景順投信 (IVZ) 2010 Q4 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 include information concerning future results for operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisition, 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, expects 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 different 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 SEC. You may obtain these reports from the SEC 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 fourth quarter results conference call. All participants will be on a listen-only mode until the question-and-answer session. (Operator Instructions)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 begin.

Thank you very much. I want to thank everybody for joining Loren and I today. We will be speaking to the presentation that we've made available to everybody. This morning we're going to take a few minutes and provide some perspective on the global business and how Invesco's positioned in key markets around the world; and then Loren is going to review the business results. And, as we traditionally do, we will open it up to Q and A after that. Those that are following the presentation, I'm now on page 3.

As we've discussed on previous calls, we believe Invesco is very well positioned to capture the enormous opportunities created by the global, demographic and industry trends. Through a variety of economic and market environments, our progress over the past several years has significantly strengthened our competitive position which is driving strong business momentum as we head into 2011. In addition to the work that we did in 2010 to further enhance the business, our recent acquisitions significantly strengthened our competitive position here in the United States, as well as in Japan, Australia and most recently in the Asian real estate market.

Going into the new year, we remain focused on building our presence in the fastest growing and most attractive markets across the globe. On page 4, if you take a look at Invesco's presence around the world, we believe our global presence is a very important competitive advantage for us. Invesco has meaningful and expanding market presence in the world's fastest growing and wealthiest regions of the world. Our strong US presence in growing global presence represents a significant long-term prospect for our business. We are among a very small number of firms that are well positioned globally to continue to grow our business and to build success over the long-term.

On page 5, what you will see is the assets under management around the world and our belief is that broad diversification across asset class, distribution channels and domestic domiciles is another key competitive advantage for our firm. This diversification enables us to weather the different market cycles; it benefits our clients, our shareholders and the business itself. I think what you will all note is our diversification across asset class and domicile is very well aligned with the industry and also with client demand on a global basis. Our multiyear focus on our strategic plan combined with our global presence has produced strong financial results over the past five years. Driven by strong investment performance, and improved market environment, and the successful integration of the Morgan Stanley, Van Kampen business, Invesco reported a 55% increase in adjusted earnings per share year-over-year ending 2010.

Our commitment to investment excellence has helped us deliver strong investment performance for our clients. If you look at the firm as a whole, 78% of the assets were ahead of peers on a five year basis. 68% of our assets were ahead of peers on a three year basis compares very, very favorably to the year 2005. The year one results are less strong. It is a result of the market run at the end of the year vis-a-vis the competitive positioning of a number of our portfolios, but we feel very confident about our investment teams and the long-term investment capabilities. Strong investment performances contributed to continued trend of positive long-term net flows for the firm, and the flow picture has improved steadily over the past two years. Our flows are now well balanced across the firm with positive net flows in nearly every part of the business in 2010.

Taking a look at Greater China and Japan, Invesco has a leading competitive position in Greater China and Japan with more than $40 billion in client assets in the region. We are physically located in 12 countries in that region. Invesco Japan is now the fifth largest global manager, and we rank eighth out of all managers in Japanese equities in this huge pension market in Japan. The acquisition of Morgan Stanley in Japan further strengthened our Japanese investment capabilities and enabled us to expand our relationship with top tier clients. The Japanese team is just extremely capable with a very strong long-term track record. Regarding Greater China, we are the first US joint venture asset management company established in the important Chinese market. The joint venture is known as Invesco Great Wall. We have a leading position in Chinese equities, with strong investment performance and are well positioned to benefit from China's growth.

We also have robust momentum in the Chinese institutional business with $2.5 billion in new institutional wins in the Greater China market over the past year. Driven by strong investment performance and a very sharp focus on our clients, Invesco occupies a leading position amongst global competitors in retail Chinese equities. Our strong investment performance is driving momentum and long-term flows for both Greater China and Japan. Invesco is in a very competitive position on the continental Europe market as well. Invesco currently has more than $35 billion in assets in continental Europe. We are physically located in 12 countries across the continent. We are one of the leading firms in this fast growing and huge cross border market in continental Europe, which is an important focus for our firm and growth in that region. We are ranked in the top [four tile] by leading cross border investment managers in continental Europe and, due to the strong local presence and competitive range of investment capabilities, is driving this result.

Invesco has a broad set of investment capabilities in this cross border product range and is among only 7% of firms with distribution capabilities that expand more than 20 markets. As one of the leading cross border managers, Invesco is well positioned to take advantage of these opportunities in this growing market.

As we discussed there are enormous opportunities across the globe. At the same time, given the dominant size and opportunities here in the United States, we need to get it right in the US as well. Our highly competitive investment performance, Invesco is very well positioned to grow in this critical market. And the acquisition of Morgan Stanley, Van Kampen and asset management has expanded the depth and breadth of our investment capabilities we can offer our clients, and significantly strengthen our market presence.

Throughout 2010, we worked to deepen the relationship with clients and consultants across all channels and segments and remained very focused on delivering investment performance. Our global operating plan -- platform and the scale of our business greatly enhance our ability to compete in the US market. As with our global business, diversification is a source of strength in the US. The increased diversity created by the combination with Morgan Stanley, Van Kampen business strengthened our US business across mutual funds, DC Insurance, ETFs, UITs in roughly equal increments. In the challenging equity mutual fund environment, this diversity provides us with a balance offering that provides clear benefits for our business. As you can see, it would be a mistake to view Invesco as just a domestic mutual fund business in the US. We are a broadly diversified global business with a competitive range of investment capabilities which provides tremendous competitive advantages here in the United States and around the world.

