景順投信 (IVZ) 2003 Q4 法說會逐字稿

Welcome to AMVESCAP’S 2003 Preliminary 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 Markets Act 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, all 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 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 Chairman, Charles Brady.

Thank you very much. Good afternoon to all participants in both London and in Europe. Good morning to those in the US. We’re delighted to have you join us for this review of AMVESCAP’S 2003 Year End Results.

Bob McCullough our CFO has joined me this morning. As you will recall, and we announced last quarter, Bob will be turning over his duties at the AGM this year to James Robinson. Bob and James have worked together side-by-side for the last seven years. Both will be joining me on the next quarter’s call. Just for your information. Bob is not going away, he is staying with us, doing some other duties, but we will miss him on some of these calls in the future.

As you all know, 2003 was an eventful year for our industry and for AMVESCAP. We had a recovering global equity market, after three very long tough years by everyone. That boosted both in industry assets under management and profitability.

For AMVESCAP the increased revenues from growing equity markets, combined with our successful reduction in core corporate expenses, led to a steady improvement in profitability throughout the year. Q4 was up by 67% over Q1 and that’s 7p versus [4.2p]. So we really had some strong momentum going into Q4.

However, largely for the industry and certainly for AMVESCAP, this positive news has been overshadowed by the regulatory investigations in the industry in the US that began in September. Since our last call in October this news has dominated press coverage of AMVESCAP.

You will recall that in November we announced that INVESCO Funds Group, our Denver based retail force had received what we call a [“Wells”] notice from the SEC and the New York Attorney Generals Office, advising us that their staff was recommending civil action against IFG based on market timing activities. A week later IFG was actually charged.

When we first received this information back in the mid-summer about market timing, we retained outside counsel to conduct an extensive review of these matters. On December 2, when civil action actually was filed against IFG that review was still in progress. Based on the information available at that time we were advised, that these charges should be contested, we simply could find nothing that would support those types of charges.

Our outsider review continued and from the economic analysis of the funds it became clear that we had not been able to protect our shareholders completely from market timers. That was the purpose of our plan, but it simply did not work as fully as we’d hoped.

The results from this analysis showed that we believe we’re ancestors of illegal late trading by third parties. They were harmful to our funds. As soon as we received this analysis, of course we wanted to take the action to make all the fund shareholders [indiscernible] and we notified the regulators that we would enter into settlement agreements – negotiations based on that.

We’re working diligently to constructively resolve all of these pending regulatory issues as soon as possible. I know everyone in the investment community would like us to get this behind us. But while we can’t predict the exact timing or size of this final settlement, I am confident that we can successfully achieve this objective and put these issues behind us, and regain our momentum that we have built up in 2003.

We get a lot of questions about, “what is the size of the settlement?” I cannot really even speculate on that. We have tried to make an analysis of damages, and all I can tell you is that the damages that we have been able to identify are dramatically less than the numbers that have been put in the market place for other settlements. I also must warn you that the settlements are not based on actual damages. They are based on negotiations between the regulators and some companies. So we’re not quite sure how this might work out, we’ll just have to keep you informed as we find out ourselves.

Now allow me to make a few comments about the significant accomplishments last year. We successfully integrated the IFG and AIM Investments across the Group through the distribution and the back office operations. You probably don’t realize this, but back in the very beginning, we knew that eventually we would have to bring together the mutual fund operations into one. So, this was an ongoing plan, far before the more recent events of the regulators. This was accomplished last year, and has a huge cost savings to us, which will be reflected in future operations.

We also received a lot of awards for services last year. Both our mutual fund companies in the US received the service awards, which is unusual when you have such a major transition that we had.

Although AIM has experienced net outflows in funds, just in the mutual fund area, all the other channels that they distribute through, which are [sub] accounts, separate accounts for counter funds, all of those had very positive flows in the year.

So, also Trimark’s business in Canada has been an extremely important business to us. It was one of the acquisitions we have made over the last two or three years. They have top tier funds and for both one and three years they are ranking number 1 in the country in servicing. They have most of their funds in the top 4,000 one in three years.

Our Private Net Wealth business, Atlantic Trust, which started from zero two and a half years ago, once we complete the acquisition of Stein Roe will be roughly at the $16b level. Which means that we have gone from a zero base to a very meaningful business over the last two and a half years. So that is a very major accomplishment.

In the UK we have completed the transfer of all of our 43 funds owned through what we call the GFAS system for accounting. This was an 18-month project that we have been working on. This was the largest conversion of its type ever in the UK and brings us to a common platform throughout all of Europe. So that was a major accomplishment.

[indiscernible] another acquisition that we made in the last few years, had excellent investment performance, extremely good. 84% of the retail assets outperformed the market for one year, 77% over three years.

In Asia we made a great step forward by launching our first fund in China. In association with the Great Wall Corporation we formed a company called INVESCO Great Wall. We successfully launched our first fund late last year.

We also celebrated our 20th anniversary in Japan. So our Asian business has really turned around and it looks very, very strong looking forward.

In December our Real Estate Division completed an acquisition of HPVs institutional real estate operation in Germany. That brought in about $2.9b of new assets, but more importantly gives us the start up of a footprint in all of Europe for real estate operations.

