Andrew Schlossberg
President & Chief Executive Officer at Invesco
Thanks, Greg, and good morning to everyone. I'm pleased to be speaking with you today. During the second quarter, we had several bright spots of performance and growing business momentum against a continued complex market, economic and geopolitical backdrop. Leveraging our vast client network, our broad product suite and improving investment results, we continue to drive higher demand for our capabilities.
For the period, we garnered $16.7 billion of net long-term flows, which is a 6% annualized organic growth rate, marking our best quarter in over two years. Importantly, we were in net positive long-term inflows in each of our three regions across active and passive strategies and in both our institutional and retail channels. We ended the quarter with over $1.7 trillion in AUM, which was up 12% from the prior year, reaching a record high for Invesco. We generated positive operating leverage with revenues up over 3% from the first quarter and we expanded our operating margin by over 270 basis points to 30.9%. This resulted in adjusted operating income growth in the second quarter that was in double digits on both a sequential quarter and year-over-year basis.
As mentioned, the market environment remained choppy in the quarter. And while we saw some broadening and increasing demand for risk assets, general uncertainty and continued higher interest rates have impacted client investment behavior and our business results. Notably, after an up and down April and May, most major equity indices rallied towards the end of the second quarter. U.S. markets continued to lead the way with the NASDAQ gaining 8% and followed by the S&P 500 increasing 4%. However, the theme of narrow market returns continued with the S&P 500 equal weighted index, by contrast, declining by 3% in the quarter. Equity returns outside the U.S. were mixed, with the MSCI Emerging Markets up 4%, Asia up 2% and Europe down 1%. Improvement in China's equity markets, which were up 6% in the quarter, were a welcome bright spot.
On the fixed income side of the markets, the Bloomberg Global Ag Index declined by 1% in the quarter, while most days, our major bond indices were relatively flat. All of that said, we have plenty of reasons to be optimistic that with increasing market and interest rate clarity, a broadening of participation will continue to take hold and investor appetite for more duration, risk-on and global-oriented assets will increase.
So moving on to Slide 3 of the presentation. We continue to believe that our advantageous market position and clarity of strategic focus provides us with the tools to deliver enhanced operating performance and returns for our shareholders. Specifically, we have built a strong global footprint with scaled businesses in the U.S. and other key developed markets and a significant and unique Asia-Pacific profile, which includes hard to replicate and a leading 20-year old joint venture in China and 30 years of longevity in the growing Japanese market.
We have also developed a diverse, yet focused range of active investment strategies. This includes both public and private market strengths and a multi-asset profile that empowers Invesco to meet a range of client demands, provides us diversification to perform in various market cycles and allows us to adjust as secular changes continue to develop. One of those secular trends is the continued client appetite for ETFs.
Here again, we are extremely well positioned with a scaled and growing suite of capabilities. Our focus is on innovation and providing access to passive factor and active strategies. Our ETF franchise continues to gain market share globally, while accelerating its profitability and its overall contribution to the firm. Finally, a hallmark of Invesco is our leading distribution platform. It's an area of particular strength in the U.S. wealth management market, which is the world's largest asset channel in an area with significant growth potential, particularly given the democratization of certain asset classes like private markets.
Our strategic focuses, which you can see in the middle of Slide 3, are predicated on prioritizing the intersection of market size and secular change, with Invesco's unique position to drive growth in the highest opportunity regions, channels and asset classes. As you'd expect, our top priority is investment performance, which is key to winning market share regardless of overall client demand of highest order is continuing to enhance the quality of our active equity strategies and thereby driving greater retention and net flows into this important segment. We have tightened elements of risk management and the relationship between investments, products and distribution has never been stronger. Our investment teams have started to put up much better performance numbers, which I'll highlight momentarily.
