景順投信 (IVZ) 2005 Q1 法說會逐字稿

Welcome to AMVESCAP's 2005 first 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 U.K. Financial Services and Markets Act regime governing real-time financial promotion.

This call may include statements that constitute forward-looking statements under the United States Securities laws. Forward-looking statements include information concerning possible or assumed future results of our operations, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, assets under management, acquisition activities and the effect of completed acquisitions, debt levels, and the ability to obtain additional financing or make payments on our debt, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, when used in this call, words such as believes, expects, anticipates, intends, plans, estimates, projects and future or traditional verbs such as will, may, could, should and would, or any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements. In connection with any forward-looking statements you should carefully consider the areas of risk described in our most recent annual report on Form 20-F, as filed with the United States Securities and Exchange Commission. You may obtain these reports from the SEC's website at SEC.gov.

Today's speakers are Charlie Brady, Executive Chairman, Phil Taylor, CEO AIM Trimark, and James Robertson, Chief Financial Officer. A question and answer session will follow accordingly. At this time I would like to turn the call over to Executive Chairman, Charles Brady.

Thank you very much. And good afternoon to our participants here in London and in Europe, and good morning to those of you joining us from the U.S.

We are delighted that you have joined us for this review of AMVESCAP's first quarter performance. I am joined today by James Robertson, our Chief Financial Officer, whom most of you know, who will present our financial results. And Phil Taylor, one of our global partners in Canada and the CEO of AIM Trimark, who is sharing his views on the outstanding record and success that the Canadian business has earned.

Before turning the presentation over to James and Phil, I would like to share a few points of information from some of our other businesses.

Throughout our performance [cause in line to] 2004, we focused on the regulatory issues concerning the Company. And obviously that was the only thing we should have focused on.

In 2005 our cause will be progressively reports as to the work that we are doing to regain the business momentum. As in the first quarter, AMVESCAP's results will reflect a balance between the expense of restarting our business and the final earnings.

Important work has been accomplished and other improvements are progressing. Let me talk you through some of the highlights.

In the liabilities side, last quarter we reviewed with you the broad restructuring of our long-term debt, with a tender of $400m of long-term debentures in May of '05. We issued $500m of five and ten-year notes to replace these.

And also during March, we completed the third and last step in our liability restructure, and we closed a new $900m five-year credit facility. All of these went well and our bond rating has still stayed at investment grade. So we are very happy with the reception in the marketplace.

And in case of ARI, which we have talked about the last two calls, I have been questioned about why we perhaps do not sell it. Well, obviously we were in the process of negotiating a sale.

And I think we have stated that we are reviewing every single part of the Company in an effort to rebuild margins. And last week's announcement that Merrill Lynch had agreed to purchase AMVESCAP Retirement, which is our 41K record-keeping administrative unit, is a direct result of that review.

As many of you know, the business model for this part of the industry is changing drastically. The most successful players are growing rapidly through consolidation in order to achieve the scale necessary to remain competitive.

After careful consideration of these industry dynamics, and INVESCO's strategic direction, we concluded that selling AMVESCAP's Retirement represents the best decision for our clients, for our employees and for our shareholders.

For AMVESCAP, the sale enables us to sharpen our focus on those energy areas where we have a greater opportunity. That's asset management, product development and client service. By leveraging our expertise in these areas to serve planned sponsors, we still can continue to participate in the growth of the defined contribution market.

Review AIM a moment. Mark Williams has been on this program a number of quarters and spoke to you on our last meeting about the mini-steps that AIM has made and that was taken to address its performance challenges, and to reestablish AIM's leadership position in the marketplace. Let me just remind you of those steps, and these steps have been concluded.

Reinforcement of the management structure of the investment groups, including changes in the leadership of the investment department and certain management teams. Realigning teams within style groups to facilitate better information and resource sharing. Redefining and enhancing the investment oversight and risk management process. Ensuring the compensation of investment professionals is aligned with the production of superior long-term performance and specifically in enhancing our research capabilities.

There are early signs that these steps are working, both one-year asset-weighted and equally-weighted relative performance continues to improve. This past quarter was a good quarter for performance at AIM. Over 70% of the AIM funds were in the top half of their respective peer groups on a year-to-year basis.

While this trend is good, management is well aware that AIM's long-term track record still needs improvement, as James will discuss in his financial review funds flow, AIM will continue to be vulnerable to large lumpy outflows from these underperforming funds for at least the first half of this year.

On the distribution and marketing side of the business, AIM's national advertising campaign, featuring AIM employees, has continued. And approximately 500 visitors have come to Houston during the first quarter as part of the reintroduction of the client program.

These meetings have generated an enthusiastic response from both participants, and induced these advisors to products like AIM's very successful international and global line-up, that were really not historically associated with a market reputation. And continuing reference to the most rational approach to compensation product lines, the AIM fund directors have recommended the shareholders to merge eight of those funds together.

