景順投信 (IVZ) 2007 Q1 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.

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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, any 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 these 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 plc 2007 first 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.

Great. Thank you very much. And I want to thank everybody for joining us for our first quarter briefing.

As you know, we've been very, very focused on leveraging the world of opportunity to become a premier global investment management organization. And over the past several months we have continued to make progress in our efforts to unlock the tremendous potential within this organization. Today I am going to briefly review the business results. Then Loren is going to go into more of the financial details. But importantly, after that, we will open up to Q&A.

Briefly, I want to go through some of the underlying financial and business highlights for the quarter. And I think you would agree that the first quarter results indicate very, very strong progress against the multi-year building process that we continue to talk about. More work needs to be done, but the momentum continues to improve with our efforts.

The results in the first quarter were in line with our expectations, driven by higher assets under management and continued expense discipline but also, very importantly, as we highlighted last quarter, the reinvestments we are making in the business for growth.

Assets under management ended the quarter $471b, up $8.6b quarter over quarter. I am sure you've noticed, if you look at average assets under management, they are up $14b quarter over quarter, which highlights the volatility that we all saw during this past quarter.

Net flows were positive, $700m during the quarter. And I'd like to highlight something very, very important. This quarter represented the strongest gross sales this organization has seen since the second quarter in the year 2000. So a very, very important point I would like to highlight. Combined, these positive developments have resulted in the first quarter operating margin being 35.4% and diluted earnings per share of $0.19.

Additionally, I would just like to mention that during the past quarter we issued $300m of a five-year note, with a 5 and 5/8% coupon on it. It replaces the $300m of debt that matured in January.

Taking a look at flows, as I mentioned a minute ago, we did see inflows, long-term inflows of $700m during the quarter. We are very, very encouraged, as I said, about the gross sales improvement across multiple regions and multiple channels during the quarter.

Redemptions did increase during the quarter, but it hit us at a lesser pace. The outflows were largely due to market volatility, which affected our offshore product range in particular. But this was offset by fewer redemptions in the U.S. institutional business.

The outflows in our money market business stabilized in the first quarter. Our institutional money market assets declined slightly, by $800m, as a few clients brought in their cash management activities.

Now let's take a look at flows by the different channels. In the first quarter we had positive net flows in our institutional channel. They were relatively flat in our retail channel. And net outflows in our private wealth management business.

If you look at the retail gross sales, they were up quarter over quarter, primarily due to the increased sales in Europe, U.K. and Canada, while gross outflows also increased, primarily, again, to market volatility in Continental Europe and Asia. Net flows in our retail channel were, during the quarter, a continued strengthening from our U.K. business, also our Canadian clients.

Importantly, a conversation we've had over the last year is looking at the dramatic improvement in investment performance in our Canadian business. Our Canadian business is back in positive net flows, with $700m coming in in the quarter, versus $400m of net outflows last quarter.

The institutional gross sales and redemptions both improved during the quarter. We finished the quarter with net inflows of $1.2b, driven by the strength of our structured products group, our global CDO platform, and also our international equity team performance during the quarter.

Private wealth management had net outflows of $500m in the quarter, largely driven by escalated redemptions, which we do not expect the financial impact to be very great.

I would now like to take a minute to really focus on probably the most important metric for our success going forward, and that's investment performance. Consistent with our strategic objective of achieving strong investment performance, overall performance continues to improve across the organization. And if you start by looking at the U.S. retail business, we continue to see improvements in Lipper and Morningstar, particularly over the important three and five-year periods. Again, continuing the trend that we talked about in the latter half of 2006, AIM Trimark showed a marked turnaround in their investment performance.

I would like, again, to hark back to the other conversation we had over a year ago. It's a very strong investment discipline, with a great long-term track record. And they've done an outstanding job of being committed to their investment discipline. Again, you can see that it does pay off and you can see it in the results.

Investment performance in the U.K. continued to be very, very strong with 95% of the assets in the top half of their peer group over one, three and five years. And if you look at the institutional performance, that's measured differently as a percentage of assets against benchmark, our equity business continues to do pretty well. Our fixed income and money market product continued to demonstrate very, very strong performance across multiple periods. And, again, in any one of these categories you could point to pockets of some underperformance but broadly we are very, very strong.

