Andrew Schlossberg
President and Chief Executive Officer at Invesco
Thanks Greg, and good morning everyone. Pleased to be speaking with you today.
We continued our positive momentum this quarter, executing across several strategically important areas of our business and finishing this quarter with record long-term AUM, continued robust net long term inflows, improved operating leverage, a stronger balance sheet, and higher return of capital to shareholders. We achieved this despite continued volatility globally. US markets ended the quarter with strong equity returns, even though we saw high intra quarter market fluctuations as ongoing geopolitical concerns coupled with mixed signals drove cautious investor sentiment.
Long-awaited Federal Reserve cuts commenced by the end of the quarter and new stimulus in China was announced, and Japanese policymakers struck a less hawkish tone, all factors that helped assuage concerns and drive a rally into quarter end, as investors began to rotate money off the sidelines and into some risk assets. As a result, we began to see some broadening of investor demand in both the equity and fixed income markets.
Conversely, the Chinese markets remained challenging for most of the period and fixed income appetite waned mid-quarter due to a rebound in bond yields, which drove industry redemptions. However, the recent stimulus drove a strong equity rally late in September, with only a few trading days to have a material impact on our quarterly returns.
Turning to Page 3, as we discussed last quarter, we maintain that our advantageous market position and clearly defined strategic focus gives us conviction in our ability to deliver enhanced operating performance and returns for our shareholders across various market conditions. I'll review specific areas of third quarter performance momentarily, but I first wanted to highlight a few of the areas of meaningful and measurable progress in relation to our strategic priorities and the key performance drivers noted on the right hand side of this page.
First, this quarter, we leveraged our global client network, our extensive product suite, and improving investment performance to drive strong net long-term inflows of $16.5 billion or a 5.2% annualized organic growth rate. Importantly, we achieved positive long term organic flow growth from each of our three regions, led by Asia Pacific at 9%, EMEA at 5%, and Americas at 4%. At the asset class and vehicle delivery levels, we continue to see strong flows and market share gains and scalable capabilities, including fundamental fixed income, SMAs and ETFs. In each of these areas, we continue to see opportunities to increase operating leverage and profitability. Additionally, within private markets, we're building momentum in wealth management channels, an extension of our historically strong institutional heritage.
Second, we ended the period with a record setting $1.8 trillion of total AUM, an increase of 5% over last quarter and a 21% increase from the prior year. Third, we again generated positive operating leverage in the quarter. We grew adjusted operating income by 4% and drove over 70 basis points of operating margin improvement from last quarter. We're improving the -- fourth, we're improving the financial flexibility of the firm, strengthening the balance sheet and enhancing capital returns to shareholders.
Specifically, we met our zero net debt goal and executed $25 million of share buybacks during the quarter. As you can see, we are acutely focused on our strategic priorities and driving profitable growth. We have good reason to be optimistic given our performance of what was a choppy operating environment globally this quarter. As market breadth continues to gain its footing, we are exceedingly well positioned to benefit. We have the strategic and operational clarity required and exceptional talent across the company to continue to execute quarter by quarter.
Moving on to Slide 4, let me expand a bit more on the third quarter asset flows results across our investment capabilities. Our growth continues to be led by our ETF platform, which had organic long term inflows of $17.7 billion, or 16% on an annualized basis. This was among the highest ETF growth quarters in our history. Flows in the US market continue to be led by factor based equity strategies, our equity NASDAQ Innovation Suite, and fixed income bullet shares. We also saw strong growth from the EMEA region with nearly $5 billion of net inflows.
We continued to innovate in the quarter, launching five new products in the US and one in EMEA with a focus on extending our active ETF lineup. We feel very well positioned to continue to gain market share and use our scale to drive profitability across both passive and active ETF strategies.
Shifting to fundamental fixed income, we garnered nearly $6 billion in net long term inflows in the quarter, or an 8% annualized organic growth rate, marking our best quarterly results in the past three years and 3 times our flow volume from last quarter. With the Fed now moving more aggressively, tail risks have declined, technicals have been strong, and we have seen investors adding duration to lock in yields. Institutional flows were the main driver for us this quarter, comprising 70% of our volume.
We recorded sizable new investment grade mandates globally, with particularly high demand in the Asia Pacific region. US wealth management flows were also strong, led by our municipal bond strategies. This was in large part driven across our SMA platform, which continues to expand rapidly, with AUM reaching nearly $27 billion, or a 45% increase over the past year. With our continued strong investment performance across the fixed income risk and duration spectrum, we remain very optimistic about our ability to continue to capture fixed income flows and money increasingly rotating into these asset classes.
