景順投信 (IVZ) 2007 Q4 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.

This call may include statements that constitute forward-looking statements (inaudible) 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 for general economic conditions.

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Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not materially differ from our expectations. We caution investors not to rely unduly on any forward-looking statement.

In connection with any forward-looking statements, you should carefully consider the areas of risk described in our most recent annual report on Form 20-F and our subsequent quarterly report on Form 10-Q as filed with the US Securities and Exchange Commission. You may obtain these reports from the SEC's website at www.SEC.gov.

We expressly disclaim any obligation to update information in this or any other public disclosure if any forward-looking statement later turns out to be inaccurate whether as a result of new information, future events or otherwise.

Welcome to the Invesco fourth-quarter results conference call. (OPERATOR INSTRUCTIONS). Now I would like to turn the call over to the speaker for today, Mr. Martin L. Flanagan, President and CEO of Invesco. Mr. Flanagan, you may begin.

Thank you very much, and thank you, everybody, for joining us today for our 2007 year-end and fourth-quarter briefing. I am joined today by Loren Starr, our Chief Financial Officer, and I will be speaking to the presentation which is available on the website if you are so inclined to follow that way.

I'm going to give a brief overview of our operating results, and Loren will get into greater detail on the quarterly financial statements, and then, most importantly, we will open it up to Q&A.

So if you take a look at the financial highlights for 2007, it was a record year for Invesco. During the year we continued to make great progress against the multiyear plan that we laid out in 2005. We continue to build momentum in our business, which resulted in record earnings for the Company this year. And importantly, in December we successfully moved our primary listing to the New York Stock Exchange from the London Stock Exchange, and also during the fourth quarter, Wilbur Ross and his team successfully closed on his very popular Recovery Fund IV. I would venture to say Wilbur and his team are really one of the most recognized distressed investors in the marketplace, and the market environment that we are in right now really plays to their strengths, and we think there are a number of opportunities for the skills of distressed investing in different parts of the world in which we operate.

We ended 2007 with $500 billion in assets under management, up 8% over 2006, and we achieved a record earnings, which I spoke of of $674 million, earnings per share of $1.64, which is up 37.8% year-over-year. And also the net operating margin improved sharply during the year, increasing 4.6 percentage points in 2007 to 36%.

And if you look at some of the key financial metrics, it really helps put the 2007 results in the context of the journey we have been on since 2005. We have done what we set out to do as we discussed where we were heading in 2005.

We have really improved the client experience, which resulted in improved operating results and put this positive momentum back into the business, which resulted in clear improvements in the organization, a much better result for our clients and also for shareholders. And I think if you just look at the increase in the level of assets under management, operating income, net operating margins and earnings per share, they speak for themselves.

Our business base is much stronger than it was in 2005, and we think we are in a position today where we can absolutely improve our competitive position and take advantage of opportunities as they present themselves in this very turbulent marketplace.

On balance I would say we had a good year in terms of making progress against our strategic direction, and I would characterize the results of 2007 as very solid.

If you take a look at annual long-term flows over the past two and a half years, importantly the composition of those flows have improved quite dramatically. Clearly we're not where we want to be, and we have more work to do in this area. But the underlying flows are absolutely heading in the right direction.

If you take a look at gross sales, and I would highlight this as really a real important health indicator, in 2007 they were the highest levels since the year 2000 and almost a 40% increase year-over-year. Net flows, including stable value, were off $3.4 billion during the year. But if you exclude the effect of stable value, we had net inflows of $12.8 billion in 2007. On either metric, whichever one you pick, it is a vast improvement from the net outflows we saw of $16 billion in 2005.

On that note, we are very optimistic about the future of our stable value business. We think it is one of the best teams in the industry, we're very committed to the business, and we think we are now at a point where the outflows associated with the events of last spring have largely run their course. There's some legacy redemptions of approximately 1.5, maybe $2 billion in this quarter that we are expecting, but other than that, it would take its normal course from that point of view.

So let's take a look at flows in more detail. If you look starting, we had assets under management $462 billion. We experienced net out-term flows of $3.4 billion, which I just had mentioned. But we had very strong flows in the Money Fund business, which grew $10 billion during the year, giving them two consecutive years of very solid growth. We have an absolutely outstanding capability in this area, and the investment results during this very difficult credit market reflects that strength.

Market gains boosted assets under management by $21 billion during the year, and foreign exchange added another $10 billion. We ended the year 2007 with $500 billion in assets under management, again up 8% year-over-year or $37.5 billion.

When you look at the averages, you can see that, in fact, the average long-term assets and the average money fund assets reached higher levels, and in particular, on the long-term assets, the difference is largely due to the steep declines in the market in the latter part of 2007.

Also, another thing I would note is the net revenue yield, excluding performance fees of about 2.7 basis points on the sale of higher fee assets and offset by the redemption of lower producing products.

Now let's take a look at investment performance, and clearly it's one of the most important indicators of any investment management firm's success. And over the long-term, you can see that the firm continues to generate strong, solid investment performance. On this chart, it takes a combined view of the organization's investment performance, and the retail assets are a benchmark against peers and the institutional assets are benchmarked against industry benchmarks. You can see that 70% of our assets under management at December 31 on a three-year basis on an asset weighted basis are beating either one of those two benchmarks.