We continue to see momentum solid momentum in our US retail business driven by investment performance, a focused client engagement effort and a strong diversified mix of assets. The incremental impact of the combination on our business is clearly positive. As expected, the combination increases Invesco's relevance as a top ten manager in the US, which is enhancing our presence in the marketplace and driving new business. Post close average monthly growth sales are up 59%.

Now let's talk a moment about the expected outflows created from the combination. When we first announced the transaction, and based on historical experience, we estimated outflows resulting from the combination to be approximately $10 billion. The three key milestones we believed would drive this number were, first of all, the perceived transaction risk that comes with any combination. Secondly, the announcement of fund mergers and then finally when the proxies finally come to a vote. And based on our early integration success, we lowered that initial estimate to $5 billion in early 2000.

We did not see an increase in our redemption rate relative to the industry through the second milestone, the fund mergers. Additionally, we have been very pleased with the speed and effectiveness of execution in integrating the organizations and our ability to deliver for clients from day one. As a result, we have further lowered our estimate to $2 billion. And the final milestone, the proxy, will drop soon. But based on the attractiveness of our funds, our success in bringing the organizations together, we believe $2 billion in outflow is a worse case scenario.

As you can see on page 16, this provides a more holistic view of the momentum across the US business. Our combined US retail and institutional business continue to demonstrate strong momentum through the third quarter and fourth quarters, with average growth sales of 72% for institutional business from the first half of 2010.

Taking a look at performance, Invesco's strong long-term performance positions the firm very well for the expected return to domestic equities. Performance of our equity assets is very impressive. [77%] and 80% of our US retail assets rank in the top half of Lipper over three and five years. Nearly 60% of the assets are rated four and five star by Morning Star. If you look at the 20 largest Invesco US mutual funds, 91% of the assets are in the top half of Lipper over three and five years, and more than 70% are rated four and five star by Morning Star.

So we believe when the movement comes back to US equities, we are strongly positioned to do well within that. Our strong presence in US, Asia Pacific, Europe and our broad diversification represents significant long-term growth prospects for the business. During 2011, we continue to focus on delivering strong investment performance and further building on our broad global presence to further strengthen our business for the long-term. Now I'm going to hand it over to Loren to talk about the results.

Thanks, Marty. So on page 19, we will show some highlights for the fourth quarter. You will see that AUM was up 2% versus Q3, with average AUM up 5.6%. Long-term flows had the headline of out $17 billion. But as we had previously disclosed, we had a large passive outflow in Asia. Excluding this, we actually had a net inflow of $1.6 billion. Overall we saw improving operating results, 14% increase in adjusted operating income, quarter over quarter, 49% looking at versus the fourth quarter of last year. Importantly, our adjusted net operating margin is close to 37% in Q4. We also continued our active capital management. We added $77 million of cash to our balance sheet moving from the third quarter. We repurchased 65 million of stock and we paid down $79 million of our credit facility.

Moving to the next slide, just focusing on quarterly flows, I want to just note that on these charts, to eliminate the noise, we excluded the Q2 inflow and the Q2 outflow of that one Japanese passive mandate I discussed. You'll see that we stepped down a bit from Q3 numbers of $4.9 billion to $1.6 billion with AUM , ex ETF, and UIT, Passive declining, but we do not see this as a continuing trend. This is really a function of one of client actions; and in general, our pipeline suggests that we should see a continued positive improvement in net flows going forward, obviously excluding any potential impact from the VKMS breakage that Marty discussed earlier.

Moving to the next page we show our net flows by distribution channel. I'll just point out that we are particularly pleased to see the strong gross sales across all our distribution channels. The momentum continues. On page 22, just highlighting some of the investment performance, again, we really saw a great strength in our, across enterprise with certain pockets of truly exceptional performance in our US retail business. 90% or greater of our US value equity AUM are in the top half of peers in beating benchmark for both the three and five years. 94% of our AUM beat benchmark in the fourth quarter. 98% of global ex US and emerging market AUM are beating benchmarks over the five years, and 94% of AUM are in the top half of the peer group over five years. In addition, our global fixed income capability continues to achieve truly outstanding performance. We had a 77% of its AUM in the top half of the peer group for the three and five years.

Asian equity also quite strong. 95% of AUM beating benchmark for five years. And the Morning Star ratings for the US retail range remains near an all time high with 57% of retail assets rated four and five stars. I should just point out that post product integration, we will see these numbers continue to improve within as much as 7% or 8% increase, again assuming no changes from where we are just due to the product integration. Let me now move to the financial results, getting a little more detail. Obviously we saw some market gains in the quarter, $24.2 billion, foreign exchange at $1.4 billion. We also saw about $5 billion due to acquisitions net of disposition.

I've already talked a little bit about the flows. Really on this page, all I want to highlight is our net revenue yield in Q3 was up a basis point to 49.5 basis points, again driven by some of our performance fees. Moving next to operating results, let me go to net revenues. You will see that our net revenues increased $54.6 million, or 7.7%, quarter over quarter. This was primarily due to increases in investment management fees and performance fees. We had favorable FX rates, which added $5.3 million to net revenues. Looking a little bit more deeply, we saw investment management fees by themselves grew 6.7%, $50.4 million of that was due to that investment management fee increase; and FX was about $6.8 million of that $50.4 million. Service and distribution revenues increased by $10.4 million or 5.4%. This is no surprise largely in line with our increase in average AUM.

Performance fees came in stronger in the fourth quarter than we had previously anticipated; it came in at $18.7 million compared to $2.5 million, third quarter. This was being driven largely by our private wealth management group as well as European real estate. Other revenues increased by $1.3 million or about 4% relative to Q3, again largely driven by real estate transactions. Third-party distribution, service, and advisory expense, which we net against our gross revenues, increased by 23.7%, and foreign exchange amounted to $2.5 million of that increase.