An additional area of focus is on a profitable organic growth. A significant driver of this is through our focus on high demand, scalable investment capabilities and delivery vehicles. In this regard, we are continuing to work to improve the operating leverage and profitability of our fixed income and multi-asset capabilities on the asset class side of things and ETFs and SMAs on the vehicle side. Furthermore, we have a focus on private markets. We have a very strong institutional footprint, which has been historically focused on real estate and private and alternative credit. We are now taking steps to bring those capabilities into the faster growing wealth management space, while continuing to tap into ongoing demand in institutional markets globally.
More tactically, we are focused on taking next-generation technology and deploying it through our platform at the enterprise, distribution and investment levels. And finally, we are improving the financial flexibility of the firm, strengthening the balance sheet and generating operating leverage as we continue to deliver better returns for our shareholders. These are the outcomes that we're seeking to achieve through the key performance indicators that are outlined on the right-hand side of Slide 3. They are also the themes at the forefront of today's discussion on second quarter results.
So flipping forward to Slide 4. Against the backdrop of the aforementioned market conditions and Invesco's strategic priorities and strengths that I just outlined, you can see, on this slide, the key flow drivers across our investment capabilities. Our strong organic flow growth in the second quarter continued to be led by our global ETF franchise. During the period, we continued to gain market share in this segment, recording $12.8 billion in net long-term inflows, which represented a 13% annual organic growth rate. This was our highest growth ETF quarter in over two years and we ended the period with a record high of $415 billion in long-term ETF AUM.
Growth this quarter was led by our equity innovation suite, our factor-based equities and our fixed income BulletShares franchise. The QQQM is our fastest growing ETF and is now the third largest fund on our platform. This innovative product leverages our QQQ popularity, but we earn a direct fee instead of the marketing benefits we receive on the QQQ Trust, which equates to around $200 million annually. We also saw strong growth from EMEA this quarter with over $5 billion of net inflows, and we recently broke through the $100 billion mark of ETF AUM in that region.
Additionally, we continue to innovate to meet client needs. Invesco is one of the few global asset managers capable of servicing clients who want customizable, cross-regional ETFs for exacting exposures, such as the recently launched Sustainable Energy ETF, which garnered $1.6 billion in assets at its launch in June. The continued advantage of ETFs are evident in both passive and active formats and across all channels, creating even more opportunity for expansion in this space.
Shifting to fixed income, we continue to believe that investors -- as investors gain greater clarity on inflation and central bank interest rate policy, they're going to move out of cash and extend their duration profiles of their fixed income allocations into a wider range of strategies. Though this anticipated shift may be more protracted than originally expected, we continue to see some green shoots. During the second quarter, client demand accelerated and we garnered $1.6 billion in net long-term inflows into our active fundamental fixed income strategies, which is in addition to the $2 billion of fixed income ETF flows achieved.
Active inflows were driven in part by municipal bond strategies delivered through our mutual fund and our SMA platforms. We rank in the Top 5 overall in munis and Number 3 for high-yield munis. We're also well positioned in SMAs with over 50 strategies placed to more than 80 broker dealers and RIA platforms. Our retail SMA offering has rapidly expanded to over $25 billion and has had an annual organic growth rate of 28%, making it one of the fastest growing in the industry. We're also positioned with fixed income strategies in our institutional channels globally. And this quarter, we had solid net inflows, driven by investment grade strategies sourced in the Asian region. We remain well positioned across the risk and duration fixed income asset classes and have plenty of reasons to be optimistic about our ability to capture flows as we continue to generate investment performance.
Moving on to private markets. Here, we also maintained momentum in the second quarter, recording net long-term inflows of $2.6 billion, driven by the strength in our credit strategies, notably bank loans and CLOs. We also saw modest positive flows into direct lending, as well as continued inflows into INCREF, which is our non-exchange traded REIT, focused on private real estate debt. This fund has maintained good momentum in the U.S. wealth management advisory space since its launch last year. It's important to note that our global real estate team has over $5 billion of dry powder to capitalize on opportunities emerging from the market dislocation of the last several quarters.
Picking up on Asia-Pacific managed assets, we generated exceptionally strong net long-term inflows of $6.7 billion in assets managed mentioned in this region. This was led by our China JV, where a net long-term inflows of $8.5 billion in the second quarter surpassed the full year of 2022 and 2023 flows combined. These flows were driven by our strong performing fixed income and balance strategies, where demand returned from investors seeking higher-returning fixed income products, given the low-rate environment in China.
