Q1 2024 Invesco Ltd Earnings Call

Participants

Allison Dukes

Andrew Ryan Schlossberg; President, CEO & Director; Invesco Ltd.

Gregory Wade Ketron; Head of IR & Treasury; Invesco Ltd.

Brennan Hawken; Executive Director and Equity Research Analyst of Financials; UBS Investment Bank, Research Division

Brian Bertram Bedell; Director in Equity Research; Deutsche Bank AG, Research Division

Craig William Siegenthaler; MD & Head of the North American Asset Managers, Brokers & Exchanges Team; BofA Securities, Research Division

Daniel Thomas Fannon; Senior Equity Research Analyst; Jefferies LLC, Research Division

Glenn Paul Schorr; Senior MD & Senior Research Analyst; Evercore ISI Institutional Equities, Research Division

Kenneth Brooks Worthington; MD; JPMorgan Chase & Co, Research Division

Luke Bianculli; Research Analyst; Goldman Sachs Group, Inc., Research Division

William Raymond Katz; Senior Analyst; TD Cowen, Research Division

Presentation

Operator

Welcome to Invesco's First Quarter Earnings Conference Call. (Operator Instructions) This call will last 1 hour. (Operator Instructions) As a reminder, today's call is being recorded.
Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin.

Gregory Wade Ketron

All right. Thanks, operator, and to everyone joining us on the call today.
In addition to our press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP.
Finally, Invesco's is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcast are located on our website. Andrew Schlossberg, President and CEO; and Allison Dukes, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions.
I'll now turn the call over to Andrew.

