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Invesco's Continued Evolution Bears Watching

Several concerns mute this firm's stewardship profile.

Morningstar recently issued a new Stewardship Grade for Invesco. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a C. What follows is Morningstar's analysis of the firm's corporate culture. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Principia®, Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

Like many modern asset managers,  Invesco (IVZ) has both a complicated lineage and a set of cultural strengths and weaknesses. Many signs indicate the firm is increasingly focused on putting investors first, but the unknown effects of ongoing changes keep its corporate culture grade from standing above industry norms.

While Invesco can trace its roots back much further, its current form was created by the 1997 merger of Invesco and AIM, two asset managers founded in the 1970s. The firm continued to grow by acquisition, expanding its global footprint by purchasing Trimark in Canada and Perpetual in the United Kingdom in 2000. In the United States, the tech bubble's burst in 2000 spurred massive redemptions across many of the firm's aggressive momentum-based strategies. The firm further stumbled when it was implicated in 2003's market-timing scandal. 

When CEO Marty Flanagan took the reins in 2005, the firm was still reeling from such missteps, and his actions since then have inspired some confidence that he could be able to right the ship. A previous co-president at Franklin Templeton, Flanagan and his Invesco executive team have improved the firm's funds and their performance. Importantly, the investment teams are communicating better globally, and the funds' board of directors has more support. 

Invesco has continued to expand under Flanagan's watch. In addition to a number of other purchases, two large transactions in recent years created major transformations for the firm. The first was the acquisition of PowerShares in 2006. PowerShares was a pioneer in the exchange-traded fund marketplace, most well-known for its  QQQ (QQQ) fund but also for its plethora of specialty-niche ETFs. It provided Invesco a strong entry into the rapidly growing ETF business. Rather than compete with other large players offering core portfolio holdings, Invesco has focused its ETF offerings as more niche options over time, launching funds like  PowerShares S&P 500 Low Volatility (SPLV) and  PowerShares S&P 500 High Beta (SPHB). But unlike PowerShares in its early days, Invesco has adopted a more robust vetting process prior to product launches by putting new ETF ideas through the same development process the firm uses for its open-end funds. As a result, the pace of ETF launches has come down, although the firm has reached out to some rather-esoteric areas such as multistrategy alternatives and variable-rate preferred stock.

While the change allowed Invesco to diversify its revenue stream and continue to be a player in the popular ETF market, QQQ remains the firm's largest ETF by a wide margin; the ETF represented 85% of PowerShares' assets under management when the acquisition was announced in January 2006, although it has come down to 43% as of July 2014. PowerShares Senior Loan Portfolio (BKLN), the first ETF to offer exposure to bank loans, has also attracted strong inflows since its 2011 inception, especially as concerns of rising interest rates have driven investors to the bank-loan sector. Overall, the PowerShares lineup now represents roughly one third of the firm's combined U.S. open-end and ETF assets. 

Invesco's 2010 purchase of a suite of mutual funds from Van Kampen strengthened the firm's open-end mutual fund lineup. The merger provided access to a strong suite of value-style equity and municipal-bond funds, two areas where Invesco historically had weak product offerings. Invesco did a fine job integrating the funds into its lineup. While manager changes and fund mergers can be disruptive to an organization and its fundholders, Invesco was swift and efficient about it and also communicated clearly with employees and investors, saying which funds--and management teams--would stay in place and which would not. Overall, the firm's current lineup is better balanced and easier for investors to navigate as a result of the mergers. The acquisition was contingent on the fund boards at Invesco and Van Kampen ironing out details of their combined structure, thereby avoiding hassles and possible distractions after the deal's close. 

Among Invesco's investment teams, there are pockets of strength, but several recent events suggest the firm is not using its resources effectively. After a failed attempt to hire a firmwide chief investment officer in 2009, Invesco established a co-CIO structure. Four independent equity CIOs have free rein to build out their teams as they see fit. While that autonomy allows each CIO to hone a specialty, it also leaves open questions as to whether each team can gain enough scale to make its process viable. 

For example, U.S. growth CIO Juliet Ellis is a proponent of sector-based teams that share knowledge across investment styles, and while these cross-team meetings have gained traction, not all teams contribute equally, potentially leaving gaps in their effectiveness. 

Elsewhere, core-equity CIO Ron Sloan has long aimed to build out a research team that can support an analyst-driven portfolio sleeve. While Invesco has given Sloan the green light to hire a few more analysts, it arguably takes decades to develop industry-leading expertise and scale. The core team manages $10 billion in assets, which is not a paltry sum but is hardly large enough to justify a group with the depth of rival firms. More so, the team has undergone a significant shift recently. In early 2014, Sloan, then U.S. core equity CIO and current portfolio manager of  Invesco Charter (CHTRX) and  Invesco Mid Cap Core Equity (GTAGX), received an expanded role to oversee international core equity funds along with his domestic-equity charges. The change brought  Invesco Global Core Equity (AWSAX)--a fund that has struggled for several years and for which the firm fired most of its portfolio managers and analyst team in February 2014--under Sloan's purview. Most of the core-equity team members have been relocated to Invesco's Atlanta office. The Global Core Equity staff has moved from London, while the U.S. team left San Francisco, except for one analyst and Sloan, who remain there. The bifurcation of the team, as well the announcement that Tyler Dann, comanager of Invesco Charter, was leaving the firm, raises concerns as to whether these investors will still be able to effectively implement their process. 

