景順投信 (IVZ) 2007 Q3 法說會逐字稿

Welcome to INVESCO'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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Welcome to the INVESCO 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 speaker for today, Mr. Martin Flanagan, President and CEO of INVESCO plc. Mr. Flanagan, you may begin.

Thank you very much and thanks everybody for joining us for our third quarter briefing. I am here today with Loren Starr, our CFO, and also we have Russ Kamp who heads our Global Structured Product Group with us and Karen Dunn Kelley who runs our Worldwide Fixed Income. These are two areas that you've heard us describe as key strengths of this organization and you combine that with the market focus we observed during the past quarter we thought it would be beneficial to everybody to hear from them directly.

So I'll start as usual with a brief overview of our business results and then Russ and Karen will talk about their areas in particular, the success, growth opportunities in some of the market challenges that seen and how we've fared during that period which is quite strong. And then turn it over to Loren for the financial results and then we'll get, importantly to Q&A.

So starting with the business update. We continued to demonstrate strong momentum in our business during the quarter and the results were in line with expectations. I think, importantly, this is in context of very challenging markets and we get that net positive growth in the quarter and the business performed quite strongly during the quarter. We ended the quarter with $507b in assets under management. That's up $15.6b quarter for quarter, and we also saw average assets under management at $494b during that quarter, again up over the prior quarter.

Long term gross sales continued to set new records. It's the highest they've been in the past five years. Net flows were positive during the quarter and, again, the Money Market products continued to perform very strong.

Earnings per share for the quarter was $0.21 and that's flat as compared to the prior quarter but up strongly from $0.13 the quarter a year ago.

Net operating margins were 37% this quarter, basically flat since the prior quarter but, again, importantly up from 26% the quarter a year ago.

We continued to make strong process against the plans that we have laid out to you and also doing that in what is now a very turbulent market. Asia had a very strong quarter, as did the U.K., continued to be a very, very strong part of our business. And also, which we will update you on during the call, we continued to be on track for the relisting of INVESCO to the New York Stock Exchange on December 4.

If you take a look at the quarterly flows, and I mentioned we did have net inflows of $200m during the quarter. I would like to point out gross sales were up $31m, up 13% quarter over quarter, which is a strong result for us. Redemptions did increase during the quarter. This is largely due to the Stable Value outflows, but also the turbulent market did have an impact during the quarter.

What is difficult to see from the combined flows is the underlying strength in the strong improving trend of our business. So you can see if you exclude the Stable Value business during the quarter -- during this period we've had real, real strong strength of increasing net flows of the underlying business going all the way back to the fourth quarter of 2006. Excluding Stable Value, we had net inflows of $5.7b in this quarter and as you know the third quarter generally is a traditionally slower quarter for the industry as a whole. Loren will discuss in a moment how the change in our asset mix is actually generating a higher revenue yield also.

If you take a look at the Money Fund Group in particular (we continue to highlight it as a strong part of our business), it did have a strong quarter again with net flows of $5.7b taking total assets to $67.3b. And, again, you'll hear from Karen in a few minutes to get greater clarity there.

If you take a look at the flows by distribution channel you can see the Retail channel had slightly positive inflows, Private Wealth Management was flat quarter to quarter, and we had a slight outflow in the Institutional channel.

Taking a look more specifically at the Retail gross flows, again, across all platforms, they had a very strong third quarter and we had strong net inflows, in particular in the U.K. Agent PowerShares. And, again, just highlighting the U.K. business, it just continues to be a very, very important part of our success, again during this quarter, and it really has been throughout the year.

Institutional gross sales again were up. We did see the redemptions up also but, again, largely due to the Stable Value of $5.5b of outflow that I discussed a moment ago.

Let me spend a minute on investment results, and obviously you all realize that it's the most important thing that we do and we have to get it right. So if we take at look at INVESCO in total as a firm, if you look at all the assets we manage and those assets that are rated, 72% of all of our assets either deep benchmarked or in the top two relative peer group quartiles. When you look at that on a three year basis we think that is a very strong result and clearly a key element of our potential ongoing success.

If you flip the page and take a look at our Investment results by various categories, Retail, Institutional, you can see it was a very powerful quarter. Obviously, has been reflected in these periods. The SMP dropping 9% during the quarter and then rallying to end up flat quarter for quarter, it was really the volatility during that quarter that had a real impact on peer group rankings. And, as you can see, the peer group rankings in the Retail business end of the quarter went from 46% to 72% of the assets over one period of five years to be in the top two quartile. But because of this very pronounced volatility and the changes in the peer groups we wanted to update the information through November 1, 2007. And you can see that the relative performance of our peer groups came out quite strongly. In particular, you can look at the Morningstar rankings. They look very, very good during those period.

I'm going to spend a little more detail on the AIM performance in a minute and also the same thing with the Trimark Investment performance because this table doesn't clearly reflect what's happened during that period.

