Invesco Ltd (IVZ) Q1 2021 Earnings Call Transcript

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Invesco Ltd (IVZ 0.66%)
Q1 2021 Earnings Call
Apr 27, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Unidentified Speaker

Good morning, and thank you all for joining us. As a reminder, this conference call and the related presentation may include forward-looking statements, which reflect management's expectation about future events and overall operating plans and performance. These forward-looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations. For a discussion of these risks and uncertainties, please see the risks described in our most recent Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements. We may also discuss non-GAAP financial measures during today's call. Reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation.

Operator

Welcome to Invesco's First Quarter Results Conference Call. [Operator Instructions] This call will last one hour. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to your speakers for today, Marty Flanagan, President and Chief Executive Officer of Invesco; and Allison Dukes, Chief Financial Officer.

Mr. Flanagan, you may begin.

Martin L. Flanagan -- President, Chief Executive Officer

Thank you, operator, and thanks, everybody, for joining us, and we look forward to the conversation. As we begin 2021, we remain cautiously optimistic with the vaccine rollout gaining traction that will emerge from the global pandemic this year. I think it's only confirmed by the increased economic activity we're all seeing. That said, risks do remain. The good news is Invesco is off to a great start this year and as you can see in the results that we reported this morning. And if you're so inclined to follow along, I'm going to be speaking to the highlights slide, which is slide three. Our investment in key capabilities and the tremendous focus on our clients continues to produce good momentum in our business.

We have now achieved nine straight months of net long-term inflows. In the first quarter, net long-term inflows were $24.5 billion. This is a record level of inflows for the firm. Net -- this follows net long-term inflows of nearly $18 billion in the second half of last year, and this represents nearly a 9% annualized long-term organic growth rate, led by net flows into ETFs, continued strength in fixed income and net inflows into the balanced funds.

And as you can see on slide three, the key areas that were highlighted in January: we have scale, investment readiness and competitive strength drove the growth in the quarter. These are areas where investment performance is strong. We're highly competitive, and we're well positioned for growth. Retail flows significantly improved in the quarter and were $21.2 billion out of $24.5 billion of the net long-term flows. Our ETFs, excluding the Qs, generated net long-term inflows of $16.8 billion. This is also a record for the firm, which contributed significantly to the $10 billion of net long-term inflows generated in the Americas. Invesco's U.S. ETFs, excluding the Qs, captured 6.7% of the U.S. industry net ETF inflows.

This is more than two times our 3% market share. Within private markets, we launched two CLOs, which raised $800 million. And we remain focused on our alternative capabilities of space, where we also see the benefits of our MassMutual. MassMutual has committed over $1 billion to various strategies, including providing a credit facility to one of our private market funds. We had net long-term inflows of $6.5 billion within active fixed income. And within active global equities, our nearly $50 billion developing markets fund, key capability acquired in the Oppenheimer transaction, saw $1.3 billion of inflows.

That said, there's still areas of improvement within active equities, where we continue to work and remain focused on those opportunities. Net long-term inflows into Asia Pac were $16.7 billion in the first quarter, following $17 billion of net inflows in the second half of 2020. The China JV launched nine new funds with $6.2 billion of net long-term inflows. In addition, our solutions-enabled institutional pipeline has grown meaningfully and accounts for over 60% of our pipeline at the end of the quarter. Allison will provide more information in a few minutes on the flows, the pipeline, the results for the quarter.

But I would note, we generated positive operating leverage, producing an operating margin of 40.2% for the quarter. Strong cash flows being generated from our operations improved our cash position, resulting in no drawdown on our credit facility at quarter end, a quarter where we experienced seasonally higher demand on our cash flow. The Board also approved a 10% increase in the quarterly dividend to $0.17 per share. Given our historical investments in the business and our most recent efforts to further align our organization with our strategy, I'm confident, talent, capabilities, the resources and the momentum to drive -- to deliver for our clients and drive further growth and success.

And with that, I'll turn it over to Allison to walk through the results in greater detail.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Thank you, Marty, and good morning, everyone. Moving to slide four. Our investment performance improved in the first quarter, with 70% and 76% of actively managed funds in the top half of peers on a five year and a 10-year basis, respectively. This reflected continued strength in fixed income, global equities, including emerging markets equities and Asian equities, all areas where we continue to see demand from clients globally. I'll also note that our published investment performance now reflects Morningstar peer rankings for composites where U.S.-domiciled mutual fund is the most representative AUM in the composite, whereas previously, we had relied on Lipper data.

This transition more closely aligns our data to the investment performance data reviewed by our U.S. clients and is more consistent with how our peers reflect investment performance. Additionally, we've expanded the population of AUM included in performance disclosures by about $150 billion for each period presented through the addition of benchmark-relative performance data for institutional AUM, where pure rankings do not exist. This approach is used by certain of our peers, and we believe it more meaningfully represents the contribution of our institutional AUM to our performance metrics.

Moving to slide five. You'll notice we reorganized our ending AUM and net long-term flow slides to group the ending AUM and net long-term flows together for each cut of our data by total, investment approach, channel, geography and asset class. We believe this will better illustrate our flows in the context of our overall AUM for each category. We ended the quarter with just over $1.4 trillion in AUM. Of the $54 billion in AUM growth, approximately $25 billion is a function of increased market values. Our diversified platform generated net long-term inflows in the first quarter of $24.5 billion, representing 8.8% annualized organic growth. Active AUM net long-term inflows were $7.5 billion or 3.4% annualized organic growth rate. In passive AUM, net long-term inflows were $17 billion or a 31.3% annualized organic growth rate. The retail channel generated net long-term inflows of $21.2 billion in the quarter, an improvement from roughly flat performance in the fourth quarter, driven by the positive ETF flows.