Andrew Ryan Schlossberg

Thank you, Greg, and good morning to everyone. I'm pleased to be speaking with you today. Economic conditions remained relatively resilient this quarter. And even though this diminished expectations for Central Bank cuts this year, equity markets continue to rise. The S&P 500 gained 10% during the quarter, again making it the best-performing major equity Index. As the quarter progressed, market breadth began to improve although gains in large-cap growth and tech stocks continue to significantly lead the U.S. equity market rally. More modest growth was recorded in developed markets outside of the U.S.
In China, markets continue to lag, but economic indicators and sentiment are showing some signs of a bottoming. Fixed income markets were generally weak this quarter with prices dropping as Fed expectations changed. During the quarter, we continued to see increase in client demand overall. We delivered $6.3 billion in net long-term inflows for an organic growth rate of 2.2%. Organic flow growth and signs of improving sentiment drove markets and assets levels higher again this quarter at Invesco and ended the period with nearly $1.7 trillion in assets under management.
Our resulting net revenue and adjusted operating income growth were up 1% and 7%, respectively, from Q4 levels, which reflects where we saw growth against our diversified asset mix profile. We remain optimistic that with increasing market clarity, a broadening of market participation will continue to take hold and investor appetite for more duration, risk on and global-oriented assets will increase. We are well positioned to benefit across our business in this type of environment.
Now moving on to Page 3 of the presentation and against this market backdrop, we highlight results in each of our investment capabilities. You'll note these categories aligned with those presented in conjunction with our net revenue yield and portfolio migration disclosures, which we've been highlighting the last several quarters, and Allison will expand on later in her comments.
We are aligning disclosures in the way we speak about our business to present a more holistic and consistent view that encompasses all of our investment capabilities. And though each of these areas of our business is in a different part of its life cycle with different trajectories, these are the capabilities where we have invested resources and had conviction about the market and our position within it. The objective of our enhanced disclosure is to foster a better understanding of various components of our investment capabilities and their performance and potential in order to drive a clearer view of Invesco as a whole, our advantages in the market and our plans to drive profitable growth.
Now turning to a deeper look into Q1 across each of these capabilities. An ongoing key driver of our strong organic flow growth is our ETF and Index platform. During the quarter, we continued to gain market share, recording $11.2 billion in net long-term flows, representing a 12% annual and growth rate. This was one of our best flow quarters to date as we hit a record high of nearly $400 billion in long-term AUM.
Growth this quarter was led by our equity Innovation Suite, notably our fund QQQM. This innovative product leverages our QQQ popularity. But with this fund, we earn a direct fee on this product instead of significant marketing benefits. In a relatively short time, it has become our third largest ETF in our product suite outside the QQQ. Additionally, we continue to expand and leverage our active investment teams into our ETF and Index franchise. Our U.S.-listed ETFs strategies incorporating our active teams now exceed $25 billion in AUM across over 25 products and multiple asset classes. The advantages of ETFs in both passive and active formats remain a focus for Invesco and our clients.
Shifting to fixed income. We continue to believe that as investors gains greater clarity on inflation and Central Bank interest rate policy, they'll move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies. Though this anticipated shift may be more protracted given the mixed economic signals of late. We're beginning to see green shoots, and we're well positioned across the risk and duration fixed income asset classes to capture flows.
We did see continued momentum into fundamental fixed income with $1.1 billion of net long-term flows in the first quarter or nearly a 2% annual organic growth rate. Leading drivers included investment-grade strategies delivered through our institutional channels as well as municipal bond strategies delivered through our mutual fund and SMA platforms. Beyond our fundamental fixed income capabilities, an additional $2.1 billion of assets flowed into our fixed income-related ETF and Index strategies.
Important to our fixed income demand story is rapidly expanding retail SMA offering, which is one of the assets growing in the industry with an annual organic growth rate of 24%, and nearly $23 billion in AUM. We're starting to see extension of duration with our top-selling SMA this quarter being the intermediate tax-exempt strategy, and we're seeing growing interest in our intermediate taxable investment-grade strategies as well.
We are well positioned to continue to grow our retail SMA platform to support the client demand for this vehicle delivery structure, especially U.S. wealth intermediary market. We have a long-dated and established track record on our SMA platform that represents not only fixed income, but also traditional active equity and custom equity index SMAs. We see a lot of opportunity in this space and we look forward to continuing to share our progress with you.
Moving on to private markets. We made momentum into the first quarter with net long-term flows of $1 billion driven by inflows in our credit strategies, notably bank loans. We also saw modest positive flows into direct real estate, primarily driven by INCREF, which is our non-exchange traded REIT focused on the private real estate debt markets, which has had good momentum in the wealth advisory space since its launch last year.
Additionally, it's important to note that our real estate team has $6 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters. But greater market clarity is going to be required before we can begin to see significant return of demand and growth.
Moving on to our Asia Pacific-managed assets. Despite overall client sentiment in China remaining relatively weak, we did generate a modest positive net long-term flows in our China JV driven by equities, particularly fast-growing ETF lineup. This was augmented by the launch of 4 new products, and we continue to believe that some early signs of recovery in China could bode well for a more constructive market as 2024 progresses. We maintain our conviction in this market and our leading position within it as the asset management industry matures with the development of local retirement and capital market systems in the world's second largest economy.
Beyond China, we also saw nets in our in India business. We recently announced a joint venture with a leading Indian company for our funds business in that market. This partnership with the Hinduja Group will enable us to continue to expand our distribution to serve more domestic investors in the Indian market.
In our multi-asset and other related capabilities, we also generated net inflows led by our quantitative equity strategies which were offset by outflows of remaining assets in our GTR capability in the U.K., which we decided to close last year.
Finally, the relative pressure on fundamental equity flows continued. However, as I pointed out previously, we've seen some moderation in certain areas of active equity flows, particularly in the global, international and emerging market segments. Our net outflows in these strategies have moderated during the past several quarters to $1 billion to $2 billion per quarter, markedly lower than 2022 quarterly peak outflows of $6 billion.
One notable standout in our fundamental equity flows was in our global equity and income strategy, which is among the top-selling active retail funds in the growing Japanese market. This fund delivered an incremental $1.2 billion of net flows in the first quarter and it's AUM has nearly tripled in the past year.
Overall, our asset flows in the first quarter continue to demonstrate the breadth of capabilities that we offer to serve our clients' diverse needs and perform through various market cycles. We believe that this positions us well in front of the rapid evolution underway in our industry. Our team remains focused on the value drivers that we believe create a competitive advantage to deliver sustained strong asset flows. Notably investment quality, product breadth and differentiation and exceptional client engagement.
So moving on to Slide 4, investment performance, which is always a top priority of our firm and as displayed on this slide. We're showing overall results relative to benchmarks and peers as well as our performance in key capabilities, where information is readily comparable and more meaningful to driving company outcomes.
Overall, investment performance was solid in the first quarter on a 1-, 3- and 5-year basis, 66%, 64% and 75%, respectively, of our AUM is beating its benchmark and around 70% of our AUM is in the top half of peers across all periods. We also have a significant number of funds that are now in the top quartile of performance with 46% hitting that mark on a 5-year basis, which is a considerable improvement over the last several quarters. We continue to have excellent fixed income performance across nearly all capabilities and time horizons, supporting our strong conviction in our ability to attract flow as investors deploy money into these strategies.
92% of our fundamental fixed income capabilities are beating their benchmark with 68% in the top quartile on a 5-year basis. Fundamental equities 3- and 5-year performance has improved meaningfully over the past year, with 56% in the top half of peers on a 3-year basis and 52% over 5 years. We've seen strengthening results across many of our domestic and global equity strategies as well.
So hopefully, you find this more streamlined approach to discussing our results, our investment capability and investment performance more straightforward and useful as you think about Invesco and its potential. As we continue to simplify and focus our business, we are also tightening our financial discipline which will enable the allocation of resources to drive innovation and growth in our investment capabilities.
With that, I'm going to turn the call over to Allison to discuss our financial results for the quarter, and I look forward to your questions.

