Invesco (IVZ) Q2 2026 earnings call transcript

Okay, thanks, operator, and to everyone joining us today. In addition to the press release, we have provided a presentation that covers the top of the plan to address. The press release and presentation are available on our website at dusco. com. This information can be found by going to the investor relations section of the website. Our presentation today will include four looking statements and certain non-gant financial measures. Please review the statements on slide 2 as well as the appendix for the appropriate reconciliations to get out.

Finally, and best goes, not responsible for the accuracy of our earnings transcripts, provided by third parties, the only authorized webcasts are located on our website. Andrew Swassberg, president and CEO, and Allison Dukes, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew.

All right, thanks, Greg, and good morning to everyone. I'm pleased to be speaking with you all today. We have built significant momentum thus far in 2026 as we continue to execute against our strategic priorities. Year to date, we posted record net influence of $67 billion or a 7% annualized organic growth rate and generated record net revenue with an increase of 17% over the same period last year.

Our broad product suite and global reach is resonating with clients as they seek to navigate an ever more complex market environment. Our increasingly scaled platform and disciplined approach to expense management gives us significant operating leverage. We increased operating income by 35% in the first half of this year, and we expanded our operating margin by nearly 470 basis points as compared to the same period last year, reaching 37.5% in the second quarter.

Further, we grew our bottom line by nearly 60% in the first half of 2026, as compared to the first half of last year. This is a testament to the hard work that our colleagues across Invesco have been doing over the past several quarters to streamline our business, drive profitability, and margin expansion, and strengthen our balance sheet. As highlighted on slide three, we are innovating for our clients, clarifying and simplifying our organization, and as a result, we are delivering for our shareholders. Product line management and innovation are key to our growth and are critical in remaining relevant to our clients. As such, we have made several additions and advancements in areas where there is significant demand, like ETFs, SMAs, model portfolios, and private assets.

We have launched more than 50 products this year across the Americas, AMIA, and APAC. This includes six new active ETF launches, and a new partnership with Superstate, where we are now the manager of our first tokenized treasury strategy. Another way we are innovating for our clients is through partnerships. Our bearings and LGT Capital private markets partnerships are designed to help us accelerate growth in the high opportunity US private wealth and define contribution markets.

We completed our first product initiatives with bearings at the beginning of this year, and we look forward to sharing more details on additional product launches with each firm later this year. We have also established partnerships in India and Canada that have allowed us to redefine our position in these markets from full ownership to minority status and as a subadvisor, respectively, while aligning with strong local financial institutions.

These changes have resulted in greater firm-wide focus, reduced operating expenses, increased leverage of our global investment platform, created balance sheet benefits, and enhanced revenue opportunities. To this end, during the second quarter, we successfully completed CI's acquisition of our Canadian products, and we have commenced our long-term strategic partnership with them, where we are now sub-advising funds with approximately $9 billion in AUF. Another clear indicator of the innovation aptitude at Invesco was the successful conversion late last year of the QQQ fund. In the first half of 2026, the Q's generated an incremental $130 million in net revenues for Invesco. Its AUM grew 20%, and it produced strong organic net flow growth in the second quarter.

We have significant opportunities to continue to expand this flagship, competitively-advantaged product, not only here in the United States, where the traction is incredibly strong, but also in other international markets. The QQQQ is now cross-listed on both the Hong Kong and Tokyo stock exchanges with over $10 billion of AUM raised in a short period of time. Examples like these are indicators of the strength of the multi-decade QQQ brand that is recognized around the world for its innovation. We see several avenues to continue to expand QQQ's client base, our innovation suite in general, and our wider $1.25 trillion ETF complex.

Beyond these and other strategic efforts, we have continued to make progress on our balance sheet recapitalization. We have significantly improved our leverage ratio over the last year from 2.7 times to 1.9 times, inclusive of the outstanding prefers. We have also increased our common share buybacks by 80% year-to-date versus the first six months of last year. Importantly, we have done this while continuing to invest in the business and reduce debt, including the outstanding prefers.