We also, at the end of the year, we’re happy to announce today that Dr. Thomas Fischer joins AMVESCAP Board as a director. As you undoubtedly know, Dr. Fischer is a highly respected global banker with exceptional experience in risk management and European markets. He serves currently as the chairman of WestLB Bank and was previously the chief operating officer of Deutsche Bank. So we’re very happy to welcome Dr. Fischer to our Board.

Now let me turn the program over to Bob McCullough to give us the financial highlights.

Thank you Charlie. Good afternoon, good morning to all of you on the call. I have a lot of information, I’ll try to go through it quickly and then we’ll be happy to take your questions.

I hope most of you have got with you the presentation pack that was sent at the time the announcement went on the wires earlier today.

Turning to page 4, which gives our Group P&L for the year, let me hit a couple of highlights if I might here. Let me start with foreign exchange, because the way the dollar versus sterling and the euro versus the dollar and the Canadian dollar versus the US dollar has moved over the past year, has made comparability between our results a bit difficult to see on the surface.

Our average exchange rate for 2003 was $1.65 to the £1.00, compared to $1.50 last year. Q3 was $1.62 this year versus $1.73 this year. So even in a 90 days period we had a 6.7% change.

Throughout this presentation, I won’t dwell on it over and over again, but just suffice to say that these movements obviously have affected the comparability when you look at our results.

For the year we had a 26.8% margin in operating profits of [£310.850] for the year, which is down about 15%. But I think this year, 2003 in my mind, really is a year of two six month periods, which we’ll come to in a couple of minutes.

In Q4 we did provide an exceptional charge of £22.8m or 2p per share, which relates to the legal costs and other costs that we have incurred and that we expect to incur in the first half of 2004, hopefully through the conclusion of these regulatory investigations.

A brief reminder that we acquired Whitehall Asset Management in our private capital business in Q1 and at the end of December we have consolidated the HPV real estate business, that Charlie just referenced. There are no numbers in our P&L for 2003 for HPV.

Our pre tax profits before goodwill and exceptional were down 16%. If you look at the major components of our expenses, our compensation for the year 2003, represented 63% of our total expense, technology 11% and marketing 8%. A total of 82% by those three areas and that compares to 62%, 11% and 9% for the previous year. So, you will see that things really pretty much stayed in line year-on-year.

Once again our tax rate for 2003 was 30.6% effective rate, and that’s before exceptional items and before goodwill. That rate for 2004 is going to increase to about 35% by our best estimate today. We have had the benefit of having tax benefits coming through our P&L statement for the exercise of options and for the utilization and realization of net operating losses that were in the Canadian business, that have been with us for some time and I think we’ve talked about in the past. Those two areas seem to have run their course and, consequently we will see our tax rate going up in 2004.

The dividend has been set, subject to approval by shareholders at 6.5p, which brings our total for the year of 11.5p per share. That is the same level that we had in last year’s numbers.

If we turn to the next page, looking at Q4, a few points I would make here. Our EPS looking at Q4 to Q4 is up 40%. In a couple of minutes I will come to Q4 versus Q3, which I think honestly is a better view. But on an EPS basis, just looking at Q4 to Q4 the foreign exchange impact on earnings per share is 0.4p per share.

I should have said on the full-year basis that was 1.7p per share. I failed to mention that on the previous page.

The only other thing I think I would mention on this slide, well two things. One is you can see the exceptional item in Q4 this year. Secondly you will see that we have some interest in investment income of £3m. That is made up of some realization of some investments that we have been holding. As well as we always mark to market our [indiscernible] money, so that activity shows in there this year, compared to the same activities of last year. But, nevertheless, it is about £4m swing year-on-year.

The next page just shows an EPS comparison, trying to put it on a comparable exchange rate. This is really just for the benefit of our US participants on the call that follow the ADR. Because with the exchange rates you will see that you really need to put it on an apples-to-apples basis if you like.

Looking at page 7, which makes the comparison on Q3 versus Q4, here I think it shows dramatically the impact on the foreign exchange. Showing a 1% decline in revenue and 2.4% decline in expenses, when you look at that in dollar terms, revenue is actually up 5.5% and our expense base is up 4% quarter-on-quarter.

Let me just make a comment about expenses. The increase that we had here really is made up of some additional spend in marketing. Some slight additional spend in compensation and we have added a couple of people, as we saw the momentum in the business shifting and changing.

Our operating profits, while up 2.5% in sterling is up 9% and our margin, as you can see is up 3.5% quarter-on-quarter.

The rise in EPS is also 6% in sterling terms or 10% again in dollar terms.

Let me stop. As you all know, we don’t give guidance on the future, but I do think Q1 is an unusual quarter for us. I think the momentum we have seen in Q4 will continue into Q1 but there will be some points just to recall, that have been with us in the past. That is with the start of the new year, we always have to restart our employee benefits accruals. Many people will reach the caps on those, particularly in the United States. We have a heavier amount of those expenses always in Q1.

We have decided, given where we are, that some additional spending on marketing to where we have good performance is something that is important to us to gain the momentum on our revenue line. Not surprising I am sure, to anybody on this call, we have seen a rather dramatic increase in the cost of our liability insurance from last year to this year. That will have some impact on Q1 as well.

