景順投信 (IVZ) 2006 Q3 法說會逐字稿

Welcome to AMVESCAP's conference call. Thank you for joining us. Today's call is being recorded at our request. 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 Securities laws of the United States. 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 conditional 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. And although we make such statements based on the assumptions believed to be reasonable, there can be no assurance that actual results will not materially differ from our expectations. We caution you not to rely unduly on any forward-looking statements, and urge you to carefully consider the risks described in our most recent Annual Report on Form 20-F, as filed with the U.S. Securities and Exchange Commission. You may obtain these reports from the SEC's website at www.sec.gov.

Welcome to the AMVESCAP 2006 third quarter results conference call. All participants will be on a listen-only mode until the question and answer session. [OPERATOR INSTRUCTIONS]. Now I would like to turn the call over to the speakers for today, Mr. Martin L. Flanagan, President and CEO of AMVESCAP, and Mr. Loren Starr, Chief Financial Officer of AMVESCAP. Mr. Flanagan, you may now begin.

Thank you very much, and we want to thank everybody for joining us for our third quarter briefing. This is Marty Flanagan, and I am here with Loren Starr, our CFO. And I just want to make sure everybody knows that the presentation that we are going to go through is available on our website, if you are so inclined to take a look at it.

Just picking up from where we were when we got together in July, we had said at that time that we'd continue to be very focused on the world of opportunity in front of us as a global investment management firm. And over the past several months we continued to make progress against our desires to really unlock the potential within this global asset management firm.

So today we'll talk about some of those steps along the way, and talk about the results, and probably most importantly, answer any questions people might have. So briefly I want to go through the financial results and some of the business highlights, and Loren will then take you through the financials in a more specific way.

The third quarter results were really quite solid. It shows progress against our -- the multi-year rebuilding process that we talked about earlier in the year. We still clearly have work to do, but we have some good momentum and we are making progress. The third quarter results are in line with our expectations. They were driven by higher assets under management and our continued execution against our operating plan during the quarter.

Assets under management at September 30 were $440b, that's an increase of $26.8b quarter-over-quarter. And average assets under management for the quarter $426b, up on average $11.8b from that prior quarter. Also, the ending assets under management did include PowerShares of $6.6b. That transaction was included in the result for about 11 business days during the quarter.

At a high level, long-term flows were slightly negative, of $700m of net redemptions. Money market funds continue to grow and we will spend more time on giving some color around the flows. Earnings per share for the quarter were $0.13, compared to $0.15 in the prior quarter and $0.09 in the same period a year ago. The operating margin was 26.7% this quarter as compared to 32.6% in the prior quarter.

I think, importantly, these results reflective of the growing financial strength of the organization during this year. We believe that the 2003 performance options will meet their criteria. And in the quarter there was a charge of $41m of expenses in anticipation of meeting those performance targets next quarter. And to put this in context, it was not being accrued previously, and for the right accounting reasons, which was earnings would have had to increase year-over-year by 50%. And I think by anybody's estimation that was not reasonable or expected.

So, at the end of the day, I think it's a good result for shareholders, it's a good result for really the employees that have worked so hard to make that happen during this year.

So if you -- that accounts for about $0.03 per share during the quarter, that $41m, and also about 6.5 percentage points in margin. And if you want to look like-for-like, you can do those comparisons yourself.

We continue to be very focused on executing our plan and expense management, and just constantly improving everything that we're focused on. Strategically, I think we are making good progress. Two of those strategic initiatives came together during this past quarter. PowerShares did close on September 18, and the WL Ross acquisition closed on October 3, so just outside of this quarter.

Let's spend a minute on quarterly flows. As I mentioned, long-term assets were slightly out, $700m during the quarter. To give you some perspective, the quarter-over-quarter decline you can look at in light of -- as we've mentioned last quarter, there were $2b of inflows in real estate and CDO transactions in the second quarter. And Loren will spend a little more time -- we are absolutely making progress and seeing improving flows on a more regular basis.

Our redemption rate overall declined to just over 19% from 23% in the prior quarter. And also the money market fund, our institutional money market fund, just continues to grow, which we had net inflows during the quarter of $4.8b. So overall net additions, long term and short term, were $3.9b during the quarter.