Allison will speak more about these efforts later in the call. We will also update you on our transformational hybrid investment platform implementation, which is another strategically important priority which will yield benefits across our organization and for our clients.

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

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

Clients continue to entrust Invesco with significant new capital across our global product sets. Net long-term inflows during the period were record $45.1 billion, marking the 12th straight quarter of net inflows and representing annualized organic growth of nearly 9%. Additionally, we generated $13.2 billion in global liquidity inflows, ending the period with $215 billion in AUM. Altogether, we reached an AUM high-water mark of $2.5 trillion.

Importantly, we continue to be encouraged by the breadth of our overall growth. We had solid positive flows across several dimensions, including in many of our strategically important investment capabilities, across each of our three regions, and in both our active and passive strategies. The breadth of our inflows was also demonstrated by the fact that over 30 of our products generated more than $500 million in net inflows during the quarter. The Asian Pacific and Amia regions again produced very strong net inflows with 10% and nearly 7% annualized organic growth respectively. Additionally, on a growth sale basis, we had our highest volume quarter for actively managed funds. With all of this as a macro backdrop, I'd like to spend a few minutes highlighting growth drivers in each of our investment capabilities, starting with our ETF and index offering, where we continue to meaningfully scale and diversify our platform to meet evolving client demand.

Ending AUM for these funds stood at a record $753 billion for nearly $1.25 trillion when including the QQQ. We also had a record $30 billion of net inflows during the quarter, where 17% annualized organic growth. Within our ETF range, we garnered net inflows across a diverse set of products led by our Q's Innovation Suite and our Quality and Momentum Equity Factor funds, which raised a record $7 billion of net inflows in the second quarter. It's also notable that nearly a third of our net inflows were generated in the Amia region, where we continue to see strong demand for our ETF range. We remain focused on innovation in the ETF space. During the quarter, we expanded our bullet share lineup with seven new funds, launches in the United States, in addition to launching five ETFs in the Amia region, including two new active funds.

We have built a robust ETF platform globally, which continues to grow as the demand has accelerated for high quality differentiated strategies. We currently manage $25 billion in active ETFs across more than 40 products, and the AUM base increases to more than $40 billion when including index strategies that are executed by our active investment teams. Our QQQ fund also attracted strong interest in the second quarter with $14 billion in net inflows or 12% annualized organic growth.

This reflects our competitively advantaged position supported by a very large and broad institutional and retail investor base that's with unmatched liquidity, with tight spreads, and deep options and derivative markets built over multiple decades for this flagship product.

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

Two drivers of fundamental fixed income flows were demand for individual SMAs from U. S. wealth management clients, and overall institutional fixed income demand in AMEA, where we recorded net inflows of nearly $2 billion for the quarter. Our entire U. S. wealth management SMA platform, which also includes a portion of equity assets, now stands nearly $40 billion in AUM. We have one of the fastest growing SMA offerings in the market, generating an annualized organic growth of 23% this quarter. The strong results, once again, indicate that we are well positioned to capture fixed income money in motion by meeting client needs across the credit and duration spectrum, geographic preferences, and active and passive exposures.

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

To further support growth in our business, we launched 11 new funds this quarter, which collectively generated $1.2 billion in net inflows. These funds align with the growing demand for innovation and balance and equity strategies. We continue to be well-positioned as the Chinese asset management market develops and evolves in both the individual investor and retirement sectors, shifting to private markets where we posted $1.9 billion of net inflows across our alternative credit and direct real estate offering. In credit, we saw a return to demand for industry leading bank loan ETF, PKLN. This growth was also augmented by net inflows into our CLO products. Despite near-term volatility and heightened headline risk, credit fundamentals remain broadly intact and spill over risks into the structured loan space have been limited.