Allison Dukes

Thank you, Andrew, and good morning, everyone. I'm going to begin on Slide 5.
Total assets under management at the end of the first quarter were nearly $1.7 trillion or $77 billion higher than last quarter end. Higher markets, coupled with net long-term inflows drove the increase in AUM during the first quarter. Of the $68 billion increase driven by higher markets, $46 billion was driven by ETF including $20 billion by the QQQ. Fundamental equity AUM was $19 billion higher due to markets. As Andrew noted, we generated $6.3 billion in net long-term inflows for organic growth of 2.2%. Long-term net inflows were largely driven by ETFs, excluding the QQQ.
ETF flows were $11.2 billion in the first quarter. Partially offsetting this was $5.6 billion in fundamental equity net outflows during the quarter. Net revenues, adjusted operating income and adjusted operating margin all improved from the fourth quarter, and I'll cover the drivers of that improvement shortly.
Adjusted diluted earnings per share was $0.33 for the first quarter. We continue to simplify and streamline the organization to better position Invesco for greater scale and improved profitability in the future. We did incur $5 million of organizational change related expenses in the quarter, we also achieved an incremental $4 million of net savings, more than we had expected previously. These efforts will result in $60 million of annual net savings this year, exceeding our goal of $50 million for 2024. Overall, operating expenses remained well managed.
We further strengthened the balance sheet by redeeming the $600 million senior notes that matured on January 30. As expected, we used $500 million in cash, and we drew approximately $100 on our credit facility to fully redeem the notes. We ended the quarter with net debt of $362 million as we had other seasonal-related cash usage during the quarter, and we're still on track to approach net debt of 0 in the second half of this year.
Moving to Slide 6. Secular shifts and client demand across the asset managed industry coupled with more recent market dynamics have had a significant impact on our asset mix since the acquisition of OppenheimerFunds. Going back to 2019 after the acquisition, ETF and index AUM, excluding the QQQ, have grown from $171 billion or 14% of our overall $1.2 trillion in average AUM in 2019 to $398 billion or 23% of our average AUM of $1.6 trillion in the first quarter.
The QQQ, a product we earn no management fees from, but does provide a substantial marketing benefit has more than tripled in size over this time, growing from $74 billion to $259 billion or 6% to 15% of total average AUM. We've also seen very strong growth in global liquidity, growing from $77 billion or 7% of average AUM to $165 billion or 10% of average AUM in the first quarter. These product areas carry lower net revenue yields compared to our overall net revenue yield.
During the same time frame, we've seen weaker demand for fundamental equities and multi-asset products, which carry higher net revenue. This has been driven in part by the risk-off sentiment that was sparked in early 2022, coupled with the pressure we experienced in developing markets and global equities as well as the closure of our GTR capabilities.
Our fundamental equity portfolio in 2019 was $348 billion or 29% of our average AUM. By the first quarter, that portfolio had declined to $274 billion or 16% of our average AUM. Multi-asset also declined from 9% to 4% of average AUM over this time frame.
Looking at the first quarter of '24 as compared to the fourth quarter of '23, we continue to experience similar dynamics with ETFs growing from 20% to 23%, and the QQQ grew from 14% to 15% of average AUM, while fundamental equities and multi-asset remained flat at 16% and 4%, respectively. The result of revenue headwinds created by these dynamics has weighed on our results over the last several years.
While we've experienced excellent organic growth and lower fee capabilities like ETFs and global liquidity is not enough to offset the revenue loss from higher fee fundamental equity and multi-asset outlet. Our overall net revenue yield has declined meaningfully during this time frame, but that decrease has been driven by the shift in our asset mix, not degradation in the yield in our investment strategies. Net revenue yields by investment strategy have been relatively stable within the ranges provided on the slide.
The other point that I want to emphasize is that this multiyear secular shift in client preferences have been and recaptured in our results. Our portfolio is better defined today than 4 years ago and our concentration risk and higher fee fundamental equities and multi-asset have been reduced. These dynamics, though challenging to manage through as they occur should portend well for future revenue growth and marginal profitability improvement. Further, we now have a more diversified business mix, which better positions the firm to navigate various market cycles, events and shifting client demand.
Now turning to Slide 7. Net revenue of $1.05 billion in the first quarter was $23 million lower than the first quarter of '23, and $7 million higher than the fourth quarter of '23. The decline from last year was largely due to a $22 million decline in investment management fees driven by the shift in our asset mix just discussed. Service and distribution fee increased $43 million due to higher fund-related [expense] fees and higher AUM to which the fees apply. But this is largely offset by third-party distribution, service and advisory expenses that are passed through from service and distribution fees.
The revenue increase from the prior quarter was primarily due to a $34 million increase in invest management fees due to higher average AUM, partially offset by the incremental asset mix shift and lower seasonal performance fees. Service and distribution fees increased $32 million due to higher fund-related fees but were offset by third-party distribution, service and advisory expenses.
Before I cover operating expenses, I did want to note that for the first quarter, certain operating expenses were reclassified to more accurately portray the nature of the expenses. These expenses were previously classified as either marketing or property office and technology and they've now been reclassified as G&A expenses.
We've included in the appendix a 2-year look back on the reclassifications to show the impact by expense category. The reclassification had no impact on our reported operating revenues, total operating expenses, operating income or net income. For comparability, the variances I will be discussing include the reclass expense categories for the first quarter of '24, and the first quarter and fourth quarters of last year.
Total adjusted operating expenses in the first quarter were $770 -- excuse me, were $757 million, an increase of 8 million from the first quarter of last year. Included in the first quarter of this year's operating expenses, are $5 million related to organizational change expenses and $7 million of Alpha platform-related implementation expenses, which in the first quarter of last year would have been recorded in transaction, integration and restructuring expenses, and not included in our operating expenses.
Adjusting for these items, first quarter expenses were $4 million lower than the first quarter of last year. Total adjusted operating expenses were $14 million lower than fourth quarter largely driven by lower G&A expenses. Employee compensation was $6 million higher in this quarter due largely to the seasonal impact of higher payroll tax and other benefit resets in the first quarter, which totaled approximately $20 million. This is partially offset by lower costs related to organizational changes that I'll touch on shortly.
G&A expense was $21 million lower than last quarter as we typically see higher G&A in the fourth quarter. Lower professional services fees in the first quarter were the primary driver of the decline in G&A expense. We also had $7 million in spending related to our Alpha platform implementation, lower than the $12 million incurred last quarter.
Going forward, we continue to expect onetime implementation costs of Alpha to be approximately $10 per quarter in '24, with some fluctuation quarter-to-quarter. We'll continue to update our progress on the implementation and related costs as we move forward. The effective tax rate was 20.6% in the first quarter. We estimate our non-GAAP effective tax rate to be between 23% and 25% for the second quarter 2024. The actual effective tax rate can vary due to the impact of occurring items on pretax income and discrete tax items.
Moving to Slide 8. We have an incremental $4 million in net expense savings in the first quarter related to the organizational changes. On an annualized basis, we have achieved $60 million in net savings, exceeding our $50 million target for 2024. And while we did realize $5 million of organizational change related expenses in the first quarter, we're not currently expecting any further significant restructuring costs associated with these efforts. The full benefits from our simplification efforts will be seen over time as we generate revenue growth and margin recovery. As we discover manage variable compensation to a full year outcome in the company performance and competitive industry practices.
Historically, our compensation to net revenue ratio has been in the 38% to 42% range, trending towards the upper end of the range and periods of lower revenue. At current AUM levels, we would expect the ratio to be slightly above the higher end of this range for 2024.
I'll finish on Slide 9. We continue to make progress on building balance sheet strength in the first quarter. We redeemed the $600 million senior note that matured on January 30, using the $500 million in cash and drawing $100 million on our credit facility to accomplish this. We ended the quarter with $900 million in cash and $368 million drawn on the facility as the first quarter is a seasonally high cash usage quarter.
We ended the quarter with net debt of $362 million, compared to nearly $600 million a year ago, all in line with our expectations. These actions resulted in an improvement in our leverage ratios, and we're now down to a leverage ratio excluding the preferred of 0.54x, a significant improvement over the past several years. We expect to pay down the credit facility as we move through the second and third quarters, approaching our goal of zero net debt in the second half of this year. We also hope to begin a more regular stock buyback program as we move towards this goal.
We're pleased to note that our Board approved an increase in the quarterly common stock dividend to $0.205 per share effective this quarter. This reflects the strength of our balance sheet, cash position and stable cash flows. To conclude the resiliency of our firm net flows performance is evident again this quarter, and we continue to make progress on simplifying the organization and building a stronger balance sheet while also investing in areas of growth. We are committed to driving profitable growth and a high level of financial performance, and we have the right strategic positioning to do so.
And with that, I'd like to open it up to Q&A.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from Dan Fannon with Jefferies.