If you take a look at the flows by channel, we did have positive flows in the institutional channel. The negative outflows in the retail channel, as I just mentioned, and private wealth management was essentially flat quarter-over-quarter. The retail channel saw net outflows of $1.2b, not fully surprising considering the time of year and really the concentration, in particular what you're seeing in the United States. You are seeing -- it was literally, through September, five months in a row now of really domestic equity products in redemption. And the flows continue to be very, very concentrated in a handful of firms, and also much of the flows going into international mandates. So, not much has changed there from the overall perspective.

The institutional gross sales and redemptions both declined during the quarter and, again, we finished the quarter with $500m. Slightly less than last quarter but an improvement from last year.

And, also importantly, I'd like to mention the redemption rates in Canada continue to improve. They are now 13.8%, which is better than the industry average of 14.3%.

And private wealth management, as I said, was essentially flat quarter-over-quarter. One thing I would like to remind people of and highlight again. We are expecting an outflow next quarter of $400m and that's really the settlement of an estate plan settlement that we have previously disclosed.

Let's spend a minute on performance. I keep referring to it. It's ultimately the prerequisite to our success. It's why we're in business. And I think you can see from the very stable retail and institutional performance it continues to improve and it's largely quite strong across the board. Let me highlight a few areas.

In the U.S., looking at Lipper and Morningstar, looking at, on a longer-term basis, the percent of assets in the top two quartiles continues to improve. Importantly, the Canadian business, AIM Trimark in particular, with a very strong investment discipline had been lagging on a relative basis. And you can see just on a short-term basis for the one-year period it's improved quite dramatically. Now 50% of the assets under management are in the top two quartiles, and that compares to just 6% in the prior period that we reported.

Institutionally, the other area that we would highlight is the equity business. The percent of assets against benchmark is improved quite dramatically, which is important, obviously. And fixed income and money market funds just continue to be very, very strong. And if you look again, the Invesco Perpetual U.K. performance is just really very, very strong across the board all periods, one through five years.

And so, that said, I think performance has gotten to a good spot.

Let's spend a minute on PowerShares. As I've mentioned now a couple of times, it did close during the period. We are really thrilled to have Bruce Bond and the PowerShares team a part of our organization. It really, from our point of view, puts us in a -- what we think is an important competitive position going forward as we look at some of the dynamics changed in the marketplace going forward.

We have asked for some insight into PowerShares' assets under management. At the end of September it was $6.6b. When you look at the ETFs, you will see the expense ration, on average, is largely about 58 basis points. 10 of those basis points are for third-party administration fees, and the balance being to run the business, the PowerShares business.

Been very active in launching new funds. Bruce and the leadership there feel it's very important in particular to be very close to first mover in the marketplace. It is somewhat different than really the mutual fund spot. There really are only so many spots that will gain the attention of investors, and so it is important to do that.

Also, last week you might have seen that PowerShares announced that it entered into an agreement with NASDAQ, assuming the sponsorship of the NASDAQ-100 tracking stocks, or fondly referred to as Q2Q. It's the most actively traded listed security in the United States and we think that association with NASDAQ is just a very nice and important development.

I am going to turn it over to Loren and have him walk through the financials and then we'll both respond to any questions people might have.

Great. Thank you, Marty. Let's now turn to slide 11 and we'll be covering the third quarter assets and flows. As you can see, we ended the quarter with $440.6b in AUM. That was up 6.5%, or $26.8b for the period.

And, as Marty mentioned, note the acquisition of PowerShares, which was $6.3b at close, September 18, and $6.6b at quarter end.

We had long-term net outflows of $700m and that was largely due to net outflows in our North American retail business. But that was offset by positive flows in the U.K., Europe and Asia.

The market had a big impact in the quarter, a total of $13.4b positive impact, which was actually a fairly large improvement relative to the second quarter, when that impact was negative $6.2b. As a result, our average AUM was up 2.8% versus last quarter.

Also on the page, at the bottom, you'll see the net revenue yield, excluding performance fees, declined over the quarter, from 55.5 basis points to 54.1 basis points. This was driven primarily by a $10m reduction in real estate transaction fees, which shows up in the other revenue line item, quarter-over-quarter.