Again, just highlighting the U.K. performance 83% of the assets are on the top two quartiles of peers on a one, three and five year basis. Just very, very strong investment performance again by our U.K. business.

And looking down the slide you can see the performance of the Institutional business as measured by a percentage of assets under management against benchmark. You can see the Equity business improved on all periods. Our Fixed Income business continues to have a strong three year, five year track record. And we did see a decline in the one year performance. This is largely due to, in the short-term, fixed income products which are focused more on liquidity and securities than yield. We invest as we find, obviously in the environment that we're in. And, again, the Money Fund business continues to have a very strong performance record across all time periods.

I'd also like to highlight that the Alternatives business, it's had exceptional performance on relevant periods presented here. It has improved after one year due to improving performance in our Global Capital Asset Allocation products. Again, just a growing area of strength for us as an Institution.

Let me spend a minute on the AIM performance. And if you take a look at some of the relative strengths you can look -- and these are Morningstar ratings, and they are really areas that are of relative strong performance where we have seen -- anticipating strong client demand. And that is in the growth area of Non-U.S. market and Asset Allocation market. And you can see that 50% of the funds are rated four star or better. And it does appear that we're going through a market rotation right now and if that is the case, we think we are in an area of real strength and should benefit from that rotation.

Of course, people do recognize AIM as a domestic growth manager. It has been an important part of our business. It will continue to. The performance should put us in a position to be successful there. But also the Asset Allocation part of our business is growing quickly and is an area that we're seeing increasing client requests. And we think it is an absolute growing strength within our business.

But, importantly, I think if you take a look at the international and global offerings we have is that they're very broad, they're very deep and we think that is going to be an area where we are going to continue to see great interest. The team is very, very strong. In fact, great record. In particular, during this cycle, the global international growth track records are very, very strong and we would anticipate that, again, if this market is moving as we all might be anticipating, we think we're positioned very, very well in that market place.

Let me talk a minute on the Trimark investment performance. And three factors in particular. Many of you know that as well as the Company, the Trimark's investment discipline is one of conviction and a very strong investment process and we are dedicated to that.

Two other elements come into play during this quarter. The strength of the Canadian Dollar, that had a relevance in the second, and then thirdly, and importantly, there was a re-categorization of peer groups within Canada which had quite an impact on the relative performance during this period.

You have noted in the past, in Trimark in particular, they have a very well communicated, well recognized concentrated selling discipline. And if you go back to 2000, their discipline took them to a place where they avoided technology sites and this technology bubble. By March 2003 their clients were clearly rewarded by this dedication to their investment process. Today, their discipline has taken them to a place where they're underweighted energy in materials and we see relative underperformance because of that. But, again, it's a very strong discipline. We feel very strong about the team.

The other factor though is the strength of the Canadian Dollar, and why does that matter? Is that you would understand why as you would in the global portfolios, they don't hedge their currencies. But also, within the Canadian portfolios, it's upwards of 40% of the portfolio has been invested outside of Canada. The foreign content role has increase and that has had a short term impact. We think it's very wise to have a diversified portfolio to take advantage of those broader opportunities. And longer term, we're sure that is exactly the right thing to do. But short term you can feel pain.

And then, importantly, on August 1 of this year, the industry recast their classifications within the CIF as the Morningstar rankings and that again had this impact which really complicates this very simple table that we put forward.

That being said, we fully support the AIM Trimark discipline and the team. We think they're very, very strong. We believe that our commitment to these clearly articulated investment disciplines is a critical part of what we offer clients and creates long terms success.

So with that I am going to turn it over to Russ Kamp who is going to talk a minute about the Structured Product Group. Russ.

Marty, thank you very much. It's a great opportunity to introduce the Global Structured Products Group. I have the great pleasure of representing 55 people who have been operating in the quantitative equity space for quite a long time. The Group, as of September 30th, managed about $34.5b. It truly is a global business in the sense that we're managing money now for clients in over 30 countries and we offer about 40 different product capabilities to those clients. And by products, often what we're talking about is just changing a benchmark or a risk level or perhaps a country of origin. But it is 40 separate and distinct capabilities that we now offer into the marketplace.

The business is managed out of Boston, New York and Frankfurt, Germany. And we are truly looking to expand our opportunities to include Asia to a far greater extent and hopefully Australia in the not too distant future. The good news about the business is that it can -- is that our products can be distributed through a number of different channels. We are presently offering our products through the Retail and Institutional businesses, as well as offshore platforms and certainly believe we could support the high net worth business as we work more closely with our colleagues at Atlantic Trust.

The strength of our business is in the history that we have. We've been managing long only products now for 24 years dating back to 1983. And we couple that with deep experience in managing short only strategies. We've been managing market neutral strategies since about 1992 and have recently introduced into the marketplace a series of 130/30 strategies both in the U.S. and over in Europe and are looking for ways to continue to enhance those offerings. In addition to that we've been managing Global Macro now for about 16 years, launching our first strategies in 1991 and coupling that with experience in managing capital shield assets now for about four years through our colleagues in Frankfurt. And these are enhanced cash strategies using tactical asset allocation products.

