景順投信 (IVZ) 2003 Q3 法說會逐字稿

Welcome to AMVESCAP's 2003 third quarter results conference call. Today's conference is being recorded upon request by AMVESCAP. If there are any objections you may disconnect from the call at this time. Callers who access the call during the live transmission will be deemed to have solicited access to the call for the purposes of the UK Financial Services and Market Fact Regime governing real time financial promotion.

The presentations that follow may include information that in US practice constitutes forward-looking statements. These are statements regarding AMVESCAP's goals, beliefs, plans or current expectations, while taking into account information currently available to our management. Forward-looking statements are not guarantees of performance, they involve risks, uncertainties and assumptions. We caution investors not to put undue reliance on forward-looking statements.

Today's speakers are Chairman, Charles Brady, INVESCO Division Chief Executive Officer, John Rogers and Chief Financial Officer, Robert McCullough. A question and answer session will follow accordingly. At this time I would like to turn the call over to the Chairman, Charles Brady, sir you may begin.

Thank you very much and good afternoon to our participants who are joining us from London, and good morning to those who are joining us from the US. I am joining you from Tokyo, so good evening to anyone in Asia that happens to be out here, other than myself. We are just finishing a two-week trip to Asia, and I would like to report on that to you in just a minute.

First, in the press release you saw that Bob McCullough who is our CFO and is who is joining me on this call, has announced that he wants to quit work for a while. Bob has been with us for 7 years, he has been a great partner and we are going to miss him. He has agreed to stay with us through the end of next year and hopefully even longer, we'll see if we can't work that out. James Robertson is going to be replacing him, you all know James. James is a chartered financial analyst and a chartered accountant. They have worked side by side for 7 years, so I am assured that this will be a smooth transition. I don't see anything, but just a completion of exactly what we have been doing in the past. I know that all of you will want to meet James, that haven't met him, but both Bob and James will be working [indiscernible] next year.

John Rogers is also on the call with us. He is the CEO of our INVESCO division he gave us a preview in January of the business and he be updating us on the progress of that business during the course of the call.

I have just completed two weeks in Asia, it was a very exciting time and for those of you that don't believe there was a business recovery, you should come out here, because it truly is a business recovery to be seen.

We have just completed this week the launch of our first Mutual Fund in China. We raised a bit over $200m, I think there are only 5 active fund management companies in China at this point in time. It is truly an amazing market and I think we are paused for a great future there.

We also came to Tokyo and are celebrating our 20th anniversary here. I cannot truly believe it has been 20 years since we first came out here. Here again you get a sense of recovery and those of you that operate in this region, I think you would be amazed, those that don't operate in this region, I think you will be amazed at what is going on. So we are well positioned in the Asian markets.

This month marks the first anniversary of the recovery building equity markets. I don't think I have to tell you these numbers, but from the [peaks of them] there are only 2000, the Dow Jones there [indiscernible] about 38%. The SEP fell(ph) about almost 50%, the NASDAQ a staggering 78%. So these were hugely [indiscernible] times over the last 2.5 years.

I truly believe that we have turned the corner. The Dow has risen about 11%, the SEP about 13% and of course NASDAQ, through a lot of relatively low priced stocks is up about 34%. We have benefited along with this, our financial statements are finally beginning to turn around. We think the [indiscernible] is there to give us a steady growth throughout the remainder of this year and well into next year.

Our earnings per share increased to 6.6p, that's a 22% increase from the previous quarter and 57% higher than the earnings of the first quarter. Our margins moved back up to 28.7% from 26.5%, so we begin to see the benefits of a lot of things we have been doing. The good news is that we start this kind of recovery with a much leaner and more efficient operation than we have had in the past.

I believe the growth in the global economy will continue to strengthen, clearly there will be ups and downs, but I think there is every reason to believe that will continue through the rest of this year into 2004.

Let me tell you about a couple of things we have accomplished. We have made good progress on the integration of the INVESCO and AIM funds, that process is pretty much completed. We are in the process of simply finishing up the shareholder votes on those funds. There was a massive undertaking with I think approximately 20 different funds being merged. So that had some impact on our sales during this period. I think people get a little confused, when they get a lot of proxies in the mail.

Our Canadian business has turned out to be a homerun. It has been sighted in a number of publications as the best reputation, best client service, the best communications categories of anybody in Canada and clearly our performance there is outstanding. We have 79% of our funds ranked in the top 42 star rankings.

Atlantic Trust continues to grow business. We have net flows and new money into the business. So we are finally getting a foothold in that business.

The AMVESCAP Retirement Funds have had steady growth. Assets under administration were up about 12% over a year ago.