Let's turn to the next slide and we'll get a little more detail in the third quarter P&L.

Slide 13. You'll see that our net revenues were flat for the quarter at $587m. Our management fees for the quarter were up 2.5%, due to the higher average assets under management in the quarter. Performance fees, which are captured in the management fee line item, came in at $10.4m in the quarter. That was versus last quarter's amount of $12.6m. And importantly, this quarter's performance fees were largely attributable to our institutional structured products group, which continues to generate strong investment performance. Their performance fees are paid on a quarterly basis.

You'll see service and distribution revenues decline slightly. This is due to lower transfer agency fees in our U.S. retail channel. And then third-party distribution services advisory fees moved in line with our assets under management, as you'd expect.

Moving on down, you'll then note that our operating expenses increased 8.6% to $431m. And by far and away the largest driver for this increase in operating expenses was reflected in the compensation line, and as Marty disclosed and discussed, this was a $41.1m non-cash charge representing the cumulative, previously unrecognized cost of our 2003 performance-based options.

And as I discussed in the last quarter, these options were not being expensed, given the uncertainty about meeting the performance criteria. The full charge for these options, incidentally, is approximately $45m and we'll see about another $4m occurring in the fourth quarter over the remaining vesting period. Assuming that these options fully vest, and given our September 30 share price, the dilutive impact is actually relatively minor; it's about 2.9m shares. And that'll be reflected in our first quarter 2007 share count.

Also importantly, all the other share-based awards granted after 2003 are being amortized over their vesting period.

So, excluding the $41.1m charge, our compensation would have been down a little bit, roughly down 1.6% quarter-over-quarter. Our margin expenses were also down, this by 11.2% due to seasonality, while all other operating line items were essentially flat for the quarter.

So, with net revenues being roughly flat and operating expenses up $35m, our net operating profit for the quarter was down 18.2% and our net operating margin decreased to 26.7% from 32.6% in Q2.

Our non-operating items on the P&L, as you can see, were up only slightly over the quarter. Our effective tax rate was down, as a result of income coming in at a lower tax rate jurisdiction. And you'll note in the earnings release the year-to-date tax rate of 35.2% is actually a reasonable forecast for us looking forward.

So finally, EPS for the quarter was $0.13, down $0.02 versus the second quarter.

And before we go to the next slide, let me just talk a little bit about the impact of foreign exchange and markets on our $120m expense reduction in 2006. Again, as we've discussed in the past, the amount of savings that we had planned for was predicated on continuation of the business environment we found ourselves in at the beginning of 2006. And again, bringing you back, our AUM at that time was about $386b.

In Q1 of 2006, we told you that there was an increase in compensation equal to $5m, due to market-driven expenses, including commission payments and formulaic bonus pool. In Q2 2006, we disclosed that there was about a $6m increase, due to higher average AUM flows and operating profits, and also about $6m due to foreign exchange. And then, this quarter, there is about $9m increase in operating expenses due to the weakening dollar. And that impact was about $6m that found its way into the compensation line item, with the remaining $3m spread among the other expense line items.

Therefore, including the $41m expense related to the performance-based option, there is a total year-to-date variance of about $67m, relative to the $120m saving. So, after adjusting for all these many factors, we still feel that we are on track in terms of achieving our overall expense goals and remaining on target with our operating goals, given the rising markets and improving performance of the Company.

Let me now turn it over to Marty. If you have any follow-up points, we can open up to questions.

We'll open up to Q&A, if that's all right.

Thank you, sir. At this time, we would like to begin the question and answer session of the conference. [OPERATOR INSTRUCTIONS]. The first question comes from Mr. Bill Katz, with Buckingham Research. Sir, you may ask your question.

Okay, thank you. Good morning. Marty, I'm sort of curious, as you look out into the October quarter, it seems like PowerShares is off to a very good start. I think their head of that operation said about $7.4b at the end of October. Where are you in terms of layering that in, in terms of the retail platform? Or is that incremental growth just because they rolled out new products and you can still grow on top of that? That's my first question.

Yes. Hard to answer specifically, but let me tell you what's going on and then you can ask another question if I'm [inaudible]. So, literally the day of the close there was material in all the hands of the wholesalers and -- as they were getting out to meet with their clients -- and actually let me back up, prior to that there had been some training, obviously, a couple training sessions and so people were very, very excited.