Daniel Thomas Fannon

I guess, Allison, first to start maybe a modeling question. The service and distribution revenues versus the third-party expense, the deltas are directionally understand they went higher because of higher asset levels. But the ratio was more negative this quarter, similarly last quarter also directionally went in opposite way. So just trying to understand what are the other kind of more detailed facts behind that and how we should think about that prospectively.

Allison Dukes

Sure. There's definitely a bit of an anomaly in those line items this quarter. We've got an elevated $21 million of fund-related expenses, which really shows up as a fee and that was related to a fund proxy expense. The fund board determined that a shareholder meeting was necessary to elect new trustees. That's a pretty infrequent occurrence. In fact, the last time that occurred was in 2017. But as a result, there's a $21 million fund-related expense that shows up in that third-party contra revenue. It's offset -- the majority of it is offset, there's $18 million that was paid for by the fund, and that would be recorded as service and distribution revenue. So I think when you look at the quarter-over-quarter change with year-over-year and the sequential quarter, you obviously see that large anomaly is not something we would expect to occur given the last time was in 2017.
When you look -- think about the relationship, and you're right, the relation -- just the ratio is running relatively high. If I look at third-party contra revenue, that usually runs about 41% to 42% of management fees. But it will be on the higher end in some of the lower revenue years just due to there's fixed cost inside of that line item. I would expect it to be above the higher end this year, maybe somewhere around 43%, again, just as we're coming into the year, starting at a lower revenue trajectory. If you look back at 2020 as kind of a reference, it would be in a similar range back then. So I think that's one way to think about it, Dan.

Daniel Thomas Fannon

Okay. That's helpful. Just going back to the disclosures and the fee rates and kind of the mix and understanding this has been a long kind of trend since the Oppenheimer deal. But if I look fundamental equity assets are up 9% year-over-year. That still represents your highest fee bucket. I know -- and it's flat quarter-over-quarter. But I guess what gives you confidence that that's not still a headwind as if beta is removed and you still have the outflow trends that have been going on, and why we wouldn't still see continued fee rate degradation.

Allison Dukes

So the question of what gives us confidence that fundamental equity is a continued headwind? I mean, I would say it could still be a continued headwind. I think what gives confidence as we look at the trajectory overall from here is that we continue to manage that exposure down or if the market effectively continues to manage it down as well as client demand continues to be more for our passive capabilities that are active. That is obviously an industry-wide trend. We don't expect a change in that trend. So to be clear, we're not expecting fundamental equities to necessarily turn into a strong tailwind, but we do think the magnitude of the headwind will continue to diminish as it becomes a less significant component of our overall AUM mix and we continue to grow the other categories. And we are seeing strong organic growth rates as we've noted, in many of the other categories.
The one thing we could -- well, the several things we continue to focus on, and I know Andrew touched on this, we can continue to go into it is investment performance. Very focused on the investment quality behind fundamental equities and making sure we continue to make good progress there and we are demonstrating progress there. And there are underlying -- as we decompose our fundamental equities, there are underlying trends that create headwinds, not the least of which is our exposure in developing markets and global equities, which given some of the geopolitical challenges that are out there continues to be an asset class that is not strongly in favor, and that will continue to be a headwind so long as we have some of the geopolitical challenges underlying the trend for client preference there.

