景順投信 (IVZ) 2012 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 at 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. Good morning, and welcome to Invesco's first quarter results conference call.

All participants will be on a listen-only mode until the question and answer session. (Operator Instructions). Today's conference is being recorded, if you have any objections, you may disconnect at this time. I would now like at the turn over the call 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 thanks everybody for joining us. I will speak to the presentation on the website if you are so inclined to follow. And I will go over the business results and Loren will get into greater detail on the financials, and as always Loren and I will address any questions that people have afterwards. So if you happen to be following, I am starting on slide three of the presentation.

To get started, long-term investment performance remained very strong for Invesco across the board in the first quarter, and again we continue so see some areas of exceptional investment performance. And on the back of this strong investment performance it contributed to a continued trend of positive long term net inflows for the firm, in spite of the continuing volatility in the marketplace. This is the seventh consecutive quarter of net positive long term flows for the firm, which we think is quite strong in consideration of the marketplace that we have all been operating in. And importantly during the quarter, we are raising our quarterly dividend 41% to $0.1725 per share, reflecting continue confidence in the fundamentals of our business. During the quarter we purchased 3.1 million shares for $75 million.

Taking a look at the summary results for the quarter, assets under management ended the quarter at $672 billion, versus $625 billion at the end of 2011. Invesco continued to generate strong long-term investment performance for our clients during the quarter, which contributed to the net long term inflows of $7 billion, this further extended the positive trend that we have demonstrated over the last several quarters. Operating income rose to $269 million versus $256 million in the fourth quarter last year. The operating margin was 36.6% during the first quarter, again expanding over the fourth quarter operating margin of 35.8%. Earnings per share were $0.44 per share, approximately 5% quarter-over-quarter. AgainLoren will go over in much greater the detail of the financial reports.

Let's take a moment and look at investment performance, and again it is our continued commitment to investment excellence and the hard work to build and maintain the culture, the strong investment culture has generated these strong long-term investment performance across the enterprise. If you take a look over at the firm as a whole, 65% of the assets were ahead of peers on a one-year basis, and 77% of assets were ahead of peers on a five-year basis. As we mentioned last quarter, the softness in the three-year number reflects the rolling off of some very strong numbers in the fourth quarter of 2008, and a brief period where we trailed the market during that snap-back beta rally in the early part of 2009. Based on the strength of the recovery later in that year in 2009, we would expect the three-year numbers to solidify in mid-2012.

Moving on to flows, again strong investment performance contributed to positive inflows in spite of the volatile markets. As I mentioned earlier, net long-term inflows totaled $7 billion for the quarter. During the first quarter, we saw strong client interest in the balance/risk allocation product, the real estate capabilities, ETFs and also in areas such as international equities, bank loans, munis, stable value, so it was really some broadness in the interest across the organization.

Globally, the IPRA suite of products is generating tremendous interest from clients who are attracted to what is a very effective investment capability in this very volatile market, and also the top decile performance that has been generated by the investment team. As a result of the strong performance, IPRA flows were $3.4 billion during the first quarter, and this represents a 40% organic growth rate versus just last quarter, so it is an accelerating level of interest into this investment capability. The IPRA suite of products is closing in on a three-year track record, that is during June that will happen, and as a result, we are seeing more clients add these capabilities to their platforms.

We also saw a solid up tick in EPS during the quarter, as more investors with equity in higher yielding fixed income capabilities back into their portfolios, and Invesco perpetual corporate bond funds continue to attract meaningful flows from the UK and continental Europe, and over the past three years assets have grown in this strategy from $4.2 billion to just over $12 billion, a threefold increase during that period. In China, we saw increased interest in our Chinese equities capabilities, real estate, balanced, asset allocation. In Japan, the Japanese advantage strategy has generated top decile performance over one, three, five-year, and has generated strong net sales last year, and again looks like a strong pipeline there. The point is, we are seeing in a really volatile, challenging market, some real interest in the investment capabilities.

