Andrew Schlossberg: Also, we’re going to continue to have the expense discipline that Allison has been talking about in addition to these streamlining efforts playing through over time and helping us grow our revenue base but also be much more efficient with our expenses and be able to reallocate additionally to these growth areas in time as well. So, you should expect to see both of those sides of the expense equation in the coming quarter.
Alex Blostein: Got it. All right. That’s helpful. Thank you. And just a quick clarification question for you guys on the net revenue yield. So, I appreciate the comments around diversification of the business improving and that should provide some stability to the net revenue yield. Just a quick reminder on China, I think there are some decreases in pricing that either already occurred or yet to occur. So, just remind us maybe the magnitude of that and whether it’s already fully in the run rate and what you expect that to hit? Thanks.
Allison Dukes: Sure. So, in China, that we do expect with some of the changes that happened there and the impact to fee rates that it will have an impact of about $10 million on our revenue overall, given the AUM that’s impacted there. The impact to operating income will be quite a bit less than that, just given there will be some comp expense takeout that’s associated with that reduction in the fee rate. And that’s a 100% so keep in mind how we reflect 100% and then back out the 51%, excuse me, that we don’t own below the line. So, the one thing I would say to that is while that is an impact to revenue upfront, we actually think this portends very well for our business in China as regulation seeks to just further strengthen the capital markets there. We know as the 12th largest asset manager, we are well positioned to be a net winner, and we think we will benefit from some of these fee rate changes and the impact to some of the smaller players.
Alex Blostein: Got you. great. Thank you very much.
Operator: Thank you. The next question comes from Patrick Davitt with Autonomous Research. Your line is open.
Patrick Davitt: Hey, good morning. Thanks for squeezing me in. So, it sounds like you’re changing your tone a bit on the path to future fee rate declines. But at the same time, it sounds like you expect much more bonds, fund flows and ETF demand from here, which are among the lowest fee buckets. So, what changed to kind of change your tone on the potential for fee cuts if the lowest fee buckets end up being the biggest inflow contributors?
Allison Dukes: Sure. Thanks Patrick. A couple of things. I don’t I would say we’re changing our tone. I mean, I do expect you’ll continue to see some modest downward pressure in our fee rate as we just continue to see some of this mix shift. We’re not calling it into mix shift and we know we all are quite aware of the secular trends that are out there. The demand for passive and the weaker demand for active and we’re certainly benefiting from one side of that trend. But increasingly, those — the impact of that is captured in our results. And so if you look at our net revenue yield, ex performance fees and ex QQQ, it’s $32.9 million basis points this quarter. So, it was actually four times basis points higher than last quarter.
That’s in some respects due to one additional day in the quarter. But I will say we have that seasonality occurs every year. And this is one of the first third quarters in a long time where you saw it be flat or positive. Typically, the pressure is downward. I still think we’ll have some downward pressure, but it’s going to start to moderate and $32.9 million is a lot closer to an average passive fee rate of 18-ish basis points than 40 was. And so at some point, you start to see where we get closer to that average and that remixing starts to have less of an impact on fee rate. I would also say, keep in mind, while we’re focusing on fundamental equity and passive and the difference in that net revenue yield, important to look at APAC managed, again, largely China and Japan under there with a 40 to 50 basis point fee range and the growth we’re seeing over — through the cycle in those two areas, very accretive to the overall fee rate and also the growth that we expect to continue to see in private markets and multi-asset accretive.
So, while the biggest drivers and the biggest change in terms of outflows and inflows have been passive and outflows in fundamental equity, there are other aspects of our portfolio that are very accretive. And our objective is to take that $1.5 trillion in average AUM that’s been relatively flat over the last couple of years, given the market depreciation and grow that. And as we grow that and these pieces of the pie grow, you start to see the impact of the last couple of years really better realized in our average fee rate and you start to see some stabilization in the decline.
Andrew Schlossberg: Yes, Patrick, I’d just add to what Allison said, the APAC multi-asset private markets that you see on Page 9, volume would increase that in time. relative to where we are. And then on the fundamental equity side, we’ve — we sort of underperformed on our market share capture and our redemptions. And so as you see redemptions start to mitigate and get into positive flows eventually, that’s going to be through market share gains. And so I think on both sides of that and I think Allison covered it well.
Patrick Davitt: Great, that’s helpful. And then one quick follow-up on margins. I think many years ago, you used to say the ETF business was a drag on margin as it hasn’t scaled yet. So, similar to Glenn’s point on bonds, I’m not getting to a point where we start to see a lot more incremental margin from the CTF growth, given how big some of the funds are getting. So, do you think we’re at a point where we could see kind of a step-up on change in the margin contribution from the ETF growth you’re seeing?
Allison Dukes: Yes, I would say going back to when I joined the firm a few years ago, we were saying the ETF business was neutral to the firm margin. It’s been quite some time since it would have been dilutive. We are certainly in a position now where it is accretive to the firm’s margin overall and we’re very focused on continuing to grow that business because it is accretive to the firm’s margin. And I think as you think about what could — one of the two biggest things that could really improve margin for this firm overall, it is rapidly growing the size of that business, stemming the redemptions and fundamental equities and again, growing that pie overall from $1.5 trillion in AUM, so something quite a bit larger than that. Scale is what is going to add contribution from a margin perspective.
Patrick Davitt: Thanks a lot.
Operator: We do have time for one final question. And our last question comes from Finian O’Shea with Wells Fargo Securities. Your line is open.
Finian O’Shea: Hi, good morning. Thank you. A question on the MassMutual partnership commentary in the beginning. Are you working toward a broader, say, private markets, organic product build-out with hopeful seating through master — or is this more a focus on executing what’s in the ground already for those areas of partnership? Thank you.
Andrew Schlossberg: Yes, thanks for the question. Much of the private market seeding for the strategies we talked about earlier has happened already and so the comments we made around the $3.5 billion are largely inclusive of all of that. As we move forward and bring additional private market strategies, MassMutual will hopefully will continue to be that kind of partner, but much of its happened already, which leads us to executing on the ground, as you said with growing third-party assets from institutions and wealth managers, which is what we’ve been doing the last several years and getting ourselves situated for that demand to continue to come. So, that’s that. What was the other piece on the MassMutual — do you have another piece of MassMutual?
Finian O’Shea: That was pretty much it. Thank you.
Andrew Schlossberg: Okay. All right. Okay. Well, thanks, everybody, for joining the call today and we continue to believe that we have great opportunities at Invesco as we discuss today and that we have momentum from which to build. We’re very well-positioned as investors gain better visibility on rates and market direction and put their money back to work. Hopefully, you’ve seen that we have the breadth of products, scale, performance, and competitive strength to meet the spectrum of client needs and we are simplifying and streamlining the organization to better position for greater scale, performance and improve profitability. So, thank you for your interest in Invesco and we look forward to speaking again soon and next quarter.
Operator: Thank you. And that concludes today’s conference. You may all disconnect at this time.