We continue to see strong demand for private credit solutions from institutional investors on a global basis, and the current environment has not changed our long-term expansion plans in the retirement of wealth management channels. We have a favorable position with dry powder, diversification, and extensive experience. For managers with our discipline, continued volatility may ultimately prove to be an opportunity.

Our private real estate capabilities also recorded positive net inflows of $1.4 billion for an annualized organic growth rate of 8% this quarter. These results were led by NCRAP, which is our real estate depth fund for U. S. wealth management clients, which continue to gain scale and assets, including leverage is now totaling over $6 billion. This fund was launched only a few years back, and it's yet another example of our deep investment talent, product innovation, and strong distribution teams collectively driving growth. We are excited about prospects across our private markets business with organic growth opportunities amplified by our partnerships with bearings and LGT capital to further penetrate the wealth management and to find contribution markets.

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

Finally, in fundamental equities, we continue to have positive net inflows from clients in Asia Pacific, driven by ongoing momentum and our global equity income fund, which remains the top selling retail active fund in the Japanese market. This fund posted net inflows of nearly $3 billion during the quarter, rapidly growing to $28 billion in A. U. F. , while generating a very favorable net revenue yield for Indusco. We also posted our second consecutive quarter of net inflows in our U. S. value equity of outflows with just half a billion dollars during the quarter. Additionally, on an overall growth sale basis, we had our among our best fundamental equity flow quarters since the beginning of 2022 on the heels of an exceptionally strong first quarter.

Despite these positive fundamental equity flow highlights, we remained in net outflows of $7.7 billion overall in this segment. The uptick this quarter included a few large idiosyncratic liquidations from a couple of institutional investors making overall allocation, reallocation, positioning decisions.

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

So moving on to slide five, which shows our overall investment performance relative to benchmarks and peers, as well as our performance and key capabilities where information is readily comparable and more meaningful to driving results. Investment performance is integral to winning and maintaining market share regardless of overall market demand. As such, achieving first quartile investment performance remains a key priority for Indusco. So overall, 44% of our active funds are performing in the top quartile of peers on a three-year time horizon with nearly half reaching that bar over on a five-year basis. Further, nearly 70% of our active AUM is beating its respective benchmark on both a three and five-year basis. And as I mentioned, we are beginning to see improved performance in our fundamental equity lineup, which now has over 40% of funds performing in the top quartile of peers on a five-year time horizon with over half beating their benchmark.

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

Thank you, Andrew, and good morning, everyone. I'm going to start with the second quarter financial results that are on slide six. Strong organic growth and positive markets drove a significant increase in assets under management during the second quarter. Net long-term asset inflows were a record $45 billion in the second quarter, nearly a 9% annualized organic growth rate, marking the 12th consecutive quarter of net inflows, favorable markets drove a $257 billion increase in AUM, and net flows in the money market funds totaled $17 billion for the quarter. AUM at the end of the quarter reached a record high of $2.5 trillion to 14% increase over the first quarter, and 23% higher than the second quarter of last year.

Average long-term AUM with $2.1 trillion, 7% increase over last quarter, and 58% greater than last year. Net revenues adjusted operating income and adjusted operating margins continued to show meaningful improvement from the first quarter, as well as the same quarter last year, while adjusted operating expenses continued to be well managed. On a sequential quarter basis, net revenue growth was 5%, while adjusted operating expenses were essentially flat, generating nearly 500 basis points of positive operating leverage, and a 300 basis point, operating margin improvement in the second quarter, operating margin expanding to 37.5%.

Dented operating income increased 14%, nearly $500 million for the quarter, and adjusted diluted earnings per share increased to 71 cents from 57 cents in the first quarter, a 25% improvement. On a year-over-year basis, net revenue growth was over 20%, while adjusted operating expenses increased 9%, generating over 10 points of positive operating leverage, and a 630 basis point operating margin expansion. Adjusted operating income increased 45% and adjusted diluted earnings per share nearly doubled from 36 cents last year to 71 cents that we reported for the second quarter. Our focus on strengthening the balance sheet continued during the quarter, as we reduced net debt by more than $450 million in the second quarter.