In the U.S. institutional business, another area that we are working hard to improve, our pipeline continues to grow. [R&Ps] are up 50%, and final presentations over 2004 first quarter. And there are promising indications that the overhang from regulatory issues seems to be lifting. And clients and consultants are, once again, focusing on the traditional selection issues - performance, process and investment quality.

An additional sign of encouragement was over $2b of new money we received from client's contributions.

First quarter performance results were solid in most product areas, with two-thirds of our institutional equity, fixed income and balanced accounts outperforming their benchmarks during the quarter. On a three and five-year basis the percentage of outperforming products increased to 70% and 80% respectively.

And as we mentioned before, the greatest challenge in the business to our large cap -- is our large cap in growth equity products. Performance there has not really improved to our satisfaction. And as a thorough review of offerings in the U.S. large cap market, we have recommended to clients that these products be migrated to the core in growth products managed by INVESCO's structured products group, which offers a more compelling risk/reward performance record.

While the initial reaction from our clients seems to be positive, we can expect a lot of redemptions in this area. It must be expected, and probably in the second quarter.

Turning to other businesses -- turning to the business outside of the U.S., performance of the INVESCO professional products in the U.K. continues to be very strong, fuelling strong retail sales. The ISA season appears to have been more robust than the industry has enjoyed for some time. And during this important period, I hope many here in London have noticed our new marketing campaign. Despite increase in marketing spend, [indiscernible] the margins produced by this business have begun to grow and improve.

Now let me turn the presentation over to Phil Taylor. The work of Phil and his team in Canada continues to produce outstanding results for the Company. And I am very pleased he has joined us today to share a review of those successes. Phil?

Thank you Charlie. The purpose of my being with you today is to really give you an understanding of AMVESCAP's trading business beyond the numbers. And I will address this as follows.

I will give you a quick Bio on my background, who I am. I will say just a couple of words about the quarter, because you have the numbers. And I will give you a five-year perspective on why the AIM Trimark franchise continues to be successful. And that will really be the heart of my remarks.

Now, first of all, who is Phil Taylor? I have -- once I graduated I spent three years in consumer grant management, and 23 years in financial services, seven years with Royal Trust in Canada, in the trust estates and investments area. Of course, we call that wealth management now. Five years in the back office execution of [recurring] business. And pretty much the remaining part of my career is in the fund industry, in both proprietary distribution and third-party distribution.

I joined AMVESCAP with AIM Funds in Canada in January 1999. I managed the integration of the Trimark acquisition in -- starting August 2000. And I became CEO in January 2002.

Now currency has had a pretty positive effect on our business over the last couple of years, as it has been translated into U.S. dollars and pounds. So I am going to limit my remarks to just Canadian dollars.

Let me deal with the quarter. You have got the numbers, as I said. And I think there are two noteworthy events. The first is we had a franchise record in February, where we generated over CAD1b in gross sales. That was a record month for us.

We ended up number two in our channel in net. And when I talk about our channel, I really mean third-party distribution.

And there was also an interesting legislative development in the first quarter. The federal budget, February 23, proposed eliminating the 30% cap on foreign investments in registered plans.

Now what that means is Canadian investors will be able to invest their registered retirement savings plans, or RSPs, anywhere in the world without restriction. And these assets account for at least one half of the mutual fund market in Canada, probably a little more. And the market is about CAD0.5b or CAD0.5 trillion in size.

So we expect to see a meaningful shift away from investing in Canada to global investing. And that actually bodes well for us at AIM Trimark, because we have got a very strong reputation for global investing. And in fact, we have an overdeveloped share in global assets. It's about 3 points higher than our franchise share. So that's good news for us as Canadians broaden their investment horizons.

Now I would like to discuss how we have continued to add value to our franchise since the acquisition 4.5 years ago. And first I will talk about some results, and then I will talk about how we do it.

Now, the first full year we were together was 2001. And if you take a look at operating profit, where basically from the full-year 2001 to 2004, we have grown at just over 11% per annum to about CAD226m in 2004.

We have increased our margin 7.9 points, to 54.5%. And from the end of 2000 we have grown our assets to CAD42.7b at the end of 2004. And that's about a 5.2% per annum increase. And if you look at the MSCI index over the same period, either in multiple currency or Canadian dollars, they are negative numbers.

The other thing we are particularly proud of is since the acquisition we have been number one in net sales in our channel. Cumulatively since the acquisition, we have generated almost CAD5b in terms of net sales since the merger.

Now how we did we do that? We really take a disciplined approach, not only in our investment management, but in the management of our business. And what we try to do is focus and align everyone in the Company on five factors.

Now I'll go through the five factors. The first three are what we call drivers of advisor loyalty. And they are derived from research and comments. And they show the loyalty of advisors are really related to these three factors.

