景順投信 (IVZ) 2011 Q1 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 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, 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 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 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 First Quarter Results Conference Call. All participants will be in 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. I would now 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 and thank you, everybody, for joining us. In addition to myself, Loren Starr, Invesco CFO, and also, Mark Armour is on the call with us today, who leads our institutional business. We'll be speaking to the presentation that's available on our website, and this morning, we'll do what we typically do and do a review of the business. But we thought it'd be very, very helpful to have Mark provide some perspective on our global institutional business and highlight the capabilities where we're seeing the greatest interest from clients and consultants. Loren will go into the financial results in greater detail and then, the three of us are more than happy to answer anybody's questions. On page 3, let me just hit a few of the first few points for the highlight to quarter. Invesco's commitment to investment excellence continued to yield strong long-term investment performance for our clients. Investment performance across the enterprise remained very strong in the first quarter with areas of exceptional performance.

Our strong investment performance continued a trend of positive long-term net flows for the Firm and during the first quarter, we saw strong long-term net flows across all distribution channels. Also during the quarter, we continued the share repurchase program, purchasing 2.1 million shares for $53 million. The fund consolidation related to the acquisition of Morgan Stanley's retail asset management business is nearly complete. We've experienced no merger related outflows year-to-date and the combined business has demonstrated strong momentum. And consistent with our six-year track record of progressively increasing the dividend and reflecting the Firm's continued financial strength, we're raising our first quarter dividend to $0.1225 per share, an increase of 11.4%. Now let me hit the summary of the financial results for the quarter. Assets Under Management ended the quarter at $641 billion versus $616 billion at the end of the fourth quarter, reflecting the improved markets and also the strong momentum across our business globally.

Adjusted operating income for the quarter was $272 million and the operating margin was 36.2%. Net flows for the quarter were $9.2 billion including net long-term flows of $6.6 billion. This continues the positive trend we've demonstrated over the past several quarters and again, Loren will go into greater detail when he reviews the financials. If you take a look at the quarterly flows, what you'll see is the strength coming from strong gross sales in the first quarter that led to continued positive momentum into long-term flows. And as I mentioned earlier, the long-term flows for the quarter were $6.6 billion, driven by continued strong interest in our traditional Invesco PowerShares ETF and the UIT business also. If you look at the different distribution channels, again, strong gross sales across retail and institutional channels contributed to positive net flows for Invesco as a whole during the quarter. And we saw positive flows into the Private Wealth Management business and this is now four years in a row that we have had positive flows into that business.

As you all know, a key strategic priority for us is to generate strong long-term investment performance for our clients and our commitment to investment excellence has led to a continuing significant improvement in our investment performance across the enterprise. A key reason we've seen improved stability in our flows has been the strong investment performance of the Firm and if you look at the Firm as a whole, 77% of the assets were ahead of peers on a three-year basis at the end of first quarter and over a five-year period, 79% of the assets were ahead of peers. We also saw improvement in the one-year number with 55% of the assets ahead of peer during the first quarter versus 48% in the prior fourth quarter. And we have detailed charts in the appendix if you would like to look at that at your leisure. As I mentioned earlier, we saw strong investment performance across the enterprise with pockets of exceptional performance.

The US value capability remains strong with 94% of assets in the top half of peers over three and five years, 94% of the UK equity assets beating benchmarks for one, three, and five years, 86% of the global fixed-income assets in the top half of peer groups for one, three, five years, 95% of Asian equity assets beating benchmarks over the five year period and Morningstar ratings for Invesco in the US remain at near all-time highs with 60% of the assets rated four and five stars. And also, Invesco received nine Lipper awards for six retail funds across a broad range of capabilities including convertibles, non-US equities, sector, value and growth. And now on slide nine, and a -- just an update on the acquisition-related milestones. As we've discussed previously, late last year we undertook the consolidation of a number of funds related to our acquisition of Morgan Stanley's retail asset management business. And to highlight a few of the ares, in the area of cost synergies, the actual results were meaningfully greater than our initial estimate.

We achieved $85 million over a five-month period post-close, against an estimate of $70 million which we thought we would achieve 12 months post-close. And in line with our expectations, we have not seen a spike in the redemption rates in the funds that were a part of the consolidation. We also experienced no meaningful merger-related outflows year-to-date. And with 92% of the assets having received the required votes, the fund rationalization is on track for completion in the second quarter. So I'm going to stop there and hand the meeting over to Mark, who will highlight Invesco's global institutional business. Mark?

Look, I'm going to start on slides 10 and 11 and what I'd like to do is to leave you all with three basic thoughts, if I could. First one you can see is on slide 11. Globally, we do have a sizeable institutional business. Secondly, we have achieved good client momentum globally over the last couple of years and for reasons that I'll touch on briefly, we do believe we've got further significant great opportunities in the institutional space. If we look at slide 11, you can see that the relationships we have with the institutional clients globally account for approximately one-third of Invesco's total AUM and the breakdown by region is shown here on the slide. You'll also note that we've got something like [600] service and consultant relations professionally. Professionals globally supporting our clients. That number to us seems about right.

It's not so much the number of people that we've got as the quality that's important. As you can tell, these things are organized regionally or by country and the reason we do this is so that they can better understand our clients' needs being local and then work with our investment teams globally to meet the needs of those clients. I probably should put as a sidelight here that even though I'm talking about all the world, not all of these people formally report to me but to Rob or to our business heads around the world. But broadly the focus that we've go the in the institutional space is really in three basic areas. First and foremost, having top quality people. Secondly, looking to -- with those people, deliver the investment excellence that we've got within the Firm by better understanding and meeting the needs of our clients and frankly, consultants who we think of as clients. So overall, our aim is to match up the investment capabilities of our more than 600 investment professionals and Marty has talked to you already about the good position our investment performance is in across the world. We've acquired these so we that can deliver, if you like, compelling solutions for their problems.