I would like to look at something more clearly to give much greater clarity to the strength of the investment performance that we are seeing. And, as you can see on the slide that breaks out our investment performance in the top two quartiles, and the two different colors in front of you, the green representing the percentage of assets in the top quartile and blue representing the percentage of assets in the second quartile, the thing that is most important is that you see a sea of green, which -- the point being a very, very important part of our assets are performing in the top quartile within that top two category.

In the U.S. you can see over 40% of the assets are in that top quartile over each of the time periods, with particular strength in our international product line up. That's an area that I've just talked about and highlighted over the past couple of years. It's just a very, very strong performing part of the business. And I would like to note that business on a Lipper basis is somewhat similar on a Morningstar basis also.

If you look at the U.K., and again see it's very much dominated by first quartile performance. In Canada, again highlighting with 82% of the assets in the top quartile on a one-year basis and if you remember, and you can see, one year ago it was just 2% of the assets.

And finally, in Europe and Asia, where we managed approximately $20b in each region, you can see the majority of the assets are in the top quartile over a three and five-year period.

And at the bottom of the slide, taking the fact that the U.S. mutual fund business, those important Morningstar ratings are broken out and looking at the relative star rankings. And what -- the point I would like to make, assuming we maintain the long-term performance that you are seeing here, we believe that we are getting to a point in time that you are going to see a significant number of funds that will roll over to higher star ratings. Now, we can't predict when Morningstar will do that, but by past indications we would expect we are getting very close to that period of time.

Now let me turn to some business highlights that happened during the quarter. As further evidence of improving performance, we won Lipper awards as one of the top fund families in both the U.S. and Canada. And the INVESCO Institutional business was named 2007 Equity Manager of the Year by Global Pensions Awards. In China INVESCO was -- won an award from the Asian Asset Management Magazine for the best China strategy and best client service. INVESCO WL Ross won the Private Equity Firm of the Year and the International Deal of the Year at the M&A Advisor Turnaround Awards.

And I am also pleased to say that we've made important progress in our North American retail business transformation that Phil Taylor highlighted at our last quarter, focusing on a much more unified consistent approach to managing the business, by bringing together throughout North America marketing and communications, service, product line management, and increased collaboration amongst the sales team where it's relevant. During the quarter this resulted in a reduced headcount of 126 people, with approximately $17m of savings in 2007.

But more importantly is this focus on the retail transformation allows us to be strategically positioned to grow more effectively and align for strategic changes in the retail market in the United States and in Canada.

We've also continued to solidify our position in China, opening a new office in Beijing during this past quarter. PowerShares assumed the sponsorship of their QQQs, now renamed PowerShares QQQ, which, as many of you know, is the most actively traded security in the world. And speaking of PowerShares space, now exceeding $10b in assets under management for the first time that happened in April. In Canada we reached another milestone where AIM Trimark exceeded $50b in January, which is an important milestone for them.

And AIM completed the launch of six independence funds which incorporates both mutual funds and PowerShares ETS. And we think this will really help us capturing the growth in demand in the retirement market for retirement maturity funds.

And finally, I'd like to mention that we generally have very positive feedback from shareholders on our proposed name change from AMVESCAP to INVESCO. The shareholder meeting is later in May, so we will have to wait to finally hear about that.

Now I would like to take a moment to talk about our fixed income business. And as most of you are aware, in late March a competitor attempted to disrupt our business by lifting out a group of fixed income professionals, based principally in our Louisville office and primarily focused on our stable value business. And, as you would expect, our efforts have been very focused on the continuity of our business and minimizing the impact of potential disruption to our clients. That's, first and foremost, all of our efforts were there.

When this happened, we immediately contacted clients and consultants to talk them through the issues, to assure them we were working aggressively to stabilize the business. I participated in a number of those client meetings, in both meetings, and found that most of our clients and consultants were reassured that our team-based approach, well-defined investment processes would enable us to continue to manage the business effectively, which was certainly a very important topic.