One is investment performance, two is the tools and advice that are provided, and three is the sense of partnership.

Then we have two other points that we focus on that I really refer to as drivers for corporate success. One is operating efficiency, and two is our corporate culture.

So let me quickly deal with these five factors in turn. The first is investment performance. And that, of course, is our core competency. And if you look at our investment performance over the last five years, on a weighted average basis, 89% of our assets are in the top half, with 81% in the top quartile. And we now have two very fairly articulated and well-defined disciplines. And what we try to do is ensure that these disciplines are known and that we protect them.

Dominant is what we call the Trimark discipline. Now our assets, about 88% of them are managed from Toronto and about 12% from other AMVESCAP units. And the Trimark discipline really hasn't changed in 25 years. In fact, we've registered the phrase "business people buying businesses". And that's really how we -- in a couple of words, how we define the discipline.

We are really patient acquirers of business. And we're not deep value investors or bottom fishers, we will buy the business at 30 cents on the dollar, bad management in a bad industry, try to check out management and restructure it and then try to sell it for 50 cents on the dollar. It's really a bottom-up approach with fundamental analysis.

We -- good management teams are what we look for. When we talk to CFOs we validate our financial models. When we talk to the CEOs we validate our strategic models. And that really gives us a proprietary view. We look for long-term track record, free cash flow, defendable barriers to entry. And we look for businesses that are temporarily out of favor and we'll track them for as long as we need to until we think the value is there.

So basically our returns come from two areas. One is closing the gap between the purchase price and the intrinsic value. And the second is the growth going forward.

Typically we will hold our names for about five years. Portfolios tend to be concentrated 40 to 50 names. And we're known for capturing much of the upside but protecting more on the downside.

Just closing off investment performance, two things I'd like to note. The first is, as I said, we import, if you will, 12% of our investment management from some of the other AMVESCAP units. And now we have started to export the Trimark discipline to other AMVESCAP units as well. And we are about 400m in assets that we manage outside Canada.

The second thing I would like to note is the performance of the AIM side of our business. That group of funds was pretty much out of favor since the merger. And this was really one of the rationales for the acquisition. Now they have risen pretty much in unison to first quartile on a one-year basis. And we have five funds that account for about CAD4.5b in our assets in the first quartile. So that's really good to see for us.

The second driver of advisor loyalty is tools and advice. And I really describe these as the value-added services we provide to advisors. And I will give you a couple of examples of them.

Tax and estate information service. We just took our 100,000th enquiry over the last ten years. Financial planning software, professional development seminars and courses, practice management solutions; we look at these as really barriers to entry because of our lead in this area.

It also means that we have elevated our wholesalers from traditional product focus to advisors to advisors.

The third element of advisor loyalty is partnership. And that is really everything we provide beyond investment expertise and tools and advice. It's really how we want to become indispensable partners to our advisors.

And just to give you a couple of examples of that, independent oversight, from an investor perspective, before it became topical. We've an independent fund board, with independent chair since the acquisition. We have got a fair-value pricing regime in place. And we're not buying distribution like some of our competitors in Canada, so we don't compete with our clients.

The fourth area that we focus on is operating efficiencies. And here we aim to be the lowest cost producer. And if you look at over the last four years, we have lowered our total expenses on a basis-point basis by about 5.5% each year since 2001. If you take a look at our average fund size, it's twice as large as the average of our six largest channel competitors.

We also practice a discipline of constant process improvement as well. Every couple of years we explore outsource alternatives and we explore them seriously. And that helps us benchmark our own operation and helps us in terms of best practices and making sure we are keeping up with the industry's best.

And the other thing we do is take advantage of AMVESCAP's economies of scale. An example of that is we are consolidating our IT infrastructure with other AMVESCAP units to bring down our costs.

And the fifth area is culture. And my personal objective is to make AIM Trimark an organization to which our employees belong and not for which they work. And we make sure that we have plenty of employee involvement in defining our culture. We do annual surveys and a lot of communication about our strategy, our objectives and our progress towards those objectives.

If you take a look at our latest survey results as an example, we had a 92% participation rate. 90% of our employees stated they were motivated to make the Company more successful and 90% could articulate our mission statement.

So in summary, just about everything we do is in support of the goal of making AIM Trimark an enduring franchise that stands the test of time.

Thank you very much Phil. Phil will be back to answer questions in a minute. But let's turn to the financials, and James Robertson will give us a run-down on the first quarter. James?

Good afternoon and good morning to everybody. I hope you all have the presentation in front of you. I will refer to the page numbers. But firstly, let me just give you some background for the quarter.

Let me first of all remind you that this is the first results we have issued under IFRS. As we discussed in the special conference call we did on March 2, the most significant methods for AMVESCAP coming out of IFRS are the change in treatment of goodwill, where we no longer amortize, the accounting for stock-based payments, and accounting for defined benefit obligations. I will endeavor to try to make it clear where the changes have impacted as we go through.

