll start with the third quarter financial results on Slide 6. Strong markets and net asset inflows drove assets under management to a record level for Invesco in the third quarter. Total AUM exceeded $2.1 trillion at quarter end. This was $123 billion or 6% higher than at the end of the second quarter and $329 million or 18% higher than the end of the third quarter of 2024.

Average long-term assets under management were $1.46 trillion, an increase of 9% over last quarter and 16% over the same quarter last year. Growth in total assets under management during the quarter was driven by market gains of $99 billion and net long-term inflows of $29 billion.

Net revenues, adjusted operating income and adjusted operating margin all significantly improved from last quarter and the third quarter of 2024, while adjusted operating expenses continued to be well managed. This drove meaningful operating -- this drove meaningful positive operating leverage on both a sequential quarter and a year-over-year basis.

On a sequential quarter basis, positive operating leverage was 480 basis points delivering a 300 basis point improvement in the third quarter operating margin to 34.2%. On a year-over-year basis, positive operating leverage was 410 basis points delivering a 260 basis point improvement in operating margin. Adjusted diluted earnings per share was $0.61 for the third quarter. We continue to strengthen the balance sheet during the quarter through the repayment of $260 million of the 3-year bank term loan.

We also ended the quarter with no draws on our revolving credit facility. Given the level of operating cash generation going into the fourth quarter, we are in a position to repay the remaining $240 million of the 3-year term loan by the end of this month. When we announced the repurchase of $1 billion of preferred stock in April funded with $1 billion in term loans, we indicated that once the loans will repay, the EPS run rate benefit would reach $0.13 annually.

Given that we will have repaid $500 million, up to $1 billion in term loans earlier than projected, we will have captured approximately 60% of that EPS run rate benefit on a go-forward basis. The magnitude of the potential reduction in the remaining $500 million term loan that matures in 2030 will depend on the level of cash flow we generate going forward. Additionally, we have a $500 million senior note that we intend to redeem when it matures this coming January of 2026.

Finally, we continued common share repurchases, buying back $25 million or 1.2 million shares during the quarter. Moving to Slide 7, a slide most of you are familiar with by now is we've been including this update for a number of quarters, and hopefully, you have found this helpful in analyzing our net revenue and net revenue yield dynamics. Client demand continues to drive diversification of our portfolio.

And as a result, concentration risk and higher fee fundamental equities and multi-asset products has been reduced while our portfolio reflects a higher mix of ETFs, index and fundamental fixed income capabilities. Our more balanced AUM profile better positions the firm to navigate various market cycles, events and shifting client demand. The ranges by capability are representative of where the net revenue yield has trended over the past 5 quarters, and we know where in the range yields have trended more recently.

To provide context for the net revenue yield trends during the third quarter, our overall net revenue yield was 22.9 basis points. This is similar to the sequential quarter decline that we experienced in the second quarter. The magnitude of the last 2 quarterly declines is notably lower than prior quarters. And maybe aside, we're closer to reaching a degree of stabilization in the net revenue yield, but this will be dependent on the future direction of asset mix shift. The exit net revenue yield at the end of the third quarter was 22.8 basis points near the adjusted net revenue yield for the quarter.

As Andrew noted earlier, last week, we announced a special meeting of QQQ shareholders have been adjourned until December 5 to allow for additional time to solicit votes. We did want to note that under the new structure, the revised fee allocation would work similar to how we currently recognize fees on most of our ETFs. The 18 basis point fee will be recognized as investment management fees, approximately 12 basis points, which is principally for the licensing fee and administrative custody and transfer agency services will be recognized as third-party distribution, service and advisory expense.

Under the current structure, marketing expenses associated with the QQQ are included a third-party expense. Upon finalization and filing of the definitive proxy statement, reflecting comments from the SEC and further accounting review, it would determine that the marketing expenses associated with the QQQ should be included in the marketing expense line item versus third-party expense.

This is solely a reclassification of where the marketing expenses are reported and the expected overall net impact to adjusted operating income of approximately 4 basis points of QQQ AUM and is unchanged from what we previously disclosed.

Now turning to Slide 8. Net revenue of $1.2 billion in the third quarter was $82 million higher as compared to the same quarter last year. The increase in net revenue was largely from investment management fees, which were $102 million higher than last year and mainly driven by higher average AUM. Operating expenses continue to be well managed with the increase of $24 million, partially driven by variable employee compensation related to higher revenue.

On a sequential quarter basis, the increases in net revenue and operating expenses were driven by similar dynamics as the year-over-year changes. And that result is a substantial increase in positive operating leverage on both the year-over-year and sequential quarter basis. The Alpha hybrid platform implementation costs of $11 million were below our expectations for the third quarter, but near the range of prior quarters.

We launched the second wave of equity AUM onto the Alpha platform during the third quarter. We will continue to implement the hybrid approach we announced earlier this year. We expect the overall implementation to be completed by the end of 2026. Regarding implementation costs going forward, we expect onetime implementation costs to continue in the $10 million to $15 million range for the fourth quarter as we transition more AUM onto the platform.

This amount in future quarters may fluctuate to a degree due to timing as we work towards completion by the end of 2026. We'll provide further updates as the implementation progresses throughout next year. As disclosed in August, we reached an agreement with Carlyle to sell Intelliflo, our cloud-based practice management software subsidiary.

We moved Intelliflo to held for sale in the third quarter and the noncash impairment charge of $36 million was recorded in other gains and losses, somewhat lower than the $40 million to $45 million that we had indicated previously. We expect to close this transaction in the fourth quarter and then the annual net operating impact of Intelliflo is insignificant to the overall Invesco operating results.

Given Intelliflo is the U.K. subsidiary, the loss is not a taxable event. As such, we anticipated the effective non-GAAP tax rate for the third quarter to be closer to 29%. The effective tax rate for the quarter was 11.2% as we were subsequently notified late in the quarter of a favorable resolution of a certain tax matter, including the reversal of a reserve for uncertain tax positions which had a significant impact on our third quarter non-GAAP effective tax rate.

For the fourth quarter, we estimate our non-GAAP effective tax rate will move back to the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items. Andrew also noted that the sale of a majority interest in our India asset management business is expected to occur in the fourth quarter, potentially at the end of October.

Post closing, given we will retain a minority interest India's AUM, which is near $15 billion and future asset flows will not be reported in our results. In addition, India's operating results will no longer be reported as part of Invesco's overall operating results including the associated revenues and expenses.

Our 40% share of the joint venture's net income will be reported in equity and earnings of unconsolidated affiliates going forward. We currently expect $140 million to $150 million in cash proceeds from the sale. I'll wrap up on Slide 9. As I noted earlier, we continue to make considerable progress on building balance sheet strength.

During the third quarter, we repaid $260 million of the $1 billion in bank term loans used to fund the $1 billion repurchase of preferred stock held by MassMutual earlier this year. The $260 million repayment reduced the 3-year term left to $240 million. And as I noted earlier, we're in a position to repay the remaining balance by the end of this month, leaving only $500 million in the 5-year maturity term loan.

