Invesco Ltd (IVZ) Q2 2021 Earnings Call Transcript

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Invesco Ltd (IVZ 0.66%)
Q2 2021 Earnings Call
Jul 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 statement. 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 Second Quarter Results Conference Call [Operator Instructions] Now, I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Allison Dukes, Chief Financial Officer. Mr. Flanagan, you may begin.

Martin L. Flanagan -- President, Chief Executive Officer

Thank you. Thank you, operator, and thank you everybody for joining us. We've reached the halfway point in the year and we're continuing to see strong momentum in our business as you can see from the results that we ported this morning. But before I begin, I'd like to take a minute to recognize the hard work of our team at Invesco, like most everybody, our employees have been working in a work-from-home or hybrid environment for more than a year now, and they've achieved these results in a very challenging environment. I'd like to thank the team for their dedicated focus and adaptability during this time. And with the success of the virus, many of us have been coming back to the office and working together in the last few months and I can tell you, it's good to see our colleagues once again. And we are in different stages of reopening around the globe and one thing that I hear from everybody that is able to get back to the offices upgraded us to see one another and work together. And I will say, we're at our best when we're working together, collaborating and innovating, and I'm excited about the future as we continue to open our offices to more employees and welcome them back. And as always, we'll follow the status of COVID and local guidelines as we transition back to the office, meeting client needs, helping them ensure continued health and well-being of our employees.

So now, let me turn to the results. And if you're so inclined to follow the presentation, I'm going to start on Slide 3, which is the highlights for the quarter. We achieved a new record in the second quarter for long-term net inflows totaling $31 billion. This follows net inflows of $24.5 billion last quarter and up nearly $18 billion in the second half of last year. Growth was led by net inflows into institutional ETFs, fixed income, and but as alternative capabilities. And as you can see on Slide 3, the key capability areas where we have scale, investment readiness, competitive strength, drove growth again in the quarter. These are areas where our investment performance is strong, we're highly competitive and well-positioned for growth.

Looking at our ETFs, excluding the Qs, they generated net long-term inflows of $12 billion during the quarter. Net long-term inflows from alternatives during the quarter were $4.3 billion, including strength in our private markets business. We launched two CLOs during the period, raising $1 billion and generated net inflows into our real estate business of a billion dollars. We continue to focus and invest in our alternative capabilities space where we also see the benefit of our partnership with MassMutual which we highlighted last quarter. MassMutual has committed over $1 billion to various alternative strategies, materially increasing the speed with which [Phonetic] we can get to market for the benefit of our clients. We continue to innovate with strategies for retail investors through the launch of products such as INREIT and the partnership we announced with UBS, in which we will provide bespoke Global Property Investment Services for management clients of UBS in Switzerland, other parts of EMEA and Asia. We also have $5 billion in direct real estate capital available for deployment. We had net long-term inflows of $8.8 billion into active fixed income and within the active global equities, our $52 billion [Phonetic] developing markets fund, a key capability that came with the Oppenheimer combination, continued to see net inflows of nearly $1 billion dollars during the quarter.

Second-quarter flows included net long-term inflows of $3 billion from Greater China and our Chinese joint venture continues to be a source of strength and differentiation for us as an organization. In addition, our solutions enable institutional pipeline accounts for 35% of the pipeline at quarter-end, this following the funding of a large passive mandate from Australia in the second quarter which was enabled by our Solutions team. Allison will add more information in a moment on flows, the pipeline results in the quarter, including the continued progress toward our net savings target. But I would note, the growth we are experiencing is driving positive operating leverage producing an adjusted operating margin of 41.5% for the quarter. Strong cash flows being generated from our business improved our cash position, helping build a stronger balance sheet and improving our financial flexibility for the future. Invesco's scale, investment readiness, competitive strength, position us well going forward and we continue to focus our efforts on delivering positive outcomes [Technical Issues] clients will drive [Technical Issues]

With that, I will turn it over to Allison to walk through the results in greater detail.

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Thank you, Marty, and good morning, everyone. Turn to Slide 4. Our investment performance was strong in the second quarter with 72% of actively managed funds in the top half of peers or feeding benchmark on a five-year and a 10-year basis. This reflected continued strength in fixed income, global equities, including emerging market equities and Asian equities. All areas where we continue to see demand from clients globally. Moving to Slide 5. We ended the quarter with $1.525 trillion in AUM. Of the $121 billion in AUM growth, approximately $66 billion is a function of increased market values. Our diversified platform generated gross inflows in the second quarter of $114.4 billion. This [Technical Issues] 82% improvement from one year ago. Net long-term inflows in the second quarter were $31.1 billion, representing 10.6% annualized organic growth. Active AUM net long-term inflows were $2.1 billion and passive AUM net long-term inflows were $29 billion. The retail channel generated net long-term inflows of $9.5 billion in the quarter, driven by positive ETF flows. This represents a $24.1 billion improvement in net long-term inflows from one year ago, driven by significant improvement in equities in the Americas. The institutional channel generated net long-term inflows of $21.6 billion in the quarter, augmented by the funding of the nearly $18 billion Australian passive mandate.

