景順投信 (IVZ) 2010 Q3 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products, and other aspects of our business or general economic conditions. In addition, words such as believes, expect, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs such as will, may, could, should and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Forward-looking statements are not guarantees and they involve risks, uncertainties and assumptions. 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 and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q filed with the 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 the information in any public disclosure if any forward-looking statement later turns out to be inaccurate. Welcome to Invesco's third quarter results conference call. All participants will be on a listen-only mode until the question-and-answer session. At that time to ask a question, please press star one. Today's conference is being recorded. If you have any objections you may disconnect at this time. Now, I would like to turn the call over to the speakers for today, Mr. Martin L Flanagan, President and CEO of Invesco and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may now begin.

Good morning, and thank you everybody for joining us and this is Marty Flanagan along with Loren Starr as was just pointed out. Loren and I will be speaking to the presentation that is available on the website if you're so inclined to follow along. What we'll do today is, I'll highlight the business results and we'll spend a few minutes just on a current update of the combination with Morgan Stanley, Van Kampen and the combination that we just closed in June, and then Loren will go in detail on the financials, and then finally, we'll open it up to Q&A.

So for those that are inclined to follow, I'm going to start on page two of the presentation deck. If you look at the quarter in spite of the continued volatility that we saw in the markets, Invesco's commitment to investment excellence really did yield a strong quarter with continued strong investment performance across the enterprise. It remained very strong and there were some areas of absolutely exceptional performance. The strong investment performance contributed to a positive trend of long-term in-flows into the organization and as many of you know, if not all of you, on June 1st, we completed the combination with Morgan Stanley, Van Kampen retail asset management business, and our goal from the day we announced the transaction was to complete the integration work prior to the close and thanks to a tremendous amount of effort on everybody's part we accomplished that goal and were able to deliver the value of the combined firm on day one as we refer to it. And now since we've completed it, we've now had a full quarter of the combined organization together and we're seeing strong momentum of that combined business.

I would also like to mention during the third quarter, we resumed our share repurchase program and purchased 6.4 million shares with a value of about $127 million. Later in this presentation, Loren's going to give some insight into our capital management approach and also I'd like to note that Standard and Poor's increased our enterprise risk management rating from adequate to strong. Invesco is now one of four asset managers with a strong rating.

So, if you take a look at slide three, assets under management ended the quarter at $604 billion. And that compares to $557 billion at the end of the second quarter, reflecting the improved markets and also strong momentum in our combined business. Adjusted operating income for the third quarter was $245 million, an increase of 30% quarter-over-quarter. And long-term net in-flows for the quarter were $4.9 billion, continuing a positive trend we've demonstrated over the past several quarters. And consistent with the second quarter, we will provide a third quarter dividend of $0.11 per share and again, Loren will go into much greater detail of the financials in just a moment.

If you take a look at the quarterly flows, page four, you'll see strength in the third quarter gross sales led to continued positive momentum in our long-term net in-flows. As I mentioned earlier the long-term net in-flows for the quarter were $4.9 billion. This represents the seventh consecutive quarter of positive in-flows for Invesco. If you take a look on slide five at the gross sales across retail and institutional channels, they continue to contribute positive net flows to Invesco overall and also if you look at the private wealth management segment of the business, it continued to experience consistent asset growth quarter-over-quarter and we've seen net in-flows for the past three years in the private wealth management business.

And if you take a look at investment performance for the group, it's one of the key reasons for the enhanced strength and stability of flows that we've seen over the past seven quarters and if you look at the enterprise, 78% of the assets were ahead of peers on a three-year basis and that compares to 71% one year ago. So continued improvement and strength and consistent good long-term performance. And again, the detailed charts of performance are in the appendix if you're so inclined.

I would like to take a minute just to highlight some of the pockets of exceptional performance. And starting with long-term investment performance at Invesco, Perpetual remains outstanding with more than 90% of the assets in the top half of peers over one, three and five years. We continue to see improvement in Invesco Trimark with 81% of the Canadian equity assets in the top half of peer groups on a three year basis and 65% on a one year basis.

Global fixed income capability continues to achieve outstanding performance with 90% of the assets in the top half of peers on a one year basis and 86% of assets in the top half of five years. Invesco real estate maintained its strong competitive position with 99% above benchmark for three years, and 92% of the benchmark across five years, really just outstanding performance. And Morningstar ratings in the US retail business remain near the highest levels since October of 2000, with 58% of the US retail assets rated four or five stars.

So I'd like to take a few minutes and just brief everybody on the momentum we're seeing in the combined business. And on page nine, just a couple of the highlights. As I mentioned, you know, we're very pleased to report that we are fully integrated with minimal transaction issues and from that period, it's been really supported by an intensive preclose training effort which we discussed previously. Our retail sales force has been actively engaged with clients who are seeing steadily increasing momentum in that business. Our relevance as a top 10 US fund manager is really enhancing Invesco's profile in the marketplace and it's helping us gain greater access to top platforms and driving new business and the Phase II work of rationalizing our product lineup is on schedule.

If you take a look at page 10, at the time of close last quarter we told you what we had accomplished at the close and it would not have happened without just tremendous amount of effort on both sides, both Invesco and Morgan Stanley, and that was an important milestone. But really, let's spend a minute on what's the progress since the close and we've made steady progress building the combined business across three broad areas, clients, operational excellence and employee engagement. Most notably, US retail asset flows were on-target and growing. We continue to enhance our profile on key platforms. We're actively engaging clients with business plans for each client and deeper coverage teams aligned against them. Our product realignment efforts are on track. And we achieved our expense targets that we laid out at the beginning of the combination. Loren will discuss that more. Most importantly, we have a strong engaged stable investment management team in place, producing strong results for our clients.