As is often the case, you like to turn challenges into opportunities. And one of the benefits of being a broadly diversified global company is that we have the depth of leadership talent and the additional capacity of multiple investment platforms to respond quickly to this event. Specifically, we used the events of the past week to bring our fixed income cash management team together into a single organization under the leadership of Karen Dunn Kelley. This move, which had been considered in the past, is now a reality. We will immediately provide both access of expanded resources and greater clarity to our clients, which we think is very, very important.

A number of you do know Karen. But if you don't, she's been in the investment business since 1982. She's been with AMVESCAP since 1989. And it's been under her direction that AMVESCAP has built one of the most highly respected cash organizations with a very, very strong consistently high-performing performance. And she's such a great leader and will be a powerful force taking this business forward.

If you looked at AMVESCAP fixed income team on a combined basis, it ranks as one of the large -- the world's largest fixed income operations, with a broad range of products across the fixed income spectrum, with $165b of assets under management. There are 180 team members, of which 120 of them are investment professionals.

But as you would expect with this type of situation, we have lost some clients and approximately $1.7b of assets have been closed to date. We have received notification of an additional $4.4b that are intending to close. Of that $4.4b, $3b is from one client. While client loss clearly is very regrettable, you will recognize that these losses represent a relatively small percentage of our fixed income business' $160b in assets under management.

And, understandably, clients and consultants have put us on watch. I want to assure you we are working very hard with our fixed income clients and consultants to keep them as well informed as possible. And I am pleased to report that due to the strong relationships we've built over the many, many years, the majority of our clients have been reassured by our efforts.

And in past presentations you've all heard me talk about how enthusiastic I've been about the potential of our institutional fixed income business. Realistically, the past month's disruption will have slowed and stalled, in some cases, some of that progress, some of that momentum we were building. We will need time to again build confidence with the consultant community in parts of the institutional business and get back to restoring that momentum. But there are clearly parts of the fixed income business which we expect to continue to grow very, very strongly and continue on its great path, which were not impacted by these events.

Our stable value business is secure, with a team of experienced investment professionals for all investment capabilities and global strength. We are well prepared to take this business forward and continue to build momentum across the rest of the institutional business. With our new integrated fixed income team that ranks very well among the industry leaders, I am very confident that we will be successful in time.

I am going to stop there and turn it over to Loren.

Thanks, Marty. Let me start with a quick review of our asset roll forward for the quarter. As Marty already pointed out, we experienced long-term net inflows of $0.7b in the first quarter versus $4.5b net outflows in Q4 of '06. And this improvement was driven by significant sales growth, about 33%, which was the result of the strength of our institutional U.K. and North American retail businesses.

Our institutional money market assets, which were $0.8b in the quarter and benefited from about $8b in market gain. So as a result, we ended the quarter with $471.2b in assets under management, up 1.9% or $8.6b quarter over quarter. And our average assets of $466.9b came in at 3.1% over Q4.

Importantly, due to the changing mix of products, our net revenue yield, excluding performance fees, was up slightly at 55.8 basis points.

Next, moving on to quarterly earnings, at the top of the slide you will see that our management fees for the quarter were up 2.1% quarter over quarter. And this includes performance fees earned of $18.8m versus $25.9m in the fourth quarter.

Our service and distribution revenues were up over the quarter by 5.8%, driven largely by higher asset and sales levels in the U.K. and Canada. Other revenues are up 13.6% as a result of higher net front-end commissions in sales in U.K. and Asia. Our third party distribution, service and advisory costs also increased, but largely in line with the distribution and service revenues.

Moving on down the page, you will see that our total operating expenses came in higher than the prior quarter by 7%, ending up at $434m. Within that number, our compensation expenses increased about 5.6%. And, typical Q1, we saw the expected ramp-up in payroll taxes, and this was about $8m versus the prior quarter. In addition, as we discussed last quarter, we booked about $10m in severance or transition costs, related to our North American retail transformation.