Looking at retail net inflows, our ETF, excluding the QQQ, generated net long-term inflows of $12.1 billion. Our global ETF platform, again excluding QQQ, again captured flows in excess of its market share of AUM in the second quarter and for the first half of 2021 with net ETF inflows in the United States included a continued high level of interest and our S&P 500 equal weight ETF, which generated $2.6 billion in net inflows in the second quarter, following $4 billion of net inflows in the first quarter. Looking at flows by geography on Slide 6. You'll note that the Americas had net long-term inflows of $5 billion in the quarter, driven by net inflows into ETFs, various fixed income strategies, private market CLOs, and the direct real estate net long-term inflows that Marty mentioned. Asia-Pacific again delivered another strong quarter with net long-term inflows of $28.3 billion. Net inflows were diversified across the region, nearly $18 billion was from the large passive Australian mandate that funded from our institutional pipeline in May. The balance reflects $4.8 billion of net long-term inflows from Japan, $3 billion in inflows from Greater China of which the majority was from our China JV, $1.8 billion from Singapore, and the remainder arising from other areas across the region.

Long-term inflows for EMEA excluding the UK were $1 billion driven by retail flows including net inflows into alternative [Phonetic], particularly our US and European senior loan funds. ETFs, the net inflows in EMEA were $2.2 billion in the quarter. And finally, the UK experienced net long-term outflows of $3.2 billion in the second quarter, driven largely by net institutional outflows in multi-asset and investment-grade capabilities. $2.4 billion of these net long-term outflows relate to our Global Targeted Return capability, which had $10.2 billion globally in AUM at the end of June. The overall UK net long-term outflows in the second quarter were an improvement of $2.7 billion as compared to the first quarter net long-term outflows of $5.9 billion. This improvement was driven by UK Retail, primarily inflows into the European Equity Funds and lower net outflows during the quarter across a number of fixed income and UK equity capabilities.

Turning to flows across the asset classes. Equity net long-term inflows of $15 billion [Phonetic] reflect a good portion of the Australian mandate and ETF, including our S&P 500 equal weight ETF that I mentioned. We continued to see broad strength in fixed income in the second quarter with net long-term inflows of $13.6 billion. Driver to fixed income flows include institutional net flows into investment-grade strategies and retail net long-term inflows, and the various municipal funds and fixed maturity products in Asia. It's worth noting that although we did have fund launches in China in the second quarter, they were not at the pace of what we experienced in the first quarter. You see this largely reflected in the $9.1 billion decrease in the net flows in the balance asset class during the quarter to net outflows of $1.8 billion. Our alternative asset class has many different capabilities, and this is reflected in the flows we saw in the second quarter. Net long-term flows in alternative improved by $4.5 billion over the first quarter, driven primarily by our private markets business through a combination of inflows from the newly launched CLOs, direct real estate, senior loan and commodity capability. Included in these alternative flow results is also the GTR net outflow that I just noted. If you do exclude the global GTR net outflows, alternative net long-term inflows were $7.2 billion, quite significant in the quarter.

Moving to Slide 7. Our institutional pipeline was $33.3 billion at June 30, reflecting the funding of the large passive indexing mandate in Asia Pacific, assisted by our custom solution advisory team. Excluding the impact of the $18 billion passive mandate in the first quarter, the pipeline has increased in size and remained relatively consistent to prior quarter levels in terms of asset and fee composition. Overall, the pipeline is diversified across asset classes and geographies and our solutions capability enabled 35% of the global institutional pipeline and created wins in customized mandates. This has contributed to meaningful growth across our institutional network, warranting our continuing investment and focus. Turning to slide 11 [Phonetic], you'll note that our net revenues increased $52 million or 4.1% from the first quarter as a result of higher average AUM in the second quarter. The net revenue yield, excluding performance fees of 34.8 basis points, a decrease was 0.90 of a basis point from the first quarter yield level. The decrease was driven mainly by asset mix shift, including higher QQQ and money market average balances, as well as the impact of the large passive of Australian mandate that funded in May. This decrease was partially offset by the improvement in markets in the quarter. The incremental impact relative to Q1 of higher discretionary money market fee waivers was minimal in the second quarter, but the full impact on the net revenue yield for the second quarter was 0.70 of a basis point. We do expect fee waiver to remain in place for the foreseeable future until rates begin to recover to more normalized levels. Total adjusted operating expenses increased 1.9% in the second quarter. The $14.4 million increase in operating expenses was mainly driven by variable compensations and marketing. Higher variable compensation as a result of higher revenue offset by the reduction in payroll taxes and certain benefits from the seasonally higher levels that we experienced in the first quarter. We also recognized sales -- excuse me, we also further recognized savings in the quarter, resulting from our strategic evaluation.

Marketing expenses increased $9.8 million in the second quarter, mainly due to seasonally higher levels relative to the first quarter, which is typically the low point for marketing spend annually. We also reevaluated the timing of various branding campaigns and launched targeted initiatives in the quarter across the globe. Operating expenses remained at lower than historic activity levels due to pandemic driven impact to discretionary spending, travel, and other business operations. However, we did reduce some client activity and business travel late in the second quarter, which is reflected in both marketing and G&A expense. As we look ahead to the third quarter, our expectations are for third-quarter operating expenses to be modestly higher compared to the second quarter, assuming no change in markets and FX levels from June 30. We expect that the higher AUM levels driven by net inflows and market improvement in the second quarter will have a modest carryover impact on both revenues and associated variable expenses in the third quarter. We also expect a modest seasonal increase in marketing-related expenses, as spend [Phonetic] typically increases in the third and fourth quarters. One area that's still more difficult to forecast at this point is when COVID impacted travel and entertainment expense levels will begin to normalize. We are engaging in more domestic travel and in-person engagements and we do expect to see continued modest resumption of these activities across the third quarter.