The last point is, we will have in Q1 2004, not in Q4, the full-quarter results for the HPV real estate business and we will have some part of the quarter covered by the Stein Roe business. That acquisition is scheduled to complete around about the end of February or early in March. So, we will most likely have about one quarter of revenue and expenses on that.

Turning to the next page, I felt it useful to put out a quarterly summary for each of the four quarters to see how things have progressed throughout the year. Again, looking at this in sterling terms versus dollar terms gives you a little bit different picture. But you can see that throughout the year we have made steady progress in the improvements in our operating margin, as we have talked about on previous calls. That, coupled with the 67% increase in the EPS from 4.2p to 7p I think are probably the two most important things that I would point out.

Headcount has gone down, as you can see. There is a later slide on this. So I think just looking at the trend lines the revenue in dollar terms is up almost $90m or £30m. Expenses were up $27m and operating profit in dollar terms up about $60m over this period of time. The margin has gone up by 7.9 percentage points during this period of time, which is about a 36% change. So, I think you can see how the momentum in the business has developed.

Page 9 just gives you an update on the exceptional items. The biggest one here is the US Regulatory Investigations. The total for the year that was provided was [$22.8m] in Q4 or 2p per share.

Looking at page 10, which gives you the operating profit comparison year-on-year, there are two or three points I would make here. First of all, all segments reported improvements in operating profit in Q3 versus Q4 in dollar terms, for the US business in Canada in particular. Some of the segments, however, show a downturn in sterling and that is all due to the foreign exchange impact.

I guess really those are the only two points I would make to you, just to call that attention. I would be happy to come back to any questions you may have on that point.

Looking at Funds Under Management, I think this is probably where the greatest amount of attention is. First looking at the Q4 results, you will see that we had $20.6b of market gains during the period. We had net outflows as a complex of $1.8b made up I think, of two important figures, one is the net outflows of the AIM business of $2.1b and a positive inflow of $1.2b for our North American Institutional Business.

There are a number of points outlined in our release that talk about investment performance. Suffice to say we are always working to improve our investment performance and particularly when it comes to our net flows.

The average Funds Under Management for Q4 were $356.7b versus $346.9b, that’s a $9.8b or 2.8% increase over the previous quarter. If you go back to Q4 last year we had average Funds Under Management of $336.6b.

Our gross sales are down from Q3, they were 19.8% and they are $18b in Q4 of this year. You will see here $2.9b added related to the HPV acquisition, while that is for the real estate business in Europe, that business is added to our US real estate business and therefore is shown under North America.

The mix at the end of Q4 is 55% equities, 45% fixed income. That compares to 53%/47% at the end of September and 50%/50% both at the end of June and at the end of last year. With that mix change of course, has some beneficial impact on our revenue.

Just a couple of comments about flows for AIM. Looking back over the last six months and looking at the top 15 funds within our US Retail Business. Those funds accounted for 45% gross sales, pretty much for every month-on-month. If you look at the net flows, they accounted for 82% of the outflows in Q4 and 63% of the outflows in Q3.

I would remind you, as Charlie pointed out, that the other channels besides long-term retail, are all positive. The conclusion I would draw from this is that we have really not seen anything dramatically different from one period to the next, or even for that matter, one month to the next. Except for the activity that we saw early in September that we talked about in our Q3 call.

Two other points on this slide. One is just to re-emphasize the $1.2b of positive inflows from North America. We have had some quite large new client wins in the stable value business. Our [Rep] business and our bank loan business are also doing quite well, as I think some new products funded that John Rogers mentioned on the last call.

The average basis points – to talk about how the mix impacts us, in Q4 last year was 55 basis points, just taking a simple average of revenues to average funds. That jumped to 57 in Q3 and is now sitting at 58 basis points. So, you can see that that impact is beneficial to us.

Turning to the yearly charts on funds flows. There are a couple of points here that I would make. That is that the institutional money market funds for the end of December are $50.9b versus $57b at the end of last year. The average Funds Under Management for the year are $365.8b versus $340.8b for the current year.

Our performance, again as I mentioned, I think is covered pretty well. I would be happy to come back and talk about any of those or any questions that you might have on that. But, obviously we’re never fully satisfied with our overall performance.

Looking then at the next page to the balance sheet. There is really not very much to add to this here. It is pretty consistent from one period to the next. The change that you can see in the creditors and debtors is just a matter of the amount attributable to the policyholders, debtors and creditors relating to our business in Germany, which are a direct offset one to the other, but get grossed up in our balance sheet and our annual report will provide the details of that. There is nothing fundamental to the business one way or the other on that front.

I would call your attention to the goodwill figure. We have added a little over £21m related to the HPV acquisition to goodwill, and Whitehall about £12.5m. Again I am happy to answer any questions you may have on that.

The next page shows net debt. Again you can see dramatically the impact of the exchange rate. In sterling terms our net debt has declined by £76m translated only into $24m. I would remind you that we did repay, as you can see, $250m of senior notes towards the subordinated debentures in Canada during the course of 2003. We also issued a new $350m ten-year note earlier this year.