I also should note that in the quarter this reflected only one month of amortization of our 2006 restricted stock grants that were awarded at the end of February. This equates to a benefit in Q1 of about $4m versus our normal quarterly run rate for the remainder of the year. In addition, our bonus pools and commissions were up about $4m due to the higher sales levels we talked about, and certain compensation plans that are linked to performance.

Our property and office line item you will see was up slightly in the quarter. That was a result of about $1.5m in lease charges related to reductions in office space by Trimark and by WL Ross & Co., which moved into our existing Mid Town offices in New York.

Technology and telecom declined 7.5% due to completion of certain technology projects in '06. And then you will note that G&A was up quite markedly, 36.9% versus the prior quarter but that was not unexpected. In fact, this was due to the unusually low number for G&A in Q4 of '06. And you will remember we received $21m from insurance recovery, which was offset somewhat by $6m in legal expenses that took place in Q4.

So with our net revenues increasing 2.4%, coupled with a 7% increase in operating expenses, our net operating margin ended the quarter at 35.4%.

And then finally, just on the topic of operating expenses, I'd like to say that we are solidly on track to meet our expense guidance, as we discussed last quarter, of $1.735b for 2007. But we will also update you on this guidance should the markets or foreign exchange move significantly from the beginning of year level.

That concludes our presentation today and might I ask the operator to provide instructions for those wishing to ask questions.

Thank you. [OPERATOR INSTRUCTIONS]. First question, Bill Katz, Buckingham Research Group.

Hi. Good morning or good afternoon. Thank you very much. This is just like a clarification before I ask my question. Marty, you went very quickly. The $17m of savings you identified in your prepared remarks, was that an annual or a quarterly number?

And then, on the closings that you announced for the fixed income, the $1.7b, was that -- is that in the second quarter, or was that part of the first quarter? And then I have my questions after that.

Yes, the $17m was an annual number.

For '07.

For '07, yes. And the $1.7b is going to show up in this second quarter here.

Yes, there was about $100m that may have showed up in the first quarter number.

Okay. So my basic question is actually on the alternatives business. You had a very impressive presentation, I think earlier in the first quarter. And you laid out perhaps maybe just how you account for it in your slide here versus how you did that presentation. And the surprise is here that number isn't growing a little bit more robustly. Could you give me a sense of where we stand in terms of leveraging Wilbur Ross and maybe some of the other parts of the business?

Yes. Very excited about, again, Wilbur Ross and his team being a part of the organization. And he's had a formula that he's been investing and, importantly, it needs to get to a level of investment before he can come back to the market. We expect when that -- when he gets to that point, he will be very, very well received in the marketplace. There are other opportunities with WL Ross and Company in different parts of the world, Asia in particular. So, we expect that at some point during this year we will probably have some good news about that.

The follow-up question is, given what's happened in the fixed income and stable value business, has there been any kind of refocus? It did look like it, certainly, in the first quarter comp numbers. But is there any kind of refocus to increase compensation to avoid any kind of other type of professional loss?

The focus really, Bill, it's been a very, very [active] period. And I think really in that you need to be competitive, you've got to make sure that you are competitive in the marketplace and we are going to do that and continue to look to the leadership running that group to make those judgments. But nothing dramatic is -- maybe if that's really the point of your question there.

Okay. Thank you very much.

Right. Thanks, Bill.

Next question, Niamh Alexander, CIBC World Markets.

Morning. Thanks for taking my question. If I could just clarify something with Loren, sorry, you gave some good numbers on the compensation but what I am trying to get to is a run rate. In the $284m there was a $10m severance, which I guess is a one-off. But then there was a $4m benefit. Is that fair?

That is correct.

So a good run rate would be a $6m lower number going forward?

Well, again, we had about $8m of payroll taxes in the first quarter that tapers off through the half of the year. So, again, I think you'd have to spread that. If you want to take an annualized number, take [the 8.8] and take 70 -- 0.75 out.

I'm sorry, take the 8.8 and --?

I am sorry. Take the 8.8 and maybe take 75% of it out, spread it over.