As Marty mentioned, the third quarter of this year was very challenging, not only for equity and fixed income markets in general, but specifically as the market place focused in on more quantitatively orientated strategies. I'm pleased to be able to report that our long only work showed positive results relative to, not only absolute standards, but also our benchmarks. And that our market neutral and 130/30 strategies, although they underperformed our expectations, because we do not use leveraging, those strategies performed reasonably well given our risk levels. And so we were pleased to be able to weather that storm. And don't necessarily believe that it was specific to quant strategies. We think most importantly it was a liquidity event that drove a lot of the market dislocation that occurred during the month of August specifically and was not really reflective of quantitatively orientated strategies.

The good news for us is that we're seeing tremendous growth in our business primarily outside of the United States through our colleagues in Frankfurt. They have seen terrific flows for their global equity and European equity work. A lot of that has come through our colleagues in the U.K., Europe and Asia. And we're looking for continued momentum in our business as we look for opportunities in the United States and through our colleagues in the high net worth area.

So that's a quick overview of the Global Structure Products Group. I appreciate the opportunity to speak with you this morning. At this point of time I'm going to turn it over to my colleague, Karen Dunn Kelley.

Thank you, Russ. And I would like to thank everyone for the opportunity to speak about Worldwide Fixed Income today. Firstly, INVESCO has one of the major fixed income platforms in the world. Our business has stabilized and we have made significant progress positioning ourselves for the future. And we believe that we have weathered the current market upheaval well through teamwork and a focus on credit and liquidity.

Our newly combined fixed income capabilities include over 120 investment professionals and a global staff of over 190 people. The global team is focused on research sectors, portfolio management and client interaction. We have a unique global footprint with locations from New York to Melbourne. We have a broad and deep product expertise to meet the needs of a diverse global customer base with recognizable scale across many business lines as you can see on slide 15.

The next page illustrates the three philosophical tenants under which we operate. The first is the people. They are the product through which we provide the intellectual capital to the diverse product line up.

Second is the product offerings which focus on high quality of care with a significant and important emphasis on our fiduciary responsibility and relationship with our customers. Our research and alpha decisions are the strong capital on which execute the investment disciplines primarily through a bottoms-up approach. We have a deep and seasoned investment team which it's most important in the execution of our time tested approaches and leverages the global product platform and the broad collateral expertise.

The following page illustrates how we have aligned our strategic direction to further our fixed income capabilities into four primary investment centers which are Houston, Louisville, New York and London, with our London center overseeing activities in both Melbourne and Frankfurt. We have also designated various product groups -- product leaders for the various product groups and mandates to ensure consistency of quality and execution in each of those product disciplines.

Next, we have portfolio managers and constructors utilizing a broad set of collateral requirements to execute and optimize designated and individual portfolios. Our research and alpha sources are broadly broken into two major categories. First, our research and alpha sources focus on what we consider the physical and/or tangible decision making processes.

Secondly, we have non-physical macro alpha sources generating decisions relating to areas such as duration and yield curve. On top of this, we have overlaid a global process management team, or the GPM, which is designed to ensure consistently high standards of care for each product as well as global coordination. These investment resources are structured in such a way that we ensure consistent, disciplined and repeated investment processes enabling us to fully leverage our proprietary investment models.

And finally on page 18, we've broken our assets down into the major categories which we view them, Money Markets, Stable Value, Global Fixed Income and Financial Structures. I'd like to spend a minute in each of these areas and discuss how they have been affected by recent credit disruptions.

First, our Money Market business. We have had a long history in managing Money Market products since 1992. Our Money Market business is where we manage portfolios denominated in U.S, dollars, Canadian dollars, sterling and euros to a consistent dollar NAV. In recent markets, this business has experienced no rating agency downgrade in any paper that we own. We are currently invested in asset backed commercial paper which does represent 17% of the category's assets, but all asset backed commercial paper investment benefit has credit protection as well as liquidity facilities. We do not own any asset backed commercial paper or CDO's and we have no direct subprime mortgage investments. We do have exposure to the SIV market. Our exposure is less than one-half of 1% of the total Money Markets portfolios. Our SIV exposure is also rated -- all rated A1+, P1 and F1+ and has maintained these ratings despite yesterday's rating downgrade of other SIV's by Moody's.

In conclusion, the Money Fund business has actually had record assets over the last month and remains critical to us.

The next asset class is Stable Value. Our $41b in Stable Value assets has been a flagship business to us since 1985. It experienced $5.5b in outflows in the third quarter for a total of $7.5b year to date. However, it is important that I indicate that approximately $9b will leave our product platform by year end.

