Invesco Has Evolved Into a More Balanced Shop, And Now Needs to Prove It Can Endure

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 B. 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).

 Invesco (IVZ) continues to evolve as a firm. 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, including expanding its global footprint by purchasing Trimark in Canada and Perpetual in the United Kingdom in 2000. Domestically, 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, he took over a firm that 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, Flanagan and his team improved communication among its global teams and provided better support to the funds' board of directors.

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  PowerShares QQQ (QQQ) fund but also for its plethora of specialty-niche ETFs, and 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 product development process the firm uses for its open-end funds. As a result, the pace of ETF launches has come down and the firm has mostly avoided any far-flung strategies. 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.  PowerShares Senior Loan Portfolio (BKLN), the first ETF to offer exposure to bank loans, has also attracted strong inflows since its 2011 inception, especially during the first half of 2013 as rising interest rates have driven investors in general to the bank-loan sector.

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 an exemplary 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. Further, at the insistence of the funds' board, the merged funds maintained the lowest overall net expense ratios (although the lower fees were achieved through fee waivers, and some have expired). Remarkably, 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.

There are signs that the firm is focused on building a sustainable investment culture. After a failed attempt to hire a firmwide chief investment officer in 2009, Invesco established a co-CIO structure. On the equity side, there are group CIOs for U.S. Growth Equity, U.S. Core Equity, U.S. Value Equity, and International Growth Equity, while the fixed-income side is managed by a single CIO. Each area has retained its independence and unique investing culture. For example, U.S. Core Equity CIO Ron Sloan gives analysts responsibility for managing a sleeve of his funds, while U.S. Growth Equity CIO Juliet Ellis emphasizes mentoring analysts coming up the ranks, rotating them through various sectors to broaden their experience. Even so, efforts to cross-pollinate research among the teams, such as shared sector-based teams and more frequent communication between the teams, seem to be losing steam among some groups. Overall, this structure should allow the departments to focus on their strengths and weaknesses, although the benefits of cross-team connections that Invesco was looking to develop may be limited.

Meanwhile, continued turnover among certain groups is concerning. 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 Negative-rated  Invesco Global Core Equity (AWSAX) has experienced changes at both the manager and analyst levels and has struggled to stand out. U.S. Growth Equity CIO Juliet Ellis also oversees a group in flux. In 2010, she 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 Van Kampen Mid Cap Growth 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.

On the fixed-income side, Invesco has been adding resources to its relatively 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. The team has also made external hires to add macroeconomic analysis capabilities. While an increase in resources could be beneficial, the new structure is unproven. It is worth watching to see whether the changes are additive to results.

The firm has made some strides in communicating with fundholders and the financial advisors that 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. The sales team also asserts that it's more focused on educating advisors and investors on the nuances involved in the somewhat complicated structure of the firm's first risk-parity fund,  Invesco Balanced-Risk Allocation (ABRZX), which was launched in 2009. That said, the firm continues to advertise that fund's performance prominently on its website, and it's by far Invesco's best-selling fund over the past three years, now with roughly $13 billion in assets.

Invesco's overall corporate culture is headed on the right path. While the directives from top management seem to demonstrate the firm is keeping investors front of mind, it will take time to see whether the changes throughout the firm are sticky and whether this iteration of the firm can stand at the same level of more-established peers and deliver consistent results for investors.

Click here to see Morningstar's Stewardship Grade methodology.