Let's now move on, if we can, to slide 12. And what I want to do is to really talk to you a little bit about some of the investment capabilities that we're seeing gain a lot of traction globally and these are ones that are typically getting large amounts of money. So first and foremost, real estate, we have a very highly regarded capability here. We've been investing in the market since the early '80s and we're in by the direct real estate business as well as real estate securities or rates. And I think as most of you are aware, we just recently strengthened that platform with an acquisition in Asia late last year. The strong team has enabled us and the strong position we have has enabled us to maintain very low staff turnover, which in turn has enabled us to continue to fine tune the capability that we've got. And this in turn has led, frankly, to very good results for our clients in both the real estate, as well as the direct real estate space.

Right at the moment, we're seeing terribly strong interest in real estate globally. And in contrast to what we saw a couple of years ago, it's not in rates but rather now in the direct real estate space and that interest is not just in the US, but also in other parts of the world including Asia-Pacific and Europe. Moving on, something that's a little bit different is our risk parity capability, we call it Premia Plus. This is managed by a global asset allocation team that's based in Atlanta. Been doing this, as we note, since 2001, so (inaudible) managing about $10 billion. As you'd be aware, these capabilities aim to give stable returns through a cycle and so it's more about not losing money rather than about gaining a large amount.

Maybe at the time it looked a bit silly, but we did actually launch this capability into the teeth of the financial crisis back in September 2008. But it turned out to be good because the returns we got early on were very strong and that good performance is being continued. In terms of interest, what we see is that globally, our retail clients seem to be most interested in the traditional Premia Plus capability which is investing across asset classes and that interest is very strong in North America, the US and Canada, but also in Europe. By contrast, we're seeing quite some interest in the Premia Plus space and institutional space, but more so on the commodities only capability and this is something that we've seen to be differentiated from our clients. So, strong interest there and frankly, been strong growth over the last several months. Stable value, we mentioned this before, like real estate, it's an area where we're seen as a market leader.

We've been managing this asset class since the mid-'80s. I think people were aware we did have some issues a few years ago, clearly, they're well behind us. Asset growth's been strong, $42 billion at the moment. The strength of our structured credit team, I think, is a differentiator, and helped the performance in 2009, 2010. But also, to us, two other things are important. First and foremost, we've had an equal focus on maintaining good value, not simply on getting returns and I think that helped us through the crisis. And then we are unusual, even unique amongst the (inaudible) managers to the extent that we do, as part of our process, use other managers and that gives us the most diversification.

So overall, we've had very strong flows in recent years and in fact, we're having to sort of control the way that which we take new money on right at the moment and frankly believe that we're well-positioned given the changes that are going on in the industry and (inaudible) to continue to gain share. Finally, and if you can excuse the pun, we did want to talk about something that's a bit of an emerging capability and (inaudible) emerging markets. Equity, we've got two capabilities -- one based in Austin, in Texas, is already at capacity, so we can't take on any new business there, so I wanted to talk about briefly was that -- the capability managed by our global equity team in Atlanta. We've got a track record here of just over six years and that performance combined with -- which is, and the performance has been good, well ahead of benchmark. That combined with the fact that we've got capacity means that we are seeing quite a bit of emerging interest in this capability as we become better known. So, there's some of the ones. There's obviously other areas where we seeing growth, but there's (inaudible).

So if I can move to my final slide, which is slide 13, I think this sort of actually highlights that we have made good progress over the last couple years in terms of engaging clients and consultants and that we are seeing meaningfully better outcomes as a result. And these are coming up in terms of better flows and greater consultant advocacy. On the consultant side, we're seeing a broad range of activity across a wide range of areas -- stable value, bank loans, US value equity, Asian equity, including importantly, Chinese equity, global and global ex-US equity, global absolute return, fixed income, real estate commodities and risk parity. And so, that interest there is translating into greater advocacy (inaudible) better ratings and that, in turn, is the harbinger in my mind for better flows into the future. At the same time, we are continuing to work hard to upgrade and better train our sales teams. The capability of people here is critically, critically important.

And so all this work together with the strong investment capabilities I believe we have in the Firm gives us reason to be optimistic for even better outcomes in the future. And I think maybe just to finish, Marty, this potential, in terms of the future, is reflected in our sales pipeline. Look, I'm not in a position where I want to quote exact numbers, but I think I can say that on a revenue basis today it's something like 30% up on where it was a year ago. And obviously, happy to take questions at the end of the session. So, thank you. And I'll now hand over to Loren.

Thanks very much, Mark. Let me turn to the assets under management slide. During the quarter, you'll see that market gains added $12.9 billion, long-term net flows added $6.6 billion. FX added $3.3 billion and net inflows into our institutional money market products added $2.6 billion. The increase in AUM quarter-over-quarter was $25.4 billion or 4.1%, resulting in our ending AUM of $641.9 billion. Average AUM for the quarter increased 2.3% to $630.2 billion. Again, largely due to the market gains and the long-term inflows during the quarter.

Our net revenue yield in Q1 came in at 47.7 basis points. That was down 1.8 basis points versus the prior quarter and I will cover this in some more detail later in the presentation. Let's now turn to operating results. You'll see that net revenues decreased $9.9 million or 1.3% quarter-over-quarter, while favorable FX rates added $6.6 million to net revenues. Getting a little more specific into net revenues, you'll see that investment management fees grew $17 million or 2.1% to $816.1 million. The increase was primarily driven by higher average assets under management relative to the fourth quarter with favorable FX contributing $9.1 million.

Of course, day count came into factor as it always does. Two fewer days in Q1 relative to Q4 reduced our retail management fees by $13 million and our management fees from alternative asset class investments were also reduced by an additional $7.5 million as one of our larger funds became substantially invested in Q1. And as is frequently the norm for such products, when a fund enters the new stage of its life cycle, the management fees will step down to reflect this transition. Importantly, in terms of guidance, I would say that we expect the impact of this step down to persist through the second quarter. Service and distribution revenues decreased by $3.3 million or 1.6%. This decrease was a result, again, of day count, but also included $2 million in reduction in 12b-1 distribution fees and this is a result of fewer B share sales and a continued conversion of existing B share fee structures to A shares. That's a theme that will continue as well going forward, perhaps not at the same amount, though, per quarter.

