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How Martin Flanagan reshaped Invesco into a single, focused firm.
In 2005 the odds that new CEO Martin Flanagan could revive Amvescap looked pretty bleak. A protégé of legendary investor Sir John Templeton, Flanagan had proven himself over 12 years as CFO and co-CEO of Franklin Templeton Investments, where he had streamlined operations and made important acquisitions. But Anglo-American asset manager Amvescap was a much bigger mess than anything he had faced before.
Built over three decades of sometimes haphazard acquisition, Amvescap was composed of nearly 20 firms in the U.S., Canada, the U.K. and Australia, each with its own CEO, balance sheet and sales force. On top of structural chaos, it suffered from severe reputational problems. The companys biggest unit, with nearly half of Amvescaps $382 billion total assets under management at the time, U.S.-based AIM Investments (since renamed Invesco AIM) had been hammered when tech stocks collapsed in 2000. Worse, AIM had played a prominent role in the mutual fund trading scandal that tainted several U.S. managers in 2003 and helped make thenNew York State attorney general Eliot Spitzer a national figure. By 2005, with the bad odor of the scandal lingering, Amvescap founder and chairman Charles Brady was fighting to stem investment outflows. He was also trying to forestall a looming hostile bid from Canadian asset manager CI Financial Income Fund Co., which had been tempted by London-listed Amvescaps sagging stock price. Speculation was widespread in the press and among analysts that the company would either be bought or broken up.
The company was wading in swamp water, and people were sniffing around to see if they couldnt buy the thing cheap, remembers Rex Adams, Invescos nonexecutive chairman.
Exit Brady, who retired, and enter Flanagan, now 48. Rather than selling off the companys parts, Flanagans mission was to somehow make them work. That meant rethinking the entire operating strategy and culture Brady had created. Flanagan says, The old Amvescap was a holding company of asset managers. Basically what happened was, you bought a business and there was little change in its life after becoming part of Amvescap. Not anymore.
To make one out of many, Flanagan slashed management. He fired or demoted executives across the company and made every CEO of an Amvescap company a division head who reported to him. He centralized the companys support services, dumping several IT platforms that had belonged to individual units. He also reorganized the companys institutional sales operation and rejiggered the compensation structure to make cross-selling a priority. Flanagan expanded Invescos product line through acquisitions, including exchange-traded funds and private equity. He moved the companys global headquarters from London back to its original home in Atlanta and shifted its stock listing to the New York Stock Exchange, where asset managers command higher multiples. Last May he stamped the name Invesco, which had been Amvescaps original name, on the company and each of its units. Continuing to sharpen the firms long-standing emphasis on international growth, he has doubled the size of the companys non-U.S. client base, which now accounts for about 40 percent of Invescos assets under management.
Investors have reaped the benefits. Since Flanagans arrival, Invescos stock price has more than doubled to $27.29 as of May 20 and it trades at 15.7 times estimated one-year forward earnings, although it still lags behind rivals like T. Rowe Price, which trades at 20 times forward earnings. Although assets under management rose only a modest 26 percent, from $382 billion on December 31, 2004, to $480.8 billion at the end of this March, Flanagan turned an aftertax loss of $2.29 billion in 2005 to a net profit last year of $673.6 million. Invescos operating profit margin widened by more than 12 percentage points, from 23.6 percent to 36.0 percent, which is slightly above the industry standard.
When I first got here, every trend line you could think of was pointing the wrong way, says Flanagan, relaxing at a round conference table in his dark, wood-paneled Atlanta office. But in the past two years, you can see very strong operating results coming through.
Analysts who follow the company agree. Michael Kim of New Yorks Sandler ONeill & Partners says, We have seen a tremendous amount of progress and a big pop in margins. But Kim and other observers regard Invesco right now as a turnaround-in-progress. D.J. Neiman, an analyst at Chicago-based investment firm William Blair & Co., says, It is still early days, but the reality is that this is a company that went through some painful times, and his team came in, righted the ship and put the company on a course to realize its potential.
It hasnt all been smooth sailing lately. Last year, Invesco lost members of a fixed-income team to rival Deutsche Asset Management. Flanagan also has big long-term challenges: reversing outflows and improving investment performance. Clients continue to take out more money than they put in, though withdrawals have slowed dramatically, from a net outflow of $19.5 billion in 2004 to a net outflow of $3.4 billion in 2007. (AUM growth has come from investment returns and acquisitions.) As for performance, the primary problem is on the equity side. The firms worldwide fixed-income group distinguished itself with a dramatic increase in performance as some strategies leaped from the fourth quartile to the second in the past three years, according to mutual fund rating agency Lipper. Flanagan says the fixed-income groups best move was its decision to stay clear of collateralized debt obligations and other complex structured products that triggered the market turmoil that began last summer. The average performance of Invescos equity mutual funds, however, rose only one percentage point, from the 47th percentile against their peers during the three years through December 31, 2004, to the 46th in the three years ended December 31, 2007. Some of the worst numbers can be found in the largest AIM-branded retail mutual funds.
