景順投信 (IVZ) 2011 Q3 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements 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, anticipate, 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 and 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 on the FCC website at www.SEC.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Welcome to Invesco's Third Quarter Results Conference Call. All participants will be 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. Now, we 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 and thank you for joining us everybody. As was just mentioned, I'm on the call with Loren Starr, our CFO. We'll be speaking to the presentation that is available on the website if you're so inclined to follow.

And this morning, as has been our practice, we will begin by reviewing the business results for the third quarter. And then Lauren will go into greater detail on the financial results. And finally, I will open it up to Q&A.

So let's get started. I'm on slide three again. And to start with, long-term investment performance remained very strong across Invesco for the third quarter with areas of absolutely exceptional performance. And our strong investment performance contributed to a trend of -- a continued trend of positive long-term net flows for the firm in spite of very volatile markets. And also during the quarter we saw net long-term inflows across all distribution channels.

And during the quarter we increased cash by $136 million and reduced long-term debt by $194 million, further strengthening our balance sheet. And looking ahead, reflecting confidence in our fundamentals, we expect to purchase $100 million of Invesco shares during the fourth quarter, which will bring the total purchased shares during 2011 up to $443 million.

So taking a look of the summary for the results for the quarter, assets under management ended the quarter at $598 billion versus $653 billion at the end of the second quarter. Invesco continued to generate strong long-term investment performance for our clients during in the third quarter, which contributed to net long-term inflows of $3.3 billion. This continues the positive trend we have demonstrated over the past several quarters.

Reflecting the challenges in the third volatile market during the third quarter, adjusted operating income for the third quarter was $256 million versus $285 million in the second quarter. And again, Loren will go into greater detail of these financial results in just a minute.

So now let's take a minute and look at the investment performance during the quarter, and I am on slide six.

So as we have discussed many times, the key strategic priority for us is to deliver strong long-term investment performance for our clients. Our commitment to investment excellence in our work to build and maintain a very strong investment culture has helped us maintain solid investment performance across the enterprise. Looking at the firm as a whole, 68% of the assets were ahead of peers on a one-year basis, 78% of assets were ahead of peers on a three-year basis and 82% of assets were in the top half on a five-year basis.

So let's take a minute and look at these long-term results across the firm. We think the best way to highlight the depth and breadth of the strength of investment performance over the long-term is looking at some key areas by investment objective. And also what you will note parenthetically next to each investment objective is the percentage of assets under management that is represented as a percentage, the whole Invesco assets under management.

So at the end of the third quarter, 78% of US core equities were ahead of peers on a five-year basis. US value equities, it was 96% of assets were exceeding peers on a five-year basis, 94% of UK basis were the top half of peers over a five-year basis. And if you look on slide seven, what you will also see during the quarter -- 78% of our global ex-US and emerging markets assets were ahead of peers on a five-year basis.

For [balance], it was 75% of assets. And for global fixed income it was 78% of assets. So again, there is real depth and breadth of this very strong investment performance across the organization.

And if you take a look at total flows on slide nine, you will see that this net flow was really driven by the depth and breadth of the strong investment performance. And as I mentioned earlier, that turned into net long-term flows of $3.3 billion for the quarter.

And if you take a look at quarterly flows on page 10, what you will see is there were strong gross sales across retail and institutional channels which contributed to the positive net inflows for Invesco as a whole. And the private wealth management business again [was in] net flows during the quarter and continued this trend of consistent asset growth quarter-over-quarter for the past four years, so again, very strong results across the various channels.

Now if you turn to page 11, we want to spend a minute and take a look at the results of the depth and breadth of our investment capabilities, our strong investment performance and this very focused client engagement effort that we have been on, which has driven solid momentum in our US retail business during the quarter.

And despite a very volatile environment, we continued to gain traction in the US retail franchise during the quarter. Gross sales increased 9% quarter over quarter and gross sales were up 40% year over year. Additionally the redemption rates for Invesco's US retail business have been considerably more favorable than the redemption rates in the industry over the past year. And during the third quarter that gap widened again, with redemption rates far below the industry average of 42% while Invesco's rate was 28%.

During the third quarter and continuing into the first quarter, we're seeing significant wins broadly across a number of capabilities, vehicles and channels. And we attribute [this to the] good investment results and the good efforts that I highlighted previously, which has given us improved access across many different platforms.

The best way to calculate that is just than ever increasing RFP activity. And again, it's resulting in greater penetration in these different client key platforms.

From our perspective, we are very early still in the process of achieving the full potential of our US retail business. But the combination of solid performance and a number of high demand capabilities are driving good momentum, and we are pleased to see the results so far.

Before I turn it over to Loren, I would like to turn your attention to slide 12 and highlight one of the capabilities that we're seeing strong demand in. And we think there is quite a bit of potential as we look forward.

If you look at total assets under management around the world, it's about $54 trillion; 8% of that total is represented by balanced portfolios, or what other people refer to as multi-asset portfolios. This obviously represents a $4 trillion global opportunity, of which $1.8 trillion in the US and the balance, $2.2 trillion, obviously outside of the United States.

And what has happened during the last number of years during this crisis period and very volatile markets is that investors are increasingly focused on recognizing the need for downside protection, in addition to being able to participate in up markets. We're early participants in this market space and Invesco has an industry-leading capability in what we call Premia Plus.