While the removal of amortization of goodwill will generally, of course, have a positive effect to bottom line earnings, it also will potentially introduce a degree of volatility, as the carrying value of goodwill will no longer systematically be reduced over its useful life.

The release does include a reconciliation of 2004 first quarter and full year from U.K. GAAP to IFRS. Under U.K. GAAP, before amortization EPS was 5.8p. And under IFRS, the EPS increased to 5.9p. That is 2004 first quarter.

The first quarter of 2005, we recorded an EPS of 4.7p under IFRS. And again, under U.K. GAAP that would have been around 4.9p.

In the fourth quarter of 2004, adjust under IFRS to 5.1p, as compared to the 5.3p under U.K. GAAP.

Okay. So the comparatives that we are looking at here are 5.9p to 4.7p, and 5.1p to 4.7p, from the fourth quarter to the first quarter.

As Charlie mentioned, in the first quarter we completed the renewal of our five-year $900m credit facility. And this completes our debt restructuring program that we began with the issuance of the new senior notes and the tender of the senior notes, which were due in May of this year.

As a result, this program has enabled us to lower our ongoing banking fees related to debt, and lower our borrowing costs over time.

We had very good bank support for the new facility, with 100% take-up. In fact, we were oversubscribed by about 38%. And this facility includes a group of 14 very high quality banks.

Turning to the market environment, markets in the third quarter in the U.S. were down meaningfully, with the S&P down 2.6%, Dow down 2.7%, and NASDAQ down 8.8%. Markets outside the U.S. were mixed, FTSE was up marginally, Nikkei up marginally, the Hang Seng was down about 5%.

FX rates have stabilized somewhat. However, when you do a year-on-year comparison, the first quarter of 2005 average rate was 1.88, compared to 1.83 in 2004. No meaningful FX movement between the fourth quarter and the first quarter of '05 -- fourth quarter of '04.

Turning to the presentation, if you can go to page four, slide four - summary profit and loss account. Just looking at the numbers here, make a couple of points. The 2004 numbers have obviously have been restated into IFRS. You can see revenues were quite flat in sterling terms. They were about 2% up in U.S. dollar terms. That's on constant exchange rate.

The year-on-year decrease in investment income which you see is due to the fact that if you remember we had the sale of our small U.K. private wealth business in 2004. And that, of course, has not repeated into this quarter. Under IFRS that gain amounted to £6.4m.

The small increase in interest expense is partially down to the cost of renewing the credit facility that I mentioned earlier.

And looking at EPS, the decrease again is accounted for by really three items making -- three items account for the entire movement between the two, of 5.1 to 4.7. That is the gain on sale, which does not recur, the expensing of new options under IFRS and the foreign exchange movement.

Turning to slide five, quarterly financial comparison. This slide compares 2005 quarter one to 2004 quarter one in a little more detail. You can see that revenues, as I said, are flat. Operating expenses are up slightly. There are several factors at work here.

We continue to have legal expenses that are associated with the regulatory issues. And in quarter one this year, these were offset by an insurance recovery, which we had reached agreement on.

These expenses, which come in at around £5m a quarter, will continue. And we may not have further insurance recovery that arrives every quarter. Of course we are pursuing and expect to get further insurance recoveries. But we only recognize them as they become agreed.

Otherwise, the increases reflect expenses for share-based remuneration under IFRS, and this amounts to about £3.3m. And there are some offsetting cost savings that have taken place, as a result of efforts to improve efficiency around the Group.

The headcount figures show a 4.2% decrease. And with the sale of the Retirement administration unit, the numbers will go down on a full-time equivalent basis to about 6,000. This will compare to our peak headcount, which was somewhere just short of 9,000 at its peak. So there has been an over 30% reduction in headcount over the past few years.

Turning to page six, looking at 2005 quarter one against 2004 quarter four. This shows that under IFRS the GAAP figure of 5.3p becomes 5.1p, primarily due to the fact that amortization of management contracts, which was previously in the amortization figures, are now taken into account in the operating profit line.

As I mentioned in the last call, there are a number of factors that lead to an inherent reduction from the last quarter of the year to the first quarter of the year. The decrease in revenues relates primarily to the non-recurring transaction fees from our real estate group, which I referred to on our last call, which came in a little bit above £9m in the fourth quarter.

Also, as always, the first quarter has less billing days than the fourth quarter, two less billing days and we charge on a daily basis in a lot of our products. And it's the first quarter in which the fee reduction, as part of the settlement, came into force. And this accounts for practically all the movement in the revenues.

Operating expenses are a mixture of a number of factors. On the one hand we have some savings coming through over the fourth quarter, as a result of some of our efficiency measures and as a result of some non-recurring expenses taking place in the fourth quarter.

