Invesco LTD Q2 2026 Earnings Call

Welcome to the Invesco second quarter earnings conference call. All participants will be in listen only mode until the question and answer session. At that time, to ask a question, you may press star one. This call will last one hour. To allow more participants to ask questions, one question and a follow-up can be submitted per participant. As a reminder, today's call is being recorded. I'll turn the call over to Greg Ketron, Invesco's Head of Investor Relations.

Thanks, operator, to everyone 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 disclaimers on slide two as well as the appendix for the appropriate reconciliations to GAAP. 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, then we'll open up the call for questions. I'll now turn the call over to Andrew.

Thanks, Greg, 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, 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, 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.

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 three, we are innovating for our clients, clarifying and simplifying our organization, as a result, we are delivering for our shareholders. Product line management and innovation are key to our growth and are critical in remaining relevant to our clients. 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 six 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 private markets partnerships are designed to help us accelerate growth in 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. 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 sub-adviser 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. 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%. 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 U.S., 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 2.7 times to 1.9 times, inclusive of the outstanding preferred. We have also increased our common share buybacks by 80% year to date versus the first six 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. Moving on to slide four, 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 water mark 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 three 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 funds. 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 QQQ 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 a third 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 BulletShares lineup with seven new fund launches in the United States, in addition to launching five ETFs in the EMEA region, including two 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 and derivative markets built over multiple decades for this flagship product. Moving on to fundamental fixed income, demand for our products remained robust.

While we report on this slide net inflows of a modest $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 of 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 $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 balance in 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 offerings. In credit, we saw a return to demand for our industry-leading bank loan ETF, BKLN. This growth was also augmented by net inflows into our CLO products.

Despite near-term volatility and heightened headline risk, credit fundamentals remain broadly intact and spillover risks into the structured loan 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 in 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 continued to gain scale and assets. Including leverage is now totaling over $6 billion.

This fund was launched only a few years back. It's 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 half a billion dollars during the 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. We are seeing improved performance as outlined on the next slide. Moving on to slide five, 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 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 three-year time horizon, with nearly half reaching that bar on a five-year basis. Further, nearly 70% of our active AUM is beating its respective benchmark on both a three and five-year basis.

As I mentioned, we are beginning to see improved performance in our fundamental equities lineup, which now has over 40% of funds performing in the top quartile of peers on a five-year time horizon, with over half beating their benchmark. With that, I'm going to take a pause and turn the call over to Allison to discuss the quarter's financial results. I look forward to your questions.

Thank you, Andrew. Good morning, everyone. I'm going to start with the second quarter financial results that are on slide six. 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 billion 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 to end 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 margins 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%, 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, with 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 to $0.215 per share. Now, moving to slide seven. 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 equities, has not been as strong.

This has resulted in a more balanced AUM profile 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. To 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 eight. Net revenue of $1.3 billion in the second quarter was $224 million higher compared to the same quarter last year and $65 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. The 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 one-time implementation costs 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, 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. The effective tax rate for the second quarter was 24.9%, in line with expectations. For the fourth, excuse me, for the third quarter, we estimate our non-GAAP effective tax rate will be in the 25%-26% range, excluding any discrete items. The actual effective rate can vary due to the impact of non-recurring items on pre-tax income and discrete tax items.

I'm going to wrap up on slide nine. We continue to make progress on building balance sheet strength and improving our leverage profile. 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 four tenths of a turn in the second quarter to 1.9 times, and the leverage ratio excluding the preferred stock declined by over three tenths of a turn to 0.54 times 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 as dividends. We increased the amount repurchased to $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're committed to driving profitable growth, a high level of financial performance, and enhancing the return of capital to our shareholders. With that, operator, if you could open the line up for Q&A.

Thank you. At this time, if you would like to ask an audio question, please press *1. You will be announced prior to asking your question. Please pick up your handset when asking your question. To withdraw your request, you may press *2. One moment, please, for our first question. Our first question comes from Patrick Davitt with Autonomous Research. Your line is open. You may ask your question.

Hey, good morning, everyone. How are you?

Morning, Patrick. Good morning. 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 we'd like to get your updated thoughts on, firstly, your willingness to adjust the fee for the Qs. 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 guide. Thank you. Patrick. Thanks for the question.