The performance fees were a big factor in terms of the revenue difference. During the quarter, we had $3.8 million compared to $18.7 million in the fourth quarter. You'll remember in the fourth quarter, we had a $12 million performance fee that came from our Private Wealth Management group. The $3.8 million in performance fees this quarter came from real estate or our Australian business, as well as our bank loan area. Other revenues decreased 1.9% or 5.5 -- I'm sorry, $1.9 million or 5.5% relative to Q4 and that was due to lower real estate transaction fees in the quarter. UIT revenues were flat relative to Q4.

Moving on down, you'll see the third party distribution, service and advisory expense which, of course, we net against our gross revenues increased by $6.8 million or 2.3%. That increase was consistent with the increase in investment management fees, as well as average AUM. Foreign exchange added $3.6 million to these expenses in the quarter. Looking at operating expenses, it came in at $479.7 million, that was a decrease of $1.8 million or 0.4%. You'll note that foreign exchange increased total operating expenses in the quarter by $5.4 million. Employee comp expenses decreased by $5.4 million, that's 1.8% versus the fourth quarter. Base salary increases, seasonally higher payroll taxes and higher severance costs in the quarter were offset by reduced variable compensation, including bonuses associated with performance fees.

Foreign exchange also increased in compensation expense in the quarter by $3.5 million. I'd also like to point out, in terms of guidance, that we do expect the second quarter compensation expense to be somewhat higher -- approximately $5 million more than in the first quarter assuming, of course, markets are flat and no foreign exchange changes. And this is -- reflects a few things. One, we have a full three months' worth of base salary increases in the second quarter, share based expense as well, which was granted in February. You'll see three months instead of two months in the second quarter and we'll also see compensation expense show up fully in that line item from the Hyderabad operation which came over in the first quarter. Previously that was in the tech area so it moved up in the P&L. It's really a geography point. So, the salary increases and the new compensation awards, as I mentioned, went in February 28 and so, that's just a natural thing.

If you look back to prior quarters, you'll see a similar trend in terms of how we managed compensation first quarter to second quarter. Marketing expense increased $1.9 million or 3.7%. This is largely due to the higher level advertising activity in the US, and again, we discussed this in prior calls. Property, Office and Technology decreased by 1.7% or 2.6%. Additional property costs again associated with the opening of our Hyderabad office during the first quarter were offset by reduced outsourced administration costs, as we were no longer paying the third party provider and FX added $0.6 million. G&A expenses came in at $61.6 million in the quarter. That's up $3.4 million. And this increase was driven by greater irrevocable [DAT] expense in the UK with FX contributing another $1 million in the quarter.

So continuing down the page, important note, non-operating income declined by almost $7 million quarter-over-quarter. This was due to lower mark to market valuation changes on our partnership investments, as well as lower realized gains on seed capital versus Q4. Obviously a hard thing to predict, but we certainly stepped down a bit in the first quarter. Our effective tax rate actually came in terms right in terms of guidance. We originally suggested our tax rate was going to be between 27% to 28% and came in at 27.6%. Adjusted EPS ultimately at $0.41 and again, we were pleased to see net operating margin holding relatively flat to the first quarter, coming in at 36.2%. Moving on to the next page, let me just take a moment to walk you through a reconciliation of the net revenue yield quarter-over-quarter.

Our Q4 2010 net revenue yield was 49.5 basis points. Late in the fourth quarter, as you know, we had an $18.6 billion low fee mandate redeemed. And the result of which, you would expect to see an increase quarter-over-quarter in terms of net revenue yield. In fact, the calculation would be about 0.9 basis points, as you see on this chart. However, there were many other things that would offset this increase. None should have been terribly surprising. First is a quarter-over-quarter decline to performance fees which reduced the yield by 1 basis point. Again, that was the high net worth business or high net worth performance fee in the fourth quarter which was not repeated in the first quarter.

We have a day count issue, too. Fewer days during the quarter resulted in 0.7 basis point reduction. The one thing that was hard for anyone to actually forecast but is important to factor in was the step down in fee rate in terms of the this large alternative investment fund that became substantially invested during the quarter. That had an impact of 0.5 basis points. The reduction in B share revenues and real estate transaction fees in combination resulted a negative 0.3 basis points. And then finally, in terms of the net inflow impact, we saw obviously, as Mark mentioned, great strength in our stable value business. You saw money market coming in and some of the ETF products, so that coupled with actually a 0.5% decline in our equity AUM as a percentage of total Invesco AUM resulted in about a 0.2 basis point impact.

Moving on to the next page, just to sort of address a point which I think is prevalent and we really want to clarify, really the point is that low net revenue yield does not necessarily mean low quality or low margin. We've seen significant inflows into our stable value products and to PowerShares over the last 12 months and more recently, in our money market business. While inflows into these products may actually reduce our aggregate effective fee rate, this does not mean the flows are detrimental to the overall Firm operating margin. We have attained sufficient scale in all of these products to achieve incremental margins on inflows that are higher than the Firm's total operating margin. And so, we are very pleased and we hope you would be pleased with the growth in these asset categories. And you will also see our Firm's margin being positively impacted by any future inflows that we see across these products. And with that, I'm going to turn it back to Marty.

Great, Loren and Mark. Thank you very much. And let me just summarize the quarter before questions. First of all, strong investment performance in the first quarter contributed to a continued trend of positive long-term net inflows for the Firm. We're very pleased with the progress we've made in consolidating the funds related to the Morgan Stanley retail asset management business combination with no merger related outflows year-to-date. And given the Firm's continued financial strength, we're raising the first quarter dividends to $0.1225 per share, an 11.4% increase. And all in all, we think it was a very strong quarter. But why don't we stop now and any of the three of us will address any questions people have.

Thank you. (Operator Instructions) Our first question does come from Michael Carrier of Deutsche Bank. Your line is open.

Thanks, guys. First, a question just on the flow side, it looks like long-term flows gaining some traction and just wondered if you could provide any other color? Because I think the one pocket that people tend to focus on is just the active equity and that tended to be a bit weaker. And given the segments that you guys provide, like we can see that the Canadian outflows that weighs on that number a bit. But if you can provide any other details, whether it's quant products, I think in the US business, even though you're not seeing much from a dissymmetry standpoint, I think, from we can gather you still see some outflows in the business and that's not too dissimilar from industry flows, it hasn't been like a strong equity flow market in the retail channel. But I guess just any other color on that.