Institutional channel generated net long-term inflows of $3.3 billion in the quarter. Regarding retail net inflows. Our ETFs, excluding the QQQ suite, generated net long-term inflows of $16.8 billion, including meaningful net inflows into our higher-fee ETFs. Net ETF inflows in the U.S. were focused on equities in the first quarter, including a high level of interest in our SandP 500 Equal Weight ETF, which had $4 billion in net inflows in the quarter. In addition to the SandP 500 Equal Weight ETF, we had five other ETFs that reported net inflows of over $1 billion each. These six ETFs represented $10 billion in net inflows for the quarter. It's also worth noting that our Invesco NASDAQ Next Gen 100 ETF, the QQQJ, surpassed the $1 billion AUM mark in the quarter following its inception in October of 2020. This is on the heels of our successful QQQ marketing campaign and sponsorship of the NCAA Championship in the first quarter.

Looking at flows by geography on slide six. You'll note that the Americas had net long-term inflows of $10 billion in the quarter, an improvement of $7.8 billion from the fourth quarter. The improvement was driven by net inflows into ETFs, institutional net inflows, various fixed income strategies, and importantly, focused sales efforts. Asia Pacific delivered one of its strongest quarters ever with net long-term inflows of $16.7 billion. Net inflows were diversified across the region. $9.4 billion of these net inflows were from Greater China, including $8.5 billion in our China JV. The balance of the flows in Asia Pacific were comprised of $3 billion from Japan, $1.9 billion from Singapore and the remaining $2.3 billion was generated from several other countries in the region.

Net long-term inflows for EMEA excluding the U.K. were $3.7 billion driven by retail flows, including particularly strong net inflows of $1.2 billion into our Global Consumer Trends Fund, the growth equities capability, which saw demand from across the EMEA region. ETF net inflows in EMEA were $1.6 billion in the quarter, including interest in a wide variety of U.S.- and EMEA-based ETFs. Notably, we saw net inflows of $0.5 billion into our blockchain ETF and $400 million into one of our newly launched ESG ETFs in the quarter, the Invesco MSCI USA ESG Universal-Screened ETF. And finally, the U.K. experienced net long-term outflows of $5.9 billion in the quarter driven by net outflows in multi-asset, institutional quantitative equities and U.K. equities. Turning to flows across asset class.

Equity net long-term inflows of $9.8 billion reflect some of the capabilities I've mentioned, including the Developing Markets Fund, the Global Consumer Trends Fund and ETFs, including our SandP 500 Equal Weight ETF. We continue to see strength in fixed income across all channels and markets in the first quarter with net long-term inflows of $7.6 billion. This following net inflows of $8.2 billion in fixed income in the fourth quarter. It's worth noting that the net inflows in the balanced asset class of $7.3 billion arose largely from China. In alternatives, net long-term inflows improved by $4.1 billion due to a combination of inflows in senior loan, commodities and newly launched CLOs during the quarter.

Moving to slide seven. Our institutional pipeline grew to $45.5 billion at March 31 from $30.5 billion at year-end. The growth in the pipeline this quarter includes a large lower-fee passive-indexing mandate in Asia Pacific, assisted by our Custom Solutions Advisory team. This is an opportunity for us to offer solutions-based differentiated passive investment to meet the needs of a key strategic client with the potential to expand the relationship over time with access to higher-fee opportunities. We are also able to leverage our in-house indexing capabilities with this mandate. Excluding this large mandate in Asia Pacific, the pipeline remains relatively consistent to prior quarter levels in terms of size, asset mix and fee composition.

While there's always some uncertainty with large client funding, we're currently estimating that between 50% and 65% of the pipeline will fund in the second quarter, including the large indexing mandate. The funding of this mandate will also have a slight downward impact on our net revenue yield next quarter. Overall, the pipeline is diversified across asset classes and geographies, and our solutions capability enables 61% of the global institutional pipeline and created wins and customized mandates. This has contributed to meaningful growth across our institutional network, warranting our continuing investment and focus on this key capability.

Turning to slide eight. You'll notice that our net revenues increased $23 million or 1.8% from the fourth quarter as higher average AUM in the first quarter was partially offset by $71 million decrease in performance fees from the prior quarter. The net revenue yield excluding performance fees was 35.7 basis points, a decrease of 0.3 basis point from the fourth quarter yield level. This decrease was driven by lower day count in the first quarter that negatively impacted the yield by 0.8 basis point and higher discretionary money market fee waivers that negatively impacted the yield by 0.3 basis point.

These negative impacts were partially offset by the positive impact of rising markets and net long-term inflows during the quarter. Going forward, we do expect money market fee waivers to remain in place for the foreseeable future until rates begin to recover to more normalized levels. Total adjusted operating expenses increased 0.7% in the first quarter. The $5 million increase in operating expenses was driven by higher variable compensation as a result of higher revenue as well as the seasonal increase in payroll taxes and certain benefits, offset by the reduction in compensation related to performance fees recognized last quarter and savings that we realized in the quarter resulting from our strategic evaluation. Operating expenses remained at lower than historic activity levels due to pandemic impact to discretionary spending, travel and other business operations that have persisted in the quarter.

Moving to slide nine, we update you on the progress we've made with our strategic evaluation. As we've noted previously, we're looking across four key areas of our expense base: our organizational model, our real estate footprint, management of third-party spend and technology and operations efficiency. Through this evaluation, we will invest in key areas of growth, including ETFs, fixed income, China, solutions, alternatives and global equities while creating permanent net improvements of $200 million in our normalized operating expense base. A large element of the savings will be generated from compensation, which includes realigning our nonclient-facing workforce to support key areas of growth and repositioning to lower-cost locations. The remainder of the savings will come through property, office and technology and GandA expenses. In the first quarter, we realized $16 million in cost savings. $15 million of the savings was related to compensation expense.