Let me start, Allison can pick up on some of the specifics of the second part of it. I want to reiterate a couple of things. We have a 25-year history managing the QQQ. It has a very large and entrenched position. It has a ton of brand recognition. Note that it's the one-of-a-kind QQQ. It also is part of our Invesco QQQ 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. I mention all that only to say investors in our fund spend a lot of time looking at total cost of ownership, and that goes beyond the total expense ratio.

Q's shareholders have benefited from that and will continue to benefit given the size and scale. What I mean by that is really tight bid-ask spreads, deep on-the-screen liquidity, a really strong trading base, and half a trillion dollars of notional options associated with it. 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 a real economic impact. I want to also mention that we have our own test case of how these additional products around the Qs impact things. The QQQM, which we launched about five years ago, stands at about $100 billion today, it didn't slow down the QQQ significant growth during the period either.

Over the last three years, that fund's up two and a half times in terms of its size. It attracted $75 billion of net new flows, despite having a lower-priced product alongside it. 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 at $10 billion combined. We're really going to focus on differentiating ourself 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. We're going to continue to innovate through the suite's 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. All of our marketing spend, as we think about that Is really going to be continue to focus on how do we focus on promoting that QQQ brand, which arguably is probably the best-known ticker out there.

We're going to continue to focus our marketing dollars in creating that education and aid in advisor adoption. It's been incredibly effective. There's hundreds of million dollars, if not north of $1 billion, that's already been invested against that brand over the last several decades. 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. 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 in Japan and in Hong Kong. We feel very good about the level of marketing spend there. Maybe just the last part of your question, I think you mentioned custodian fees and any flexibility there. Look, I'd say Bank of New York is the custodian. We could not have gotten the conversion done without Bank of New York's help six 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. 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.

Thank you so much. Very helpful and detailed. One quick follow-up on the Superstate win. I think that fund was already managed by a firm that is arguably much more established in liquidity management. Could you expand on how that opportunity came together and why you think Invesco was chosen over the previous managers? Thank you. Yeah. We have a $220 billion global liquidity franchise.

We're managing funds for decades, we do have a lot of strength and capability in the liquidity side, maybe it starts with that. The second thing is that we've made a commitment to innovate through digital assets and through establishing partnerships. Having the opportunity to take over that billion-dollar tokenized U.S. Treasury fund was important to us. 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 two of us.

Thanks. Thank you. Thank you.

Our next question comes from Bill Katz with TD Cowen. Your line is open. You may ask your question.

Thank you very much for taking the questions this morning. To pick up on the operating leverage, I think it came in well above most people's expectations. Andrew or Alice, I'm 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. I think within that, you mentioned in the deck about opportunity to take out some more savings as you sort of migrate down the AlphaGen implementation base. Maybe update us where those savings could come from? Thank you. Sure. I think we've been quite consistent in saying we had an objective of returning our operating margins back to the high 30s.

For 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. That's the real challenge in a business like ours, where you've got a high degree of beta and revenue sensitivity to the markets. That's 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.

I would say near medium-term operating margin targets 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. 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.

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. As we get past implementation, we will continue to focus on driving out further operating expenses consistent with our guidance last quarter into 2027.

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. We're going to continue to expect to see growth in those segments.

That's helpful. This was a follow-up, maybe a different thread. Just want to think about your incremental thought process now on capital return. You've de-leveraged pretty significantly. You're generating a lot of free cash flow. I think you mentioned payout, 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 zero, which I think the market would like to see? How are you thinking about maybe the use of cash flow? That'd be helpful. Thank you.

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. We are continuing to make forward progress, and expanding 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. 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 and the premium that is required. Those are all negotiated conversations, and we're in a 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. 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 is investing in ourselves. We are doing that. As we continue to launch new products, we continue to see great investment opportunities in our own product capabilities.

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 opportunities. We are always open-minded and looking at what's out there and always evaluating the landscape. We evaluate that against our own organic growth opportunities. Heretofore, we've been able to deliver better shareholder returns on our own organic capabilities than anything we have seen from an inorganic perspective. 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 two years. Additionally, we've adopted, I think, an ethos of partnership throughout the company as well, which was long dated. We've done the two in private markets. We made changes in India and Canada, as I mentioned. We've divested from our fintech. 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.

Thank you very much. Thanks.

Thanks, Bill. Thank you. This question comes from Glenn Schorr with Evercore.

Your line is open. You may ask your question.

Thanks very much. 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. Thanks. Yeah, the retail SMA space has grown really rapidly as you said, industry wide, and we've outpaced that growth.

