景順投信 (IVZ) 2008 Q2 法說會逐字稿

This presentation and comments made by management in the associated conference call today may include statements that constitute forward-looking statements under the United States securities laws. Forward-looking statements include information concerning possible or assumed future results of our operations, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, assets under management, acquisition activities and the effect of completed acquisitions, debt levels and the ability to obtain additional financing or make payments on our debt, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, when used in this release, words such as believes, expects, anticipates, intends, plans, estimates, projects and future or conditional verbs such as will, may, could, should, and would and any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations.

We caution investors not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, you should carefully consider the areas of risk described in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q, as filed with the United States Securities and Exchange Commission. You may obtain these reports from the SEC's Web site at www.sec.gov. We expressly disclaim any obligation to update any of the 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 Invesco's Second Quarter Results Conference Call. (OPERATOR INSTRUCTIONS).

Now I'd 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 second quarter results briefing. I'm joined today with Loren Starr, our CFO, and also Mark Armour, Head of our Worldwide Institutional business.

This presentation we'll be speaking today is available on our Web site if you're so inclined to follow along. I will give a brief summary of our business results. Mark will focus on the institutional business - the progress we're making in the various focus areas. Loren will go into greater details on the financials, and then, of course, we'll open up to Q&A.

If I can, let me do a little context setting again.

This is the second quarter that we've had our results in the United States. And, within that, Invesco is one of the few global, independent asset management firms in the world, and we have a presence in many of the world's fastest-growing markets.

We believe one of our greatest competitive advantages is the combined power of our distinctive worldwide investment management capabilities. We have capabilities in virtually every asset class and investment style, and, with investment teams on the ground in 12 countries around the world, we think we're very uniquely positioned to compete. By building on this foundation, we believe we are well positioned for long-term success.

So let's take a look at the quarter. Let's state the obvious. The markets were very, very volatile during the quarter. But, in this environment, we continued to focus on what we thought were the most critical initiatives that will continue to improve our competitive position in the marketplace. Broadly speaking, our concentration was improving our client experience, expanding our offering for our clients where we saw opportunities, continued to strengthen our investment excellence capabilities, and improving our organizations to better position our business for the long-term success. And, as I said, Mark and Loren will speak more specifically to these efforts as we go through the presentation.

So, some of the highlights for the financial results for the quarter. During the quarter, assets under management moved roughly in line with the markets. We ended the quarter with $461 billion in assets under management. The average during the quarter was $482 billion in assets under management. So you could see what happened as the markets depreciated during June, in particular.

Net outflows during the quarter were $6.2 billion - in long-term outflows, that is, and that compares favorably to the $8.4 billion of net outflows in the prior quarter. We continue to see strength in the cash business, where we had net inflows of $4.7 billion.

The second quarter results were in line with our expectations. We think they're good results, particularly given the very challenging markets we saw in this quarter versus, really, where the world was a year ago.

Our net operating margin for the quarter was 35.2%, and this compares to 35.9% in the first quarter. And, if you look back a year ago, again, when we were in a very different environment, operating margin was 37%.

As I mentioned last quarter, we use free cash flow to reduce our credit facility balance and to buy back stock. During the quarter, we paid down our credit facility by $200 million, and we bought back about $40 million of stock in the quarter. And, lastly, our second quarter dividend is $0.10 per share, and this is consistent with the dividend we announced in the first quarter.

And, if you look at quarterly flows for the organization, gross flows in our long-term funds, were similar to the level experienced in the first quarter. Again, given the environment, that was a pretty reasonable outcome. I think it's very instructive to look at the absolute level of redemptions, which were actually lower in this quarter than they were in the prior quarter. And, again, that, we think, is a pretty good indicator recognizing this environment that we've been in. Our cash business had, again, as I mentioned earlier, a very, very strong quarter, growing 5.8% during the period. And month-to-month growth went down, but, again, still positive net inflows of $4.7 billion.

And, if you take a look at flows by channel, you can see that, if you look at the retail business, again, gross retail redemptions improved during the quarter from the prior quarter with fewer redemptions generally. And the private wealth management business had net inflows during the quarter. And, again, this was an improvement over the prior quarter.

Institutional net outflows also improved during the quarter, in spite of a couple sizeable redemptions during that period. But I think, again, the great color will come from Mark when he speaks of the institutional business in greater detail.

If you look at performance, it's really the most important thing if you look for longer-term success. Obviously, short-term performance across the industry has been very, very volatile. But, if you look at our long-term performance, it continues to be very strong for the organization overall. If you look at the combined view of investment performance of our retail assets versus peers and our institutional assets versus benchmark, you'll see that 71% of our assets under management have a strong three-year track record, either being above the 50% peer group or above the benchmark, largely in line with the first quarter.

Taking a look at investment performance a little more specifically, not a whole lot of changes during the quarter. But, if you look at the retail investment performance, you saw some improvement on both Lipper and Morningstar versus the second quarter. In Canada there was little change in performance; again, recognizing their investment style has kept them out of energy, the weak dollar, and materials. So that value discipline was lagging during that quarter. In spite of the volatility, the U.K. performance continues to be strong, really, on all bases. And the same is true of continental Europe, and Asia-Pacific was strong longer-term performance.

Within institutional equity, the capability to see some improvement on a one- and five-year basis, and, particularly, we had some-- The quantitative equity team had a solid quarter, which is not unimportant, given the pressure that there had been on their quantitative strategies over the last nine months. And 75% of their assets under management were above the peer group.