So if you take a look at page 11, and give this greater focus in your minds, we've highlighted from the initial announcement of the combination with Morgan Stanley, Van Kampen, it was highly complementary to Invesco's existing capabilities. And if you look at the two organizations, pre-close, you can get a sense of the product mix and we know how Morgan Stanley Van Kampen was very complementary in specialized fixed income and equity. You can see the vehicle mix here and post the close, you can look at the long-term business in the United States as ETS UITs being 31%, mutual funds, 44%, and DC and insurance 25%. And the point is, in a really challenging US equity mutual fund environment, the diversity provides real balance and clear benefits not just for the clients but also for the business.

And if you look on page 12, you can see what's happened. Post close, we continue to see solid momentum in the US retail business. Yes, driven by the strong investment performance, the client focus and the engagement. But what you'll note is the incremental impact of the combined organization is clearly positive. And so if you look month over month, preclose and post close, what you'll note is the trend month over month of increased gross sales.

And you'll see that post close, the punch line is this, average monthly gross sales are up 40%, and the average monthly redemption rate has declined 12 percentage points which is really quite amazing, and I think you have to put that in the context of the flash crash in May which was very pronounced here in the United States. So that would be the early results of the combination. I still say we're very early in what we expect out of the combination as we look forward.

The other thing that we've seen is we continue to expand our presence on key client platforms. There's been a 240% increase of the platform placements since the month of June so that number being put in the preferred rating with the different platforms. And again, we just continue to see growing interest and activity with the business. So our view is that right now, we are on track, very much on track and we think more good things to come.

Just to bring you up-to-speed on where we are on slide 13, really Phase II of the integration, it's really just a very sharp focus on the product offering for our clients. We anticipate this process to be done six to nine months after the September 30th close. We are well into the effort of seeking approval from the fund boards and ultimately fund shareholders. But that process is on track and moving forward. So I'm going to stop there and hand it over to Loren.

Thanks very much, Marty. Basically during the quarter, our net long-term flows provided $4.9 billion in AUM, market gains provided $34.4 billion, FX added $8.2 billion and then acquisitions net of dispositions added $1.7 billion, these increases in AUM were partially offset by net outflows from market money funds of $2.2 billion, but the increase in AUM quarter-over-quarter was $46.8 billion or 8.4%, resulting in the ending assets of $604.5 billion. Our average assets under management actually increased more strongly, 21.4% to $583.3 billion, and this was primarily due to three full months of the Morgan Stanley, Van Kampen asset management business in Q3 as opposed to only one month in Q2. The net revenue yield in Q3 was 48.5 basis points, down only slightly quarter-over-quarter.

Now let me turn to the operating results. The quarter-over-quarter variances in P&L that you're going to see are largely due to the two additional months of the Morgan Stanley Van Kampen retail asset management business in Q3 versus Q2. Net revenues increased $118.1 million or 20.1% quarter-over-quarter. The acquired business accounted for approximately $96 million of this increase. While favorable FX rates added about $8.1 million.

Going down a little more deeply into that, you'll see that investment management fees grew by 14.7%, or $95.7 million and again, that was driven mostly by the contribution of the acquired business. FX contributed $11 million, while the Morgan Stanley Van Kampen business contributed approximately $74 million. The remaining management fee variance of $10.7 million was due to the positive impact of markets on AUM relative to the second quarter. Service and distribution revenues increased by $52.2 million or 37.4%, with the acquisition accounting for about $50 million of this variance. Performance fees declined $1 million to end at $2.5 million.

Other revenues improved by $16.9 million relative to Q2. Again, driven largely by the two months more of the Van Kampen business in Q3. $14 million of the $16.9 million favorable variance was a result of new UIT issuance, which continues to run at a higher level than initially expected. The remaining $2.9 million increase is due to greater attainment front-end loads, as well as due to transaction commissions from our real estate business. Third party distribution service advisory expense which we net against gross revenues increased by $45.7 million with the VKMS acquisition contributing approximately $42 million of this, and FX adding the remaining $3.9 million.

Moving on the slide, you'll see that our adjusted operating expenses at $461.3 million increased by $61 million or 15.2%. FX accounted for $5.4 million of this with remainder largely being explained by acquisition. Employee compensation expenses increased by $37.6 million or 14.5% versus the second quarter. The acquisition contributed to the majority of the variance, but we also had an increase in variable compensation, primarily bonus and sales commissions in line with improving operating results in sales. Furthermore, we recognized $3.4 million of severance costs in Q3, which was $1.4 million less than will be recognized in Q2. And FX increased compensation expense by $3.7 million.

Marketing expense increased by $9.6 million or 27%, again, largely due to acquired business. Property, office, and technology increased by $7.8 million or 13.8%, again, for the same reason. G&A expenses came in at $54.3 million in the quarter, that was up $6 million versus the second quarter. FX added about $0.7 million, while the remaining $5.3 million in expense variance was explained equally by the impact of the acquisition as well as a variety of other non-acquisition related G&A expenses in the quarter.

Continuing on down the page, you'll see that our effective tax rate on pretax adjusted cash net income in Q3 was unusually low, relative to the other quarters. 23.1%, and in comparison to 29.3% in Q2. You'll remember, however, that this is in line with what happened in Q3 of 2009. And it's a function of our releasing the FIN 48 provisions for uncertain tax provisions. What I would tell you is that going forward this pattern of sharply lower tax rates in Q3 should subside, as we don't expect to be releasing similarly large provisions in the future.

For Q4 2010, I would say that we expect our effective tax rate on an adjusted basis to return to a more normalized ongoing level of about 29% to 30%. Before I move from the slide I'll just point out that our adjusted EPS came in at $0.39 an increase of 44.4% versus Q2, and our adjusted net operating margin was 34.8%, an improvement of 2.8 points versus Q2.

Let me now shift gears. I'd like to provide an update on our progress toward achieving the cost synergies that we've discussed. Moving to the next slide. Distinct from most other large transactions you've seen, we did take on imperatives to fully integrate the business essentially day one at the closing of the deal. While this was a difficult challenge, it did set up the possibility for us to generate full cost synergies very quickly.