If you take a look at the highest level, the investment performance on a one, three, five-year basis and looking at the percentage of assets in the top half versus peers, you can get a sense of where the organization is. I think we are all keenly aware of the volatility in the market to say nothing of 2008, but through the end of 2007, it was a very volatile fourth quarter. The S&P was down 3%, but down 10% from its peak.

And let me take a minute just to highlight some of the performance. And, as you would expect, there is greater volatility in the December 1 year number quarter-over-quarter because of this result.

On the US retail business, the performance was largely unchanged on both a Lipper and a Morningstar basis. But one thing that I would like to note is you might have seen Morningstar recently came out with their annual report of the largest, 20 largest domestic equity fund shops looking at performance on a three-year basis. AIM ranked 12th out of 20, and that is clearly not where we want to be. We clearly want to continue to move up those ranks.

I think we have the team in place to do that, but the thing I would like to highlight again on this journey is that AIM had the third greatest improvement in relative rankings during that period. So the direction is quite strong and heading in the right way, and again I feel confident in the performance that is being generated by the team in place.

If you look at Trimark's performance, it continues -- appears to be a challenge during the period. And again, currency and resources were the biggest headwinds during 2007, and I think if you look at the five-year number, the both influential element and the decrease in the five-year number was the year 2002 rolling off, which was just an outstanding performance year.

And as we enter 2008, it appears that resources and currencies will not have the same headwinds that they had in 2007. And if that is the case, we anticipate improved relative performance, and again it comes back to the strength of the team, which we think is very, very strong, and their high convictions to their process, which over time has generated very, very strong results for investors, and we are sure that we will turn return to that level of relative performance.

If you take a look at the institutional business performance, and it is measured again percentage of assets against relative benchmark, the equity business, if you look on a one-year basis, it appears that it has deteriorated. But it is literally 43 basis points below the benchmark, so it is right at that tipping point. There's nothing setting off alarm bells in our mind, and if you look at the fixed-income business, that performance continues to improve on a one-year basis and continue that strong three and five-year performance.

The Money Fund products again continues to demonstrate strong performance over all periods, and again during this period, they are generating absolutely standout results in this unprecedented difficult credit markets.

And then moving on finally to alternatives, we continue to have a very strong three and five-year performance. The relative falloff from the one-year number is largely due to some asset allocation products, [PCAA] overlays, which are literally 11 basis points below benchmark, so nothing that we're concerned about. Again, we think it is a very, very strong team, talented team, and we will continue to do very well for clients.

So I'm going to stop there and hand it over to Loren.

Well, thank you very much. I'm going to turn to the financial highlights, looking at the quarter-over-quarter results. And although the period ending AUM decreased during the quarter by 1.4%, we did have higher average AUM levels, which boosted our operating revenue by 4.8%. The operating income declined 5% quarter-over-quarter, but this was almost all due to the $22.6 million charge that we took as described in our release from the relisting and from the final settlement of market [toning] private litigation that stemmed from 2003.

This charge actually had a $0.04 negative impact on EPS and pushed down our operating margin 2.9 percentage points in the quarter. Excluding this charge, EPS would have been $0.47, and net operating margin would have been 37.3%.

Now let's turn to the flows, which you can see, and Marty described broadly for the year, has continued on in the quarter. We had Q4 gross sales at $31 billion. That was 35% higher than Q4 in 2006 gross sales. And redemption and growth increased in the quarter as expected, but this was, of course, the remainder of the stable value outflow taking place.

In order to give you a clearer picture of the underlying organic growth in the business, we show on the right part of the chart our long-term net flows, excluding stable values. You can see on this basis that Q4 would have been $3.9 billion in positive long-term net inflows. And as Marty mentioned, we believe that after Q1, the bulk of these redemptions on stable value are going to be past us.

Going to the next page, on institutional money markets, we feel very strongly that this is a business that is poised for further growth. Despite the challenging credit environment, we are very pleased to see that the money market AUM increased $3.4 billion to $71.1 billion in the quarter, reflecting the strength and the quality of our institutional capabilities.

And, in fact, during the month of January, we have seen an additional net inflow of $3.5 billion for the total money market AUM of $74.6 billion is where we are at at the end of January.

By adhering to our disciplined investment process, we believe that we have come through this quarter very well positioned within the industry, and as we previously discussed, we have no exposure to SIB or to subprime commercial paper, and furthermore, we have not repurchased any securities out of the portfolio, nor have we been impacted at any point by downgraded or defaulted securities. But everyday seems to bring new challenges, of course, and for the municipal money market fund, the recent rating agency downgrades of certain monoline bond insurers have made headlines since approximately half of all municipal securities issued in this market are insured.

But beginning last fall, our credit team began to proactively shorten maturity and reduce their dollar limit to the sector, and as a result, at the end of January, we have a very limited exposure to monoline bond insurers, about $850 million, and that is only for two insurers, both of which are rated AAA by all three rating agencies and nearly 70% of this exposure to the financial securities insurance, which is owned by [Dexia] with the remainder of the exposure to NDIA.