Alternatives and money funds continue to demonstrate strong performance on a one-, three-, and five-year basis. What I would like to point out, if you look at fixed income against benchmark, 45% of the assets were beating the benchmark. And those that follow fixed-income markets know that benchmark has been a very, very difficult thing to beat in these credit markets. And the best we can tell, if you look at benchmark returns - top quintile performance over the past 12 months. So, in that context, 25% of our (technical difficulty).

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

Thanks, Marty. In a few minutes, what I'd like to do is just remind everybody of what it is that makes up our worldwide institutional business. Marty mentioned performance. I'd like to highlight some improvements there. I think, more importantly, though, I'd like to talk a little bit, if I could, about some of the new investment management capabilities and strategies that we're taking into the market and that our clients are looking to have and then mention, again, some of the good cross-border styles that we've achieved, which is consistent with this strategy we have of making sure that we get the best of Invesco to our clients.

So, as you can see on this slide, from our perspective, we clearly think of ourselves as a leader in the institutional asset management globally. Critically, in my mind, we do have the strength and scale to be relevant. So we've got, as you know, well over $200 billion in assets under management. We've got clients spread across the globe in over 20 countries. And I think, as importantly, and I'm sure you're aware of this, we do have very broad and very deep investment capabilities supported by strong investment teams. As well, and I know we've spoken about this before, we do have a very strong range of alternatives capabilities, and these are needed, in my mind, to meet client needs. And they're helping us to get significant flows.

And then, finally, the global footprint that we have with major investment groups and sales capabilities around the world allows us to distribute out our strong investment capabilities - those that are here based in the U.S. to our clients globally and, frankly, those that are outside the U.S., to bring them back in. So we really are looking to take our capabilities around the world.

Over the past year, I believe we have improved our position in the market relative to peers. Our investment performance is good and improving. And, consistent with our strategy in taking, frankly, advantage of the markets at the moment, we have been making good efforts in terms of upgrading our talent in specific areas, and we continue to keep a good watch, I believe, on costs to make sure that we've got the resources to capitalize on these best opportunities.

Turning now to investment performance, I think we did see some good improvement over the quarter and, now, the year to date, with a number of strategies looking to be in better places. Marty mentioned the quantitative group - much better first half. We've now got three-quarters-- Over 70% of our assets from the U.S.-based strategies are now above benchmark, which is really good.

The slide that you've got there is showing the change in one-year investment performance from the end of 2007 through to the most recent quarter. So we're looking at the end of '07 and comparing it to end of June. And we're looking at it either relative to peers or to benchmark. And you're probably concerned that I'm data mining a bit here, but what we're really trying to do is to identify where it's most relevant to look at peers. At other times, I think it's more relevant to look at benchmark. But, for example, quantitative strategies really should be referenced against benchmark, whereas, for example, in fixed income, as Marty said, the benchmarks-- Most of us have been underperforming those over the last little while. And you can see, for example, in the liquid assets, diversified core, and so on-- You can see we've got good results against benchmarks.

In the alternatives area, clearly very important for us. And, again, I think you can see some-- in a wide range of areas from our GTA through our multi-strategy fund, which is that-- Sort of think of it as an internal fund of hedge funds, if you like. Our equitized market neutral, which is run by our quantitative strategy group - global REITs and U.S. REITs. You can see that, in nearly all of those areas, the performance is either good or clearly looking to improve.

Cash shouldn't go without a mention. The returns have not only been good, but I think, as people are well aware, we've genuinely had a lot of safety, as well as liquidity in yield, in Karen Dunn Kelley's term, in this group. The great job that our cash people have done should not be underestimated.

I'd now like to move and talk a little bit, if I could, about some of the things that we're doing in terms of capabilities and new strategies. We continue to look to add capabilities and strategies that are going to help meet client needs in what are, clearly, very challenging conditions. And what we're seeing is two trends. First and foremost, the interest in alternatives is not (inaudible); if anything, it's probably gotten stronger over the last 12 months. But, at the same time, the dislocation in the markets has provided opportunities for us.

So, moving on, you can see that, in our real estate area, we've got a number of new funds being raised globally at the moment, mostly in the direct space. These would be funds in different parts of the world either going to local clients or, often times, going to clients outside the domicile of the investments.

Very importantly for us, our global REIT capability achieved-- You've got this three-year track record up now. Very strong (technical difficulty) puts us in the top quartile, and we know we're supported here by some very good ratings from the major asset consultants.

As I said, we're also introducing products both in the absolute return area and, also, areas to take account of the market dislocation. I think many of you would be aware that we recently filed an S-11 for the creation of an agency REIT in the United States. We're also fund raising in a number of other areas - strategies and vehicles which are capitalizing on the credit market dislocations.

In the alternative space, [one that's using] is that we have created what we call an alternative beta strategy-- We're naming it Premia Plus, which is looking to provide kind of hedge fund-type returns but with much increased liquidity. So this is interesting. This isn't an alpha strategy; this is actually a beta strategy and looking at the beta from a risk side rather than a return side. Very interesting. We've got a lot of interest in a short period of time here.

And, finally, we are doing a lot of work, as I suppose we all do in this industry, in terms of developing and delivering solutions that utilize the best of Invesco to meet more customized client needs.

WL Ross & Co. with [Wilbur] has been doing a lot. This is clearly an environment which, for him and his people, is close to nirvana with all this dislocation. So they're being able to deploy capital very well right at the moment for the funds that were raised last year. So there's been investments in things such as [paying back] mortgage originators, such as Option 1 in American home mortgage and also SpiceJet.