We are in good shape with our debt covenants. Our debt to EBITDA ratio must be below 3. We will sit at slightly over 2.0 at the end of the year. Our interest coverage, or rather credit agreement requires us to be in excess of 4 times and we’re sitting at a bit over 8 times at this point in time.

Aside from movements in the credit facility the next debt maturity that we have is $400m of senior notes that come due in May 2005. So this year will be a matter of using the free cash flow to repay debt.

The cash flow, on the next page, again there is really nothing there that is spectacular. I would just call your attention to the fact that our capital expenditures have declined substantially from last year of £54.5m to £36.5m in ’03. I think the capital expenditures will come back a bit from that number in 2004, because we have quite a large hold on some technology spending that we will need to probably ramp up a little bit next year. But I do not see them getting back to the £54m range that we saw in 2002. Again, you can see the acquisition impacts, which are the Whitehall and the HPV real estate.

The next page shows the headcount slide. Showing 834 people reduction this year than in the counter year, including 158 in Q4. The bulk of that 158 is in two places. One in AIM US and the other in the UK business. You will recall from previous discussions that the last [crunch] of people in Denver came out – or were scheduled to come out with the fund mergers in Q4 and you can see the impact of that. We begin to see the rollout of the project team in the UK primarily due to GFAS conversion that Charlie mentioned a bit earlier. So, those are the two big items accounting for the headcount.

The other thing is we have had about a net 60 increase in headcount through the two acquisitions during the course of the year.

The next page talks about shares outstanding. I needn’t say anything more about that.

The last two pages have to do with the reconciliation from UK to US accounting principles.

One last bit of good news here. When we talked before we were going through the agony of trying to interpret and figure out what the impact of the US FASB announcement on our balance sheet financing or variable interest entities might be upon us that looked rather onerous. But as the FASB in December issued further clarifications in it, you have probably seen in other companies in our same sector, that we do not feel that this pronouncement now will have any meaningful impact on our business whatsoever. So that is a bit of happy news for us for certain.

With that Charlie let me turn it back to you and I’d be happy to answer any questions that might be coming.

I think what I have seen is, the last three years down turn has been a challenge for the industry and for us. This is on the back of a very long run up and I think we were due for the correction. It has been far more severe than we would have hoped.

The last three months have also been extremely difficult for AMVESCAP. In addition to having to try to turn the business around and actually gain momentum, which I feel like we have. We know that our reputation has been damaged by these regulatory issues. This has been harmful to both me and my colleagues. It is harmful professionally and it is harmful personally. I can assure you that when I meet with people around AMVESCAP, and I try to meet with as many as I can and as often as I can, they have a strong resolve to get these things behind us and rebuild our reputation. So I am sure that we will be able to do this in due course. Unfortunately the timing is not totally within our control. But we will move as quickly as possible to put these matters behind us.

We need to focus at AMVESCAP on the good fundamentals of the business, which is enhancing investment performance, continuing the high level of service to our clients, and leveraging our business and operating platforms. I feel like we are largely positioned in all of those areas. The performance has clearly done better. The level of service has maintained at a high level and with the restructuring that we have done over the last three years, I think our operating profit platform is almost efficient as anyone’s in the industry, now they’re poised to really produce meaningful results.

I think our employees understand this. They are dedicated to try to make all of this work and the ultimate success will be our ability to execute on these matters.

With that, I think we will ask our moderator, Mike if we can have questions now.

Thank you sir.

Our first question is from Hugh Vansteinis(ph) from Morgan Stanley.

Good morning. I have three quick questions. Firstly I wanted to clarify – you mentioned that you had found evidence of late trading at IFG. I just wanted to check that I had heard correctly. Was that just IFG or also at AIM?

No it was just IFG. Let me make it very clear. Late trading was about someone else, third parties.

Fine, okay.

But it was only at IFG.

Secondly, I was wondering if you could give us an update of the discussions you’ve been having with the FSA in the UK on capital adequacy. If you were to settle in line with some of the other settlements we’ve seen, would that have a material impact on the capital adequacy rules?

In the first place we have no news on that value. That has moved along to a point that we’re simply waiting on the EU to make their pronouncements. So there is no new news to report. We do not think that this settlement will have anything to do with that. I think it is actually on the outside of that.

Okay. Lastly I noticed that Continental Europe and Asia have still been a bit of a disappointment in flows throughout last year. What levers can you pull and what things are happening there to try to reverse the continual 2%-3% outflows per quarter there?

Well actually we have a very positive outlook for Asia at this minute. Our business in Australia has turned around dramatically and actually will show a [indiscernible] profit for this year.

Our business in Japan has turned around dramatically and will show a meaningful profit, a meaningful growth this year over last year. Not so much in profits, but [indiscernible] will be better. But the four new businesses have just begun to pick up.

The important part of Asia of course, continues to be Greater China. There we have a very strong position in Taiwan, Hong Kong and in China itself, now with the launching of our new funds. There has been some outflow out there. Most of the outflow has been the result of funds that were actually managed in Europe – that were European type investment funds and where we had performance issues. So it really wasn’t the results of Asian performance as much as the results of non-Asian performance. That has also been addressed and I think we’re looking for much stronger [indiscernible] in 2004.