The feedback I'm getting from the field, if you want to call it that, is it's going over very, very well. People are very excited about it. But that it's still a learning experience for the advisor channel, for them to -- what really is an ETF, how is PowerShares different, so as we thought, great interest. Everybody thinks it's going to make a lot of sense for us as an institution but it will continue to be some time before it would get to the level that you would think [it's just] fully integrated and you're seeing those results. But the early feedback is very positive.

Okay, I'm just curious. As you think in terms of managing dilution into '07 on, I think Loren said something like 2.6m new shares associated with this grant, which was sort of anticipated. How are you thinking about usage of free cash flow to possibly offset that via buyback?

Just generally, we'll continue to look to buy back shares that are issued in situations like that. We don't want it to be a dilutive activity for us as an organization.

Just one second, Bill. On that specific thing, obviously what Marty said obviously counts, but for all future grants, we are more predisposed to using restricted stock instead of options, is kind of one point. And then, in terms of restricted stock that is granted to employees, we do buy that out in the open market and so there is no dilution associated with future equity shares, based on our current thinking.

And then, just finally, even with the -- the stock's off about 5% in the U.S. today. I think investors are having a hard time trying to understand exactly what core earnings are, given some of the ebbs and flows, the FX, and the one-time charge, etc. If you were to strip out the impact of FX and the performance fees and, again, excluding the $0.03 charge in the U.K., $0.06 in the U.S., for the option grant, where would you put run-rate earnings power entering into the fourth quarter?

You know we can't do that. So here's what you can do, though. Quite truthfully, I think if you look at the $0.03 and you add back the $41m, margins are now [in effect] at 36%, they've improved quarter-over-quarter again. They were at a low a year ago of 22%, so it's a phenomenal improvement in, frankly, a relatively short period of time. So I think people should feel very, very good about that. And earnings again are just improving.

When you look at the relative flows, again, last quarter, if you remember, we talked about -- we're talking about explaining the lumpy things that give us positive flows, that's a nice thing. But the thing to look at is really the ongoing flows and if you look at the underlying business, if you look at net/net, net outflows are continuing to decrease in the United States, they are continuing to decrease in Canada. Those are all positive things.

And that's what we've been trying to get people to focus on, and that it's not an overnight event, as you've realized. And we do think, again, people tend to look at the United States in particular because of the last five years being so difficult. Improving performance, continuing to sharpen the product line up, and very, very importantly, the very, very marked improvement of performance are those, again, prerequisites for our ongoing success.

What we cannot change, though, are investor preferences. And I think you would -- most analysts would keenly know there's just this unbelievable concentration of flows going into -- towards certain value managers and global managers. And the other thing, as I mentioned earlier, when you have five months in a row you're seeing net outflows in the total equity category in the United States, so there is a level of investor that is still cautious about what they're doing.

Thank you for taking all my questions.

Okay.

The next question comes from Mr. Phillip Middleton with Merrill Lynch. Sir, you may ask your question.

Thanks very much. A couple of things, first of all -- well, three things. First of all, the $10m that's economic fees dropping out of the other revenues. The other revenues seem to me to be at a lower level than they have been for some quarters. Is this a sustainable level, or is this just a blip downwards, or how should we think of that?

I think, again, we've seen generally that this is at a lower level than the prior quarters, and I think it's just a confluence of some -- a variety of things. There are a lot of things that flow to that line item, so it's actually a little bit hard to predict. I think it is one of these things that you can look at our past and say that this is probably a little bit unusual for us.

Thanks. And a couple of question on PowerShares. First of all, the kind of margin guidance you give would lead one to assume that you're looking at, say, something in the mid-thirties operating margin now, before product development costs. I presume what you're saying about the mix between fixed and variables, of that something, say, in the high teens is fixed and the high teens is variable. So over time the margin ought to expand as you layer on new funds. Is that broadly right?

Yes, that was the, I think, probably the right response. One of the interesting things about the economics of ETFs is obviously you have the management fee, like a regular mutual fund, but you are paying a fair amount off to the licensing fees, which are fees that are variable to the assets. So there's not quite as much, necessarily, operating leverage. You're not paying portfolio managers, but you are paying the variable --

Index creators.