The remaining $1 million in savings was related to facilities, which is shown in the property office and technology category. The $16 million in cost savings were $65 million annualized, combined with the $30 million in annualized savings realized in 2020, brings us to $95 million or 48% of our $200 million net savings expectation. As it relates to timing, we still expect approximately $150 million or 75% of the run rate savings to be achieved by the end of this year, with the remainder realized by the end of 2022. Of the $150 million in net savings by the end of this year, we anticipate we will realize roughly 65% of the savings through compensation expense. The remaining 35% would be spread across occupancy, tax spend and GandA. The breakdown for the remaining $50 million in net cost saves in 2022 will be similar.

With $95 million of the expected $150 million in net savings by the end of this year already in the quarterly run rate, the degree of net savings per quarter will moderate going forward. In the first quarter, we incurred $30 million of restructuring costs. In total, we recognized nearly $150 million of our estimated $250 million to $275 million in restructuring costs that were associated with this program. We expect the remaining transaction cost for the realization of this program to be in the range of $100 million to $125 million over the next two years, with roughly 1/2 of this amount occurring in the remainder of 2021. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.

Our expectations are for second quarter operating expenses to be relatively flat to the first quarter, assuming no change in markets and FX levels from March 31. We entered the second quarter with $1.4 trillion in AUM driven by net inflows and market tailwinds from the first quarter. These tailwinds will have a modest impact on both revenues and associated variable expenses. The impact on expenses will be offset by lower compensation expense related to seasonality in payroll taxes and benefits, plus incremental savings related to the strategic evaluation. We also expect a modest increase in marketing-related expenses as the first quarter is typically the low point in marketing spend annually. One area that is still more difficult to forecast at this point is when COVID-impacted travel and entertainment expense levels will begin to normalize. With the rollout of vaccines, we believe we might begin to see a modest resumption of travel activity later in the second quarter and perhaps more in the third quarter.

Moving to slide 10. Adjusted operating income improved $18 million to $503 million for the quarter driven by the factors we just reviewed. Adjusted operating margin improved 70 basis points to 40.2% as compared to the fourth quarter. Most importantly, our degree of positive operating leverage reflected in our non-GAAP results was 2 times for the quarter, underscoring our focus on driving scale and profitability across our diversified platform. Nonoperating income included $25.9 million in net gains for the quarter compared to $31.9 million in net gains last quarter as higher equity and earnings primarily from increased CLO marks were more than offset by lower market gains on our seed portfolio as compared to the prior quarter. The effective tax rate for the first quarter was 24% compared to 21.7% in the fourth quarter.

The effective tax rate on net income was higher in the first quarter primarily due to an increase in income generated in higher-taxing jurisdictions relative to total income. We estimate our non-GAAP effective tax rate to be between 23% and 24% for the second quarter. The actual effective tax rate may vary from this estimate due to the impact of nonrecurring items on pre-tax income and discrete tax items.

Turning to slide 11. Our balance sheet cash position was $1.158 billion at March 31, and approximately $760 million of this cash is held for regulatory requirements. Cash balances are impacted by the typical seasonal increases in cash needs in the first quarter related to our compensation cycle. We also paid $117 million on a forward share repurchase liability in January. In addition to using excess cash to reduce leverage, we seek to improve liquidity and our financial flexibility. Despite the increased cash needs in the quarter, the revolver balance was 0 at the end of March, consistent with our commitment to improve our leverage profile.

Additionally, the remaining forward share repurchase liability of $177 million was settled in early April. We also renegotiated our $1.5 billion credit facility, extending the maturity date to April of 2026 with favorable terms. We believe we're making solid progress in our efforts to build financial flexibility and as such, our Board approved a 10% increase in our quarterly common dividend to $0.17 per share.

The share buybacks dating back to last year on slide 11, which reflects $45 million in the first quarter of this year, are related to vesting of employee share awards. We remain committed to a sustainable dividend and to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.

In summary, Marty highlighted the growth we've seen in our key capabilities and our continued focus on executing the strategy that aligns with these areas. We're also executing on our strategic evaluation and reallocating our resources to position us for growth. And finally, we remain prudent in our approach to capital management. Our focus on driving greater efficiency and effectiveness into our platform, combined with the work we've done to build a global business with a comprehensive range of capabilities, puts Invesco in a very strong position to meet client needs, run a disciplined business and to continue to invest in and grow our franchise over the long term.

With that, Sue, I'll open it up to the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Dan Fannon with Jefferies. You may go ahead.

Dan Fannon -- Jefferies -- Analyst

Okay, good morning. Can you discuss the strength in Asia a bit more broadly? I know you gave a lot of detail around where the flows were come -- came from and balanced as well being a source of the asset flows. But curious about seasonality in that part of the world versus maybe what we see in the U.S. that was once typically the strongest and then kind of the outlook for that region given the strength that you just generated in the first quarter.

Martin L. Flanagan -- President, Chief Executive Officer

Dan, was it Asia? I'm sorry.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Asia.