We mentioned in our Q2 release, after we closed the acquisition and simultaneously integrated the business, we would no longer be able to track the Morgan Stanley Van Kampen business expenses separately from Invesco's. It is still possible to demonstrate that we're delivering the promised expense synergies. Our original estimated cost synergies of $80 million to $85 million in year one I'd point out were net of $15 million of reinvestment in marketing for our US retail business. So excluding the impact of incremental marketing investment, the comparable gross year one gross synergy expectation is $95 million to $100 million.

And the reason I'm saying this is, given the requisite lead time and planning, we have not yet begun investing the incremental $15 million in marketing, and so we do expect to begin the investing at the end of 2010 or early 2011, with a pace of spend at roughly $3.7 million per quarter. What that means is that for the Q3 results we're discussing today, we would want to see gross annualized run rate synergies in the $95 million to $100 million range, and not the $80 million to $85 million range. So on this slide, we can demonstrate that we fully achieved the targeted annualized run rate of $95 million to $100 million of gross cost synergies in Q3, with the one caveat that it's not a precise method since post integration as I've discussed we're not able to track the MSVK expenses separately.

Let me take a moment to explain this table. Column A on the table shows two times the adjusted one month of operating expenses that the VKMS acquisition contributed in June 2010 and we showed that in the second quarter release. Column A, excuse me, represents the expected Q3 versus Q2 expense variance due to the acquired business, assuming no further cost synergies were created relative to the June results.

Column B on this table details out activity that contributed to Invesco's quarter-over-quarter variances, but were unrelated to the VKMS and US retail business, and that includes foreign exchange, and other identifiable variances such as severance, as I discussed from our retooling of the US institutional sales force, increases in variable compensation, and other known expense items from Invesco specifically. Column C is the sum of A and B and they represent the hypothetical Q3 versus Q2 expense variances assuming no additional run rate synergies created during Q3, relative to the run rate embedded in June. So essentially it assumes that in Q3 we operated the MSVK business as in the same way we did in June.

And column E is the actual quarter-over-quarter adjusted operating expense variance results for the firm. If you take the difference between D and C, that's what you'll find in column E. That represents the incremental cost synergies we achieved during the third quarter, relative to the second quarter, and column F is purely the annualization of column A. Taking you through all that in summary, subject to the caveat I mentioned earlier, this does show that we achieved an incremental $45.6 million in run rate annual cost synergies during Q3.

If you add this to the $51 million, which represents the annualized run rate synergies we calculated in June, we have delivered a total annualized run rate of $96.6 million in Q3, and this amount is squarely within our one year target of $95 million to $100 million of gross cost synergies which of course excludes the impact of the new marketing investments. A little bit of complicated table, but I hope it gives you comfort that we're on track to deliver no less than what we projected in year one and as we discussed we would expect to deliver at least another $10 million in savings at the end of year two, after the US fund range product rationalization has been completed.

So with that, let me take a moment to turn to the next slide and talk about our capital management. So our priorities remain consistent, no surprise. We will first look to reinvest our cash flow back in our business, followed by making acquisitions if they make strategic and financial sense. Thirdly, we wish to provide a moderately increasing dividend every year approximately 4% to 6% annual growth. Fourth would be opportunistic stock buybacks.

We'll continue to operate these capital priorities against the foundation of maintaining a strong balance sheet. The new reality post financial crisis is that our clients and consultants require investment management firms that they work with to have a strong financial profile. In addition, for Invesco, a strong balance sheet provides us with the flexibility to take advantage of strategic opportunities that could arise in the future.

Therefore, as we have discussed in the past, our priority is to decrease the incremental leverage we took on at the close of the Morgan Stanley Van Kampen transaction and pay off the $650 million of borrowing that's drawn on the credit facility. So despite this, though, we also told you not to assume that our hands were completely tied with respect to buying back stock and given where the stock was trading during the third quarter, coupled with our normal practice of eliminating dilution from deferred equity compensation, we did undertake to buy back $127.7 million in stock, according to 6.4 million shares, at an average price of $19.82, and so as you saw this last quarter, we will continue to maintain an opportunistic stance in retrospect to stock buybacks. So with that, I'll turn it over to Marty.

Thank you, Loren. So Loren and I are happy to answer any questions anybody might have.

(Operator Instructions). Our first question does come from Ken Worthington of JPMC. Your line is open.

Hi. Good morning. Couple questions on distribution. What kind of impact are you noticing thus far from LPL and Edward Jones in terms of retail sales? And then talk about the whole selling effort there. Separately on Van Kampen, you had been talking about elevating Van Kampen on various platforms. How is that going?

Yes. So just with those two organizations, obviously very, very strong organizations. Edward Jones continued to just be very strong and probably the reason is as we matched off against Edward Jones there were the fewest changes. So the leadership on our side had not changed. The whole selling forces really did not change at all. We just continued to move forward from that point of view. So it continues to be a very strong relationship and as we mentioned earlier, there is a broader array of products now that Jones has put on their platform and from what I'll call the traditional Invesco part of the business.

LPL, we are a preferred partner right now and literally just completed. It is a -- as you enter into new relationships like that, there's been a broad effort and I'd say early days, but one of the highlights is that we completed a, what they call sort of a client engagement plan and they received the top marks within their system. So again, I'd say that's early days but we expect that to be a very strong relationship going forward. And I'm sorry, what was the third, last one?

On the Van Kampen side, in discussions with platforms like Merrill Lynch and UBS to elevate the Van Kampen status there, how is that going? And I guess over what time period do you think that starts to season? Is it multiple quarters? Could we see something from either LPL or Van Kampen 4Q, 1Q or do you think it takes longer than that?

I think, again, much of what I talked about earlier I'd call them sort of leading indicators. So the broadening of funds on platforms is I think prerequisite for ultimate success. And as I mentioned, that's just improved quite dramatically. So Van Kampen on to some of the platforms that were less strong on that has gone very, very well and if you look at the performance in the key areas, the US value in particular, and the broader muni bond platform that we have now, very, very strong. I don't think you're going to see -- what kind of flows you're going to see, it's all going to be fully dependent upon really when do investors start to look to US value equity as an asset class and what I do feel, when that starts to happen, we're going to participate very, very nicely because it's just a very strong track record.