Yes.

Yes. Okay, and just one final question. This probably doesn't matter, but could you explain the Cubes deal to me, because you've taken over some sponsorship rights to the most traded company in the U.S. and you're saying it doesn't matter much in revenue terms but it's great publicity. I just wondered if you could just try and guide us through a bit more about the economics of that deal.

Yes. Phillip, you've really hit it right on the head, and I think the broader topic of why would you do this is that there is this element that I believe, and Bruce believes pretty strongly, is that mind share matters. And NASDAQ and the QQQ is just a phenomenal brand, right, and it's also something that people are obviously very interested in, reflective of just it being the largest trading security there is. And when we talk about how advisors, we think, in time are building their portfolios, looking more broadly to active management and then building around it with ETF products that might be more like the NASDAQ QQQ, it makes sense to be in the portfolio.

And NASDAQ's point of view was that it's not the business they're in. And by having us become the sponsor, it's matching up again to what they view as PowerShares being one of the real creative leaders in the industry. It will broaden the appeal to investors and it helps their client base, but also ours, very much. So -- and it is a unique structure. And it's unique to the United States and probably hard to translate, it's called something, unit investment trust. The economics are really limited to expense reimbursement for us. And, once again, if that doesn't translate, ask again and I'll try to answer.

And actually, can I just jump in, Marty, for one second? One of the things that I think there probably would be some confusion on is the -- this is an expense reimbursement so there'll be no impact on revenues, as far as we can tell, so there's confirmation from our auditors. But -- so this won't be dilutive in terms of the margin, showing up as a gross revenue and an expense. It'll be netted out in the expense line item.

Okay, thanks very much. That seems very clear, actually, thanks very much.

The next question comes from Mr. Bruce Hamilton with Morgan Stanley. Sir, you may ask your question.

Thanks. Morning, guys. A couple of questions, firstly just on the tax rate. To understand, I think, if I heard right, you said 35.2% going forward is about the right rate. Is that -- the reason that's come down, is that because of the acquisitions you've made?

Second question, again, looking at PowerShares, I assume that your guidance that you gave previously that it would be accretive in 2006 means that, after deducting cost of financing, the operating margins of that are at least the mid-teens to make that work. I just want to check there's no tax -- brought forward tax losses or anything that mean that actually Powershares is currently loss making.

And then thirdly, on flow momentum into Q4, obviously you've pointed out there were a few factors that impacted sales positively in Q2 that didn't reappear in Q3, but I guess also there was some seasonal softness generally. Have you seen any kind of pick up in retail or institutional momentum, given the markets have been obviously a little bit better in September and onwards? And just understanding, obviously, institutional can be quite lumpy but is there anything else there to think about?

And one final question. On costs in Q4, should we think through any significance seasonality? Typically, historically you have seen a bit of a Q4 increase in costs. Is it probably safe to assume that that's going to be the case here or is it much more even loaded across the year?

Okay, Bruce, let me try to take that third question. On the tax rate, the 35.2% really is reflective more of where our mix of business is and where we're earning our money. And, given the growth in the U.K., which is a lower tax jurisdiction than some others, that's really reflective of that. It's not reflective of the acquisition element. So we do feel that our original forecast going forward would be focusing around that 35.2% rate.

On the PowerShares, I think we can comfortably say that PowerShares is not loss making upon the acquisition and that your presumption seems reasonable, so I have no reason to tell you that your logic is wrong.

And on flow momentum, yes, I would say there's a lot of seasonality in the third quarter, as you would expect. And we saw it not only in the United States but very much also in Europe, which was a very big contributor in the first two quarters and that slowed down in the third quarter. The general momentum, I think you will obviously see the seasonality factor begin to move away, so that's not going to be affecting things. However, in terms of pipeline and when things hit the institutional CDO launches and real estate transactions, again, those are things that are hard even for us to figure out exactly when they fund, and so that's just one of the variables that everyone needs to think about.

We do feel that the PowerShares transaction is going to continue to really help us on the flow side. It is a fast -- continues to be a fast-growing business, both in terms of product launches but also in terms of flows. And so we that's going to be something that'll be noticeable in the fourth quarter.