Shifting to private markets, which in aggregate had flat flow growth in the quarter. Leading the category, though, was our real estate capabilities, which recorded positive net inflows of $1.2 billion in the quarter. Growth was led by INCREF, which is our real estate debt strategy targeting the wealth management channel. This fund was launched last year and has steadily gained momentum in the wealth space and is now distributed through several key platforms, including adding one of the largest US wealth managers late in the third quarter. These developments complement our significant real estate presence in institutional markets. I'll also note that we have over $5 billion of dry powder to capitalize on emerging opportunities. Within alternative credit, we recorded net outflows driven by bank loans, particularly in our ETF.
Moving on to Asia Pacific. On a managed basis in the region, we recorded modest outflows of $800 million. Conversely, and as I mentioned earlier, flows sourced from Asia Pacific clients were quite strong, at $5 billion in the quarter. This highlights how we're leveraging our broad product suite globally to meet demand across this important region.
Specifically, we had very strong inflows in Japan for the quarter, driven by continued success in our global equity and income strategy, which generated $1.2 billion in net flows. It is among the top selling active retail funds in the growing Japanese asset management market. Institutional activity was also strong in Japan with inflows in our investment grade fixed income products. This was offset by some outflows in locally managed Japanese equity strategies.
In China, market volatility reigned for the third quarter, particularly in fixed income where we recorded some outflows after a strong second quarter. During the period, we were pleased to launch four equity ETFs through our China JV. ETFs are a fast growing part of our China business and build on our strength in the US and EMEA, and we anticipate this vehicle type will continue to see strong demand. At a macro level in China, we're encouraged by the government's recent focus on economic stimulus. We've seen some positive effects of this over the past few weeks and we believe that continued development should ultimately be very helpful for our business, particularly for equities, even if there is some volatility in the near term. Our business profile and our prospects in the Asia Pacific region remain very strong, led by our well established China JV, our long presence in Japan, and our recently announced JV in India.
Turning to our multi asset related capabilities, we saw modest net inflows in the quarter driven by quantitative strategies. Finally, the relative pressure on fundamental equity flows continued in the third quarter. However, as I pointed out previously, we've seen some moderation over time in the important global, international and emerging market segments. Net outflows in these strategies have slowed during the past several quarters to approximately $1 billion to $2 billion per quarter, remaining markedly lower than 2022's quarterly peak outflows of $6 billion.
Specifically, outflows in our emerging markets equity strategy have been particularly or partially offset by continued strong inflows into our aforementioned global equity and income strategy, as well as small cap equities across multiple markets. While asset flows in our fundamental equity capabilities remain below our long term expectations, AUM has benefited from market gains and stands 15% higher than this time last year. Our investment leadership team continues to focus on driving high quality Alpha [Phonetic], upgrading our talent bench, and strengthening our risk management tools. Regardless of client demand, our focus remains on gaining market share in the fundamental equity categories in which we compete.
Moving on to Slide 5, we provide an alternative aggregation to our AUM inflows to provide additional context for our performance. I've covered most of the key highlights around the broad strength and results of our diversified profile by geography, investment approach and channel. But one additional item that I will point out is at the bottom right section of the slide, where you can see the continued positive net inflows coming into our institutional channel. We're beginning to see higher levels of money in motion, particularly in fixed income, and greater overall client expansion across the firm.
Moving on to Slide 6, this slide summarizes our overall investment performance relative to benchmarks and peers, as well as our performance in key capabilities, where information is readily comparable and more meaningful to driving results. Achieving first quartile investment performance is a top priority, and we're making progress on this front.
On a one- and three-year basis, we've increased the percentage of our AUM in the top quartile of peers, with over 50% of our funds now hitting that mark for one-year and 43% over three-years. Further, 71% of our AUM is beating its respective benchmark on a five-year basis with 42% in the top quartile. We continue to have excellent fixed income performance across nearly all capabilities and time horizons. This supports the conviction we have in our ability to track flows as investors deploy money into these strategies.
Of note, 64% of our fundamental fixed income capabilities are in the top quartile of peers on a one-year basis, with 70% beating their respective benchmarks. Over five years, 81% of our funds are in the top half of peers, with three quarters beating their benchmarks. We're especially focused on improving fundamental equity performance, and we continue to make incremental progress this quarter. We've improved the percentage of our AUM in the top quartile peers across each time period shown here, with 28% in the top quartile for one- and five-years and 24% over three-years.
Additionally, on a five-year basis, we now have 61% of our AUM in the top half of peers. With that, I'm going to leave it here and turn the call over to Allison to discuss our financial results for the quarter, and I look forward to your questions.