Martin L. Flanagan -- President, Chief Executive Officer

Yes. Yes, let me make a couple of comments, and Allison can speak to it also. So look, there's just a little question -- I think we've all talked about the strength of Asia and China, in particular. China's real. China is real for us. It's very meaningful. You've seen the recent growth over the last couple of years. And you said the first quarter is really, really strong. There's no question. But the reality, you follow the market, it's had a pullback. You have to anticipate that that's going to slow down a little bit here. That said, it doesn't -- when you look at the full year, it's going to continue to be an important contributor. And we're just looking for further growth in the years to come. So that's our perspective at the moment.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yes. The only thing I'd add, obviously, sentiments maybe shifted just a little bit there in the recent months. Very strong sentiment in the fourth quarter, very strong sentiment in the first couple of months of the first quarter. We've definitely seen a little bit of a softening there. We'll pull back in March and into April. So it's going to be a place to watch. I will say that, broadly speaking for Asia Pacific, we are starting to see flows really start to come in, in a balanced profile across the region, China being very significant, as Marty said. In total, a little north of $9.5 billion of those flows came from IGW and Greater China. But we, as I mentioned, saw $3 billion inflows from Japan and couple of billion from Singapore, $2.3 billion from some of the other regions.

And of course, as we noted in the pipeline, we're seeing very strong mandates coming in broadly from Asia Pacific. So I think it's -- I don't know that it's seasonality so much as maybe sentiment that we've got to keep an eye on there. I would note in the nine funds that we launched in the first quarter in IGW, they generated $6 billion inflows in that first quarter. Most of those were balanced equity funds, and the fee rates there are very strong. They are better than the firm average and real meaningful contributors to our growth.

Dan Fannon -- Jefferies -- Analyst

That's helpful. And then I've had just a follow-up, Allison, on the strategic evaluation that you're having progress in several quarters in. Just thinking about the $200 million in aggregate, is that number would you consider to be conservative at this point? And anything above that? Would that be reinvested back in the business? Or is there enough potential for some upside to those savings?

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

I'd say you definitely see us making good progress with $95 million of the $200 million, we feel like achieved at this point. The $200 million remains our net target. We are very focused in reinvesting savings and continuing to reallocate those savings into areas of growth. So at this point, I don't think we're -- we would be suggesting that the $200 million is conservative. We are going to be consistently looking at how do we continue to transform our business and make sure that we are spending in the areas where we can generate the most growth and really looking at allocating our expenses and reallocating our expenses with that mindset.

Dan Fannon -- Jefferies -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Patrick Davitt with Autonomous Research. You may go ahead.

Patrick Davitt -- Autonomous Research -- Analyst

Good morning everyone. Could you give a little more color on the kind of somewhat outsized redemption rate on the institutional side? Anything idiosyncratic or a common theme you could point to in that acceleration? And in that vein, any known lumpy redemption as an offset to the very strong unfunded pipeline you've highlighted?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. On the redemption, I wouldn't call it any one specific thing in the institutional redemptions. But it's similar to when money comes in, it just really is hard to predict quarter-to-quarter. So I wouldn't point to an elevated level of redemptions going forward. Daniel will just continue to follow clients' desires on the timing of redeeming or giving us money.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yes, I would agree. I mean it's lumpy. There's nothing specific happening there. The gross funding out of the institutional pipeline was about $21.5 billion. And again, you're seeing the pipeline, even excluding the significant mandate, really maintain its size. And we're seeing a lot of the fundings come not just from the pipeline, but existing client augmentation activity outside the pipeline. I think it's important to remember that the pipeline is not the only source of our institutional flow. It's certainly a strong indication. But as we continue to grow these relationships and really deepen the relationship, they become much more strategic, which generates additional flows. But nothing specific to point to there.

Operator

Thank you. The next question is from Craig Siegenthaler with Credit Suisse. You may go ahead.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks. Good morning everyone. I wanted to follow up on Dan's question on Asia. And I heard your commentary on flows by geography. That was very helpful. But could you also help us walk through what the product mix would have looked like inside the $17 billion of flows? And any color in terms of channel mix, retail versus institutional?

Martin L. Flanagan -- President, Chief Executive Officer

So I can hit some of the high levels, and Allison can add to it. So within China, it's heavy equities. And Allison call it balanced, in particular, that has been a historical driver. Japan continued to be fixed income during the quarter -- and excuse me, the big flows were really coming from retail, although the Japan, that was institutional.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

And in terms of asset class mix, I'd tell you, the -- half of it is coming from balanced and the remainder coming across equity and fixed income capabilities. But our balanced products there are really driving a significant amount of the flows. In terms of the retail and institutional mix, there was about $13 billion on the retail side out of the total $16.6 billion.

Craig Siegenthaler -- Credit Suisse -- Analyst

Great. No, super helpful there. And then just as my follow-up, I wanted your perspective on the May 24 lockup expiration for MassMutual. I'm wondering is there any thought on extending that into the future. And if it isn't, could we expect some stock sales from MassMutual later this year?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. So look, let me just start by. Yes, the relationship continues to be very, very strong. And we continue to do more and more together, as I mentioned, just in particular around alternatives for us. There's the recovery, obviously, not just with equity but also with the preferred. And I can't speak for them, but what I can tell you is they've told us that they're very happy with the relationship. They're very happy with the investment. And we just anticipate that would continue.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thank you.

Martin L. Flanagan -- President, Chief Executive Officer

Yep.

Operator

Thank you. The next question is from Ken Worthington with JPMorgan. You may go ahead.

Ken Worthington -- JPMorgan -- Analyst

Hey. Good morning. So capital gains and dividend tax rates seem poised to rise materially for the wealthy. What do you think are the implications for wealthy investors in terms of their investments? Do you think this drives any meaningful reallocation as these new taxes go through? And are there opportunities for Invesco in product development to help these wealthy investors adapt to a much higher U.S. tax rate and probably higher taxes globally?