What you will note on this is that, if you think of traditional balance portfolios, risk allocation is really driven by the weight of bonds and stocks in the portfolios. Think traditionally 60% equities, 40% stocks.

Our strategy is different, and it is a strategy designed to win by not losing and to avoid large drawdowns while participating in good markets. And we do this by focusing on risk exposure as opposed to asset allocation or class weights. The approach allows us to hedge against the equity-unfriendly outcomes such as inflation and the recession.

If you take a look again on the next page, and you can see the results of this approach, from our point of view, it provides good upside participation. But just importantly, very strong downside protection and has tremendous advantage in the various volatile markets that we have seen.

And since inception, Invesco's performance has ranked within the top three percentile of similar capabilities worldwide. And for 2011, the strong performance of our capability has ranked us in the top 1%.

And it's this strong performance that has enabled us to grow this balanced risk asset allocation strategy from nearly zero in the fourth quarter of 2009 to approximately $3.2 billion at the end of the third quarter. We've also applied the same approach to a broader set of strategies that brings the total closer to $5 billion.

[I think] (inaudible) will continue to look to expanding in this application to areas where we think it makes sense. We continue to have a number of these strategies ready for investors in the not-too-distant future. And the strength of the industry-leading capability is helping us win business, obviously, and broadening the appeal for the whole Invesco product capability set.

Additionally, we've enclosed two additional pages of disclosure that are required as we talk of something so specific like Premia Plus. And, again, you can read that at your leisure. But for now I'm going to stop there and turn it over to Loren to go over the financials.

Thanks a lot, Marty. During the quarter the long-term net flows, as we discussed, added $3.3 billion while money market funds had net outflows of $1.1 billion. The big story, of course, was the declining markets and the unfavorable FX. That reduced our AUM by $57.5 billion during the quarter, so the resulting reduction in AUM quarter-over-quarter was $55.3 billion or 8.5%, leaving us with $598.4 billion in AUM at the end of Q3.

Average AUM for the quarter decreased 3.1% to $632.7 billion and our net revenue yield in Q3 ended up at 44.6 basis points. And that is a drop of 1.4 basis points. This is really due to three factors in the quarter.

The first was lower performance fees and other revenues. The second was the impact of a full three months' worth of fee waivers that were associated with the US product realignment. And that was, as you know, largely completed in early June of this year. And the third is the market impact on product mix. And our equity AUM actually declined from 46% to 42% of total AUM, again largely due to the market.

Next, turn to operating results. You will see that net revenues in the quarter declined 41 -- I'm sorry, $45.1 million. That is 6% quarter-over-quarter, while unfavorable FX rates lowered net revenue by $4.3 million.

If we drill down onto this, you will see that investment management fees fell $40.2 million. That is 4.8% down to $804.1 million. This was mostly due to the drop in our average AUM, although once again the fee waivers related to the US product realignment and the mix shift also contributed to the fall. Furthermore, FX reduced our investment management fees by $6.1 million in the quarter.

Service and distribution revenues were down $17.1 million or 8.3%. This was caused once again by lower average AUM, but also by a decline in some of our [TA] fees from the US product realignment.

Performance fees in the quarter came in at $3 million. That is a drop of $5 million versus Q2. You may remember we highlighted that we had some performance fees from the UK in Q2. That was about $3.5 million and that did not reoccur in this current quarter.

Other revenues in the third quarter came in at $26.7 million. That is down $5.6 million. Again, this is primarily explained by lower retained front and load fees, sales declines in Europe during the quarter.

Third-party distribution, service and advisory expense -- which we net against our gross revenues -- decreased by $22.3 million or 6.6%. This was in line with the movement in investment management and service and distribution fees over the quarter. And foreign exchange has an impact of $2.5 million reduction to this line item in the quarter.

Moving on down to the slide, you will see that our adjusted operating expenses at $450.4 million declined by $16 million or 3.4% relative to the second quarter. In this case FX accounted for $2.4 million of this decrease.

Employee compensation at $306.3 million fell by $4.6 million or 1.5% versus the second quarter. FX contributed to $1.5 million of that decline.

Marketing expense decreased by $2.3 million or 8.6% to $24.4 million. This was due to reduced sponsorship costs as well as the lower levels of advertising in the quarter. FX marginally impacted that (inaudible) declined by $0.2 million due to FX.

Property, office and technology expense was $62.8 million in Q3 and was a minor increase of $0.3 million. FX reduced the expenses by $0.3 million in the quarter.

And then general and administrative expenses came in at $56.9 million in the quarter, and that is down $9.4 million. This was due to a variety of cost, management and disciplined activities. Lower travel recruitment and professional expenses contributed as well, and FX amounted to about $0.4 million of that decline.

Going down to the bottom of the page, you will see that nonoperating income decreased $2.5 million quarter over quarter. This was due to mark-to-market certain of our partnership investments as well as due to a lower level of realized gains on the disposable of [seed] capital during the quarter.

Our effective tax rate came in on pretax adjusted net income at 22.5%. The third quarter's lower tax rate reflected a FIN 48 release for [uncertain] tax provisions. Going forward we would like to guide you to [an] effective tax rate that we believe will fall in the range of 25.5% to 26.5%.

And so finally, our adjusted EPS was $0.42, a decline of 4.5% versus Q2. And our adjusted net operating margin came in at 36.2%.