The son and grandson of Chicago Board of Trade corn traders, Flanagan attended Jesuit schools in Chicago before enrolling at Southern Methodist University in Dallas. He also founded SMUs first rugby team and injured his hip playing the sport. He still has the limp to prove it.
Flanagan graduated in 1982 and began his financial career with a stint at Arthur Andersen that lasted just long enough for him to qualify as a certified public accountant. In 1983 asset manager Templeton, Galbraith & Hansberger hired him as its 15th employee at its headquarters in Nassau, the Bahamas. Emerging-markets pioneer Sir John Templeton assigned his young apprentice to take notes at monthly Saturday morning executive committee meetings, and over the years, Flanagan became his confidant.Sir John would peel back the onion with you, peel it back, peel it back, recalls Flanagan, and force you to focus only on what was most important. (According to a spokesman, the 95-year-old Templetons health does not permit him to be interviewed.)
By early 1992, Templeton and his two partners, John Galbraith and Thomas Hansberger, had decided to sell out and retire. They tapped Flanagan to handle negotiations with Charles Johnson, chairman and CEO of Franklin Resources, which specialized in U.S. municipal bonds. At the time the $913 million deal closed in October 1992, it was the largest involving mutual fund companies. Five months later, Johnson made Flanagan chief financial officer of the combined entity.
When Flanagan moved to Franklins headquarters in San Mateo, California, in 1993, the firms postmerger $107.5 billion in assets were a lopsided mix of 80 percent U.S. municipal bonds and 20 percent emerging-markets value equities. The company had an impressive operating profit margin of 47 percent, but as growth stocks gained favor during the tech boom of the late 1990s and as industrywide distribution costs soared, margins shrank to a low of 24 percent in 1999. CFO Flanagan set out to cut costs and boost performance. He also sought a balance between central control and autonomy, giving managers freedom on investment decisions while consolidating sales, accounting and other support services Flanagans bosses at Franklin gave him the authority to act almost as CEO and pursue acquisitions. In June 1996 he engineered Franklins $610 million purchase of Michael Prices Heine Securities Corp. and its $18 billion-in-assets, value-oriented Mutual Series Funds, in which Flanagan had some of his own money invested since the 1980s. Then in December 2000, Flanagan drove the $825 million acquisition of Fiduciary Trust Co.,which had $50 billion in assets, bringing high-net-worth clients to Franklin. By the end of 2001, Franklin had $246 billion in assets spread across a range of products. In 2004, Flanagan was rewarded with a promotion to co-CEO, a title he shared for two and a half years with Gregory Johnson, the son of Charles Johnson, who became nonexecutive chairman. Gregory Johnson says Flanagan was an effective partner whose mild-mannered personal style belied his toughness: Just because youre not screaming and yelling doesnt mean youre not getting a lot done.
By 2005, Flanagans accomplishments at Franklin had attracted the attention of Amvescaps then-70-year-old CEO Charles Brady. In 1978, Brady and eight partners in Atlanta had launched the company by acquiring the pension management business of a regional bank and renaming it Invesco. Like others building asset management empires in the 1970s and 80s, including Raymond (Chip) Mason of Legg Mason and Norton Reamer of United Asset Management, Brady believed that scale was key to success and pursued a multiboutique strategy. He acquired firms in desirable markets or with a particular expertise, then left them mainly to their own devices. He was ahead of other U.S. managers at the time in thinking faster growth could be found overseas. In 1986 he sold 45 percent of Invesco to London-listed asset manager Brittania Arrow. Two years later, after Brittania had suffered big losses in some of its investment trusts and run afoul of British authorities for overly aggressive retail fund sales practices, Brady became CEO of the merged company, eventually renaming it Amvescap. Over the next 16 years, he would snap up more than a dozen managers Primco Capital Management, Realty Advisors, Cigna Funds Group, Aetnas Hong Kong assets, AIM Management Group, Chancellor LGT Asset Management, Trimark Financial Corp., Perpetual, Grand Pacific USA, National Asset Management Group, Pell Rudman & Co., Parkes & Co., Whitehall Asset Management and Stein Roe Investment Counsel.
Assets grew, but so did the companys increasing balky management structure. Brady was an ideas man. Marty is much more of a details and execution-oriented person, says Philip Middleton, a research analyst who covers asset managers for Merrill Lynch & Co. in London. Brady declined to be interviewed.