Moving on down the slide, let's go into operating expenses. We had $481.5 million in operating expenses which was an increase of $20.2 million or 4.4% versus Q3. $4 million of that was due to foreign exchange. Employee compensation expenses increased by 7.4 million, or 2.5%, versus the third quarter, and this was a function of increased favorable compensation, but also including bonuses linked to the fourth quarter performance fees. Foreign exchange increased our compensation expense by $2.7 million when compared to the third quarter. Marketing was up a little bit more in the fourth quarter. It increased by $6.8 million or 15.1%. This was largely due to increased advertising and client activity in the US. As we previously discussed, we expected to begin investing incremental advertising dollars in the fourth quarter with a full year run rate of $15 million in 2011. You saw some of that activity in this quarter.

Property office and technology increased by 3.3%, with FX being $0.5 million of that. G&A expenses came in at $58.2 million of the quarter. That was about $3.9 million up versus Q3. Foreign exchange was $0.5 million of that, while the remaining $3.4 million expense variance reflected largely new product launches and a general higher level of business activity. Moving on down the page, let's talk about our tax rates. You will see our effective tax rate on a pretax adjusted cash to income for Q4 was 26%. That was up versus the 23.1% in Q3. You will recall that in the third quarter, we had the release of the FIN 48 provision for uncertain tax positions. Going forward, we would expect that our effective tax rate to hold steady around 27% to 28% with no significant quarterly variations, assuming again everything flat, no major changes. Our adjusted EPS was $0.44, an increase of 12.8% versus Q3; and again, our adjusted net operating margin was 36.8%, an improvement of 200 basis points.

Before I turn it back to Marty, I just wanted to point out a few things related to Q1 2011. As a reminder, compensation expenses should run about $10 million higher in the fourth quarter. Again, all things being equal, current asset levels, that really reflects the seasonal payroll taxes. I just want to make sure people remember that. In addition the first quarter had two fewer days. In Q4 that does affect the retail revenues and that should be about a 2% reduction in revenues just due to day counts on the retail side. Finally, new equity grants to Invesco employees, which is really part of our annual compensation plan, will be made in the middle of the first quarter, and new shares will show up in February. In line with our stated capital priorities, we will look to buy this issuance in over the course of the year; and as we have seen, we have been opportunistically buying in our shares. We spent a total of $192 million in the second half of 2010. With that, let me turn it back to Marty for any final comments before we open up to Q and

Why don't we go to Q and A, if we could.

(Operator Instructions)One moment for the first question, please. Our first question does come from Michael Carrier of Deutsche Bank.

Thanks, guys. I have one first question would just be on -- a little bit more color on the flows and we strip out the 17 -- or $18.6 billion, when I look at the different channels and the different products, it looks like what you would expect,. You had a little weakness in retail and there's some noise going through with the mergers. Then you had some strength in institutional; and by product, you had some strength in fixed income and all and some weakness in equities. I don't know if you can quantify, particularly in the equity bucket, how much of that is being related to some of the fund mergers and the Van Kampen side of the business, and then, what is more core or anything lumpy as a number.

Michael, we good question, obviously something we looked at very carefully. When we were thinking about what was related to the integration and the potential announcement -- when we announced the integration in November, we were looking at what the fallout might be. We did not see any spike up in our redemption rates relative to the industry levels. In fact, we have been tracking this and certainly not off of the industry levels. It's hard for us to point to breakage due to these announcements if we are really tracking where the industry is on the asset classes that we have. So again we have a higher proportion of domestic equity, has not been in favor. Obviously our international equity has been in an inflow, and that's where the industry inflows have been, so again, we've looked at it very closely from asset class to asset class to see if we've seen anything. And that's why we are optimistic; and we moved from the $5 billion down to the $2 billion worse case breakage number, because we really haven't seen any fallout yet.

Okay. It's helpful. On the institutional side you mentioned the pipeline; it's still pretty healthy. Just from a product mix, are you seeing any interest, any update there?

I think the focus still is very much where it has been. We see a great deal of interest in the alternative bucket generally, specifically real estate is probably the area where we are seeing the most degree of interest on the institutional side, but we are seeing greater interest in some of the commodity types of products asset allocation types of products. Stable value is another element that is featuring very nicely, because we are very competitively positioned, and we're performing extremely well. Bank loans are also an emerging theme. So again, it's broadening out, but it's still somewhat concentrated in some of those asset classes that we've discussed in the past.

I think also emerging markets equities is starting to get a lot of attention also, so you are starting to see -- what you are seeing is the retail flow is happening institutionally at the same time, so it is broadening the interest.

Last one, performance fees, obviously strong in the quarter. Any color on the drivers of that and just an elevated level or just more seasonality in certain products.

I think we would probably characterize it as -- obviously it was an exceptionally good performance in Atlantic Trust, and it was centered around one product in particular, and I don't know if we would necessarily -- we did see that product perform last year, I think it was about $6 million or $7 million of the performance fee and it was even higher this year. I'm not saying it wouldn't necessarily occur again in the next fourth quarter, but as an annual type of fee calculation, you wouldn't expect it to show up in any of the quarters coming forward, Q1, Q2, or Q3. The real estate piece, there's probably more potential for seeing performance fees in real estate generally and they do occur off cycle. That was the smaller piece of the performance fee, but it is one that has become more elevated than we've seen in the past.

Okay. Thanks, guys.

Sure.

Our next question does come from Michael Kim of Sandler O'Neill.

Just given some of the data we've seen from the ICI in the last couple of weeks, it does seem like retail investors are starting to warm up to equities, broadly speaking. Assuming that trend continues to play out, I'd be curious to get your take on where you think your biggest growth opportunities might be, whether it's value, core, growth, alternatives, or what have you. Thanks.