Finally we turn to the most significant news in the industry. That of course is the Attorney General of New York and the SEC's investigations in the trading violations of hedge funds and others in the mutual fund industry. Every single day now there is an article in the paper about something going on in the mutual fund industry. About market timing, delayed(ph) trading, or fair value pricing. I truly believe that in the end this will turn out to be more smoke than fire, although obvious there are some cases of abuse.

Along with the other members of the industry, AIM and INVESCO have received these enquiries from the various regulatory people and we are cooperating fully with them. We have conducted our own internal reviews on these issues and continue to believe that these actions taken by our funds have been consistent at all times for the best interest of the shareholders. So we are actively participating, in the industry, the trade associations and everyone else looking at what changes need to be made if any. I guess we will just keep you informed about that, but we have no real news as to date.

Now let me turn the presentation over to John Rogers for a review of the INVESCO division.

Hello everybody. I'd like to just update you on four things related to the INVESCO division. Flows, performance, the operating platform and then the business pipeline.

Starting with business flows, in the third quarter we saw gross sales activity across the INVESCO organization, and that as you know, excludes sales in mutual funds in North America. We saw gross sales in the third quarter at the highest level in at least the last 7 quarters, so activity has begun to pick up. In particular we saw higher growth new business activity in North America and I'll report in a little bit more detail on that in a second.

However, as you saw, we did have net outflows in the organization of about $2.1b during the quarter. Now let me just give a little detail on that. In North America we had $1.8b that were retired from four private CDO's. In that particular case those CDO's had reached or were very near the end of their reinvestment period. Those four structures were not INVESCO originated, and we have not been accruing income on those structures since the end of 2002.

Also, in terms of net outflows, we did have some net outflows in Asia Pacific. There were a couple of notable flows there, one large loss account was a cash mandate with very low fees, and another of the large accounts was a two year contract with a public entity in Asia, for which we are currently rebidding.

Let me mention though that the lost business in North America in the quarter, had an average basis point fee of 24, versus new business that came into the North American platform at 37 basis points. So you can see that we are adding business at higher fees than the business that is going away.

We had three important launches in the INVESCO organization during the quarter. Charlie mentioned the China project, but I will mention three others. We launched a Capital Shield Fund, which is a principal protected product in Europe that gathered $60m and won an award from the German industry group for product innovation. We also launched a sub-advised version of that for a German financial institution that collected $80m, most of those products are still open. Then in Honk Kong we launched a Hong Kong authorized unit trust, called the Asia Ballads(ph) Fund, which raised $46m in a short period of time.

A couple of other points on new business, we have closed two new collateralized structures in our fixed income organization. One using asset backed securities as collateral and the other using senior secured loans. Those two structures raised $700m.

The search pipeline is generally strong, I would say it is not significantly changed from the same period a year ago.

Our second main topic would be investment performance - what really drives long-term asset gathering. If you look across the INVESCO complex over the important 5-year and 3-year periods, for the 5-year period 67%, and this is asset weighted, 67% of our equity products are above their respective benchmarks. 51% of our bond products, excluding Stable Value, are above their benchmarks. Over the 3-year period the same numbers would be 54% of the equities and 45% of fixed income. I would say that the trend in the equity products is improving as the year progresses, after a slightly weak start. Markets, as you know, have been led by low price, low quality equities. The high quality approach that we take, has under performed in the beginning of the period, but things are turning around now.

A particular strength in terms of investment performance over the long-term has come in our UK managed fixed income and equity products, out of the platform in Henley. The Reach products that we manage in Dallas, our bank loan senior security group up in New York and high yield US bonds in New York. A strong performance in our Australian small and reasonably large cap equities, Chinese equities and Japanese small caps.

The third topic would be an update on our operating platform. In September in the UK we converted 43 funds to what is called an ICVC status, that is Investment Companies with Variable Capital Status, and we transferred our core administrative platform to a system called DEFAV(ph) offered by the MFTS Group. This is an 18-month project, it is the largest conversion, as far as we know that has every occurred of its type in the United Kingdom. A 10-country network using the same administrative processing platform for INVESCO, it is going to allow us more flexible product development. Things like the ability to launch multiple share classes and will increase operating efficiencies in the UK, so that was a major project.

Let me just close my comments with a little update on the pipeline. In the North American institutional business our won, but not funded book, is two times as large as it has been since the beginning of '02. We have increased our win ratio this year in North America, the win ratio is about 54% year to date, versus just about 40% through this period in '02. The pipeline for new business and won but not funded business in continental Europe and the UK is quite strong. Charlie mentioned the increasing activity in Asia, and we have also noticed an increasing amount of activity in the pipeline in Australia.