The full impact of the $14.8 million reduction in the preferred dividend was realized in the third quarter and the go-forward run rate preferred dividend is $44.4 million per quarter. The $14.8 million reduction is now earnings available to common shareholders. We also continued common share repurchases and the third quarter buying back $25 million or 1.2 million shares during the quarter.

We intend to continue a regular common share repurchase program going forward and expect our total payout ratio, including common dividends and share buybacks to be near 60% this year as well as in 2026 as we continually evaluate our capital return levels. The partial repayment of the bank term loan improved our leverage ratios for the quarter with the leverage ratio, excluding and including the preferred stock, improving to 0.63x and 2.5x, respectively.

Going forward, we expect this ratio to continue to improve as we repay the term loan and redeem the $500 million senior note maturing in January. To conclude, the strength of our net flow performance and diversity of our business is evident again this quarter, driving strong revenue growth. This, combined with well-managed expenses resulted in significant operating leverage and a sizable improvement in our operating margin.

We're pleased with our progress on building a stronger balance sheet. And we are committed to driving profitable growth, a high level of financial performance and enhancing the return of capital to shareholders. With that, operator to open up the line for Q&A.

[Operator Instructions] And the first question comes from Bill Katz with TD Cowen.

Excuse my voice this morning. So maybe on the QQQs, I'm sort of curious if you could maybe put any kind of meat on the bone a little bit around where you are relative to the quorum or the approval rate and the development with the SEC in terms of recategorizing and reclassifying where you're going to account for the marketing spend, does that raise the probability of getting to the required vote to make the shift?

We can't give you details on where we are relative to the quorum or the approval rate. But as we noted in our disclosures, we're very pleased with the progress, and it's an overwhelming majority that's voting in favor of fee change.

So we're pleased. It's not unexpected that these things take a lot of time, especially for a fund as large and widely held as this one. So it takes a little more time to get to the quorum, but we're pleased with the progress we're making. On the second question, as it relates to the marketing expenses, no, there's nothing in that, that really changes anything, to be frank. I mean this is entirely related to the comments from the SEC on the proxy, some of the language changes, putting that back through an accounting review.

And we determined this is the most accurate and appropriate place to reflect those marketing expenses. And so going forward, I don't think it really has any impact whatsoever on how people are thinking about the proposal. There's no change at all to operating income. Again, it's still approximately 4 basis points and the way marketing expense will work is as disclosed in the proxy filing, which is a discretionary amount of marketing expense within the range that we provided in the proxy.

Our next question comes from Brennan Hawken with BMO Capital Markets.

Just a follow-up on Bill's question. I understand that you guys are using a proxy voting firm to help drive participation. I just want to confirm, is that considered a marketing expense of the fund? And is there any sort of spend threshold where over that, it starts to become an operating expense for Invesco?

Yes, we are using a proxy solicitation firm, and it is considered a marketing expense of the fund. So those expenses are accrued in the fund. I don't foresee that happening with those expenses bleeding over into operating expenses for Invesco.

There can be some timing differentials in terms of how we accrue within the fund month-to-month and versus just timing, I would say, on fund expenses versus operating expenses for Invesco.

Right now, I do not see that as being a risk to Invesco's operating expenses, especially if we continue on the path to the meeting on December Fed that's scheduled.

Got it. Okay. And then this might be a little granular, but I'm going to give it a shot anyway. I understand that there's 3 proposals in the proxy vote. Are all 3 proposals progressing similarly? Or is there any divergence in between 1, 2 or 3?

No, there's no divergence. They're all progressing similarly. I think that is a very granular question. There's one in particular, everybody is focused on. But fair question. And no, I think it's all progressing consistently. .

The next question comes from Glenn Schorr with Evercore. .

So your fixed income flows have been pretty good. Your performance is very good. But there's obviously been some volatility around the potential of lower rates and the potential of credit issues rising. So it's been a while since any of the channels had to deal with that. But curious what you saw in October and things like bank loans, just -- and then more importantly, in general, given the global nature of your flows, what you expect on a go-forward basis just across the fixed income platform?

Sure. Let me start. So we did not see any material implications from some of the events you described in October. We're continuing to see real strength in our fixed income business. It's a $680 billion platform. It's up from $625 billion at the start of the year and that's come through mostly organic growth. So we've had over $30 billion in platform-wide fixed income flows. We mentioned in the prepared comments that's really been broad-based.

Our SMA platform in the U.S. has probably been the strongest piece here in the United States. But overseas, we've seen good movement out of some shorter-duration strategies into some longer duration strategies, global bonds, investment-grade bonds. And we're seeing that pick up materially in Asia and EMEA.

So we continue to go from strength to strength. I'd say some of the bank loan flows were a little weaker at the back end of the quarter, but it continues -- we continue to be a leader in that space and continue to do well in the bank loans and also in CLOs. Anything you want to add?

No. I mean I'd say no surprise and no secret. I mean, market has been a little bit jittery on the credit side in the month of October. And so I do think we see some softening, maybe somehow on the bank loan side in the month of October. We'll see how this plays out as we continue to try to evaluate this rather specific risk or something broader based.

So I would say nothing notable and overall, we continue, as Andrew said, to see things perform pretty well, in particular, the strength in our CLO platform and some of the launches across the third quarter and the demand coming into the fourth quarter still remains high.

And investment performance is pretty strong across the whole platform. So as demand picks up, as some of this cash starts to potentially move off the sidelines, we should be well positioned. .

Our next question comes from Alex Blostein with Goldman Sachs.

I was hoping you could maybe unpack the 2 divestitures you made earlier that you mentioned, both on the Teleflow side as well as the JV in India. Maybe one, with the use of proceeds, obviously, you guys have been deleveraging, and there's more to do there. But maybe talk a little bit about capital return priorities as you look out over the next 12 to 18 months. And then as we start to look out into 2026, what are the implications maybe for expense growth on the back of those divestitures?

Sure. Maybe I'll take that in a couple of different directions. So let me start with India. So India, as we noted, we're expecting proceeds there of $140 million to $150 million. Maybe just a little bit of color getting to kind of what's the impact on some of the expense and I'll say operating income trajectory from there. India is a business that from a revenue perspective, runs around $13 million a quarter, expenses run around $7 million a quarter. So call it, operating income of roughly $6 million a quarter. As we noted, that will come out of our operating income results, and we will reflect that 40% ownership below the line and equity and earnings going forward.

The AUM of about $15 million in the flows will no longer be reported in those results either. In Teleflow, we're expecting, as I noted, about $100 million in proceeds. That's before any potential future earnouts. We expect that one to close later in the fourth quarter. That one runs -- operating income runs anywhere from breakeven to $1 million or million or $2 million loss a quarter. So call it, very negligible to results overall that would be removed entirely from our results.