Martin L. Flanagan -- President, Chief Executive Officer

Ken, great question. If I knew the answer, I wouldn't have this job probably. But the reality, as like, we're very, very focused on it. And I'd say where the firm has gotten to right now, even with the individual investors that you're talking about, the way that we have moved our business is, quite frankly, focused on a lot of high-net-worth individuals within the wealth management channels and really supported by the solutions capability that we've developed over the last number of years. In fact, that's where it started. And so if tax-manage was a focus before, it's surely going to be -- continue to be a focus now. The good news is things like municipal bonds are going to continue to be very, very important. We happen to have a very strong franchise there. But needless to say, people are going to want access to equity for growth. And we'll continue to see what we can work on, but I don't have anything very specifically on that.

Ken Worthington -- JPMorgan -- Analyst

Okay. And then for a follow-up, dividend and capital management. So you paid off or paid down a number of obligations through April 1. Balance sheet is in much better shape than it was a year ago. So how do we think about the balance of capital return and further strengthening of the balance sheet as we look through to the rest of the year? And how are you thinking about a payout ratio for 2021?

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Sure. Thanks, Ken. Yes. So I'd say our capital priorities are consistent with what you've heard us say repeatedly for the last several quarters, and I'm very pleased to say we're making good progress against those. And you can really see the evidence of that progress and some of what we've announced today. We remain committed to financial flexibility, which gives us the opportunity to really reinvest in the business and support our future growth. And that is our priority, first and foremost, is creating that financial flexibility to reinvest in the business and growth capabilities there. We also want to improve the strength of our balance sheet and continue to return excess cash to shareholders. So pleased we were able to announce the increase to the common dividend today. We are committed to stable and modestly increasing dividend in terms of a payout ratio.

And we're being thoughtful about how we continue to improve the payout ratio. The decision we made a year ago to cut the dividend was not one that was made lightly, as you know. It was not an easy decision. But absolutely, I think we would reflect and say it was a good decision because it's given us the opportunity to continue to improve that financial flexibility through the more uncertain times last year. As we have made progress so far in some of those liabilities with the forward share repurchase liabilities both now completely paid out and our leverage well managed, it does give us the opportunity to continue to think about modestly increasing that dividend. We felt like 10% was the right level for where we are today and the earnings profile we have today. But we think we have an opportunity to continue to improve that over time. We just want to be thoughtful and measured in our pace there.

Ken Worthington -- JPMorgan -- Analyst

Great. Thank you very much.

Operator

Thank you. The next question is from Brian Bedell with Deutsche Bank. You may go ahead.

Brian Bedell -- Deutsche Bank -- Analyst

Alright. Good morning folks. Maybe Allison, just to stay with you on the top of expenses. The -- if you can talk a little bit about the outsourcing deal with State Street? I know that's a longer-term endeavor, and I believe that's over and above the $200 million. If it's too early to frame the potential net savings from that? But maybe just to characterize the timing of that and whether the vast majority of the assets of Invesco that are serviceable by State Street are moving to that platform and whether that -- in a normal market environment, whether you feel that you have confidence that you can stay above the 40% operating margin level?

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Sure. Thank you for the question, Brian. Yes. I mean, as you know, this is definitely a longer-term installation. You did see the announcement via State Street a couple of weeks ago. The installation is going to have benefits that will be realized in a time horizon that really extends beyond our existing cost transformation program. So as you know, that really runs through 2022. And as we think about the benefits that we can generate from Alpha, those are going to be things that actually won't be realized until '23, '24 and beyond. And so it's too early at this point for us to put any contours around what we think it could generate for us. We do expect to be able to do that at a later date. I would say, broadly speaking, we absolutely expect there to be operational efficiencies and risk mitigation, elimination of redundancies. I mean all of these things are going to create real benefits as we scale over the coming years. But too early just yet to point to what that could look like. Anything you want to add, Marty, to it?

Martin L. Flanagan -- President, Chief Executive Officer

Look, I think it's going to be -- it's a very important undertaking for us. And that front-to-back investment -- all of our investment platform on it is going to be very beneficial to the firm.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. That's good color. And then, Marty, just on ESG, obviously, this is a topic you talked about quite a bit. Just -- I guess first question is, are you able to size the ESG flows to the franchise in the quarter and the level of what you considered ESG AUM? And then secondly, maybe if you can just talk more broadly about what you're seeing in demand for those products? And any update on the integration of ESG throughout the investment process firmwide?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. So let me make a couple of comments, and Allison can talk. So right now, 75% of all our investment capabilities have ESG inclusion. Obviously, our intent is to be 100%. Right now, that's up to 2023. Our goal is to pull it in closer. If you look very specifically at ESG-specific mandates, assets under management are just about $40 billion. And so to be clear, that's excluding -- that's not counting ESG inclusion. I mean that's really the way of the world.

This is really dedicated ESG product offerings where there has to be some ESG consideration within it. And the flows have been quite strong. It's really some of the historical things that within our ETF lineup. That said, what we are seeing with institutional clients, in particular, working with our solutions group is really creating bespoke outcomes to meet their ESG goals. And we're also leveraging our self-indexing capabilities with a number of these institutions to meet their ESG goals. So it's really no different to us, and it's quite pervasive. I'd say the strongest area right now is U.K., Europe. The U.S. is following. And quite frankly, in Asia, it's also very, very strong. So needless to say, if you don't have the wherewithal or the capabilities to be on your front foot with ESG, you're going to be at quite a disadvantage.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yes. I'd say our -- the flows that would be specifically attributed to our ESG capabilities in the quarter were around $4 billion. I'd say, notably, we are the second largest ESG ETF provider in the United States. We have nine ETFs right now that are dedicated ESG ETFs in the United States, where we have about $9.5 billion in AUM there. That $4 billion was a global number and flows over the first quarter. So we are absolutely seeing real strength, just underscoring the importance we all understand around ESG capabilities.