Taking a look at flows by channel, you can see gross sales across retail and private wealth management contributed to the positive net flows for Invesco as a whole. During the quarter, the institutional business saw strong client interest in the IPRA product, the commodities basically for product real estate, bank loans, stable value, so again a strong and growing pipeline, and we saw substantial increase in the international growth product during this period too. Wins in these areas were offset by the $1.4 billion liquidation of the PPIP program, the Treasury program, and $1 billion in lower fee fixed income mandates that the client declined to internalize the capability. The declining growth sales quarter-over-quarter was largely a timing issue, and our institutional pipeline continues to grow, and be very strong and growing.

I would like to come back to the PPIP program. It was from our point of view a great program. We were pleased to be in it. The team generated excellent results, so some very good news strategy. The treasury was very happy to get the capital payback at the pace that we did, and again, came out of it as one of the top managers. Again, what you will see in the active, it is $1.4 billion out of our active asset categories, but for that redemption the results would have looked that much stronger. So in general, we feel very positive about the flow picture, and in spite of this trendless direction of the market, things are feeling quite strong for us at the moment.

Moving on to slide nine, I would like to spend a minute talking about the US retail business. The depth and breadth of our investment capabilities, our strong investment performance and focused client engagement efforts haveresulted in strong momentum in this US retail channel during the fourth quarter. In spite of the volatility, we saw the combination of strong performance and a number high demand capabilities drive good momentum into the business. Earlier I mentioned IPRA and the ETFs, we are seeing demand for our international growth products, emerging markets, Munis, and high yields. Again, we are starting to see a broad interest along different capabilities in the retail channel.

As a result of these strong demand for these capabilities, we continue to see our market share grow sales increasing relative to the market and trending positive over the long term. US grow sales up 32% quarter-over-quarter, and redemptions were significantly lower than the industry average, ours coming in 24% versus the industry at 32%. We still believe we are in the early process of achieving the full potential for our US retail business. The combination of solid performance and number of high demand capabilities are driving good momentum, and we are pleased with the progress that we are seeing.

Before Loren moves onto the financials, I would like to update everybody on the capital management priorities. A numberof you have been long-term holders of Invesco, and the direction of the Company quite well, but it is really, we have focused very much on this multi-year strategy to grow and strengthen our business, our commitment to investment excellence enables us to deliver strong long-term investment performance for our clients. We have worked to enhance the depth and breadth of our investment capabilities and have made successful strategic acquisitions that further expanded our capabilities. We also worked to further enhance the effectiveness of our global operating platform.

As a result of all of this progress, the depth, breadth, and strength of our business has put us in a position to evolve our capital management priorities, which you will see on slide 11. And has been in thepast and has not changed, our first priority is to reinvest in our business in ways that enhance our ability to deliver strong long-term investment performance to our clients. Now in addition, dividends are now featured more prominently among our priorities, which will provide a more committed level to return to our shareholders. This emphasis is reflected in our decision to increase our dividend 41% during this quarter. We came to this conclusion after a number of discussions with some of our very senior investors here, a number of our shareholders, a good conversation with the Board, and we feel very, very good about this direction, we think it is very positive in reflecting the strength of the organization.

We will also continue the program of repurchasing shares, and as we have said the in past, our goal is to achieve a cash buffer of approximately $1 billion in excess of regulatory requirements. A key difference is that we have dropped acquisitions from the revised capital management priorities. All of the acquisitions we have made to-date have been strategic and focus on enhancing our ability to meet client needs, by revising our priorities we want to make two points very clear, first, we don't need acquisitions to be successful, and secondly, we are not, and have not been a consolidator of asset managers. These revised priorities reflect our confidence in our ability to meet our client needs, and based on meeting our client needs we are sure that we will continue to grow, and further strengthen our capital position over time.

I will stop there, and turn it over to Loren.

Thank you, Marty. Moving on to the slide on assets. You see during the quarter we generated total net flows of $8.1 billion, $7 billion in long-term, and the remainder in money market products. Similar to prior quarters, the aggravate flows reflected continued strong client demand for ETFs, UITs, and other passive products. In the category of actively managed assets, we did see demand accelerate as Marty mentioned for balanced risk, but for other income-oriented products in the quarter. Thee inflows, however, were offset by active equity outflows, and also the previously announced $1.4 billion return of funds related to the liquidation of the Treasury component of our PPIP fund.