We're 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. We have a real, I think, competitive edge in the fixed income space where I think others had 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. I think as the pivot goes from mutual funds to other formats, active ETFs and actively managed tax-aware SMAs, we think the growth could be considerable.

That $40 billion we manage today was half that three or four years ago. We've had exceptional growth, and quarter-on-quarter growth. We continue to expect that to be the case. Most of it is coming in the U.S. I think there may be some opportunity over time in other parts beyond the U.S. The technology is really good. My comments before, we'll continue to invest in technology probably over people and be able to scale that business pretty extensively, we think. 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, fundamental fixed income. During the quarter, we had a switch in rate expectations. It feels like it's paused a recovery on the real estate side. It's not broken out explicitly in your table. I wonder if you could talk about your thoughts on the real estate backdrop demand for your product. If it can continue without the help of lower rates. Thanks. Yeah, thanks. Let me start quickly, 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 two or three years, we haven't seen that subside really at all. I think it's going from strength to strength. I think that's a little bit of a function of some of the demand, also a lot less supply in that space. On the equity side, I think the fundamentals are a bit mixed. Maybe Allison can pick up on a couple of the details around that.

All in all, for the quarter, we saw growth, net flow growth, organic flow growth in our real estate franchise.

Yeah, I'd say more specifically even, where we saw really strong growth was in INCREF. That continues to be one of the fastest ramps in the wealth channel for any of our real estate credit products. That's at about $6 billion in AUM and continues to be a strong driver of flows. I don't know that it dampens demand, that's more specifically to your question, perhaps it doesn't return us to what we were perhaps experiencing five, seven, ten years ago, when we were in a zero rate, low rate environment for a very long time. I think largely the market's been working through a lot of that. We continue now to see just better demand overall. Dry powder for us on the real estate side is around $7 billion. We do still have a lot of unallocated capital.

We are seeing a little pickup in transaction activity overall. We're still modestly optimistic even with the rate outlook.

Thank you. Thank you. Thank you.

Our next question comes from Dan Fannon with Jefferies. Your line is open. You may ask your question.

Thanks. Good morning. Andrew, I was hoping you could expand upon your comments around the Q 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 product launch that should accelerate and/or pick up as the year progresses?

Yeah, sure. Thank you. There's two big cross listings out in Asia in the last six to nine months. Those are two really big markets for us. Not only were they important launches there, but they just amplify the recognition we already have in those markets, and it's a double benefit. We have, I think, 20-25 sort of Qs related, or Innovation Suite as we call it, related products all over the world. The bulk majority of those have been in the European region and the U.K. and also here in the U.S. We'll look to selectively, not just from a markets different geography perspective, but even inside where we have dominance here in the U.S. We'll look to selectively expand it.

I think given that the marketing we've done around the QQQ specifically now 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. We're probably going to leverage that more than just product launches over the coming quarters.

Great. Thank you. Allison, just as a follow-up on expenses, given AUM levels or I think you said record highs and 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 distribution fees, divided by management fees. That relationship is really the way we think about how to forecast our own expenses there, and is 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%-23% range, maybe even a little bit closer to 23% going forward. The trend towards that 23% is really due to that product mix shift that we continue to see with growth, strong growth in the QQQ, the QQQM, RSP. Those products that have lower management fees drive a little bit of that relationship.

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. 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.

Great. Thank you. Thank you.

Our next question comes from Brennan Hawkins with BMO Capital Markets. Your line is open. You may ask your question.

Good morning, Andrew and Allison. Thanks for taking my question. Just a follow-up on the QQQ. The net revenue yield came in at six basis points better than the prior guidance. Can you help us understand the primary factors that drove that delta? 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? Thanks. Yes. 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.

Around six 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. That all nets out to about a six basis point net revenue yield, and then about six basis points to operating margin as well.

Great. Thanks for that. 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. QQQ, QQQM, RSP, those are probably the biggest drivers to that net revenue yield. Just given both the flows and the market experience and some of those lower fee product capabilities, you saw an exit rate of 22.0 at the end of the second quarter.

Great. Thanks for that color, Allison.

Thanks, Brennan. Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Your line is open. You may ask your question.

Hey, good morning. I think all the reasons you gave around the value the franchise created over time, the liquidity, the tight bid-ask spreads, all that makes a ton of sense. I think the concern is really in the growth going forward. I really want to zone in on this question from the perspective of the distribution channels and how reliant are your growth sales and the Cues from areas that could have just more sensitivity to the actual management fee being lower, whether it's, an fiduciary capacity, advisory capacity, or things like that. How do you think about that? Because again, the concern is really probably more on the forward growth as opposed to the back book.