Now the other point I would like to make about where we are is about 90% of the current monoline exposure that we have consists of securities that are structured with seven day to one month liquidity put to highly rated banks for full repayment of principal and interest. But the bottom line is that we remain very comfortable with the credit card quality of our money market investment, and we do not expect the current issues on the monoline market to cause any credit liquidity problems for this portfolio.

So with that, let me turn next to our flows by distribution channel. You can see on the next slide that retail gross sales grew about 6.5% quarter-over-quarter, and that was driven in particular by continued strength in our UK and Asian businesses. Q4 retail net flows came in at $1.2 billion as a result.

We also show the institutional net sales, but again this time excluding stable value to give you a more clear picture of the underlying growth. You can see that we ended up with ex stable value of $2.5 billion in Q4, resulting from good growth in our alternative products as we discussed whether Ross and (inaudible) had finally closed on their Recovery Fund IV, bringing in $1.8 billion during Q4 and adding to the $2.2 billion they raised during the third quarter. And then to the far right, you will see our Private Wealth Management business came in with positive net flows of $0.2 billion during the quarter, continuing a reasonably good positive trend.

Let me next now go to our asset roll-forwards, and as you can see, we have already covered the flows. During the quarter, though, we did see declining markets and FX, which led to $5.6 billion of a decline in AUM. As a result, we ended the quarter with $500.1 billion in AUM to the decrease of 1.4% since the end of September, but again as previously mentioned, average AUM increased 3.1% quarter-over-quarter.

We also saw an improvement in our net revenue yield in the quarter as we did for the full year as Marty described, and that was both including and excluding performance fees. And this is a trend that we have been seeing resulting from lower fee asset redemption being replaced by higher fee asset sales. And so also when you include performance fees, you saw that our net revenue yield increased 1.9 basis points to 60.1 basis points given the somewhat higher levels of performance fees that we earned in the quarter. And if we go to the next slide, we can talk about that more fully.

So operating results Q3 versus Q4, you will see that quarter-over-quarter the management fees grew by 3.1%, which is in line with our average AUM growth. We saw in the fourth-quarter performance fees of $13 million with the majority of that being derived from our UK investment trust.

Our service and distribution fees, which as you know probably are largely driven by US retail 12b-1 fees and transfer agency fees, were basically flat to Q3 levels. Other revenues were up 41.7%, so resulting from increased sales in the UK and Asia and also due to institutional real estate transaction fees. The result of all these items, total operating revenues grew 4.8%.

Now just to take a few seconds just to transition us from IFRS to US GAAP, I just wanted to note that under US GAAP we do not show net revenues anymore in the face of our P&L, and third-party distribution service and advisory is now found as an expense line item and cannot be netted against service and distribution revenue.

The other major change to the P&L under US GAAP is that we can no longer proportionately consolidate joint ventures, operating revenues and expenses. As you know, we have a 49% stake in a very fast-growing joint venture in China with about $15 billion in assets under management. Proper accounting under US GAAP requires that we show these results for this business below the line in equity earnings of unconsolidated affiliates. That will be all I will talk about that right now.

But moving on down the slide, you will see that operating expenses for the quarter at $779 million increased 8.2% in Q4, and within that number, compensation expense increased 2.9%. We granted $73.5 million in deferred stocks to employees at the end of the third quarter, and this added about $6 million in amortization in Q4.

In addition, we saw sales commissions increase by about $2 million, and it was related to the sale of higher fee products and in particular related to the launch of the WL Ross Recovery IV Fund.

Another point that is worth mentioning here is that all the intangible amortization associated with the WLR & Co. acquisition is now classified as compensation under US GAAP. Previously under IFRS this cost was found in our G&A line item. And just to remind you, this non-cash cost is $5 million per quarter.

If you will continue to move on down the P&L, you will see that third-party distribution service and advisory costs increased during this quarter by 5.2%, and that was driven by higher asset levels and also a continued trend towards platform and supermarket sales in the UK. Marketing as a cost was up 7.3% in the quarter, largely due to increased advertising in Canada.

We saw property, office and technology down 9.5%, and this was a result of the $7.4 million onerous lease charge we took in Q3, which obviously did not reoccur.

And then on G&A, we saw this quarter an unusually large level of G&A costs. But that is all pretty well explained. Within G&A there was a charge of $22.6 million, which consisted of the $12.8 million related to the relisting of the Company, and we also had that $9.8 million related to the final legal settlement of the 2003 MDL private litigation.

But, in addition to these charges, there was also $12.5 million of what I would characterize as largely onetime expensive. More than half of it was due to proxy costs for our US retail business. We had legal costs related to achieving the legal settlements in the quarter, and we also had costs associated with the transfer of our DC record-keeping platform in the UK to Threadneedle, which was just recently announced.

So below the operating income line moving down there, you saw equity earnings of unconsolidated affiliates increasing 40.9%, and again as discussed, this was due to the growth of our joint venture in China, which we own 49% of.

Interest income declined 16.3% due to lower cash balances as we actually executed the repurchase of our stock buyback program. And other realized gains were up in Q4 as we recognized gains upon the sale of several key capital investments, which ended up with quarter-over-quarter EPS growth of $0.02 or $0.43 per share.