We also saw market and FX continue to work in our favor this quarter, and they added $39.4 billion in AUM. And the resulting increase in AUM quarter-over-quarter was $47.5 billion, or 7.6% giving us $672.8 billion in AUM at the end of Q1, the average AUM for Q1 was up 5.9% to $658.2 billion.

Moving on to net revenue yield, I just want to spend a little time on that since it has been a focus. Our net revenue yield in Q1 was 44.7 basis points, that reflected a decrease of 1.4 basis points quarter-over-quarter. The decline was due to the combination of three large factors. The first was due to, and the biggest, lower transaction fees and other revenues accounting for 0.9 basis points of the decline. We saw lower performance fees in the quarter, and that accounted for 0.3 basis points decline.

And then we saw a reduction in our gross management fee yield, now this had a few things going on there, first, we saw our Invesco power surge QQQs increase from 4% to almost 5% of our average AUM, and that accounted for 0.2 basis points of the decline, and then we had two offsetting elements. We saw fee expansion through asset mix as equities expanded as a percentage of our AUM, however that was offset by day counts in Q1, and those two effects were roughly about 0.3 basis points offsetting.

And next turning to operating results, our net revenue grew by $19.5 billion, that was up 2.7% quarter-over-quarter and that included a favorable FX rate impact of $2 million. Looking further onto line items, you will see that investment management fees increased $41.3 million, or 5.4% to $812.1 million and this increase was roughly in line with the growth in average AUM we experienced from Q4 to Q1. FX accounted for $2.9 million of that increase.

Service and distribution revenues were up $7.9 million, or 4.4% also in line with higher AUM, and investment management fees and FX accounted for $0.4 million of the increase. Performance fees for the quarter were good. We came in at $21.2 million, but that was a decrease of $2.8 million versus Q4. The performance fees were generated primarily from certain of our investment trusts in the UK, but also from our real estate portfolios. Other revenues for the quarter came in at $33.1 million, that was down $11.8 million, and this decrease was the result of lower transaction fees really due to our private equity business, which had strong transaction fees in the fourth quarter. Third party distribution service and advisory expense, which we net against gross revenues, increased by $15.1 million, or 5%, again this is largely in line with the increase of investment management and service and distribution fees, and FX increased these expenses by $1.2 million.

Moving on further down the slide, moving to operating expenses, they came in at $467.1 million, that was an increase of $6.6 million, or 1.4% relative to the fourth quarter. FX increased operating expenses by $1.4 million quarter-over-quarter. Getting to the line items, you will see that employee compensation at $313 million increased $0.7 million or 0.2%. We saw seasonally higher payroll taxes offset by reduced variable compensation costs relative to the fourth quarter. FX increased compensation expense by $0.8 million.

Again just to remind people as is always is the case every year at the end of February, the firm provides for salary increases and new deferred compensation awards to employees. The second quarter will therefore reflect a full three months worth of this impact related to these expenses, versus only one month of impact in Q1. However, this increase should be offset by a reduction in payroll taxes in Q2.

Moving on down to marketing expenses increased by $4.9 million or 22.2% to $27 million. This increase was a result of higher advertising expenses in US and the UK, and FX had a marginal impact of $0.1 million on this line item. Property, office, and technology expense came in at $66.3 million, that was an increase of $4.4 million, and that reflected higher property lease expenses, as well as increased investment in portfolio management and client engagement technology initiatives in the quarter, and FX increased these expenses by $0.3 million.

Then we get to G&A, G&A came in at $60.8 million, down $3.4 million, or 5.3%. FX had an impact on G&A of $0.2 million, but you will remember in last quarter, we indicated roughly $3.5 million of G&A would not occur, and that in fact happened.

So continuing on the page you will see that nonoperating income increased $8.3 million compared to the fourth quarter, and this increase was due to the mark to market of certain of our partnership investments, but we also realized some gains on the sale of seed capital during the quarter. And then we had the firm's effective tax rate coming in at 25.1%,that was in line with our prior guidance, and again going forward through 2012 we would expect that tax rate to be between 24.5% to 25.5%,which brings us to our adjusted EPS which we grew by 4.8%, to $0.44, and then as Marty mentioned, our net operating margin expanded about 80 basis points to 36.6% quarter-over-quarter.