The total proceeds of around $240 million, $250 million. In terms of our capital priorities, they remain balanced. We remain focused on improving the balance sheet, returning about 60% of our capital to shareholders and investing in our own growth capabilities. So we're getting to a place where we're starting to create more and more capacity for ourselves. We're pleased with the progress we're making on the balance sheet. I don't think we're totally where we want to be yet. We are seeking to continue to improve that leverage ratio, particularly while we have the strong operating cash flows that we have, very pleased with the ability. We have to pay down the remainder of the 3-year term loan by the end of this month, and that's all from operating cash flow and before any of these proceeds.

So these proceeds give us the flexibility to continue to launch new products going into next year. We're highly focused on our capital planning for 2026 and working with our teams across the firm as we think about what's going to drive revenue most aggressively going forward.

So gives us flexibility to keep doing all of those things, investing in ourselves, creating flexibility on the balance sheet, managing the debt levels lower and returning capital to shareholders. In terms of expenses next year, I'd say expect them to continue to be really well managed, and we'll certainly be giving you more color as we get into 2026.

Our next question comes from Dan Fannon with Jefferies.

Great. So I guess another question on expenses, just with regards to the Alpha platform and integration. We've got $10 million to $15 million, I guess, in the fourth quarter of ongoing implementation costs. But can you talk to next year in terms of the pace versus what we've seen this year?

Then ultimately, I think it's about reducing future cost growth, but can you give us kind of the end state as you think about what this integration will do in terms of how to think about long-term expense growth?

Yes. So as we noted, we are highly focused through the hybrid platform implementation on completing this by the end of 2026. So there are -- there's aggressive planning underway right now. And so we do expect the pace of implementation and implementation costs to remain high throughout 2026 as we seek to move all of our assets onto the collective platform by the end of the year.

So I would say, as we think about '26, and again, we'll give you more color as we get closer, we would expect some of the cost to modestly increase related to Alpha and the hybrid platform implementation. That gives us the opportunity to then start to look at what do we decommission, how do we streamline our operating systems. I wish we could be turning up more along the way, but we have to complete a lot of these things.

And before we can actually decommission and stop renewing certain other aspects of our overall operating platform. So that really becomes the 2027 opportunity. I'd say it's certainly early to be giving guidance around 2027. But what I will say is I expect these run rate expenses that are associated with the hybrid implementation to peak in '26 and then we will begin aggressively planning for how we streamline our operating platforms going into '27.

Against that backdrop, and I'll reiterate this, I think you can look back over the last few years and see our overall expense space has been extremely well managed even while we've been putting in the systems, and it has been a heavy lift, and there has been cost associated with it, but we've really been able to improve operating margin significantly against this.

Revenue growth has helped, no question, but the expense base, in particular, has been very well managed along the way. And we're not going to take our foot off the gas there. We've got real opportunity to continue to manage that going into the next few years.

Yes. And we're really pleased with the progress of the implementation on the hybrid solution since announcing the change in the spring, we brought on a pretty significant piece of of the equity business onto the platform, things are going well in terms of the implementation and the teams working together. .

Our next question comes from Benjamin Budish with Barclays.

Maybe just another follow-up on the expense side. It looks like markets are constructive. Your flow profile has been looking increasingly healthy. If the QQQ vote goes through as it sounds like you're optimistic it does, there's going to be kind of even more flowing to the bottom line. So I guess, maybe just kind of -- again, following up on the last couple of questions. How are you thinking about variable expenses going into '26 and '27? Obviously, there's the ports of pieces you can control. But how are you thinking about opportunities to drive more operating leverage given the -- what looks like a healthy backdrop top line revenues?

Sure. I'll take that. I mean variable expenses, as we've noted in the past, they run about 25% for us. So that certainly is the first port of call, if you see pullback in revenue and it is where we see expenses really moving up as we see increases in revenue. So as we think about what that means going forward, I mean our focus is really on how do we keep managing, maybe we fixed expense base because the variable in many respects is what it is, and we're pleased for that to fluctuate up and down.

The fixed expense base is where we spend a tremendous amount of time really looking at how do we continue to unlock value there and taking a hard look at every aspect of it. I think a lot of the work we've been doing over the last couple of years, and you're seeing the fruits of that is the simplification work.

And where we can reduce redundancies and simply our operating platform across all of our investment capabilities by unifying teams by looking at where we can be more global as a firm and a little less regional reducing some of the duplication that came with some of that structure in the past. Those are the opportunities we've had to continue to interrogate our fixed cost expense base, and we will continue to do that.

That's really a part of our rigor now. And so as contracts mature, as opportunities arise, as people leave the firm as markets change, we really look at how do we continue to simplify and collaborate better and collapse some of our platforms perhaps together so that we can go to market in a single fashion. And that's going to be -- that's work that -- it's in our blood now it's in our DNA, and it's the work we're going to continue going into the next couple of years.

Yes, I think we -- clarifying our strategic priorities that we've shared with you over the past year or 2 has been helpful to energize the firm towards those. And while managing expenses in a very disciplined way, as Allison mentioned, also investing in the business, whether that's been the product line, our private market capabilities and distribution efforts, what we're doing in our ETF platform, we've been able to invest over the last 18 months on a net basis as well. .

Really helpful. Maybe just one separate follow-up if I may. Andrew, I think you addressed one of the questions around credit more broadly. Just curious with the launch of this new fund with MassMutual, any specific feedback on that one? I know there's a healthy component of direct lending in there. And just in terms of distribution, maybe remind us what the sort of rollout looks like, whether it's wires versus RIA, how should we see things start to flow in?

Yes, no problem. The fund -- we repurposed a legacy fund that has about $250 million in assets in it, and we'll get an infusion for MassMutual as well. So it's starting with a decent asset base, it has a good record. And it's going to be targeting all of those U.S. wealth management clients that you mentioned.

So traditional financial advisers, RIAs, et cetera. We've only been in market for a couple of weeks. So it's a little too early to say with regard to where progress is. But I will say the notion of it being dynamic meaning it cuts across all sides of the credit spectrum, the ability for it to leverage both the strengths of Barings and Invesco. And it's well priced and relatively liquid.

I think those are all attributes that we've heard soundings from the wealth management marketplace that they're looking for a little more of a one-ticket solution. And that's how we're putting it into the marketplace and we'll report on it as we go forward, and we're already working on product too.

Our next question comes from Patrick Davitt with Autonomous Research.

Another follow-up on the expense question. Sorry if I missed this and all the discussion. But I think non-comp, but particular was still well below expectations in 3Q. So is that a good run rate to think about how things are tracking in 4Q at least?

Yes. Thanks. I would say I think probably a little low in the third quarter. It could be a touch higher in the fourth quarter. I think we typically do see some seasonality when you think about marketing expenses and the professional services, some of the things that come in there at year-end. So it's not significantly higher, but I think I would expect noncomp to be modestly higher in the fourth quarter very modestly. I think comps are well, is probably compensation expense as you think about compensation as a percentage of revenue, it's probably the one that's maybe a bigger driver as you think about just the fourth quarter and the overall year compensation is highly dependent on revenue.