Finally, about 50% of the new business that we are booking into INVESCO is coming from existing relationships. So the client servicing efforts and solutions approach that we are taking is beginning to bear fruit.

I will stop there and turn it over now to Bob McCullough.

Thanks John and thank you Charlie. Good morning or good afternoon to all of you on the call. I'd like to run through the financial review slides that hopefully you have all received, they have gone on our website. I'll do this quickly and try to hit some highpoints and will of course be interested in your questions.

Most of what I am going to say really focuses on Q3 versus Q2 because that really gives, I think, a far better comparison than looking back 12-months ago, because so much has changed over that period of time. I would say a year ago at this time, we announced our intention to reduce our cost base by $150m or £100m at the time, at the end of 2003. I will come onto that and try to tell you the status on that as we go through the presentation.

If you look at the three-months financial statement, you will see a slight decline in revenues in sterling terms - but in dollar terms our results are actually up Q3 versus Q2 for this year. Our operating expenses have actually declined again from a year ago, by almost £7.5m. Importantly, our margin at the end of September for the quarter ending September 30, of this year is 28.7%, which we will talk more about. We continued to drive that back toward the targeted minimum of 30%(ph) margin.

Our profit before tax and goodwill is up 9% over Q2. Our tax rate remains unchanged at 30.6%, when looked upon as pre-goodwill.

There has been a lot of discussion about foreign exchange rates, so let me just give you a couple of figures as reference points. Our average exchange rate in the second quarter of this current year, was $1.63 to the pound and in the third quarter it is $1.62, which frankly a bit surprised me, because we have had such a steep movement over recent times. Looking back 12-months ago, however, it was $1.55 and when you compare last year's third quarter to this year's third quarter, there is about a 0.2p negative impact due to comparative foreign exchange.

Also we have seen strength in the Canadian dollar in this period of time as well. Comparing with 2002 to 2003 results, that also had an indication of about a 0.1p negative indication.

Our expenses for this quarter, the three major categories, the compensation, technology and marketing, have stayed pretty constant as a percent of revenues. Our compensation has increased by about 1 percentage point over what it was in the second quarter, I'll come onto that in a couple of minutes in a little bit more detail.

Looking at the nine-month results, I won't dwell particularly on this, because it is covered I think in the press release. Just to make the point that the margin for the nine-months is just about 26% versus 28% a year ago. I would call your attention to the fact that we had £62m of exceptional items that were recorded in the June quarter, as you will recall, and £20m recorded a year ago. The details of both of those were spelt out in the press release.

On an EPS basis we are 16.2p per share for the nine-months this year. 6.6p of that coming in the current quarter as Charlie indicated.

Our head count at September 2002 was 7,993 people, down now almost 1,100 people or 14% to the 6,905 people that we have on board at the end of September. So we have had a dramatic change in the head count. If one goes back to the beginning of the third quarter a year ago, that number is even more pronounced, because at the end of June 2002 we had 8,143 people, a 15% decline over the last period.

Turning to the quarterly comparison of Q3 this year to last year, you will see an increase of 8% in our - I'm sorry Q2 this year to Q3 this year, which is the best comparison, an 8% increase in revenue. Our operating expenses have increased by a little less than 5% by £9.7m. Let me stop here and say that the [pinned] line that we have been talking about for some time has continued in Q3 from Q2, but we did have an increase in compensation accrual this quarter for additional bonuses, which is what is creating the net increase that is there. That is also what caused the rise in the percentage increase of compensation to revenue between the last quarter to this.

Our operating profit you can see has improved by 17%, even with that accrual or almost £13m. I think significantly we have monitored in the past our fixed to variable ratio and we are seeing recovery there as well. Where we at the end of September have about 78% of our cost base in the fixed category, 22% variable - that's up from 83.17%(ph) at the end of the June. I think at the best of times we were at about 75%/25%. So you can see that we are working diligently to recover back to that level.

Our cash flow remains very strong with an EBITDA of £106m in the quarter, which equates to 13.1p per share and a 205-person drop in head count, during the quarter of 3%. So we continue along those lines.

Our average funds under management, which we will talk about, have improved by 30.3%(ph).

The next comparison, Q2 this year to Q3 last year really doesn't tell the whole story, for a couple of reasons. One is that it was just the beginning of our cost reduction initiative a year ago. The foreign exchange rates compared last year to this year make the comparisons a bit strange. What I would say that one thing that probably is worth noting, is that the fixed to variable percentage was 82% fixed to 18% variable at the end of September 2002 versus the 78%/22% percentage you see today.

I will be happy to come back and answer any questions that you may have.