And, finally, our private equity fund of funds team has been able to build on its capabilities by identifying and investing in emerging private equity funds. So we've found some great interest in that space as well.

Looking now at worldwide institutional from a global distribution perspective, this slide's just highlighting some of the things that we've done over the last year. As we're aware, the institutions that we're dealing with are sophisticated and demanding, and they're certainly not getting less so. But I think that works, frankly, to our advantage because, as a firm, we do have global breadth and depth of investment capabilities. We do have a broad range of investment capabilities. And, frankly, having significant teams on the ground in locations means we are able to build strong personal relationships with these bigger institutions.

So we've spent significant time looking to distribute the best of Invesco to our institutional clients globally. And I think, as you can see on this page, we are having some real success in terms of distributing these capabilities to a broad range of different types of institutions in a broad range of geographies around the world.

And I think I'd like to finish on the distribution side by saying that we're working very hard right at the moment in terms of upgrading our talent in certain locations. And, frankly, what's going on in the markets has been good for us here. I think we're able to access a better quality of people than maybe we were able to do a year or so ago when the markets were hot.

And, finally, we are capitalizing, and I think we're doing an increasingly good job here in terms of capitalizing on our global footprint by ensuring that our sales efforts are coordinated to get the best of Invesco to these key clients.

So, to conclude, and this is a slide that you would have seen before, if we go back to basics, what we believe that we have is a strength-- that we've got a wide range of investment capabilities. I think we're able to package these up in vehicles for our clients, as well as probably anybody, and, in turn, take this (inaudible) into our clients. So, for us in the institutional space, we're taking advantage of this wide range of capabilities and the wide range of packaging options to be able to deliver to our institutional clients the solutions that they need.

I'd now like to stop and hand over to Loren Starr, our star CFO.

Thanks, Mark. Let me move on to a review of our asset roll-forward for the three months ended June 30.

As Marty mentioned, during the quarter we did have net outflows of $6.2 billion, and that was a $2.2-billion improvement compared to Q1. Furthermore, I'd like to point out that just over half of this quarter's net outflows were due to the natural maturity of a single CDO, as well as due to the termination of one low-fee, fixed-income account in Asia-Pacific. And so the blended fee for these two products was actually less than 10 basis points.

And, furthermore, offsetting much of these outflows was strong growth in our money market product, where we saw net inflows of $4.7 billion in the quarter. And month to date, through July, the demand remains quite strong for our money market product.

We also saw declining markets reduce our asset levels in the quarter by $6 billion. And, therefore, as a result, we finished June with $461.3 billion in AUM, and that's a decrease of 1.9% since end of March.

I should also point out that the June ending assets are 4.4% below our average AUM for the quarter, which was $482.6 billion. And, again, it's sort of obvious, but if sustained, this would suggest that we're going to experience a lower revenue run rate for the third quarter. Additionally, our net revenue yield, excluding performance fees, could possibly decline by about 1 to 1.5 basis points in the third quarter. And this is all based on our current asset mix. Obviously, the markets are very difficult to predict and quite volatile, and we saw the asset level actually drop below $460 billion in July. Now it's coming back. So it's anybody's guess where this ends. But we're very vigilant on this point, since this will have an impact on the Q3.

Let me move to the operating results on the next page. You'll see that total operating revenue grew 2.8% versus the prior quarter, and this was primarily due to increased performance fees as well as other revenues.

Performance fees increased $11 million in Q2. And, of the $22 million performance fees, $13 million was generated by our real estate business, with the remaining $9 million coming from several other areas of the firm, including Invesco quantitative strategies, Invesco perpetual, Asia-Pacific, and our bank loan group.

The other revenues increased by $10 million. That was largely driven by greater levels of transaction fees within our alternative area, which would include private equity and real estate.

Moving on down the slide, you'll see that total operating expenses for the quarter, at $696 million, grew by 1.9% in Q2. And, within that number, employee comp increased 3.7%. This was a result really due to a full quarter impact of annual salary increases, as well as due to the amortization of new yearend deferred share-based compensation, both of which became effective March 1 in the first quarter. The declining payroll taxes that everyone expected were offset by some increases in the bonus pool, in line with our higher operating income.

Marketing as a line item was down 13%, as Q1, in general, is a peak marketing quarter, particularly in Canada and the U.K. So this was a seasonal decline.

Property, office, and technology was up 11.2%. That should come as no surprise. As we disclosed in last quarter, we had about a $4.9-million property credit booked in Q1.

The G&A line item did increase this quarter by 8%. Importantly, this is really a result of the way we account for certain funds. And many of our newly launched funds do not allow expenses to be directly netted against their associated revenues. An example of this would be some of the newer ETF launches, which are now using an all-in, unitary-growth fee structure, which really means that we receive a higher advisory fee, but we now must pay for these fund expenses that otherwise would have been paid directly for by the funds.

Below the operating income line, we saw the equity earnings of our unconsolidated affiliates decrease quite a bit - 46.4%. This was due to lower average AUM in our joint venture in China. As everyone has seen - well publicized - we had quite a decline in the A-share market in China in the quarter.

Interest income and interest expense both declined, as we used our cash to pay down our credit facility, largely, during the quarter, and we did about $40 million of stock buybacks.