The reduction combined with improved EBITDA resulted in a substantial improvement in our leverage ratios. Finally, we increased common share repurchases in the second quarter, as compared to prior quarters, buying back $50 million for 1.9 million shares. We also announced in April an increase in the quarter-early common stock dividend to 21.5 cents per share. Now, maybe just slide seven.

Secular shifts in client demand continue to drive strong growth in lower feed products, such as ETF, including the QQQ, while the demand for higher feed products, such as fundamental equity, has not been a straw. This has resulted in a more balanced AUM for a file for Invesco, which better positions the firm to navigate various market cycles, events, and evolving client demand.

We've seen the impact of the asset mix shift moderate over the past several quarters, resulting in a more modest decline in the net revenue yield, and more recently approaching a degree of stabilization. To provide context, the net revenue yield was 22.4 basis points for the second quarter. While slightly down from the first quarter, it was in line with the fourth quarter. The exit yield at the end of the second quarter was 22 basis points. Starting to slide eight, net revenue of $1.3 billion in the second quarter was $224 million higher compared to the same quarter last year, and $65 million higher as compared to last quarter. The increase in net revenue was largely driven by investment management fees predominantly due to higher average AUM.

On a year-over-year basis, the increase was also driven by the reclassification of the QQQ to fee earnings. Operating expenses increased $70 million versus the same quarter last year, and only $2 million as compared to last quarter. The year-over-year increase was mainly driven by higher employee variable compensation related to the growth in net revenue and marketing expenses related to the reclassification of QQQ. The hybrid investment platform implementation costs for $14 million in the second quarter, in line with our expectations and prior quarters.

The incremental operating expense associated with AUM that has been moved on to the hybrid platform was $5 million in the quarter. The majority of this expense is impacting property office and technology, and it will be in this line item going forward.

Regarding the hybrid implementation platform cost for the remainder of 2026, we expect quarterly one-time implementation cost to run closer to $15 million per quarter in the second half of this year, with the push to have implementation completed by year-end. As we transition more AUM onto the platform, the incremental expense related to AUM on the platform will build towards $10 million per quarter later this year. Expenses associated with the platform may fluctuate quarter to quarter due to timing. The effective tax rate for the third quarter, we estimate our non-gapped effective tax rate will be in the 25 to 26 percent range, excluding any discrete items. The actual effective rate can vary due to the impact of non-recurring items on pre-tax income and discrete tax time.

I'm going to wrap up on slide nine. We continue to make progress on building balance sheet strength and improving our leverage perspective. During the second quarter, we reduced total debt by $343 million, and net debt by over $450 million as compared to the first quarter. This included reducing the amount drawn on the revolving credit facility from $1.1 billion at the end of the first quarter to $736 million at the end of the second quarter, accomplished through operating cash flow. The reduction in debt, coupled with improving EBITDAF, of the preferred stock declined by four tenths of a turn in the second quarter to 1.9 times, and the leverage ratio excluding the preferred stock declined by over three tenths of a turn to 0.54 times for the second quarter.

Looking back over the past year, the leverage ratio exclusive of the preferred stock improved by nearly a turn driven by the $1.5 billion in preferred share repurchases, debt reduction, and improving EBITDAF. We expect further improvement in the leverage ratios for the remainder of the year as we reduce the amount drawn on the facility and simultaneously grow EBITDAF. We also increase the degree of common share repurchases in the second quarter as well as dividends. We increase the amount repurchased to $50 million or 1.9 million shares, and in April, we announced an increase in the quarterly common stock dividend to $21.5 cents per share. We intend to continue a regular common share repurchase program going forward as we target a total payout ratio, including common dividends and share buybacks to be near 60%.