Putting this into context for you, of over the $16b assets that will leave by year-end, over $7b of that is represented by two customers. And additionally, of the over 1,200 accounts -- of approximately 1,200 accounts we have only lost 34. Despite these outflows, we believe this business is stabilizing and, in fact, we have opened new accounts and grown assets from existing customers. We were the largest Stable Value manager in the industry and despite the asset lost we remain in the top five. We are absolutely committed to this very important business line and its customers.

Our Global Fixed Income business represents about 25% of the total business and consists in a broad array of strategies such as Core Core Plus, Sector and Index products etc. The subprime exposure to these portfolios represents about 3%. However given market dynamics I must say that we have seen relative value opportunities and have selectively added to positions and are actively managing them in this space.

Finally, Financial Structures represents about 8% of the assets and consists of three segments, CDO's, CSO's and CLO's. Our CDO's of asset backed securities consist of three CDO's of approximately $1.3b of assets under management. As the rating agencies have changed the criteria in this asset class over the last month, certain tranches of two of our programs are currently on watch with negative implications. And we are working with the rating agencies on their behalf.

Our investment grade CSO business, there are four deals with approximately $4b in assets. None of these deals have been downgraded or placed on watch for downgrade and none have subprime exposure.

Our CLO platform, which consists of 21 products with a total of $9b in assets, there is no subprime exposure in these portfolios which consist of investments across over 20 different industries. There have been no downgrades or credit watch action taken on any of the CLO's transactions. And, in fact, this is a category where we have had the opportunity to write new business in the third quarter.

I'd like to thank you for your time and in conclusion we believe that our Worldwide Fixed Income platform is in a position to take advantage and service the ever changing Fixed Income market and needs of our customers. And at this point I have completed my comments and I'd like to pass it back to Marty.

Great, thanks Karen very much. If I could, let me give everybody an update on the INVESCO listing. As you know, in July we lost our foreign private issuer status which put us in a position of having two primary regulators, the FSA and the SEC, and which also resulted in us reporting both under IFRS and U.S. GAAP accounting. And given the additional accounting and regulatory obligations and risks, the Board proposed that we change our primary listing. And as a current update, in conversations with our shareholders, we've had very, very positive feedback. And we'll have the results of the shareholder vote on November 14th. And assuming all goes well we will begin trading on the New York Stock Exchange on December 4th.

I'd also like to mention that we'll be holding an Analyst's Day at the NYSE on November 15th, and the press release and the website details are available about the event if you're so inclined to attend.

I am going to turn it over to Loren and have him go through the results for the quarter.

Thanks very much Marty. Let me start with the review of our assets roll forward for the three months ended September 30. During the quarter we generated long term net inflows of $0.2b. And, as Marty pointed out, excluding Stable Value, the actual underlying net inflows were positive $5.7b versus $2.5b in Q2, so there's an improvement there.

Institutional Money Funds came in solidly at $5.7b. In addition, we benefited from $4.1b in market gains, as well as $5.6b due to FX and most of currencies strengthened somewhat strongly relative to the dollar. So as a result, we ended the quarter with $507.2b in assets under management which represented an increase of 3.2% since the end of July. We also saw an improvement in our net revenue yield this quarter excluding performance fees and that's a continuation of a trend we've talked about in the past, as our lower fee asset redemptions are being replaced by higher fee asset sales.

Now let's move to the operating results and take a bit of a closer look on this topic. At the top of the page of the operating results you will see that the quarter over quarter management fees grew modestly, up about 0.8%. However, if you exclude performance fees, our management team's were actually up more strongly increasing about 4.7%. And as all you know, we generally receive most of our performance fees in the first and fourth quarters. So in the third quarter we received performance fees of $4m which is roughly in line with past experience. And as we pointed out at the last earnings call, the second quarter performance fees of $34.4m was actually the anomaly as it included a substantial one time amount of $22m from China.

Moving on down you'll see service and distribution fees were up 1.6% over the quarter, which generally moved in line with the higher asset levels. Other revenues were down 7.8% due to lower gross sales activity in the U.K. relative to the second quarter which was a very robust quarter for the U.K. The third party distribution, service and advisory fees increased in the quarter by 3.2%, again driven by growth of AUM.

And then moving on down the slide you'll see that total operating expenses for the quarter at $451m were essentially flat relative to the prior quarter. Within that number, compensation expense increased only slightly by 0.2%. Marketing, on the other hand, was up 14.1% in the quarter and this was largely due to the launch of new alternative products in our Institutional channels and you'll see that in the asset roll forward for those who want to look in the back of the press release.

Then we saw property and office was up as well in the quarter. This occurred as we vacated and then sub-let some office space in Denver and we took a one time owners lease charge of about $7.4m. And just to remind people, when we gave our guidance back in February of the $25m transition expenses, this is part of that.

Moving on down, technology and telecom was up about $1m as we transitioned certain technology contracts and functions to our new office in India. And then, as expected, G&A declined this quarter. The $13m decline was largely due to $10m less in tangible amortization for the WL Ross business as we incurred, as you might remember, a $15m amortization catch up in Q2 and then Q3 had $5m which is the ongoing quarterly run rate.