Some of Bradys acquisitions were problematic. Chancellor LGT, with offices in London, New York and Tokyo, had been a headache for its previous owners, the royal family of Liechtenstein, and continued to be one for Amvescap, which bought it in 1998. Others turned out to be time bombs. AIM, for instance, purchased in 1997, was a high-flying growth manager that had made big bets on tech stocks. When the dot-com bubble blew up, AIM fell hard. Between January 2001 and December 2005, AIM Investments suffered a net outflow of $48.4 billion. Amvescaps total assets under management fell 17 percent, from $402.6 billion in 2000 to $333.0 billion in 2002.
Not all of the AIM damage came from the market. In 2003, AIM and Invesco Funds Group were caught up in the U.S. mutual fund market timing scandal, in which favored hedge funds were allowed to trade rapidly in and out of retail funds. ThenNew York attorney general Spitzer leveled charges against AIM in December, and over the following year, AIM suffered $26.4 billion in outflows. Invesco Funds and AIM eventually paid a total of $375 million to settle with the states of Colorado and New York, but the reputational damage was severe and lasting. Between 2002 and 2005, Amvescap suffered about $60 billion in net outflows. By 2005, Amvescaps shares were trading in London for the equivalent of about $10, not far above their seven-year lows. For a while, CI Financial talked publicly about buying Amvescap. Brady stonewalled, however, and by August 2005 the Canadians had backed away.
Meanwhile, Brady, who had considered retiring earlier in his career, decided the time had come to do so and began wooing Flanagan to succeed him. When Flanagan got the first call from a headhunter, he demurred, but he admits he was intrigued.Its that challenge thats in front of you, says Flanagan. It gets back to Can you do it? Can you do it again? And when a second call came a couple of months later, there was another reason to say yes: a dramatic pay increase. In 2007 he earned about $16.8 million, including salary, bonus and stock, nearly three times the $5.9 million he earned in 2004, his last full year at Franklin, according to proxy statements filed by both companies with the Securities and Exchange Commission.
When the new CEO started visiting Invescos offices in the U.S., Europe and Asia in August and September 2005, he was, he says, aghast at the redundancy he found. If you think the opportunity is delivering investment strategies to clients around the world, you wouldnt have a holding company of asset managers that are replicated in any single factor whether its finance, legal, IT or sales in all these different buckets, he says.
Flanagan shared that conclusion with about 60 of Invescos most senior managers at a meeting in Atlanta on three sweltering days in October 2005. At a second meeting in Houston a month later, he asked the same group to identify the companys strengths and weaknesses on sheets of paper and then name the best-performing managers. Flanagan says he tried to promote consensus, though he made it clear that some managers were going to be reassigned, demoted or fired.You need to get the organization engaged to move forward. One individual saying its so will not work, he says.
Flanagan did much of the firing himself. How many people has he let go? I havent counted, and I dont want to, he says. Recalls Bob Yerbury, the former CEO and CIO of Invesco Perpetual in London who became a senior managing director in charge of Invescos entire Europe operation: We went through all the turmoil of coming together. You go through a lot of pain doing that.
Among the departees were two onetime contenders for Flanagans job: John Rogers, former head of institutional sales in Atlanta, and Mark Williamson, who ran AIM Investments in Houston. Flanagan replaced Rogers with Mark Armour, who oversaw Invesco institutional sales in Melbourne, Australia, and replaced Williamson with Philip Taylor, who had run the AIM Trimark mutual fund family in Toronto. Ultimately, Flanagan whittled his executive management team down from 14 direct reports to eight, six of whom were promoted from the ranks and two of whom came from outside the firm CFO Loren Starr from Janus Capital Group and chief administrative officer Colin Meadows from McKinsey & Co. Of Invescos 50 most senior managers today, about 30 are new in their jobs, including 20 internal transfers and ten external hires, says Flanagan. Such downsizing, together with measures like reducing the companys array of about 600 software applications to just 200 today, accounted for about half of the cost savings on Flanagans watch.In the first year we took $120 million off of our 2006 expenses, explains Starr. That was closing down facilities, merging technology platforms all this leveraging of common platforms.
Flanagan also went to work on the companys sales strategy. Before his arrival, AIM funds were sold almost exclusively to U.S. retail investors, Trimark mutual funds to Canadian investors, and so on. Flanagan says that although the weak cross-selling effort was partly a function of the companys fragmented structure, there was a more important impediment. There was no incentive. It was not viewed as a good thing to do, and there was no compensation associated with it. You wouldnt be surprised at the outcome. In 2006, Flanagan introduced a new compensation structure for In-vescos newly unified sales force. He declines to discuss details but says, We are creating a level playing field with the right incentives.All told, assets managed by one Invesco subsidiary and cross-sold by another grew from about $39 billion at the end of 2005 to $52 billion as of March 31.