Additionally, our US mutual funds Board has approved certain changes to the pricing of transfer agency services that we provide to our fund. As a result, we anticipate that our outsourced administration costs which we reflect in property, office, and technology expenses, will increase by approximately $25 million on an annual basis. Offsetting this will be a corresponding increase in service to distribution revenues, resulting in a minimal impact to operating income. We expect this new pricing structure to go into effect in the third quarter and to be fully in place by the fourth quarter. Moving to Slide 9. We update you on the progress we've made with our strategic evaluation. As we've noted before, we are 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 continue to invest in key areas of growth, including ETF, fixed income, China Solutions, alternatives, and global equities. In the second quarter, we realized $7.5 million in cost savings. $2 million of the savings was related to compensation expense and $5 million related to property, office, and technology expense. The $7.5 million in cost savings or $30 million annualized, combined with the $95 million in annualized savings realized through the first quarter of '21 brings us to $125 million in total or 63% [Phonetic] of our $200 million net savings expectations.

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 '22. Of the $150 million in net savings by the end of this year, we anticipate we will realize roughly 70% of the savings through compensation expense. The remaining 30% would be spread across occupancy, tech spend, and G&A. We expect the total program savings to be 65% in comps -- in compensation and about 35% spread across the other categories. So the $125 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, we will continue to moderate going forward. In the second quarter, we incurred $20 million of restructuring costs. In total, we recognized nearly $170 million of our estimated $250 million to $275 million in restructuring costs that were associated with this program. We expect the remaining transaction costs for the realization of this program to be in a range of $85 million to $105 million through the end of 2022. As a reminder, the cost associated with the strategic evaluation are not reflected in our non-GAAP result.

Moving to Slide 10. Adjusted operating income improved $38 million to $541 million for the quarter, driven by the factors we just reviewed. Adjusted operating margin improved 130 basis points to 41.5% when compared to the first quarter. Most importantly, our degree of positive operating leverage reflected in our non-GAAP results was 1.8 times for the quarter, underscoring our focus on driving scale and profitability across our diversified platform. I'll also point out that our adjusted operating margin back in the third quarter of 2019, which was our first full quarter following the Oppenheimer acquisition, was 40.9%. At that time we reported a net revenue yield excluding performance fees of 40.7 basis points. At the end of the second quarter of 2021, our net revenue yield ex-performance fees was 34.8 basis points, yet our adjusted operating margin was 41.5%. We have been building out our product suite to meet client demand and client demand has been a lower fee product. We're focused on aligning our expense base with changes in our business mix, enabling the firm to generate positive operating leverage and operating margin improvement. Non-operating income included $42 million in net gains for the quarter, compared to $26 million in net gains last quarter, primarily from increased unrealized gains on seed money and co-investment portfolios.

The effective tax rate for the second quarter was 22.8% as compared to 24% in the first quarter. The effective tax rate on net income was lower in the second quarter, primarily due to a change in the mix of income across taxing jurisdictions. We estimate our non-GAAP effective tax rate to be between 23% and 24% for the third quarter. The actual effective rate may vary from investments due to the impact of non-recurring items on pre-tax income and discrete tax items. Few comments on Slide 11. Balance sheet cash position was $1.3 billion at June 30 and approximately $750 million of this cash is held for regulatory requirements. Our cash position has improved considerably over the past year, increasing by nearly $350 million, largely driven by the improvement in our operating income. Our debt profile has improved considerably as well with no draws on our revolver at quarter-end. As a result, we've substantially improved our net leverage position. During the quarter, we repaid the remaining $177 million forward share repurchase liability in April. And there are no remaining share repurchase contract liabilities. In terms of future cash requirements, in the second quarter, we recorded an adjustment for the MLP liability associated with the Oppenheimer purchase, reducing this liability from our original estimate of nearly $385 million, down to $300 million. We anticipate funding this liability in the fourth quarter of '21, but we do anticipate a degree of insurance recovery related to the matter. The insurance claims process is inherently complex and we do not have an update at this stage of the timing or size of that recovery.

Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility. In summary, we continue to see growth in our key capabilities. We remain focused on executing the strategy that aligns all these areas while completing our strategic evaluation and reallocating our resources to position us for growth. And finally, we remain prudent in our approach to capital management. We're in a strong position to meet client needs, run a disciplined business, and to continue to invest in and grow our franchise over the long term.

And with that, I'll ask the operator to open up the line for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Glenn Schorr with Evercore ISI. Your line is open.

Glenn Schorr -- Evercore ISI -- Analyst

Hi. Thank you very much. I wonder if we could talk a little bit about private markets. You talked a little bit about what went well in the second quarter but curious if we could maybe get a bigger picture view of what has the highest growth potential? What specifically you're doing on the retail side to drive growth? And maybe I'll take a chance to see how -- what's your vision of how big this segment can be?

Martin L. Flanagan -- President, Chief Executive Officer

Yeah [Indecipherable] Glenn, thank you for that. And so, obviously, it's been an area of focus for much of the industry. Our principal driver right now has been the real estate. It's a very strong global real estate group, direct real estate. Some of the more recent developments has been -- we're trying to get that into the retail channel. And INREIT, which is non-public, but is now available in the US, it's early days, that was also was funded by MassMutual for about $400 million, which is really important, [Indecipherable] that has great potential in the next year or so as is in the marketplace based on this historical performance of our real estate group. The other was really a venture with UBS and offering same thing, direct real estate with some listed real estate securities through Switzerland, other parts of EMEA, Asia-Pac. So, those seem to be really immediate opportunities. And quite frankly some of our private credit has more recently been gaining attention with institutional investors. They have a very good track record. With our track record, you now have seen the follow-on. But we look at this as a very important part of our business as we [Technical Issues]

Glenn Schorr -- Evercore ISI -- Analyst

Thanks. And maybe, just a quick one for Allison. Allison, you mentioned about the modest pickup on the expense side in 3Q, but if we could just -- I don't know if you're able to level set it from -- how much below normal are we? I appreciate. We don't know when normal travel, normal spend is happening, but if you would just -- right now, you have very normal expenses with really strong markets and flows, but not so normal expenses. Can you give us a way to dimensionalize that?