So, before turning it back to Marty, let me just quickly comment on our capital management. During the quarter our net debt declined by $330 million, which was resulting from the $194 million repayment of our credit facility and $136 million increase in balance sheet cash.

We do continue to believe that our stock is attractive at current price levels, and therefore we intend to purchase $100 million during the fourth quarter, making our total buyback of $433 million in 2011. With that, I will turn it back to you, Marty.

Great, Loren, thanks very much. And I think you can get the sum of the quarter. It is led by continued good, very good investment performance across all of Invesco.

And really, we think the trend of -- continued trend of long-term net inflows across all the channels was very strong in spite of a very, very volatile quarter. And with that, Loren and I will answer any questions anybody might have.

(Operator Instructions) Michael Carrier, Deutsche Bank.

Thanks, guys. Maybe two questions on the revenue side, I think the other bucket a little bit more volatile this quarter than what we're used to. I guess you mentioned some of the drivers of that in terms of some of the weaker European sales, but just wanted to see -- is anything like seasonal in that line item when we think about the fourth quarter?

And then the other line which is be the performance fees, obviously something that is hard to predict. But just given the improvement we're seeing across the franchise on performance, some of the products like Perpetual, the MLP, PPIP real estate, just trying to gauge any expectations as we head into the fourth quarter relative to the [3 million] we're at today. You know, the bias for performance fees at least for the fourth quarter, maybe even the first quarter.

Michael, let me try to address that. In terms of other revenue, it was really predominantly driven by the front end load, the retained front end load sales that were down significantly in Europe and in the UK, and so that had an impact there. Again that was really I think in the height of the concerns around Europe, so I would hope we'll see that abate and that we would begin to see that number come back in Q4 and beyond.

In terms of performance fees, I think you are right. I mean performance is very strong, as we have highlighted. We do have some seasonality around performance fees, as you have seen.

Particularly in the UK in the Atlantic Trust, there tends to be a Q4 opportunity for performance fees in the UK also in Q1. That is kind of very short-term, but I would say generally we think performance fees -- we would expect to see more across all of the platform of products that generate them. And I think in the near-term we'd expect to see certainly some improvement off of this current level even into Q4.

Hard to quantify; I feel sort of uncertain about giving you real numbers on that one. But again, I think given the performance that we're seeing in our products, it would certainly be a good expectation to see it go up.

Okay, that's helpful. And then just on the expenses maybe, the G&A just seemed much lower. Anything unusual in there that we shouldn't expect to continue? Obviously if the environment improves then travel those types of expenses will go up, but anything that was unique in the quarter?

No. Based on our forecast, we think the G&A line item is sort of a good run rate, if not even the potential for less going into Q4. We're very focused on managing our cost in this current environment, a lot of uncertainty. And so it is a major theme internally to make sure that we're prudent in how we spend certainly the discretionary line items.

So, again, I think if you look at our current numbers, there's nothing unusual in terms of thinking about it into Q4.

And just final one on the flow side, the alternatives fixed income continued to see some strength. In line with the industry, in active equities we are little bit weaker. Just any color, whether it's the Canada business like Trimark, any additional outflows on the client side? Just trying to figure out on the active equity side what was driving that during the quarter.

Michael, just picking up on that, so if you go back a few quarters, the topics were what is going on in the quant world and what was happening with us. And I would say again, if you look at the performance of -- our quant team has actually been quite strong now. I mean it literally -- I think as we talked a couple quarters ago, is the world looked to fundamentals more.

It was really October, November last year where it started to -- performance had started to do what it was meant to do and continued to generate alpha for the portfolio. So it feels like that headwind has left us, from the standpoint of clients moving totally away from quant to an area where it went sort of flat.

But frankly you are starting to see some interest coming back in quant. Now, I wouldn't want to get anybody too excited, but you are starting to see that in Europe in particular. So that's a nice change from what was a year ago, early this year.

You will also see, when you look at the investment performance of the Canadian investment teams, it is really strong. So it is just very, very different than what we have had in the past couple of years, which is a very important topic.

And also when you look at Canada, a handful of things are going on. One, good investment performance; you know, a broadening of what is available in Canada. The ETFs are really, early days, starting to make a difference.

Also, the Institutional Business where we had focused previously -- again early days, but again, you're starting to see some indications of rising RFPs in the market place. So, feeling much better about where we are there, and again, so -- a level of confidence that is increasing for us as an institution.

Ken Worthington, JPMC.

Hi, good morning.

Ken.

On the institutional side the business on slide 10, you showed that gross sales picked up while gross redemptions fell again, so we have a nice trend there. Can you talk about both sides of the net flows picture? So, what is going right on the products and regions in terms of what is getting traction?

And then, what is not -- or what has fallen less out-of-favor than it had been in the past in terms of products and regions on that institutional side? I assume real estate is one that continues to do quite well. But what are the others?

So, Ken, good question. The earlier -- a few quarters and last year it was really quant that was really the institutional topic on the redemption side. As I just said, it feels like that has really changed.

What we continue to see on the RFP side throughout different parts of the world, really I would say sort of across the spectrum it's real estate -- direct real estate, global REITs. These combinations of Premia Plus, asset allocation, multi-asset strategy products are really taking hold institutionally and I would say that is pretty broad in different regions of the world.