And then gains of consolidated investment products are offset by the minority interests of consolidated entities. These two lines items are really the result of an accounting rule called FIN-46, which requires us to consolidate certain of these entities that we manage.

Finally, other losses in the quarter came in at $1.1 million. That's a decline from Q1 '08, and that reflects a variety of items in the quarter that largely offset each other.

So, quarter over quarter, our EPS was up $0.02 to $0.41.

With that, I'd like to turn it back to Marty for some final comments before we begin with the Q&A.

Great. Thanks, Loren and Mark. As we said all along, we feel very, very strongly that our long-term success is really dependent on being very focused on our strategy and very aggressive execution of that strategy, which we continue to be on, even in these difficult markets. And I really feel that the steps we've taken to strengthen our business will be more effective as the integrated global asset management business has positioned us very, very well. And we're continuing to improve our competitive position in this challenging market.

And, with that, why don't we open up to questions for Loren, Mark, or myself.

Thank you. (Operator Instructions). Our first question is from Dan Fannon of Jefferies.

In terms of the performance fees, as well as the other income, Loren, you gave us some color on what drove that. How should we look at that going forward - both of those revenue line items in terms of the sustainability and the levels of those revenue streams?

That's a great question. I think they are generally bunchy. There's a difference, I think, between the performance fees we saw this quarter versus a year ago. You might remember we had about $22 million in performance fees that came from China a year ago in the second quarter. And that, I think, was a one-off performance fee. We actually generated performance fees from a variety of areas within the firm, which is what you would expect, given our significant portfolio of different businesses.

Obviously, the magnitude and how they come in is much harder to see. I think there's a [standard] level of some amount of performance fees. If you look at us historically every quarter, we've certainly seen some. They tend to bunch up generally around the first quarter and the fourth quarter, and I think that's still largely the case.

However, as performance picks up, certain of our businesses, particularly IQS, Invesco quantitative strategies, can generate quarterly performance fees. And so that is something that, obviously, we look forward to, but it's hard to predict exactly how big they are. The fact that res is coming in with a large performance fee, I think, is something that is probably somewhat of a bunchy, quarterly phenomenon. But we do expect more performance fees; it's just hard to say exactly which quarter they're going to come in.

So I know that's not a perfect sort of predictive model, but we do think there is certainly a sustainable amount of performance fees that one should model into our numbers.

Okay. And then, in terms of the other income, it seemed like the transaction activity picked up. If we were to look at that in comparison to 1Q, is it safe to say that the 1Q level was more of a depressed level than kind of what we're at today if you look comparison to '07, and what you did in this quarter is more of a standard-type run rate?

Again, it's a little hard because there was quite a bit that was coming-- Again, happily, it's coming from different areas. So we had real estate, and then we had our private equity business coming in with these types of transaction fees. And there are actually a variety of different ways that these things are-- Transaction fee is a broad term that covers many different things. Again, I'd hate to give you a forecast. I do think probably Q1 was at a low level. I'm not sure if Q2 is at a run rate level, but it's probably somewhere in between is the reality.

Okay. And then, lastly, in terms of the comp expense, headcount was down about 2%, but we do see comp going up. Is there some mix issue as performance fees go up, and, in some of the mix of revenue, we'll see comp go up? Or is it some of the things you just talked about that-- some of the costs just coming in from higher salary increases?

It really is primarily the salary but, even more so, probably the amortization of the stock that's coming in. That came effective March 1. So I would say our cash bonus pool will generally move in line with operating income. So I mentioned there was some growth in the bonus pool, which offset some of the payroll taxes. But the increase Q1 to Q2 is really due to the salaries and the amortization.

Okay. Thank you.

The next question is from Ken Worthington, JPMorgan.

A couple of questions. In terms of performance, particularly in the U.S. and in equities, it doesn't seem like it's where it needs to be to generate sales. You've been making changes to personnel. Can you talk about what changes were made during the last quarter and other strategies or things that you're doing over the next, say, second half of the year which go to address and improve performance in the U.S. and equities buckets?

Again, we do the best we can to give sort of a summary of investment performance, and sometimes it does serve a disservice. So let's talk about it.

If you look at sort of what's in mutual funds right now, and this is asset-weighted, so that has an impact on it also-- Right now, the core equity teams are performing very, very well, certainly above top quartile at one, three, and five years. The growth team-- As you know, we made some leadership changes earlier in the year. The largest fund had been, really, a drag for us, and we made a leadership change there. The person taking it over manages a fund that's a top-quintile performer over one, three, and five years. So, if you look at the growth lineup, it's really quite strong, other than this one fund, where, again, we made this leadership change. So I feel very good about that.

The value suite is relatively underperforming. It's not dissimilar to what we're sort of seeing in this environment. We feel good about the team. We think they're very talented. But they have suffered with the environment that we've been in. The other thing that's happened is sort of the broadening of what's available in the suite, and that was, again, over the last couple of years. We introduced the IQS team into it - the Japan portfolio being managed out of Japan, the China portfolio being managed out of China, et cetera. But, again, those are not large funds, because they're relatively new.

We did also realign the IQS management with all the quant funds available now in the lineup. Again, we made some changes on a smaller global fund that's being managed out of a broader core equity team in Atlanta. And, also, very, very importantly, the international team has a very, very strong three-year and five-year track record. It lags some year to date, but, again, it's consistent with its strategy. They're very highly ranked portfolios.

So, when you get at the fund level and you look at the suite, I think it's stronger than what the sort of rollups on an asset-weighted basis show. And that's the feedback we're getting, and I really feel very good about how we're positioning ourselves there.