Martin L. Flanagan -- President, Chief Executive Officer

The other area where the bulk of it is, it's been direct real estate where you could imagine to work with clients and the other is really through our quantitative team is the other area where you have the balance of the dedicated ESG capabilities.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thank you so much.

Martin L. Flanagan -- President, Chief Executive Officer

Yup.

Operator

Thank you. The next question is from Robert Lee with KBW. You may go ahead.

Robert Lee -- KBW -- Analyst

Great, thanks and good morning everyone. Thanks for taking the question. Maybe, Marty, you haven't really spoken about this. I think pause in a while. But if you think back over the years, the firm's also made some technology investments, which I believe you've put under banner of TeleFlow in U.K. Can you maybe update us on that on strategically where that is -- fits in the organization and maybe how you enable to start to leverage that? Whether it's to improve relationships or flows in these relationships? Just trying to see where that stands.

Martin L. Flanagan -- President, Chief Executive Officer

Yes. Good. So as you pointed out, we've had a number of smaller bolt-ons around that technology. And it has all been pulled together over the past year. That was the effort last year. It's now -- the banner is in TeleFlow. And where the success has really been is -- more immediately is through something called Vision, which is a technology that is an analytical tool that we work through our solutions team with our institutional clients. The next area where we are looking to expand outside of the U.K. is in direct to the financial advisor channel. That again is where we're turning our attention beginning this year to expand that. So we did take a year to pull the rest of the platform together, and it will, frankly, be focused on the RIA channel, in particular.

Robert Lee -- KBW -- Analyst

I mean in the -- are you -- is it possible to attach any type of demand of sales or flows to that?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. Yes. So right now, there's about $900 billion of AUA within that platform. And the core capability continues to grow. And again, the historical focus on financial advisors has not changed. And we think that's, again, going to be where the future is for that platform.

Robert Lee -- KBW -- Analyst

Great. Thank you.

Martin L. Flanagan -- President, Chief Executive Officer

Thanks Rob.

Operator

Thank you. The next question is from Brennan Hawken with UBS. You may go ahead.

Adam Beatty -- UBS -- Analyst

Thank you and good morning. This is Adam Beatty in for Brennan. I wanted to follow up on the fee rate, which has trended fairly well recently. How would you characterize the exit rate, if you will, from the quarter versus the blended average through the quarter? Was it kind of trending upward, trending downward or what? And also in terms of the pipeline, ex the large low fee mandate, is the fee rate on that pipeline higher or lower than the current blend for the firm?

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yes. Thanks, Adam. Hard to decompose the trending of the fee rate exactly just given the puts and takes of how the calculation is done throughout the quarter. But I would tell you, just generally speaking, it probably -- the puts and takes, I would say, were actually probably made the trending relatively stable. So if you think about what the fee rate, sort of the change in the first quarter fee rate net revenue yield ex performance fees relative to the fourth quarter, lower day count in the quarter, as I mentioned, impacted net revenue yield by 0.8 basis point.

So that was meaningful. And then money market fee waivers were pretty consistent through the quarter and that would have been about 0.3 of a downward impact overall in the quarter. Now I would say baked into that was what we were experiencing in money market fee waivers in prior quarters. So it's probably about a 0.6 basis point impact overall in terms of the fee waivers in the quarter. It was just 0.3 higher than the prior quarter. Those were largely offset, however, by the positive impact of rising markets and net long-term flows.

So that's why I say I'm not sure the entry rate and the exit rate were that dissimilar given the nature of the puts and takes inside of the quarter. And so I think as you think about it going forward and getting to, I think, probably where you're going with the pipeline as well, there are going to be a couple of things that we think about as we think about the fee rate moving into the next quarter. One day count is less of a drag going to the second quarter. It's a very modest, and I'd say very modest, help with just an additional day. As I mentioned, I think money market fee waivers, I think that impact will be consistent through the quarter. And so I think that's going to be a bit of a neutral but negative impact on an absolute basis. And then looking at the pipeline and the pipeline being very significant, obviously, in absolute size.

If I exclude this large significant Asia Pacific index mandate, the remaining pipeline actually looks pretty consistent with prior quarters, both in terms of absolute size and the fee composition. And as we've noted in the past, the fee -- the average fee rate on the institutional pipeline is below the firm average, not significantly below, but I'd say modestly below the firm average. And it's been -- it's held quite steady for the last three or four quarters. And so I don't expect that to be a different impact, but this very significant sizable win, which will fund sometime in the second quarter, will be a modest drag on net revenue yield in the second quarter, more so going into the third quarter when it is fully realized in the run rate.

Adam Beatty -- UBS -- Analyst

Excellent. Makes sense. Turning to alternatives and the flow outlook there, there's a few different crosscurrents. You had the COO issuance. Last quarter, you pointed to some kind of routine dispositions in real estate. But the pipeline looks pretty solid. So just want to get your thoughts on how that looks going forward.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

I'm sorry, I missed the very beginning of...

Martin L. Flanagan -- President, Chief Executive Officer

Alternatives.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Oh, on alternatives on the pipeline?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. So it continues to be -- real estate continues to be very, very strong. Bank loans have come back after being challenged last year, for sure. And GTR is really -- has been a headwind within alternatives. Otherwise, it's been continuing to build out that pipeline quite strongly.

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yes. I don't think we've touched anything notable or sizable in terms of the pipeline or any real differences as it relates to alternatives.

Adam Beatty -- UBS -- Analyst

Great. Thank you Allison. Appreciate it.

Operator

Thank you. Our next question is from Mike Carrier with Bank of America. You may go ahead.

Mike Carrier -- Bank of America -- Analyst

Good morning. Thanks for taking the question. Just given the expectation for rising rates and potential inflation, just wanted to get your sense on how the fixed income and balanced platforms are positioned for that backdrop, both in terms of potential performance impact and then client demand.