But at the same time, as we heralded in the last call, we have had increased marketing costs as we attempt to one, put more effort into the first quarter, naturally. But also, as we make a move to increase our momentum and try to get our gross sales moving.

And also there's the resetting of benefit costs, which takes place in the first quarter.

And as mentioned previously, there will be ongoing legal costs, which in this quarter were offset by the insurance recovery.

Turning to page seven, this shows some segmental results. And in the next slide there is a little more analysis of this. But let's just point out one item here, that during the quarter we reclassified about £3m of revenues and costs were reclassified out of the continental European -- the Europe business and into the U.S. institutional business.

Turning to page eight. We're comparing the business units between the first quarter of '05 and the fourth quarter of '04. You can see the decrease in AIM is due to the reduced revenues as the effect of the fee reductions and the number of days in the quarter, which I've already referred to, and lower average assets.

The AIM group, as Phil has mentioned, continues to have very strong results. We have a nice increase in the U.K. results, and in Invesco U.S. the decrease is mainly due to the non-recurrence of the transaction fees impact of the real estate business in the fourth quarter. And in the U.K., as you've seen, the increase mainly comes from higher revenue on good sales.

As noted earlier, we did reach agreement and announce the sale of our retirement administration unit. This in no way alters the fact that we still retain a strong capability in going after the management of DC Assets. As far as the transaction is concerned, this unit was running at a small operating loss, and we will recognize the effects of the transaction when we close. That's expected to be in the next few months, somewhere between -- this may be the third quarter when that will come through, and we will give the financial details and effects at that time, on the close.

Turning to the next slide, looking at funds under management. The net outflows of long-term assets, at $2.5b, shows a significant reduction from the previous three quarters. A very meaningful slowdown in the rate of redemptions. The net outflows, as you can see, arose primarily in the U.S. units, as expected. We had continued positive flows in Canada and the U.K. And I might note that in the $2.2b shown in the U.K., about $1.6b relates to institutional accounts. Although it's contracted in the U.K., the management of the account would be in the U.S institutional group.

The U.S. institutional business has continued, and will continue for a little while, to be exposed to outflows from its core and growth business, as Charlie mentioned, there's a transition going on there. And we will expect to see further potential outflows over the few quarters from that area.

Looking at the AIM U.S. business. This is the time of year when many annual reviews take place from insurance platforms and DC platforms, looking back over 2004. And we are aware of some losses of assets that are likely to occur in the next quarter. Accordingly, we could see some increased outflows before beginning to show the effect of what we have been seeing as an underlying improvement in the position. This underlying decrease that we have seen, and also an increase in our market share of growth flows, will begin to show through although it will take some time over the course of this year.

As Charlie mentioned, we've had some good performance numbers. The first quarter got off to a good start in the U.S. institutional business. There was also a very strong performance, and performance continues strong, in our Canadian and U.K. businesses.

Turning to page ten, the balance sheet. 2004 and 2005 are presented under IFRS. There is a change in the goodwill number. This occurs because we are booking the IFRS goodwill number in local currency, in the currency in which the transaction took place. Goodwill will now vary with exchange rates quarter to quarter.

The change in non-current investments will reflect the adoption of IAS 32 and IAS 39, which require that investments are marked to market. These standards were adopted at the beginning of the year, so the December 31 balance has not been adjusted. Also note that unrealized gains and losses, as a result of IAS 32 and 39, they don't go through earnings but are booked directly to equity.

The change in current investments is primarily reflecting the liquidation of seed money and treasury securities in Canada.

Turning to 11, Group cash flow. The movement in debtors and creditors and other line is really quite a variable line, reflecting changes in client balances, which are just inherently volatile at any one point in time. The acquisition and disposal line reflects the acquisition of the Steinrow business, net of the disposal of the U.K. private wealth business. And the financing line shows the paying down of debt, as well as some share purchases for employee trusts.

Slide 12. This gives you a breakdown of debt. As I mentioned, we have renewed the credit facility and at the moment the credit facility has been reduced from $151m to $45m since the beginning of the year, the utilization of the credit facility.

And finally, we give for your records the number of shares outstanding, for you to keep reference.

So that takes you through the quarter. With that, I'd like to hand back to Charlie.

Thank you very much James. During our last call, you'll remember I expressed my optimism for 2005, that it would be a successful rebuilding year, and that's exactly what it is. It's a rebuilding year, it's a year that we had to manage the reinvestment into the business, at the same time trying to grow our earnings -- get our earnings growing again.

The first quarter was a weak quarter in the markets, but I think in spite of that, we had a solid effort on the part of rebuilding our momentum. And I think at this presentation, I hope you'll agree with us, that we are truly focusing on our remaining problems and making progress in the recovery from the challenges that we had last year.