And moving to the next slide, let me give you a quick update of how we did against the expense guidance we gave. Just to remind folks in early February of this year, we provided expense guidance of $1.375 billion, but that was predicated on a continuation of our January 2007 business environment when our AUM was $468.6 billion, and as of December 2007, we have discussed our AUM levels are now 6.7% higher.

Furthermore, our guidance did not obviously contemplate our adopting US accounting standards, nor does it contemplate many other things that happened in the year, including our relisting efforts or the legal settlements to name just a few.

But you look to left part of this graph, the first three bars are used to bring our operating expenses back to an IFRS equivalent figure, which is $1.835 billion. Then stepping to the right, we show variances, the first one due to the combined impact of market appreciation and a weaker dollar amounting to $47 million in extra expense. Second, we saw the variance due to relisting, the legal settlement and other onetime costs in the fourth quarter amounting to $35 million. And then finally, we incurred $25 million of non-cash amortization related to the WL Ross acquisition during the year.

So taking all these elements into consideration, we ended up roughly where we thought we would for 2007.

You may well be wondering if we are going to be providing expense guidance for 2008, and perhaps you can also appreciate the complexities of doing this given the current volatile market environment. In fact, the financial plan that we put together in October last year when our AUM was at $521 billion clearly is irrelevant today.

Therefore, what we've decided to do is really just appoint you as the most appropriate guide to our most recent quarter results for expenses, excluding the onetime element. And, of course, recognizing that many of these elements within our expenses such as bonus pools, commissions and distribution costs will vary with revenues and sales. And we can also help manage costs obviously to some extent by slowing down certain non-essential initiatives and projects only to the extent that we need to do that.

But, of course, looking forward to 2008, we will continue to find ways to generate efficiencies as we move closer towards our strategic objective of having a true global operating platform. And as we did last year, we will balance cost savings with reinvestments in the business and pursuing new long-term opportunities. Just to remind people, we reinvested about $42 million of our $66 million in cost savings last year, and we would expect to maintain this type of discipline and approach going into 2008.

Let me now move to the final page, the capital update. As we have discussed in the past, our first capital deployment priority is to reinvest in the business, which we've spent followed by acquisitions, and we think they make strategic and financial sense, then dividends and buyback. We declared just recently a final 2007 dividend of $0.22 for a total 2007 dividend of $0.384, and this represents a 6% increase from last year's dividend of $0.362.

As we have mentioned in our earnings press release, we will transition next to a quarterly dividend payment moving into 2008.

Also, let's just talk a little bit about the share repurchase program. Clearly we continue on track with this program during the year. We repurchased for treasury 12.9 million shares for $345.5 million, which leaves about $155 million left of the original $500 million authority.

We also, in addition to this amount in the fourth quarter, bought 8.4 million shares or 217 million for the employee share award trust, all of which were counted as treasury purchases.

So consistent with our capital priorities and our growing free cash flow, we would anticipate share buybacks to be an important part of our capital strategy going forward. But I need to mention that we will balance this, of course, with our desire to remain BBB+ and AAA credit ratings.

So with that, I'm going to turn it over to Marty now who will have a few final comments before Q&A.

Okay. Can we have any questions, please?

Excuse me, operator. We are open for questions at this time.

(OPERATOR INSTRUCTIONS). Michael Kim.

The first question I had in terms of flows kind of given the recent market volatility, are you guys seeing any kind of broader industry trends in which retail investors may be starting to allocate more money away from equity and into fixed-income and money markets?

Just more specifically, how do you think Invesco is kind of positioned to retain those assets such that when the money starts to flow back into longer dated products, you will be able to recapture those assets on that end?

You know, you're asking a question that everybody is asking, all of us, even the participants. From our point of view, like everybody, very very hard to predict where the industries -- where the markets are going, and our focus has been really on building out just a broad deep product lineup. We, as we have talked about, we have a very, very strong fixed-income capability. Especially the short duration type products are very, very strong, and we feel we're in a position to, if, in fact, investors choose to seek safer grounds in their opinion that we can meet that.

But I think it is too early to predict what the long-term or if you look out for the year what is going to happen. There is no question I think if you just look at -- public data of industry flows, that investors become quite nervous in the equity markets as you would anticipate.

Okay. And then in terms of performance, how should we be thinking about the drivers to continuing to kind of move up the performance rankings? Is there any kind of hurdle rate that you think about in terms of maybe the percentage of US assets in the top half of respective Lipper peer groups? Do you think anything is really required in order for AIM's flows to kind of turn more meaningfully positive?

Yes, I think that let me talk about our focus as an organization. I think, first and foremost, it is about the people, right. It is about attracting, motivating, getting the best people in the best places to do things for clients, and I think we have made great progress in doing that. And, as we have talked about, if you look at the retail channel, the broader Invesco product lineup is very broad, very deep, and performance is improving. And I also think a number of the changes we have made over the last couple of years have improved the strength of the team, and I think you're seeing that in the performance.

I think the other reality is that the Morningstar rankings are important, and flows continue to go into four and five star rankings, and our focus 85% of our flows are into [waive] fee products, and on that basis our star ratings continue to improve. And I think that it is just -- you know very much a reality. And the more we continue to move up the rankings, I think you will still see the change in the flows accordingly.