Also during Q3 we incurred about $8m of expenses and this was related to the new European PowerShares product launches that have been publicized as well as some other non-recurring items.

So, despite the $30.4m decline in performance fees in the quarter and with operating expenses slightly elevated with the expected one time transition costs, our operating margin ended the quarter at 37.4%, as Marty said, roughly flat to last quarter.

Moving then on down below the operating income line you will see that our interest income increased 14.5% as we had higher cash balances. And then we also saw realized gains from sales fee capital slightly exceed realized losses during the period, which gave us an EPS of $0.21, unchanged versus prior quarter.

Now before moving onto our Q&A, let me take a moment if I could, to quantity the impact of markets and FX on our original 2007 operating expense guidance which was $1.735b. In early February of this year we had said the guidance that we gave was predicated on the continuation of January 2007 business environment when our AUM was $468.6b. Our AUM levels are now about 8% higher than that.

Furthermore, our guidance did not contemplate the $100m WL Ross acquisition amount being reclassified as an amortizable intangible asset. Nor did it contemplate our re-listing and re-domiciling efforts which we believe will be completed in December. There are a variety of factors attached to this project that in total amount to a one time cost of approximately $12m and this $12m cost will be recognized in the fourth quarter.

Looking specifically now just at Q3, we incurred about $20m more in expense than our original guidance suggested. $5m of that was due to the WL Ross amortization. The other $15m was made up of $8m from FX and another $7m was due to expenses tied to higher asset levels. So for those of you who are keeping score, this makes the total year to date expenses $45m.

So lastly, let me just touch on our share repurchase program. It is very much on track. Year to date through November 7, we've repurchased 12.1m shares for a total amount of $158.7m, leaving $341.3m of the original $500m authority.

Which then concludes my prepared part of the presentation, so may I ask the operator to please provide instructions for those wanting to ask questions now?

(OPERATOR INSTRUCTIONS). Our first question will come from William Katz, Buckingham Research. Your line is open.

Hi. Thank you. And good morning, good afternoon everybody. Before I ask my question, you have gone very quickly. Loren, can you just quantify what you said were the transition costs this quarter?

The transition costs were the $7.4m of the owners lease charge. There were some other non-recurring elements which I can go through if you want though.

Okay. But you would view that as an unusual non-recurring item?

Which one?

The $7.4m.

That's an unusual non-recurring item, yes.

I just wanted to make sure I'm on the same page with that. Okay.

Martin, a question for you. I'm curious and maybe Karen if you could weigh in as well, recently the Department of Labor suggested that Stable Value funds would not be included in the target date retirement funds on the new pension plan reform. Given the challenges that you seem to be having here in terms of the ongoing outflow, what is the strategic benefit of having that business?

And then secondly, a related question, you talk very strongly about the Fixed Income capabilities, but we look at the flows of that business and it's very underwhelming. I'm curious when we could anticipate a change?

And the final question is could you give us a sense then of where you stand in terms of incremental margin from here? It sounds like there's a lot more margins delivered in this quarter despite all these one time start up expenditures, if you will. So a little more guidance there would be helpful. Thank you.

Yes. Let me make a couple of comments and Karen can chime in. The first part about your Stable Value comment, it starts with the underlying assumption that they only exist because it's a default option. Well in fact, that's not the case. Many of our clients have chosen Stable Value because they see it as an important part of their defined contribution portfolios and we think that's going to remain.

So that's one premise that I'd respond to. The other thing, the fact is we do very well and we will continue to do it well. And so that's really what Karen was addressing.

I think the other point about the Fixed Income area, and if you go back even a couple of years ago when I first got involved here, I think it's fair to say I've been in the business a long time, I didn't realize the strength and depth of the Fixed Income group. It really has not been a combined focus of the institution. And, by the way, even with that, there's $160b of assets under management.

So we have the capability where we think we have some real good strengths and we're going to continue to focus on it going forward. But I don't disagree with that the relative loans are not what we think they are capable of being. And success, in time, should change that.

Karen, would you add to that at all?

The only other things I would add to that is that when you talk about the importance of the Stable Value business and changes, the other thing with this Stable Value business, obviously we've got a large customer base. We have a tremendous customer base. And it gives us the opportunity to spend time with that customer base, talking about other things that we not only, as a full institution, can provide from the all of INVESCO, such as target maturity funds and other things, but even just in Worldwide Fixed Income, we have an opportunity to talk to them about things that are critical in the evolving fixed income market such as LDI strategies and other things.

So clearly, as it is one of the flagship product lines, it has also been an opportunity and a building block for us and we continue to think that that is going to go on in the future.