And I think in the past, you've given some stats or details just on some of the sales momentum, particularly in the US retail channels. So, any updates on that would be helpful as well.

I'll start with the active equities question. You're right. Obviously, in terms of the some of the areas you mentioned, the theme is the mostly concentrated in the area of quant which has been a theme for the entire industry where quant has really not played large in terms of consultants' playbooks right now and is seeing industry-wide outflows. We do feel cautiously optimistic about the category. It's one where performance has certainly come back and it's one where we think ultimately we'll see a resurgence. But that has been by far and away the majority of what has affected our active equity category. And again, I would just point out that, that tends to be at a lower fee, too, so it certainly is not active equities in US retail mutual funds that we're talking about here.

Okay. That's helpful. And have you guys ever sized that up just in terms of the size of that business?

Yes, I don't think we've ever gone into great specifics. Mark, I don't know if you want to comment on that.

Yes, thanks, Loren. Maybe a couple comments. I think the first one is that actually we have seen some pretty meaningful outflows over the last couple of quarters. I mean, if you look at the slide 6, excuse me, you can actually see that in terms of inflows and outflows on the institutional side of the business. You can see that both sides, both in and out, are quite big numbers. I think what's been pleasing from outside is that notwithstanding the fact that we're seeing these big outflows, we're actually generating big inflows on the other side so the net numbers come still positive.

Two other comments on the quant side. Not really sure when this will come to an end. I think we are seeing, though, the turn on the performance side which I think is a necessary precondition. Our European strategies have been performing well now in terms of ahead of benchmark. But for some quarters now and that's now translating into lots of global capabilities and also some of the US ones. I think the other thing thought that's important to note is that the (inaudible) consultants themselves, not all of them follow the quant strategies, but those that do assume writing our capabilities quite highly. So I think the combination of improving performance, the markets returning to more normal in terms of their behavior, gives us some sort of reason for cautious optimism as we go through 2011. But we're certainly not, to be fair, we're not seeing a return to massive inflows into quant for the time being.

And Mike, just in terms of the retail question, absolutely we're tracking our plan in terms of the sales. I think we've been really pleased with sales and we're seeing quarter-over-quarter growth in sales and we see expectations of future growth barring any market disaster. So, the sales story has been very, very strong. Obviously, the themes around net flows has somewhat to do with the redemption rates and we still are seeing high redemption rates generally, as it the industry in terms of the muni products and some other areas. So that's a theme that is a little harder to control. But in terms of hitting the targets we're looking to achieve, I'd say we're right on track.

Okay. That's helpful. And then, Loren, maybe just a few things on the P&L. So, on the revenue side, you gave the one detail on the $7.5 million in terms of the -- I'm assuming that's on the AUM side, the private equities side and we've seen that meaning just in terms of the structure of those products and how that works. Now, if there's a future fund launch, then obviously we'd expect that fee to come back in line. I just want to make sure I'm thinking about that right versus, like that's --

Mike, you absolutely are. That's the way these types of products do work. So future fund launch would clearly offset any reduction because a future fund launch would start at the normal fee again. So you basically -- we covered that plus there's a clawback typically for these things where if things have closed over multiple quarters you'd actually clawback the prior quarter's worth of revenue, too. It's a little -- I don't want to call it a timing thing, but there is an element exactly to what you're saying.

Okay. And then on the comp, definitely came in a lot lower than expected and in the first quarter you have -- I think you guys mentioned in the last quarter just the seasonal increase for like payroll taxes. So when you're saying $5 million up sequentially, is that a net number including all the different factors, whether it's the equity comp, the Indian operations, the payroll tax come down?

And it is. It is. There will be some payroll decline, that'll be offset by, obviously, the three months of salary and share-based comp and some lift in terms of bonus pools being up given the fact that we're ending the quarter at a higher asset level than the average for the prior quarter in Hyderabad. So, again, I think we managed -- if you look back to prior quarters, the way we've operated it's been somewhat similar situation in terms of how we've managed through the first quarter.

Yes, okay. Thanks a lot.

Sure.

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

Thank you. Good morning, everyone.

Hello, Robert.

Quick question, can we maybe drill a little bit deeper into the ETF UIT passives of flows? I'm just trying to get a little better handle on the mix of flows and the -- also AUM there. Because obviously I think creating, at least for me, a little bit of confusion. You had about $2.7 billion of flows into PowerShares products, excluding -- not including QQQs, passives and UITs. Could you kind of size up the other flows and maybe asset levels there in the other product categories?

Sure. I think in terms of the flows, we have -- UITs I think came in at roughly $1 billion in the quarter, which is again, somewhat consistent with prior quarters. Other past developments -- looking actually right here, we got the Deutsche Bank -- probably the rest of it is really around the DB PowerShares products. As you know, we have a relationship that is historic with Deutsche Bank in terms of the commodity types of products that we access the distributor of those products as opposed to the manager of the products but we generate a revenue that really goes directly to the bottom line. And so the majority of the rest of that number is coming from that product.

Okay. And maybe just -- I mean, since you include all that, all those assets I believe in your AUM calculation, you could take this as a suggestion, maybe just may be helpful to break out those things that don't generate asset-based fees. You thinking about it down the road?

We'll certainly take that into consideration, Rob. I think obviously we're providing a huge amount of disclosure already in terms of breaking out passives and actives. It's getting complicated. So for us to cut it yet into more slices is obviously another level of detail that -- listen, I take your point, we'll definitely consider it if there's another way for us to show that.

Okay. Appreciate it. Maybe going to the alternative flows, on the active side you certainly have positive flows there. And in listening to the comments around the risk parity products, were there any -- I'm assuming that's what drilled most of those inflows. Could you update us at all on any fundraising activity that may be going on, on Ross or whatnot? I know there's a limit to what you can say. But are they in the market raising a fund right now?

Well, certainly I'd say broadly and Mark, you can feel free to chime in. The themes or the products that Mark put up on that page are the ones that have really been driving a huge amount of the flows and it's something that real estate and stable value are major, major contributors. There's other elements in terms of emerging markets smaller and growing. We certainly would love to be able to say something on the Wilbur Ross but we cannot for the reasons that have been very clearly articulated in the past. Unfortunately I do -- the most that you're going to be able to take away is what I've mentioned around -- to date on the topic.