We'll see how the fourth quarter shapes up. But it's probably -- so far this year, we're accrued to about 43% to 0.4% year-to-date. We really manage it on a full year basis. I think it's probably something in the 43% context. It could be a touch under 43%. That's how I would think about fourth quarter expenses overall.

Great. And then as a quick broader follow-up, I guess you mentioned a bunch of active ETF launches. Any sense of AUM into those kind of products more coming from existing products or existing wrappers, cannibalizing existing wrappers or do you sense that it's actually new AUM in the system? .

Yes. I mean, it's a couple of billion dollars. So it's not unmeaningful. It's hard to tell exactly where it's coming from. I'd say the strategies we brought forward have been a combination of new strategies and some that are existing strategies in another format. So -- and most of it has been actually in new strategies. So I think it's incremental growth, quite frankly. It's similar advisers, though. So the higher net worth advisers that we work with across private markets and ETFs in general are interested in those active ETFs, too.

But our expectation is that this is very early and it will develop over time and that it's not just a U.S. phenomenon. I think this is something that the world is kind of acknowledging that the ETF vehicle has some significant benefits. And it's a good vehicle for both passive strategies and active strategies and things that are hybrids of the 2, which I think will come in time.

The next question comes from Brian Bedell with Deutsche Bank.

Great. Maybe just write along that -- the last question from Patrick on the ETFs. As you expand those strategies and the move more of that or I should say, as RIAs in particular, adopt the strategies. Are you -- is that moving that factoring into fundamental equity fees?

Yes. I mean, look, at the statement, it's -- we're seeing a lot of growth in the past in the index side of the business. The active side is kind of just getting going. I think you'll see it across the piece. And I don't think it's just going to be ETF wrapper. I think you're also going to see the SMA wrapper that we have outlined whether it's fundamental equity, fundamental fixed income and ultimately, maybe some of the alternative private assets, too. So I think you'll see it both in the vehicles that I mentioned being the expansive view vehicles and I think across the capabilities. Fixed income has been a place where we've seen a good amount of growth in our ETF lineup, both passive and active.

So equity is probably the one that needs to -- will pick up the pace here as we go forward. But fixed income has predominantly been where the flows have come.

Great. And [Audio Gap] Conversion to happen to the P&L, is it right, subsequent to that? Or do we have to get through more approvals and that's beginning of next year?

Sure. So on your first question on the India AUM, that shows up on the China and India -- sorry, that shows up on the China JV in India category. So you expect to see that $50 million -- $15 billion. That would convert immediately following the shareholder meeting. So assuming we have the quorum which we have a quorum and the shareholder vote requires both in that meeting, then it would convert effectively the next day. .

Our next question comes from Michael Cyprys with Morgan Stanley.

Want to circle back to India. I was hoping you could speak to the sale of a majority interest. Just curious if you could elaborate what to that decision. It's a major market where many are quite bullish on the long-term prospects. So why reduce the stake. Maybe you can elaborate a bit on your partner and just blend how you decided to partner with them, how you see them helping drive accelerated growth from here? .

Yes. Thanks for the question. We've had great success with partnerships and alliances and JVs, notably the one we have in China over the last 22 years. And so we look at the Indian market and it's growth, but we also look at [Audio Gap] for that in both financial institution as well as a large brand and a well-known local operator in the Hinduja Group was just a good combination and marriage together. It will allow us, as Allison said, to participate in the growth from a profitability standpoint, but it will also allow us to see that business grow and for us to participate hopefully with sub-advising assets into it, especially those assets that will be beyond the local Indian managed assets.

So I think as global equities or global bonds come into that market and Invesco will be hopefully, the underlying manager of those strategies, and that's the expectation of the partnership. So it really was just a classic sort of 1 plus 1 plus 3 and an ability for us, as we mentioned, to really focus our resources and energy on a full basis in other areas and participate in the Indian market as it grows and develops.

Great. And then just a follow-up question on China, where you're seeing quite robust flows. I was hoping you could elaborate on the success that you're seeing there, the steps that you've taken to drive this improved momentum? What sort of demand are you seeing for passive versus active in China? Maybe remind us of the complexion of the business today.

Yes, sure. So Look, I think some of our success in China is a function of us being there for 22 years and staying committed and focused on developing a full-fledged retail asset management business there, which we have. And so the $122 billion in assets that we have under management there is an established platform, one of the larger ones in the market, a well-known brand, well thought of for its compliance and investment integrity.

And so as markets improved and as demand has started to improve from those retail investors in the market, we're seeing the benefits of that. The business is pretty diverse. So as a reminder, it's about 30% equities, 30% bonds, 20% balanced and 20% money markets.

And to your question on ETFs, I think it's around $12 billion or $13 billion now of ETF. It's a business we only -- or the JV only started in the last few years. The growth has been still largely in the active part of the business, but we're seeing a pickup in the ETF flows as well. And we're trying to meet that demand by launching new product, as I mentioned. So I think the ETF part will continue to develop as will their models area as will the traditional equity business, it's really evolved over the course of those 22 years. And so as we're getting a little more favorable outputs from China in terms of the easing signals from the government or the pushing forward of consumption, less reliance on the property sector.

And importantly, for us, the development in time of a retirement market there and a more robust capital market, we think that JV should continue to go from strength to strength. And just as a reminder, it's a domestic to domestic business exclusively.

Our last question comes from Ken Worthington with JPMorgan.

Okay. Great. And we so M&A is back in investor dialogue, given Trient offer for Janus as you sort of reflect on Invesco in the industry, where has consolidation been successful and where has it fallen short? And given your balance sheet is strong, your fundamentals are strong, is it a good or a bad time for Invesco to think about M&A to further strengthen your position and kind of get to your strategic priorities more quickly?

Yes, thanks. We're -- we've been very focused on all the organic opportunities that we have inside the company. And hopefully, we demonstrated throughout this call in the last few quarters, of the progress that we're making. And we still think there's quite a bit of progress we can continue to make in time organically. The business is global. It's diverse. It's in the asset classes where there's demand and we continue to believe we can grow that organically.

I think Allison mentioned the priorities that we have for our use of capital and what our focuses are at the moment. We want to continue to invest in ourselves, and we want to continue to improve our balance sheet. We'll keep our eye on M&A. We'll continue to keep our eye in particular in places like the private markets areas where we have a strong business today with $130 billion in assets but also expectations for future growth. So I don't think it changes much our focus and our dedication as a company.

Okay. And back to you, Mr. Schlossberg.

Okay. Well, thank you. And in closing, we are unlocking value across the organization for the benefit of clients and shareholders. This includes looking at how we fundamentally operate leaving no opportunity unexamined as we strive to improve client outcomes generate operating leverage and profitability, continue building a strong balance sheet and enhancing our ability to return capital to shareholders.