Martin L. Flanagan -- President, Chief Executive Officer

Yes. Look, it's a great question. I think rising rates here probably helps our fixed income outside of the United States, obviously, from institutional investors from that perspective. I think it's really going to be the pace and the magnitude of the rise of interest rates. If it's slow and steady, I think we'll be fine. Some of the areas that will be media things like bank loans and a lot of things that reset. So right now, we've really not had a headwind emerge from the rising rates. But needless to say, we're paying close attention to it, the recent increase. Allison, I don't know if you...

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

That sounds fine. You got it.

Mike Carrier -- Bank of America -- Analyst

All right. Great. And then just a quick follow-up on the institutional pipeline. Just trying to get a sense of what changed to drive such a robust pipeline, whether it was this quarter last quarter, like over the last year. Do you guys have any investments in distribution, like geographies, strategies, pricing just because it's such a big shift relative to the past?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. Look, the reality is it's sort of overnight success after multiple years of investment. And it really is a combination of the capabilities that we've had, I believe just how we're matching up against clients around the world. And really, the solutions capability is just really, really important. But you need solutions, you need self-indexing, you need a range of capabilities, and you have to have deep relationships with the institutional clients. And that's all coming through. The other thing I want to maybe connect the dots, so we sort of talk about some of the large institutional passive mandates that have come.

And that's very consistent with what we've been talking about strategically, where every client that we deal with around the world and again not unique to us, they're dealing with fewer money managers. They want more from us. And so that also includes a range of asset classes to create the outcomes. So historically, we did not take our indexing capabilities to institutional clients. Needless to say, we've changed that recently. And it just creates a deeper, better relationship with the clients. The reality is large institutions around the world are going to use passive capabilities, and we want to be able to provide that along with the rest of the ranging capabilities we have all the way to alternatives. And the combination of all those things is really what's driving the change.

Mike Carrier -- Bank of America -- Analyst

Great. Thanks a lot.

Martin L. Flanagan -- President, Chief Executive Officer

Yup.

Operator

Thank you. The next question is from Bill Katz with Citigroup. You may go ahead.

Bill Katz -- Citigroup -- Analyst

Okay. Thank you very much for taking my question this morning. Maybe Marty, one for you. I haven't talked about MandA in a little while. Just sort of what's your latest thinking on when you look at your footprint? What, if anything, would make sense that you don't have? And how you're thinking about maybe more aggressively leveraging the platform as you build more efficiencies?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. You're right that we haven't talked about since last quarter. So I'm kidding. Just, look, our thoughts have not changed, right? I think it was really important for us to, obviously, complete what we did with Oppenheimer last year. Obviously, the pandemic didn't help getting off on to a great start after that. But if we look at the capabilities of the firm right now, we feel like we have most everything we need. And the things we probably pay attention to would be areas where there sort of be bolt-on capabilities, largely probably in areas that we want to continue to expand. That could be around credit. It could be around infrastructure. Does that help, Bill?

Bill Katz -- Citigroup -- Analyst

Yes. That's helpful. And then maybe just my second question leads into that, just wondering if you could maybe expand your comments a little bit on what you're doing to deepen the opportunity set in the private markets.

Martin L. Flanagan -- President, Chief Executive Officer

Yes. So that's why it's going. So look, we've been extending the real estate capability into infrastructure, but it's very early days for us, right? So it's an area that's very competitive and is one that we want to be competitive in off of the bank loan capabilities that continue to build out private credit, direct lending capabilities. Private credit is going quite well, the distressed capability, in particular. And also the team in direct lending has been building a nice track record as one to get the scale, though. So that's the areas that we've been focused on.

Bill Katz -- Citigroup -- Analyst

Thank you.

Martin L. Flanagan -- President, Chief Executive Officer

Yup. Thanks Bill.

Operator

Thank you. The next question is from Mike Cyprys with Morgan Stanley. You may go ahead.

Mike Cyprys -- Morgan Stanley -- Analyst

Good morning. Thanks for taking the question here. Just maybe turning back to your investment spend. I think you had mentioned on the expense saves that's net of investment spend in the business. So just hoping you could maybe help quantify maybe how much you're investing back in the business. Or how do you think about that in terms of points on the margin? And how would you characterize that pace of investment spend today versus what you have been doing, say, two to three years ago? And how different might that pace be as you look out over the next two to three years?

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Let me start with -- we're not quantifying what's been reinvested. So what we've put forth is the $200 million net target and that's really what we're tracking to. And as we think about the reinvestment, it really is -- one, it can be rather difficult to trace and track the -- where it's reinvested at that absolute level because we are always investing in the business. But what we're looking to do is really make some changes that are discrete line items of cost that we can take out, and again, create more than $200 million, so that we do have some growth savings to be able to reinvest back into the business. And the way we're thinking about it is really about driving operating margin.

I can let Marty comment on the past and some of how the thinking may differ prior to my time at Invesco. But I would tell you our focus now really is on delivering that profitable growth. And so as we think about reallocating, we're really thinking about how do we reallocate some of those savings into areas where we think we get the fastest growth and really drive that margin enhancement. And I think you see some of that margin enhancement and what we've been able to deliver over the last two or three quarters. I don't know that we can deliver that margin enhancement of that magnitude quarter after quarter into perpetuity. But again, it gives us the opportunity just to really leverage the scale that we think we are starting to create across a real diversified platform and making sure that our investments are in those key capabilities that really drop profitability to the bottom line.