Michael, I think that's the case. It's not a big run towards them yet, but as you are seeing and what we are seeing too, you are starting to see people become more interested in it. As you and probably others have all done the work, when you look within the categories of US equities, you have the largest outflows over the last quarter going into the year, large GAAP growth, large GAAP value in those areas. Those ultimately will be the drivers of larger flows and we think we are very well positioned with the range of products we have in the performance against that. Again predicting where individuals will go is a hard one. I think also If you look at the international and global equity categories, again if you look at the categories within it, the vast amount of flows were going in to diversified emerging markets where we have very strong capabilities as a firm, but in the retail channel, our product is right now closed to new investors, which is the right thing for the investors that we have, but it doesn't open it up for those there, literally, so world stock funds and European stock funds being that out flows within those category. Again I think the headline is people are starting to move cautiously in to equities, and US equities in particular; and I think we are very well positioned for that; and also international equities would be the second area.

Okay. Then just in terms of compensation, it looks like that line was relatively flat after you adjust for maybe a step up related to performance fees this quarter. Just wondering if you could talk a little bit about how you have been able to remain disciplined on that front.

Michael, we always -- we forecast every quarter what we think operating income comes in based on current assets; and so, we are always looking ahead; and we don't believe in, sort of, catching up in the fourth quarter. So in our forecasting, we try to have a relatively smooth kind of progression on compensation other than sort of one off performance fees, which we really have a harder time predicting. Again, I think we had -- we are not surprised it was relatively flat. We think it makes sense relative to what we were doing. Some of it is a function of who is earning what, where and performance in different investment teams. But again, it's a diversified portfolio of teams, and so, there shouldn't be great movement from quarter to quarter, generally.

Finally if I could touch on the muni bond business from Van Kampen. I'd be curious to get your take on how the PMs are positioning the portfolios these days, and then also more broadly in terms of the fixed income flows, are you able to kind of quantify the outflows related to muni bonds this quarter? And then, if you look at the residual inflows, where were you seeing strong demand? Was it focused on stable value or other areas of the business? Thanks.

I think you're hitting on an industry topic. If you look at the fourth quarter last year where the headlines were very nerve-racking to investors around municipal bonds; you saw the tax free segment within the industry and it outflows. Quite frankly creating, I would say now, some pretty attractive situations for investors. That's a personal point of view. So we saw that too. We weren't immune to that. The team is a very, very good team. They do -- great at work and I feel very good about the portfolios that we have and the holdings within them. And I think it's a very attractive time for investors, personally.

Okay. Then just the residual fixed income growth.

Stable values have been a very, very important segment for us. It's just been a very strong performing part of the business, and it's probably recognized as the leading capability in the industry -- top couple for sure. We have been benefiting from that.

Okay, thanks for taking my questions.

Our next question does come from Roger Freeman of Barclays Capital.

Hi, good morning. Again, back on the flows related to Van Kampen fund mergers. Why do you think that you actually haven't seen anything measurable in the outflow front. I mean, you had thought that advisors might be bias to move customer funds out of these funds, avoid a lot of the proxy annoyances and other noise, and then come back in. And that sounds like that hasn't happened.

Yes, and I -- look, we've all been in the industry for a long, long time, and when we came up with that $10 billion number of expected outflows, as I mentioned, we didn't pull it out of the air. It was literally mathematical calculations based on historical information we had and industry information we picked up. Again I'm repeating myself, but there is always perceived transaction risk. There is usually -- it's hard work to do. The combination of the fund merger process -- they are drivers where you get redemptions. I personally attribute it to just very, very good communication with the clients, but also the integration just went very, very, very well, and the idea that all the systems are converted at the day of closing, as best I can tell, has never happened before. I think that's a huge driver; and at the same time, you have the management. The investment management teams weren't distracted there. We put them in a position where they could focus on the clients and drive performance; and I think that's really -- seems to be what is driving this result. We view it as a very unique outcome.

The other thing I would just add, Marty, I think the performance of the products --

That's right.

That are stronger than we had even anticipated in terms of we got a lot of product that was coming over and matching it to the right product buckets; and to the extent that you are taking the strong performing product and you might put it into a lesser performing product, there is always issues there. It's not really been the case. Our products are performing and even improving in their performance. It's allowed us to get greater confidence, that we have no issues in terms -- again, we are keeping the $2 billion as a safety net here. I think --

Is there any netting in there in that -- any of the new business that you have been awarded or expected or started a fund in there already, or are you not going to start until after the mergers are complete?

We are getting flows in and so we are getting inflows in that net against outflows, but what we're really talking about, though, is specific breakage related to the fund mergers, and that's what we're not seeing.

Lastly, as you look at 2011, besides the Van Kampen mergers and everything around that, what would you say the other couple of three biggest priorities for you as a management team are? You've had a lot of number of initiatives in place. You revamped your institutional sales force. Is there anything there we will be able to track or retail focus on getting in to model portfolios? What are your other priorities?

You've hit on a number of them. As I talked about earlier, Europe -- continental Europe -- is a great opportunity for us. We've taken position very well and we're focused on doing better in continental Europe. Asia Pacific, we think we are uniquely placed there. We will continue to probably do better there. If you look at some of our capabilities, not just emerging markets, but our Asian capabilities, our Chinese capabilities, those are asset classes and categories that will in time just continue to standout as investors continue to look to expand their exposure in those areas of the world. That's really the conversation we are trying to have. I think generally the most public information you can get to is US mutual funds; and so, that's what people focus on here. And if you focus simply on the US mutual fund business, you are missing the point; and that's what we are trying to get across today.

Great, thanks.