And so I personally think, Ken, this is a multiple quarter effort and the other reality is that if you look at the performance, if you look at the depth and breadth of the organization, the platforms that are being accepted into the funds on to the different platforms, that's very, very good. We still have some work to do. We're a new name in retail channels. That's a fundamental fact. If you put us against a firm that's been operating with a single name for 15 years in a channel, they'll run ahead of us out of the box. But I'd say we're making very, very good progress along the way to be a very, very important partner.

Okay. Thank you. And then for Loren, in the press release, you break out net revenue yield before performance fees. Based on the world at September 30, so based on FX, equity markets, sales, et cetera, how does that yield look next quarter? Does it start to cheat up? Does it cheat down? Can you just help us in direction there?

The biggest driver of that will have to do with performance fees, but you're saying ex performance fees.

Yes.

It will generally move up with equity markets. So I would say given the fact that assets are somewhat higher, we will have that. I would say UIT and passive could change a little bit of the mix. Generally with equity markets where they are and FX contributing it should move marginally up.

Great. Thank you very much.

I'm going to add one more comment to Ken's question just to make the point. As say was talking about, if you look at pre and post close, average gross close being up 40%, which is quite dramatic in light of the markets we're in and also the redemption rate dropping 12 percentage points, but it's really this broadening on the platforms, key client platforms and since June we've seen a 250% increase. So that's a number of products that are being put in preferred positions on platforms. So that's a very, very good start. But again, I don't think we're going to be satisfied until we get probably through next year.

Thank you.

Our next question does come from Robert Lee of KBW. Your line is open.

Thank you. Good morning, guys. A couple quick questions. First, just looking at compensation costs. I'm just curious, I mean, putting aside the transaction, are you seeing any kind of latent or building pressure on comp costs. You've had -- revenues have come back, earnings have come back, performance is good. I would assume that for a lot of teams across the globe, maybe expectations are starting to kind of creep up again and competition for people. Are you starting to see any kind of pressure there globally?

I think the reality is, we have a very consistent compensation philosophy and very, very clear plans in place that sort of match performance and results around investment teams to compensation levels and so as the performance continues to improve and if the business does better, our mechanism is such to reflect that. But I would also say we are very consistent because of that during a downturn of we had the ability also to use Invesco stock and the products that investors invest in as long-term deferrals. So I think our mechanism is very, very good and very consistent and again I think you have to go back to because we had thought through these things, I think it served us well during the downturn and it will put us in a position to continue to report results. But I think the reality is as we do better so will not just our shareholders but also the organization.

Okay. And next question would be, understanding that a month doesn't necessarily make a trend or so, but could you talk a little bit about what you're seeing in the new business trends broadly, breaking out institutional versus retail since the end of the summer you've had the market come back. Any signs in the retail land that there's starting to be a little more activity and then institutionally, how or where have you characterized the strength in the RFP activity?

Maybe I'll make a couple comments and Loren can chime in. I think you have to look at the world in different ways. Funnily enough, I think the US retail world was uniquely impacted by the flash crash. I think you saw that across the -- if you talked to some of the investment banks with distribution, I mean, it just literally went on strike. And so you saw that.

And I'd say what you're starting to see right now is the mutual funds, I think that was the area that was most impacted, mutual l funds in particular, starting to get some confidence coming back, a little bit in investors from that point of view and probably ultimately moving up the risk curve a little bit as people refer to -- or are taking on risk. But I'd still say it's early.

Where you did see it and what we saw very much going into UITs and ETFs and that was a real positive I'd say for us. You probably saw that across the industry. But if you go to different parts of the world, whether it be Asia or Europe or the United Kingdom, we had inflows, retail in-flows in each of those areas so it was not as impacted as the United States was. If you look at the institutional pipeline, it just continues to grow and for us the mandates continue to be very strong real estate, continue to be very strong stable value.

Also, some asset allocation capabilities that we have premium plus are really getting high degrees of interest. And so I'd say that's still a little more conservatively positioned than what we're seeing in the retail side of the business and you do have some consultants that are actually very focused on fixed income and really limiting exposure to the equity market and we can all pass our judgments whether or not we think that's the right asset allocation but I suspect we're a lot closer to some people moving towards the equity side of the business.

And maybe one last question. I guess to some degree, kind of money funds have kind of popped up a little bit again. I guess the President's Council issued their report late last week and I guess one of your peers decided they're going to take a small charge to kind of top off some money funds in advance of having to report shadow NAVs on a delayed basis. I mean, any preliminary thoughts on take-aways from the President's Council's report on how you could be impacting or think about your money fund business, and then I guess the second thing would be would you see any need to do a little top-off of money funds similar to what one of your competitors did?

First of all, I'd say from an industry point of view, the President's Working Group comments were very consistent I think with what the industry was expecting to come out of it. From a inner perspective, we think we did a very, very good job in the first round of changes to money funds and we think we have a very very thoughtful next stage through the liquidity bank which we think creates, again, a very compelling product as time goes on. So at an industry level, I think we're heading very much in the right direction.

With regard to our own money funds, we haven't had any problems with our money funds. They're very well-run. We didn't have any downgrades of credit. We didn't have SIBs, none of those types of things. It's probably those firms that had SIB-type exposure that might be having to look to do some top-offs and we don't have to do that. From a specific Company point of view, we're in a good spot.

Great. Thanks for taking my questions.

Our next question does come from Michael Kim, Sandler O'Neill. Your line is open.

Hey, guys. Good morning.

Hi, Michael, how are you?

First, just a follow-up on some of your comments earlier in terms of pension plans, maybe increasingly looking to immunize their liabilities, I guess two take-aways that maybe are in play here, just first being that we could see a more permanent shift in favor of low risk mandates but then at the same time maybe we see a step-up in contributions, just given the fact that a lot of these plans are still meaningfully underfunded. So just curious to get your take on that dynamic and then how that could potentially impact your business.