Can I just add, Hugh for your benefit, a lot of the business that we conduct in Europe and in Asia is money that is sourced there, but it is actually managed in other parts of our business. So, to really get a full picture of that you really need to almost combine Europe and Asia and the UK and in some instances even North America, just because of the way we do our accounting.

I would just underscore exactly what Charlie said, that the business flows have really been quite good there.

Okay, thanks a lot gentlemen.

Our next call is from Ken Worthington of CIBC.

Good morning. Can you give us a little update on your plan to reduce costs by $150m? What kind of reductions should we still expect in the first part of ’04?

I’d be happy to try and do that. This gets to be a bit tedious Ken. If you look in just pure sterling terms, if you go back to our previous presentation, our targeted run rate for Q4 was £893m annualized for the year. If you look at our Q4 at £211.6m you will see that we have more than met that objective.

The important thing, however, without getting too tedious into the numbers, the important point to keep in mind is that that whole plan was really set about to return our business to a minimum 30% operating margin. That, at the end of the day, is I think the most important way to look at the success of the initiative itself.

We have met the target, pretty close to $150m or more than £100m if you look at it that way. But I think the key I would just say to you is to think about the margin at 30%.

Now, having said that, the point I made a couple of minutes ago about the added costs in Q1 will have some impact no doubt upon the operating margins, simply because they are a bit front loaded versus looking at the year as a whole.

Great, thank you very much.

Our next question is from Robert Vumby(ph) of HSBC.

I have a couple of points. First of all you allude to the improving investment performance over the last 12 months, which seems to be reflected in the statistics. Could you just comment on what you attribute that improving performance to?

Secondly, what sort of level of marketing expense you might do and to what extent do you think that marketing expenditure will lead to a turnaround in flows? How long will it take to do that? How much more will the performance need to be sustained?

Just as a further point. I didn’t quite catch the point on the tax rate. Could you just confirm that it is now going to be 35% going forward, is that right?

I think that’s right. I’ll let Bob answer that one.

The flows – this is a business that goes to extremes I suppose. Back in 1997/98/99/2000 years we had 85%/90% of all our funds in the top 4,000. We were brilliant performers in that period of time.

That performance turned around and bit us because I guess we were too aggressive in trying to feed the market. Of course a lot of money comes into those peaks. It probably comes in at the wrong time in those funds.

We had to work our way through that and it turned out that our largest funds had in the next two or three years’ the worst performance. So we are having to slowly work our way out of that.

The number of funds that have actually outperformed in the market now, are 60% I believe is the number. We have a lot of product to be sold now in the market place, but we are still having some flows out of those major funds. Their performance has also picked up I might add. But you do have people that got in the top, there is a whole cycle in the mutual fund business. After people hold the funds for two or three years, you do have redemptions, so we’re working our way through that.

Nothing fundamentally had to be changed about the investments. We had put a lot more emphasize on risk control. Money was coming in so fast in 1999 that you really couldn’t even think about where to put it. We have now put in place a number of different measures, that let’s us measure exactly what risk or kind of exposure we’re having. Really not so much to improve performance, but just to keep us from having a replay of what we’ve had in the last couple of years.

All of this is coming through, I think it is all working well right now. I think we will see a gradual improvement. In fact [indiscernible] flows that must gradually show improvements. So I am pretty positive on the fact that we have already turned it around.

Might I just add that you must not lose sight of the fact that the INVESCO side of the business has got really good performance across the board. With most of our products, more than half beating its benchmark, both on the equity and a very sizeable amount on the fixed income area as well. So while we focus a lot, inappropriately so on the US retail business, the results performance wise in Canada, UK retail and all of the INVESCO business is really quite sound.

To that point, just yesterday we were awarded a $1.5b new account for a public fund in the US and another $100m account. So that’s two brand new accounts that just came in yesterday. That’s in the INVESCO Institutional side of the business.

Robert, the tax rate is 35%? That you should be using in your models for 2004.

Going forward as well?

I think so yes. It may vary slightly off of that, but fundamentally that’s – what it really relates to is outside of the UK the two big areas of course are the US and Canada and Germany. All three of those locations have got tax rates in excess of the 30% that’s there in the UK.

Okay, thank you very much.

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

Bob, can you just repeat the explanation please on INVESCO why there were fund inflows in Q4? Maybe just split the $1.2b between [Rep] funds and possibly the impact that you saw at INVESCO from the SEC enquiry?

The bulk of the inflows really came in three areas. One is we had a couple of large stable value accounts, which was if you will, a form of fixed income I guess you would say. Very popular in 41K plans etcetera.

We also funded at least, I think, two CDOs in the quarter – collaterized net obligations. I think John Rogers actually mentioned that on last quarter’s call. Our [Rep] business has had positive inflows. The rest of the business was neutral or slightly positive/negative, just nothing large. But those were the key elements.

I think it is important to note that having the positive inflows in that part of the business, as many of you that have been on the call for as long as I have been here, know that we have generally talking about net outflows. So it is really nice to be able to talk about the net plus side of the business there.