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yeah, it's a hard one because we have to look back at to -- or where we were in the last half of '19 to try to figure out what normal might have done and not sure that that's normal going forward. And I think that's the real challenge. I'd say we're probably $10 million to $15 million per quarter below what we would have seen in the last half of 2019. And I don't expect we'll see all of that come back just when we get back to whatever some permanent state is. And I think we're a ways off from that just given the international travel restrictions that looked like they're going to be in place for a while. But I do think we are certainly starting to see a resumption of domestic travel within regions that are allowing it, and we're certainly seeing, as we reopen offices, some pickup in just client activity, overall.

So I think probably a good estimate is to think about being maybe $15 million below what normally used to be. And some element of that will come back over time.

Glenn Schorr -- Evercore ISI -- Analyst

That's awesome. Thank you for that. I appreciate it.

Operator

Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.

Ken Worthington -- JPMorgan -- Analyst

Hi. Good morning. Thank you for taking my questions. Super high level, maybe first for you, Marty. As you look to the future, maybe over the next three years to five years, what you see is the most significant factor that's influencing the direction you're taking Invesco? I think if I asked that question maybe five years ago, you might have said something like factor-based investing, but what are your thoughts today?

Martin L. Flanagan -- President, Chief Executive Officer

Yeah. Ken, it's a good question. And I think you've raised this before. If you look at the firm right now, a number of the investments that we've made over the years are coming through in a very material way and probably first and foremost, the impact of China. And you're just seeing it just continue to be a source of strength for us as an organization. And quite frankly, I think by many estimates within, Asset Management, globally, we've seen plenty of could be -- explained half of all the flows within our industry in the next five years. Whether it's right or not, I don't know, but what I can say, it's a major factor. The other element is really how Solutions is really embedded in almost all of our client engagements. Institutionally, we've called it out and you see that. But, by the way, it is also true in each of our engagements that we're seeing. And you mentioned factors. We talked about that five years ago. It's a huge part of our ETF business, and frankly, our index business and it's going to continue to be an important part of what we do. And as you do know, well, just recently, just in the last two years, we've taken that factor capability, indexing capability to institutional clients and we get [Phonetic] it with a very strategic view with the recognition that what clients are using fewer and fewer money managers and they want the totality of the capabilities coming from money managers. And, well, you've seen some of the impact here, most recently with the IWF in Australia, but what it should really do is to become very important clients holistically. So those would be the biggest trends that I would point to, I think. The reality is, it's actually happening right now. So that's my personal perspective.

Ken Worthington -- JPMorgan -- Analyst

Awesome. Great. Thank you. And then maybe, Allison, you mentioned UK outflows, including some outflows from GTR. Does the decline in GTR assets lower the capital that you're either required to operate within Europe or volunteer to hold to operate in Europe? Or is the growth elsewhere in Europe or the UK, mitigating these declines?

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Unfortunately, the short answer to that question is no. The AUM decline there does not impact the regulatory capital, but we have to hold them. It's a little more complicated than that and its focus is a little bit more on the P&L, specifically expenses than it does AUM levels.

Ken Worthington -- JPMorgan -- Analyst

Right. Great. Thank you very much.

Operator

Thank you. Our next question comes from Robert Lee with KBW. Your line is open.

Robert Lee -- KBW -- Analyst

Great. Thanks for taking my question. Marty, I have a question for you on Greater China. So, some of your competitors had opened up [Technical Issue] or opening, I guess, are ultimately [Technical Issue] through the [Technical Issue] have enabled to [Technical Issue] on the, I guess, a majority stake. I know you've talked about for a while but [Technical Issue] Greater China's billions [Phonetic] of your benefit to, at least economically taking a share [Technical Issue] majority stake in the operational [Technical Issue] on it. Just update us on your [Technical Issue]

Martin L. Flanagan -- President, Chief Executive Officer

Yeah. Great. So, there might be some of the repetitive [Phonetic], but to remind everybody, so we own 49% of the joint venture. Right now, our partner, [Indecipherable] Power, we have been in conversations for two years to take a majority stake. There has been an agreement in principle, but it has not moved forward for the various reasons, COVID being one of them. And quite frankly, that would be the principal reason. But it has not hurt us and I think this is really an important thing. And to contrast our position to others, we've had management control since the beginning of the venture. And that has really -- is what separated our success as compared to our competitors. So we literally operate as one entity within China, where it's in the retail markets for Invesco. Great wall [Phonetic] but institutionally, we'll go to large institutions with the retail platform and our institutional platform. So, again that's really what's enabling the growth. We also have a wholly owned subsidiary, focused on other elements within China. And I think as you look at where others are, I think what's important to look at is separate announcements from the actual, has it happened. And generally, it's slowed down over the last 18 months for most institutions. They are trying to get to market with some of these new undertakings.

Robert Lee -- KBW -- Analyst

Great. And maybe my follow-up on the [Technical Issue] flow. I mean [Technical Issue] too much for a while, but I guess, a year or so ago, you launched Sydney [Phonetic] platform, sort of the other day, I think it was [Indecipherable] that wanted to start using [Technical Issue] platform. You may be up there so nobody [Technical Issue] meeting your expectation. And if you are [Technical Issue], did you see that continue to new product sales?