Next question does come from Craig Siegenthaler of Credit Suisse.

Thanks, good morning, everyone. If we think about the fee rate and we think about Wilbur Ross or the alternative flows in the end of the fourth quarter, we look at -- that's a positive. Then we look at fund consolidations which may serve as an negative to the fee rate, but then also we look at the market performance, the shift back to risk assets in the fourth quarter, a little bit in the first part of the first quarter. How should we think about the fee rate trending in the first quarter? I know, Loren, you mentioned that there is less days, but if we already account for that, shouldn't there be somewhat of a step up in the first quarter?

I think that generally excluding performance fees, with equity markets growing, which they have been, that does have a positive impact on our fee rate. So that's absolutely one part of it. The other thing that's definitely going to happen is you had the passive fees that sellout in the fourth quarter; and that was at a very, very low fee rate; and for that, we'll have sort of just, obviously, a mathematical benefit to the first quarter relative to the fourth quarter. The general flow into passive is always something that could shift things around a little bit. People are gravitating back to some of the domestic equity mutual funds that will be a very positive thing as opposed to potentially other types of passive products or ETFs, but we have continued to see strengths in ETFs, but they're at a higher fee, so again, I don't think that necessarily will dilute our traditional -- our traditional ETFs that will dilute our fee rates. So I'm optimistic based on where the market is going that we will certainly see a benefit to the fee rate going forward.

Thanks. Also you mentioned how well this company is positioned from an AUM standpoint for an economic recovery. When you look at the income statement -- when I look at your income statement it seems a lot more weighted towards fixed costs than peers, especially when I look at some of the lower expense items and even the component of comp, which you did a lot less cutting on the downturn, so maybe a tad less than the upturn. Can you quantify or qualify some of the statements? Do you believe you have a fairly large concentration of fixed expenses, which will allow revenues to be offset with less expenses in a recovery.

Craig, I think our fixed expense relative to variable expense is about two-thirds fixed, one-third variable. And that is something that I think will provide us with great operating leverage on the upside. What is it a function of; it's a function of, one, us being a global company, which is inherently, more -- we have more infrastructure to do as opposed to operating from one city and one product. I think the operating leverage will work in our favor. We can try to variabilize the fixed expense, but we don't think that's the right answer. We really think that the greater idea is to keep a lot of the back -- I don't want to the back office, because it's the wrong way to describe it -- but the platforms and keep driving the costs down, and we can add value to the process. If you farm that off to a third party, you variabilize that, but you lose the margin upside. We think we have the opportunity through just normal market growth to see our margins continue to expand from where they are today. And we are hoping that that is going to be the case and we think that's what our investors want to see as well.

Got it. Thanks for taking my questions.

Next question does come from Glenn Schorr of Nomura.

Thanks very much. Just figured I wanted to ask one more question on the redemption issues. If you look on your slide 20, if you look at -- growth sales are obviously a great leading indicator and picking up, but redemptions seem to be going a little lockstep with them. Even just netting out the muni issue in the quarter and some of the fund consolidation stuff, what do you think is driving the pickup on redemptions there; and can we get to the nirvana point where you keep driving those gross sales and, actually, redemption settle in?

Glenn, there are a couple of one off things on the institutional side. You see it on slide 21 probably more so where it wasn't so much a retail redemption point; it was more of a spike in the institutional side, and again, there were some one off things that I could point to that we don't think are going to be recurring fees. The point on the retail side is that we will expect to see obviously -- certainly at a minimum, moving in line with the industry and doing better than the industry ex -- any breakage and high net worth or the private wealth management continues to drive forward. And on the institutional side, our pipeline, everything we've seen both in terms of, one, but not yet, funded, as well as qualified opportunities; they're both growing double digit growth rates versus Q3 versus prior December. So again, we have every reason to feel that this fourth quarter may just be a little bit of a noise point.

That would be great. The some one-offs on the institutional side add up to something that we'd think is relevant, right?

It is. It's in the billions. So again, they are low fee, though, we talked a little bit about it in our December release that there was some outflow on the institutional side. Again, some of our products are designed to be low fee, but will generate other types of revenues. But again, it's something that I don't think you will see have a material impact on our revenue. If anything, it will improve our yield.

Thanks, Loren. One last cleanup. Head count just a little bit higher, curious if that's all in the growth markets that you started out the presentation talking about and what to expect there given your part way through the integration.

I think the head count is a function of the integration depending on where you are looking obviously, but we did do some acquisitions through the course of the fourth quarter, so there was some head count pickup there, which, again AIG real estate business; that's one piece, among others. I think some of it is the acquisition. Finally, we are prepping for the move to our -- moving our Indian office over to our books. Right now it's all being done through a third party provider. And we've already started that process. Some of those head count that were in the Indian outsourced relationship are on our books, so you will, see actually, the head count, jump just ahead and -- in the first quarter up probably close to 500, even more ahead when we bring those individuals over. It's again not going to do anything from a P&L perspective; it may move some things around in terms of where it's located between property and technology in to compensation, but again, it's not material in terms of moving.

Ok, got it. Thanks very much.

Our next question does come from Cynthia Mayer of Bank of America Merrill Lynch.

Could you give us a little more color on flow trends at perpetual, because looking at the earnings release, it looks like you didn't have any flows in the UK this quarter and performance is challenged for one and three year periods -- one year and three year periods based on the appendix. So I'm wondering, could that turn to outflows from what you are seeing and also is the underperformance there due to any particular positionings that might reverse in a different market environment?