Great. Thank you. Then another initiative that you had talked about in the past is sort of the cross selling, opening up different products to Invesco's various distribution channels. And, again, there, can we get an update for the quarter and then an outlook for the second half?

I'm going to have Mark talk about that because he's been very instrumental in helping get a number of those. If you can, Mark, that would be great to sort of--

Thanks, Marty. In the slide that I had on achieving global institutional distribution, I mentioned or highlighted some of the success there. The difficulty for me is maintaining the confidentiality from a client level. But, factually, we've had major [styles] as we've seen here, from U.S.-based investment management groups into Europe and into Asia, in particular. I think we're seeing some significant interest in-- I suppose the obvious area is the areas with large amounts of assets. We've had very good ongoing success with IQS with the international and global products. They are now selling those in 15 or 20 different countries around the world. And global REITs' capability is one that, again, has got large take-up globally, and, frankly, the interest in that, notwithstanding what's going on in the markets at the moment, has only gotten bigger and better.

In the private equity space, people are aware that-- Wilbur's fund last year was distributed globally. I think he's looking forward-- I can't say too much. But, as new funds come forward, I think you'll see that, as we've got our global distribution machine, particularly on the institutional side, frankly, humming a little bit better than it might have been in the past, I think you're going to see that that globalization of the distribution is only going to get better.

I think we've also made a lot of progress in terms of working with our cash folks. We've got a great, great capability there. And, again, we're broadening the scope of what we're doing on the cash side. So we've got some significant mandates in the truly institutional space; in Asia, for example, billions of dollars over the last quarter. So we are really starting to see what I believe is increasing momentum there in terms of taking, in particular, the major capabilities that are U.S.-headquartered, if you like, but also being some specialist capabilities in other parts of the world; so, for example, out of Asia, out of Japan, out of China, and out of Europe to the rest of the world.

I think also, Ken, if you look at other elements that-- the active ETFs which were launched earlier in this year. Again, we think that's a real longer-term phenomenon; but those also being introduced in Europe at the beginning of this year. They'll be introduced into Canada shortly here. So, again, I think it's-- If you look at the makeup of the different investment teams, where they are seeing success just continues to broaden.

To be clear, it's not where we want it to be, and that is what we look at as a great, great opportunity.

Thank you.

Your next question is from Jeff Hopson out of Stifel.

Can you comment on the alternative flows? It may be a little bit softer in this quarter. And, in general, can you give us a sense of the institutional pipeline across the board in a tough environment?

Okay. Look, I think if we look at the-- Just in terms of the flows for the quarter on the alternative space, the numbers that have been reported have been heavily biased by the fact that there was a major CDO that came to maturity in the quarter. So that was sort of, frankly, hiding what was actually going on in the alternative space.

Where we're at in alternatives is-- If we go through it sort of area by area, lots of activity on the real estate side. The commitments to this will run ahead of investment. So what we're going to see in terms of reported AUM that there's going to be a lag between us doing fund raisings, which are, for example, happening over 2008. But, given the market conditions, the investment of those funds may not happen in a big way until we get through '09 and '10. But a lot of activity on the real estate side, which, as it happens, because a lot of these are private market things, I can't actually talk to you in detail about them.

Secondly, on the private equity side, we factually have been, again, increasing the amount that's going into both our fund of funds space-- WL Ross & Co., as we know-- there's nothing that we can talk about right at the moment. But I know that, over the next 12 months, there will be things that will happen in this space. And, when we can talk to you about it, we will.

We've also been doing some good things in the hedge fund area. So there was a good win from outside, which was, I think, public in the Wilbur's-- from a major public fund in the east coast of the U.S into Wilbur's hedge fund. So that will be funded. We'd expect the funding to be this quarter and so on.

And so I think what I'd be saying is that the momentum is there. Frankly, the flows within the alternative space are a bit like the performance fees; they're going to be lumpy. But the trend here in terms of the revenue that's coming from the alternatives is going to continue to be on an increasing trend. And I think, in that regard, it is important to recognize that, if you look at the total institutional flows when we're seeing negatives there, do understand that the outflows, which we've still obviously had some year-to-date-- had a stable value in some other fixed-income areas, are much, much lower than the inflows we've been receiving and so on. And that revenue base-- Our revenues in institutional, frankly, are continuing to increase.

Okay. And how much was the CDO?

Nearly 1.5.

Okay. And then, on the money market business, any near-term expectations for that business? It seems like it softened overall in June. But any thoughts on the direction of money market?

Loren might want to add something here as well. But, do remember that we've gone over a major quarter end there with June. So, what's happening is that, literally, in the last couple of weeks of June, we saw some significant outflows, and it's come back in. So, if you were to look at where the AUM today is, it's going to be meaningfully different and in the right direction than it was at quarter end. So that trend continues to be there. And I think, from my side, what's important is that, working with Karen's cash people, who are just fabulous - Karen Dunn Kelley's cash team - we really are, I think, doing a meaningfully better job in terms of globally distributing this capability. So we've got a very strong presence in the U.S. marketplace. We've clearly got a presence outside that. That presence is expanding. And, frankly, the way that group has been able to manage the cash portfolios means that our standing within that market segment is continuing to improve. So I wouldn't-- The trend's intact is what I'd say, and it was really a quarter-end phenomenon for the June quarter.

Okay. Great. Thanks a lot.

Our next question is from William Katz of Buckingham Research.