The other thing to your comment about, yes, the flows have been underwhelming, to quote yourself. I do think that what I would want to comment is you look across the platform, we have had growth in money funds, we have had growth in the (ForEx) Retail business on the Fixed Income side, we have had growth in the global assets, we have had growth in the financial structures market. So you are exactly right. If you want to take it in its totality, the flows are not what we'd like them to be, but there have been individual and underlying areas that have had growth in assets, and we think that that will be the building blocks for going forward.

And the other thing, Bill, I would just add, and the other factual matter is that -- not that we like it, but with the lift out which actually occurred, it slowed down our progress. We were really expecting quite more institutional success and that's where we think we're going to see the shorter term success. And that said, I think we're a very, very strong business and it just slowed down.

Okay. I'm still curious on margins. What would you consider then for this quarter to be an absolute run rate of expenses when you wash through all the noise?

This is Marty. I'll make -- I think we tried to present the information and we'd prefer that you make that judgment. And I think the other thing we talked about too is we're going to be very clear, very transparent, which I think you have the information to do that. I think the reality is we are actually, if you look at the market today, we're in a very turbulent market. And the natural question is where can margins go? They can go up and down based on the market and we feel right now we're in a very turbulent market. Hopefully we will be very focused.

Loren, would you comment?

Well, yes. Bill, the things I'd emphasize are the things that I think I went through which is marketing was definitely up in the quarter. We had some institutional alternatives on launches that -- they cost some money. But I'm telling you, the returns on that stuff more than paid for that. And I don't say that's a run rate. Those things happen when they do. So that's one element.

The property losses we discussed. There was a $7.4m one time owners lease in this. That's a non-recurring element. And then within G&A there was about $8m of what I would call things that are related to the PowerShares European product launch, and that is good stuff again. And hopefully we're going to continue to grow that so I don't know if it's recurring or non-recurring. But it's stuff that pays for itself. And then there were some other miscellaneous non-recurring things within that too that were not terribly material.

So, again, you take the numbers and you strip those things out, that's the run rate. But obviously it moves up and down based on where the outfits go and other elements in our business.

Okay. And then just one last question on the subprime discussion on the CDO portfolio. What type of economic impact would write downs occur? Would it be something that goes through the fund level or something to do with the IVZ level?

Well, the only place where we would see the impact, because we have some equity invested in some of our CLO business, would be in that area. Obviously it would have to be a fairly dramatic situation in the market for us to start writing anything down. We've only written down, I think, something under $2m on our total investment in that area.

So, again, you'd have to see the fall rates double and stay there for a long period of time for us to begin to worry about that equity investment. So we feel very comfortable with the feed money. And that's about $40m that we have invested there.

Okay. Thank you very much for answering all my questions.

Thanks, Bill.

Thank you. Our next question comes from Bruce Hamilton. Your line is open.

Hi. Morning guys. A few questions. Sorry, just a clarifying point. On the Stable Value, if I heard correctly, you've seen about $7.5b of gross outflows and you've been notified there is $16b in total. So is there another $9b to go? So I just wanted to clarify on that one.

Secondly, just in terms of the confidence on flows into Q4, clearly U.K. and Asia have been very, very strong. Has there been any impact that you observed in the pipeline from the continuing market turbulence and have you seen any sign of investors moving more cautiously, maybe positioning out of equities which is clearly pretty strong for you in the last quarter?

And then thirdly, on the operating margins, I assume from what you've just said, clearly there's some ebb and flow. But there's no real reason why you guys shouldn't move up to and through the U.S. average margins at around 40%, assuming some top line growth and continued cost discipline.

Maybe -- let me talk about the flows for a minute, and Karen can pick up Stable Value and Loren can talk about the margins.

Just on flows, it's the $1m question. It gets to -- we think the investment performance is strong. It puts us in a very, very strong position. We can say that's a prerequisite to success. But, again, in very, very turbulent markets, there's no question at any point in time investors become cautious and I think it's not unwise of everybody to anticipate a slowdown if that continues. But it's too early to tell. I think that's the reality at the moment.

And Karen?

Your conclusion on Stable Value is correct that, to date, we've launched approximately $7.5b and that we expect another $9b through the year end.

And then, Bruce, on margins, as we've said in the past year, we still have a reasonable amount of fixed expense in our base. It's usually two-thirds one-third, two-thirds plus one-third variable. The thing that's very important though is that we are very much wanting to grow the business. Obviously there's been a lot of transition over the last couple of years and we've been focused on gaining earnings momentum. And we've certainly demonstrated that. And we've got ourselves, I would say, to a level of competitive margin that is certainly respectable relative to the other global asset managers.

We do plan to balance savings with investment going forward. But we absolutely need to invest in our business in order for us to be the world class global investment manager that we aspire to be. So our expectation on margins will really fall on where the markets go, probably as a primary point. But we're always going to continue to strive to find efficiencies in our business. And we are still about halfway through, I would say, our overall plan in terms of moving to a global operating platform.

I know that's not explicitly giving you the numbers you probably are looking for, but the story's still intact. Everything we've said in the past is still the same story in terms of what we're trying to achieve.