Okay. And then, maybe one last question on capital management, raised the dividend, bought back some more stock. How should we be think -- obviously, your rate of share repurchase has -- I don't know if picked up is the right word, but its remained at decent levels the last several quarters or so. At one point, you had talked about there being a corporate goal to actually build liquidity -- more liquidity within the Firm on a more consistent basis, whether its to be opportunistic, maybe pay down some of the outstanding line. How should we be thinking about your use of cash from this point forward? Are you at a point where maybe you want to start chipping away more at the outstanding credit facilities, building up that cash reserve or should we expect more of the same going forward as compared to the last couple of quarters?

Yes. Rob, one point is, first quarter is always the most cash intensive in terms of outflows because of bonus payments and taxes. So in terms of being able to do a whole lot with free cash, most of that cash was going to those things I mentioned. Going forward, I think again you'll see a balance between opportunistic stock repurchases, paying down the credit facility and also, ultimately getting some more excess cash on the balance sheet. We feel very comfortable in terms of where the Firm is from a financial strength perspective. It's something that we're going to be generating a significant amount of free cash flow coming off of the acquisition and also the growth in the asset base that we're seeing. So we feel we can achieve all those objectives in a very balanced way. And again, in terms of how it all pans out quarter to quarter, I think that will have a lot to do with where markets are and where opportunities are.

Okay. Great. Thanks for taking my questions.

My pleasure.

Our next question does come from Ken Worthington from JPMorgan. Your line is open.

Hi, good morning. Just to follow up on Mike's question earlier, for the fund that was substantially funded, that did not collect any management fees in the first quarter, is that correct?

No. That would be incorrect. That's really just a step down that takes place and there are two elements for the step down. For the funds that are launched that are based on committed assets, you get the full commitment and then you get a higher fee. At the point where you become substantially invested, the fee is applied only to the invested assets, so that's a difference and then it also steps down almost by one-third of what it was.

I understand that for fund four but the substantially funded product for the quarter, that did not collect any management fees, so you stepped down on the old fund, but you haven't collected anything on the new fund?

Right. So, I think in terms of the nomenclature, when we're talking about substantially invested, that's the fund four that we're talking about, right, so just to be clear.

Okay. My apologies.

Fund four was substantially invested and that's when the fee stepped down. I can't really talk about anything else related to the future fund.

Understood. I tried to be vague enough.

Listen, we're dancing around the topic, too.

Okay, perfect. And then, in terms of expanding distribution, maybe for Mark and then a follow-up with Loren. Can you talk about the progress made during the quarter in terms of getting more funds rated by the consultant channel during the quarter and any new entrees into other distribution channels? And then on the retail side, was there any progress made in getting retail funds or more retail funds into model portfolios?

Mark, do you want to talk a little bit about the consultant side?

Happy to do so and hi, Ken. I think the -- in simple terms and I touched on this very briefly, but if we look around the world on the consultant side, and this is trying to be more broad-based, not simply institutional, we have seen a lot of consultant interest in activities, stable value bank loans, US value equity, Asian equity and that -- Asia is a (inaudible) Japan typically, but also Japanese equities, Chinese equities, global and global ex-US equities. Global absolute returned (inaudible) real estate commodities and risk parity and so to give a sense as to the trend here, Ken, what we saw is that in the five most influential consultants globally, just during the first quarter, we saw four of those five increase the ratings on a number -- on a number of products, including real estate, (inaudible) fixed income, non-US equity, private equity and risk parity. The rate of change that we saw in terms of the number of increases either to buyers and so on frankly was at a pretty strong rate so on that side, we are actually making some real progress.

So the implication there is future sales are going to get better? And then can you quantify the one not funded or high probability pipeline for the institutional business?

Ken, we haven't historically put any numbers out on this. It's something that we're talking about internally in terms of doing so. We've been keeping a track of our sales pipeline for good over a year now and we're just trying to get a sense as to how reasonable or frankly, accurate it is. The one thing I can say in terms of the prospects is that right at the moment the pipeline -- and we look at it both on a revenue as well as an AUM basis, is on a revenue basis, something like 30% bigger than this time a year ago. I think the other comment I'd make is that if we look at it, its the base or the basis of that pipeline is (inaudible). In other words, its not as concentrated as it was a year ago. So, I think all of it adds up so if it was to translate into reality, because of course it never ever does directly, then you have reason for optimism that the kind of trends should be continued.

Okay. And then the retail side getting the model portfolios, progress there?

Ken, it's Marty. Yes. What Mark talked about really continues through the retail channels, too, and getting to more model portfolios continuing to get deeper, broader access and relationships to key distributors within the United States. And again, all the -- if you want to call it preconditions for continued success, increased net flows are very, very much in place. And the other area that we think we're very focused on as a firm, too, is right now we're probably in a top 10 position in Continental Europe. We're not happy with that and we think we can be just much more successful there. That's another area of our immediate focus over the next six, 12 months, we're expecting to see some incremental strength coming out of that part of the world, too.

Okay. Thank you very much.

Our next question --

Maybe just a final comment, Ken. You said we have, over the last a quarter or two, started to see some, I think, quite good broad based momentum in the more of tightly defined BC channels, so that's something quite pleasing for us.

Great. Thanks again.

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

Thanks. Good morning, everyone.

Hello, Craig.

Good morning.

Just first question, I was thinking about Mark's prepared comment on the international growth fund and I'm wondering what percentage of active long-term AUM is now at capacity? And maybe what percentage is near capacity? And maybe rough ballpark numbers would make it easier.

There are very few products that are at capacity within the Firm. As Mark talked about, one emerging market's capability is at capacity. A couple of the small caps are at capacity. But there really is just an awful lot of capacity left within the Firm. So we don't see that as a headwind for us as an organization.

Okay. Got it. And then, just on your commentary on the incremental margins from the passive ETF and UIT business, you said they're higher than your existing business. Can you also kind of ballpark on average where those three areas are? Because with a lot of those products, it's not really an incremental comp expense, it's more maybe an incremental non-comp expense. How do you think about the incremental operating margin on another dollar of AUM gained in those buckets?