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

We're committed to driving profitable growth, a high level of financial performance, and enhancing the return of capital to our shareholders. And with that operator, if you could open the lineup for Q&A.

Yeah, Patrick. Thanks for the question. Let me let me start the analysis and can pick up on some of the specifics of the second part of it. You know, I want to reiterate a couple of things. I mean, we have a 25-year history managing the QQQ. It has a very large and entrenched position. It has a ton of brand recognition, and note that it's the one-of-a-kind QQQQ. And it also is part of our ETF Innovation Suite, which now has $650 billion of assets across a ton of products around the world. The Qs recall has a ton of scale, a ton of liquidity, execution benefits. It's the fifth-largest ETF, and the second-most actively traded in the world.

So I mentioned all that only to say, investors in our fund spend a lot of time looking at total cost of ownership. And that goes beyond the total expense ratio. And shareholders have benefited from that and will continue to benefit given the size and scale. What I mean by that is really tight-bed-ass spreads, deep on-the-screen liquidity, a really strong trading base, and half a trillion dollars of notional options associated with it. So it has a really strong ecosystem around it that's unique.

Also, switching costs are something people look at. And given the low-relative tax base of so many in the QQQ, those switching costs come with the real economic impact. And then I want to also mention that we have our own test case of how these additional products around the Qs impact things. The QQQM, which we launched about five years ago, stands at about $100 billion today. But it didn't slow down the triple Q significant growth during the period either. Over the last three years, that funds up two and a half times in terms of its size, and it attracted $75 billion of net new flows despite having a lower price product alongside it. And then recently, as I mentioned in my comments, there's significant ownership of the QQQ around the world.

And indicative of how quickly we can scale up because of our strong brand, we recently listed in Hong Kong and in Tokyo, and those AUM levels are already at $10 billion combined.

So we're really going to focus on differentiating ourselves on the total cost of ownership. We're really going to accentuate the deeply rooted QQQ brand, which is both recognized here in the U. S. and globally. And we're going to continue to innovate through this week's leadership in new markets and new channels.

Alison, do you want to pick up on maybe some of the more specific questions? I'm sure anything pricing related, I would say we're going to focus on long-term client outcomes. We're going to continue to focus on product differentiation, the ecosystem strength. We're not going to have a short-term competitive reaction. We've been in this for a long time. We're going to be in it for a long time, and we're really focused on that total client experience as Andrew was discussing. We've got that dominant entrenched position that's worth a substantial amount, and all of our marketing spend as we think about that is really going to be continue to focus on how do we focus on promoting that QQQQ brand, which arguably is probably the best known ticker out there.

And we're going to continue to focus our marketing dollars in creating that education and aid and advisor adoption. It's been incredibly effective. There's hundreds of million dollars. It's not north of a billion dollars. It's already been invested against that brand over the last several decades. And it's going to be hard to match that level of brand strength and awareness or even match the spend that we have already spent against it. And we've really got the flexibility now to choose how we want to market and where we want to market and where we want to direct that spend. And in the manner that we think is best, a lot of our marketing spend right now is dedicated outside of the United States.

And as Andrew said earlier, we're north of $10 billion in AUM due to the cross listing of the QQQ and Japan and in Hong Kong. So we feel very good about the level of marketing spend there. Maybe it's the last part of your question. I think you mentioned custodians B and any flexibility there. Look, I'd say the custodial fee was Bank of New York as a custodian. We could not have gotten the conversion done without Bank of New York's help six months ago. Those are long-term contracts that you enter into. So I don't think there's a lot of room on that right now, but I want to be really clear. They've been an unbelievably terrific partner and we couldn't have done it without the Bank of New York.

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

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

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

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

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

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

We would like to continue to work that down just a bit before trying to address more of the preferred. That is as we have said before a mutual choice between mass mutual and ourselves and a lot of the conditions and circumstances have to be there including their willingness and the rate environment and the premium that is required. Those are all negotiated conversations and we're in a position to do more. At some point in time I think we said earlier this year we hope to be in a position by later this year or early next year and I still feel that's probably the right timing for us. Because what we are making sure we continue to reserve a great deal of capacity for is investing in ourselves and we are doing that.