Okay. That helps. Thanks so much. And then, from Marty, if I could just move over, you talked last quarter about -- it was more intangible but very important, about improving AMVESCAP, how you are perceived with the consultants, because selling to institutional -- at an institutional level is really important. Is there anything you can share with us on how that's progressing, what initiatives are underway and maybe what, if any, is the feedback you are getting so far? What needs to happen?

Yes. You are asking the right question and, again, everybody is very, very focused on it. At least by -- I think it was Mark Armour was really making a very good point. There is perception and reality. And there are some areas of our investment teams that perception and reality is matched and we've had great success there. I think real estate was one area that Mark was pointing out and there's also been perception gaps. And I think, importantly, that's one thing that we are trying to highlight here, and I know this is more of a retail breakout, but really showing the depth of great investment performance that we have across the platform. As Mark and the team have been spending -- very focused on this, I think we are making progress.

But as you know, with institutional consultants in particular, it's a long -- it's worked. And the feedback I've had has been positive feedback, when we've been in those conversations. But, again, it is not -- I think, if I remember the timing, I think Mark was talking about some improvements this year. But it's really the two or three years out where we should really be in a very different place. And it really has to start with quality investment teams and quality performance and I think we have that, thank goodness.

Okay. That's very helpful. Thanks so much. And then, if I could just, if you could indulge me a little bit, with respect to the European market, we are getting very mixed messages with respect to retail and institutional investors. There seems to be some big swings in different countries with outflows and inflows. How is it on the ground? I can see your performance has deteriorated a little bit but do you still think you are very well positioned there? Or do you think it might be a bit of a tougher market for net inflows in '07 versus '06?

Yes. I think it's positioned very, very well. There's a long history of success in the European market within this organization, also Asia. But I know you are talking about Europe. If you look at the outflows, they were concentrated to some fixed income products. And there were great winners last year and we had the inflows. But clearly, very sensitive to relative investment performance and that's what we saw happen this quarter.

That said, I think we continue to have our, if you want, what we refer to as the offshore product range reflect the best of the institution. We are making progress. It still does not represent the best of the institution. But I think what you look for, what's in it, is I think a lot of the future also lies within our European equity products and the performance is really very, very strong. Now, part of it went back to the European equity product [the 08] that really 2000 [carried] where it got hurt. And it's a new -- it's then a new investment management team around it and they've done just a great job of the record. So that's where we expect that we are going to start to make some greater inroads in time.

I also think there are several products that are sitting their two-year anniversary, which is an important point in terms of getting onto platforms. So I think that's also a positive thing in terms of sales potentially for this area.

Okay. That's very helpful. Thanks. And just last a real quick question, the performance fees, they were lower year on year. Was that because there was a smaller proportion of assets that were subject to performance fees or was it primarily performance related?

No. Most of the performance fees that were earned this last quarter were from the U.K. We have extremely strong performance still with our structured product groups, which is typically the other area that has generated performance fees. We didn't see the same strength this quarter in that. But it's -- those fees are earned on a quarterly basis, so there is still potential that we'll see those fees coming in over the course of the year.

Okay. That's very helpful. Thanks so much.

Thank you.

Next question, Bruce Hamilton, Morgan Stanley.

Hi. Good morning, Martin. Good morning, Loren.

Good morning.

A couple of questions, sorry, just to go back to the cost base, you've obviously been pretty clear in outlining what were kind of one-off impacts in Q1. At the full-year stage you talked about $25m of non-recurring spend to do with the North American transformation program. Am I right to understand that we've had $10m of that, so I should expect another $15m in the second quarter?

That's right.

That's right. And the second question was you reiterated your cost guidance of $1.735b. Now, that guidance was set with asset levels at the January level, and assumed fairly flat asset levels and I assume the currency at that state. Are you now saying that, with the dollar at $2 to the GBP1, which would increase your dollar costs, and with assets continuing to rise, you will still hit $1.735b? Or is there going to be a bit of flex in the cost base? I am just trying to understand that.

Yes, absolutely. What we are saying is in the quarter there wasn't much of a flex in terms of the numbers, because the FX didn't really hit fully in the quarter. If that rate continues, persists, through the full second quarter, there might be something that shows up and then we will tell you about it. I am not going to forecast FX rates and where they are going to go for the quarter. So we will see what happens.