I think we obviously have seen significant inflows coming in from the UK, it's been broadly across a variety of product categories which is good news. We still see good sales there, but the redemption rate has moved more in line with industry averages and that really was the story for what happened in the fourth quarter. I don't think we are concerned about outflows; certainly, there has been underperformance when you look at the numbers, really due to some of the high convention kind of investing that happens with our teams there. It can move around quite a bit depending on which market environment you are in, and we've seen it go from the best in class to the lower of that, just based on where the markets are moving in a particular day or week. So again we feel good about the flow prospects overall, just given the diversification of products and high performance that we have across the broad spectrum. Generally when we seen underperformance in the UK, we have not seen significant outflows when that has happened. People understand the style that's being provided; and I think the vast majority of people have great faith in the management of the teams there. So again, it's something that we are still looking at. I'm not saying it couldn't happen but I would say, at this point we are not concerned. We feel confident that we got a good story in the UK.

I'd just add that it's a world class investment team of cross categories. The performance is very consistent with the investment philosophy and approach and feel very confident in time that performance will do very, very well.

Obviously the run-up in the markets which have been really driven by, I guess some might say, lower quality movement is a theme that obviously has affected the performance in the UK and some of the other areas within the firm generally that have a longer view on managing their position. Again I don't think we are concerned. We don't really think the one year numbers are going to drive flows and the longer term track record singling the UK are just outstanding. I think that will account for more.

Okay. Also in terms of equity rotation, it seems as if a lot of the discussion has focused on a rotation in the US. And since you guys are so global, I'm wondering if you are expecting a rotation toward more equity outside the US. And if so, where, or is -- or allocations outside or at least in the markets you operate in, are they more based on other factors?

It's interesting, Cynthia, and it's a great question. When you look at it from the data we see, the US has been the most pronounced difficult equity market at a retail level. If you look at continental Europe, there were some very, very strong concentrated flows in global bond funds. But you still have equity inflows. But I think what you are going to see in is -- on the continent in particular -- is probably rotation back to equities, and by European equities will be a very, very important part of that. And again, we think we are positioned very, very well for. We are seeing in Japan, frankly, the Japanese equity team continues to get more interest again, so we expect that to be another area. There has been continued interest in the Greater China area in to equities, but interestingly again, some of the categories are we might classify as more diversifi -- energy type sectors or precious metal type sectors -- more sector driven which, I wouldn't say how people in the United States would generally look at things. We do think the equity theme is beyond the United States.

Great, thanks a lot.

Next question does come from Ken Worthington of JPMC.

First question is on Canada. You highlighted the China growth and the Japanese growth, but it seems like Canada is still the problem child, if you can just plug the hole there, you double sales. So my question is, the performance has gotten better. When do you think -- when is it most likely that that business can turn and is there anything you guys are doing behind the scenes to kind of move the progress along to try to reduce the redemptions?

Ken, you hit on the first important topic, improving investment performance is a very, very important thing, and that's happening. Canada also is a very different market than what we seen almost anywhere else in the world, where in my view there is almost this separation of manufacturing and distribution is sort of the common theme around the world. You see it to the extent of financial institutions getting out of money management. And it is exactly counter in Canada, where the banks have done a very, very good job in money management; and they are getting stronger and sort of the distribution element they are distributing and managing, and that is probably a very unique trend in the world. Generally what you are seeing is, you have independent asset managers that don't have distribution; this has been a challenge. That's been a big compounding factor. So with that as a theme, what we've also seen too, what's important is we've had a very narrow product offering in Canada, is being broadened within that channel which we think is helping and will continue to be helpful in that marketplace. Also, we have been -- frankly has had really no position in the institutional market in Canada and that is an area where we are focusing on as an organization, very early days, but we think we're going to see -- that's another area of success for us. We think it's an important market for us. We think in time we will do well, but there is this overall industry phenomenon going on at the same time.

Thank you. Just one second question. You have been beefing up the retail institutional distribution capabilities and adding resources there. If we could scratch beneath the surface a little bit, I'd love some more details on what is happening. Particularly in retail, can you talk about maybe progress you made this quarter or expect to make next quarter with the independent brokers versus the regionals versus the wire houses. And then on the institutional side, I think one of the metrics is getting the funds rated. Any progress made on getting more funds rated this quarter; and again what kind of progress do you expect to make there, maybe over the next quarter or two. Thanks.

Let me try to get some of those, Ken. On the institutional side again, there has been -- let me first step back and say, all of the investment capabilities, we look to make available in both retail institutional channels when it makes sense. Within that, this notion of getting on platforms or getting rated by consultants is a important factor. There is -- I feel very good about the institutional leadership we have in this organization right now. I'd say it's being put in place throughout last year and really probably mid-November was the end of -- if you want to call it -- the positioning of the team. They're very, very focused, broadly, in doing the things you want them to do, a segment of that being on consultant ratings and there is a plan to broaden and drive those ratings up in the consultant channel. That is, like anything, a longer dated effort, but I think we will make some good progress during the year. Within the platforms in the United States, I would say there is this on going focus in progress. I don't have specific numbers.

I do know that we are continuing to make progress. I had the opportunity to speak to our head of distribution and he has provided definitely anecdotes that say yes our product is being promoted and put on preferred, in terms of, models -- being said, these are the products that you should be buying. And these are large, large distributors. I don't want to name names, but we are definitely getting traction there. We've having a lot of our products approved in some of the wire houses. I think we just recently just had six new ones -- approval and some of our products that are really getting traction too are some of the asset allocation products that -- I think our track record is amongst is best, has a differentiated capability. We're -- RFPs really are moving significantly higher from where they were in the early part of the year, more than doubling. Again, we're seeing the right sense of progress. We have every reason to continue to be optimistic that we are getting traction. I do think if the market environment comes into play that's favorable to the assets that we are have to offer, it will spell flows.

Thank you very much.