Martin L. Flanagan -- President, Chief Executive Officer

Yeah. So, right now there's a trillion dollars in assets under advisement. So you've seen some like Maestro [Phonetic], plus [Indecipherable] Pharma's, well, an important addition. Obviously, it's very early days and when you track our relationship with Citi, really, to focus the past year was really pulling together the different elements of Intelliflo and creating sort of a single operating platform to go to the clients holistically. And we are now starting to see the outcomes of that. And we'll be more specific to, well, these sort of events are material enough to have that conversation. But again, we're starting to get the momentum back in the business. And again, last year slowed down, some just with the COVID environment, but again, we're still optimistic about the prospects of Intelliflo.

Robert Lee -- KBW -- Analyst

Great. Thanks for taking my question.

Martin L. Flanagan -- President, Chief Executive Officer

Yeah.

Operator

Thank you. Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks very much. Good morning, folks. If I can just [Speech Overlap] the -- good morning -- the organic base fee growth as compared with the organic growth, if you can just -- like Allison just touched on, what you think the outlook for the [Indecipherable] for the net revenue yield going into the third quarter, given the ship or given the strong growth in passive versus active in the second quarter? And can you benefit at all from lower money market fee waivers given the rate IOER REIT? [Phonetic]

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yeah. So, I mean, I think there are a couple of things to keep in mind and the biggest drivers of net revenue yield quarter-to-quarter is really going to be the mix of flows. And that's really just a function of client demand and making sure -- and again, we feel like we have -- we're driving scale across a really well-diversified platform. So we're going to capture demand where demand exists, but that mix will certainly have an impact on net revenue yield. And then, market impact obviously is going to be always impactful on any given quarter. And then, money market waivers, as I noted, money market waivers right now, this quarter, accounted for about 0.70 on a basis point of a drag. And in terms of where do we see that going, it's -- IOER would be helpful. A movement in Fed funds would certainly be more impactful. But it isn't perfectly correlated, it's just that because there's competitive dynamics as well. And so we're going to be thoughtful about where we're positioned vis-a-vis the competition and making sure we're being thoughtful and smart about these waivers, sharing in them with our distribution partners across the institutional element of our waivers. And I'd note, our money market waivers are kind of 80% to the institutional channel and about 20% to retail. So, we are able to share in some of these waivers as we work with our partners to ensure clients are really getting the outcomes that they're expecting.

So, coming back to net revenue yield, I do think we'll probably see a modest sort of slowing down. But what I'd focus you on is, some of the comments that we are making as we look back at 2019. Net revenue yield 6 basis points lower than it was a couple of years ago, and yet our operating margin is higher at 41.5%. So, I recognize net revenue yield is something that we want to make sure we get in the models. But really, we don't think about net revenue yield quarter-to-quarter. We think about revenue and driving positive operating leverage across our platforms and I think our performance over the last year especially, really drive -- really underscores our ability to do that.

Brian Bedell -- Deutsche Bank -- Analyst

Yeah. That's a good point. Thank you for that. And then just on sustainable product flows, either Marty or Allison, could you talk a little bit it out, first of all, how much did sustainable [Phonetic] products, both active and passive drive flows in the second quarter? And then what's your AUM and what you would classify as sustainable products? If you can update a bit on that. And then just in terms of the game plan for product launches going forward in this area, even if -- even if you can sort of generalize what the strategy is?

Martin L. Flanagan -- President, Chief Executive Officer

I'll make a couple of comments to make sense of our [Phonetic] sustainable ESG capabilities and then I'll let Allison pick up. So, obviously, for us, we look at ESG as an incredibly important part of what we do and we are absolutely focused on integrating ESG [Technical Issue] across the whole organization, 75% of all our assets now have integrated ESG built in our capabilities. I think as you know, it's really been driven [Technical Issue] EMEA [Phonetic] in the first instance, which is a [Indecipherable] business [Indecipherable], and we think it is throughout the totality of our organization. And if you look specifically at dedicated ESG assets under management, it's up $52 billion today. We continue to see growth there. If you look at our EPS, we have one of the highest market shares of ESG ETFs, which is a [Technical Issue] track record. Again, we'll continue to see flows because of that. So, but again, if we look at this as just an absolute imperative for us to get right throughout the organization, whether it be how we manage money, but also the capabilities in the marketplace, and literally working with clients to ensure that we're hitting what is important to them as we work through this.

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yeah, I mean, I think Marty hit on most of it in terms of flows for the quarter, they were softer than the first quarter and it was a little less than $2 billion. We saw quite a bit stronger flows in the first quarter which really I wouldn't say there's anything specific driving the lower flows in the second quarter other than perhaps the market headwinds. We certainly saw some highs in the first quarter and a little bit of pull back from that could be -- could point to some post-election highs that were driving the first quarter and some modest shifts from growth. Overall, our ESG capabilities continue to be quite strong in terms of the performance in demand. As Marty noted, we're capturing more than our fair share of the market in terms of flows into the ESG capabilities.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thank you for the update.

Martin L. Flanagan -- President, Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon -- Jefferies -- Analyst

Hi. Thanks. Good morning. I wanted to follow up on your comments around balance. I think, Allison, you mentioned there were fewer fund launches? [Indecipherable] obviously, that's in outflows. The performance is good. So, maybe if you could give us an update on kind of the outlook for that category?

