Invesco’s recent disclosure that chief executive Martin Flanagan had received a 10 per cent pay rise was awkwardly timed to say the least, coming as it did the day after the giant US investment group’s share price tumbled to a 24-year low.
Defending Mr Flanagan’s $12.3m pay packet — which included $11.5m of bonuses, plus $77,000 towards use of the company’s private jet — Invesco’s remuneration committee said the payout was in recognition of his “positive achievements and outcomes of the company’s multiyear strategic objectives”. This was despite the business being the worst-selling investment group globally in 2019, during which time it bled more than $1bn of assets a week.
Invesco has picked up where it left off last year with huge outflows in the first quarter of 2020. Its problems have been exacerbated by the global market sell-off in response to the coronavirus pandemic. “This marks the firm’s greatest challenge of the past 15 years under Flanagan’s leadership,” says Stephen Biggar, an analyst at Argus Research.
Mr Flanagan has not been immune to the pain personally. The 75 per cent plunge in Invesco’s share price since January 2018 has wiped more than $100m from his personal stake in the business, according to public filings analysed by S&P Capital.
Invesco’s assets under management fell a further 9 per cent in March. The investment goliath shot into the trillion-dollar club of the world’s biggest money managers last year after its $5.7bn acquisition of OppenheimerFunds, which brought in $300bn of new client assets.
In late March, rating agency Fitch downgraded its outlook for the business from positive to stable, citing the impact of the pandemic on the amount of money it manages. “Invesco’s operating results will be pressured in the near term by materially weaker market conditions, leading to lower management fees on assets under management, given the declines in market prices and likely accelerated . . . outflows,” Fitch’s analysts wrote.
Invesco has been battered by the same forces disrupting large active managers globally over the past decade — the pressure to generate strong returns and drop fees in the face of low interest rates and greater demand for cheap, passive products.
Mr Flanagan has sought to protect the business by moving more into index funds and diversifying its line-up through large acquisitions. Passive products account for a quarter of Invesco’s assets — up from 17 per cent three years ago — but these index-hugging funds produce lower fee income than Invesco’s historic core of funds run by human managers.
In its full-year results, published in January, Invesco reported operating income had fallen by a third throughout 2019, from $1.2bn to $808m, while its operating margin dropped from 22.7 per cent to 13.2 per cent.
The timing of the large Oppenheimer deal — which followed closely behind sizeable acquisitions of two exchange traded fund businesses a year earlier — has also dialled up existing problems.
The deals led to hefty job cuts, including 1,300 redundancies announced in the final quarter of 2019, amounting to 12 per cent of staff. This level of corporate disruption prompted much of the outflows, as clients withdrew their assets before waiting for the reformed business to settle down.
“The market was already sceptical about whether Invesco would achieve the cost savings and revenue synergies from the deals — it will be harder to meet those goals with the market in the state it is in now,” said Mr Biggar.
Invesco’s share price has nosedived from $38 at the start of 2018 to just under $10 on Thursday — having hit its nadir of $7.38 on March 23. Investors had hoped that once the acquisitions settled in, the enlarged business would emerge stronger. But the heavily reduced assets will make that much harder.
Invesco’s funds lost billions of dollars’ worth of market share to passive giants as investors frantically reallocated their savings during the coronavirus-pandemic market rout. According to estimates by Flowspring, a research company, Invesco lost $3.5bn to BlackRock and its iShares ETF franchise in the first quarter, $1.2bn to Vanguard and $1bn to State Street Global Advisors.
Several of Invesco’s best-known funds have been smashed by the recent downturn. In the UK, two once-popular income funds run by Mark Barnett have shrunk at an alarming rate, partly due to the announcements made by several large businesses that they were paring back their dividend payments.
Throughout April, Mr Barnett’s £3.4bn High Income fund and £1.5bn Income fund — both made popular under the stewardship of Neil Woodford — shrivelled by £650m and £267m respectively, according to data from FE Fundinfo, a research company. Earlier data from Morningstar showed High Income, the fourth biggest equity fund domiciled in the UK, had lost a third of its value in the first three months of the year.