A couple questions; first, I guess, in terms of capital management. It looks like you had a preference for debt reduction this past quarter. So I wonder if you could help us. Thinking ahead, is the one point some-odd million shares you repurchased this quarter, which is down pretty sharply from where you were running the last four quarters or so, is that sort of a new trend? I'm sort of curious of the slowdown in light of what's happening with the share price. That's the first question.

And, then, the second question is - It looks like headcount is down again sequentially, about 2%. I understand the seasonality and the impact of amortization, but how should we be thinking about compensation leverage on a go-forward basis as well?

Bill, on our first point, I think we had telegraphed in the first quarter that we were going to use some of the cash to pay down some of our credit facility, which ended, I think, at the end of the first quarter around $387 million. So it's down about $187 million now. Again, with the markets being where they were, assets going down, the debt ratio-- The credit ratios actually sort of took a step back because we had completed the $130-million contingent payment for power shares. There was a contingent payment associated with the WL Ross business as well.

Our capital hierarchy-- As we've always said, we will use our cash first for growing organically if we can. The next will come from acquisitions. We never said we were going to do acquisitions and lever up to do acquisitions. So the way people should think about these contingent payments is these are going to be used-- We're going to be using to, obviously, pay for acquisitions as opposed to taking on debt. Generally, that's the right way to think about it.

I'd say we did pretty much take a big dent out of the credit facility. Our capital priorities remain intact. So, again, in normal markets, I'd say we will be using the bulk of our cash flow really to do stock buybacks. These have been anything but normal markets; however, I do think we're not going to say quarter by quarter this is our commitment to stock buyback. We do think the price is interesting and an attractive one. But there has been a degree of prudent supply to take the leverage down.

So, again, I think the broad message is our capital priorities are intact. This was largely doing what we said we were going to do in terms of paying back for the acquisitions. And then, beyond that, we're largely maintaining our capital priority.

I agree. Bill, just also on the compensation, I think the point you're trying to identify, too, what would sound like inconsistencies with where we are in the market. The stock grants were granted based on last year's result. They kick in just by the time you get through all the internal processes at this time. So we continue to be very focused on people management. But what we are doing is upgrading talent at the same time. So there's not an inconsistency with how we're managing the business; it's just the timing of these things more than inconsistent actions. I don't know if that helps, but that's--

I didn't think it was inconsistent. I'm just sort of curious if, with sequential decline, that we would see some further operating leverage as revenues repair. (Inaudible).

It literally was when they-- just sort of when the math started to kick in as opposed to-- Again, our overall compensation philosophy is in place. If we learn less, the bonus pools will be less. And, if we earn more, they'll be more.

Okay. So, from here-- You gave quite a lot there, Loren. From here, where are the contingent payments that are left for either WL Ross or PowerShares? If that sort of slows for a bit of time, then, all else being equal, buyback would step up?

Again, I think the one other wild card in all this is-- Our second priority is to do acquisitions if they strategically make sense and if they hit certain hurdles. I mean, that's always a wild card. And I think, in these markets, I'd probably say there are-- Opportunities do seem to be surfacing quite a bit. I'm not saying we're looking at acquisitions, but I do think it is one of these things that, if we're going to live by our capital priority, we're going to continue to look at these types of opportunities as well. But, again, ex acquisitions, yes, absolutely; stock buybacks are back the number-one priority.

Okay. Terrific. Thank you.

Our next question is from Cynthia Mayer of Merrill Lynch.

Just a couple of follow-up questions. Could you go over one more time the gains? I know you said FIN-46, but what [aspects] are moving that around? And is it possible to break it out into buckets? Is that Canada?

No. It's really related mostly to two private equity fund investments that we had. So the second quarter gains that we saw really arose from valuation increases in these two investments. Clearly volatile. The (inaudible) category is pretty volatile in terms of valuation. The other thing is to bear in mind that those gains are on about a $1-billion portfolio. So it's really not that material when you look at it as a return off of that $1 billion.

So, hopefully, that's a little helpful. But it's all in the private equity area. That's where that's coming from.

And so that's all mark-to-market, as opposed to a realized gain?

Well, some are mark-to-market, and some are our valuations, since they're not public stock. Again, the important thing is that it's being offset completely by the minority. So, in terms of the P&L, the way to think about that FIN-46 is it's more immaterial to our earnings. It is there because we need to disclose it for FIN-46 purposes. But these are other entities, obviously, that we're just bringing in as we have to.

Got it. Okay. And then, on the new funds and ETF launch costs, is that a line item you would just sort of expect to build forward? Those are one-time costs associated with launches. But do you have a pipeline of launches that you think will make that go up some more?

Those are more than one-time costs. I think they are sort of general servicing costs. There's a mixture of some one-time and some servicing in that number. Again, importantly, those expenses are being offset by revenues above. So, if we're going to unitary fee, essentially, you're getting a higher manager fee or advisor fee or all-in fee that's offsetting these costs. And, prior to that, you basically had these costs being paid for directly by the fund. The ETFs that we're launching are all now using the unitary theme, so, as we grow ETFs, you would expect to see that line item potentially grow - again, offset by revenues above.

Okay. So I guess a slight headwind to your margin because of that.

Yes, that's true.

Okay. And then, on the equity assets, I'm just wondering if you-- to what degree you think the changes you made in terms of the leadership actually are causing some of the outflows.