The next slide on EPS comparisons is done only to show, for those of you that follow the EPS and ADR terms, that what the impact of using a common foreign exchange rate does. You can see that when you put it on a common basis, that it tracks very closely what is happening in sterling. But if you look at the different exchange rates you will see vastly different percentage changes, from what is reported in the press release.

Let me spend just a minute on the next page, on the cost savings reconciliation. In the last quarter's call we got off into a discussion that was frankly totally my fault, of trying to give too much detail. This is a complicated situation because of foreign exchange. But if you go back in time to where we started our initiative and when we said that we need to really get more serious even about cost reduction, the Company was looking at a base run-rate at that time of about $1.9b(ph) of revenue, and a 22% margin or expenses of about $1.480 in dollar terms or £990m of expenses. What we said to ourselves was, we have got to get back to 30% at this run-rate. From that, mathematically you can see how the £100m or the $150m targeted run-rate was derived mathematically. When you drop down and look at where we are actually today, you will see in sterling terms our expenses have come down £126m. Our margin has improved from 22.1% to 28.7%, but when you look at it in dollar terms you will see that we have achieved only $84m because of using the current exchange rate.

So trying to put this back onto something on an apples to apples basis here, we have gone back and said using the same exchange rate that was there a year ago, what would our expenses and what would our savings have looked like in comparable terms? You can see at the lower right, that that translates into £74m or $110m. This is right on track to where we believe we are. We are still are on target to achieve $150m. We have included in the quarter, as I mentioned before, an adjustment for some compensation, similar to what many of our peers have done. Our target remains to be at 30% or better, and our run-rate by the end of this year and going into next year, and so all of that I think remains very much unchanged.

To sum up this whole point, I think what we have said consistently and tried to convey to you, is that with some stability and a revenue run-rate, we have confidence in our ability to manage the business to a minimum margin of 30%. Not to say that we would be satisfied with that, but at least at a minimum level.

Let me turn then if I can to the segmental analysis, showing the quarters this year versus - Q3 versus Q2. Let me make about three points if I can here. The margins in Q3 have dropped down a little bit from the second quarter. That is due to the bonus adjustment, but otherwise all of the expense trim lines and the margins are on a positive track.

If you look at AIM our expenses are down, both in the US and in Canada. If you drop down into the INVESCO category you will recall in Q1 we spent a lot of time talking about the 3% margin of our UK business, but we said at the time that it was timing that we had significant expense reduction activities under way there. I think you can begin to see just how dramatic the leverage of that business and those expense reductions has been.

The expense credits that you see here, should basically continue into Q4. With marketing and technology I failed to mention the percentages of those, at 7% and 11%, remain unchanged as a percent of revenues from what we had before.

Turning the page to the nine-month area, I would just make three points here as well. One is that the expenses at each of our major businesses are down and our profitability is improving in each one of those. The margin changes that you can see here also are influenced by the different exchange rates between one year and the next.

Let me then turn, if I can, to the Funds Under Management analysis and address the changes in this area. A few broad comments, our average Funds Under Management in Q3 were $346.9b that is versus $335.8b in Q2 or an $11.1b increase. So typically our mix has improved to 53/47, equities to fixed income from 50/50 at the end of June. Our breakdown between institutional and retail is basically unchanged at a 50/50 split.

The press release describes the breakdown of the investment styles in equity investments, there really hasn't been much of a change there, but I would just call that to your attention.

Our gross sales in Q3 amounted to just slightly less than $20b, $19.8b that is versus $20.7b in Q2 and $20.5b in Q3. So our gross sales remain pretty darn strong, if you will.

John has covered the net outflows on the INVESCO part of the business I think quite well. The headline news there, I think, being the one large account in North America of $1.8b. We would be happy to deal with any questions you may have, but I would just underscore the point that John made. That the basis points on business coming in versus that lost has been dramatically better.

Let me comment a little bit about the US retail business, there has been a lot written about this. Let me give you our views if I can. Our gross sales in this part of the business are very much in line with our prior quarters, so we have seen really no change in that regard. We have basically four or five channels of business that run through this area. The most significant of which is basically our mutual fund business, but we have a sub-advised(ph) business, a variable annuity business and our [indiscernible] business and our 41K business that round(ph) that out. In all of those channels, except for the mutual fund, we saw positive flows in Q3 and also in Q2 of this year. The focus really is on the US retail business, our redemptions there and our gross sales refined. Our redemptions continued to be higher than industry standards, which frankly is due to a continuing, shall we say, disappointment in the historical results for several of our large core and growth funds. These, by the way, are the funds that took in a significant amount of money in 1999 and in 2000.