Our next question comes from Dan Fannon at Jefferies. Just building a little bit on the last question with regards to some of the comments you gave in the presentation around improvement in the monthly sales and some of the retail activities. Can you give us a sense of where that is coming from, potentially from a specific distribution partner, or from certain channels to kind of get a sense of where we think there is still is opportunity or where acceleration can come from.

I think the headline is there is opportunity in all the channels. I don't think any one of us feels we hit the potential in any one of the channels. I think that's a general theme. Not just in the United States but different parts of the world. Again come back to Europe and Asia in particular. Again, I think as Ken had asked just before, what you are following up on, our absolute ongoing efforts are to do everything we are supposed to do to broaden that and make that more successful.

I think the area where we are seeing a lot of very good progress just generally the retirement channel, insurance, some of the specialized capabilities we can plug in, there hasn't been a lot of disruption there. Obviously general disruption in some of the broker dealer, wire house areas, and it's harder to move ahead. We talked about -- their working out their own situations and that takes time. In terms of our key partners, we were seeing progress, definitive progress, and we feel good about that. The other area that generally is working for us too is just an area of sort of US retail, ETFs and UITs, that continue to be really a strong capability for us and a differentiating capability; and I think that's something that again we are not seeing any slow down.

Great. I guess just thinking about 2011, on the expense side, Loren, we have guidance for another $10 million coming out from Van Kampen. Any thoughts outside of compensation in terms of that more fixed cost base in terms of levels or I guess in just in terms of trend as we see it building throughout the year.

I think we continue to work on expense management across many different levels and many different projects. There's nothing that's significant other than -- probably the biggest moving piece has been our ability to leverage our Indian operation more and more fully, that's just a theme that we'll continue to see. You'll see it in that area. And obviously, there's savings in that process. Beyond that, there is nothing dramatic that I can really talk about other than obviously the basic blocking and tackling.

What I would add, though, Dan, for everybody too, we will never stop this effort of continuous improvement, becoming more efficient, more effective every year. It's just absolutely essential for a business to constantly challenge itself and become more efficient, more affective for all the obvious reasons. Again, compared to five years ago, when there was a focus on low hanging fruit, we're just at a very, very different place as an organization. It's always going to be a continued focus for the firm to get better and better.

Great, thank you.

Next question comes from Bill Katz of Citigroup

First question is just on the institutional pipeline. You talked somewhat qualitativelyand somewhat quantitatively. Can you put any kind of hard numbers around that to sort of see -- it feels like you're working on some small numbers with some good growth rates. I'm just trying to understand from the absolute sense, what kind of pipeline you might be talking about.

Bill, we've never really historically provided that level of details, and I'm hesitant to start now. Obviously, when you think about how an institutional business works, we have a good sense of what's going on in terms of the sales. You look at our sales, that's representative of what we're bringing in for a quarter. Generally, we're not funding more than -- multiple quarters in advance. So again, sizewise, it's within our quarterly sales number. It's something that -- I think at this point, we'll pass on that question, if that's all right.

That's very helpful.I apologize. I was writing notes down as fast as I could. Did you give any kind of any update around the Wilbur Ross and Wilbur Ross Recovery Fund in terms of where we stand in either marketing or any kind of capital raising?

Unfortunately, we're not able to talk about that specific fundraising for the reasons that we've discussed in the past. I can't get into any specifics about what's been raised or when the rate's going to be raised, when is it going to close without getting --

But there was nothing in this particular quarter, for the fourth quarter.

Even in as much as I would like to talk about it, I can't even tell you what could fund in the new quarter. I know it's kind of frustrating for everyone. I just can't specify anything specifically to that fund.

Loren, one big picture question for yourself, you guys gave a nice update earlier around the world in terms of where your footings are. From a requisite size perspective -- one of the things that seems to be playing out in the industry, is that the bigger are taking a disproportionate of market share. As you look at your franchise around the world, do you feel like you are at the requisite size that can fully leverage the pretty strong performance that 's developing?

Yes, I really do. It's a -- again, this is not a new attribute of Invesco; it's one of those very, very deep and important elements that goes back decades. When you look at the relative positioning of this firm in Asia, Greater China in particular, and more recently with the addition of Morgan Stanley, Japan combination, we are very, very strong -- very strong in that part of the world, and also a deep history in continental Europe. Again, it's not an overnight idea. It is decades of being there, and very, very capable group of people on the ground there. And we have just been focused on trying to broaden our success there. I think we'll be quite strong there. I feel very good about our positioning.

Just one last one as a follow-up to that, thinking about Canada and your comments where you have sort -- architected to more of a closed loop rather than an open loop, given the performance and flow trends there. Any thoughts to potentially shed that asset and maybe reinvest the proceeds into faster-growth markets, either outside the United States or take advantage of some market share in the United States?

Bill, you're breaking up a little bit, but I think I got the gist of the question. Canada is a very, very strong capability for us. We think there's a great opportunity in toto in Canada. We have not historically taken advantage of the total Canadian opportunity, and we intend to. We just think it's a capability that's used throughout the organization; and we like the talent it contributes. We're committed to being very successful in that market.

Thank you very much.

Our next question does come from Robert Lee of KBW.

Thanks. It's hard to believe there's still some questions left.

That's all right. That's why we're here.

Just a couple of quick ones. First, for Loren on capital management, if I think back to immediately post-the-deal, my impression had been that the real focus was going to be to pretty aggressively pay down the short term debt related to the deal. And what you've seen in the last couple of quarters, you've paid down some short term debt. You've really been much more aggressively on share repurchase. Given the strength of your cash flow, how you feel, should we -- I don't know if this is a fair question -- should we think that for the time being that you're probably going to continue to a more balanced approach, given how the stock has been trading, the low cost of that debt. Maybe you're a little happier leaving that short term debt there for a while.