Thank you.

Welcome.

Thank you. Our next question comes from Philip Middleton of Merrill Lynch. Your line is open.

Yes. Thanks very much. I just wondered if you could tell us a little about where the inflows were coming from? We've heard a bit about the outflows. But what actually has been selling well? In particular the institutional numbers look very strong. Where -- what sort of product is that representing?

And also I just want to get some idea of how much of the retail flows are PowerShares. I've got my own idea, but I wondered if you've got anything to say there.

Hi, Philip. It's Loren. Well, I guess probably the best place to go in terms of seeing what's happening on flows would be the tables in the back that we provide in the press release. And I think you'll see, if you look at alternatives by asset class going from June to September, we had about $2.5b of new alternative assets coming into that category. And that's in the private equity area.

And then we also saw, there's another cut, strong equity inflows. And again, great strength in the U.K., great strength in Asia, I'd say, in particular, are driving that area.

Okay, if they're institution -- so what you're saying is institution -- the $5b odd of institutional flows ex-Stable Value was $2.5b of some WL Ross products and, beyond that, largely U.K. -- largely equity mandates. Is that what you're saying?

I think that's probably the predominant elements taking place, yes, I'd say.

Okay. Thanks. And PowerShares?

The PowerShares, I believe that the total number obviously is relative. I think it's about $13.8b, $14b in total assets under management is the current number for PowerShares of AUM. Is that your question, Philip?

Well actually how much of the Q3 flows were PowerShares?

I don't think it was actually -- actually, that's a great question. I don't have that offhand. Let me see if I can find it. I don't think it was particular page numbers, yes.

Thanks.

Our next question is from Marc Irizarry, Goldman Sachs.

Hi everybody. It's Marc Irizarry, Goldman Sachs. Just a question on the turbulence, Marty maybe for you, in terms of the impact of the turbulence in the markets on institutional investor behavior. What are you seeing in terms of -- obviously liquidity appears to be picking up not only for you guys, but other places as well. But what are you seeing on the margin in terms of institutional behavior, maybe in terms of RFPs or mandates and in terms of how the institutions are responding? Thanks.

We've not really seen a downturn. Again, I think institutions tend to be longer term viewers in the areas where we're of particular interest largely in alternatives right now. We illustrated the other area that we talk about where we see great success. And Russ Kamp talking the unstructured products, and UB, lots of interest. That's is one. And also the other area where we get is a lot of the international equity stuff, the -- on the platforms, the international growth team in particular.

So, again, I think we're -- I still think people are trying to sort out where the market's going to go. And I think what might be more telling if you look at in the quarter mutual fund flows in the United States, if you want to look at that as an indicator, what you did see is you saw domestic equities in outflows, quite strongly during the quarter at the industry level.

So, again, I would just be speculating, but, as far as we're concerned, what we're seeing right now factually is we're on the same path as we have been institutionally.

And is the composition of your institutional pipeline the same as it's been, i.e. no change?

It's not changed. Really the same asset classes are of interest to people.

Okay. Great. And then just a question on fixed income, whoever is best equipped to answer this one. Can you tell me what your fees are on your CDO products? And then also what gives you the confidence going forward that we're not going to see more credit downgrades there and that may be the position that your exposure there maybe is a little too high.

And also, can you give an indication of where NAVs are for the CDOs for October and November? Thanks.

I don't know that we'll get to NAV discussions on portfolios. But I think what we were trying to accomplish with Karen in particular is that we can't predict where the markets are going to go. But by her commentary, which I think was quite broad and quite specific, even with very turbulent, very aggressive downgrades in the market place, we've done very, very well. As of September 30th and as of what we know today, I think that's really the context of the whole thing.

Karen, what would you add to that?

Obviously, we look at it and actually from the CLO side and the bank loan side, you're seeing actually market defaults actually are at historical low levels right now as opposed to high levels. And that we are typically in the -- senior secured corporate bank loan make up about 90% of the underlying securities. And so that we look at them clearly, so get mark to market on a monthly basis, and we do look at them, but we think, as I think it was Loren indicated before, that default rates would have to go up in multiple fashion before we would have to see anything material on those products.

And I -- and on a basis point they range between 50 and 62.5 basis points in terms of fees. And in terms of downgrades, my crystal ball is not working on that one.

Great. So this seems to be a lagging indicator, maybe, of what's happening. And then in terms of -- actually, Marty, I'm sorry, this is a question for you, Loren, on other income. Looks like that line item moved lower. Any help in terms of what we should expect for other income? And can you just remind us what's in there? Thanks.

Yes. The other income, it's hard to predict. It's probably the thing that I'd have the least ability to forecast going forward. And so I think there's a certain amount of normal volatility in that line item. So I'd -- actually I'd have a hard time telling you exactly what to expect there on an ongoing basis. It's not something we manage, per se.