Those efforts have helped nearly double non-U.S. clients assets, from 23 percent of total assets under management in 2000 to 42 percent currently. The largest single chunk, about $80.8 billion, or 18 percent of total assets, belongs to the U.K. unit, Invesco Perpetual. A smaller but growing piece, about $15 billion, is managed by Invescos Chinese joint venture, Great Wall Fund Management Co. in Shenzhen. Before Flanagan arrived, says Jeffrey Ptak, director of exchange-traded securities at mutual fund rating service Morningstar in Chicago, who has covered Invesco as an analyst, It was a global firm in name only. But Flanagan has done a much more concerted job [than Brady]. . . . There are not that many truly global asset managers out there. They are one of the select few.
In addition to cutting and restructuring, Flanagan has also been making strategic acquisitions. In September 2006 he acquired ETF manager PowerShares Capital Management, adding $5.9 billion in assets. In October of the same year, Invesco acquired LBO and restructuring firm WL Ross and Co., which now has $6.7 billion in assets. Founder Wilbur Ross says he joined forces with Invesco partly to expand his business in China through Invesco Great Wall. WL Rosss assets augmented those of New Yorkbased Invesco Private Capital, and Ross says Flanagan promised him more autonomy than Invescos other units have. I was at first very skeptical because private equity is primarily a very entrepreneurial activity, Ross says. But he has been very faithful in living up to the concepts of independence that we worked out in the deal. Flanagan recently told analysts he intends to keep making acquisitions but said the bar will be high. He will require a minimum 20 percent return on capital, a maximum five-year payback period and immediate profits.
Flanagans moves to restructure the company are mostly complete and are starting to pay off. Flanagan says he believes equity investment performance will improve as a result of changes at the top. New AIM Investments chief Philip Taylor recently replaced four AIM portfolio managers; he has reassigned several others. Flanagan also maintains that Invescos investment teams around the world are now sharing ideas more efficiently as the corporate structure changes from holding company to operating company, and he expects this to boost performance. As we unlock the value of the global organization, he says, we will get the performance right, but it takes time.
On the fixed-income side, Flanagan downplays the damage inflicted by Deutsche Asset Managements liftout of 16 members of an 86-member stable-value team last March. Analysts say there was little damage to Invescos revenue because the business had the companys lowest margin, charging 8 basis points. Flanagan expresses confidence in his new head of fixed income, Karen Dunn Kelley. Flanagan and Deutsche officials declined to comment further. Lawsuits filed by both sides are still pending. (Invesco accused the defectors of violating their employment contracts, and the defectors demanded to be released from them.) In November, Flanagan told analysts on a conference call, It slowed down our progress.
The biggest current challenge is reversing outflows. Of the $123.3 billion that investors withdrew from all Invesco accounts last year, the biggest lump $16.2 billion came from stable-value accounts, which fell from $48.5 billion to $32.3 billion as of December 31 and lost a further $2.2 billion during the first quarter of this year. Invescos redemption rate in 2007 was 26.7 percent of assets at the beginning of the year, which was about average among its peers, according to William Blair estimates (Franklins redemption rate was 27.2 percent; Janus Capitals was 24.7 percent). During the first four months of this year, Invesco had total outflows of $19.3 billion, or about 4 percent of total assets, a softer blow than many money managers have suffered this year.
Flanagan says that Invesco now has the mix of assets it needs to attract inflows, about equally divided between fixed income and equity, with a hefty chunk of its assets in ETFs and alternatives. (Invesco manages about $60.2 billion in alternatives, about 15 percent of total assets and a greater percentage than for most of its rivals, according to William Blairs estimate.) Were going to be okay, says Flanagan. If you look at the mix, its about right. He predicts that by the end of the decade, Invesco will be in the same asset classes but with more assets and better performance: a broad range of capabilities from cash all the way to alternatives. He hopes to add active ETFs, for which PowerShares received SEC approval in February, making Invesco one of the first money managers in the space. He also plans to add more quantitatively driven portable alpha strategies, such as 130/30 funds, of which Invesco now manages $850 million. And he plans more non-U.S. products, pushing international assets beyond the halfway mark of Invescos total assets under management.
Concentrating on customers and showing them a unified corporate face is Flanagans overarching strategy. Instead of having a consultant sit down with 15 different people representing 15 different investment skills, the conversation now is, This is Invesco. This is the range of our capabilities, he says.
Getting people inside the company to think that way hasnt been easy. It is hard work, he says.