Via Financial Times

Speaking to an audience of several hundred investment professionals in New York this autumn, Martin Flanagan, chief executive of Invesco, painted a bleak picture of their industry.

“We are going through a once in a generation change,” the plain spoken head of one of the world’s biggest fund managers said. “Every single client we deal with around the world is using fewer and fewer money managers . . . that just changes the landscape like we’ve never seen before.”

Mr Flanagan was alluding to the pressure on active managers to cut costs in an era of ultra-low interest rates and cheap passive funds — pressures which are forcing many players to fundamentally reassess how they compete.

But compounding these challenges is a set of problems specific to Invesco: the painful integration of its mega $5.7bn acquisition of New York-based OppenheimerFunds, clients pulling back from one of its main investment strategies and the UK arm suffering from an association with its former star stockpicker Neil Woodford.

Invesco’s share price is down more than 50 per cent since the start of last year, and despite a rally in the first few months of 2019 is only back at around $18, its mid-January level.

Line chart of Net flows ($bn) showing Invesco's active and passive funds are world's apart

Pressure is beginning to mount on Mr Flanagan, who has led the Atlanta-based $1.2tn fund house for more than 14 years. His attempts to insulate Invesco from these tectonic pressures have been to expand the business into a greater number of markets and offer a wider range of products.

Yet these moves — including the Oppenheimer deal, finalised this year — have put Invesco at the centre of a perfect storm and made it the worst-selling fund manager globally this year. The group’s funds have bled more than $1bn a week over the past 12 months.

“The market will only give them so much leeway [after the Oppenheimer acquisition],” said Stephen Biggar, an analyst at Argus Research. “They will want to see some tangible benefits soon.”

In recent years Mr Flanagan has moved the business, which was built up through acquisitions in the 1980s and 1990s of successful active managers, increasingly towards cheaper passive products. These now make up a quarter of the group’s total assets, up from just 17 per cent three years ago.

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Two years ago, Invesco bought two ETF businesses, Source and an arm of Guggenheim Investments, which brought a total of $54bn of assets. The addition of OppenheimerFunds this year added around $300bn in client assets, sending the group’s total to $1.2tn when the deal closed in May.

In a market that increasingly favours huge scale players or nimble boutiques, swelling in size made strategic sense but integrating Oppenheimer has not been plain sailing.

Column chart of Assets under management ($bn) showing Invesco's path of growth

The combined business has shed 1,300 jobs, helping the group shave an estimated $501m in costs according to its third-quarter earnings results, outpacing the $475m target Mr Flanagan had repeated on quarterly calls with analysts throughout the year.

However, the integration has also caused internal tension and prompted clients to bolt at the prospect of upheaval. The staff cuts amounted to 12 per cent of the combined workforce, according to headcount totals at the end of 2018, and included a Denver office of 850 people that focused on administrative functions.

Invesco avoided firing portfolio managers, whose departures can trigger a red flag for investors and groups like Morningstar, which assign ratings to funds. But large-scale job cuts typically lead to clients withdrawing their money in the fear of disruption to the business, especially when they are centred on back-office and sales roles.

The tie-up has not prevented the enlarged group from losing assets. It has suffered persistent net outflows throughout the year, including $7.8bn shed in November, according to Citi estimates.

These are “substantially deeper” than anticipated, according to Bill Katz, an analyst at Citi. Since the Oppenheimer deal was announced last October, the group has suffered $62bn of net outflows excluding ETFs, according to Morningstar — by far the biggest loss of business of any fund manager globally.

Line chart of Share prices and index rebased showing Invesco lags behind rivals

The outflows place fresh pressure on the group’s distribution arm after Mr Flanagan had repeatedly pointed to OppenheimerFunds’ sales team as a prized jewel since first announcing the deal last year.

“On the US distribution side it’s worse than expected — there have been more outflows than anticipated,” said one senior employee. He said the meagre performance of Invesco’s own stock had hit executive morale.

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“It doesn’t look very good,” he added. “When you have a share price that has been cut in half, it reduces the firm’s flexibility to grow,” such as through further acquisitions or even incentivising staff with stock-based compensation. He added that despite the challenges in the US, the UK business was facing greater strain due to poor performance in its funds.

One former Invesco executive, who spent close to 20 years at the company’s UK business, said its current challenges integrating Oppenheimer are reminiscent of its teething problems when it took over Henley-on-Thames-based Perpetual in 2000.

“The first two or three years after the Americans came in was a real struggle,” said the former executive, who declined to be named. “It wasn’t until around 2003 that things started to pick up again.”

Up to 40 per cent of Perpetual staff left the business in the first few years under Invesco — including star manager Stephen Whittaker — prompting advisers to take the company’s funds off their best buy lists. But the company roared back, not least due to the popularity of Mr Woodford’s Income and High Income funds.

When Mr Woodford left the company in 2014 to set up on his own, Invesco suffered heavy outflows once again as many longtime clients switched their money to the new business. Mr Woodford’s protégé, Mark Barnett, took over management of his funds and became Invesco’s head of UK equities.

But Mr Woodford’s dramatic downfall this year has been an uncomfortable experience for his former colleagues in Henley, not least Mr Barnett, due to their similar holdings in hard to sell unquoted shares — the source of Mr Woodford’s fall from grace.

Mr Barnett was forced to apologise to investors last month for underperformance of his funds, following heavy investor withdrawals and a warning from influential ratings company Morningstar over the level of liquidity in his portfolios. Invesco later added another of its UK fund managers, Martin Walker, as co-head of the UK equities business with Mr Barnett in an attempt to quell concerns over client departures. 

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Mr Barnett suffered further ignominy this month after being fired as manager of the £1.3bn Edinburgh Investment Trust, with the listed fund’s board singling out Mr Barnett’s stockpicking as the main reason behind its poor performance.

Invesco’s Henley office has also been roiled by British investors’ aversion to absolute return funds, products that proved popular after the financial crisis as a way to protect against losses using expensive derivatives-investing techniques, but failed to meet that promise.

Invesco’s Global Targeted Returns fund — which is now the biggest in the market after overtaking Standard Life Aberdeen’s Gars product — dropped by a fifth in the past year to £9.9bn having suffered £2.5bn of outflows. 

The company points to business wins in continental Europe and China as reasons for optimism, as well as a record year of inflows for its European exchange traded funds. But problems in the US and UK — its two biggest markets — have had a far bigger bearing on the company’s health this year. It is also suffering from a problem familiar to its fellow behemoth global fund managers in that clients are switching out of higher-margin active funds and into cheaper index-based funds. In the three months to the end of September, Invesco suffered $15.7bn of outflows from its active funds, which was partially offset by $4.6bn of inflows to passive products.

Despite the challenges analysts have signalled cautious optimism. Six of the 19 analysts tracked by Bloomberg that cover Invesco stock believe it will outperform, with just one signalling the stock has further to fall. Cutting more expenses than forecast after the Oppenheimer deal has improved the outlook, but continued traction on gross sales “in addition to improved investment performance is needed for us to get more constructive,” Daniel Fannon, an analyst with Jefferies, said after third-quarter earnings.

“Invesco is a supertanker,” says the former executive. “It’s a darn sight harder for it to turn around flagging performance than if it was a much smaller business.”