It's a great question. They range, as I said, they're similar to our existing products and we've talked about incremental margins of 60% to 65% for the Firm as a whole. I would say they fit in that range. And so, its again striking the fact that you're not having to pay compensation, but you do have other variable expenses, whether you're licensing an index for a PowerShares product or you have to pay for wrap and other things. But when you put it down on paper, they're coming in at those types of incremental margins. We feel really good about continuing to grow those flows and feeling good that, that is only helping our margin expand as we bring that stuff in. And that would be true for money market as well.

All right. Great, guys. Thanks for taking my questions.

Yes.

Our next question does come from Bill Katz of Citigroup. Your line is open.

Okay. Thank you. Good morning, everybody. Just a couple questions. Just starting with the flows a little bit, can you dimension a little bit some of the trends that's going on in Canada, the UK and Europe where you're seeing some attrition? Is it sort of macro driven just in terms of the other things going on in the marketplace or is it performance issues? Any sort of qualitative update would be helpful.

Yes, maybe start with the UK there. It's -- one of the macro environments in the UK has been a topic, but within it, again, we're just in a very, very strong position as a firm. I think probably recognized as probably the top money manager there. Somebody had mentioned the relative performance of the equity income products. I feel very, very good about them.

If you look over beating peers over any relevant period, absolute returns during any relevant period and again, just really, really top -- Woodford's arguably the absolute top money manager in the United Kingdom, probably one of the top money managers in the world. And just feel very, very good about where we're positioned there. So I feel very good about that. If you look at Canada, probably two topics. One, there is a -- it is different than anywhere else in the world right now. Actually, Australia would probably be the same.

But the banks are very, very strong and they've done very, very well in money management with regard to vis a vis independent money managers, so that's a current trend. Within that, our [relit] performance in Canada is improving in the core product, but I think very, very importantly where we are seeing traction beyond that sort of traditional core retail business is in the ETF market in Canada is a committed vantage force there. And also looking, we have very little position in the institutional market in Canada and we have just started, in the past six months, going into that market and early days but feel very, very good about the prospects for us in Canada. So in total, we think Canada is a very important market for us. And we'll continue to do very well in time.

Yes. The one thing I would also just mention on the UK, if you look at the UK, there was an institutional outflow in the UK and if you strip that out and its sort of large, I think on the order of magnitude of $1.5 billion, the retail business is actually not doing badly at all. And so a little bit of noise in the UK, domicile slow number that should not alarm you.

Okay. That's helpful. And the second question is maybe for Mark, just going back to that slide on page 13, which is very helpful, so thank you. You mentioned earlier that's sort of quant so sort of out of phase, is it reasonable to conclude then -- maybe ask it a different way -- could you talk about the step up of redemptions in the fourth quarter and the first quarter and the outlook over the next couple of quarters as on offset to the growth sale opportunity?

Yes, I think a couple comments and you can see it in the chart. The first one would be that the nature of the institutional business is that the flows can be very lumpy, they can be -- individual mandates can be very broad-based coming in and going out. Having gone through a period where our redemption rate and outflows were lower than we would normally expect -- the last couple of quarters have been a little bit higher, we've had a couple of mandates here, there's been some in the quant space, but there's also doing some strategic asset allocation changes by some quants that have resulted in some big outflows. I think in simple terms, we would not expect it to continue. Whether it turns around in the next quarter or its a quarter later, I think its unclear.

But on the other side -- I think the first point is we would expect that redemption rate to come back to more normal levels. So, if you're looking at the chart there where we've been running four to five, I think that's probably a little bit below average. The 10 is above average, so we'd hope to get back to more normal maybe five to seven top numbers per quarter going forward. I think what we do need to do, though, is to continue make sure that the inflows continue to be strong and broad-based. And as I said, the pipeline indicates that there should be reasons for optimism on that.

Okay. That's helpful. And this is one last one for Loren and maybe its just geography as you said before, but with the head count additions from the end of the year, you highlighted Hyderabad, any incremental cost savings as a result of the step up in this area?

Yes. Over time, I think you'd expect to see roughly $5 million over the course of a year savings as a result of going from the third party provider to having it on our books managed by ourselves. Again, that may be something that will be hard to see in the sense that we're growing Hyderabad, generally. And so its an expense base. It's growing, but its also reducing -- that's probably the biggest impact is to the extent that we continue to smartly allocate our operations and resources in locations like Hyderabad, it will have a bigger net cost savings for us than what I just mentioned in terms of the transfer.

Okay. Thanks for taking all my questions.

Thanks, Bill.

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

Hello, guys. First, just to follow up on the flows, I understand it's still early days as it relates to fully leveraging the combined Invesco and Van Kampen franchise, but at the same time, some of your competitors continue to put up strong flows on the actively managed side despite less than ideal macro conditions. So, I guess the question is where do you see the greatest organic growth opportunities in the near term? And do you really need to see retail investors coming back to equities more forcefully in order for your flows to really pick up here?

Yes. A couple points. We're as focused on this as you are and I make -- my point of view is this. You start with broad, deep range of products that are performing well and we absolutely have that. I mean, it is really very, very strong. And we now find ourselves in the position that we can be very, very helpful to the main distribution partners in multiple ways whether it is the UITs, the ETFs or the open-ended mutual funds. And again, the strength of the performance is really important for us. The other reality, though, that I think is just clear is the truth of the matter is, Invesco as a name brand has not been in the retail channels.

It has not been known to the same degree as another Firm that has been in it for 15 years. So we -- as I've said in the past, from a standing start, with relative -- same relative performance, somebody's been in the channel with the name brand for 15 years is going to outpace us at this time. We're working very, very hard to close that gap. And again, I feel we have all the talent on the ground, I feel we have great relations and the client basing people are also very, very strong. I think, again, I think we're in a very strong position to do very well in time.

The other thing I would just point out is, I think we'll be even better positioned once we complete the fund mergers. Because right now, obviously there's still a lot of noise and a lot of product out there that no one's going to sell or buy into because it's clearly an orphan thing that's going to get moved in. And so, I think there's going to be some benefits when that happens, that will -- you'll be able to see.