I think we are, with the performance we have got, we are very optimistic about what the future will hold in store on that part of the business.

Bob what was the impact of the SEC investigations or the charges on the INVESCO funds please?

There is no way Chantelle that I know to quantify that.

We can’t tell what it is, but it doesn’t seem to be major, it seems to be minor. We just can’t tell, there’s just no way to know.

Okay. One other question please. If you were to record soft underpayments for third party research as hard on the costs in 2004. What would the impact on the P&L be?

I think the number that we have quoted has been less than 1% of our expenses. It is probably even less than that. It is probably something in the range of $20m or $30m would probably be a reasonable estimate of what that might be.

Thanks Bob.

Our next question is from Jennifer Nettishime(ph) of [indiscernible].

I have three questions. The first is on the legal reserve. It looks like a pretty high number. I was hoping you could articulate what is included in that? If there is an assumption of restitution or if it is just payment for lawyers etcetera? Also, if I understood correctly, it is an assumption for all the legal expenses you would accrue in ’04.

My second question was a follow-up on Ken’s relating to the restructure. There is so much confusion relating to the FX etcetera. You say that you have achieved your goals, but it strikes me that headcount is down two times what it was expected to be way back when the plan was articulated. I think we have had an unexpected market tail wind in addition. So with that in mind, I was hoping you could maybe articulate your operating margin goals for ’04?

My final question was on the legal environment. If you could maybe articulate your decisions relating to soft dollars and direct [indiscernible] are included in that operating margin assumption?

Let me take the first one and I’ll let Charlie talk about the goals for ’04.

Jennifer what we have done is, we have included in there the costs that we have incurred to date for legal costs, the expert consultants that we have had looking at the economic analysis and the like. To try to get a handle on the quantification of what the impact of this all might be on us.

As well as, we asked each of the law firms involved and the outside consultants that we have been using for their estimate of what would be included in 2004, for the first half of the year. On the assumption that between now and then hopefully we would have this all resolved and behind us.

That’s what is included in that number. There is one other project I guess I should mention. That is, as we announced back at our last announcement, that we are undertaking a comprehensive review of our mutual fund policies and practices. The cost of that in the [Pinet] investigation is also included in the amount you can see there.

There is nothing contemplated, whatsoever, for any restitution, settlement or any other word you want to describe, it is just purely our out of pockets. We don’t know whether any part of these would be covered by insurance. So we have not tried to take a stance on that.

The bottom line here I think I would leave with you Jennifer, as well as for others, is that whenever this thing resolves itself, we will have, no doubt, some final adjustment which will include a true up of these costs. But what we have tried to do is just not have a dribble out every quarter as an exceptional item as to what these costs might continue to be.

The part about goals going forward [indiscernible]. If we have to [indiscernible] soft dollars, they are not big enough in our overall operation to affect our overall goals of something north of 30% margins.

Frankly I am just as happy to do away with them. So long as they are in the market place they raise questions that have to be answered. It would be better if we didn’t have to answer those kind of questions. I felt the SEC should have done away with them 25 years ago, when they set this policy, but they didn’t chose to do it then and I don’t know whether they will now or not. What we can’t do is to unilaterally do it on our own. We have to go along with the industry. Because that would give us some economic disadvantage if we stepped out.

I do think the SEC will take a stance. There will be regulations that will cover this. I don’t think we will have to step out on our own and I think it probably will reduce the amount of soft dollars. But, frankly this is not going to be a big factor to us.

What about the materiality of the directed brokerage or revenue share, if that turns hard too?

I doubt that’s going to be a factor. We’ll be just like everybody else. We will have to adjust whatever we have to adjust to compensate. But the truth is it it’s not really going to matter.

Yes. Just for perspective on the operating margin targets. Just given the market tail wind and, like I said, the fact that headcount is down twice as much as you had initially projected. What is eating up the remainder of those cost savings, such that, you’re looking more like a 30% - you’re sticking with your 30% operating margin goal rather than something ahead of that?

We haven’t had the real positive flows that we’d like to have. Clearly the assets have gone up, primarily by the market movements. But we haven’t had the large flows that we would hope to have. Our budget would have called for more. But the negative publicity I’m sure is affecting us on that side. So we just don’t have it.

We think we will regain it. I think it is more to do with performance than anything else. We have made tremendous progress on the performance side. So I am looking for, hopefully a surprise, on that side.

Our next question is from Carolyn Darren(ph) of Smith Barney.

A couple of quick questions. First of all the corporate cost line looks significantly lower in Q4 than in the Q3. Can you just give me a little bit of color on that and the feeling for whether that will now be a sustainable rate going forwards?

Yes. I think that Q4 corporate costs are really fairly reflective of what they should be on a go forward basis. As you can understand, I think some element of what’s in there is a matter of timing. Some question as to how much of those costs we actually put out to the other business units, both of which affect it. But in terms of where the costs sit right now, I think that should be fairly reflective of what I would expect going forward.

Okay, thank you. You mentioned in terms of the institutional INVESCO flows that CDOs did account for some of that. Can you quantify exactly how much they accounted for?

Purely from memory – I know we had one, I think $300m CDO with [Blue Grass] that funded in the quarter. It seemed as though there was another one of $400m, actually that’s not right. The other one was in Q3. So I think $300m was in Q4.