We have resilient operating performance across many key value drivers. Our global footprint with a significant and unique Asia Pacific presence and a strong performing EMEA business, coupled with our scale and breadth of products positions us well to perform through shifting market dynamics. We continue to demonstrate that we have durable performance and reason to be optimistic about the future.

We want to thank everybody for joining the call today, and please reach out to our Investor Relations team for any additional questions. and we appreciate your interest in Invesco and look forward to speaking with you all again soon.

Thank you. That concludes today's conference. You may all disconnect at this time.

All right. Good morning, everyone. Welcome to day 2 of Barclays Global Financial Services Conference. I'm Ben Budish, I cover the U.S. brokers, asset managers and exchanges. And to kick it off today from Invesco, we've got Andrew Schlossberg, President and CEO; and Allison Dukes, CFO. Welcome. Thanks so much for being here.

Thanks for doing this, Ben.

Thank you.

Maybe just to kick it off, can we start with your latest observations in the marketplace. How is investor appetite trended since the heavy volatility we saw earlier in the year. How flows look more recently? Your AUM release came out this morning.

Given the time.

A bit out of time, but what's sort of your latest observation?

Yes. I mean going back to the early part of the spring, things were obviously a little tepid and investors were, I think, reacting to a lot of the trade news and things out there. But really since then, the volumes have been quite strong for Invesco. We did release our assets for August, and we had net positive flows of a little over $11 billion, which is one of the best months we've had on record in a long time.

And that followed other good months since April. So for the third quarter to date, we're flowing more than we did in the whole of the second quarter and approaching what we already did in the first quarter. So I think volumes are picking back up. For us, it's been a lot of the places where demand has been high, ETFs, SMAs, investment-grade fixed income, global equities, especially out in Asia, but in particular, China as well has really come back online. So we're starting to see investors move their capital back into the markets.

Great. Maybe looking at a couple of the things you've done over the past year or 2, the MassMutual preferred redemption, the QQQ fee structure change. Just curious from a high level before we kind of dig in a little bit more deeply, how else are you thinking about creating value at Invesco?

Yes. A couple of things you mentioned were really important for us in unlocking value. But I think they're just indicative of the work that the team has been doing for the last several years to really tighten the strategy, simplify the business, get focused on creating operating leverage, a more flexible balance sheet, which we can talk all about. But in terms of going forward, there's a few significant strategic priorities that we're really staying laser-focused on. And the first one is always and will be delivering good high-quality investment outcomes, especially in our active equity portfolios.

And we've seen performance improve over the last several quarters. We now have about half of our assets in those active strategies in the top quartile of peers, which is up from 25% just a few years ago. And we have started to see the flow volume out in Asia and Europe for equity strategies in the positive territory, and we're working towards getting the same thing in the U.S. We're focused on secondarily scaling strategies where there's high demand and where Invesco has a pretty significant strength.

So ETFs, SMAs, model portfolios, private wealth for private markets, so wealth management for private markets are all sort of things that are really significantly important for us. And the Barings partnership that we formed, the flow volume that we're seeing in the ETF space, getting our SMAs to over $30 billion are all examples of how we're doing that. The international markets for us, Invesco's Asian business and European business, are about 40% of our long-term assets, and they're accounting for about 80% of our really sort of record long-term flows. So those markets are really critical for us. Places like China, India, Japan, the U.K. are all going through significant demographic changes or wealth changes, and we're participating there, and we seek to really differentiate.

Our investment operating platform and investing in innovation, we announced that we were going to go to a hybrid solution for our Alpha platform, which is going to allow us to finish that project more quickly and really start to unlock the value it was meant to create. We divested our IntelliFlo business, which we can talk about a little while later, all to focus our energy on next-stage technology.

And then lastly, just putting up financial returns and strong operating leverage. So in the first half, operating income was up 10%. Operating margins were up 200 basis points compared to the first half last year. So a little long-winded, but just trying to -- quarter-by-quarter, just put up big events and outcomes like you asked about.

You mentioned the IntelliFlo sale. Just curious if you could unpack that one a little bit. What was the rationale there?

Do you want to go ahead?

The rationale was really focused on a continuation of the same theme, which is how do we unlock value for our clients and our shareholders. And that comes with needing to be really focused, focused in terms of where we direct our capital, our investments, our time, our energy really thinking about our core business. And IntelliFlo is not entirely core to what we do. They are a market-leading, cloud-based, practice management software provider to independent financial advisers in the U.K. So a business that was never entirely strategic to the broader Invesco portfolio of businesses.

So we announced, at the end of last month, an agreement with Carlyle to sell IntelliFlo to them for a purchase price of up to $200 million, of which $135 million would be received at closing, which we anticipate in the fourth quarter and the remaining $65 million is in potential future earn-outs. So great opportunity for us to monetize that business, unlock value. Because we have moved it to held-for-sale in the third quarter, we will be, in the third quarter, booking a loss on sale of something in the range of $40 million to $45 million, and that would flow through other gains and losses, so below the operating income line item.

And because that loss is not a taxable event on a subsidiary in the U.K., we do anticipate an effective non-GAAP tax rate for the third quarter to be closer to 29%, just due to this discrete item that would be flowing through other gains and losses. The operating results of IntelliFlo won't actually come out of our results until the fourth quarter after closing. And that business is kind of breakeven to operating loss of a couple of million dollars in any given quarter. So the removal of those results will be neutral to modestly accretive to the overall Invesco results.

So in keeping, again, with the strategy overall, focus, create operating leverage, really look for opportunities to improve our operating margin, really improve the direction of our investments really to our core business. I think it's a great opportunity. We're excited to get this one done in the fourth quarter.

A lot of helpful details. Maybe just sticking on the topic of capital management. So MassMutual, you repurchased $1 billion of the preferred, you're going to be paying down your term loans over time. What are your capital priorities, otherwise? How do you think about appetite capacity for M&A? What else is sort of top of mind?

Our capital priorities remain really balanced. Starting first and foremost with investing in the business and really supporting our business, broadly speaking, in terms of product launches and just the ongoing CapEx that we have to modernize our technology and our platforms overall. We're also highly focused on maintaining a really strong balance sheet. And that's been a real journey, as you know, that we've been on for the last few years, and we're making substantial progress there.

And last but not least, returning capital to shareholders. So yes, in May, we did repurchase $1 billion of our preferred that is held by MassMutual. We financed that with two term loans of $1 billion at a 3-year tenure and a 5-year tenure. We have actually already paid down $100 million of 3-year term loan. We're able to pay $100 million down in this quarter. We anticipate continuing to pay those term loans down as quickly as we feasibly can. We have a $500 million senior note that comes due in January, which we intend to redeem as well.

So really making substantial progress in creating that flexibility in the balance sheet that we're looking for. And there's a path for us to continue to look at doing more with MassMutual as it relates to the preferred. And so as we make progress on the leverage ratios. We're focused there. I think it's really an opportunity for us to come back at the right time to look at doing more to unlock that preferred, which is really just flexibility, and that is the focus on creating more of an all-weather balance sheet than we've had in the past.