Andrew Ryan Schlossberg

Yes. Delivering in fundamental equities is one of the firm's top priorities and Allison outlined where those are. Global international emerging market equities, in particular, their demand spans the world, and we're well positioned to take advantage of that, as demand comes back. And so we'll manage the things we can control, which Allison outlined around investment quality and quality of the teams.

Operator

Our next question comes from Ken Worthington with JPMorgan.

Kenneth Brooks Worthington

High level, MSCI World and S&P were at all-time highs at the end of March. Invesco stock price has lagged this year and is down since the beginning of '23. You touched on a series of points over the discussion this morning. But pulling it all together, as your review of the stock price performed over the last 12 to 15 months, maybe first, what is your assessment? And then Allison, you highlighted that mix issues have negatively impacted earnings and those have moderated. Can you help us better evaluate that mix moderation is approaching the level that can better allow earnings to grow and better allow the stock price to perform better?

Andrew Ryan Schlossberg

Yes. I mean, look, clearly, as a starting point, we're not pleased with where the share price is. We're working hard to improve that in the areas that we can control. Several of the things that were market demand has been, we've been strong. So whether that's passives, ETFs, indexing, places like fixed income and growth in areas like Japan and out in Asia Pacific. Some of the headwinds that we've had with a large portion of our assets in place where some demand has not picked back up in terms of the asset flow demand that is places in global and international emerging equities, areas like China continue to be places where we feel well positioned, but market demand i.e. client flows needs to come back.
So those are some of the things that we're focused on from a growth standpoint. And from an expense standpoint, continuing to be disciplined with the expense base, and using opportunities to rotate our expense base to areas, we anticipate we'll grow going forward, which we continue to hide. So those are the things that we're going to continue to do to drive the profitability of the company and hopefully the share price higher.

Allison Dukes

And I'll just touch, Ken, on the mix moderation. I think, look, there is just at some point, a mathematical sort of tipping point that happened there as you think about our AUM mix and where effective sort of net revenue yield is today based on the composition we have. As it gets closer and closer to what our passive net revenue yield is, there's a bit of a terminal value there. We, in no way expect our fundamental is to go entirely to disappear. There continues to be strong demand there. In fact, our gross sales were quite strong.
But if you look at the underlying headwinds and pressures, again, particularly given some of our exposure and our tilt towards global and developing markets, it creates a lot of headwind. But there is a terminal value there as we start to see the mix continue to diversify as ETF and index become an even greater percentage of our overall portfolio the organic growth there is creating positive net revenue growth.
Fundamental fixed income, we are seeing positive net revenue growth. We continue to see good net revenue growth in global liquidity. And a lot of this just continues to be offset, not entirely, but moderately offset by fundamental equities. Those headwinds will diminish at some point, just given client demand and asset allocation.

Andrew Ryan Schlossberg

Yes. I mean the only other thing I do want to add is markets have been, as we all know, have been narrow even inside the indexes, as has client demand, as has the amount of cash that remain sitting on the sideline. There are some positive things that we think as clarity comes into the markets at a more -- at a greater rate, we'll start to see demand broaden out.

Kenneth Brooks Worthington

Okay. Excellent. And just Allison as a follow-up, that tipping point comment. How close are we to that tipping point? How far in the future do you think that is or maybe we're already there.

Allison Dukes

It's hard to say because it is so client demand driven. And again, look, if I just look at our net revenue yield of 26.1 basis points and you think about our passive ETF and index kind of net revenue yield of 15 to 20. We're a whole lot closer to that at 26.1 than we were at 40 basis points. So there is that -- and I don't know the tipping means growth because I do think we believe there's stabilization and stabilization will then allow that annualized net new revenue growth to really take hold, and we can start to see it in true organic revenue growth that would match the organic flows.
Hard to say exactly, but I believe we're getting closer and closer. We are as challenged this quarter was, we are optimistic as we look into the year. And we're optimistic because of a variety of trends. We look at markets haven't hurt. April has obviously not been terrific. But markets are modestly helpful. Our organic growth continues to be very strong. We see pockets of growth across frankly, almost all asset classes, we're very encouraged by what we see in terms of the organic growth trends both in the first quarter and continue throughout the year. And we know our expenses are well managed against it. So we actually feel reasonably confident that we're starting to reach a pivot point. I just can't be certain what client demand and markets hold.

Operator

Our next question comes from Brennan Hawken with UBS.

Brennan Hawken

I'd like to start with the shift in expenses. Does the shift of some expenses into G&A and a method of signaling that these expenses could maybe eventually be cut or slim down as the operating model is adjusted and streamlined?