As James said, and I'm repeating, we successfully refinanced the balance sheet, keeping our investment grade. We got the ARI sold to Merrill Lynch. We increased our marketing and advertising budgets. This was during the really critical advertising periods, around the end of the year. We've increased dramatically our oversight risk and management control and audit capabilities.

We have other things that need to be done. We have still some excess property facilities around the world. If you really think about it, our workforce has gone, over a period of three years, from about 9,000 to what it is now, after the sale of AR about 6,000. And of course that leaves us some excess facilities, which we need to work on and we're in the process of doing that.

And we will make a final determination soon about people that we might seek recovery from, for the harm they caused us in the late trading problems. Because we do feel like we were taken advantage of in some areas and we have some claims against people.

With that, I'd to open it up for questions, please, as all three of us are available.

[OPERATOR INSTRUCTIONS]. Our first question comes from Huw van Steenis.

Morning everyone. Just two quick questions. First on the institutional. Can I just check I've understood correctly? Of the 13b in the core and growth in the institutional area, you're saying that you're going to shift that into enhanced index. Could you just share with us how clients have responded to that? Should we assume that all of that 13b is in the high-risk camp?

And then secondly, in U.S. retail it must be a source of frustration that despite extra marketing and being behind the Spitzer Effect, your outflows were as bad as before the settlement. So I'm just wondering what else can you do to turn around the U.S. business and catch up with the success elsewhere in the Group? Thanks.

I'm going to let James answer the first question and I'll try and answer the second.

Okay. Actually, the asset base we're transitioning is a little nearer to 10b, Huw, and it's too early to say the performance of the product it's being transitioned to is very strong. So we believe it is an attractive product, but yes, it will -- undoubtedly we are expecting some fallout in the process.

Anyway, Huw, on the flows in the funds. The gross sales are pretty good across the board, not just funds but the whole complex, about 17b in the first quarter. We are seeing a big increase in that and we know we've got some lumpy redemptions, but the underlying redemption figures actually have improved quite dramatically. And we know that they're probably bunched in the first half of 2005, and we clearly are looking for an improvement in the second half. So I think actually, these things are paying off.

Okay. Thanks.

Our next question is from Joanna [Nayder].

Hi. Good morning. A few questions. First, you mentioned the higher expenditures from marketing in Q1. And I was wondering if maybe you could quantify that a little bit, as well as saying how much is going to be in Q1 versus other quarters, just whether we can expect that to come down or stay at the same level?

Also, on the retirement sale, I was wondering if maybe you could talk a little bit about how you feel about the risk of potentially losing some of the 41K mandates, now that you're selling the administration platform.

And then lastly, a question for Phil, just on whether he expects some fee pressure in Canada and what kind of revenue margin you think is sustainable and what kind of operating margin also is sustainable for that business?

Okay. James?

Shall I take the first two?

Yes.

And then hand over to Phil. Hi Joanna. The marketing spend is really going to be variable, according to the success and the response that we see to it. It's somewhere around the region of about a £5m increased commitment in the first quarter. We've been pleased with the results of it, so I think we will be continuing that for some periods. Having said that, traditionally the summer months tend to get a bit quieter, so we may see that aiming off in the coming months. But frankly, if we see it having the effect that we want, in terms of the sales momentum, then we are likely to keep the advertising budget flowing.

As far as the sale of the administration side of the business, one of the aspects that was a fact and that featured in our analysis of the strategic decision to sell the administration unit, is our increasing belief that the management of the assets and the administration of the assets are increasingly becoming two separate decisions. With fiduciary committees and consultants involved in the managing of the assets, and then administration being a critical mass operation by professional administrators. By that, there is the potential for some of the assets to perhaps be reappraised, but we believe that the investment decision is now predominately a separate decision from the administration decision.

Let me make one point on that. The assets that we're moving are moving to what we call structured core and growth products. That's not an enhanced index product, it's a full fee product, it's a structured and core growth product. So it has a great record, and we think that it's just a lower risk profile and the clients, so far, have at least been positive to the reception of possibly doing that. But we really just have to wait and see.

Phil, you had a question on fees.

When you look at fees, they may not be as high as you think here in Canada, compared to let's say the U.S., because our fees are all bundled in and if you look at the U.S. they have 12 B1 fees that are separate. In Canada here we have goods and service tax, a VAT tax that's added as well. And the Canadian market certainly hasn't got the economies of scale that the U.S. market has.

If you take a look at our fees, actually, from '99 to 2003, our average weighted MER has gone from 239 basis points to 210. So our fees have already come down. We're at the lower range of fees right now.

How do we intend to protect our margins? Well, it's certainly increasing our economies of scale, increasing our assets, continual cost management and cost improvement, as well as helping to protect it with branding and consistent long-term performance.

Okay. You don't think there's much risk of having to cut your fees further in the future?

Well, that's something we would certainly resist but it's been talked of on the Canadian market probably for about a decade. And I think as long as we're providing value and long-term returns, then I think we're justifying our fees to the market.