As we continue to launch new products we continue to see great investment opportunities in our own product capabilities and I think we've demonstrated the shareholder returns behind that with just the organic growth that we have been delivering consistently for several years since now. That isn't at the expense of inorganic opportunities. We are always open-minded and looking at what's out there and always evaluating the landscape. But we evaluate that against our own organic growth opportunities and heretofore we've been able to deliver better shareholder returns on our own organic capabilities than anything we have seen from an inorganic perspective. So all things are always on the table for us and we're always evaluating the opportunity set.

I mean organically I think we've generated close to two hundred billion dollars of net long-term inflows over the last two years. Additionally we've adopted I think an ethos of partnership throughout the company as well which was long dated. You know what we've done the two in private markets we made changes in India and Canada as I mentioned you know we've divested from our FinTech. So I mean we've been active and we're going to continue to be creative both for organic and in different forms of inorganic growth if it presents itself.

Yeah I mean the SMA retail SMA space you know has grown really rapidly as you said industry wide and we've outpaced that growth. We were up to 40 billion dollars of retail SMA you know a lot of tax tax oriented tax aware as you called it. A lot of that growth for us has come on the fixed income side and in particular in the muni space shorter duration but getting into a little longer dated. So we have a real I think competitive edge in the fixed income space where the others have focused almost exclusively on equities. You know we're also seeing growth on the equity side both in systematic equity a little less than the fundamental side.

But I think of the pivot goes from mutual funds to other formats you know active ETFs and you know actively managed tax aware SMAs you know we think the growth could be considerable. That 40 billion we managed today you know was half that three or four years ago. So you know we've had exceptional growth and quarter on quarter growth. So we continue to expect that that that's be the case. Most of it is coming in the US. I mean I think there may be some opportunity over time in other parts beyond the US. But the technology is really good and so my comments before we'll continue to invest in technology probably over people and be able to scale that business pretty pretty extensively we think.

And we have all the investment capabilities inside the house to be able to do it.

Yeah thanks. Let me start quickly and then I'll hand it over to Allison. You know we continue to seek demand in the death side of real estate, credit side of real estate in particular. Our real estate credit fund which I mentioned in my comments is now up to six billion dollars with leverage. You know it's grown kind of routinely every quarter over the last two or three years and we haven't seen that subside really at all. I think it's going from strength to strength. I think that's a little bit of a function of some of the demand but also a lot less supply in that space. On the equity side you know I think the fundamentals are a bit mixed and you know maybe Allison can pick up on a couple of the details around that.

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

Yeah I mean I'd say more specifically even where we saw really strong growth was in endcraft and that continues to be one of the fastest ramps in the wealth channel for any of our real estate credit product. So that's in about six billion in AUM and continues to be a strong driver of flows. You know I don't know that it dampens demand there's more specifically to your question but perhaps it doesn't you know return us to the what we were perhaps experiencing five, seven, ten years ago when we were in a zero rate low rate environment for a very long time but I think largely the market's been working through a lot of that. We continue now to see you know just better demand overall I mean drag powder for us on the real estate side is around seven billion dollars.

So we do still have a lot of unallocated capital. We are seeing a little pickup in transaction activity overall and so we're still modestly optimistic even with the rate outlook.

Yeah sure thank you. You know there's two big cross list things out in Asia in the last six to nine months. You know those are two really big markets for us so not only were they important launches there but they just amplify the recognition we already have in those markets and it's a double benefit. You know we have I think 20 to 25 sort of queues related or innovation suite as we call it related products all over the world and the bulk majority of those have been you know in the European region and the UK and also here in the US. You know so we'll look to selectively not just from a market different geography perspective but even inside you know where we have dominance here in the US.