Bank loans is another area that you continue to see continuing activity. And then in different parts of the world, emerging markets, you are actually seeing people look at Japanese equities. You're actually seeing people look at some of the core US Equity portfolios, but it's more dividend-related type products.

So it's ever broadening, I would say, and I think that is a good sign, frankly, for the industry also. And actually I should add, I did mention bank loans, but credit-related fixed income continues to be sort of topical.

Okay, great. In terms of Premia Plus, when does the retail version of that get its three-year numbers? And what distribution platforms open up to you when you get those three-year numbers? And is this a big deal, or is this kind of not that big a deal -- the three-year retail side?

So, I think it is. So it's June of next year that you get the three-tier number. But you are already seeing -- as I mentioned, the results into it, even without a three-year number, are really quite surprising. That is usually sort of the starting point, get a three-year number. But even without that, you are seeing some very good results.

And I think is a result of a couple of things. One, the team has a good long history, high-quality team that there was an institutional track record [that hits] three years I think in November, December of this year. So, people have looked at that.

And again it is getting traction ahead of its time, but again just the fundamental theme of downside protection is something that is very broad. So we would expect, just even when you hit that three-year number, just a continuing broadening of the mandate.

Okay. Then last question is just on read REITs. REITs have been incredibly successful for you, and I think you continue to just blow it out in terms of getting new assets. At some point there's something like too much of a good thing.

Where do you stand in terms of being able to deploy all the REIT assets that you're getting in the front door? And is there any validity to this being -- getting more difficult for you guys to manage the big numbers coming to Invesco?

That is a great question, so let me make a couple of comments. One, the investment team is absolutely superb. And they are very good managers, long-term track record, been together for a very long time.

And first and foremost with them, and with any team, as soon as they get to a period where they say we can't -- if they don't think they can handle anymore, we shut the doors. We absolutely stop it. And it is a team that is very dedicated to their clients, so I don't have that concern.

Again they're also very conservative in how they manage the portfolios. But, there will be a time when they will probably say we have topped out. And we will just have to see how much longer that is.

And I don't know, Loren, if you would add anything from your conversations.

I think everything you said has been reflecting to me too. So there is definitely more room to go, but there is a point where it flows. And so, again, that is something that we're not at a point to quantify.

And just underline a point, we don't want to be one of those places where too much of a good thing becomes a problem. So we will be telling you that we're stopping it before that happens.

Great, thank you very much.

Bill Katz, Citigroup.

Thanks, I appreciate it. Just coming back to the US product realignment, can you quantify how much in sort of foregone revenues or earnings might be from any of your plans? And then what might be the timing for the fee waivers to roll off?

So, I think I got your question. The fee waiver number is about $30 million per year, and so that was put in place with the combination of the funds. And clearly when you had higher priced funds merging with lower-priced funds, for the right thing for clients was to waive fees down.

It's a discussion that occurs at the fund board level, so it is not something that we directly control. And so, again, in terms of what could happen in terms of those fee waivers, it would be presumptuous for me to talk about what the dialogue is going to be around the fund boards. But again, there is the potential for the fee waivers to drop and that would create some relief off of that run rate.

That's helpful. My final question just on [comp], it's certainly a good overall cost control relative to the revenue environment. As we look at comp relative to revenues on adjusted basis, that was a 43% ratio -- the highest ratio in well over year.

I'm just sort of curious. While you did a good job on the G&A side, what is your outlook for comp? What are some of the drivers we should be looking at from a modeling perspective?

So, Bill, yes, I think -- a couple of points on comp. One, I think we have mentioned it several times in the presentation, our investment performance continues to improve. And so we have a direct linkage between compensation and investment performance with our teams, and so that is one element in our story in terms of what is driving our comp numbers.

The other, again, as we try to forecast and provide a very smooth compensation picture every month, every quarter, we forecast where assets are going to be and we accrue based on that estimate. And so we rarely -- and we try to avoid having any sort of catch-ups or things that happen in the quarter or something that is not sustainable. So we try to give you that smooth view. So the numbers that we showed on compensation are good sort of proxy going forward.

Again, given the fact that there is probably three quarters of lower assets as opposed to one month, you could see further decline in that number into the fourth quarter. But again, it's something we manage closely but is very much aligned to investment performance as well.

Actually, just one follow-up. Martin, I'm curious of your view on two areas -- just sort of regulatory change. One, maybe an update on the money market business; seems to be a lot of flux where that is right now. Then secondarily, could you talk about any kind of risks to the regulatory environment on the ETF business?

Yes. On the money front side of -- the focus, you know, regulators they have still -- sort of two comments I would say. This is probably, what, six months ago they were happy with the regulatory changes put in place for the money funds. But they still wanted something else to be accomplished, something more to ensure that there was further ability to mitigate any runs in the market.

And the first point that I would make about that is that during this European debt crisis, we like to refer to it as that from, what, March on of this year, think the regulators actually feel very, very good about the outcome of money funds during that period. It was a very stressful period on money funds and they did actually well. So the changes put in place were a good thing.

And I think you probably expect -- you know, I think the goal is -- end of the year into the first quarter of one more change to money funds. And my sense of it would be something that is very manageable for the industry that ensures that you continue to have a very bright group of people in the money fund industry and not, frankly, ruining what has been a very important vehicle within that sort of ecosystem of the financial world.