And if you look at the past year, I think also if you look at the relative flow position, it has improved quite, quite strongly, and we have some real areas of strength, and again I can't get in a position of predicting where flows are going to go. But our goal is to be ready as investors' preferences change that we will be there to respond.

And then maybe a question for Loren. Just kind of assuming that the equity markets remain volatile, you spoke to this a little bit previously, but how much flexibility do you think you have on the expense side to defend margins, and what are some of the areas that you think you could scale back relatively quickly? And then maybe more on that point, you talked about balancing incremental cost savings and ongoing investment spending as we kind of look into '08? Is it fair to say that kind of the net effect should be that the cost savings will exceed any kind of incremental spending here in the near-term?

Michael, I think for us right now our biggest challenge has been for actually last year is that we see so many opportunities going forward in terms of future investments, things that are going to help grow the business. And we want to do them all obviously, but there is a limited capacity to do that.

So I would say our biggest challenge right now is not so much thinking about margins, it is really how do we focus on what those key elements are, how do we fund those while maintaining reasonable financial disciplines? The reality is for any asset manager, there is a limit you can do with your expense base. As market decline dramatically, your expenses cannot possibly move as quickly as the markets can.

But we obviously have, and we have said in the past, we have a fair amount of our expense base that is variable. You know bonuses and commissions and those parts will tend to move in line with assets. We have some flexibility in terms of slowing certain non-essential projects down, but at the same time, we don't want to sacrifice anything that is going to be important to our long-term future.

So it is one of these balancing acts. The good news obviously is that we have done a lot in terms of creating new efficiencies in our business. We continue to be able to drive through new efficiencies into '08, and we can use some of those savings to help fund some of these growth opportunities.

So I know that is not explicit guidance, but I think it should give you a sense of what we're trying to do right now, which is balancing obviously the savings that we have put into place through all the activities we have been doing for these past two years in order to fund what we view is really, really attractive future growth opportunities.

Okay, that is helpful. Thanks a lot.

William Katz, Buckingham Research.

Maybe to pick up on that last point, I noticed that your headcount increased sequentially maybe for the first time in a bit of time. I guess the bigger question from your comments from both you guys it does seem like you are transitioning a little bit from more of a defensive to an offensive mode. Maybe I'm reading too much into that, but is that a fair assessment, and at this point in time, again adjusting for these very volatile markets, that the incremental margin outlook at this point would be more a function of topline growth than sort of underlying efficiency gains?

Yes, this is Marty. As Loren talked about earlier, we think we have really strengthened business quite a bit over the last two and a half years. And we are very confident as an organization, and we have identified the most important initiatives that will make a difference for us as an organization.

Where we were sitting in August, and like probably most management teams where sort of wary of the future during that process, we identified all the things that we would like to do, and in a more constrained environment, we are going to continue to focus on things that will absolutely make a difference and really have an impact to the organization. And we think that we want to use this environment to improve our competitive position.

That said, we are very cognizant of making sure that we strike that right balance. And the challenge in front of the organization is to make sure we're spending the time to absolutely make a difference for us. So I don't know if I'm answering your question clearly enough though.

(inaudible) satisfactory. And the second question I have is, just as you think through capital deployment into '08, it seems like you have a pretty healthy conundrum of very strong free cash flow against what seems to be limited product needs. I'm just sort of curious if given where the price is relative to your long-term earnings expectations, how you are thinking about cash flow, and if there are other products that you feel like you need, what and/or where might those be?

Well, again, the reality is you saw internally the areas where you think the opportunities are, they are quite vast. We continue to look at our Asian businesses. Quite a bit of opportunity. WL Ross continues to be quite a bit of opportunity for us. The fixed-income business is another area where just as we keep talking about, as we continue to come through this period with the performance that we had on the fixed-income side, we see continued opportunities there.

Also, the ETF business, which as you know from the United States we've now introduced it into Europe, Continental Europe, the United Kingdom, we see other opportunities for it, and possibly Canada and into Asia. So there is not a lack of what we think are opportunities. But we are -- this might help answer that question you asked before -- the issue is a matter of timing.

In a different market environment, you might go forward in a market with some of those things where you think it really is not going to make a difference. But again, those things where we think we can actually make a difference today we will go at pretty hard.

So it sounds like, if I understand correctly, then that a lot of the incremental growth is from products that you already have. So the basic premise of the question is, should we anticipate that buyback would be the dominant use of cash flow in '08?

Yes, I think that would be the case sitting here today.

And then sort of a very tactical question but for Loren. I am just sort of curious, your distribution margin, it looks like it tightened up pretty significantly sequentially. Your revenues were flat, but your expenses did step up. I am just sort of wondering if you could talk a little bit about some of the underlying dynamics there.

Sure. One of the things about our distribution revenues is that is largely a US-driven kind of concept with the 12b-1 fees. In the UK and in Canada, you basically pay for distribution effectively through the management fee. So the management fee can grow, but you see as an expense that line item growing without the associated revenue coming in.