Yes. I think we can make some broad comments. The fundamental fact, it's got to be Company by Company because they're all in different spots. The notion of immunizing your portfolio at the bottom of a market cycle to me doesn't seem very wise. The combination of some firms that are able to give contributions which we saw just in the last week or two, we saw some of those, I personally believe you're going to see some equity exposure go against that, it's very hard to close that gap by immunizing your portfolio. Mathematically you can't do it.

But that doesn't mean that you won't see some firms that are fully funded or close to it that would take some risk off the table by immunizing their portfolio. So the reality is, I think where all of us see -- where we see retirement growth is going to be in the DC world but there's a tremendous amount of assets in the DB world right now and I still think the merits of a well balanced portfolio to deliver results are going to make sense and maybe once funds are fully funded and they can offset the liability, you'll see a massive immunization trend but I personally can't imagine that right now considering the market cycle we came out of and one we're likely to go into.

Then kind of maybe turning to the retail side of the story, as we look across the industry, it does seem like flows remain pretty concentrated and a relatively limited number of products that either have strong performance or maybe are filling a particular strategy. What are some specific funds at Invesco that you think can really become market share leaders going forward, if and when we do get this reallocation back into equities?

Yes. Maybe why don't I do it by category instead of fund by fund. I think the fundamental fact as we pointed out a few quarters ago and if you're asking specifically about the United States, our equity lineup is very, very strong and if you look at US value, US core international growth, it's about as competitive as you're going to find out there. And if you look within our fixed income lineup, the muni bond lineup we think is very, very strong. The bank loan group is very, very strong. Those are things that are probably going to continue through a market cycle.

I think many of us would be expecting probably pressure on tax rates, which make muni bonds attractive and bank loans and high yield is another area where we're quite strong. I think even in regard to the interest rate environment, they'll continue to be attractive. So the broad categories I think we line up very, very nicely. And if you look at the growth line of small cap growth is very strong and large cap growth, we actually have more recently added a very strong growth team leadership and feel very good about that also. So it is broad.

Okay. And then maybe just a final question for Loren. It seems like you've had a nice bounce here in margins and you're kind of running just shy of the -- maybe the 35% to 40% range that you've talked about in the past. So assuming we continue to get cooperative markets, seems like you've got some tailwinds here, whether it's an improving mix or further efficiencies and just kind of natural leverage in the model. So do you feel like you can get closer to kind of the high end of that range, maybe a bit quicker than you might have expected previously.

We don't have any specific margin targets, so we will obviously move in line with equity markets and general markets. But I think the reality is that clearly you saw the impact of the acquisition was very helpful for improving margins and the idea that we could be in the high 30s in a short period seems quite feasible if we maintain sort of the levels of assest, where we are today. So again, I think it is certainly in line of sight for us.

Okay. Thanks for taking my questions.

Our next question does come from Craig Siegenthaler of Credit Suisse. Your line is open.

Thanks. Good morning, everyone.

Hey, Craig.

Just a follow-up on Michael's last question, the expense reductions. How big of a driver is the fund mergers in 4Q and 1Q relative to the future expense synergy? Is that basically all of it?

Yes, Craig, there is no real expense reduction in 4Q and 1Q due to the mergers. The mergers will actually take place sometime. It could be the end of the first quarter, sometime the second quarter. We said there's an extra $10 million of expenses that would come out at that point in time but all of the expense reductions that you've seen to date are really a result of just the taking on the business on our operating platforms and facilities and all the things that we've talked about in the past.

Just on the timing point of view, it seems it would be very late first quarter, I think you should probably think more likely first half of second quarter. But again, the reason why we can't be more specific as we saw last time, I mean, this -- there's multiple approvals and probably the hardest one that is least predictable is the individual shareholder approvals.

And then with the timing there, should we really think about that $5 billion of kind of net redemptions driven by the kind of the product mergers here, should that really be a 1Q and 2Q event and not really as much a 4Q event?

Craig, it depends again on when ultimately we can get approval for the transactions that are being proposed. If they're accepted by the fund boards, there actually would be information out this quarter through the stickering of the funds that would perhaps begin some of the outflow at that point. So it could be somewhat in the fourth quarter as well.

Then was there any [Roboloff's Fund Five Flows] included in the third quarter?

No, there weren't.

Okay. Great. Thanks for taking my questions.

Thanks.

Glenn Schorr of Nomura, your line is open.

Thanks very much. Just two quickies. One is just a reminder on the geography of cash, US versus UK and how that plays a role in your detailed cash management update slide in terms of buybacks, paydown of credit facility and such.

Oh, in terms of the firm's cash.

Correct.

So in terms of the firm's cash, we had about $460 million of cash in what we call the European subgroup. It's not just the UK. It's cash that could be used throughout Europe out of a total of $664 million.

Got it. And so when we think about credit facility or buyback, it's really coming at the net of those two; correct?

The $204 million, which is the assets available for that type of activity; correct.

Plus future cash flows; right. Loren maybe just one other number question. What do you have in the way of funds or assets under management with performance fees attached and is fourth quarter the bigger strike date or is that first quarter?

So the total amount of assets under management with performance fees is roughly $20 billion to $25 billion, it's probably closer to $20 billion. The fourth quarter, first quarter phenomenon that you've seen in the past in terms of performance fees had typically been driven through the UK. I think we have said in the past that we weren't expecting performance fees in the fourth quarter from the UK and again, it's a point in time calculation so it's something that we have typically, find very difficult to forecast and so I would still suggest to you that you should not assume that we're going to see anything large coming from the UK in the fourth quarter. There may be some performance fees from some other parts of our business coming in the fourth quarter as we've always seen some parts of the business having some level of performance fees. But probably nothing dramatic.

Okay. I'm good. Thanks, Loren.

Cynthia Mayer of Banc of America, your line is open.