Absolutely.

Okay. And then, maybe if you could just give us an update on the ETF business in terms of growth prospects both here and outside of the US? And then also any updates on where you stand as it relates to actively managed ETFs?

Right now the global franchise ETF business is about $60 billion. It's the fourth largest ETF provider and it's all obvious to everybody on the phone where the big asset base is, it has historically been in more of the passive area. We feel that we have absolutely been the first mover and a leader in value-added ETF products. And if you look at the relative asset classes, that's where our flows are going in recognition of fundamental indexing and the like has been a very, very powerful trend. We're rolling into five-year track records, good five-year track records with those and I think that's some of the things that you're seeing in these flows here in the United States.

I mentioned Canada. They've exceeded $1 billion in ETF flows in a matter of six or nine months, so very, very strong. We've been in Europe probably four years now, but again, from a standing start, we're not where we want to be. We think the prospects are good for us on the continent and we'll continue to push that very well. I think we're positioned very, very well. We like the ETFs that we have, we like the -- what I call the construct of them very much and -- I'm sorry I forgot, what was your other point?

Just on the activity managed side?

We did -- , its quite a topic, isn't it? We did launch an active ETF, two of them, actually three of them now, I want to say 2007 and I should know the date off the top of my head, with great fan fare and not a whole lot's happened. And there's industry discussion about the role of active ETFs and the like. And we'll see. My personal opinion right now is that not all asset classes are appropriate in an ETF wrapper. And if you think of most equity investors that are building positions, they're just not in a position to have their portfolios published every day. And so I just don't think that you're going to see that be a very successful category within active ETFs.

Now, on the other side, fixed income and very liquid type portfolios, an active portfolio does make sense. But again, I come back to what we have and these value-added ETFs, it's further up the food chain away from beta products, if you would like to call it that. And we think that's a real sweet spot. It is for us now and we think it probably is for the industry for a period of

Okay. That's it for me. Thanks.

Okay. Thank you.

Our next question does come from Roger Freeman of Barclays Capital. Your line is open.

Good morning.

Good morning.

Just coming back to a couple of topics that have been discussed here -- on the retail side, if -- it sounds like, at this point given you've had no meaningful outflows related to the fund consolidations that the $2 billion number from last quarter is -- you don't think that's going to happen at this point. Correct me if I'm wrong on that. But then, secondly, how do you think about -- and Loren, you sort of mentioned noise, how do you think about the lack of gross sales on these funds and what that might have been? Do you think that at least anecdotally what you pick up through the channels that net flows might be closer to a push on those funds rather than the negative numbers we're seeing?

When you talk about these funds, you're talking about the ones that are to be merged?

I'm just looking at the top -- just your top ten equity funds, some of which are now Invesco Van Kampen funds and the really -- seven of your top ten equity funds are negative flows. If you look at growth income, equity income, I guess there's -- the performance has fallen off a little bit. Maybe that's part of the issue there. But I'm just trying to get a sense of how much do you think lack of selling is actually contributing to the negative flows right now?

We think it's not a lack of selling at all. We think its -- the number one driver of any redemption rate is going to be the demand for the product. And so to the extent that people are not wanting muni products, we're going to suffer that as well as anybody else in the muni space. In terms of domestic equity, it's coming back but I think it's still not as much as what we've seen in some of the other equity categories or the hybrid categories where we don't have as strong a footprint as others do. So I think it's where we're positioned is probably the biggest element in terms of our outflow picture right now, combined with what Marty mentioned in terms of we're still building the name and the brand.

But I mean, again, I think we have every reason to be hopeful going forward because we don't think any of these elements are going to persist and they're just going to get better and better. It's hard to point to it other than to say -- but in terms of our plan in hitting the sales targets that we thought were realistic, we are tracking that very well now. We're not at all uncomfortable with the results we're seeing on the sales side in terms of the redemptions, that's where we look at us versus the industry rates and we say are we somehow an outlier? Are we doing something that's clearly different and I think we don't see that.

Okay. But then, just to tie a couple points together, it sounds like you're not getting redemptions as a result of the funds mergers, you're not suffering from a lack of selling, so I'm trying to figure out what the noise is that when you get past June that things will necessarily look any different?

I think it's an issue of underperformance of the funds that are currently going to get merged into some of the better performing funds. Clearly, if you're in an underperforming fund --

Got it. Okay.

-- sub-scale and that's going to get merged away, you're probably not going to get a whole lot of flows and it's going to be a high redemption rate. I think the good news is that once those assets are merged into the better performing, lower redemption rate funds, that we'll see those assets actually take on a lower redemption rate. That would be our hope and also, because the performance will be better and then it will be a better experience for those clients.

Okay. That's helpful. And then just lastly, as you think about your sales targets and some of the anecdotal comments you've made over the past year and change about expanded distribution agreements et cetera, how good do you do you feel about that pipeline and when that starts to come on? And do you think post June you're able to paint that picture for us a little better?

The best that we can do, I can tell you, is the feedback that we are getting across the distribution from head offices, through the people in the field, we are positioned very, very well. The relationships are very, very strong and I believe we are doing all the right things. I think Loren's hitting on a very important point, the more investors start to move into US equity funds, the better we will do. We're positioned very, very well against that as a firm. And again, Ken asked earlier, we're getting into more models and during this process, you get on hold when you go through post merger process, all the on-hold statuses. I think they probably all have been eliminated right now which is also very important thing. So we would think post all the mergers in the second quarter, we just have to be in a very good position to see increasing flows and participate in the industry in a real way.

Great. Okay. Thanks a lot.

Next question does come from Jeff Hopson with Stifel Nicolaus. Your line is open.

Okay. Thanks a lot. You talked about Continental Europe a little bit. Which products there would you expect to spur --

Jeff, you're breaking up a little bit. I can't hear your question.

Okay. Sorry about that. In terms of Continental Europe, you spoke a little bit about the potential for some recovery there. Which products could lead that? And then in Asia, better quarter this month in terms of flows, which are the products there that are doing well?