So it is a really a little bit of an apples and oranges comparison, and what you really have to do in order to look at that is kind of look at the UK management fees against these UK distribution expenses and kind of look at that. But we have seen as the UK has been growing and continues to grow, that margin has been sort of, you know, that you're looking at has been tightening just because of the success of the UK business.

I see. Okay. Thank you.

Mike Carrier, UBS.

Just another question on the cash flow. I think you kind of gave the balancing buybacks versus maintaining your credit rating on the debt level. But just in terms of the balance sheet, we're looking at the cash flow versus the debt level in the rating agencies, like how much excess cash do you need to feel comfortable versus what you think you can do on the buyback side?

Michael, one of the things that we need to do, which is probably an element that is a challenge for us is because we have large operations in Europe and the UK, whereby regulation required to maintain cash balances there as part of the capital requirements, capital adequacy directives. So there's probably around $650 million of the cash balance that really is there to -- it is really usable within that regime, but it is not something that one could use, for example, to buy back stock. So I think that is one part of the discussion.

Obviously the other part of the discussion is we do think that there is going to be obviously significant cash flow coming from the business that has been a growing part of the story. We would I think comfortably hope to be able to buy back stock with reasonable pace without running into rating agency issues. And that is particularly complemented by the general strength of our business and improving flows, which also helps in terms of the dialogue with the agency.

I put that comment in there really just as a reality point, which is there is a limit to what we want to do. Because we don't want to be downgraded, and thus, that is always going to be the consideration for us.

Thanks. Just another question on some of the newer products. It looks like the SEC is moving forward on the active ETF front. Just your guys' view, obviously you are well positioned, but just the market opportunity, where you are seeing demand in terms of different distribution channels and anything you think of on the fee side. Obviously you cannot give too much disclosure, but just any color you can provide.

Yes, I think stating the obvious, we have been very, very pleased with our association with PowerShares, and the fundamental premise two years ago when we teamed up with PowerShares was a broadening of the use of ETF in the marketplace. And it is a complementary really structured to the open ended mutual fund and also very complementary to our quote business, which is very much active management.

The leadership that Bruce Bond and the team brought with Intelligent ETF has really been quite successful. I would also suggest that we're probably in the early days of the success of ETF. And there continues in our opinion to be quite a bit of opportunity in the advice channel for ETF in time. And the SEC considering active ETF is really a natural progression for that structure. And again, my personal point of view is all of these structures have their place, whether it be an open-ended mutual fund, an ETF or a closed-end mutual fund. And again, we leave through the leadership of Bruce Bond and the PowerShares team. We have a leading position there, and we continue to look to participate in the growth in that market.

Okay. And then just finally on the international business, you guys have a lot of exposure to UK, Europe and Asia. I'm just wondering over time do you think you can do anything -- I am just looking for additional leverage -- but anything to try to get the tax rate down?

Michael, thanks for asking that question. I think we're actually quite fortunate in our situation as where we are -- obviously we are domiciled in Bermuda, which is one element to the picture.

The other element is that we have two large businesses quite profitable, one obviously in the UK and the other in Canada. Both of those regimes are lowering their tax rates. So the UK lowered their tax rate from 30% to 28% this year. So we're going to benefit from that. And then Canada actually has a long-term plan for reducing tax rates from -- last year it was at 33.6% down to -- I think it is 30.5% this year.

So there's fairly dramatic changes that are taking place within the Canadian tax rate and UK tax rate. We're going to benefit from all of that. So I would actually say that it's more likely than not that our effective tax rate is going to be declining over the next three years. Probably a percentage point a year would be not a bad point of guidance for thinking about the tax rate going forward.

Craig Siegenthaler, Credit Suisse.

First morning, can you talk about the strategy behind some of the UK pension business? Many institutions really view this as the gateway to the attractive payout markets, so I was interested in your perspective.

Yes, I think it is really where we see the market going. We look at ourselves as leading asset managers. The structure of the market and the opinion of the team in the UK was, in fact, we did not need the DC business. The DC platform, in fact, as we were using more and more platforms, we thought it was more in the way than an enabler to us as an organization. So very much supportive of the decision, and we think it is going to continue to benefit us as we move forward.

And just in response to your response to some earlier questions, it sounded more like the operating margin would remain flat in a flat AUM environment. I know there is a lot of fungible factors there, but is this about right, or are there future improvements that could offset investment opportunities over the next year?

Well, again I think what we -- there's a lot of things I go on underneath the expense number, and as we said, there are projects underway that we have talked about in terms of moving to a global operating platforms where we have consolidated technologies, we're looking at enterprise centers that would provide us efficiency that we had not seen before. Those savings are going to be used to help fund very important future growth initiatives. We're going to balance those two things.

So I guess again not wanting to provide guidance, I think you should understand that we obviously don't want to take a step back from the progress we have been making competitively in terms of our financial situation. And so we are going to be balancing kind of what we view as the things that are going to pay off in the long-term with these costs savings.

So again, I don't want to be in a position by saying flat assets, flat margins, because there are always things that could happen to us. Generally we like to see progress across the board. We have always looked for progress on expense efficiencies, so we have higher yielding assets that have been helpful.

The one element I would just put in is that with the market pulling back a little bit, the fees, the effective fee rate is driven very much by equities, and equities will be the element within our mix that has probably taken the brunt of the market decline. So there may be some mix elements that could have an impact on margins, which could counterbalance our desire to move forward on our financial progress.