Hi, good morning. Was wondering if you could give a little color on the other revenues, maybe give a breakout of what that was. Was the increase versus last quarter the two extra months of UIP fees and FX or was there something else in there?

Cynthia, the total increase in other revenues was $16.9 million. And of that, again, there is $14.4 million was a result of new UIT issuance. Now, if you remember in June, there was $5.5 million of UIT revenues, okay? So the $14 million difference is showing that we're at a much higher run rate than we were at June. But it is really driven by the $14 million driven by UITs and there was $2.9 million that was a result of a more traditional Invesco-related business, real estate transactions and front end loads.

Okay. And since the UIT issuance is running at a higher rate than you expected, what is driving that and what's your outlook for that and how profitable is that business?

I think, again, it's being driven by I think interest in the product itself, which is tax efficient, very transparent, it is one of these products that I think appeals to many individuals who are looking to buy and hold. And it is something that I think we've seen the expansion of UITs go beyond where they traditionally were within the Morgan Stanley network as they've sort of become part of the broader Invesco network and I think that's another contributing factor to the success but they are a leader in the industry. And it is something that I think we feel that we can do a lot with. Fixed income has been a very big part of the interest in the UIT side. The Build America Bonds piece. But interestingly, and more recently, equities have been factoring into that mix as well now.

Great. One more question. Can you update us on the outlook for acquisition-related outflows and give us a sense of what impact they had this quarter and what flows would have been without them?

Right. Well, Cynthia, we would say that the acquisition-related outflows are going to really be a function of the product mergers and the announcement of the product mergers which have not happened yet. So we would not attribute any of the $5 billion that we had originally discussed to this quarter or prior quarters. We think the $5 billion is still a number that we're guiding people to, that would begin once the information is out there. We're still hopeful that it's less than that. But given kind of our analysis, we think that $5 billion could be the case. So we think that would be centered around the fourth quarter, starting the fourth quarter, assuming the approval takes place and continuing on through the first and the second quarters of 2011.

And finally, can you tell us what there was in the way of fee waivers in the quarter and also what the ending share count was?

Fee waivers were never a major factor for us, Cynthia, because we have a money market business so if there is a number in there, it's probably under $5 million in terms of fee waivers so it's not a significant component. In terms of ending share count, it was 474.3 million.

Great. Thanks a lot.

Sure.

Next question does come from Dan Fannon of Jefferies, your line is open.

Good morning. Marty, could you maybe expand upon the comments about the product placement increase of roughly 250% sequentially, kind of let us know where we are in that process, if we should still see increased penetration, or more products being placed going forward or have we kind of done the majority of that already?

Look, I think you have to look at it is as, one, an immediate jump out of the box, Edward Jones being an important part of that and then a couple of the others. But we don't think we're done. We think it's literally going to be all of next year before we get that sort of state that we think is sort of a more normal state. But one of the questions earlier was just around LPL, where very strong relationship, very strong -- if you want to call it planning phase out of the box, but that's different than getting the depth of product that you want on the platforms and it is just a lot of work, as everybody knows. It's really no different than trying to get buy ratings and consultant platforms and so I'd say we're early days of where we want to get to.

Would some of that increase be attributable to Morgan Stanley and Smith Barney also having a bigger exposure there as well?

That's absolutely a part of it, yes.

Okay. And then maybe if you guys could update us on Wilbur Ross and the timing here for when we should start to see or will see some of the flows coming in.

As much as we would like to talk about it, we can't, given where we are in the cycle. I apologize but anything that we say could be used against us.

Okay. Thank you.

Our next question does come from William Katz of Citi. Your line is open.

Good morning, everyone. I want to come back to your margin opportunity again, Loren. If I was listening right you mentioned that the fee rate might tick up a little bit marginally if equities continue from where equities are today, I guess and you've gotten the bulk of the cost saves. From the conversation is seems that retail leverage is more of a 2012 phenomenon. Can you walk through how you get those extra 700 basis points of margin improvement from here, all else being equal.

Obviously it's the same things that have allowed us to in the past generate higher margins. If equities grow, it's the higher fee rate part of our mix. There's certainly some amount of compensation that gets built up against those revenues. But incremental margins as we've discussed are somewhere 60%, in that range. So you can generate higher margins just through that expansion.

I think the other parts of the business, to the extent that we're able to continue the positive trend on sales and organic growth is going to be helpful for profitability, particularly if we're selling higher fee products which again if equities are sort of coming into light I think we would benefit from that as well. So there's one more element in the mix, not a major one. We've talked about in the past, as we continue to transition to our enterprise support centers and lower cost locations, there's some element of margin expansion that's going to take place there, and we are looking at taking on our India operation to our books sometime in early part of next year and there's going to be some cost benefits to that as well.

Okay. That's helpful. Just a couple other questions. Marty, you mentioned before from the President's Working Group, my read of it they sort of came up with seven or eight different alternatives but really didn't have any solutions with within those that they're passing on to the FSOC to take a look at. You mentioned a little more clarity maybe the possibility of liquidity bank. Is that the most likely scenario in your mind in terms of all the optionality that they've identified?

Let's see. So let me answer it this way. So as I said, our absolute understanding consistently was that the President's Working Group was going to lay out a bunch of options and the pros and cons along those and that's what happened. The liquidity bank from my point of view, and I think the industry's point of view, really is a very, very constructive, powerful thing that helps meet a primary goal that's trying to be achieved by the President's Working Group and so I'd say from our perspective, we think it's the more likely outcome, just because it achieves goals that have been set out by the President's Working Group.

Okay. I may have misinterpreted. I apologize for that. Just last question, you mentioned that retail's going to take a little while until it hits the full run rate but yet on a sequential basis your gross sales did pop and your redemptions did slow. Can you talk a little bit about -- any maybe this is UITs and ETS, but what you're seeing in terms of the lift sequentially that's giving you the bounce in the gross sales?