Okay. That's great. Thank you.

Our next question is from Kenneth Worthington.

Hi. Good morning. First question is in Invesco Europe and Asia. Can you maybe talk a little bit about the factors contributing to the loss in the region and the plan to return to profitable growth there?

Okay. I'm going to let James handle that.

Hi Ken. One of the changes that we are making in Europe, which is actually where the loss is reflected, is that we have moved some of the asset management to be part of a broader platform for structured products, and we are also in the process of de-banking from Germany. The result of that is that it's taking out a lot of the revenues that in general tend to arise as a result of fees being slipped between custody and banking fees, instead of being pure asset management fees. So as a part of that transitioning out of the banking operation, there is a decrease in revenues in that area.

At the same time, our strategy is to build up in terms of the distribution capabilities, particularly around offshore funds and separately managed accounts, and to focus the efforts in Continental Europe primarily as a distributor of products from other platforms. And it's enjoying pretty good success on that front right now, but it will take a while to transition the revenue change that used to derive out of Germany into the ongoing remuneration distribution activity.

Le me add to that. It's a bit misleading, the way we present it, and maybe we should present it a different way. But a large percentage of the fees that are actually earned in Continental Europe are actually passed off to the fund management group, so they really don't show as revenues in Continental Europe. In fact, that number is quite high compared to the level we actually show. So if you put it on that kind of basis, it's actually showing really pretty good growth, especially this last year.

Okay. Thank you.

Our next question comes from Philip Middleton of Merrill Lynch.

Hi. Just a couple of questions. First of all, could you give me a little bit more detail about the financial impact of selling the retirement business? You said it made a small loss. Can you just give some order of magnitude of that?

And secondly, it's interesting what you said about Continental Europe. Could you give us some sense of where the credits from that are going? So in other words, whose margins are being, if anything, flattered by that cross-charging?

I'll take the second question first, if I may Philip. Continental Europe. I don't know if anything's being flattered because we have a system that is applied all around the Group, whereby a portion of revenue is allocated if you're managing the money, a portion if you're distributing, and a portion if you're administering. And that's pretty much consistently applied around the Group. Inherently, if you have an activity which is just pure distribution or pure administration, and the margins are inherently lower and just don't have the potential, than the business of managing the money, so that's how it would be.

In terms of the assets, it's a pretty broad range. The offshore range of assets that are distributed and managed out of the U.K., some are managed out of the U.S. and some are managed out of Asia Pacific. The majority is U.S and U.K. In terms of separately managed accounts, again I would say the majority of those are heading towards the U.S. predominately.

And then your first question, retirement business. I think once we get the transaction closed, we will have a handle on the full effects of it. So in terms of the gain on the transaction and all that, we will give you those details at the time the transaction closes. Just to give you some parameters, however, the business was operating at a small loss, somewhere between just over 2m or 3m per quarter, and we expect the transaction, when closed, to be a gain.

Thanks very much.

Our next question comes from Mark Halewell of Marathon Value Portfolio.

Hi. I wonder if, Charlie, you could comment a little bit about the recruiting process of investment managers, how competitive you see that? Are you retaining the people you want?

And secondly, on the same theme of competition, would you be able to give us any comments on how you see the competitive environment between the banks and your units?

Well clearly, that's one of the reasons that some of our costs have gone up, because if you really look under the numbers a little bit, you'll see that not only has the total comp gone up, but actually the headcount has gone down. And quite frankly, we have to be competitive, that is the only product we have. We run studies regularly, we basically have to pay what the market pays and so -- and I think we are competitive in that respect.

Recruiting new people doesn't seem to be a problem. There's clearly some downsizing among a lot of people right now, and there is talent available. And so it just doesn't seem to be a current problem now. Obviously we've got an issue with options, that I'm sure everybody's aware of and we're studying what we can do about that. But I think we've been able to hold our talent. I think the turnover rate actually is extraordinarily low, under the circumstances of what we went through last year. It's actually been very good.

Thanks. And would you give us a fresh look at how the banks are doing in your marketplace, whether you feel a sense of encroachment with some of the business that you lost? Or is it coming from all sources?

I don't feel like there's -- the banks continue going in and out of the business. I think there's actually just one. I think many of them are actually reviewing whether or not they want to stay in this business. So I don't think their competitive position has necessarily improved. It is the problem of distribution versus production. Clearly we're production, we actually produce the products and try to work with third parties to distribute them. So we have a cleaner conflict of interest picture than some people have.

So I don't know that I see that as a problem, although the banks keep buying people from time to time and any assets, as we all know. James, do you have anything to add to that one?

No, I think that's the gist of it. The banks have always been a major factor in the industry. Particularly as distributors of products, as well as manufacturers. We have seen a continuing, and I think irreversible trend, towards the opening up of proprietary distribution and moving to a managed [shelf] with the ability to sell other people's products. That's usually very good for people who have our kind of profile, where we are not in a position of being in conflict with the banking business or insurance business, and is an opportunity.