Do you have $900m of underlying net funding flows?

Yes, that’s right.

Okay. My final question, have you done any quantification in terms of your pension deficit under FRS 17?

It is very small. The only three places that we have defined benefit pension plans, one is in the UK, that’s been a frozen plan for some time. Also in Germany and that’s an unfunded plan. So it is really quite small for us. Everybody else is under a defined contribution [indiscernible] including most of our employees in the UK even.

Okay, thank you very much Bob.

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

I have just a few questions. First of all I don’t know if you can comment on this or if you want to save it until Q1. But I was just wondering if you would give a general indication of the magnitude of the increased liability insurance costs.

Secondly, I was also wondering if you could comment on whether you think that the end result of all of these investigations and potentially new regulations will result in any kind of material increase in the regulatory compliance costs that you have?

Thirdly, I was wondering if you could comment on the regular institutional search activity that you’re experiencing or that you anticipate this year?

The insurance costs I’m afraid I’m not going to comment on. But the industry itself is [indiscernible] and we’re not different from the industry I might add. Everyone has got the same issues, no matter what your regulatory position is, you’re going to have the same costs. It is in the magnitude of several hundred percent increases.

It is about 400% over what it was last year.

That is everyone that I am aware of.

The second question was about clients – I don’t think there is any question of client’s costs going up. I think again it will be everyone, because client’s costs will go up. We will have to factor that in the cost of new business. But it is without a question going to happen.

Okay, but it doesn’t jeopardize your margin targets at all?

I don’t think so. You’d need to have a large asset base and being as diversified as we are, is the fact that you can spread it in a lot of different places. I just don’t think it will make that much difference, it will be a factor though.

Okay.

The third question was RFB. The RFB activity is still strong. I just mentioned two accounts we got yesterday [indiscernible] almost $2b. There is a lot of activity going on. We’re not denying the fact that we have people who put us on the watch list, who want to see what happens out of all this. But you would expect that. Most people have been pretty understanding about it.

As a matter of fact, we had one mandate within the last three weeks that has been awarded to us, that had been put on hold that was funded for $250m, that’s in this year, so things are moving forward.

Okay. One more question – AIM Canada one-year view performance, I know it is just one-year, but it is [indiscernible] quite different from the three and five-year view numbers. I was wondering if that’s a concern at all for you?

Investments go through cycles as you well know. Their performance for one-year is slightly different than what it has been for three or five, but the numbers of – over any meaningful measure are just extremely strong. They do not change their styles to match the market they have investment styles that they stick to, any kind of weather, and that is what they should do. So we’re totally pleased with it, I think it is going pretty well.

They have an enormous position in Canada, [indiscernible] for last year. I’m not sure if I’m speaking for the entire year, but they had flows over more than 100% of the whole industry.

Okay, that’s great, thank you very much.

Charlie, can I just make a correction. Carolyn I gave you something – I was thinking one figure and saying something different. I think really probably the better win with the corporate costs is about where we were at the end of Q3, about [£7.5m] or about £25m per year, something in that range. I’m sorry, I was saying one thing and thinking another.

The next question is from Jason Streets(ph) of UBS.

You said that the impact of soft dollars, [indiscernible] etcetera, any of those changes will be immaterial. Do you see any material impact from any of the proposals currently from the SEC?

I don’t think the current proposals. I think what we are concerned about and the industry should be concerned about is that there is going to be hearings in Congress on this and there may be some laws that come out of that, that will be something that will really impact the industry. We can’t tell at this point, because we just don’t know how that will go, but it will be a very political issue. But that would be the thing I would be most concerned about. It is almost the unknown.

The things we know about or think of, we can deal with.

You don’t think some enforcement of independent boards with a [indiscernible] thing to reduce these etcetera? You don’t think that will have an impact?

I don’t think that’s the real problem. I think most of the Board’s have been very reasonable about this. The European structure, where suddenly you have independent boards is probably the better structure to go to, but I don’t think the political comment wouldn’t let that happen here. But its proven that the Boards are probably not very effective in controlling some of the activities, because they’re simply not positioned to. It is not that they wouldn’t wish to, they’re just not in a position to.

I’m not quite sure what needs to come out of Washington, it could be anything, but it will affect everyone in the same way.

Sure. Can you just tell me if the fees on AIM Funds typically higher than the fees on the old INVESCO Funds?

I don’t know that to be the fact. Different funds have different fee structures, depending on how old they are. More often than not the older funds have a little bit lower fee schedules. So it is almost like the history of the fund.

Also of course, depending on the investment leads, some funds have higher fees because it takes more manpower to run them, especially international funds.

Thanks very much.

Our next question is from James Alexander of M&G.

I have a few questions. Briefly you couldn’t say what your margin targets are exactly? If you look at your different businesses, they all have quite differing margins. I am just not quite sure what your margin targets are across the Group in the different businesses.

You have got to take it as aggregate. You are correct, there are some businesses inherently more profitable and some businesses inherently are less profitable. We do try to set a target for each one of them. But the aggregate of all of that is roughly the 30% range, that Bob was talking about or +30%.