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yes. You know what really drove the real strength in the first quarter with the fund launches in China, in particular, we had probably a high watermark, just given the strength of those launches, both in terms of the size and performance, overall. I think inside of China, on the JV, we had seven fund launches, again in the second quarter. I think about five of them were balanced, again driving about $1 billion in flows. So it continues to be strong overall. Just some lumpiness quarter-to-quarter, I wouldn't necessarily point to anything specific beyond that.

Dan Fannon -- Jefferies -- Analyst

Okay, that's helpful. And then just on the strategic evaluation and understand the targets and kind of where you sit today, but curious as you've kind of gone through this in the areas of investment that you're looking to put some of those savings in, in some of those buckets, if there's been any real changes from your original expectations that you're allocating more dollars to or seeing more growth or -- it seems like we're getting the same kind of message each quarter, But curious if there's any more detail around, I think that might be different than when you originally outlined it?

Allison Dukes -- Senior Managing Director and Chief Financial Officer

I'll start and will let Marty chime in there. I would say, you're getting the same message each quarter because our strategy isn't changing. And I think it's that focus on our strategy and the continuity, in fact, that we're -- the consistency is something I hope you'll pick up on because there is consistency in our focus and our approach. The key areas of investment and key capabilities are things that we really do believe are the areas where we need to be invested ahead of client demand. We're seeing client demand in some of these capabilities today, but we expect there to be continued demand, and we're going to stay focused on those key capabilities. In terms of changes, I don't know that I would say there is anything specific that would cause us to change. We're always going to see -- sentiment may soften in China a little bit. I don't think that takes away from our focus or our beliefs, but that is a key growth area for us despite what market sentiment or political noise may be out there, quarter-to-quarter. Our solutions capability, I think we're convicted as ever, but that is a key capability for the future and I think you really see how that is driving our growth in the institutional pipeline and overall. Our ETF capabilities continue to be real drivers of growth as we're capturing more than our market share in terms of flows. I think our capture of flows this past quarter was somewhere around 4.2%. Our market share is 2.7%. But even more important than that is our capture of the revenue pool. We captured about 8%, a little north of 8% of the revenue pool of flows and ETFs over the last quarter, which I think really points to the strength of our capabilities there, how they're positioned, they are some of the higher fee capabilities relative to the ETF universe. And there is real demand because they're differentiated in terms of performance and outcome. And so, I don't know that we've had any surprises as I think back over the last year. It's been a supportive market. And this past year, that's helpful. But that doesn't deter our focus on making sure we're aligning our cost base to deliver exactly what you've seen us deliver in this past year, which is real strength in our operating margins and operating income growth.

Martin L. Flanagan -- President, Chief Executive Officer

Allison, that's well said. And, Dan, it's no mistake, when you look at the second quarter highlights, when we call out the key capability areas. We haven't changed because that's where our heads down, we see that as the greatest opportunity for us as an organization. They align with some of those macro trends that we talked about a few minutes ago, and it has been disproportionate investment from us. And also just the portion results. So you're not going to see change much, quarter-to-quarter.

Dan Fannon -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.

Brennan Hawken -- UBS -- Analyst

Good morning. Thanks for taking my questions. When you think about the success that you've had with your solutions offering, how do you build on that strength and how do you maintain differentiation? Are you seeing competitors try to emulate the success that you've had there and how do you step -- stay a step ahead? And also, is it -- how much of this business actually repeats whether that be a few quarters or a few years subsequent? I know it's early, but any stats you can provide or estimates or sense you have on that?

Martin L. Flanagan -- President, Chief Executive Officer

Yeah, let me -- so, it's a great question. And I can't describe what the competitors are doing, but our approach was a little bit different from the standpoint of, we started with the recognition, well, any number of years ago that clients wanted a broader range -- broad range investment capabilities, as we've been building out as we talked about. Importantly, what we did, building a solutions team is it sits on top of the investment teams. So it does not compete with the investment teams, it uses the investment part, system capabilities and that is somewhat unique, as best we can tell in the marketplace. And so, the client engagements are such that it's literally an engagement where the clients understand what are they trying to accomplish with the portfolios and delivering [Indecipherable] range of capabilities along the lines. And that's what we've seen. The more recent one though, as I mentioned a few minutes ago, was introducing index capabilities to institutions and the totality of that is what creates the importance of relationships with clients. And you end up expanding your -- your mandates per client in these relationships. So it does -- it's early days, but we're seeing, it is persistent in time. And then again, as I said a few minutes ago, we're seeing that it is very important institutionally, it's also quite important in the retail channel also. So. we just look at it this way, but frankly, it's the way the business is being done as we look to the future.

Brennan Hawken -- UBS -- Analyst

Okay. And then, second question, more -- probably more for Allison. I know we're seeing liquidity continue to improve. You laid out the idea that we're going to be having the MLP liability funding later this year. So, still some calls on liquidity. But without a question, in a far better position. And without those calls dramatically lower than they were a year ago. So with that in mind, what are your updated capital management priorities? How should we think about the likelihood of a step-up in buyback? I know we got the increase in the dividend, recently, but how are all of those different calls on liquidity? How do they rank in your mind from here, Allison?