Got it. And then just one more on Asian net flows, it was still positive, but down a few billion from the prior quarter. I'm just wondering what kind of drove this decline, and the new rate of about $500 million per quarter, is it kind of sustainable, or is it a little higher than here?

I think these are tough flows to judge. A lot of the flows have been coming from the China joint venture in Asia, which has been one of the fastest-growing parts of our Asian business. The trick is obviously in terms of the governments has been regulating the amount of new products seen put into that market. So we are a little bit sort of at the mercy of how the markets are going to work and the regulators are going to work there.

We're very focused on another part of it, which is this QDII phenomenon, which will allow us to begin to sell non-Chinese equities into the China market, and we think that there's definitely going to be an opportunity for flows going forward with that initiative. But that's going to sort of be panning out into 2008 across several quarters.

So it is a little bit of a dynamic and hard thing to forecast quite honestly. I cannot give you like a number per quarter to be thinking about for that business yet.

And when you think about growth, is it mostly China, or are there other regions? Because one of your competitors spoke actually kind of negative on the Taiwanese market, so I just wondered your thoughts on a regional basis out there?

Well, I think probably the area that is most prone for growth is going to be China and just greater China and Hong Kong. We do have a strong presence in Japan and Taiwan and also Australia, but I would say the area that is the most quickly growing has been the Chinese part.

In terms of Taiwan, we have actually been reasonably successful with that business. The other thing that I probably should just mention is other parts like Korea we have been quite successful in terms of growing organically there through selling other products managed out of Hong Kong.

So I think the region as a whole offers many, many ways to capture these opportunities. But we're not negative on Taiwan. I think we hey are generally neutral if not optimistic.

Got it. Thanks a lot.

And I think just adding -- stating the obvious I think for all of us, as we sit here in February of 2008, the outlook for flows I think for all of us in the industry are probably unclear as market sentiment will clearly impact investors' decision-making processes. So I think for all of us that is probably the most difficult thing to judge, and the best thing we can do is stay very, very focused on doing the right things for the clients, staying dedicated to our disciplines and being very thoughtful about how and where we invest in our business.

Douglas Sipkin, Wachovia.

Most of my questions have been answered. Just one on the fixed-income business. I'm just wondering what you guys maybe had in store to reinvigorate that business? Because when I do look, the performance continues to trend very well. But when you look at the flows, it does not seem like you're getting much benefit from that. So is there something I'm missing there, or is it just a matter of time, or is there more that you guys are planning from a branding standpoint to improve the fixed-income flow dynamic given the pretty respectable performance numbers that I see?

Yes, that is a great question. I think let me put this in the context of my personal opinion, and it's a very, very strong business, great leadership, very, very talented people. And I think the capabilities are very, very strong and how they manage money is really, quite frankly, world-class.

It is a part of the business when I showed up there two and a half years ago. I did really did not realize that there was a fixed-income business with Invesco. And I don't -- I have been in the industry for a long time. So that really gets to in our opinion we just have really not had really the marketing sales support behind the business that is representative of the capability within the business. And we think it is not unimportant that during these very difficult times, and you've heard Loren walk through just even on the cash business, their results, really just missing most every land mine that is out there. And we think that will clearly reinforce the strength of that business, and it will take time.

But the good news is we're starting from a very broad, very deep, global worldwide fixed income capability, and I think in these markets people are looking for those skills sets, and quite frankly, we have them.

So your observation is the same observation we have, and we're hoping to make a difference in time.

Michael Long, KBW.

I just wondered whether you could give us any sort of color on the inflows in respect to PowerShares in the quarter? And also whether you could say anything about the inflows and outflows of the US retail given the performance that has shown some sort of bounce back whether that is actually shown in inflow numbers yet?

And also similar to that I guess is the Trimark business. You have warned us about the problems of performance there from the time the way the sectors have been rotating. But are there any sort of signs yet of clients sort losing patience and (inaudible) funds, or are they still sort persisting with the investment strategy at the moment?

Yes, let me -- I will start with some of -- on the Trimark performance in particular. Again, there is a long deep history of Trimark recognition of their commitment to their discipline, their concentrated approach, very long-term conviction approach. And everybody understands it and believes it, but it surely gets challenged when the relative performance is not there.

And, as I said, what you're seeing right now is where we are in that relative performance side, and our view is that the message is quite strong in the marketplace. And again, I cannot predict the year, but as you see right as we sit here early in the year, this is much more of their market, and we would -- if things stay there, the relative performance is going pick up and quite strongly, which should have --

So obviously the fiscal through the fourth, I was wondering whether there are any signs in the fourth quarter of any sort of withdrawal that actually had some from the Trimark area? Because it is also performs, or I think it would still make a believer in the longer-term history of that?

It is Loren. I think looking at the -- kind of drilling down into those areas broadly, I think we actually saw obviously a little bit of a pickup on redemptions in Trimark with most of the change being in sort of declining sales just because it is a harder discipline to sell right now given where it is. But the redemption rates are still well within line of industry averages, and so we feel pretty good about sort of the message that people and their clients understand the discipline pretty well.