I think I got the question so let me just talk about Europe. We are very, very focused in Europe through sicav products, like everybody is, what is referred to as a cross-border market, and where we think we're very, very strong, the Invesco European corporate bond fund has been a very strong product. Our European equity products are very strong. Actually, the PowerShares EQQQ actually is getting some real traction there. Also the Invesco Asian equity fund, so it's really quite broad-based.

And historically, where, over the years where we have played more is not necessarily in the core. What would be core in Europe would be things like a Euro corporate bond fund or really a European equity fund and now our equity products -- our European equity products are good, strong performing. And again, that will put us in a good position on the continent. And I think you asked the same question in Asia?

Asia -- I know one of our biggest successes has been around our US REIT products have actually been selling very, very strongly in Asia, particularly in Japan. We've got a balance fund that's one of our top performers and then within our joint venture, small and mid-cap funds are selling as well. Again, it's hard to point to one particular product, but the REIT piece -- again, on the strength of the real estate and our capabilities there is playing very heavily in Asia.

Okay. Great. Thank you.

Our next question does come from Mark Irizarry of Goldman Sachs. Your line is open.

Great. Thanks. Just on the performance fees, looks like this quarter is seasonally lower, you could say. Can you give us some help, Loren, in terms of what the seasonal patterns should look like for flows, for performance fees? Are you seeing more AUM coming in with performance fee features? And then also, how should we think about realization from Wilbur Ross now that the fund looks like it's more in harvesting mode rather than investing mode?

I think in terms of the seasonality that people may have historically seen with our performance fees, that came from the UK and from the quant group. Both of those areas, I would say, for the near term, we wouldn't expect to see performance fees coming from either of those areas. The performance fees that we've seen have been a little bit more episodic for the high net worth business, which has been actually paying out at year-end over the last couple of years. It's been mostly coming from an MLP type of fund which has been just been one of the top funds in that space. It could potentially do it again this year and so I don't want to forecast it. It's also a very strong start.

But again, it would be something that would be a year-end type of calculation and not -- we would not recognize anything in any of the prior quarters. You could see performance fees showing up from bank loans and real estate and other places and in smaller levels. But generally, I don't think there's going to be anything that I could point to that would say you should expect something. The Wilbur Ross fund four type of product -- obviously just finished substantially investing his product, as I've mentioned. And so, in terms of the realizing of carry and performance fees for us, there's a watermark that he has get to over and so it's going to take some time, I think, before we would begin to see things show up on the performance fee. So that would be probably -- my guess is more of 2012 type of event and beyond than it is a 2011 event.

Okay. And then just on the servicing and distribution fees relative to the distribution expenses, it looks like you have this somewhat of a drag given lower transaction fees. Is that going to continue? Should we expect the margin between the servicing and distribution fees to continue to outstrip the expenses there at the same rate?

I think the theme about B share rolloff is something that throughout Asia and the US, B shares have a higher rate in terms of the distribution revenue. I'd say many assets are no longer doing B shares and it's really changed the mix of what they're selling and we're not different in that respect. That rolloff is something that will continue over probably several years, in the sense that there's a big book out there. It's not going to be dramatic, though. It's not something that's going to move around quarter-to-quarter. I think the $2 million step down may be a little bit more dramatic than what you should expect going forward. It's probably under $0.5 million, really, quarter-over-quarter going forward.

And then, Marty, I think you touched on this earlier, but can you talk about the growth in sales that you're seeing in US retail ex the passive product? Are you seeing an acceleration in pickups sequentially in sales in US retail active product?

We absolutely are. And as Loren has said, it's consistent what our plan has been -- has been very consistent with that. But what we -- I think sort of some of the questions that people have had is, part of the question is do we think we're operating at peak growth sales? The answer is absolutely not. We expect it to accelerate and increase gross sales in the quarters ahead as one, investors come back to the market and our positioning -- US equities in particular for us, come back into the market and our position against that, we think we're positioned very, very well.

Okay. Great. Thanks.

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

Thanks. Good morning. I appreciate the desegregation of investment management fees quarter-over-quarter, but just wondering year-over-year, how does that look and are you seeing any core fee pressure from passive or lower fee products?

Yes. I think the management fee element is going to be affected by mix and so in terms of our mix, I think you can certainly see equities expand. We have the acquisition, which was probably the biggest element at roughly 49 basis points, 47 to 49 basis points. So those are going to be the elements that will reconcile year-over-year more than anything else. I don't think -- there's not been any sort of pressure to reduce management fees because of competitive reasons. Again, I think when you talk about ETFs and there's been a lot of discussion in the market about ETFs reducing fees, we've not seeing that same pressure because we're not in a commoditized-type of ETF product. I would say overall, to the extent, and certainly to the extent that we've grown and we hope to grow outside the US, that we would hope to see that fee rate increase. I don't have any more details. If you want, it may be something we could capture offline if you'd like.

No. That's fine. That's helpful. Thanks. And then, just on the buyback in the quarter, can you help me characterized or understand if it was really -- is it related to reducing RSU expenses or did the stock screen well against your internal growth expectations?

Its definitely -- the answer is both. We have a desire to reduce any RSUs associated with -- and this really documents our stocks -- associated with our share grants and so we made some headway into that. But we also saw the price was quite attractive. And so, again, and you should expect us to continue. There's still more to do and again, it doesn't necessarily stop at the point where we finish that element. We still will be active in terms of buying in stock if the stock price warrants it.

Right. And then, any sort of forward expectation obviously of $0.5 billion in cash and then forward free cash flow, any idea what sort of capital could be earmarked for forward buybacks?

Well, again, our priorities are structured in a way that if we don't have any acquisitions and then clearly, if we don't have any internal needs, which we generally don't have anything of any substantial amount, our dividends are going to grow single digits. You would expect to see, over the long-term, a fair amount of this cash being able to be returned in the form of buybacks. So I would say that would be the default in terms of where the cash will go. We do have a desire to continue to build up some cash on the balance sheet in excess of the European subgroup cash and we also have a desire to pay down our credit facility. So those are elements that are going to balance against the straight buyback.

Excellent. Thanks for your time.

Thank you.

Thank you very much, everybody for your questions and interest. And again, on behalf of Loren, Mark and myself, thanks very much and we will talk to you next quarter. Have a good rest of the day.

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