Can you just maybe give me -- round up what's in that line item?

Let's see. Yes, real estate. So we have real estate is one element. We have front end loads associated with retained retention of front end loads, again generated somewhat by sales in the U.K. Is there anything else that we (inaudible). Transaction commissions. Is that good enough for you?

Sounds like a hotchpotch.

It is a hotchpotch. Yes, exactly.

Okay. Thanks a lot.

Okay. No problem.

(OPERATOR INSTRUCTIONS). Our next question comes from [David Dorg], [Bound Shore].

Hi. Good morning. I was just wondering, this morning you put out a release with your assets under management for the end of October. Looks like Stable Value is down by about $4b and your Money Market was flat. Granted I make every effort to try to take into account all the pieces. But it would appear as though that your net flows looked actually relatively strong for October. I was wondering if you could comment at all about any areas where you saw strength in the month. Or maybe I was wrong on my calculation.

I guess one of the things that -- obviously we don't disclose flows on a monthly basis, so I do think the only that clearly had some strong impact on the month of October, without coming specifically on flows were FX and the market, both were significant players. So, again, Marty gave his view about where he thinks flows are going. Obviously, there's some question marks generally as to what is going to happen for the fourth quarter. So I think we'll just wait and see how that pans out, if that's all right?

If I can just push a little bit more? I was trying to take into account the improvements from FX and some type of guesstimates on the SMP, Europe and Asia. I was just wondering if there's anything that stood out for you guys from a flows basis?

Again, I think Karen may have mentioned some. We still see strength in some of our CDO platforms. We're still able to do some of those things. Again, we do feel that there's great opportunities in the alternative platform. We have things in the pipeline. So there are any number of elements we're very optimistic about. We just have to offset that with whatever reality the marketplace may bring to bear.

Terrific. That's helpful. Thanks.

Thank you. Our next question will come from Simone Glass, UBS.

Actually, my question has been answered. Thank you.

Just one thing, for Philip Middleton's benefit, since he's not on the call, we had $1.2b in inflows, net flows of PowerShares products in the quarter.

Our next question will come from Martin Cross, HSBC.

Yes. Good morning to you. Just a question on the net debt you have reported coming down from $330m to [$421m]. Is this -- I appreciate this is part of a program, but is this a timing issue? The cash balance has built up before the interim dividend was paid or is there more to it than that?

Well obviously we still have the $500m buyback in place which is going to be a commitment to cash. We also have the expectation, at some point, to be paying out cash to our PowerShares folks. They have $130m contingent payment that needs to be made. Same with WL Ross). There's a contingent payment that could get paid up to $55m. So there are various elements that I would say might offset that number, although I think the general point is obviously we're cash -- in significant cash generation mode and that's the way we should be.

And the way we think about our leverage and our cash is we want to maintain our BBB+ A3 rating. We feel that that's important to our business, and then we're going to manage our debt and our cash position to target that credit rating.

Okay. Thank you.

Thank you. At this time our last question will come from Andrew Mitchell, Fox-Pitt Kelton.

Yes. Thank you. I wonder if I could ask about the performance slide, slide nine? I was just interested if you could perhaps add a little bit more on that because if you just look at the, as you highlighted yourself, if you look at the sequence of relative performance, September does not look so good. And yes, on the next slide I think you're showing that the Morningstar ratings have notched up at least one category.

I was wondering if there is some stretch to those ratings as a result of the September dip and whether that's likely to have a noticeable impact on the retail flows going forward.

Yes, great question. I think the best thing we can constantly point to with regards to Radiance is relative performance and I think, importantly, if you look at where we were November, Morningstar in particular improved quite strongly. So we would anticipate that. Again, we're not driving that bus so I can't respond with any accuracy.

And, again, I would point to the relative star ratings of what we think are important categories for us. And right now I'd say we're positioned pretty well to be competitive and to grow.

Thanks.

Thank you. I will now turn it back over to Marty Flanagan for closing comments.

Again, thank you everybody for joining us today. And I think despite what was maybe an interesting and challenging third quarter for the whole industry, we continue to generate strong operating results and, again, I think this is reflective of our continued focus of operating discipline, focus on accountability, transparency, as you see through these conversations, and execution.

Importantly, we're very focused on delivering the combined power of our distinct worldwide investment management capabilities. And today I think you heard two examples of that, particularly come through Karen Dunn Kelley and Russ Kamp on Structured Products Group. And I think we all realize and recognize that we could be in some challenging markets here and over the short term. And we remain very focused and aware of that and will react accordingly, but with an eye to continue to strengthen our position and to grow.

And we think, as a global investment management organization with some growth. Four or five investment teams, our global footprint and a strong client focus, we think we are just improving our position to be very successful over the long term.

And with that, again, I just want to thank everybody and we'll talk to you next quarter. So have a good rest of the day. Thank you.

Thank you. That does conclude the conference for today. Please disconnect all remaining lines at this time.