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Morningstar | Market Gains Offset Outflows in Invesco's 1Q, Setting Company Up for Better Near-Term Results

While there was little in narrow-moat-rated Invesco's first-quarter results that would alter our long-term view of the firm, we are likely to increase our fair value estimate slightly to reflect a somewhat stronger quarter than we were projecting. Invesco closed out the period with $954.8 billion in managed assets, up 7.5% sequentially and 2.2% year over year. Excluding the impact of the Guggenheim acquisition and the onboarding of its Chinese joint venture, which added $38.1 billion and $9.5 billion in assets under management during the second and third quarters of 2018, respectively, the firm's managed assets were down 2.9% year over year. Long-term AUM outflows of $5.4 billion during the first quarter, driven primarily by net redemptions from Invesco's active strategies (of $9.3 billion), were about in line with our expectations.

While average long-term AUM was down 6.0% year over year during the March quarter, Invesco reported a 10.4% revenue decline compared with the prior-year period due to a drop-off in performance fees and a lowering of its overall effective fee rate to 0.396% (from 0.439% in the first quarter of 2018). Although this is worse than our projections for positive mid-single-digit top-line growth this year, Invesco has much easier comps in the back half of 2019 and will be closing the Oppenheimer deal at the end of May.

While first-quarter adjusted operating margins of 20.3% were 470 basis points lower than 2018 levels, with almost all of the company's expenses expanding at a much faster rate than revenue, they were in line with how we expected the year to unfold. Our five-year forecast, which assumes that Invesco realizes more than 80% of its projected $475 million in cost synergies from the Oppenheimer deal, calls for adjusted operating margins of 28%-30%, putting the firm on par with where we expect the average operating profitability of its publicly traded peers will be.