Manager turnover hasn't been isolated to the core-equity team. Manager retention across the firm is relatively low compared with other similarly sized firms, a result of both recent mergers and ongoing changes. For example, the U.S. growth equity team has seen several rounds of changes. In 2010, the firm hired Erik Voss (and colleague Ido Cohen) from J&W Seligman to invigorate the firm's large-growth funds. Even so, continuous churn at the portfolio-management level and among the analysts on the growth team may be contributing to substandard performance at funds such as  Invesco American Franchise (VAFAX) and  Invesco Summit (SMMIX). In 2013, Jim Leach--a 2011 hire who took over the mid-cap Invesco Capital Development and Invesco Mid Cap Growth (VGRAX) following a string of poor performance--took the lead of small-growth manager Matthew Hart's team in an effort to shore up resources between the small- and mid-growth groups. Separately, within the U.S. value group, Silver-rated  Invesco Diversified Dividend (LCEAX) lost a comanager in June 2014. While lead manager Meggan Walsh remains a capable steward of the strategy, it's disappointing to see a long-tenured team member depart.


Not all areas are in flux. For example, Clas Olsson's international-growth team includes several long-tenured managers and analysts with minimal departures over the years. The team has earned a solid record at its charges, including Silver-rated  Invesco European Growth (AEDAX) and Invesco European Small Company (ESMAX), which has one of the firm's best relatively risk-adjusted records over the trailing 10-year period. On average, the overall firm's equity funds earn a 3.1-star Morningstar Rating, indicating that the funds edge past their typical peers on a risk-adjusted basis. That metric received a bump following the Van Kampen integration (when many poorly performing funds--and to be fair, the occasional outperforming fund--were merged or liquidated), although it has since decreased and now sits at its preintegration level.

On the fixed-income side, Invesco has been adding resources to its historically lackluster taxable-bond funds. Greg McGreevey, former CIO for all of Hartford's insurance portfolios, was hired in late 2011 to head up Invesco's fixed-income capabilities. The firm has also invested in technology for the group and is making an effort to consolidate several regional offices. As part of its consolidation efforts, 32 investment-related employees were relocated to Atlanta and two to Chicago, while 20 left the firm; the firm reported that five employees chose to leave on their own accord while 15 were let go, partially as a result of integrating their municipal-bond teams following the Van Kampen integration. The firm also made 43 hires, both to fill slots and to add to its macroeconomic analysis capabilities, including a centralized team that is responsible for coming up with views on credit, rates, and currency. While a net increase in resources could be beneficial, the new structure of incorporating a top-down view across the firm's funds is unproven. It is worth watching to see whether the changes are additive to results.

While righting some of its long-standing strategies, Invesco is making a big push into strategies that are less correlated with traditional stock and bond funds. The firm launched six new alternative strategies at the end of 2013. Invesco has offered real estate and senior loan funds (which the firm also classifies as alternative investments) for several decades, although five of the six new funds are the first that are classified in Morningstar's alternatives categories (the sixth fund in the new suite, Invesco Macro International Equity (VZMAX), is classified in the foreign large-blend Morningstar Category). 

Several competitor firms have also jumped on the alternatives bandwagon, and while uncorrelated strategies may have a viable place in an investor's portfolio, their track records are relatively short. The teams managing Invesco's new suite of mutual funds have longer track records managing institutional accounts, but a retail mutual fund is a different beast. While mutual funds offer the advantages of more transparency and purportedly lower fees compared with hedge funds, their managers must deal with daily liquidity provisions that could result in heavy inflows or outflows at inopportune points in the market cycle. If flows in and out of  Invesco Balanced-Risk Allocation (ABRZX)--a risk parity strategy launched in 2009--are any indication, investors are not well equipped to understand the performance patterns for these nuanced strategies and use them effectively: The fund's three- and five-year Morningstar Investor Returns, which approximate the average investor's return, are materially smaller than the fund's time-weighted return, which assumes the investor buys at the beginning of the period and holds it through the end of the period. 

To be sure, the firm has made strides in communicating with fundholders and the financial advisors who sell its funds. Market commentaries as well as frequent videos and reports from portfolio managers posted on the firm's website provide timely insights for investors, for example. Still, it will take time to evaluate how these funds behave across the market cycle and whether investors have the right information to handle and evaluate their distinctions.

While the directives from top management seem to demonstrate the firm is keeping investors front of mind, the changes across various teams and the level of uncertainty with some of the new initiatives continue to keep this firm's culture grade at the norm.

Click here to see Morningstar's Stewardship Grade methodology.

Kathryn Spica, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.