In terms of AIM itself, AIM actually had a pretty good quarter in the fourth quarter in terms of flows, and there's still an outflow. But it was an improvement over the third quarter. So a pretty good showing I would say with some large platform wins as well. Which again I think calls to the strength of kind of the capabilities that are there.

And then PowerShares, what we have seen has been really a sort of generally volatile market. Some of the flows tend to slow down a bit, but they are still delivering strong positive flows into the business. We sort of generally expect these trends to continue on into this quarter. But again, we are only one month into it really. So it is hard to say exactly what is going to happen.

I think our goal obviously is to have the products that will meet the needs of the market at the time the market is moving all over the place. So in terms of that as I mentioned growth and value and what is going to win and what is not. So that is kind of the interesting dynamic. But we are generally optimistic about where we are going forward.

Right. I'm sorry if this question is a little bit ignorant, but is there any sort of plan to expand the distribution of PowerShares in terms of geographically or through the institutional basis (inaudible)?

Yes, I mean it has been an absolute focus. The premise of the combination with PowerShares would go deeper into the advice channel in the United States, and we have been doing that. We still think, as I said earlier, we're early days there, and we did introduce really in December and in Europe PowerShares into the United Kingdom. We introduced PowerShares. So it is a geographic expansion also.

And the institutional managers, there are buyers of ETF. It has not been the primary focus -- of PowerShares ETF has not been the primary focus of our drive.

Philip Middleton, Merrill Lynch.

Just briefly on WL Ross, presumably in the fourth quarter, you booked a catchup fee for the second closing in the third quarter. So what sort of impact will that have had on your revenues in the fourth quarter?

And generally could you just talk me through a little bit more about the economics of that asset gathering, which is clearly very, very successful?

In terms of a catchup fee, are you talking about revenues?

When you have a first closing, when you have a second closing, you charge the whole -- the people who come in second pay twice, don't they? They pay as if they had been at the first closing?

Yes, I think there's probably just a short period between these two periods of the first closing and the second closing. So there was not anything that came through at least in my various analysis that popped up in terms of a double --

Okay. Could you say a little bit more overall about the fee levels on that fund? Presumably it is 2 and 20 over a hurdle in the normal private equity payment terms.

Well, the management fee is 150 basis points, and I think 20% is the right level for the fund.

Andrew Mitchell, Fox-Pitt Kelton.

A couple of questions. Firstly, on the area of performance, particularly in US retail, could you just clarify, perhaps run over a bit more fully your comments addressing that slide? Obviously on the numbers you showed, it does not actually give a great picture relative to Q3.

So I just wanted to confirm that the impression I got from what you were saying was that the Q4 compared to Q3 Morningstar ratings would actually have been improving. Is that correct? And you suggested in a sort another answer that sales had actually been improving partly through some of the large houses. So perhaps you could say a bit more about their reaction to the performance improvement. And linked to that, is there anything you can say about the changes in management announced today at [Haden]?

And the second area of question was simply to ask whether you don't think the current market conditions might present opportunities on acquisitions because you have not really mentioned that in terms of use of cash flow?

This is Marty. Let me be clear if I was not. The point I was making on the Morningstar rankings in particular quarter-over-quarter, there was very little change. It is really September to December if you look at one year, three years and five years.

Then the point that I was highlighting was Morningstar recently did a survey of domestic equity managers in the United States looking at the top 20 domestic managers and highlighting -- I sort of highlight the relative increase of AIM's ranking within that. It was the third-best improvement within those rankings.

If you look at the three-year numbers, they have improved quite strongly. It tends to be the longer numbers that people look at. Our success, there is no question if you look at the gross sales and the net flows in the retail channel, they have been improving quite dramatically over the last couple of years, and it is on the back of really improving performance across the team. And specifically with the management changes, Juliet Ellis has taken the leadership role of the AIM growth team. We think she is an outstanding leader. She has been running the small cap team, and if you look at her numbers, they are very, very strong. Her in combination with Paul Rasplicka who is a very, very strong manager in the midcap area also generated great returns, and the leadership of Rob Lloyd has taken over the Constellation Fund, and if you look at -- Rob has been managing the AIM Summit Fund, which is a large-cap growth fund and has had very, very strong performance, top quintile over three and five years. So we think it is just a very, very strong team. And we are expecting great things from them to come in the future.

And finally, on the acquisition site, again it is not our primary focus in this organization. Our primary focus as an organization is to continue to execute against our business plan as we have talked about over the last couple of years. That said, if we see gaps or skill gaps, we will pay attention to those. And the two examples would be WL Ross & Co. and PowerShares. But again, it is more opportunistic at least to be consistent with our strategy.

Okay. I would just like to again thank you for everybody's time in joining us today wrapping up our 2007 year. We think we have really generated real momentum, investment performance, asset levels and flows, and all of this resulting in improved operating results. We really do think that we have positioned ourselves to improve our competitive position in what looks like a challenging environment at the moment, and we will continue to be very disciplined in our approach. And our goal is to make sure that we can invest in those things that will make a difference during this period.

So again, thank you very, very much for your time, and we look forward to talking to you next quarter. Have a good rest of the day.