The level of shrinkage forced Invesco to write down the value of the funds’ unlisted holdings by 60 per cent, which caused another 5 per cent drop in value for the funds.
The fund manager had been forced into such drastic action because as the value of listed companies shrank, the proportion of the funds made up of unquoted holdings edged closer to the regulatory limit of 10 per cent. At the end of March, 9.2 per cent of the Income fund and 8.4 per cent of the High Income fund portfolios were made up of unquoted stakes.
Invesco also announced it would be disposing of all its unquoted holdings across its UK equity funds, as the business tried to distance itself further from its former star stockpicker Mr Woodford, whose business imploded last year after he failed to control the liquidity of his funds.
“These are extraordinary times which call for decisive and positive action to look after the best interests of clients in the short and longer term,” Invesco said in announcing its decision to sell the unlisted assets. “This step is entirely consistent with our valuation driven, risk-adjusted investment management strategy and ensures we remain in tune with market conditions.”
Just one of Invesco’s UK-domiciled mutual funds has posted positive investment returns this year, a money-market fund that has returned 0.1 per cent, according to Morningstar. In contrast, more than half of its UK-based funds have lost at least 20 per cent this year, with the Income fund losing 38.5 per cent by early April, while High Income was down by 36.5 per cent.
Its hardest hit fund in terms of performance, the Latin American UK vehicle, had lost 46.4 per cent by early April, according to Morningstar data.
This week Invesco’s UK business suffered further humiliation when the board of the Perpetual Income and Growth Investment Trust, which was launched by Mr Woodford in 1996 and managed by Mr Barnett since 1999, announced it was firing Invesco as portfolio manager. It followed Mr Barnett’s loss of the Edinburgh Investment Trust in December.
The amount of money Mr Barnett oversees has more than halved, from £11bn in September to £5.3bn.
Peter Brunt, an analyst at Morningstar, the fund rating company, says: “Within the Europe-domiciled stable of Invesco funds, performance has been disappointing broadly speaking over the past five years. There have been strong performers, however these have been limited to just a few pockets of the group, for example, Invesco Japanese Equity Advantage [and] Invesco Asian.”
Last year, Morningstar warned that many of Invesco’s US-focused active stock funds had suffered from poor performance or manager turnover, while manager turnover has also been a problem with some Hong Kong-based offerings.
In the US, its flagship leveraged loan fund has been ravaged by a large bet on a struggling St Louis-based coal producer and is the worst performing of its peers over the past year.
The $6.4bn Invesco-Oppenheimer Senior Floating Rate fund has halved in size in 12 months having suffered more than $6bn of outflows since February 2019. The fund had previously been the largest loan fund in America.
In another blow for the US business, Dan Draper, head of Invesco’s $250bn ETF business, defected to S&P Dow Jones Indices this month. Mr Draper had spearheaded one of the few bright spots within the company in recent years, with its ETFs attracting $16bn of inflows last year.
Neal Epstein, senior credit officer at Moody’s, the rating agency, says despite its recent problems, Invesco is a well diversified business that has grown strongly during Mr Flanagan’s reign. “He is a very thoughtful and experienced executive and . . . has been a good hand on the tiller,” Mr Epstein adds.
“They have been doing everything you would expect a large, global asset manager to keep doing to maintain their relevance.”
In a statement to FTfm, Invesco stressed that Mr Flanagan’s recent pay rise came off the back of a 20 per cent drop last year and that he was “one of the most highly regarded executives in the investment management industry”.
The company added: “The current market outlook has changed materially from our previous expectations for 2020 and has profoundly impacted the markets and our industry . . . The challenging flow picture in late 2019 has been exacerbated by market turbulence related to the global Covid-19 crisis.”
On Thursday, when Invesco reported its assets under management figures for the end of March, the group total stood at $1.05tn. Invesco bought its way into the trillion-dollar club last year with the acquisition of Oppenheimer and its $300bn of assets. Its membership of that elite group hangs in the balance.
Additional reporting by Attracta Mooney