During 18 years as chief executive of
Invesco,
Marty Flanagan expanded the asset manager’s foray in Asia and acquired the PowerShares exchange-traded fund brand. He recently stepped down from the top job.
Flanagan guided Invesco (ticker: IVZ) from a loose collection of eight investment firms with disparate brands and cultures into an integrated top global asset manager. As of June 30, the Atlanta-based company’s assets under management reached $1.54 trillion, up from $386 billion in 2005 when he took over. That puts Invesco in the top 20 largest global asset managers by AUM.
He made two key decisions. First, he significantly expanded Invesco’s existing joint venture with a state-owned firm in China,
Huaneng Power.
Each owns a 49% stake in Invesco Great Wall Fund Management Co., but Invesco has management control. The asset manager oversees $113 billion in local China-related assets.
Second was acquiring the PowerShares ETF brand in 2006, which gave the company control of the now-$200 billion
Invesco QQQ Trust Series one
ETF (QQQ), the most popular index fund following the Nasdaq 100. It set the company on the path to become the fourth-largest ETF provider globally, with 393 ETFs.
Flanagan will remain chairman emeritus at Invesco until 2024, helping new President and CEO Andrew Schlossberg with the transition. Barron’s spoke to Flanagan about his tenure.
Below are edited excerpts.
Barron’s: You found early success with expanding into Asia in 2005 and then with the PowerShares acquisition in 2006. How did those two big moves help set a vision for Invesco under you?
Marty Flanagan: I started my career way back when with John Templeton in the Bahamas, and so I always had this global perspective that I got from him. Asia was just a very attractive market, China in particular, even 20 years ago when the talk was still “the potential of China.” We view China as the single greatest opportunity within asset management.
If you look at the projections of where new money is going to come into asset management globally over the next five years, 40% of it is expected to come from China. Being the largest local money manager there, with a reputation of being on the ground managing for local Chinese for 20 years, is really a fundamental strength of Invesco.
Switching gears, in 2006, we became really attracted to the PowerShares ETF business. The deal was $3.5 billion when we signed it. You had already seen growth of the index providers, with Vanguard,
BlackRock,
and State Street leading the way, but it tended to be more institutionally based. PowerShares was in the wealth management channels then, so that was an attraction and a differentiator at the time. We thought it was a good way to serve the retail investor.
You see great opportunities in China, but there are also significant challenges for U.S. firms. Why have you put so much time, talent, and treasure there?
For asset management, it continues to be the greatest opportunity within the industry, globally. Our business, Invesco Great Wall, has been up 20 years, and importantly, our joint venture partner, Huaneng Power, is a state-owned enterprise, and we have had a great experience with them. It’s a local asset manager, managing money for Chinese individuals, investing only in Chinese securities. It is a local business, so the risk profile of that is very different than inbound investment into China right now.
As the second-largest economy, what do they need? They need economic growth. For economic growth to happen, they need the development of financial services to finance growth; they also have to develop a retirement system for the population. If you think of just the fundamental needs, asset managers, financial services have had a good experience, and that will continue for some period of time.
You’re confident that the country will remain a good investment, even with the saber-rattling we’ve seen between the U.S. and China?
The geopolitical tensions are high, there’s no question about it. And it’s really competitive. From my conversations with people in China and the U.S., there are some things that we will just never agree on. But I’m encouraged that there are many things we can agree on. We both need economic growth. Let’s both benefit from each other’s economies, but be tough on each other where we think we have our differences. My sense is that’s starting to happen now.
Where is it happening?
The recent executive order to ban U.S. investments in Chinese technology was very narrow, and it focused on what we think is important to our country. That’s a contrast to what I was concerned about, that it was going to be sweepingly broad. You just had [Treasury Secretary] Janet Yellen go to China; that was excellent. You had the Secretary of State [Antony Blinken] go; that was really important. These are meetings we couldn’t even do 12 months ago. So the conversations are happening.
Over your tenure, the asset-management industry has seen the rise of ETFs and fee compression. What’s your take on this?
The change has been really good for investors. Institutional clients always were quite sophisticated and had the ability to get access to a range of asset classes, but if you think of decades ago, individuals could just own a mutual fund or two. Now, individual investors can have customized portfolios with a full range of investment capabilities. The other development over the years is that fees have come down. It’s a great thing for investors.
The ETF business was long dominated by index fund providers such as BlackRock, Vanguard, and Invesco, but the growth now is coming from firms such as JPMorgan Chase and Capital Group with actively managed ETFs. What does that mean for the industry?
I try to remind people that the ETF is just a wrapper. In the financial crisis, when it was hard for active managers to outperform, everybody wanted an [indexed] ETF because it was cheap and it generated returns, but people didn’t focus on that when you buy an ETF, you are making an investment decision, just as you are in a mutual fund. When [indexes] became concentrated so that all the returns were coming from 10 to 15 stocks, it can become quite risky.
It’s a natural development [to see more active ETFs], but if you look at who’s been successful more recently with ETFs, they’ve largely had private distribution capability. Another thing that’s different with active management—you’re not going to have 150 successful ETFs that are the same thing. The market has matured past that. Now, I think you have to be quick to the market, and not just quick to introduce an ETF; you have to get quick to scale because a fast follower can jump right in front.
What’s your outlook for markets?
I think it’s actually really healthy that interest rates are getting back to, let’s call it, more-normal levels. I think it’s going to be good for risk assets. Ultimately, it’s going to be good for business cycles also. When money’s free, you can make business decisions that, frankly, you couldn’t if there was a higher hurdle rate of return. I think that’s going to create some discipline about how businesses are operated.
Fixed income is more attractive than it has been a very long time. From an equity point of view, it’s now a stockpickers’ market. If you look behind the indexes, there are some very attractive investments. But if you just look at the valuation of the index, it’s easy to say the market is too expensive. It has been driven by a very narrow set of companies.
For a disciplined investor, if you have a three-to-five-year time horizon, and you’re building a portfolio with a full spectrum of asset classes, consistent with your investment objectives, I think it’s a pretty interesting time.
What will shape investing in the years to come?
Every 10 to 15 years, we go through these stair-step advances in technology, and we’re in one right now. The challenge for a firm is where you do place that investment because it’s expensive, so you really have to decide on those areas that are going to make a difference for your business. We’re using artificial intelligence and the tools for anything that can help enhance the portfolio manager’s life, better research, taking the friction off processing information.
With the client-facing technology, we’re using it to get a more-informed understanding of our clients. This whole personalized interaction that would have been a pipe dream five, seven years ago, is now real. Through the use of data and analytical tools, you can understand what a financial advisor is focused on in their client profiles, so when one of our wholesalers interacts with them, they show up and they’re actually informed and helpful, and not wasting people’s time. That enables a financial advisor to be more effective in meeting client needs.
You’re staying on an advisory capacity until 2024. What will you be doing? And then let’s talk about your retirement plans.
I’ll stay involved. I’ll be an advisor in different areas, which I’m happy to do. China is an important one. Before Covid, I had gone to China every year for 18 years.
I’m a trustee at Southern Methodist University, where I went to school, so I’m looking forward to being more active there. I’m also chairman of Engage Ventures in Atlanta. It’s an accelerator and a fund for early-stage investment. It partners with all of the big corporations here in Atlanta,
Home Depot
[HD],
UPS
[UPS],
Delta Air Lines
[DAL], and so on. The board is largely made up of the CEOs of the companies. I’ll continue to be chairman there; it has been a lot of fun.
Thanks, Marty. B
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