Yes, so let me -- I'm trying to -- thanks for asking the question, Bill. I'm answering sort of two questions, right. What we tried to point out just by giving pre-close, post-close, month over month gross sales, redemptions, sales redemptions and net flows but we are literally trying to show out of the box you see -- and again, it's only four months, 40% -- excuse me, five months, a 40% average increase month over month in gross flows. So the message is strong out of the box impact already and -- but I think the next question that I was hearing was are we done and the answer is no, we're not done at all.

And we think getting through next year is -- we'll just -- my view is we'll see a continuation of broadening importance to important counter parties during that period of time. So again, where we saw a lot of the flows is UITs were very important during this period, largely around fixed income. We're seeing equities coming through right now in UITs as Loren mentioned earlier, ETS are very strong but again, we're seeing just a much broader penetration within the channel that we're in. So I think we're strong out of the box and going to get stronger.

Okay. Thanks for taking all my questions.

Thanks, Bill.

Our next question does come from Michael Carrier of Deutsche Bank. Your line is open.

Good morning, guys. Just one more question on the distribution side. I know it's hard to quantify it, but if we look at the number of platforms that you're on right now, where you're getting preferred status, and then the number of products that you have to offer these distribution platforms, when you're looking over the next call it 12, 18 months, do you think you're in the second or third inning or fourth, fifth inning? Like how much more penetration do you think you have?

Well, you're asking the right question and again, I put in the context of we're probably third or fourth inning from where I think we're going to get to.

Okay. That's helpful. And then just any color, looks like the flows in the Asian market continue to do fairly well, it's probably the hardest market to gain a lot of insight to, so any color from -- in terms of like where the demand is coming from, which products? And that's it. Thanks.

We saw some significant interest in products in Japan. I think there was about even $900 million of new sales in the quarter for US real estate product as an example of our ability to sort of bring the best of Invesco to different locations. So that was definitely one piece that stands out.

And just following up on that, again, we focused a lot of our conversation around Morgan Stanley Van Kampen transaction on the US side which is obviously very impactful but it has put us in a very strong position in Japan too and just with local capabilities but also institutionally there, so.

I think there was also a large technology fund that was also launched that we provided to you in the quarter. Again, all in Japan. I think Japan has really been a very positive partner.

And I would just add one more thing. It's just answering the question about Asia. I think as we look forward and just as the world goes, and investor appetite from a US perspective looking outside the United States, we have a very, very strong greater China business as you all know. But also, we're the largest managers of Chinese equity securities and in time, the feedback we're getting is some real interest starting to begin around Chinese equities, it's a greater possibility in the US, not just retail where we've been but into some institutional portfolios.

The acquisition that we did in Australia I think is going to help certainly improve our competitive positioning in that market with the large cap Australian product now that is probably one of the best regarded and highest performing. Again, I think that is something to look forward to.

Thanks, guys.

Our next question does come from Marc Irizarry with Goldman Sachs. Your line is open.

Marty, could you talk a little bit about as you enter Phase II just sort of what the new business product opportunities are for you, sort of combining some of your capabilities, when you think about the opportunity of sort of filling out some of the white spaces out there that you don't have today. How do you think -- how do you sort of plan to move forward in terms of product?

Our view is once we -- starting in the US, once we -- so if you look depth and breadth of product, quality of product, we feel very, very good and it's led by our investment management teams and we think they're very, very strong so the next phase in the United States on the retail side is just cleaning up the lineup which we have sort of dwelled on today. If you look at the separate, distinct and best management teams, the quality of teams, the performance, it's not just the United States, but outside the United States. We started to talk about Asia for a second, and we find that to be very, very attractive for us. But quite frankly, our European business, where were the top Pan-European players, we think there's much greater scope for us to be impactful in Europe and so, again, our attention continues to look at historical strengths of this firm and that's outside of the United States and we don't feel that we're -- there's lots of white space. There's always room for improvement with what we have but at the moment it's all looking quite strong for us.

This is probably a little bit further out but I think some of your capital priorities include acquisitions. Where -- Loren, can you talk about some of the criteria. Marty, maybe from a scope perspective, what would you be looking at these days?

Criteria that we discussed in the past, financial -- first, it's strategic. We want it to be a strategic acquisition. We don't like generally to do passive sort of types of acquisitions. I don't think we've ever done any that are sort of just buying assets for the sake of growing. So it's going to complement the business, add a capability that we don't have as an example.

The financial criteria would be IRRs in excess of 20%. We like cash payback within seven years. And we also like to see the deal be accretive from day one. It's a combination of those two things that will generally give us a sense of comfort that we can move ahead financially. Marty, I don't know if you want to talk about--?

I think you did pretty well. From where we are, there's nothing imminent. We just don't sense that we have gaps and we think our greatest utility for our clients and shareholders is to put our head down and do a very good job with what we have.

Okay. Great. Thanks.

Next question does come from [Brendan Hawkins] of Collins Stewart. Your line is open.

Thanks for taking the question. Was hoping that you guys could talk a little bit more about the UITs. Is this a roughly $5 million per month run rate sort of the right way to think about it? And then were there specific issuance that skewed the quarter? And also talk about the margins on this business.

Brendan, so in terms of the run rate, obviously June was at a $5.5 million. I think we suggested that we're moving at a higher run rate even this quarter with about $14 million differential, so call it $6 million to $7 million. I think, again, the profitability on these products are pretty well set by the industry standards in terms of what the sales charges are and what's retained. So there's nothing specific about any one UIT or any particular type of UIT that we're generating that is creating this. I think the other thing to note is the number of UITs are significant. It's not one big UIT. It's many, many different ones being continually launched throughout the course of the quarter.

So it's a portfolio and as a particular UIT sort of comes to maturity, we have the opportunity to create a new one and bring -- put those clients into a new UIT. And so it is sort of a self-perpetuating, very positive cycle. The profitability is very strong, with margins at the higher end of the range of the types of businesses that we have. So it's a very good business for us financially and it's one that I think we do believe has some opportunity even outside of the US at some point, obviously regulatory barriers may still exist that would not allow us to bring it to different countries but we are looking at that as well.