James I might just add into that a couple of points. As I think you and I have talked about over the years. Obviously right now there is an element of built-in costs for investment with the businesses we have in Europe and Asia. But when the revenues begin to return we will see enormous leverage in that business. But there is a sort of built-in infrastructure cost below which one cannot tell if those businesses are viable, if you will. So, I think currently that is one area where margin expansion would be greater than it would be for example in the US retail business.

Also, we have been making investments, I think, as we have said pretty regularly, to grow and develop our private client business. While that is coming from a fairly small margin right now, the opportunity for that to grow to [indiscernible] margin of 30% or better is certainly not out of the question.

Finally, our institutional business has been going through a lot of restructuring over the last couple of years and that too has got margin growth prospects as well. You can do the math in each one of those, I guess Charlie I would say that there is really no business that we have that shouldn’t have the opportunity to grow to at least 30% margin over time?

No, I agree with that.

So that 30% target is not like a maximum? Because sometimes it sounds like a maximum, and if could just mathematically have some margin as in PWM, or go to 10% in Europe or something. Then the overall margin is going to go north of 30%.

[More than an acceptable minimum.]

Okay. My second question is, in Canada, I hear what you’re saying about the quality of the business and certainly the quality of the margin. But it doesn’t look like there were any net inflows. I am just wondering why the market leader doesn’t get any inflows. Has it changed a lot in January with the inflows across the market in equities?

I haven’t got the January numbers, but the truth was the industry in Canada itself was not growing, that’s the problem.

The industry itself has had net outflows James, quite substantially so.

Okay.

[indiscernible] some periods, I’m not sure if it was for the full-year, but for some periods we had over 100% of the industry flows.

That’s excellent, that’s really good news.

My third questions is just on the headcount reductions. Have they now come to an end? Is that the end of your headcount reduction [indiscernible] end 2003 staff number is pretty much the base level from here?

We had a couple of other projects that we had on plan that have been put on hold. I’m not sure whether they’re going through or not. Each of them would probably result in 200 additional people. But at this point we don’t have any big plans for any more reduction.

Because you’ve done a terrific job in getting the staff numbers down so…?

We did have a couple more plans, but we have just put them on hold for the time being.

Just my last question, is there a time frame for when PWM or Asia/Europe might make these margins that we were just talking about? Is it like three years, five years?

Basically I would say three to five years. I think you’re going to see steady progress the way along. But we’re looking for progress this year, 2004 should be a better year for both of them.

Okay, good. I look forward to it. Thanks.

Our final question comes from Martin Cross of Tether(ph).

[indiscernible] point here, but getting back to the capital adequacy question. I think I heard you say that you saw no connection between the possibility of regulatory fines or compensation payments, however large, and your impending capital adequacy plan issue.

I didn’t say there was no connection, I just said that [indiscernible] that’s not going to be big enough to make an impact on [indiscernible].

Maybe I’m missing the point here, but I’m mean you’ve got £2.4b of shareholders equity – sorry £2.2m of shareholders equity, of which £2.4b is goodwill, so you’ve got a negative real shareholders equity and net debt. You’re paying out £100m near enough in dividends and you’re dealing with a man in New York who has extracted hundreds and hundreds of millions of dollars from various securities firms. Now I now this is an imprecise scenario but you seem to be sailing very close to the wind. Can you enlighten me, is there something I have missed?

Well I think the problem is that the £2.4b of goodwill is so large compared to any kind of theoretical sum that you might reach, that you have to solve the problem by [indiscernible] goodwill. If that’s not solved then you can’t make anything work. So that’s what we would expect to have as a resolution of that.

So you’re saying you expect some regulatory adjustment to allow you to account acquired goodwill as equity or regulatory capital?

Martin let me, try to chime in here a bit if I can. I think the most relevant point for the short-term is that even with a settlement of some meaningful size, I wouldn’t want to predict what that is. That we have more than enough borrowing capacity under our credit facility to enable us to meet those settlement terms.

As you know our business generates cash in a big way and we have used that cash in the past to reduce our debt load. Yes, whatever settlement would be there would increase the debt, but over time it would be repaid as well.

The redeem plan all along and capital adequacy, and again waiting until we see what the regulators come out with. But we feel very confident that there is a viable plan, I might say, that would enable us to meet the capital adequacy test without at the same time, hindering our business one bit in terms of where we sit today.

Now again, we have until 2007 before the capital adequacy, if it comes out in its present form, is even implemented. So we have got a long time to be able to make that adjustment.

Thank you guys. That’s helpful.

This call concludes our question and answer session. I’d like to turn the call back over to Mr. Charlie Brady.

Thank you very much for attending today. We had a large audience. This has been a difficult three years, plus this last thing added on. But, if you look under the surface I think you will see that the ship has been turned around. We have had some momentum over the last three quarters and we think that is continuing. Our budgets for next year indicate that is going to continue, subject always to markets, we would think that we can get this thing moving back up the way it used to be.

We will, somehow or another, put this regulatory issue behind us. Whatever it takes is what we’ll do. But that will be done as soon as we possibly can do it.

Thank you very much for your support. We’re looking forward to business with you in the future. Thank you.