As Mark Williamson said last quarter in our call, our investment performance here is improving and it remains an essential primary focus for us. If you look at this quarter's flows, about 60% of this quarter's retail outflows [came] from 12 of the 15 largest funds. You know what those are, so it just underscores I think the issue on performance that is there.

Going along with that, we are in the midst of one of the largest un-mergers in the industry history, bringing together AIM and INVESCO. There was some [indiscernible] that was anticipated, as I think Mark mentioned at our last call, and in fact we have seen some of that.

Also, partly attributable to that, INVESCO lost one large 41K account in the quarter, which attributed also to the net outflows. Quite rightly there has been some portion of the outflows that was a result of people just giving up on the mutual fund industry and focusing, because of the focus by the industry regulators and the like that Charlie mentioned, and some that might have been employing short-term trading strategies through the mutual funds. This is a very difficult thing for us to monitor, because so much of these monies are run through Omnibus or 41K or other types of intermediary accounts that are quite difficult for us to be able to see.

We did experience a large amount of redemptions during the early days of September that certainly appears to be due to actions taken by a number of these nominee accounts, to tighten their own restrictions against excessive short-term traders. But again, it is very difficult for us to know precisely what and so forth. What we have seen, in the latter half of that month and into October, trading patterns in terms of sales and redemptions continuing to return to where they had been before.

I will be happy to come back and answer any questions on that, but I think that should give you some flavor about where we are.

If we look at the nine-month results on FUM flows, we see sort of the same pattern that is there. I would just call your attention to, under the new and lost business under Europe and Asia, that the $2.1b is a reminder. We had one large account in Q2 that went in-house in Europe and that money is expected to come back to us later this year and into next year in a different form.

The average basis points in Q2 were 55bps compared to 57bps in Q3, which is due to a mix change. Basically, we saw increases across the board in all of those areas.

Turning then quickly to the balance sheet, I would just say nothing is unusual here. I would be happy to answer any questions. We did pay off the subordinated debentures in Q3, which shows part of the large reduction in the current maturities of long-term debt that coupled with the retirement of the senior-notes in May of this year. Rather than to dwell on that in the interests of time, I will come back to that if you have any questions.

On cash flow, the same story - really nothing that is new or different here. I would call attention to the fact that our capital spending is substantially below where we were last year. We are about £22m this year compared to £35m last year. As we have tightened our belt on operating expenses, we have also began to really look seriously at our capital needs in technology in particular and to bring those together, sort of under one roof. So I expect that our capital spending in the remainder of this year will track along more or less to what you see proportionately for the nine-months, and it will fall short of our capital spending for last year.

Also, we had basically no activity in our fixed asset investments. You can see we had a net change of £1.5m there and there is really no further activity of consequence expected there either.

Looking at our net debt position, this illustrates the repayment of the senior-notes and the equity subordinated debentures. You will see that at the end of September our credit facilities sat at $102m or £61.5m. We have substantial capacity in our credit facility for borrowing purposes. The only other point I would make there is on the other line, that at the end of September about $10m of that $24m is due to the national US dollar denominated note. The rest of that is just the foreign exchange movements from one period to the next.

The next page shows the head count change. I won't dwell on that, but will be happy to come back to questions, other than to make the following point. That is that the reductions you can see here will continue through the end of the year and into next year. All of those are related to programs that are well under way, the most important one being the integration of our mutual funds in the United States, and the conversion of GFAS(ph) in the UK, that [indiscernible] will lead to further reductions. But again, the important point is, no new programs, just a continuation of what is underway.

The last thing, on the shares outstanding, I have no real comments to make there. But the one thing that is missing from this presentation is the US to UK GAAP reconciliation. The reason for that is a pronouncement called FIN46(ph) that is out in the public arena. That will have potentially material ramifications to our US accounting principal presentations that we will do at the end of the year. It has to do with consolidation of variable interest, into these, which the FASB is considering clarifications on a number of points, are we are undertaking the review of that. I'd be happy to deal with any questions, suffice to say, it is a very complicated area, one that is consuming a lot of our time and has consumed I think a lot of time and attention for others in the sector in the United States and in their reporting.

We will have this reconciliation back in at the end of the year, but we are not required to present it on an interim basis and we have elected not to do so.

I would just wrap up by saying it has been a good quarter, an active quarter and we still have got a lot of work to do in a number of areas, but I think you can continue to see the benefits of the cost reductions coming through.

With that Charlie I would be happy to turn it back to you if I could.