With that I am complete, and I will turn it back over to you Marty.

Great, we would like to open it up to any questions anybody might have.

(Operator Instructions). One moment for the first question, please. Our first question does comes from Ken Worthington of JPMorgan, your line is open.

Hi, good morning. On the direct real estate business, how much money have you raised but maybe not invested yet, and how quickly are you putting dollars to work here?

Ken, yes, we have several billion dollars of won but not yet funded real estate assets, and that is a pipeline that continues to expand. It does take a while for it to be invested, so it could take anywhere between half a year perhaps even longer, depending on the opportunities, they are patient in terms of looking for the right investments, but it is something that has been sort of put to work, and continues to be put to work quite at a good clip.

Okay. On the institutional business, I know this is lumpy, but can you talk a little bit about what happened this quarter? It looks like redemptions were normal but the gross sales dropped off a lot, and I think maybe, is PPIP on the redemption side, the give back to the government, I don't thinking you make fees there, but was that recorded in the institutional gross redemption line?

Yes. In terms of the first question, there are a couple of factors. One is generally sales and redemptions quite honestly are lumpy in institutional so it is hard to see straight line progression all of the time. But if you remember, there was, I think we talked about in the fourth quarter, about $3 billion of real estate sales that took place. It was in the passive side of the business, on the institutional side, and this is sort of separate real estate properties that we manage that showed up on the sales side in the fourth quarter, and that wasn't something that recurs. That was about $3 billion, and you take that out, it becomes more flattish quarter-over-quarter at least comparing to the fourth quarter.

In reference to your second question, absolutely, the PPIP was and is reflected in the institutional outflows, and again, we think it was a good story. It was sort of a planned redemption in terms of what we were looking for, about $1.1 billion of that in active, $0.3 billion of that in the passive category, just to give you some color. Overall, I would say in terms of the institutional pipeline, just to give you some more color on that, I do think it is one that we feel is strengthening and is in fact, probably higher than we have seen is recent history and it is broad based, so it is across many of our categories of capabilities, whether it is balanced risk, real estate, bank loans, global equities, it is a very, very positive story for us at this stage, and so we feel pretty good even though the first quarter didn't necessarily reflect it in terms of the absolute numbers, we feel that it is looking pretty solid for us.

Great. The Japanese REIT business, obviously beginning of last year was a big, big, tailwind for you. In the quarter, how did it do, is it a headwind now, is it really not doing anything, where does your Japanese REIT business stand?

It is actually doing pretty well. I would say in the quarter, there was $470 million of redemptions related to that particular capability, that was the net outflow number in the quarter. The first month, April, I think it was about 50, so it is actually a better pace into the second quarter. So we feel pretty good. Again, we don't think that there is this big sort of pent-up desire for redemption on this product, and in fact we have been very successful in terms of providing this product through a variety of distributors, with stickier time horizons than others in that space. So we think that we have a pretty good situation there, and quite honestly we are working with distributors in Japan to look at other products that ultimately, if it made sense, could serve as a way to replace those assets if they wanted to redeem.

Okay. Great thank you very much.

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

Good morning, everybody. A couple of questions, first one on the marketing spend, how much of that is tactical given the performance and some of the momentum of the growth sales, versus more structural given the broadening of the platform?

A couple of comments. The vast majority has been broad recognition type marketing spend, and that is in place and is going to continue. As we have said in the past, just we know that we have work to do to catch up there. And there has been some specific, if you want to call it tactical marketing, but largely around in the United States around the good performing equity products, the equity income products, the international product, and we will continue to do that, but the vast majority is really broad.

Bill, there may have been about a million dollars or so related to the UK launches of the global balanced risk product so a little bit of tactical, and there probably will continue to be a little bit of tactical as we continue to roll out those products.