I'd add to that, though, and you are right on the point, and Loren was talking about it earlier, that taking a picture in time, with strong investment performance and the like, bonus pools, often our investment professionals are tied to how they [tell] what they do, and that would clearly be a factor.

Okay. And one final question, given that you are getting close to the 50% U.S. investor threshold where you are going to incur extra reporting and regulatory costs, can you give us a bit of color on what the costs would be, when that's triggered? Would that be triggered immediately that you move to 50% of your shareholders being U.S.? And is there any -- would that prompt you to re-list, or some of the comments in the press about the SEC reviewing some of these reconciliation requirements? Would that mean that you would just keep with the current situation and hope that by 2009 whatever extra costs may incur in the near term would then fall out of the equation? Just trying to understand how you are thinking internally about that issue.

Well, just on the macro point of view, is -- I know it's been a topic for investors for a long period of time. What we think is most important is that we have a situation where the Company is followed well, where we are well understood. And those are our primary concerns and primary considerations as we look to what we need to do going forward. So I know that's not specific, but I can't be. But it will -- if we trip that 50% marker, it's going to get very complicated.

And can you get -- presumably, internally you've tried to quantify what the cost impact would be. Is it a $20m type cost or is it more material? What's the best way for us to think about it?

Bruce, I think it's less of an issue of cost as to complexity to [offset] to our shareholders in terms of having multiple regulators and multiple ways to account for our earnings. And I think there are very few companies who do that. And so I think it's more a matter of the cost of complexity and that's hard to quantify truly. It's not going to be so much dollars paid, as just the confusion factor.

And so, if you've got 50% U.S. investors by, let's say, the middle of next month, does that mean that at the Q2 stage you are going to have to do the full reporting 10-Q, 10-K, or is there some time lag?

Yes. We test that measure because it's a fairly complicated test that requires a lot of in-depth analysis to really understand our shareholder base. So that's a quarterly test. And so, when we do our next quarterly test, we would look at that number and if it shows above 50% it would really trigger the following quarter. So it would not trigger a second quarterly result.

Then again, I think if and when that happens we will be clear on what we think the costs are. But, again, what we think is most important for you and the investment community to understand is the -- where the Company is with its growth prospects, with the progress we are making in the investment performance, we should not be any lower than on a multiple with our peers. And you can actually argue with the progress we're making we should be at a premium. And that is something I think -- that's the job you all look at and I think that's something we're very focused on ourselves.

Thank you.

Next question, Philip Middleton, Merrill Lynch.

Hi. Thanks very much. Three completely unrelated questions. Firstly, I wondered if you could just explain a little bit about what is happening in Europe in terms of performance, because you're showing some quite -- overall performance numbers are fine, but within that the European performance seemed a bit tricky. I wondered if you could discuss that.

Secondly, my normal question about Atlantic Trust, what your strategic thinking is there?

And thirdly, just -- I should know this, but I think PowerShares is in the retail asset gathering. I just wonder if you could confirm that for me.

Yes. Let me -- this is Marty, Philip. Just on the -- within the European flows, I think the point that you'd be -- there was a fixed income product, a shorter end of the curve type product that was a great success last year and it just relatively underperformed. And it's a sort of tight band that was in there and that's where we saw the bulk of the outflows in the quarter. And so that's sort of the tricky element I think you're talking about.

No, sorry, it was actually the market gains number, the minus 4.5.

We'll take a look. Well, Loren's going to take a look at that and let me come back.

Okay. Thanks.

Atlantic Trust, again, I think the leadership there is very, very strong. Jack Markwalter I think has done an outstanding job over the last number of years, taking an organization and getting it to where it's contributing on a profit basis to the institution. But also strategically I think the element is one, if you go back three, four, five years ago, high net work was all the rage. I'd come back to where mostly these categories are all breaking down.