As it relates to returning capital to shareholders, we've been buying back $25 million of stock a quarter. We intend to continue that. We announced a 2.5% increase in the dividend back in April. So we're at about a 60% payout ratio this year, and we like where we are there, especially as we think about the opportunities to continue to unlock this capital to reinvest in the business and create flexibility in the balance sheet.

And as it relates to M&A, again, I'll come right back to it, it's the balance sheet that's going to give us that flexibility to do what we want to do there. We can talk a little more about this, but we've got a lot of opportunities as it relates to partnerships. And we think that's just as productive sometimes as an acquisition can be. And of course, we've already entered into an agreement with Barings, which is owned by MassMutual, for a partnership that we previously announced there.

And we continue to have just a number of organic opportunities to reinvest in ourselves, as Allison was saying. So there's still a lot to unlock at Invesco.

We'll certainly come back to the Barings partnership. But maybe some other recent news you kind of alluded to earlier, you recently filed to make some fee structure changes to your flagship QQQ ETF. Can you talk a bit about the background why now? And a management fee for Invesco, lower fees for investors seems like a pretty easy win-win. What are the other maybe remaining hurdles that need to be overcome?

So we announced that in July. We did file the official proxy on August 18, I believe, which does contain all of the benefits and the risk and the considerations that I would point you to. It also contains all of the time lines in the past in that solicitation, which is underway right now. In terms of why now, there were a lot of reasons. I think this was a UIT structure that was probably one of the last few and is a very long-dated fund, and this was an opportunity to modernize it, consistent with the rest of our platform and convert it to an open-end ETF.

A lot of the rationale, too, is tied up in the fact that the marketing budget has just become so large that it's hard to efficiently spend a marketing budget on one single fund that's approaching $300 million. And so it created an opportunity to enter into conversations with all of our stakeholders to look at how we could convert it into an open-end ETF. Very pleased we were able to reach the stage we've reached so far. It does have a 2 basis point benefit to the end investor. And that solicitation is underway right now. It is one of the most widely held ETFs in the world. So this is no small undertaking.

And I think as published in the proxy, there is a shareholder meeting that occurs at the end of October. That will be the first available date that we might have any opportunity to see how things are going. So more to come there. Very excited. I think, again, in keeping with everything we've said, an opportunity to unlock value. We do anticipate the revenue on that fund will be around a net -- 4 basis point net revenue yield associated with the QQQ, which does continue to grow. And the flows, we often understate those flows because we don't create revenue on them today, but we look forward to a future opportunity to convert that to revenue.

Maybe staying on the subject of ETFs, can you talk about the current lineup of active ETFs? I think as of last quarter, you had 31. What sort of strategies you're seeing the greater success? What does the pipeline look like for more products? And maybe high level, how do you think about active asset management here? Does it makes sense to kind of clone prior mutual funds, generate new active strategies, come up with sort of new things, funds that use derivatives to generate income? How do you think about the approach?

I mean we started in the active ETF space almost 10 years ago. And finally, the market really seems to be adopting the premise of bringing together active management and the benefits of an ETF structure. So we think it's going to continue to grow. We'll continue to expand our lineup, which today is a lot of fixed income active ETFs, some commodities, options income and over the course of the next year, more so into the equity space.

But Invesco, given the size and breadth of our ETF business, which I think you're probably all familiar with and its heritage being really oriented around alternative weighted data, a more sort of active approach to how to bring ETF to market and the size and scale of our active business as well as sort of the well-traveled path of reaching wealth advisers. I mean we're primed to be one of the real leaders in the active ETF space.

With regard to how one will get there, whether it's probably not conversions for us. It's probably more -- and I'd say less clones and more new adoptions of active into ETFs. Many of us have relief that we're seeking to get on share class of mutual funds, an ETF share class. But I think it's really going to be for us just creating the optimal ETF lineup around active and not trying to spend too much time thinking about conversions and clones and share classes. It is going to be a journey for active ETFs. I mean you're seeing the pace of it move forward. But it's still, for us, $15 billion, $20 billion of $900 billion of ETF-related assets. So there's a lot of room to grow.

Speaking of active, ETFs being increasingly adopted, but active equity mutual funds have been across the industry trending the opposite direction for some time. You guys recently announced some management consolidation here among some other changes. What is Invesco doing to try to buck the trend? And maybe more broadly, Andrew, what are your thoughts on sort of the future of active versus passive?

I mean, look, the active and passive are going to coexist. I think the definition of active is going to continue to evolve. And I think it's relation to the mutual fund needs to be disconnected. So this notion of active equals mutual fund or mutual fund equals active, I think, is probably the wrong way to think about it going forward. So active will get brought forward in public markets, but also private markets. I mean, those are all active strategies as well. And it will start to, beyond just ETFs, find its way into SMAs, model portfolios, all kinds of custom solutions where you're able to bring active management.

So we're working and building all of those areas. So I wouldn't overemphasize the mutual fund. But we're very bullish on the future of active. The bar has gotten raised as you all know. So no longer the days were being average and active was okay. And so hence my comments before about you really need to be in the top quartile, top decile, and that's what we're striving to do with all of our investment strategies. We did announce earlier in the spring some consolidations toward that effort. So we brought all of our global international emerging market equity teams across is now into a single platform. We did the same with our private markets between real estate and alternative credit, and we had done the same thing a few years ago with global fixed income.

So having a scaled platform where you can share investment ideas across, like investment strategies, where the top talent can really rise, and we can promote that top talent and where you can really get the scale out of the investment support and the operating platform to drive investment quality. So we think the future for active has very much a home in people's portfolio, but you really have to be outstanding.

It's a good segue into the private side, which you mentioned. Maybe before we talk about Barings, curious on the real estate side. So in your wealth channel, you've been showing some solid inflows to INCREF. I'm curious, what would you say is going well here? It seems like most non-traded REITs, in particular, are not having that sort of kind of success. So what's going well for Invesco? And maybe can you give us an update on where you are in terms of distribution, how many wirehouse platforms, where else are you selling the product?

Why don't you go ahead, Allison?

We're seeing strong demand for real estate credit. So I think relative to non-traded REITs, this is a bit of an alternative solution, and we've seen really strong demand there. So we launched INCREF just about 2 years ago, it's a $4 billion in AUM today. So really nice demand, good growth in a relatively short amount of time. I think it provides a pretty attractive asset class for investors. And as some of, I would say, rhetoric around real estate and real estate credit, in particular, continues to improve, I think it bodes well for the future of INCREF.

One of the things we're seeing, too, is just strong cross-sell opportunity between our fixed income SMA and INCREF. I think you got a very similar target high net worth, ultra-high net worth and client there. So we're seeing pretty good cross-sell opportunities between those. It is today on over 20 platforms, most of the wire houses is what I would say. And I think continuing to grow. I mean we just were awarded another very significant platform recently. So we're very optimistic about the future of INCREF and the ability to continue to get that one placed on a number of platforms.