I don't think-- Cynthia, actually, strangely enough, to the contrary, Morningstar has actually written some really positive reports about the leadership changes, which is great. So I think, quite frankly, if you look at the absolute redemption levels, they're actually going down and not up. The redemption rate is staying about the same. So those are, to me-- call it small wins. But I feel really confident about some of those changes. And, again, just the feedback we're getting from gatekeepers and the platform wins we're winning are as high as they've ever been.

So, yes, I understand they're sort of hidden in there, but it's the timing of when they hit and the like. But those are important indicators that we're looking to for the future.

Okay. And one last small one. You said that marketing's down. That's seasonal. Do you expect that to pop back up next quarter?

Again, I think probably the bigger potential in the fourth quarter-- or third quarter is just-- It may be a little bit higher than the second quarter. It's hard to predict exactly. I just think that it's certainly coming off of the first quarter. The first quarter was more the anomaly than the second quarter.

Okay. And tax rate? Is this a good run rate?

Yes. Exactly.

Okay. Thank you.

The next question is from Mike Carrier, UBS.

Recently, you've been pretty active on the new product line with the active ETFs. And then you had the Wilbur Ross, the partnership, and then the agency security IPO. I'm just curious. Do you see more products or opportunities in the pipeline, given certain client demand?

And then, also, any type of color around either the size or fee structure on these alternatives, particularly, like, the Wilbur Ross?

And then, finally, do you have any gaps that you feel--? I think in the past, there really haven't been any big gaps that you wanted to fill. But just what we're seeing in, I'd say, the financial services sector, with, particularly, banks needing to raise capital and offload their asset management arms in order to raise capital, would you be potentially interested in some of those opportunities if they came up at pretty good prices? Or do you feel like you're pretty good in terms of your product capabilities?

Just on the product launch side, that's sort of the balance we're striking right now. We have a leadership position in ETFs, we believe, and we want to continue to go forward with that. And where there's client demand, we'll respond to it. What flies in the face of that is, in this tough environment, do you want to spend the money? Our view is we really want to take advantage of the things that we can right now. And so we're going to continue to focus on introducing product where it makes sense in the marketplace.

Secondly, our private equity capabilities are strong, and there is no fee pressure. It's just a highly in-demand skill set and our distress capabilities. We don't see that. I think, as Loren has addressed, there is a lot of noise in the marketplace of what might be happening with-- in the financial services dislocation. Again, our first priority is organic improvement in growth. But, again, if there are opportunities that fit of strategy and make sense, we will pay attention to them.

Okay, and then one for Loren. On the-- You mentioned it. It's not specific to Invesco, but just the pressure on the average AUM going into the third quarter. We're only 20-some days into the quarter. But, given what the markets did in June, the revenues will be under pressure. When you're looking at your expenses, whether it's on comp, marketing, or G&A, is there anything in the short term that you feel like you guys can manage down for the second half of the year? Or are there still things that you guys need to invest in and spend in that there's just not going to be that much flexibility?

I think we're committed to continuing to invest in the areas that are going to be very important for our future. And so that's going to be sacrificed. And we're going to do that through funding it from areas that, quite honestly, are probably less important. So that's an ongoing process. It's one that we've been engaged in for several quarters and, actually, even longer than that, since it really started with the whole transformation of the organization. I think the obvious areas, like discretionary spending, are areas that we continue to look at closely. And I don't think-- There's always more that you can cut someplace.

But, for us, we are-- We have a pipeline of projects that we believe will help us (inaudible) our growth going into the second quarter and into 2009. So we feel good about the environment in the sense of being prepared for it. We presumed that the markets were going to be this way, in effect. Unfortunately, it's coming true. So I think we did feel like we were well prepared for where we are today.

Okay. Thanks, guys.

The next question is from Robert Lee, KBW.

I'm just curious. Can you comment a little bit on your China JV? I know, at least in 2007 and maybe somewhat before that, that had been a nice contributor to-- I believe it's included in your assets under management. So it had been a nice contributor to some growth there to close and sales. Can you maybe bring us up to speed on what's been happening there lately and how you think about that, at least over the next several quarters?

Maybe I'll make a couple of comments, and Loren can then-- Again, greater China is, we think, a real strength of ours. China, in particular, is a real strength of ours. And we think, if you look at those JVs-- Ours is called Invesco Great Wall-- we're one of the very few, if not the only one, that leads with our name. And we have 3.5 million clients in China investing in Chinese securities. We know what's happening in the markets there, obviously, so that's clearly had an impact on contributions to our business this year.

But, long term, we just think it's a great, great opportunity. Out of that, we are seeing, as Mark talked about earlier-- not just seeing-- We are participating in a number of these, if you want to call them, more institutional-type wins coming out of that area. So we're just very, very excited about the opportunities there longer term.

Obviously, the assets were impacted just through the markets normally. And redemption rates spiked up a little bit. But it is actually-- Given the decline, it's not been a terribly bad experience. People are still buying funds in China. There has been a general lack of new fund launches, so people are actually buying existing funds. That's been a very positive trend. My understanding is, given the Olympics and given where things have been with the earthquake, that a lot of the new fund launches have just been on hold until that clears out.

So we're actually, I'd say, optimistic about the Asia-Pacific business going into the last half. It's probably better positioning than in the first half. So we still maintain the dominant position, as Marty mentioned, and we are still continuing to invest in that business with the expectation of it coming back.