So, I think right now the outcome could just be a very positive one for all parties concerned. But again, it can change on a dime. But that is where I'd say we are right now.

Then with regard to ETFs, I think obviously there is a lot of focus on volatility in the market place and what is driving that. There's probably two areas that I think are getting a lot of attention. Most recently it has been ETFs, but it's really -- high frequency trading has really I think very, very important area where there is a lot of focus from regulators' point of view.

Is that -- the question is, is it contributing to what in fact you're supposed to accomplish, which is a capital markets environment that is for long-term investors and capital formation. So that is the question around that.

And then with regard to ETFs, the issue of really I think the focus is on leverage ETFs in particular, and I think that is going to continue to be a topic and a focus.

My conclusion on that would be the absolute broader ETF market, the vast majority of ETF market will not be impacted by that conversation. And I would say the ETF participants are very focused on making sure that it continues to be a very viable and strong industry going forward. So I think the regulatory outcomes in both of those areas could be good for investors and good for participants.

Okay, thanks for taking all my questions.

Michael Kim, Sandler O'Neill.

Hi, guys, good morning. Just couple questions, first just to follow-up on capital management, it looks like you opted to kind of focus more on deleveraging last quarter and then maybe more of a focus on share repurchases this quarter. But in this type of environment, it does seem like there might be some opportunities to take advantage of some attractive M&A opportunities.

So, can you just kind of talk about how you are thinking about using capital going forward, and then maybe if you are starting to see some more distressed or more motivated sellers looking to dispose of their embedded asset management businesses more recently?

Let me make a couple of comments. I think Loren will talk also in addition to capital management.

But I would say our broad strategy has absolutely not changed, that first and foremost we're going to look to reinvest in the business and improve the business that we have. And again, I think if you look across, the business looks very broad, very strong, good performance, so -- fewer gaps.

We do look at opportunities as they emerge from time to time. But it is a very, very high bar for us and that will continue to be our focus as we go forward. But Loren do you want to --?

Yes, actually, one of the points that's probably worth just to point out, as Marty said, time to time we will see opportunities in the market. And in fact, that was one of these cases this last quarter. And when such things happen we are restricted from continuing on with the share buyback program.

The fact is we didn't do anything in terms of this opportunity and so we're out of that restriction, clearly, given our announcement. But in case you were wondering why we weren't more actively buying shares in the last quarter, it was really due to us being tied up in this restriction.

But again I just -- Michael, to your -- and I want everybody to [understand], it is extremely high bar for us. And I think some of the properties that are coming on the market or rumored to be on the market, they frankly -- at headline levels look more distressed than what we are interested in. But again, we will continue to pay attention.

Okay, that is helpful. And then just secondly, given the lower AUM base and assuming markets remain under pressure, are there any specific areas where you can -- you are looking to may be further cut back on some costs or some expenses just to maybe defend the margins to some degree?

Let me make a couple of comments and Loren can chime in. It's -- again, I think if you look back over the years, we are very, very focused on ensuring that we run a good, effective business and are very focused on cost management.

That said, we are probably like many firms looking at where the environment is and unsure of what it might look like. There is sort of a two-pronged focus for us as an organization.

First of all, we're looking at -- we feel we are probably better positioned as an organization than I can say at least the last six years that I have been here, and that clearly we are slowing down some areas where opportunities slow down, when the markets slow down. But there are still many opportunities for us and we're trying to strike the right balance on those that still feel closer, that we are continuing to move forward on it. But we're doing the right things and focus on discretionary spending in particular.

That said, if the world falls apart, we will respond accordingly. But we think it would be unwise to literally shut everything down right now. We just think it would be not the right thing to do. We just want to make sure that we can run with the opportunities in front of us, but those that are less opportunity because the market (inaudible) slowed down or just put on hold.

I don't think I have much more to add. That is exactly the process we've been going through.

Okay, that's it for me. Thanks.

Roger Freeman, Barclays Capital.

Hi, good morning. Marty, I just wanted to follow-up on the comment you made about M&A opportunities that I guess some of the potential ones may be more distressed than you would like. Is that a function -- I assume that comment about Europe. And is that that if you buy an in-house proprietary platform, that the parent institution is a risk to the customer base disappearing?

It's more -- and again, (inaudible) (technical difficulty) because everybody is sort of fundamentally thinking that where Europe sits right now, many of the European asset managers might become available. And there is [two-folded because it] tended to be very proprietary distribution, that becomes a topic and a very important topic you can sometimes work to your advantage and disadvantage.

But at the same time when you have duplicative platforms and you compare the (inaudible) investment management capabilities against your investment management capabilities, it really gets to something the industry has not done a lot of, and that is just absolute consolidation. And it has worked well. That is what banks do when they rollup certain deposit platforms.

It's different when you start to get to the client side of the money management business, and I think that becomes a bigger consideration for any firm that would be looking at those. So I don't think it extends to the financial stability of what would be the selling institution. I think there's always ways to protect yourself against that. (multiple speakers) Again, every situation will be different.

Got it. Maybe just on the Van Kampen, speaking of your own prior deals, has there been any additions to model portfolios recommended [less] during the quarter as institutions or distributors that had been holding back have kind of come back?

I don't have the specific numbers in front of me. But what I can tell you is, if you just look at RFP activities that put you on platforms, it is probably -- from a year ago, there's probably than 100 additions to platforms. Obviously some of those happened within the quarter, so it just continues to get broader and stronger.