Okay, just a couple of final comments. It is like if you think it is largely complicated, the momentum keeps you moving in the same direction for a while. When we were going up and had the momentum going in a lot of directions, it was very difficult to turn it around. I think we can actually see the benefit of that now, we are actually turning around, and the trends are in the right place. That's both in our cost reductions and in our revenues. They are initiatives that are already in place, they are not new initiatives. They are in place that will carry both of those things further, so we should continue to see some benefit of it.

The mutual fund news that we were reading about every day in the paper, it is just another in a series of things that go all the way back to the dot COM correction, the 9/11, bump, bump, bump - you go down the list. We thought we had seen the end of major events in our industry, but it doesn't seem to ever end. In any case, as I said earlier, I do feel that probably at the end of the day, they will find there is a lot more smoke than fire here, but we all have to be [indiscernible] in to what the public thinks about these things. It may have some impact on overall sales for the mutual fund industry for some period of time.

With that I'd like to open up for questions. You have got John standing by, Bob and I will be here.

Thank you sir. At this time we are ready to begin the question and answer session. If you would like to ask a question please press '*' then '1'. You will be announced prior to asking your questions. To withdraw your question if you can press '*' then '2', once again, to ask a question, please press '*' then '1'.

Our first question is from Philip Middleton of Merrill Lynch.

Good afternoon. Speaking of the costs myself, I am very pleased to see costs going up in the financial services industry, but I was a little surprised at the - I frankly didn't expect your cost line to go up in this way over the quarter. I find it a bit difficult to square with simply bonus accrual. Could you explain a bit more about that?

Also, if you are sticking to your target of around $13.30, that probably equates to just under £200m a quarter. Do you really think you are going to get the costs to that level?

Bob can you deal with that?

Yes I can. Philip it is due to the bonus adjustment. There is some [indiscernible] in Q3 that obviously as you look at nine-months bonus requirements for the year will be, we don't have the ability to go back and sort of even flow that back to the first and second quarters. So there is two thirds of that adjustment, one might sort of characterize as a "catch-up" adjustment. That is not to the impact of it. Yes, when we look at our forecast we continue to be on target with cost initiatives and feel quite good about where we stand in that regard.

There is a lot of work to be done, and I would just remind you that when we talked about this, we talked about it being into a run-rate at the end of this [year]. Not what was likely to occur in the fourth quarter report for this year.

Sure. To be clear about that then, you think that around $1.33b is a reasonable run-rate to expect to be continuing the new year with?

That is assuming with the revenues at $1.9 or thereabouts level, where we are right now, that would be true, right.

Okay, thanks very much.

Our next question is from Chantelle(ph) Moschelle(ph) from Deutsche Bank.

Can you please address the capital issues in the Group and specifically give us an update on the timing of when the requirements will come in, and you could potentially read [on the phone]?

Bob did you hear all of that?

I did. The question Charlie was the status of the capital adequacy directives and what that means for us on [indiscernible].

Okay. There is nothing new, so far as we know the decision about that will probably come in February of next year. In earlier meetings we have talked about, we have a game plan if in fact that does happen. We feel comfortable that our game plan will work. There are discussions in the background that seem to go to easing any kind of demands on us, rather than trying to strengthen them. So I really cannot tell you how it might come out, but I don't think it is any worse than what we have already seen, and possibly will get better. We don't have any cost figures factored in at the [better] time, but I think it is actually looking better.

Our next question is from Ken Worthington of CIBC.

Good morning, good afternoon, good evening. My question goes to soft dollars. Can you talk about how your AIM INVESCO subs(ph) and changing their use of soft dollars and how that may impact corporate expenses going forward?

I'd like to give you an answer, but I'm not sure if I can. The subject of soft dollars obviously is bowled(ph) to the forefront of discussions between the SEC and the FSA and other regulatory bodies. At the present time we are operating within the guidelines that are labeled to us, and we will continue to do that. I just frankly don't know how this might come out. So I am not sure I am prepared to give you any kind of real answer on it, but as it unfolds we will definitely give you answer, we just don't know what it is right now.

Let me try to put it into a context if I could for you, however. Our soft dollars by our latest estimate, which is updated by a few months, we translate it into something just a touch over 1% of our annual expenses. So it is a meaningful sized number in just money terms, but if you look at it in terms of our overall activities, it is not that large.

Okay, that's very helpful, thank you.

Our next question is from Joanna Nater(ph) of Lehman Brothers.

This is a question for John, well actually two questions. One, I am just wondering what you are looking for in terms of your performance of your various funds, relative to the benchmark in terms of the percentage that would target, say by next year to be over the benchmark?

Secondly, you mentioned the percentage of new sales that were going to your existing clients. I was just wondering how that figure compares with what you were last year?