My final question, is just in terms of capital management, it seems very clear that you are not looking to do anything of size that is not to your liking, but conversely as you look at your footprint now, and you see what is growing and what is not, are there other areas that might be pruned that can be reinvested into faster growth parts of the business?

Bill, we continue, you have followed us for a long, long time. That has been our history for the last number of years and we will just continue to do that. And where we feel really good about the depth and breadth of the capabilities around the world, it is just areas that we would like to get stronger in, and we are just always looking at that, and that is always what we try to do, so we will stay on that path.

Thanks for taking my questions.

Thanks, Bill.

Robert Lee of KBW. Your line is open.

Thanks. Good morning, guys.

Good morning.

Maybe I will follow up on Bill's question, and be a little bit more direct. Obviously there have been reports on Atlantic Capital, and I have also seen some other reports here and there about speculation about your maybe even looking at the CLO business as a business maybe you no longer want to be in, so I guess, more directly given that you have a slide here showing that it had inflows, should we be thinking that Atlantic Capital remains as a kind of strategic important business for you, and more broadly is it possible that we could see more businesses kind of be pruned like CLOs, and things like that?

Let me respond to a couple, again, first of all, we don't ever speculate on any of these activities, its amazing, sort of the attention here, but around a line of trust, you have seen they have another great quarter of net inflows and they are doing a spectacular job for their clients. It is a very unique, well run business, and you can see why people are interested in it. But again, we are going to continue to stay on the path that we have been on with them, and they have done a great job. We can't say anything more than that. And again, we continue to be very, very committed to the bank loan CLO business. It has done great things, it is a great team, and we see continued opportunity there. Where CLOs in particular literally dried up over the last number of years but it looks like an opportunity again over, in the coming years.

Okay, great. Maybe a followup. Would it be possible on the ETF business, a little bit more on the passive ETF side of the business, a little more granularity in the sense of, how much of the flows there were straight ETF products, versus say same UTI products, and maybe even the triple Qs?

We saw net flows on ETFs broadly of $6.5 billion in the quarter. $2.1 billionof that was our traditional ETF products at the higher fee. $4.2 billionof that was the Qs, and $0.2 billionwere the Invesco power shares DD products. So that is the breakout.

Great. That was it. Thank you for taking my questions.

Our next question does come from Dan Fannon of Jefferies. Your line is open.

Good morning. I guess focusing on flows here. If you could talk about, first off Asia , it looks like you a what chance of outflows in the quarter, and then also within alternatives you also saw a moderate change, and talk about what are the products that are redeeming in both of those areas

So, Dan, in Asia, it was, again, largely what we saw the US REIT product go out, so there was some pressure there. There was a little bit of an institutional outflow we saw in Australia was a factor. On the alternative side it was really PPIP that it was the $1.4 billion that you are seeing there, and maybe there was CLO that was redeemed.

Okay. Thanks. It seems like a fair amount of moving parts that you walked through with regards to the revenue yield, so I just want to think about it going forward, all else being equal, given the number of days going into the second quarter, plus just kind of the movement of average assets, as I said all else equal we should see the revenue yield kind of move higher here into Q2?

You won't have a day count impact affecting it. Again barring in further movement in the Qs and so forth, which can obviously have some impact there. There would be an uplift ofsome fee rate. To Q2, and then obviously we talked about the fee waivers falling off, which is our expectation still in the second half of the year, among some other things that we think will be helpful for the fee rate.

Okay, great. Thank you.

Sure.

Our next question does come from Michael Carrier with Deutsche Bank.

Thanks, guys. Just on the expenses. It seems like maybe on the marketing and then on the occupancy, you guys mentioned some of the drivers there, but I guess just looking at where we are at currently, and going forward, any items, one that would be coming out of there, and then probably more importantly, any new initiatives that you are looking at to be picking up, or are these fairly good run rates going forward?