Allison Dukes

Well, no, the shift was not -- if I understood your question correctly. It was not a way of saying -- I mean, truly the shift reclassifying expenses where they better belong. Things like travel, entertainment didn't belong in marketing, it belonged to G&A. So it was really trying to get expenses where they need to be. So we better reflect the true nature of those expenses and not necessarily a signal in any way.

Brennan Hawken

All right. Another question on disclosure. Hopefully, this one turns out to be a little more fruitful. So it seems like you guys are shifting the AUM disclosures here to align with Slide 6, where you provide the yields. But just a couple of questions. This is net revenue yield, right? So it excludes performance fees, but it is net of anything going on with distribution. I just want to make sure I'm looking at that correctly when we think about how to use it as a modeling tool. And going forward, if this is going to be the way in which we should model, are we going to get a more granular disclosure of these yields, so we'll be able to really fine-tune models tightly that -- and maybe some historical time series showing what the fee rates were historically so we can really fine-tune.

Allison Dukes

So a couple of things. One, yes, the 26.1, consistent with the disclosures we've had that are in the press release and here in terms of the net revenue yield. Yes, we've been -- you and several others were very encouraging of us continue to above our disclosures to this kind of format. And so we hope you find it more helpful going forward. We think it's more helpful as well.
In terms of the disclosures, the fee rates we provided in this range here will be the way in which we continue to provide that. We will adjust those ranges. Should the ranges actually no longer prove to be accurate, but they are the right ranges and we do see each one of these categories really operating within that range, again, very dependent on client demand. As within any of these categories, we do have strategies that really do kind of hit the barbell of the different ranges that are there. And so it's very dependent on client demand.
So we did provide a history by these categories in the presentation. So you can go back and see some of the flows by category. And then we've got the fee ranges there as well, but we will update the ranges going forward as the ranges change.

Brennan Hawken

Okay. And is -- are the monthly AUM disclosure is going to align with this too? just -- sorry.

Allison Dukes

Yes, they are.

Operator

The next question comes from Alex Blostein with Goldman Sachs.

Luke Bianculli

This is Luke on behalf of Alex. Just another question while we're on the topic of updated disclosure. Can you just run through the major components in the private markets business, maybe how big each bucket is? And how you're thinking about the growth outlook for this part of the business?

Allison Dukes

Sure. The major buckets would be -- maybe starting with real estate would be -- it would be direct real estate. So that's around $69 billion listed real estate, which would be around $15 billion. So those would be the two components of real estate. And then private credit, which is primarily bank loans at about $39 billion, and then our distressed and direct lending funds, which total just about $2 billion, maybe a little north of $2 billion between them.

Andrew Ryan Schlossberg

And maybe I'll -- look, in terms of growth, what we mentioned this quarter in the credit side, our bank loans and floating rate strategies continue to be in demand, and we're one of the market leaders in that space across all vehicle types. And we don't see that abating. And then on the real estate side, the greatest opportunity for us in terms of growth right now is taking what's largely been an institutional recognized franchise and bringing it into the wealth space as we've been talking about.
And we have a few strategies in market right now that I mentioned earlier, our real estate equity strategy and then also more recently, our real estate debt strategy. Both of those products have been in the market for a few years now, the debt one more recently, and they're well picked up by wealth platforms and continue to be picked up by wealth platforms. So as demand continues in that space, we think we can be a pretty active participant.

Luke Bianculli

Got you. That's helpful. I appreciate the color. Just one more, maybe circling back on like the fee rate dynamics. You guys highlighted expense savings slightly better than prior expectations. But with the continued degradation of the fee rate, can you just frame about the pace and trajectory of margin expansion over the next 12 to 18 months?

Allison Dukes

Sure. And then I would remind that the degradation of the fee rate doesn't necessarily mean the degradation of revenue. And so that's one of the things we're trying to unpack as we continue to refine the disclosures on Page 6, and where the organic growth is coming from. We can have great strong growth in ETFs and no real growth in some of our higher fee categories and still see fee rate degradation but see strong revenue growth. So that's the most important thing to remember and where we're trying to again provide those disclosures.
So where do we expect things to go from here? I mean I think as we continue to manage expenses and we do -- we are very actively, thoughtfully and aggressively manage our expenses. And we will -- while I said we don't expect any significant organizational change costs from here. That doesn't mean we won't continue to find opportunities to create further organizational changes. What I want to be clear on is we weren't necessarily guiding to. You should expect more in organizational expenses because we're not in the midst of a major program, but we are in the midst every day of looking forward decisions we can make to continue to refine and streamline the organization, and we'll take advantage of those opportunities as we have been for the last year since first realigning the business a year ago.
We have continued to really step through a series of changes, and we will continue to step through changes as we see opportunities to streamline the business. We really believe we've got the opportunity to continue to create positive operating leverage. I have no reason to believe we couldn't do it starting this quarter. I will just be clear, client demand and markets have continued to be headwinds. Markets not so much last quarter, but client demand was a headwind. We could see markets be a headwind this year depending on what continues to happen from a geopolitical perspective and some of the impact that has on our developing markets exposure in particular. But that said, we absolutely have the opportunity to create positive operating leverage from here.

Andrew Ryan Schlossberg

We continue to also invest behind these growth capabilities that we've been mentioning in the last several quarters. And we've been able to do that from a standpoint, as you see in the results, and we're really seeking to create an organization that's more flexible, an organization that's more streamlined and focused that allows us to rotate that expense base where we need to in different market conditions, but with the long term in mind.