I mean our private markets complex is about $130 billion between real assets and alternative credit and our wealth management team and profile in the U.S. market, we're top 10. We've been investing behind, bringing private markets to wealth over the last several years. We've added specialists onto the team, all sorts of thought leadership capabilities and really investing behind the wealth platforms and making it easier for these end investors to get into these strategies and for advisers to really understand them. So everything Allison described has been sort of a multiyear journey starting to pay off now. And you can kind of see the setup for the next set of strategies that we can bring behind INCREF.

We've mentioned the Barings partnership kind of in passing a few times. So maybe let's talk about that one a little bit, that was announced earlier this year. Talk about the arrangement. What does each party bring to the table? What are your sort of 12-, 18-month expectations? And how are you thinking about potential future product creation opportunities?

So just to remind everybody, we announced this alongside the restructuring of the preferred and the establishment or the intention to establish a few products, of which MassMutual is going to put its capital, its general account capital behind these strategies. And so the idea was to take the strengths of Invesco's alternative credit and real asset capabilities with the strengths of Barings on the credit side.

And in particular, Barings bringing to the table, upper middle market direct lending, bringing some of their loan capabilities, bringing some of their specialty finance capabilities alongside what we do in the lower end of direct lending, distressed and our loan capabilities alongside real estate lending. And so being able to bring a diversified credit strategy wrapped in a vehicle that will make sense for mass affluent, high net worth into the wealth space.

And so the arrangement is essentially Barings as a piece of the management, of the funds -- us a piece of the management of the funds, us distributing the funds to market, MassMutual's capital into the strategies. And what was important for us is when we announced it in April that we get to market as quick as possible. There's a lot of partnerships being announced. I'd say, watch what happens rather than the headline of them getting announced. And we will get this to market relatively quickly. And we're just in the throes of that right now. And that will be the first of two products along the same sort of theme. So we're really excited about it, and we really think it's kind of a perfect connection. And I think we have a road map now for doing more things like this going forward.

Maybe one last question on the private markets topic. So private asset utilization, the 401(k) channel, is one of the hot topics recently. How do you see Invesco positioned for that opportunity?

I mean it's not sort of like what I was saying before about ETFs. I mean the scale and size of the private markets franchise that we have today, which has largely been placed with defined benefit plans, so institutions, sovereign wealth, endowment funds. So we have deep heritage in the defined contribution space. This executive order that came out, I think, that's excited everybody and should, starts to move down a path where plan sponsors can be in a better position to adopt these private assets into target date funds probably most likely. But there's a lot between now and then. I think litigation risk will be top of mind for plan sponsors. So we'll see how the executive order turns into either legislation or actual progress. But then you got to get the plant sponsors to adopt it.

So I guess a slightly long-winded way of saying, I think Invesco is incredibly well positioned. We already have private assets in defined contribution plans in both the U.S. and in the U.K. But I think the notion that this is all going to turn like a switch for the industry, I think, is overstated. So it will be a little bit of a slow development. But Invesco, I mean, I don't think we couldn't be better positioned with all the tools that we need to do it. It will be kind of like the wealth space. You'll see preparation, preparation and then things will start to move.

Okay. Maybe switching topics, your international business. So in Q2 and early this morning, you called out positive flows outside the U.S. in Q2, EMEA and APAC. Maybe just unpack that a little bit, what's going well there? How do you see the broader trend playing out?

I mean I was mentioning it earlier, and I think it's not as well understood. I don't think about Invesco as it should be that 40% of the long-term assets come from clients outside of North America. And just to repeat the fact over this year through the results in August, about 80% of the long-term net flows are coming from outside of North America. So the strength of those businesses in all through Asia and in Europe are incredibly meaningful.

And I think we owe the success to being in those markets for decades. We've been in China in our JV for over 20 years. We've been in Japan for 30 years. We've been in the U.K. for 50 years. And so we're really committed on the ground with locals. And so we run those businesses in a sort of domestic way around reaching clients and around putting together portfolios, but we use our global size and scale to bring investment capabilities produced all over the world.

And so those markets, some of them are wholly domestic, like China, and others are very international like Japan. And so I think our commitment and our focus you're really starting to see that move. And all three of our regions, including America, are all in positive flows. So the diversity, and I think the offset to volatility that's in the market, and kind of you can see the strength of Invesco's global profile, I think, showing right now.

And what's the appetite like for domestic versus international assets? Earlier in the year that was sort of a big theme coming out of a lot of the new tariff news. There's going to be a shift in preference for local in Europe and Asia. Are we still seeing that? Has that played out?

It really hasn't played out. So I think the notion of U.S. exceptionalism dimming, we haven't fully seen it, right? So where you have seen decisions where people are redeploying their portfolios, I wouldn't say it's for nationalistic purposes. People are diversifying, taking advantage of valuation disconnects and some fundamental change. So it's really not -- we have not seen this sort of drive back to everybody kind of hunkering down in their domestic market.

We have seen things broaden out. So we are starting to see portfolios not just be focused on U.S., large cap tech or short-duration fixed income. So that's been more of the trend we've seen. It's a little more broadening out, which is so needed for investor portfolios.

Got it. And maybe moving to China and APAC, starting with China. Can you give us an update there? It looked like the asset levels look pretty solid in August, you mentioned before, you're seeing kind of a pickup in demand, kind of an update on the latest there.

And just a reminder for everybody, our Chinese business is domestic for domestic. So it truly is a very isolated on that market. So how goes the Chinese economy, the Chinese development of its capital markets, its retirement system, those are the factors that will drive the success of our business. And as you said, we're reaching new high watermarks for assets under management. Flows have been very strong this year in China and kind of successively strong throughout the year. Those flows have been focused on earlier in the year, fixed income, and they've continued to be heavily fixed income skewed but moving into some balanced assets as well.

So it feels like the reforms that the Chinese government has put in place for its domestic economy, its emphasis on capital markets and the confidence in capital markets, the diversification away from real assets and real estate, which was a challenge for them about 18 months ago. And I think maybe some of the tensions between the U.S. and China, which are still high, feeling a little more relaxed in certain places. So it's been a good progress in China. And it's a really differentiating piece of Invesco. And I think, again, our being there for 20-plus years and the success we've had in building what's regarded as one of the best asset managers there, we're seeing kind of return to the positive.

Great. And can you talk a bit about some of your other key Asian markets? You mentioned Japan. You've been there a very long time. Same kind of question, what are the key drivers in that country? What does the local appetite look like? What's the latest?

Yes, it's been remarkable. It was forever, when is Japan going to start going and when are they going to actually have some inflation, which was always funny when I go there and they talk about how excited they were for inflation. It was the only place that, that happened. But we went from really about $30 billion in assets to $85 billion in assets over the last 5 years. So it's been a really good growth for us. And it's come in the form of global equities. So investors in Japan, big owners of equity assets outside of Japan, and we have a very strong global equity strategy and then also investment-grade fixed income with institutions.