I think it's very much a function of -- when we see the value in the stock, we'll definitely come in and be opportunistic. We never said our hands were tied in terms of how quickly we're going to pay down the credit facility. If we see value, in terms of buying the shares, I think we will do that, and we will balance it in a very prudent way against the other priorities. Paying down the credit facility is a priority, don't get me wrong. Again, there's not a, we've got to get it done by Q3 of next year mind of mentality. We do want to make progress. Again, I think you should expect us to continue to be very balanced and opportunistic in terms of how we deploy our capital, with the goal to maximize shareholder value overall.

Quick question on the ETF business, can you just briefly update us on what success you're having on broadening that business outside the US, whether it's into Asia or continental Europe? I know it's been in process a couple of years, but my impression from several quarters ago is maybe it hadn't quite lived up to your earlier expectations. Are you seeing any improvement there?

Fair question and you're on the mark, I feel really good about the progress we've been making in the United States with ETFs. I think it's really been a great combination for us. In Europe, it's probably been three years ago when we first entered the market. The fundamental fact is during the crisis period we did slow down on additional development in Europe. Whether that was smart or not, we can judge that in a few years. We do think it's an important attribute that we have, and it is going to continue to be a focus of ours in Europe. Canada actually has -- again, it was about a year ago that we started in Canada. There has been some really good early successes. It's about $1 billion of assets that have come out of Canada -- the ETF market in Canada for us Again, we just at it -- we are looking globally. We are paying attention globally. We will response when we think the markets are ready, and there's an opportunity for us to do it. But again, I think what you would see over -- again, so we've not given up on it, but your observation is a correct one.

Just one last question, just in the big picture. 12B-1 fees really haven't -- been kind of quiet for a while. I know SEC comment period, I believe, ended a month or so ago. Any sense, any rumblings you're hearing on how long it's going to take the SEC with all they've got in their plate to actually come up with some final recommendations?

Just within your question is the answer. You have a new division director coming in right now, so yes, there's an awful lot of work done -- on a recommendation, there was an enormous amount of feedback on the recommendation, and I think by some estimates, there was more feedback on that recommendation of any proposal that's ever come out of the SEC. You put that in combination of new director, the feedback they had, but also with all the things that have been put on their plate with the new regulations they have to deal with, I think it's going to be quite a while before they get back to the 12B-1 topic.

I appreciate you guys taking my questions.

Our next question comes from Mark Irizarry of Goldman Sachs.

I guess this is a question for both Loren and Marty. Your growth market initiatives, you obviously have a significant amount of non-US presence. Can you just rank the margins in some of the growth markets, or just give us some perspective of what you think about the overall company operating margin. Are we entering a point in time where the margin accretion from some of those growth markets is going to accelerate. Clearly you have a lot of boots on the ground there, but what's the incremental margin opportunity in those growth markets?

Marc, I'll give you a little help on this one. We provide some insight -- you can see our joint venture; this is just one example, because it's fully disclosed in our asset release, so you can see the margins are very healthy there. I think it's 60% in that range, and higher. Some of those markets to the extent that they really begin growing could be extremely helpful for us in terms of asset -- margin expansion. The other element to margin is scale. So the areas where we have the greatest scale and probably largest mutual funds tend to be higher margin, and you can look to the UK as an example of an area where you see that type of phenomenon. With that said, generally although offshore product is high margin for us, it's a higher fee than some of the US product -- so there isn't dramatic differencebetween continental Europe and the UK as a general point. Where we have seen is -- the lower margins have been the small areas that are more asset side and really not operating outside of their own local area. So those are our opportunities to cross-sell product in and become bigger in those locations. I don't want to name names, but you can look to our map and you'll probably see certain things. We've done some things, like in Australia to improve our scale; and that's very helpful for margin. Japan is another example where we've obviously taken a conscience act to try to grow to scale there. So that's going to be our approach, is to continue to look where we are and be relevant to the markets where we're operating.

Marty, maybe in just one of the areas that just stands out relative to growth markets is Latin America. Is there any strategy there to continue to broaden out the global footprint?

There isn't currently, and it's not for lack of discussion, as I mentioned earlier. Like any business, we look every year, all the time, where should we be placing our emphasis, and our conclusion has come to the next incremental dollar, management time, we think, reinvest it back in the countries that we're in right now is a much better result for our clients and shareholders than going into a place like Mexico or Brazil right now. And that's the path that we're on probably for the foreseeable future, unless things change.

Our next question comes from Chris Barr of CSLA

This is just a follow-up to the capital priority question. Do you guys have a stated dividend payout ratio, or guidelines you want to shoot for and do you think you'll have another dividend announcement sometime this spring like you've done in the past?

Our dividend policy is really to have our dividend grow under all markets steadily, so we target single digit growth rates for dividend, and it could be somewhere between 4% and 6%, generally, year over year, under all things -- we don't -- we do not target a specific payout ratio, but we do want to make sure that we never have to cut the dividends or have to reduce it. Again, I think if you look at how we've done it in the past, it's actually served us quite well, even through the whole credit crisis.

And the normal announcement date is usually in the spring, and that will --

We would announce for the first quarter increase sometime after the earnings call for the first quarter --

Okay, thank you.

We show no further questions. I will turn the call back over to you for closing comments.

I want to thank everybody for their time and interest, and again we feel it was a very good year, very good quarter. We've very optimistic as we look forward for the opportunities for the organization. Again, we just feel we're placed very, very well globally and have a strong range of investment capabilities, a very dedicated organization. And again, I think we should have a very good 2011, and I hope we all do. Thank you very much and have a good rest of the day. Take care.