Yeah. No. Thanks for the question. Maybe I'd point you to a few things. One, the shareholder base is incredibly broad, and it cuts across every aspect you could imagine. 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. 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. We learned how broad the shareholder base is through that proxy solicitation.

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

Got it. Okay. Understood. Allison, another cleanup on expenses for you. You gave all the kind of moving pieces for this year. As you look out into 2027, it's still a little noisy with integration, and that's likely to fall off. As you think about that $15 million in implementation fees, how quickly do you expect that to phase out in 2027? Does that all kind of go away in the first quarter, or is that more gradual, and what is likely to be the pace of that?

I would expect, look, we'll give more 2027 guidance as we get a little bit closer to it. I would expect implementation expenses to start to taper off in the first quarter. There it's going to be, it doesn't all magically go away on December 31st. There's certainly going to be some implementation that bleeds into the first quarter. Beyond that, implementation expenses should be bleeding off pretty quickly. 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. That's going to be our real focus going into 2027, and of course, that will extend into 2028.

I think about expense guidance more broadly going into next year. Look, we're very pleased that we're at 37.5% operating margin this quarter, and the signal that that sends about our ability to get back into the high 30s and operate in the high 30s. Our focus is going to continue to be on positive operating leverage, how we generate profitable growth, and positive operating leverage underneath that.

Great. All right. Thanks so much.

Thank you. Thank you. Our next question comes from Brian Bedell, Deutsche Bank.

Your line is open. You may ask your question.

Great. Thanks for giving me my question. Just one last cleanup on expenses. I am not sure if I missed this, but I think in one case you said $3.275 billion was the expense target for 2026, and that was predicated on $2.3 trillion in AUM. Just as the market sort of is trending better and that number goes up, or the AUM goes up, can you just talk about the overall variable component of the expenses that we should be considering to that delta?

I think the most variable component I would point you to is, again, the compensation, the revenue. I mean, compensation is Two-thirds 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 have given you kind of pieces together, the parts of that and gets you to a relatively consistent relationship and expense guide. That guide we gave was because there had been such a sharp turn in AUM from March 31st to the time of the earnings call at the end of April, we wanted to make sure we cleaned up, and gave some relative expectations there. Your biggest variable driver is going to be compensation, and that 40%, I think, is the right relationship as we think about this year.

Yep. Totally. That is a couple of things. Just on the long-term equity flows, can you just talk about the I think you mentioned the idiosyncratic liquidations, just sort of the impact for the second quarter. As you think about the progress that you are 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 flows on a sort of a stable basis or, I should say a more repeatable, sustainable basis?

Yeah. No, thanks. Look, to state the obvious, improving the flow dynamics for fundamental equities is a major feature for the company. That's going to come on the back of improved performance and product quality, of course, but also where market demand is. I think getting to positive flows is a little bit of a function of, does the market environment moderate for active equities? 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 three large, institutional mandates that obviously won't be recurring, left this quarter. 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.

I'd say, just adding onto that, I mean, we definitely see positive flows and certain strategies. We've discussed the Invesco 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. Where there is good investment performance and there is sort of the secular investor demand, we're capturing it. That returning to positive flows on a consistent basis is a challenge for the industry, as you well know.

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

Yep. Totally makes sense. Thank you.

Welcome. Okay, operator, we have time for one more question.

Thank you. We have a question from Ben Budish with Barclays. Your line is open. You may ask your question.

Hey, good morning, thank you for squeezing me in here. 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 into the back half of the year? Just, it looks like Q2 stepped up a bit more than we would've expected, given those seasonal items in Q1. Curious if there's any incremental color you can share there. The 40%, quite helpful, just, how do we think about that in the context of what the market may do? Thank you. 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, then it tends to taper off.

That's all things being equal, of course, depending on where 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 deferrals, that's always going to create a Q1 hit that's going to drive that comp to revenue ratio a little bit higher. Excuse me. Then some of that bleeds into the second quarter, a lot of that's washed out by the back half. Again, I'd point you to a full year guide of that 40%.

Okay. Thank you very much.

Great. Thank you. And thanks, operator. 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. 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. As always, please reach out to our investor relations team for any additional questions. 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 line.