And I think one of the catalysts for a lot of this development in addition to us having the right products in the market at the right time has also been the government's focus on asset management. I mean their desire to have a much stronger capital market system, much stronger company management around equities and their desire to really advance ownership. The government is just very focused on those reforms. And so that just means the flywheel of capital flow for a company like ours that's been there for 30 years, really starting to be recognized.

Maybe pivoting to fixed income. So Fed cuts seem increasingly likely and likely just around the corner. So what's your latest thinking on how investor appetite for fixed income may evolve.

Well, hopefully, going out the duration curve a little bit, and I think we're starting to see that a bit more. And we have a $650 billion fixed income platform that goes passive to active, public to private, all of that duration spectrum, and we're starting to see a little more flow come in beyond short term. And I think that's been the anticipation. We're seeing it come in ETFs on the passive side. We're seeing it come in SMAs on the active side. And I think over time, this notion of public and private coming together in fixed income, we're well positioned for that trend if it develops.

So I think we're cautiously optimistic and maybe we've got a little more central bank clarity now -- or rate clarity, I should say, and I think it will bode well for us. We've been in positive flows every quarter. So it's not a flow thing for us. I think it's just a diversification of those flows into maybe some higher yielding, higher fee strategies.

I was going to ask Allison if there's any color you have on the P&L implications of movement from shorter duration to money market assets to long-duration fixed income, how should investors think about that impact?

I mean of course, there is modestly higher yield opportunity there. So I wouldn't overstate it, but there is a bit of a revenue opportunity there. I think a lower rate environment actually where it's even more impactful is to our direct real estate business. That's where I think transaction activity has been reasonably low and a little bit stuck with just the higher rate environment. And so I think we are hopeful is that in a lower rate environment, you start to see some of that transaction activity picking up, which should bode well for future flows and future revenue generation there.

Maybe switching gears again. You mentioned earlier in our chat, Invesco is currently transitioning its equities platform over to State Street Alpha. Can you give us an update on where you are in that integration. Maybe talk a little bit about the longer-term benefits, how you hope to drive?

Maybe I'll start and Allison can jump in, too. We made that decision in the spring, and it's going quite well. Our anticipation is our next wave of go-live on assets on the platform will happen here in the third quarter. So that's been really great progress. And we'll start working on the final phases of that with the intention of finishing this program over by the end of 2026.

I mean you really summed it up. Why did we do it? It's more than anything. It's an intention just to make sure, we're simplifying our operating structure as much as possible and making sure we've got certainty of execution. And so the opportunity to get this finished up in 2026 was about most importance to us. And this migration in the third quarter is a significant milestone, and we'll unlock the opportunity for us just to continue to progress through this for a completion at the end of next year.

And look, simplifying our operating platform, we talked earlier about bringing together the benefits of our investment teams. With this platform complete, we'll be able to really exercise those benefits. And it's been an opportunity to bring together what was dozens and dozens of systems and processes and ways of doing things and all of this into a fewer set of those. And so the financial benefits and the operating benefits will be what they are. But I think actually the time and the energy that we invest behind things that are redundant, we don't need to do, and we can spend our time on new innovations and technology that we really want to take forward.

Curious, so maybe just unpacking that a little bit. I was going to ask, Allison, you talked a lot about simplifying the structure, raising the company's margins. This is part of that. I was going to ask what else can be done? Like where else is there space to become more efficient? Andrew, you also mentioned new technologies. Curious how you're thinking about utilization of AI, either internally to make things more efficient, to improve the investing process. A couple of questions in there.

Sure. I mean, look, I think we have pretty successfully demonstrated a real focus around expense management over these last few years. Our expense base has been around $3 billion, and we have been consistently harvesting some of those expenses, reinvesting them in places where we can get stronger growth. Our focus is, I would say, kind of maniacally focused on how do we improve operating margin quarter after quarter, create that operating leverage. Our focus is on scale. So how do we drive more revenue over a relatively fixed, and I won't say fixed, consistent expense base because we are looking to variabilize whatever we can.

And in that, I think, look, everything we've just talked about, whether it's from the Qs to monetizing our investment in Intelliflo, which unlocks some expense there, the decision around both Alpha and Aladdin, those are all examples of places where we're looking to reinvest the expense base. We have had implementation costs kind of almost getting baked into the run rate of the expense base that we anticipate coming out after 2026. Those, as we have said, have run kind of $10 million to $15 million a quarter. Some quarters, $15 million to $20 million. Those are real examples of, I think, future efficiency.

And then much like many, we're looking at various technologies all over the place that we can use, just to make our people more productive, make our people more efficient. I think you've seen our headcount has been flat to down. I anticipate that to continue to be the case for some time because we are now managing over $2 trillion in assets with fewer people than we had a year ago.

And that's really because we're taking advantage of the technology. We're taking advantage of solutions that are out there. We're looking for places everywhere to make our people more efficient. We always tell our folks, we're not looking necessarily to get smaller. We're looking for the top line and our AUM to get larger with the team we have today, so we want to make our people more efficient so we can work together more collaboratively.

I mean just to add on the AI or generative AI front, I mean, it's still early days. I mean we're clearly heavily invested in the technology and probably more importantly, training all of our people to use it effectively from engineers who are way more advanced than the front of the house, where they're really users, and we're applying it all through those parts. I think the obvious use cases are the ones that you would expect in operational processes, technology processes, commentaries, marketing, things like that.

But increasingly, our investment teams are also using it to be more efficient in their research to be able to bring together their ideas more rapidly. So we are deploying it all throughout the company, and I'd expect we're going to continue to. In terms of what will it benefit be, I think Allison started to summarize them, and we'll start to see it, I think, play through over the next several years.

Maybe one final question here, just talking about new technologies. I'm curious your thoughts on blockchain tokenization. You guys do a few things there. Yesterday, Nasdaq was here, they had a press release in the morning talking about an application they had filed to list tokenized versions of equities. So how do you think about opportunities there, either in terms of product creation, like ETFs, in terms of back-end like fund management, they use stablecoins to settle transactions, kind of a lot of different angles there, but how are you thinking about opportunities?

I mean, all of the above. Today, we have several digital asset, coins and other assets that you can invest in through ETFs. So we've wrapped them in ETFs. I think that's an early innovation. I don't know if that's always going to be the future. I think tokenization is probably the one that continues to be the most interesting for us. In particular, as the NASDAQ talked about yesterday, how could you see the future of tokenizing funds, how could you see the future of tokenizing some private assets? So I think for us, in asset management, being able to invest in digital assets will be 1 avenue. I think using tokenization and that technology has probably a lot more internal applications.

Got it. With that, we're nearly out of time, but we'll leave it there. Andrew, Allison, thanks so much for being here. It was a pleasure to having you.

Thanks for having us.

Thanks, Ben.