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Thanks, Brennan. Yes. the resolution of the MLP matter will be a terrific milestone for us to get through. That's been out there for a while now and something we've been anticipating and reserving for. And so, as we think about the funding of that matter and the fact of the liability, at this moment, it does appear to be lower than what we were previously anticipating is good news. And we do look forward to the resolution of that in the fourth quarter. As we get through that, that does in fact clear out a lot of these, I'll call them contingent liabilities, that were, I think we needed to be cognizant of and manage our cash flow for over the past year-plus. And so, as we look forward beyond the regulation of that, I mean I'd say a couple of things, one, we continue to focus on just the improvement of our balance sheet, overall. Our leverage profile, as I noted, continues to improve, with the strength of EBITDA really -- depending on how you think about our leverage. But looking at the non-preferred element of the capital structure, I mean we're below one times now, with the results in the second quarter and that's a strong improvement. We're going to continue to be focused on opportunities that we have to improve our balance sheet. And I don't know what that means just yet, but we do have maturities, as you know, that come up in '22 and '24. And those remain areas of optionality for us as we think about balance sheet improvement. Beyond that, we are going to continue to be committed to that sustainable and modestly increasing dividends, as you noted, increased the dividend last quarter. And we will continue to look for opportunities to increase the common dividend concurrent with improvement and our performance and our results. And then longer term, we're doing share buybacks. I don't know when that will be, as I said, we want to get through the MLP matter and we continue to be focused on the leverage profile. But share buybacks certainly remain an opportunity for us to continue to return capital to shareholders.

Brennan Hawken -- UBS -- Analyst

Thanks for that color.

Operator

Thank you. Our next question comes from Bill Katz with Citigroup. Your line is open.

Bill Katz -- Citigroup -- Analyst

Okay. Thank you very much for taking the questions this morning. Marty, the question for you. So as you think about your relationship with MassMutual, where does it go from here as you may think to discuss maybe the seed capital need versus maybe opportunity to grow organically through their distribution pipe? And then, maybe any opportunity that you could see working with them on M&A?

Martin L. Flanagan -- President, Chief Executive Officer

Yeah. Thanks, Bill. So again, it has been multifaceted as you're pointing out. So, one is sort of a co-investor seed enabler in alternatives. That's been very, very positive, not just for the investment itself, but really the credibility of a subsequent [Phonetic] investor with double [Phonetic] institutional clients. And as you could sell the retail channel, is now -- currently it's now $10 billion on the retail platform right now. We're the number two flowing organization within that right now. And as you know, they've recently -- their close of acquisition and the equity business, that looks like it's going to be an opportunity for us as we move forward. So again, we just continue to work together in a very, very [Technical Issue] basis on various opportunities as we look to the future. With regard to M&A, I'm not exactly sure what the question is -- but they understand our strategy, very much as an organization and if something that made sense along the lines we've talked about in the past that it improves our street position and if it's complementary to our business, there is sort of what we're trying to call it [Indecipherable] festive cultural alignment, I'm sure that will be supportive of that.

Allison Dukes -- Senior Managing Director and Chief Financial Officer

And the one thing I'd say is we manage about $5 billion on a record dealer platform. [Speech Overlap]

Martin L. Flanagan -- President, Chief Executive Officer

Excuse me --

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Second, inflows there.

Bill Katz -- Citigroup -- Analyst

Okay, that's helpful. And then just a follow, come back to the capital management for a moment. Certainly appreciate a little uncertainty as you go to the end of the year with the liability still outstanding, but just given where the stock is trading today, I guess, your relative positioning, I'm just surprised that buybacks would be fourth on your list. Just talk a little bit about maybe the internal rate of return assumption you have between new business growth coming in the door versus the opportunity to buy back stock at these price points? Thank you.

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Yeah, I mean I don't want to imply that it's fourth on the list. And as we said before, it's not quite as the need of the waterfall as that would imply. We are being thoughtful about the timing and when we would resume buybacks. And certainly, we are thoughtful about how we think about that internal rate of return relative to other opportunities. The one thing I didn't say and I should have said is, the number one opportunity we have is to continue to invest in our own growth. And we are constantly thinking about the opportunity we have to invest in our own product launches, invest in our own capabilities, and we think that drives longer-term growth that shareholders are really looking for. Buybacks aren't fourth and last by any means, but we've had a number of parallel paths we've been running over this past year in resolving some of these contingent liabilities, as well as improving the balance sheet, overall. We're making good progress there and we're going to continue making progress as we think about all these opportunities we have.

Bill Katz -- Citigroup -- Analyst

Thank you, guys.

Martin L. Flanagan -- President, Chief Executive Officer

Thanks, Bill.

Operator

Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Alexander Blostein -- Goldman Sachs -- Analyst

Great. Good morning. Thanks for taking the question as well. I was hoping to go back to private markets discussion for a second and really zone in on the retail opportunity you see for Invesco. Maybe just a little more color on what products specifically you're sort of aiming to penetrate the retail footprint with? Sort of kind of what is your go-to-market strategy there? And considering significant amount of kind of open space and building upside [Phonetic] for private market solutions in the retail channel, can you get there organically or do you think you need to acquire additional capabilities?

Martin L. Flanagan -- President, Chief Executive Officer

Yeah. So, it's a very good question. And in search I thought was the INREIT which is being introduced to the retail market right now, sort of that investing [Phonetic] capability. Our view is that the largest opportunity for [Technical Issue] direct real estate capability is in the retail channel globally. And that's not unique to us. I think many firms have tried to figure out how best to -- alternative forms in particular, how to best access that channel, and it's very hard from the standpoint of those firms. If you're an alternative firm and have the capability that you really need that -- that retail presence with distributors, wholesalers, and the like to be successful. And so, there are very few firms like us that can pull that off. And so we look at this as a very important development for us. Again, just with what we've done with UBS. And now through multiple distributors here in the United States. So we don't think that -- we have the capabilities that are in demand within that channel and it's early days as far as I'm concerned for what we're going to see just moving forward here.