I think the banks are not -- it's not an area where they are especially strong or especially weak, their performances go up and down like everybody else's. And I think the general trend is that their share of net flows in the U.S. is going down on a proprietary basis.

Our next question is from [Chantelle Marshall] of Deutsche Bank.

Hi Charles. Can you please give some further color on flow in the U.K. institutional business, the 2.2b incurred this quarter, and the outlook for flows in Invesco U.K. for the rest of the year?

Yes. On these flows, about 1.6b of the 2.2b was a major institutional mandate forced out of the U.K. So that's why it's reflected in there, because of the distribution relationship. But actually, for a product that is managed out of Atlanta, so the management of the asset will be in Atlanta. That clearly is not an occurrence that's going to happen every day. It's a very large win and we're very happy to have achieved that. We wouldn't look for that to repeat every quarter.

Otherwise, the rest of the flows are spread around the mutual fund products in the U.K., where we've had a strong quarter in inflows. The industry had a better season, a better ISA season this year, and I think we came second in flows in the U.K. And that has, for the moment, continued and of course the ISA season tends to tail off after the tax year.

Thank you.

Our next question is from Jason Street of UBS.

Can you say how much that insurance recoverable was in Q1, please?

Yes. We have, in broad terms, something around about £5m of legal costs, and then in terms of insurance recovery it would be about £6m recovery.

That is recovery of effectively your legal costs, is it? Is that what you're saying?

Yes, from insurers in respect of legal costs.

So you might continue to repeat, but we just don't know.

We have other claims that are being pursued vigorously for further recoveries, but we just don't reflect them in our P&L until we have agreement that the money is going to be paid. So [inaudible].

What sort of scale would they be, then? Are we talking another £20m for the whole year, or £5m or --?

I think it will continue at the same kind of rate per quarter for some time. I'm not sure how long that will go on because it depends how long it takes for the various legal proceedings to get to their end. They seem to take a while.

Okay. Thank you.

Our next question is from Bruce Hamilton of Morgan Stanley.

Hi. Morning guys. Just two questions. Firstly, given that you said that the administration was losing, at an operating level, a couple of million, does that then mean that -- private wealth management's no better than breakeven pretty much, do you feel that you need to make further acquisitions to make that division work? Or are there funny reallocations going on there that we're not aware of from the outside?

And secondly, can you give us compensation as a percentage of the operating expenses in Q1?

What's the second one, Bruce?

Sorry. It's compensation as a percentage of total operating expenses in Q1.

I think I'll get -- can I get back to you on that one? But I don't think it's changed dramatically from its historical range of being around about just short of 60%, but I'll call you on that one, if I may.

On the first one, on private wealth management, as I've tried to explain before, we're in a growth phase there of trying to build out a national footprint for the business. And when we set up branch offices, they are initially loss-making because we can't amortize the costs, we have to charge the costs of setting up the business. You take on the resources then you go and get the new business.

And broadly, the strategic plan at the moment is to try and pace the expansion costs, to be in line to run the company at around a breakeven or a small profit level, and that is one of the factors, taking into account the speed at which we're building out the operation. As those expansions come into fuller maturity, so you'll begin to see profitability flowing from the greater asset gains that come out of the expanded network.

On the other hand, there's also further efficiencies to be gained as the business grows. We have a platform which is now in place, which is very much exposed to getting greater critical mass and synergies than it has at the moment, as we grow the assets.

I think, though, if you looked under -- again, looked under the numbers, it's something like a same store sales type of concept, that you would see a pretty significant improvement 2004 versus 2 -- what we think 2005 will be. So they're actually making more progress than it appears.

And one other factor to mention, Bruce, is that one of the changes of IFRS is that we are having to reflect in the private wealth company the amortization of investment contracts acquired. Previously that would have gone through the goodwill line. And also retention payments, which previously might have been part of the -- would have been accounted for as a transaction cost, are being accounted for as incurred basis as an operational expense.

Thank you.

Our next question is from Kenneth Worthington of CIBC.

Hi, just a follow up. Of the 21b or so of assets under administration and the retirement business you sold to Merrill, what portion of that was assets under management?

Well, the two are different numbers. The 21b was assets under administration. But the assets under management, let me confirm that, but I think it's about 8b.

8b. Okay. Thank you very much.

But I'll confirm that back to you.

At this time, there are no further questions.

Well, let me thank everybody for participating. We think that the first quarter was a -- we accomplished a lot in the first quarter. We've actually accomplished a lot since last November. And we will continue on this march through the rest of this year and know that we look at 2005 as simply turnaround year, and pretty much that's the position for future years.

So thank you for participating. We appreciate your interest and we look forward to visiting with you again. Thank you.