On costs, the seasonality factor, we're in the midst of our planning session. I would say we're trying to gear for next year. There may be things that we know we want to do and we make take care of things in the fourth quarter to move things along more quickly. I can't tell you exactly what that is because we're in the midst of these types of things. So whether there's a little bit of noise in the fourth quarter or not, I couldn't really tell you other than the general fact that we've been very focused on what we want to do next year and that sometimes generates activities in the fourth quarter.

Great, thank you very much.

Sure.

The next question comes from Ms Carolyn Dorrett with Citigroup. Ma'am, you may ask your question.

Hi, good afternoon. Three questions, if I could. First of all, could we just start off in terms of the European Asian performance, which fell in the third quarter on a one-year basis of 45% from 77%? Could you just give us a bit of color on why that happened?

And I'm expecting, as the seasonal impact for the third quarter alleviates in the fourth quarter, for fourth quarter flows to pick up. Is there anything in that performance deterioration that would contradict that expectation?

Carolyn, I think the primary driver of the decline in the third quarter versus the second quarter on Continental Europe and Asia is Japan. I think there is some weakening there. That's a fairly large asset base for us and I think that is one of the things that we feel very good about in the investment process. But there's some -- definitely some quarterly movement there and the whole Japanese market has obviously been through quite a bit of volatility.

And with regard to anticipation of flows, we can't respond. It's your judgment that will lead you but we can't give any guidance.

Okay. Turning just to the worldwide institutional business, you were talking in the past about trying to get some benefits from removing some of the inefficiencies in the marketing there under Mark Armour. Are you able to give us an update?

Yes. Mark is now under John Rogers' leadership, is moved to Atlanta. He is moving forward in that role and very, very engaged in. We already have seen during the year prior to that some good broadening of the relationships within the organization. It's early days but, again, I think Mark is really going to help make a real impact for us.

Okay. And finally, can you just give us on a broader scale a little bit more of an update on your rationalization program in terms of what you've achieved and where you might go next?

Yes. I think what we're going to do is, instead of doing quarter by quarter a little bit -- you're talking about the global operating platform and where we're going as --

Yes.

We'll really brief everybody, I think, after the end of the year. I think that's probably going to be most comprehensive that way. But I can tell you each and every day progress is being made. I do just want to reiterate it's a multi-year effort. The low-hanging fruit is pretty simple stuff but there has been great progress in identifying and beginning to execute things and rationalizing the application portfolio within the organization, where best to view our work and aligning the teams, etc., etc., etc. So good progress is being made but I think, really for people to grasp it, we'll come back to it and talk about it in the context of the year.

Okay. Thank you.

The next question comes from Mr. Robert Dalley with Lehman Brothers. Sir, you may ask your question.

Hi. I have two questions today. The first is in the July press release around WL Ross you said that the acquisition was going to be immediately accretive. I just wondered whether you could give any more color on that.

And then the second question is with regard to the retail net outflows. You said that they were mainly due to AIM U.S. And I was wondering if you could give any guidance on the actual number of the 1.2b which is related to that, and whether any of that related to the offshore funds and, if so, why was the outflows -- and some more color around why that would be related to those inflows. Thank you.

With regard to Wilbur Ross, it did close October 3 and so it's still early days. [I think] at the end of the quarter, after it's been part of the organization for a period, have not changed. We're very, very excited about the association and we just think it'll be a great contribution to the organization overall.

It was hard to hear some of your questions around the flows. I think you were asking can you give more color on the U.S. outflows in particular. I don't know how best to [deal with other], and what I have been framing is that we continue to make year-over-year progress. The net outflows continues to decline.

Probably the -- as said, the most important thing we can be doing is improving performance, which has been. I think if you look back, the relative performance is as strong as it's been in the last five years, which is important. And I think it's actually at a pretty competitive level right now. We just need to make a difference in the channel and have people care about us, and I think that's where, again, PowerShares is going to help do that.

But there also very, very importantly has to be a change in peoples' desires of what they want to put money in, and that is just not happening yet. And very, very concentrated in asset classes and also very, very concentrated with relatively small number of money managers. And it's very -- well, frankly, it's impossible to predict when that might change. But hopefully that's your question more clearly.

Thanks very much.