Operator

And the next question comes from Glenn Schorr with Evercore.

Glenn Paul Schorr

Maybe one on -- in the spirit of driving growth in high-demand solutions, can you peel back the onion a little bit on what you're doing, what success you've had on both the SMA platform and active ETFs. I know two things in one there, sorry.

Andrew Ryan Schlossberg

Yes. I mean let me talk about both. On the SMA platform, as I mentioned, it's now grown to about $23 billion, which is multiples higher than just a few years ago. The immediate success that we've been having is in the fixed income space, where there's been decent demand and a lot less supply of offering. We're seeing that kind of across the piece in fixed income. More recently, we've been introducing custom indexes and elements of the active strategies, which have had a slow pick up where there's more supply in the market but we think off the drop of what we've built, there's opportunity there.
And then in time, we think the SMA platform, like the ETF is going to continue to be a preferred vehicle which will allow us to bring other strategies, fundamental strategies or they're fundamental and quantitatively developed strategies together into that SMA platform. So we're -- we think we're in early stages of growth in SMAs. And I think going to the way the technology and operational platform set up now in a more modern way, it scales a lot better than SMA businesses did a decade or two ago.
On active ETFs, we've been in that space. We've been one of the pioneers in active ETFs starting as far back as 10 to 15 years ago. We have, as I mentioned in my remarks, we have about $25 billion of AUM that has an active team connected to it, which doesn't mean just active funds. So about half of that is in active ETFs in the classically defined sense, and the other half is passive-oriented strategies, but supported by our working with one of our investment, active investment teams, things like multi-asset or bank loans are examples of that.
And we continue to think the ETF chassis and which were large and scaled in is going to continue to bring in not just traditional active strategies but also alternative active strategies, meaning ones that combine fundamental and quantitative approaches. And we think we're set up well to be a leader there given the quality of our active, the depth of our ETF range. And the recognition I think we have on the wealth platforms, which will drive this growth. So both areas are vehicles that we're excited about, and I think there's a lot of opportunity to bring our capability to.

Operator

And our next question comes from Bill Katz with TD Cowen.

William Raymond Katz

Maybe a big picture question first. There's a couple of articles just about sort of streamlining your India platform. It seemed to be a little bit different when I heard just now in terms of the JV. Just sort of wondering if you could talk a little bit about just the opportunity to continue to streamline globally or to reinvest into faster growth areas and how that might ultimately back to earnings.

Andrew Ryan Schlossberg

Great. Let me -- I'll start, and then Allison can pick up. Two different components of our Indian business or Indian profile that are worth mentioning. We use India as a very large enterprise back office, middle office center. And that's been phenomenal for us in a place where we're going to continue to invest behind and continue to -- it will be one of the places that helps us streamline the cost base over time.
Separate to that, we have an Indian fund business. And what we announced in the last few weeks was that we were forming a joint venture with a large Indian business called Hinduja Group. And Hinduja Group has bought 60% of our interest, so we'll have a minority interest. And Hinduja is well-recognized company in India and also a financial services company in India, which we think in a combined way can help us grow and accelerate the pace of development that we have there, and we can -- we're better suited as a minority interest in that regard.
And those are the sorts of things I think you could think about as we continue to go market-by-market, looking for ways to both grow and to think about where we deploy our resources, capital and operating expense.

William Raymond Katz

Okay. And my next question (inaudible) a little bit. Allison, can you just go back to the distribution discussion. I was taking notes because I want to make sure I understand it, and maybe apply it to the 26.1-basis-point average fee rate for the quarter. And what would be the exit rate if you normalize for the sort of unique fund costs? And then you mentioned that you're going to be sort of back to sort of net zero by the second half of this year, but you might be able to sort of rethink capital return along the way. At what point should we anticipate buyback, particularly where the stock is trading now.

Allison Dukes

Sure. I don't know that the net of the third-party distribution, is that meaningful. So if I go back and just kind of recap what I said there, you've got about $18 million related to that proxy event that was recorded as revenue and $21 million that's recorded then a third-party contra revenue, so effectively $3 million that was borne by Invesco there. Not terribly meaningful as you think about net revenue yield. So I don't -- I'm not trying to dodge your question, but I don't know that it's terribly meaningful to net revenue yield.
I know it is a bit confusing, though, and I would continue to guide to the thinking about something around 43% of third-party contra revenue as a percentage of management fees is the right way to think about that relationship in a revenue environment. And as revenue improves, you should expect that to kind of come back down into that 41% to 42% range, and the proxy of it being a bit of an anomaly.
As it relates to our return of capital, and I'm sorry, I might have missed that question, when buybacks might resume. Buybacks. Again, I think as we approach our target of zero net debt, which we expect to be middle, back half of this year. And we are being very thoughtful in our cash management overall, very pleased with what we've been able to do so far and very much in line with our expectations. We expect we'll reach it middle to back half of this year, and we do hope to be resuming more regular share buybacks. I think I've noted in the past, our total payout ratio would be in the 40% to 60% range I might expect it and just sort of the lower earnings environment to be on the higher end of that range. Hopefully, I covered that question there, Bill.

Operator

The next question comes from Brian Bedell with Deutsche Bank.