Thanks Joanna. We don't have a specific target. There is no magic number, obviously you'd like to have 100% of your products ahead of their benchmarks over all time periods. We find that there probably aren't many players in the industry that have the breadth of products that we have in the institutional and retail market place. So there aren't that many comparables. Personally I think targeting roughly 70% of your products ahead of benchmark over 5 years is going to put you in a very good position, to be a net gatherer of assets. In fact, we have been able to gather assets at very high levels with performance of even, let's say 50% ahead of benchmarks over 3 and 5 years. So the long-term numbers that I have suggested to you, particularly in equities, are very promising.

In terms of new sales coming from existing clients, that number would be, as far as I can tell, up on last year. We want that percentage to continue to rise over time. It is one of the basic strategies that we have in the Group, is to seek to increase the sales that we get from existing clients. So the trend appears to be higher, we would like it to continue on an upward bias.

Okay, that's great. Thanks.

Our next question is from James Alexander from M&G(ph).

The question I have got is particularly on INVESCO US. Looking at my model the Q3 numbers for INVESCO US, both the revenues and expenses were quite out of kilter. Revenues popped up almost £10m and costs popped up £8m, net there was an increase in operating profit. I was just wondering if you could comment on what was going on there? I know you mentioned the bonus accrual, but it doesn't look like there was any in the AIM US, it was all in INVESCO US. I don't really understand either the revenues or the expenses in INVESCO US.

John can you deal with that? Let me make one general comment about the increase bonus [indiscernible]. We did increase in Q3, which is necessary to keep our good people. When the market was falling off in Q1 to Q2 we kept reducing it, because that is part of our strategy. Our strategy is always to match expenses with the income. Had the market never recovered, we would never have added any impact to these bonus [indiscernible]. So now when they have market [indiscernible] with a rather substantial amount, we have had to go back and catch up for the first parts of the year. So there is some doubling up, if you will, and I think that skews the numbers a bit. I am sorry they do that, but frankly I don't any other way to manage the bonus [indiscernible].

I think there is also one specific item in the accounts that may have contributed to most of the points that you make. That is that in Q3 we included the costs and revenues of the investment group that we have in Denver. As you know, we shifted the costs and revenues for the marketing, for the distribution and administration of the INVESCO Funds Group over to AIM, but we retained the costs and revenues associated with the investment group. I think that you will find that that is probably behind most of the increase, both in revenues and expenses for INVESCO US for the quarter.

Sorry, retaining something, kept the costs? I don't understand how that would increase the costs and revenues. Sorry, maybe I am being stupid but I didn't quite follow.

James let me try to give it from an accountant's perspective for a moment if I might? What has happened is, in the early part of this year, INVESCO Denver, the Mutual Fund complex in Denver was, if you will a stand alone, it had about 700 or 800 people attached to it. At 1 July that business molded into the AIM US Retail that you see under the AIM line with the exception that the investment staff, about 60 people, went over to the INVESCO segment. So the costs associated with those 60 people were not in the INVESCO figures in the first half of the year, but came over in Q3. It doesn't affect the bottom line of the Group at all, it is just a matter of where they have been reclassified.

Equally so, we have a revenue split that we are sharing between that which goes to AIM and that which goes to INVESCO, through our Mutual Funds still managed by that team in Denver is shared the same way. So a large part of the revenue increase you see in Q3 is due to the revenue split for that part of the business [indiscernible].

Almost as if they came back - would be a better way? They came back onto the costs of INVESCO US?

It is really a question of geography between AIM and INVESCO, rather than something that is fundamental in operations.

Okay, thank you.

Once again, if you would like to ask a question please press '*' then '1'.

Our next question is from Anard Basudevin from DKW.

Two questions if I may. My first question is on INVESCO US, could you give us an idea as to how much more of your core-mandated funds are at risk of outflows?

My second question is on the integration of AIM and INVESCO Funds. I believe that out of the 20 funds you were planning to integrate, your mutual fund holders did not give approval for 12 of them and therefore you might have to go for proxy voting. What does that mean for costs, and does that mean that there could be more extraordinary expenses for the restructuring process?

Charlie can I deal with the second one and then have John talk through the first?

Yes that will be fine.

The shareholder meetings did take place, I think the day before yesterday. In fact as you pointed out, several of those meetings were put into recess until enough votes were pulled together. This was not at all unexpected, in fact it was very much expected. In fact, when we put our estimate together of the cost of the integration, out of that cost the proxy solicitation was part and parcel of the exception charge we took in the second quarter. So this is just state of play, it will have no impact on our cost base. The only thing of course that it does, is it has some bearing upon the timing as to when the mergers themselves can legally be completed. But we have got, I believe, 60 days to complete that effort. Again, I think the important point is, it is not anything that we were really - we were hopeful we would get a better answer, but it is not unexpected at all.