The next question comes from Mr. Mamoun Tazi with MAN. Sir, you may ask your question.

Yes, good afternoon. A couple of questions, if I may. The first question is about the performance. At the end of 2006, the 2001 performance will be dropping out from the five-year measure. What impact would that have on the performance numbers that you have -- that you're releasing?

Yes. We don't think it's going to have a dramatic impact, like it did a year ago. If that was a year ago, when you dropped off that really very difficult period for the organizations that had great exposure to growth portfolios.

Okay. And, in terms of PowerShares, I'm trying to understand the impact on third quarter numbers and also for 2007. If you have a 50 basis points net revenue margin, or net revenue yield, that gives you something around 35m for the first half annualized. And I'm trying to understand what the impact on costs is as well. Am I on the right track in terms of looking at it from the revenue side? And can you please give us some color on the impact on the costs and also the impact on third quarter and full year '07?

Hi, Mamoun, it's Loren. I think you've got all the pieces. We know it's a roughly aggregate expense ratio on the assets of about 58. 10 of that goes to a third-party servicer, leaving 48 management fee that's used to pay. But that's really the net revenue to the Company. We've said that it's roughly 50% fixed, 50% variable in terms of the expenses. So I think that gives you something to potentially think about modeling going forward, how the thing is going to scale over time. So I am hoping that's enough for you to do your modeling.

The 48 is revenues?

48 is the revenues, that's right.

So you don't give us any cost estimates and therefore, if you tell us 50% costs and 50 -- no, 50% fixed and 50% variable, that doesn't tell me what the cost is.

Okay. Well, roughly -- there's roughly $5m in the third quarter in expenses related to PowerShares, so that will give you a sense of where it's starting.

Okay, okay. And then, maybe, I'm trying to repeat something here that people have already discussed, it's the outflow picture. We've seen net inflows in the first quarter and the second quarter and now we've seen net outflow. Why is there such a volatility of these inflows? And do you see them being less volatile going forward?

Yes. We have to highlight it each quarter and a good part of our business is institutional type business. And, as Loren pointed out, it is very -- it can be very lumpy, it's unpredictable. And last quarter there were $2b of inflows based on a CDO transaction and a real estate transaction. The prior quarter, I can't remember them specifically again, but there were again a couple of very important specific institutional mandates during that quarter.

So it is not predictable and we're doing our best to highlight that, so people don't get caught off guard by the flows quarter to quarter. I do think, importantly, if you look at the trend, and that's probably the best thing you can do, if you look at a year ago and two years ago and three years ago, the trend continues to just improve really across the board. And I think that's the best we can really do. We're going to continue to be as transparent as we can but we surely can't predict the future.

My final question is about third-party distribution costs. They keep increasing quarter on quarter, to 204m this third quarter. Can you give us an indication of why are they increasing and where you see the long-term trend? Are we going to see a decline in these fees as net inflows increase in the U.S?

Third-party distribution expense increasing is a good thing in the sense that it shows that our assets are growing. A lot of those fees are basically 12b-1 fees that get paid to the distributors of our products. And those are calculated also of average assets and so, as our assets increase, so do those fees. So they are things that there's very competitive pressure to increase how much contributors get of that. We're very much always dealing with those types of issues. But we're not concerned about a trend in terms of that shifting dramatically.

Okay. Thank you.

The next question comes from Mr. Andrew Mitchell with Fox-Pitt Kelton. Sir, you may ask your question.

Yes, hello. I wonder if you'd mind me coming back to a couple of points you've already addressed in part. The first is on the costs front, where you indicated that obviously there's ongoing work and you'll return to that with the full year results announcement. I'm just wondering if, thinking about your cost base, we should expect a similar sort of target type of reduction that you expressed before, or whether this is from here on going to be more of an incremental process.

And the second question was to come back to the performance point on Europe and Asia, where you were highlighting Japan as a factor. And maybe I just missed it but I wasn't quite sure why it was that the relative performance within the peer group appeared to show a fairly sharp correction. Is there something about the way those funds are -- the process in which they're run which is producing that change?