Alexander Blostein -- Goldman Sachs -- Analyst

So, it sounds like organically it's kind of the path you're on private market alts as opposed to anything inorganic?

Yeah. Yes, we have plenty to do with the capabilities that we have right now in the retail channel. Got you. Great. And then just very quick follow-up, Allison, for you. I mean, I apologize I missed it but can you talk a little bit about the fee rates associated with the $33 billion institutional pipeline? And then, curious again within the old part of the institutional pipeline, what strategies does that comprise of? Thanks.

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Sure. We -- if we look at the pipelines and look at the fee rate, I think what we've disclosed previously, it's fee rate for our institutional pipeline tends to be -- it's below the firm average, but it tends to be in the kind of high 20s, low 30s basis points. And as I look at the fee rate of the pipeline at the end of the second quarter, it's the highest I've seen since I've been at Invesco. And so, I'm quite bullish as I look at the pipeline, both in terms of the size that it was replenished back to $33 billion following the $17 billion funding of the Australian mandate. And the composition of the pipeline itself in terms of average fee rates and the balance across the regions and asset classes. It's pretty balanced across the United States, Asia-Pacific, and EMEA. And in terms of asset classes, kind of coming back to the second part of your question, it's actually a little bit higher on the alternative side than it has been in the last few quarters. And that's really, I think again, points to our private market capabilities, both our real estate capabilities as well as our senior loan capabilities. And I think again, speaks to just the strength of those capabilities, the demand that exists in the institutional channel, and our performance there as well.

Alexander Blostein -- Goldman Sachs -- Analyst

Great. Thank you very much.

Operator

Thank you. And our last question comes from Michael Cyprys with JP Morgan [Phonetic]. Your line is open.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey. It's Mike Cyprys from Morgan Stanley. Thanks for squeezing me in here. Just a question on China given the success that you guys had over there. Just hoping you could talk a little bit about your approach to distribution in China. What's worked, what hasn't worked as well? What lessons do you take away from your deep experience in the really -- in the region as it relates to distribution? And maybe you could also touch upon some of the digital distribution initiatives as well, as how that's evolving?

Martin L. Flanagan -- President, Chief Executive Officer

Yeah, great. Thanks, Mike. A great question. So needless to say, it's a very, very [Technical Issue] market and success is only going to fund the retail channel that you are so deeply embedded. So, in China, and you have your business driven by local Chinese which is the case for us. And you have to be a little more typical [Technical Issue] in the United States [Technical Issue] very important engagements with large banks, insurance companies getting on platforms and service on that side. I will say half of our retail flows right now [Technical Issue] on some type of digital product. [Technical Issue] it started with us with -- in financials as we came [Phonetic] in early, I think the first foreign money manager to -- they're a very large money fund. And it then expanded from that into other capabilities and then on other platforms within the marketplace. And then, what you also see is the digital engagement is at a level that is the most sophisticated in the world. And how you and engage with the clients, the demands on the organization are quite extraordinary. But, by the way, the benefit is it just has helped us in other parts of the world as we think of those types of engagement as they continue to evolve in different marketplaces. So, in the retail channel institutionally, it's same thing. Some of the sophisticated institutional investors in the world and it is, you just have to bring the best and brightest within the organization, representing the full range of capabilities. And this is another example where some of the largest penetrations with those institutional clients, in multiple mandates within China for us. And it just really reflects the necessity of the depth and breadth of an organization and to be able to serve institutional clients at a very high level. So, I don't know of that since -- I hope but that's what's worked for us.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. Thanks. And just a follow-up question, maybe more for Allison around the impact of market movement on your expense base. I think in the past, you've said maybe about a third of the expense base is variable or so almost with market. Is that still right? And then, I see you called out about $18 million or so impact on the comp side from market movements on Slide 9. Should we think about that being driven by the 5% market appreciation in your AUM, in the quarter translating into that $18 million impacts, $72 million annually? How should we be thinking about that?

Allison Dukes -- Senior Managing Director and Chief Financial Officer

So, a couple of things. One, I'd say, yes, you're -- the portion of our expenses that would be variable in nature and primarily driven by market, but certainly other flows will drive it as well, would be about a third. In terms of that market variable comp on Slide 9, and there is FX in there as well, so do keep that in mind. But yes, you can really kind of look at that relationship with just comp to revenue even and see there are some concerns [Technical Issue] that as revenue increases AUM performance, all of these things drive compensation in and drive the increase in variable compensation. I don't -- I wouldn't point you to any break, and the historical relationship there is still consistent with what we've got it to in the past. And yeah, so I'll leave it at that. Did that answer your question?

Michael Cyprys -- Morgan Stanley -- Analyst

Sure. Thank you.

Martin L. Flanagan -- President, Chief Executive Officer

Okay -- operator, I'm sorry, did I cut you off?

Operator

Go ahead, sir.

Martin L. Flanagan -- President, Chief Executive Officer

Yes, good. I just wanted to -- Allison and I just -- on behalf of Allison and I, thank you very much for your time and pretty short engagement and we'll be in touch. Have a good rest of the day.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Unidentified Speaker

Martin L. Flanagan -- President, Chief Executive Officer

Allison Dukes -- Senior Managing Director and Chief Financial Officer

Glenn Schorr -- Evercore ISI -- Analyst

Ken Worthington -- JPMorgan -- Analyst

Robert Lee -- KBW -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Dan Fannon -- Jefferies -- Analyst

Brennan Hawken -- UBS -- Analyst

Bill Katz -- Citigroup -- Analyst

Alexander Blostein -- Goldman Sachs -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

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