Okay. And then you also talk about, with respect to the Premia Plus balanced product, more new product coming, can you give a sense for how active that pipeline is, [any] number of funds?

I do have to be a little careful about that just because of where they are in sort of that process, but again, I don't think it's going to be investment thesis driven. And it needs to be long-term viable solutions, so it would be an extension of some of these ideas. So don't think immediate investment needs as opposed to sort of running to the market with launches. That is not our approach.

But again, it is something. It's a very strong a team. And it is a combination of needs that people want met out there. So it feels like it's probably going to be around for a while.

Okay. And lastly, just on expenses on the marketing piece, how much of the -- that decline sequentially was stadium cost coming off, and maybe any seasonal changes in ad spending versus the discretionary component of the cost management?

Yes, so I think the piece that reflected it coming off -- it came off [toward] the end of August, so you only got one month of benefit at sort of a $6 million run rate. So that would be $0.5 million is the benefit for not [seeing] the sponsorship in the quarter.

Glenn Schorr, Nomura.

Thanks very much. Just a quick question on the investor appetite on alternatives, and just triple checking that the Wilbur Ross fund is still in capital raise mode, it is that correct, so you can't say too much about it?

We can't talk about any capital raising activities, as you know, just from SEC regulations and the like. So, I hate to say it, that's all I can say.

But in general, it's been sluggish in the industry on alternatives. Obviously the market got cratered in the third quarter. But is there anything more about behind it than just slow markets? Because maybe the glass half-full approach would be that markets are up 10% so far in October.

So let me talk about the industry and investment opportunities. How's that?

It is a fact; fundraising and the private equity area, the fundraisers are taking twice as long and they have been raising about half of what they did sort of the prior round. One of those is this numerator/denominator effect with institutions that you have seen, where some plans are less interested in alternatives. Others, just because of the markets working against them, they sort of hit their quota.

That said, the investment opportunities that WL Ross and Company, the team there, their pipeline is extremely full. They're finding a fantastic set of investment opportunities. The team could not be busier and more excited about what is in front of them. And that is a very, very good thing.

They're very active. They will continue to be very active. And they're going to give some very, very good results for the people in the existing funds. That bodes very, very well I think for ongoing client opportunities.

Okay, thanks. A quickie on Premia Plus, just curious; the institutional product -- what kind of a fee rate are we talking, whether it be the actual number or relative to traditional balance funds? And then the follow-up would be how retail is going to be priced?

I don't think we have the ability to talk about the pricing right now on this stuff. But it is something that retail, I think, is public. It's like 60 basis points, something in that range, so I'd rather not get specific on the institutional side at this point if that's all right.

No problem, no problem. Final one is just, when you look at the fee rate or the revenue yield ex performance fees, it obviously comes down in a quarter when the markets get beaten up. Ending assets are below average assets, so you expect more pressure. However, like I said, October is up a lot.

So should we expect -- still two months ago, but somewhat leveling off on that net revenue yield ex performance fees?

Yes, I hope so. Again, it's a great question and really does depend entirely on where equity markets go from here. And so, yes, sort of more stability more recently, sort of moving in the right direction would tend to allow me to agree with that comment. But again, we have to see how the rest of the year goes through. And FX may have some impact as well, so I am hopeful that we will see stability in that line item.

I think what I would do, though, confirming your point, Bill, so -- tell us what the market is and the fee rates will change accordingly, so the thesis is still in place. As the markets respond positively, the effective fee rate would run back. So, we don't want you to come away with not thinking that is the case.

I think I'm a little too positive, but thank you.

(laughter) I like it.

Dan Fannon, Jefferies.

Hi, good morning. I guess, Loren, first, what is the right level of leverage we should think about you going forward? And maybe a little bit of color and how you came up with $100 million thinking about the buyback for 4Q?

All right. Well, in terms of leverage going forward, we have discussed some debt to EBITDA ratios at 1 or somewhat below. We feel very comfortable at those levels. We were at somewhat higher levels after the second quarter when we stepped up the buyback. So, again, I think you will see those ratios declining over time. So, I would say think about one-times as a general thought.

Beyond that, the opportunity to delever further, it's always a conversation -- does it make sense or take on more leverage. You wouldn't take leverage on just to take leverage on. It would be done in the context of some opportunity, typically, is why we would take on leverage.

And for such opportunities, you could see a higher degree of leverage than we have today in fact. So it is a dynamic conversation, but [some] business as usual I'd think about one-times.

The $100 million really is just looking at our total kind of payouts of cash flow and where we feel comfortable, and we think $100 million makes sense. It puts our sort of payout of cash flow and operating income at the higher end of the range that we've done historically. But certainly not in an uncomfortable way, and we think it's -- makes a lot of sense given where the price is.

Okay. And I guess on a quarterly basis, what are you viewing as your excess cash flow these days or your run rate?

Well, again, quarter to quarter, it will vary because every quarter we will have bonus payments and tax payments, and then we'll have dividends back from Europe and others. So it doesn't really work quarter to quarter. You can average it out for the year.

But if we're generating about $100 million of free cash -- sorry, $900 million of free cash flow, you can sort of calculate the dividend is already sort of baked at $200 million, $250 million. We have some need to build up some cash on the balance sheet, as we have discussed, and I think we're on our way to do that. So we do want to continue to do that. How much we would deploy for buybacks, again is sort of a dynamic number.