Brian Bertram Bedell

Maybe just come back to the active ETF question. To the extent you're cloning these from fundamental strategies, or I guess the question is, what is your appetite to create active ETFs that are either clones of the fundamental strategies or similar types of strategies? And can you capture a fee rate on those ETFs, a management fee unit or net revenue yield on those ETFs that are similar to the fundamental strategies. And I guess -- and as you're growing them, are you included in the ETF bucket? Or would they be in the fundamental buckets?

Andrew Ryan Schlossberg

Yes. Let me start, and Allison can pick up on that last part in particular. It's very much driven by client demand. And what I mean by that is where there is interest in fundamental strategies that are the same or similar to ones that we offer today. We'll offer them and we'll bring them forward. We haven't seen that so much to date. They've either been a new strategy or a variant of. But we'll continue to bring the best capabilities we have into the active ETF wrapper where it completely makes sense.
You're going to see some of that, I think, in the industry come through conversions. You're going to see some of that come as cloned or as newly originated funds. But I think, ultimately, you're really going to see the ETF as a preferred wrapper for many investors to have lots of different ways of deploying active into it. As I was saying before, some fundamentals, some quantitative, some that are going to be a variety of both. So I think there's going to be a decent amount of product development, and I think each firm is going to have a different strategy on it. We've got some of the unique attributes that I mentioned, and you'll probably see all of the above from us. In terms of the fee rates and where they're included, I'll leave it to Allison.

Allison Dukes

So as we -- as those grow and as we start to embark on that, they would show up in the ETFs and index investment capability category. And when and as and if it changes the fee rate, we would adjust that range as well in the disclosures. But we've got a ways to go and just creating critical math there that would actually create a change in that range.

Brian Bertram Bedell

Okay. That's good color. And then just on the classic ETF franchise. Just maybe if you can talk about how you view the scalability of that. And clearly, you're always making investments in -- across your product lines. But if we continue to see outsized growth in that franchise, should we expect that to be positively contributing to your margins over time?

Andrew Ryan Schlossberg

Yes. I'll let Allison, you start, and I'll pick up.

Allison Dukes

Well, I mean, I'd say on the bottom part of your question, yes, and it is positively contributing to our margin today. It's just offset by some of the outflows on the fundamental equity. So to be very clear, our overall traditional ETF franchise is margin accretive as it stands today, and we are starting to see the benefits of scale, although I think we're just scratching the surface of it and continuing to grow that is a true focus for us.

Andrew Ryan Schlossberg

Really across all part -- I mean, we often talk about product when we -- in origination, new product or scaling existing products. But there's a whole ecosystem behind it, which as we get larger, allows us to continue to have operating leverage. Technology plays a big part. Operations plays a big part. Capital markets plays a big part. I think these are some of the advantages we have of having been in the ETF business for multiple decades on having the size and scale we have. So it does scale well and incremental margins should improve over time.

Operator

And the final question comes from Craig Siegenthaler with Bank of America.

Craig William Siegenthaler

My first one is on Asia. So you had positive flows from the China JV and in India, where your overall APAC business had net outflows. So I was curious what were the largest sources of redemptions by geography and product in APAC this past quarter?

Andrew Ryan Schlossberg

Yes, I know it could be a little bit confusing, so I'll let Allison pick up. I think in the region, do we have positive flows in the region? So let me distinguish, the managed assets that you see on Page 3, the negative is driven by a Japanese equity capability that we have that had some net outflows in the first quarter. So that was the only driver of negative impact on what we call Asia Pacific managed assets on Page 3. But maybe from a regional perspective, Allison, why don't you pick up?

Allison Dukes

From a sourced perspective, we were in inflows. In fact, it was pretty strong, about $3.3 billion of inflows, so a 6.6% organic growth rate, largely driven by Japan continues to see a lot of success in Japan with our Henley Global Equity and Income Fund. We've noted some success on that for the last several quarters. That garnered over $1 billion of inflows in the first quarter. Continued success in India, just under $1 billion of inflows in India, positive flows in the China JV, as we noted as well. So overall, strong growth in the region from a sourced perspective.

Andrew Ryan Schlossberg

And Craig, you can see some of that on Page 13 in the appendix, we show it on a sourced flow perspective.

Craig William Siegenthaler

Got it. And just my follow-up. You had $1 billion of private market net flows, and I can see there were $2.8 billion of long-term outflows. Does your definition of outflow include both redemptions and realization because as you know, some you exclude realizations from the net flow definition.

Allison Dukes

Yes. Ours include redemptions and realizations. And so when you look at our flows in private markets, largely driven by bank loans, which I think Andrew noted, it's a little over $1 billion in bank loans. We did see inflows on the real estate side as well in direct real estate, and that would be net of realizations. Some of the outflows were actually on the listed side and some of the listed real estate.

Andrew Ryan Schlossberg

All right. Well, thanks to everybody for joining. And in closing, I really want to reiterate that we're well positioned to help clients navigate the impact of evolving market dynamics and subsequent change to their portfolios. And very much believe that as market sentiment improves, this should translate into even greater scale, performance and improved probability. Given the work we've done to strengthen our ability to anticipate, understand and meet evolving client needs I'm very excited for the future of Invesco.
I want to thank everybody for joining the call today, and please reach out to our Investor Relations team for any additional questions. And we continue to appreciate your interest in Invesco and look forward to speaking again very soon. Thank you.

Operator

And that concludes today's conference. You may all disconnect at this time.