Okay. And maybe a follow-up. I know you've spoken a bit about PowerShares and continuing to rollout products there. Could you maybe just give us a little bit more color on-- I'm assuming the trends aren't any different than you see elsewhere. Does that business--? Are you experiencing more volatility in that business? I don't mean from an asset perspective but kind of creation and redemption process.

It won't be precisely correct but generally correct. Since we teamed up with PowerShares, I think almost every day that I look at net flows, we were net flows every single day to varying degrees. As the markets fell off, they slowed down. But, literally, through June, in particular, you saw days of net outflows. So the volatility did, in general, trend down with investor preferences but then some literal outflows. But, again, it's sort of gone away. So it has been more volatile.

But the real opportunity for us-- We think we're very early into where this part of the business will end up-- is it's really-- It is a vehicle. It's not going to make any other vehicles go away. But the fact is it's here to stay and having more-- As it gets more adopted by the advice channel with more solutions within them is really the opportunity going forward. So we think the mid- to long-term horizon is very, very strong. But, yes, it has been volatile on the short term.

And just one more point, more specific. Actually, the flows for PowerShares were ahead in the second quarter versus the first quarter by almost $0.5 billion or, actually, a little bit more than $0.5 billion. And the redemption rate, which was high in the first quarter, actually has come down quite a bit. So I'd say we're looking, actually, more normal with our ETF flows than in the first quarter.

Okay. And just one quick follow-up on PowerShares. Do you have a feel--? Do you have an effective way to track as your wholesalers--? I'm assuming they're out there talking about PowerShares and how the advisors should use them in portfolios. Do you feel like you have an effective way to really track how that's been working?

It is a difficult thing; there's no question about it. It's just not-- In the mutual fund world, it's all very well delineated and clear. It's much less clear, just because of the nature of the vehicle. Of course, you need to figure that out. We've done the best we can to figure it out and incentivize people appropriately within their suite of skills. But you're right on the topic. You need--

Do you feel comfortable that, even though it's tough to track, that's been having an impact?

Oh, yes. Oh, no question. Oh, absolutely. Yes, absolutely, there's an impact.

All right. Great. Thank you very much.

Your final question is from Michael Kim of Sandler O'Neill.

I apologize for missing this, but, just for clarification, you had the $1.5 billion redemption from the CDO product and then a sizeable, I guess, fixed-income outflow during the quarter. Can you just clarify what the size of that fixed-income account loss was and kind of the rationale for the closure there?

I think the fixed-income was somewhere under $2 billion, and I think it was an inflation (inaudible) fixed-income products (inaudible) Australia. So I don't have the rationale for why (inaudible).

It was two things. They're a very big client that we've had in Australia. They've been changing, frankly, their investment strategy. They've been doing two things in terms of taking some assets in house, and this was an example of that. They're also changing some of their strategic asset allocations more in line with some of the trends that we're seeing globally. So this was one that our Australian colleagues were notified about more than-- We've known about this for more than a year. It was just the exact timing as to when it was going to occur. So it had nothing to do, and this was always frustrating-- what the capital of very long-term clients, also in the IQS area this year, were delivered to mandate, but they're making strategic asset allocation changes, often times, to move, say, from (inaudible). We've had a couple of those this year, which have (inaudible) at our outflows in the institutional space. This is an exact one of those.

And, again, I should just point out again; that was a pretty low fee [mandate].

Okay. And then, just more broadly, I understand the markets have been pretty volatile, really, across all regions during the quarter. But, aside from the U.K., it seems like you've got ongoing outflows, really, across Europe and Asia. Can you just talk a little bit about where the redemptions are kind of focused, either by product or channel? And, then, do you think this is just really a function of kind of the overall market weakness as opposed to kind of a longer-term shift and risk appetites more generally?

I'll just talk very quickly. On the institutional side, frankly, our inflows are very much in line with our expectations. Our outflows are a little bit above. And where they've been above, it's often been seen because of these completely unexpected ones from these strategic asset allocation changes. So, on the institutional side, there's no trend.

I think it is different, though, on the retail side. We've seen just the normal reaction to the volatile markets. So, if you look at the net numbers, typically what's going on-- It's not that the outflows have increased but, rather, that the inflows have slowed, which is, frankly, typical retail investor behavior in market conditions like this.

Let me just add-- I think you've probably seen-- Continental Europe-- Just on that strategic side, you did see structured notes really take a meaningful part of, largely, mutual fund flows over the last 12 months or 18 months. That was probably more the macro factors that you were talking about what was out there; so, therefore, a difficult market in total there.

But we're still positive on the outlook. Again, we think things like introducing ETFs into that market will serve us very, very well, side by side to our open-ended products there with some of those changes. Again, (inaudible) happened in those markets. Generally, it's more that retail behavior is (inaudible). Mid to long term, we're positive. I think risk and appetite will come back; the question is when. I'm sure all of us on the phone have a different sense of when that is. But the best thing that we can do in the meantime is keep pushing forward to making ourselves better. Where you see less of that, though, as Mark was saying, is really the platforms and the institutional plans more in particular. They just continue to make their decisions. So we would expect that client to continue to move forward more quickly towards risk product than the more retail-type client.

Okay. That's helpful. Thanks.

Okay. Well, thank you very much, everyone. Again, we thought, in light of the environment, a good quarter. We are, again, just recognizing the environment we're in, so we're keeping our heads down. But, at the same time, we're very, very focused on continuing to move the business forward and putting us in a position to be just that much more competitive when this market environment changes, which, in fact, it will.

So, thanks very much. Have a good rest of the day.