The historical notion of high net worth, retail institutional is becoming quite a blur. And what we do is look through the capabilities, I think, within the institution. And the range of our clients now are looking for all sorts of different types of advice. And, strategically, how we look at it is that there's some skill sets in there that we think are crossovers to things such as endowments and foundations, which is in some places the institutional world. And you also have some "retail-type clients" that are looking for some of the services in high net worth.

So, as we see the world bundling together, we think at this point in time that strategically there is a place for it within this organization. But, again, you're not going to see it on the same footing as the historical categories of retail or institutional.

Thanks very much.

Next question, Joanna Nader, Lehman Brothers.

Hi, good morning. A few questions. First of all, just wondering if you could comment a little bit more on your expectations around the institutional flows. When something like this happens and you lose a fair amount of people, would you expect that you would have quite full information on likely redemptions near term or do you expect that that evolves progressively over the next few quarters?

And then -- and just also, I don't know if you can really quantify this but just if you could maybe qualitatively comment on how you think the impact could be on just the sales process of being on a watch list?

And then, on the retail side, I'm just wondering if you could comment a little bit on your U.S. retail marketing effort, now that your performance has improved so much, just how important the Morningstar ratings are to that really taking off and whether the advisors that you are marketing to recognize that these are about to turn, and how important that is to them?

And then lastly, on the institutional thing again, I'm just wondering if you could give just a little bit more color on how much of those flows was CDOs or I guess other discreet-type products versus the longer-shelf products?

Okay. Let me see if I can -- I was trying to follow each of your questions. Let me go backwards. The historical strength really within the fixed income area has been at the end points. And we expect the cash element of the business to continue to be very, very strong.

The other area that has been strong and continues to be strong, you saw it in this quarter, is the CLOs, CDOs and some of these other opportunities where it might connect into the private equity world. And as the question was earlier, our expectation has always been more on the private equity side, the stress side, to be more a third, fourth quarter type event. That also connects back into the institutional world. That's really where that client base is going to come from. We continue to have very -- a high degree of interest from clients and consultants in that area.

With regard to more broadly on the institutional client base, with the fixed income changes, again, it was very focused on the structures -- the stable value business, which is the historical strength of this institution. But, again, the different investment centers are in fact different and they have had historically different client bases. We've highlighted that as an opportunity in the future to be more important to clients with different asset classes. We are still seeing a lot of interest in our retail business, our structured product business, activities such as 130-30. These are products that we've had for a long, long time with good, good track records. So we'll continue to make some good progress there.

There are those elements within the fixed income world that will be slow, whether it's global fixed income and the like, and those were opportunities for us. But, again, until we build the confidence back in the client base around that, it's going to be slow. Right now, it would be stalled and that's fair enough. And our goal out of the box was to make sure clients and consultants understood what our capability was for meeting our fiduciary duty and I think, as I've said earlier, when we've had those conversations they understand that we are capable, right now, of that.

Moving on to the retail business, again, it is -- we're getting -- in the United States it is one of the great opportunities for us and it has to be led by investment performance and depth and breadth and quality of the product range. We've made great, great progress there. And that's why, again, wanted to very much highlight specifically that the important -- or that the great progress we're making in investment performance, and going back to the blue/green slide, if you want to call it that, and showing not just the percentage of assets in the top two quartiles but really how strong we are in the top quartile on a Lipper basis.

What has been trailing is that Morningstar four-star rating and the reality is they are important. And, again, I can't speak for what Morningstar is going to do but based on past experiences we would expect that we will start to see some important change in our four and five-star ratings over the next few quarters here, and that will be very important.

So, did I hit all your questions?

I think there was one more question. Joanna, you asked what happened in terms of the sales in the quarter for institutional. There was some -- there was about a little more than $1b that came in through CDO type of products or CLO type of products. There was probably close to $1b in our international equity product managed here out of Atlanta. And there was about $0.5b, again, I'm just reading some of these things, through our structured product group. So, again, there was great strength across a variety of our centers of excellence. So it was pretty broad based.

Okay. Sorry, can I just follow up, then? Just in terms of planning for the next few quarters, with Q1 particularly a big quarter for you in terms of your pipeline for CDOs and CLOs or -- and your other structured products there, would you expect that it's just representative of the kind of activity that you had planned to do, basically throughout the rest of the year?