We'll look to selectively expand it but I think given that the marketing we've done around the QQQ specifically now can be much more expansive across that whole innovation suite in the large and there's just such a halo benefit given that we're you know the the one and only QQQQ. So we're probably going to leverage that more than just product launches you know over the over the coming quarters.

Sure let me let me take the distribution ratio first. You know I think again I would continue to point to the best relationship to think about there is third party expenses plus distribution fees divided by management fees. That relationship is really the way we think about how how to fork after an expenses there and is the guidance I would give you that was 22.7 percent for the second quarter it was also 22.7 percent in the first.

I think going forward it's fair to think about that is you know somewhere in that 22.7 to 23 percent range maybe even a little bit closer to 23 percent going forward. The trend towards that 23 percent is really due to that product product mix shift that we continue to see with growth strong growth and the QQQQ the QQQM RSP those products that have lower management fees and drive a little bit of that relationship. So hopefully that's helpful as you think about the guidance there.

On compensation of the percentage of revenue as we are looking at that for 2026 is likely being largely in that 40 percent context and as we're halfway through the year it's been a very strong first half the year. We are again cautiously optimistic on the second half of the year but we all understand how this industry works. I think 40 percent is probably the right ratio to assume for 2026.

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

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

Yeah no thanks for the question maybe I point you to a few things one the shareholder base is incredibly broad and it cuts across you know every aspect you could imagine so that's point one. The second I point you back to was in the late summer and fall when we were soliciting all that we had at their emphasis on on fee sensitivity maybe as a bit of an indicator of their focus.

Meaning how difficult it was to get them to vote for a reduction in their own fees and they and we learned how broad the shareholder base is through that profit solicitation. So the bottom line is there's there's no single type of shareholder here.

I would expect and look we'll give more 27 guidance as we get a little bit closer to it but I would expect implementation expenses to start to taper off in the first quarter but there it's going to be doesn't all magically go away on December 31st so there's certainly going to be some implementation that leads into the first quarter beyond that implementation of expenses should be bleeding off pretty quickly and then as we have noted before there is a lot of work then to really think about how do we take advantage of the installation of the system and continue to manage our end delivery in such a way that we can get even greater operating leverage out of our overall platform and that's going to be our real focus going into 27 and of course that will extend into 28 because I think about expense guidance more broadly going into next year but we're very pleased that we're 37 and a half percent operating margin this quarter and the signal the best and about our ability to get back into the high 30s and operate in the high 30s so our focus is going to continue to be on positive operating leverage how we generate profitable growth and positive operating leverage underneath that.

You know I think the most variable component I would point you to is again the compensation the revenue. I mean compensation is two-thirds of our expenses as you know I would point you to that 40 percent comp to revenue guide there you know rather than a total expense based guide because I think everything else was given you kind of pieces together the parts of that and get you to a relatively consistent relationship and expense guide. That guide we gave was because there's such a sharp turn in AUM from March 31st to the time of the earnings call at the end of April. We wanted to make sure we cleaned up and gave some relative expectations there but your biggest variable driver is going to be compensation and that 40 percent I think is the right relationship as we think about this year.

Yeah no thanks it's um look to the safety obvious you know improving the flow dynamics for fundamental equities is a major feature for the company and that's going to come on the back of improved performance and product quality of course but also where market demand is and I think you know getting deposit flows is a little bit of a function of you know sub-to-market environment moderate for active equities and we've seen that happen in several cases and we've been able to outperform.

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

And I'd say just adding on to that but we definitely see positive flows and certain strategies we've we've discussed the Hen Lake Global Equity Income Fund that has been selling very well in Japan in particular flows this quarter were two point six billion dollars um are US value equity fund range had a second consecutive quarter of that inflow so where there is good investment performance and there is sort of the secular investor demand we're capturing it but that turning returning to positive flows on a consistent basis is a the challenge for the industry as you well know.

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

Welcome.

Hey operator we have time for one more question.