The first part of the question?

If I got the first question right, it is, what is the status of the relationships and client status with the funds that have a core mandate in North America?

There is no simple answer to that. We have clients who have given us core equity mandates in at least four different product areas. The structured equity area, where we have enhanced index, and a structured core product. We have a more traditional type of a core product, that we manage in Louisville(ph) and then a growth oriented core. Then we have a large cap value product that also is used by some clients looking for core equity exposure.

Long-term performance in all those products is actually pretty good. We are having good client stability there in general. So I wouldn't say there is anything particular about the current climate or the current performance it has - thinking any differently about that booker(ph) business than we normally would.

I think as a general statement, we have been pleasantly surprised at the stability of the funds. In earlier studies of this, we felt we might lose a bit more. We have lost some money, but just not as large as I thought it would be.

Our final question today is from Joanna Nater of Lehman Brothers.

A few questions. One, I am wondering about, in the institutional side, the new securitizations that occurred, I think you said John it was $700m(ph). Did those occur actually in Q3 or did they just occur?

The other thing, I am wondering about the new accounting standard affecting consolidation of subsidiaries, do you think that this will affect this segment of the market at all?

My second question about the 41K mandate that you lost, I am just wondering, because of the fund mergers, if you think that you are going to be at risk of losing more of those?

Let me try and speak to the bookend questions, and I'll let our accountants, our accounting expert here, speak to the middle one.

The two structures that I mentioned, the $700m(ph), Joanna those are funded in Q3. We have one more in the pipeline now, which should fund this quarter, another large one, which should fund this quarter. Then there is one more, that we are in the fund raising stage with now, which we will probably close, depending on spreads, in the first quarter of next year.

In terms of the 41K business, first of all the flows in the 41K business in our alliance group in INVESCO have been positive this year. It actually has been a pretty good year there. But there are some legacy accounts, which may have, for example, been in sector equity funds, had exposure in sector equity funds, things like technology and what have you. In some cases funds that are being merged, where there may continue to be an occasional account loss there, I just cannot guarantee that one way or the other. Again, I wouldn't say there is anything systematic about that situation. Our 41K and alliance business is having a pretty good year.

Okay.

Joanna, say again your question on the 1046(ph).

I am just wondering if that consolidation issue around SPZ(ph) will affect the CDO's? I don't know if you keep any piece of that, if that affects that at all. Or if you think that will affect the business of other people that have to report under US GAAP for their primary accounts.

I think you will have to ask them about that question. But certainly it will affect us and all of the CDO's that we write, would end up on our balance sheet, and it will completely change the structure of the revenues that we report away from management fees to interest and dividends. That is sort of what makes this a bit unusual, if you will. But the bottom line effect on our business and the impact on our cash flows at the end of the day, would be zero. I think that [indiscernible]. [indiscernible] the balance sheet, we change the structure of the income statement, but it all goes out as a minority interest.

But you wouldn't change, just because it doesn't change the economics of the business, you wouldn't feel that you wanted to change what you were doing, just because the reporting of it changes?

I think we will have to look at all of that in the fuller context of what it means. Because it could obviously have implications on our debt covenants and ratings and rating agencies and so forth, so all of that will have to be - will be considered. It is broader than just this - not to get off on a tangent, but the way the bulletin is presently written, it will require us to evaluate over 800 investment products every quarter, as to what [indiscernible] you were going to qualify. It seems like, from the current definition, that all, underscore all, unit trusts, wherever they may be outside in the world, would have to be factored in. So we would be subject to considering consolidation of all of our unit trusts in Canada, UK, and offshore funds, etcetera. Just to give you a sort of order of magnitude of what we are talking about. Far broader than just CDO's.

Right, okay.

That just simply won't happen.

Yeah, that all seems crazy.

I think that is all the time for questions we have. Again, I don't think I need to tell you how much my relationship with Bob McCullough means to me personally, but hopefully he is going to be around with us for a long time and he will be participating in all the things the Company does for a long time. So you will all have the chance to visit with him again. James will be coming on board, dealing primarily with the budgeting for next year. If you have questions, our basic plan is that Bob will finish off this year and close up the books and then James will take on the budgeting and the forward-looking for next year. When you have questions, you might think about it in that context.

In any case, let me thank all of you for being with us. We think we are in a recovery mode. It is never going to be easy, it is never going to be smooth, but it does look like we were making solid progress. So we appreciate the support each of you have given us and look forward to working with you in the future. Thank you very much. Good night.