Martin L. Flanagan -- President, Chief Executive Officer

Yes. Michael, so look, it'll be quite simple. So if you -- there is on the highlights slide, we talk about the focus on investment solutions in China. Active equity, active fixed income, private markets factors, indexes, those have been the areas where we've been just laser-focused, and they have been the net beneficiaries of that. Also underneath it really everything digital, as you would imagine. So all of our digital capabilities as we face off against client, that is just -- clients has just changed quite dramatically for everybody. Last year has advanced it quite dramatically. And I think also what you're seeing really in the platform to make it much more efficient and effective and Alpha Next Gen is an example of that. And it's beyond just more efficient, more effective. It's really moving everything to the cloud and also creating a data capability that really enhances our ability to get to all the information we need to make better decisions. So it really is quite focused, and I think it's showing up in the results.

Mike Cyprys -- Morgan Stanley -- Analyst

Great. Just a quick follow-up. With the improving performance trends that we're seeing, maybe you could just remind us on how much AUM is eligible to earn a performance fees. Which strategies would you say are the largest contributors there? If I remember, I think in the past, maybe it was real estate. And just given your improving performance trend, how are you thinking about performance fee revenues for this year compared to what we've seen in prior years?

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Sure. I'll take that. Our AUM that's eligible to earn a performance fee is around $58 billion. And we tend to see in terms of what comprises that AUM, it is largely real estate. A number of contracts that would relate back to China, Asia Pacific, broadly speaking, but specifically China. And so as I think about it going forward, it is just inherently difficult to predict the level of performance fees given it varies by contract and by client relationships. So I really can't give you a lot of guidance there. I would point to the fact that fourth quarter performance fees were north of $70 billion, as you know. As I look at performance fees this quarter, pretty consistent to what we saw in the second and third quarter of last year. I wouldn't necessarily suggest that, that is what you should expect every quarter because it is so difficult to predict. But I do think looking at some of those historical trends is at least factual and somewhat helpful.

Mike Cyprys -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from Chris Harris with Wells Fargo. You may go ahead.

Chris Harris -- Wells Fargo -- Analyst

Great. Thank you. So a record quarter for flows. Flows improved in a lot of different areas. I guess the one area that was a bit of a headwind was the U.K. Wondering if you can talk a little bit about what drove the weakness in the U.K. this quarter and how you're feeling about the outlook.

Martin L. Flanagan -- President, Chief Executive Officer

Yes. So look, U.K. equities continues to be a headwind. It's been a period of, one, just the asset class, which were historically a larger manager within the asset class and historical performance. The performance is still a headwind. That said, we've made the changes to the portfolio managers. I feel really good about the teams there. It's still early days for them, but that is really the main focal point there.

Chris Harris -- Wells Fargo -- Analyst

Okay. Got you. And one quick follow-up for Allison. Other revenue was up quite a bit in the quarter. What drove that? And how should we be thinking about the run rate for that line item?

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yes. It was up quite a bit. It's largely due to higher UIT and front-end transaction fees. It is -- almost all of other revenue is transaction based as opposed to AUM or volume based. So it can be, I would say, as you think about a run rate, a little bit more difficult to predict, I'm just double-checking that. Yes. I mean I think we had an unusually large quarter, and there were some specific items in there. As it relates to some of the UIT and front-end transaction fees, I don't know that you should expect that same level of revenue quarter-to-quarter.

Chris Harris -- Wells Fargo -- Analyst

Thank you.

Operator

Thank you. And our last question comes from Glenn Schorr with Evercore. You may go ahead.

Glenn Schorr -- Evercore -- Analyst

Thanks so much. I just wanted to ask an industry-level follow-up on the MandA backdrop. And Marty, you guys obviously have done much, much better. The industry flows have been better, margins have been done better. The markets are up and valuations have recovered some. I'm curious, if at all, if that changes the industry narrative and consolidation theme takes any of the pressures for that need for scale? Or if you've seen a continuation of what we've seen so far in terms of bigger is better?

Martin L. Flanagan -- President, Chief Executive Officer

Yes. Look, I don't think it does. Yes, it provides relief for the sector, if you would say, a rising tide raises all boats. But the reality of where the industry is has not changed. I mean it has all the characteristics of a maturing industry where, again, fundamentally I mentioned a couple of minutes ago, every client is expecting more from money managers. They are working with fewer money managers around the world. And you really need scale in multiple levels across the organization, whether it'd be in investment capabilities, operational scale, the ability to invest in technology. That's just not going away. And so there's going to be consolidation, but there's going to be two ways as we've talked about in the past. There's going to be inorganic but also organic. Literally, just money leaving to go to those firms that are performing better for the clients. And still, the other reality of Manda within the sector is hard. I mean you really need a skill set to be successful at it and that's still -- even if you do have those skills, it's just hard. And you got to be really focused and be able to execute it. So I don't think the strategic dynamic has changed, quite frankly.

Glenn Schorr -- Evercore -- Analyst

I appreciate that. Thanks, Martin.

Martin L. Flanagan -- President, Chief Executive Officer

Yup.

Operator

And that was our last question.

Martin L. Flanagan -- President, Chief Executive Officer

That was it, operator -- Sue, thank you. And on behalf of Allison and myself, thank you very much for participating, and thanks for the questions. And we'll talk with everybody very, very soon. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Unidentified Speaker

Martin L. Flanagan -- President, Chief Executive Officer

Laura Allison Dukes -- Senior Managing Director and Chief Financial Officer

Dan Fannon -- Jefferies -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Ken Worthington -- JPMorgan -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Robert Lee -- KBW -- Analyst

Adam Beatty -- UBS -- Analyst

Mike Carrier -- Bank of America -- Analyst

Bill Katz -- Citigroup -- Analyst

Mike Cyprys -- Morgan Stanley -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Glenn Schorr -- Evercore -- Analyst

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