But I think the best way to answer that is if you look at our history and what we have done. These payout ratios, if were paying out maybe one-third of our cash in dividends, and you can see 20% to 30% in buybacks -- another 20% to 30% and buybacks. So $300 million in buybacks per year, take it and divide it by four and that would be one way to do it (multiple speakers) just (technical difficulty) on today.

Okay, thanks.

Robert Lee, KBW.

Is it possible -- just wanted to maybe get a little bit more color on the ETF business. In particular, I know you had renewed efforts to expand the business outside the US, opened up Mexico I guess sometime this past year. Maybe some updates on the progress you are seeing there in different markets, and kind of what we should be thinking about that contributing to new business flows over the coming year.

Just broadly, again, we feel really, really good about our ETF business and the way we are positioned within that market. Again, largely more value-added ETFs in the marketplace we think is going to continue to be a growing part of the ETF business in the United States and around the world.

As you just mentioned, listed in Mexico, the Canadian effort which is probably one of the more recent ones and more broad, continues to broaden for us where originally it was ETFs within a mutual fund, then purchasing ETFs on the New York Stock Exchange, and then more recently just getting [TSC-listed] ETFs. And Europe is an area we continue to -- we have been in it in a relatively small way, but it's a market right now that is under pressure just broadly, just because of what is going on there.

And also, back to the question earlier, there's some broader questions in Europe just around the structure of the ETFs with leverage within the ETFs and that. But that said, longer-term we think Europe is an area that will continue to be an opportunity, and probably longer-term, different parts of Asia for us. So, again, it is absolutely a principal focus of ours as an organization.

Again, today's been a very focused conversation here, largely [around] the US retail businesses simply because of our most recent efforts there. But front and center for us is the ETF business and we think we're going to continue to participate in a real way going forward.

All right, great. And Loren I just have a couple of simple really kind of modeling questions.

When I look at some of the adjustments, intangible amortization and the deferred taxation, it kind of -- well, I guess the intangible amortization has been trending up. Has that been just as you kind of finalized some of the accounting from prior acquisitions? Kind of what has been driving that? And for the deferred taxation, it's been bouncing around a little bit quarter to quarter.

Yes. There is a variety of things that go into that. It's probably a fairly detailed answer. Maybe we can just catch up later and we will kind of give you some insight into that. But again, there are a couple of factors driving those bits.

Fair enough. We'll talk later. Thanks guys.

Craig Siegenthaler, Credit Suisse.

Thanks. Good morning everyone. Just wanted to start here with a P&L question.

A few other guys asked on the compensation expenses, but I'm wondering how do the underlying components change? When we think about some of the more fixed cost items like base comp and healthcare costs, and then we separate them from some of the more variable items like bonus accruals and stock-based compensation, what was the rough kind of delta in those items quarter-over-quarter if the total comp changed at about 1.5%?

That's a fairly specific question there, Craig. We generally don't break out those levels of detail on our compensation line items.

I think what we have said in the past is variable compensation is about one-third of our total compensation. That didn't change quarter-over-quarter. There wasn't any extreme sort of changes in hiring or -- because I think you would find the salary components and the fixed components to be fairly fixed.

So, what you saw in the quarter was really just the flexing of the variable component. And again, that is -- the cash bonus piece is the one that actually has an impact in the quarter, whereas obviously we do provide some deferred compensation for our professionals at the end of the year. That gets amortized over four years and that is a future expense.

So, again, hopefully I can just answer your question by saying there wasn't anything unusual happening in any of those line items, other than the variable piece, the cash piece flexing down.

All right, that's helpful. Then just move over to the alternative flows. I know there's a bunch of different asset classes in that group, real estate, fund of funds. Can you kind of help us think about the sequential change in alternative flows and what really drove that?

Yes, I think you're going to find it is going to be largely the real estate piece. And there's both direct real estate and it's sold globally. There is also the REITs that we discussed a little bit on the call. There's been a strong interest in REITs in Asia, so that's been a big driver of that line item.

There have certainly been other elements within that class (technical difficulty) bank loans and other things that Marty talked about. But I think the largest piece certainly would be the real estate component that drove the quarter.

And there's nothing from the private equity side?

Not at this point.

Great, guys. Thanks for taking my questions.

Jeff Hopson, Stifel Nicolaus.

Okay, thanks a lot. On the US retail business, September flows positive, obviously helped by the allocation products. Do you think that you have turned the corner in US retail or is the environment too volatile to suggest that?

You're asking the question we all want the answer to. It's a hard one. So let me -- leading the way for us really is this Premia Plus type product. There's little question about it.

But absolutely factual, what you're seeing within the channel, disproportionate interest in equity income type products. Whether it is the RFPs, placements on the different platforms, flows into the products and if you look at what you have, where are the flows going, it tends to be those products.

And I would say if you are in a sideways to [bias up] market, I think you're going to continue to see real interest in that range, frankly across the industry, because at some point once people think that they have sort of limited their downside, they're going to get out of cash products. And that is probably the next range of where they're going to put the money and that has been very consistent with what we have seen. It was pleasantly -- just surprised to see some continued flows into those areas.

And then a follow-up, on the UK flows were little bit weaker. Is that all macroenvironment? Because I know performance has been good on key products; anything to update there?