We anticipate that this dynamic will continue to play out in the coming quarters, given the evolving economic environment in the market. We also launched four new equity products this quarter in China, which added $200 million of flow during the period. Additionally, as part of a collaboration between our China JV and global ETF team, we launched, in June, Europe's first ETF link to the ChiNext 50 Index, which is a fund with unique access to long-term growth potential in China. The ETF market in China has seen rapid growth recently and we are uniquely positioned to gain share and be an early mover and innovator in this space.
Picking up on multi-asset related capabilities. As noted, we saw modest net outflows attributable to lower fee quantitative strategies. And finally, the relative pressure on active fundamental equity flows did continue. However, as I pointed out previously, we have seen moderation, namely in the global, international and emerging market segments. Net outflows in these strategies have slowed during the past several quarters to $1 billion to $2 billion in aggregate, which is markedly lower than the 2022 quarterly peak outflows, where we saw $6 billion.
A continued bright spot in our active fundamental equity capabilities has been our global equity and income strategy, which is among the top selling active retail funds in the growing Japanese market. This fund delivered an incremental $1.2 billion of net inflows in the second quarter, and its rapid rise in AUM has placed it in our Top 10 active equity funds at Invesco. Overall, we're confident that the high-quality active equity management will continue to be an area of significant portfolio allocations, and it's a reason that we are so acutely focused on investment quality and performance in this area.
So moving on to Slide 5. This chart provides an alternative aggregation of our AUM and our flows to provide you with additional context on our results. From a geographic perspective, you can see that we delivered solid net long-term inflows across all three regions, with particular strength in Asia Pacific, where we had over $10 billion sourced from clients in these markets. Strong growth in China was augmented by continued momentum in Japan, where we have seen institutional demand for fixed income, most notably investment grade, as well as the continued retail demand for the aforementioned global equity and income strategy.
It's important to note that the views -- that this view of the Asia-Pacific region is a more holistic measure of the scale of our business than the previous slide. The AUM and flow numbers not only include the products that we manage in the region, but also the breadth of Invesco's other products managed globally that are sold into the Asia-Pacific market. An additional key takeaway from Slide 5 is depicted in the chart at the bottom center of the page. Here, you can see the significant improvement in return to positive net flows and our overall active investment strategies. This cuts across all asset classes, public and private markets. Furthermore, you'll note the graph on the bottom right of the page, the positive flows and strong improvement seen in our institutional channel. This is driven by demand pickup across both public and private credit.
So moving forward to Slide 6 for an update on investment results. As I have reiterated several times this morning, investment performance is a top priority of our firm. This slide shows our overall results relative to benchmark and peers, as well as our performance in key capabilities where information is readily comparable and more meaningful to driving results. Investment performance was solid in the second quarter. On a one-, three- and five-year basis, overall performance improved incrementally from last quarter, with 70%, 65% and 76%, respectively, of our AUM beating its benchmark. Additionally, on a one-year basis, we have improved and we now have nearly 70% of our AUM in the top half of peers and 45% in the top quartile of peers.
At the asset class level, we continue to have excellent fixed income performance across nearly all capabilities and time horizons, supporting our strong conviction in our ability to attract close as investors deploy money into these strategies. Specifically, 92% of our fundamental fixed income capabilities are beating their benchmark with 83% of our AUM in the top half of peers on a five-year basis. We are acutely focused on improving fundamental equity performance and have been making progress here as well. Half of our funds are now performing above benchmark on a one-year basis, with 52% beating peers on a one- and five-year basis. So hopefully, the overall additional context and the more detailed disclosures that we have shared today and last quarter have further clarified our results, outlined the significant opportunities that we have before us, and provided more clarity on our approach to capitalize on them over time.
So with that, I'm going to turn the call over to Allison to discuss our financial results for the quarter and I look forward to your questions.