I think we believe there is still great strength in our CDO business and that there is still appetite for the product. Obviously the sub prime market just generally has had some impact on the CDO appetite generally, although our business in particular was reasonably immune from all that, given our strength in more of the loan side of the business and less on the asset-backed side. So I think we see continued demand for the product. I'm not sure if the first quarter was necessarily big. These are sort of chunky things that come in and it's hard to really forecast with great certainty size or timing. But the business is still very active.

I think I'd add too, most importantly it's been a good, long track record of success in the CDO, CLO business. And the investment team is very focused on making sure that they can deliver investment results and where we are in the credit cycle will be something on their minds. And that will be paramount and the pace of offerings too.

Okay. Okay. Great. Thank you.

Next question, Andrew Mitchell, Fox Pitt.

Yes, hello. I think most of my questions have been addressed. I was particularly interested in the potential lumpiness, as that institutional inferred. I think you have appeared to have said that we shouldn't necessarily regard that as particularly lumpy. The other very detailed point, it's probably not significant, but I was looking at the slide six where you've got the pattern of retail results there and I'm just puzzled on the three-year comparison, why there appears to be that difference between the Morningstar and Lipper performance between '06 and March '07. It looks a bit strange.

Yes. And that's why we put both of them out there. They're both very important suppliers of performance in the marketplace and they categorize funds differently. And where we might think something is a value fund, they might think it's a core fund. Or -- and, again, it's not our choice. So we thought the best thing to do was to show both of them.

Okay, thanks. And just reverting back to that lumpiness question on institutions, is it fair to interpret what you said before as being that essentially we shouldn't regard those inflows as being particularly unusual?

It's Mark Armour here. Maybe if I can just add a little bit, because there's been quite a few questions on this. Look, I think the first thing I'd say is that the way the sales have come through so far this quarter is pretty much as we expected. The reality is, particularly with some of the private market type parts of our business, so this would be our private equity, we'll [inaudible] some of our real estate funds and also CDOs, CLOs. They are by their nature lumpy because we are launching -- we go through the process. It's like an IPO. We launch a fund.

So we've done in the first quarter what we expected. On balance, it's probably been a little bit better than we'd expect. But the point I'm trying to make is that we will have different, whether it's from our private equity area, whether it's our real estate area, whether it's the Wilbur Ross part of the business, we've got a catalogue of -- there's a pipeline, if you like, of launches throughout the year which we would expect to come through. So while there might be lumpiness in any individual one of them, if you look at it across the board it's going to be, frankly, somewhat smoother.

Then we go on to the more normal parts of our business, the continuously on sale parts. So that would be like our global structured products group or our Atlanta Investment Center, and so on, or even our fixed income business. And what we've, again, seen there is we actually, in a growth sense, we had quite a strong first quarter. Again, some of these things were a little bit better sometimes than we thought and others maybe not so. But I think we've got a -- we're forming a good base there for the year as a whole.

I think, once we get through the year, though, we are going to have to be quite cautious in terms of abstracting away from the flow impact of stable value. So the stable value flows will be meaningful negatives for us. Marty quoted the numbers a little bit earlier. So that's something that I think as we go forward we are going to have be -- I think Loren's spent a bit of time to be clear with people as to what's happened to our flows, and then also break it out by that stable value part.

And maybe we'll eventually get to the point where we can talk to you about revenues rather than just flows as well, because there is a bit of -- even though I got some pushback the last time I mentioned that, because I think it is important for us to abstract between, or to differentiate between, 1b of stable value and 1b of private equity, because they are very different in terms of our bottom line impact.

Thanks, Mark. We're going to have one more question, if that's all right.

Our last question comes from Matt Deverin with Clovis.

Thanks. My questions have been answered. Congratulations on a good quarter, guys.

Great. Thanks, Matt. And, again, thanks everybody for your time. Very, very excited about what's going on and really appreciate your attention and questions and feedback, and we will be in touch soon. So have a good rest of the day, wherever you are.