How many of your customers -- is it pretty much all of them just re-up for the new UIT when it expires? And then generally speaking, the fixed income based UITs last longer, right? So is that effectively locking up the cash for a longer period of time than the equities?

Yes. In terms of the actual how successful we are, re-upping, I don't actually have that information. But you are correct about the fixed income products. They tend to be in excess of 5 years, 5 to 10, even 15 years. So once they're in, when they're in one of those, they're in for a longer period of time.

Great. Thanks.

Roger Freeman, Barclays Capital, your line is open.

Good morning. Just a few clarifications on things that were asked. In terms of cost synergy, on the merger, if I look at basically you're now running inside on the gross basis of your target. Is there anything identifiable, I know you don't track it separately, is there anything besides the fund merger or anything associated impact with that that's still to be done or is this the run rate?

I would suggest this is the run rate. Obviously for all of the business we continue to look for opportunities to improve but I'd say in terms of kind of achieving what we wanted to achieved I'd say we delivered it.

Okay. And then the $10 million of expense you mentioned around the fund mergers is that $10 million coming off of stepped up costs affect that or is that ongoing administrative costs that potentially come out.

It's the extra cost to administer all the mutual funds that obviously we suggested are going to be streamlined so that will come out when the funds go out. The only other stepped up cost that we have already discussed is from the hundreds, 95 to 100 is the actual implementation of the $15 million of marketing investment that will start end of this quarter, early next quarter.

Okay. That's helpful. And then just back on this 250% increase in preferred product placement. Can you just help us with what kind of number that is, like how many additional products this is. Are we talking 5 to 12 or is it something bigger than that?

That's a very fair point. We struggled with this. We're trying to give insights without -- there are sensitivities from our distribution partners. So let's put it this way. Since we started, let's call it about, oh, 50, 60, 70 type funds. How's that?

That's super helpful. And has some of that -- some of that's already started to fund or would you say the vast majority of that has not funded yet?

They've been approved.

Approved, right.

That's on the platforms. That then means there has to meet a need of the clients.

Right.

Right.

Okay. Last question. Just in terms of the blended net revenue yield, excluding performance fees, that came down slightly. I guess thinking with Van Kampen coming in, that's around 50 basis points, the decline sequentially is -- what explains that? Is it just mix of the legacy Invesco business?

No, I think it has more to do with the growth of some of the passive products that we've seen, there's been a real surge in that type of product.

Okay. Great. All right. Thanks.

Thank you.

Our next question does come from Jonathan Casteleyn of Susquehanna. Your line is open.

Yes, good morning. I know you can't say a lot about Wilbur Ross Fund Five. Can you just remind us historically about Fund Four, when it was closed and sort of historically how long does it take these funds to get seasoned and potentially qualify for performance fees on a look forward basis?

Fund Four closed in the end of 2007. And $4 billion, there were two closes as part of that, one in the third quarter, one in the fourth quarter. And in terms of the timing around performance fees or the carry that we would be receiving. It's hard to obviously predict. It has everything to do with how quickly things get invested and then get harvested. That has a lot to do with the current market environment. I think for Fund Four, it did not get invested as quickly as maybe some of the other funds have been, given the market, it was prudent to wait and probably smart to have done that.

And we have obviously been waiting for it to get to 75% invested because we could not launch another fund until that happened. In terms of the harvesting period, I think it's still going to be several years to be thinking about the timing before we actually see a performance fee. It's above a hurdle too so you need to generate I think it's 8.5% hurdle rates, generally. So I would guide a couple years before you begin to think about performance fees for Fund Four.

Thanks. That's helpful. Just quickly, the buyback was listed as sort of the last priority as far as capital allocation. Can you sort of flush out in the quarter or just generally how the Company tries to evaluate the stock and determine value or not. As I say, in the fourth priority position you did buy back stock in the quarter. Is there any way to sort of highlight?

We have our own models. We look out several years and we understand kind of our target growth rates and we spend a lot of time thinking about the value of the firm and kind of our growth trajectory, and we also look at our sales relative to competitors as we imagine them. When we see that the market is not giving us value for -- certainly this acquisition is a good example of something where we saw a disconnect. We felt very good about our ability to go in and buy the stock at a lower price.

Great. Thanks again.

Jeffrey Hopson of Stifel, your line is open.

Thanks a lot. In terms of the UITs, did you give us the actual flows this quarter? And then in the UK business, your performance has been fantastic. The flows have been solid but perhaps at lower levels than historically so. Is that just the environment? I mean, you would seem to have the product that would fit with the environment, so how do you view kind of what's happening in the UK right now?

I'll do the UITs. In terms of the UITs, in Q2, net flows were $0.4 billion, and Q3 was $0.9 billion. So that was kind of the step-up there. I think obviously the UK, sales were at record levels. They came off a little bit in the third quarter. But I think the general feeling is it was very positive elements. So if there's anything I'd say that's causing us to think there's a trend going down or anything, I think it's just noise that may, the way things fund.

I would say they've done a tremendous job. It's really, if anything it's an environmental factor.

Okay. And then fixed income, I'm having trouble tracking. So they were strong this quarter. So was that more retail or institutional, besides the UITs, the fixed income flows?

That was more institutionally driven and one of our very successful products, we have a very strong competitive position in is stable value which is the type of product that goes into retirement accounts and so it used to be the default option. People who want to protect their assets will use that. Many of the large players in that space have been exiting. And we continue to have one of the best performing products there. So we've been seeing a huge amount of interest in this quarter and then also in terms of the pipeline.

Okay. Great. Thank you.

At this time, we show no further questions.

Well, Loren and I would just like to thank everybody very much for participating in the questions and again, we think it was a very strong quarter. We think we positioned ourselves very well, do a very good job for our clients and also for shareholders and we'll continue to move the business forward. So thank you very much. Have a good day.

Thank you. Today's conference has ended. All participants may disconnect at this time.