Yes. On the costs side, we're -- as I mentioned, we're going through the planning process for next year. We'll see [nearer] the time, thinking about what is achievable. There's a lot of work being done internally in terms of how we begin to execute into a -- in a global operating platform. But I think at this point we're not prepared to say how it's all going to translate and whether there's going to be large charges or things that are going to be more incremental. Obviously it's our goal not to have large charges generally because it's a multi-year approach. We would generally expect not to see that. So that's one basis point.

On performance in Europe and Asia, some of it is the way that we present the information. And it's a little bit hard because we're showing percentage of assets in the top half of the peers, so if you just happen to miss that cut-off and you fall into the third quartile just a little bit, it disappears and you probably presume more of a dramatic shift than really is the case. That is very much the case in this situation, where you just have had a little bit of the assets fall into the third quartile and so it looks more dramatic than it really is.

So, again, I'm not personally concerned and nobody in Japan is concerned about this, since obviously it's stock selection. We have people who are staying true to their discipline and we're sure that this is going to come back.

That's great, thanks.

The next question comes from Mr. Andy [Denhopp] with Clovis. Sir, you may ask your question.

Good morning. I was wondering if you might be able to talk about the money market business. Outside of market conditions, is there anything that you're doing to garner those fees -- or, I'm sorry, garner those assets? Are you getting a low fee product out there? Could you just talk about your strategy there?

Yes. It's really a very, very strong part of our business and the leadership there under Karen Kelly is very, very strong and it continues to be growing an important part of our business. It's not unique to the United States. It continues to be expanded to different parts of the world. And it's a pretty -- well, quite frankly, it's very [thoughtful], not just for performance but the service model is a very strong one, very compelling one. Understanding who the users are of the institutional money market funds and matching up with them very, very directly. So we continue to see it being a growing part of our business and it's a uniquely strong cash platform.

Thank you.

The next question comes from Mr. Marc Irizarry with Goldman Sachs. Sir, you may ask your question.

Great, thanks. Hi, guys. Just a question, Marty, more strategic in nature, maybe a little more philosophical, in terms of the way you think about the business. If you look at AUM by client domicile, clearly you're -- the mix is shifting away from the U.S. But how do you think about the -- over a more standard term, couple of years out, the mix of client domicile dollars, particularly in the U.S., given some of the fund issues you're having here?

And then also, along with that, what's your view on the acquisitions to get you to the appropriate mix of client domicile dollars? Thanks.

Philosophically or strategically, I think very, very much I'm a believer in the need for global asset management firms. There aren't that many of them. Amvescap happens to be one of them. And on a very macro level, if you think of the United States being roughly half of the assets you can manage, it leads you to believe that the other half of the opportunities are outside the United States. And many of the markets outside the United States are growing more rapidly than the United States.

Our strategy is to follow that and we have some very, very strong businesses on the ground that can lead us, whether it be Invesco Perpetual, AIM Trimark, the Invesco business in Asia, our very strong joint venture in China. Our business in Japan is really re-emerging in a very, very strong way. Our historical presence in Continental Europe. So we just get very, very excited about the opportunities for us as an organization.

So we will obviously continue to focus very much on the United States; it's too big not to focus on the United States. But we continue to expect a relatively more rapidly growing part of our business outside of the United States.

With regard to acquisitions, we don't believe we need to do acquisitions to be successful. We're making really solid progress as an organization. We will continue to pay attention to compelling opportunities as they present themselves or we think it strategically helps improve the organization, such as PowerShares and ETF. We saw that as an emerging strength in the world.

And also WL Ross is a very, very unique compelling market leader in private equity. And what was interesting, it's also very global in nature and matches up very, very well against what we think is happening in the world and where it's going to go, and strong presence in not just the U.S. but in Japan and South Korea and in India. And we look for opportunities in China with WL Ross. And also at the same time, just as you have probably seen from what's happened in Europe, with some of the recent activities in the steel industry.

So we feel that we're positioning ourselves very, very well for the trends in the world and very excited about them. Okay.

Okay.

Thank you very much. And I just want to thank everybody for joining us. As I say, just wrapping this up, we feel we're making very, very good momentum as an organization. We're very focused on improving our business, improving our experience for our clients. And I think the results are showing we're doing a number of the right things, but we have more to do. But we're very focused on being successful for all concerned.

So, with that, thank you for your attention. We'll see you soon and talk to you next quarter.