I think it is macro. There really is no -- nothing that was within the portfolio that would indicate that the product is less attractive than it has been in the past, other than people just being -- running to the hills generally. But even then, we didn't see sort of a dramatic reduction in flows.

Okay, great. Thank you.

Cynthia Mayer, BofA Merrill Lynch.

Hi, thanks. Just maybe a quick flow question to follow-up on that. It looks like the fixed income flows were lower this quarter than in the last couple of quarters. I'm wondering if that is a function of particular products like munis, or maybe an area like UK. Or is it a function of the performance, which if you look at page 24 is a little bit off in the last year? Or are there any large lumpy institutional impacts? Any color you could give would be great.

We have continued in the money funds -- excuse me, muni bonds continue to be sort of an area that had been more net outflows. It is less than where you saw earlier in the year when people were so scared, but that would probably be the bigger area.

I think the only thing I would point is -- we had a lot of growth in Stable Value in the early part of the year. And there was a lot of [RAP capacity] to accommodate the demands. RAP capacity continues to be a scarce commodity, and sort of put a little bit of capacity constrained in terms of how much Stable Value we can do, so that is probably the other element within the quarter.

Okay, great. And then maybe just on FX, if you look at the FX impact on revenues and the FX impact on expenses, what would be the net impact on the operating income this quarter?

Yes, so I think it is just those two numbers (inaudible) (multiple speakers) it was a couple of million bucks, right?

(inaudible)

$4.3 million.

$4.3 million?

Well, no, sorry. $4.3 million was the impact for revenue and operating expenses was -- (multiple speakers) $1.9 million?

Yes, $1.9 million.

Is the net number (multiple speakers)

Yes.

All right, $1.9 million was the impact on operating income.

Okay, great. Thanks.

Mark Irizarry, Goldman Sachs.

Great, thanks. Marty, it looks like the US front flow picture doing well and maybe the rest of the world to seeing a little bit of pressure, particularly in continental Europe. Can you just give us some perspective on how flows are tracking in continental Europe so far this quarter? And then Asia, strong; how much of that is really being driven by the REIT story out there?

Let's see, just picking up -- start in Asia. REIT has been very, very positive in Asia, but I would say just our position in Asia is very, very strong. In Japan now, very strong; greater China very, very strong, and I just think that is going to continue to be an ever-growing positive part of Invesco's long-term success.

So, again, anybody that has been out there again even recently it's just a very, very different environment than if you are in continental Europe. So that is going to continue and probably just continue to broaden.

And Asia was one of the areas, as I was speaking earlier, that you're literally seeing greater mandates in things like Japanese equities even into [bigger] China, interest in US equities in greater China, so things you would necessarily think are top of mind actually in the region. So, very strong.

And obviously the continent in particular, it has been an area that people, consumers, investors, rightfully become worried and that slowed things down. That said, it's such a huge part -- as we talked about in our last conference call, it's such a huge part of the asset base in the world, that it is a time to continue to focus on and make sure you are positioned well for a time when it improves.

And we're not giving up on that, and we think this is the time to make a difference. It's no different than our approach in the United States where we look to strengthen the US business during a very difficult time. And I'd suggest that that has worked out very well for us. We expect the same out of Europe.

And then just on the continent, what have you seen in terms of maybe the progression of flows as you move through the third quarter and then maybe early in the fourth quarter?

Sales were down a little bit, maybe 10% quarter over quarter, but redemption rates were the story and so, not surprisingly, people were moving cash into riskless assets. We've seen some -- obviously some turnaround in the market, in the environment, so again, it's too early to say whether we are reversing that trend fully into this quarter.

But again, I think given the breadth of the products and the different types of products that we have, we have a Premia Plus type of product in our European lineup as well that we think we can continue to really generate some really good performance and flows for our clients there. Even if they are not necessarily wanting equities, which again has not been a huge piece of our picture in corporate -- continental European equities where -- we don't do -- we haven't done a lot of that in Europe. It's really been around other types of products -- Asian equities and other elements.

Great, thanks.

Jonathan Casteleyn, Susquehanna.

Thanks. Good morning. Just a question as everyone works their way through the European credit crisis, just wondering what additional processes or risk-checking you had to instill within your money market business to ensure liquidity, and etc.?

We have not made any changes, but let me put that in context. It is a very, very, very strong money fund team, a very strong credit team. And during the crisis here in the US, I think you have heard me say we didn't have a single credit that was downgraded in the portfolios that we had. So it's -- again, we just continue the processes that have been in place for many, many years and it has worked just fine during this period for us.

Okay, great. And then just one follow-up on -- a technical question on the fundraising for Wilbur Ross. Does the fund have to be raised before October to qualify for the earnout? Or is there -- can that be extended on the earnout side?

I'm sorry, we just can't talk about any fundraising activities. It's not that we don't want to, it's just the SEC prohibits us from doing it.

But what I will say, the team is very, very strong; doing a very, very good job finding great investments. And I think the existing clients and the existing funds are going to have a very, very good outcome. And again, I'm sorry we can't be specific. We're just prohibited from doing it.

Okay, thank you.

Again, thank you very much everybody for joining us today. Again, it was a good set of questions, and again, we thought it was a very strong quarter on the back of good investment performance and ever-improving flow opportunities for the organization. And we appreciate it and we will talk to you next quarter.

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