Mike, I would say they are fairly good run rates going forward. The marketing at current level is probably the right way to think about it going forward. Property office and technology could see a little bit of noise here and there, but I do think it is just one of these numbers that will be fine. There is a big moving piece to this, so I will just remind people, that we will explain, but it is offsetting. It has to do with our European infrastructure transformation. We will see some properties being exited, we will see an outsourcing of our transfer agency, and then a reduction in salaries. You will see that line item, property office and technology increasing through the last half part of the year, but it will be offset through some employee compensation as we really move to this outsourcing arrangement which gets completed at the end of the year. We will explain that, but again just so you understand, there will be some offsets there. G&A we feel pretty good about, so no real need to point anything out there. We continue to try to manage closely, and it depends on what sort of market environment that we are in to some extent, but based on where we are today, they are pretty good.

Okay. That is helpful. When I look at your flows and going across channels adjusting for the PPIP, it looks like you had flows probably across all of them, on products kind of the same thing, you have inflows across each of the categories, and then region, X the Asia, you had some outflows in Canada, but still inflows across. The only area where it has been challenging for the industry, and you guys are no different, would be on the active side, the fixed income may not be as strong in equities a bit weak but in line with industry trends, but when you look at where you guys are in the products where you are seeing flows versus where you seeing outflows, do you still categorize it as it is still just industry trends, or are there certain products where you are seeing momentum or are you seeing some improvement in performance, where you could start to see that kind of inflection point, obviously it is going to depend on the market incentive in and around flows, but more specific to among your product lineup?Anything that is turning or changing that you are seeing?

Yes. You are asking exactly the right question. We have the conversation all of the time, not just amongst ourselves, and also amongst our clients, and I know you all do too. As we look at it right now, we just start by looking at the depth and breadth of the capabilities, it is broad, it is deep, we like what we have, strong performance, and what you are seeing is still the market unclear investors of what they want to do. We agree with the that theme that core fixed income is not the place to be, in the next 12 to 18 months, and the way we look at this as the flows, the asset allocation capabilities is getting an awful lot of attention, the risk parity in particular, that is very consistent in our minds with people starting to move away, trying to get some greater returns that what we have had while still trying to maintain risk.

And you see some of the other flows, municipal bonds you can see why people are doing that for yield, but also thinking where tax rates might be going, emerging markets we are starting to see some of that also, and bank loans, again, very interesting. Real estate, very interesting. But that is very consistent with people moving, trying to move towards generating greater returns. We personally think the idea that the world is passive from now until 30 years from now is just not accurate. I think this is a very natural evolution. It is slower than what you have seen in the past, which is not surprising considering the magnitude of the challenge that we came out of. And if you look at the flows, they are broad, our net flows across the main categories, but we are still ina position, if you look at where the net outflows have been, it is largely been in US equity products, and that is a real strength of ours. And when you look at our assets under management, we have disproportionate US equity, moreso than the industry, so when people start to move into US equities, we should benefit very, very strongly from that, because of the depth and breadth of the capabilities. We think the right answer it is very hard pick to markets, but having a broad set of capabilities that are performing well, you should do well. And I think that is what you are seeing right now from Invesco.

Okay. That is helpful. And this might be maybe a little too early, but just on the Europe restructuring, any update there, timing, just any color there, and like I say, it might be too early?

I think it is really going to be a second half discussion. Again, I think it is a little too early, other than it is on track, we are doing well, everything has been signed and so progressing. We do think it is going to help transform our business. It is an operational part of the overall transformation, we have talked about what we want to do in Europe generally, and I think that we see good traction with the flows. We quite honestly we pulled back a little bit on some of the initiatives we were focused on, because of the markets that we were in, and it didn't seem to make a lot of sense to significantly increase advertising for example in Europe, when people were certainly as a an industry not necessarily buying product, so think there is more to come on the European story overall that we will be happy to tell at the right time.

Alright, thanks, guys.

Matt Kelley from Morgan Stanley.

Thanks, guys. I hope you can talk a little bit more about your efforts on retail side, working with different platforms, and specifically what products financial advisors are most excited about offering at this point in your discussions with some of the different wire houses would be helpful?

So let me go through it. It is a little bit repetitive, so I apologize for that, but what we are seeing, I discussed it earlier, you can just see quarter-over-quarter gross flows are quality dramatically, and it was 32% quarter-over-quarter, what that is reflective of is the conversation we have been having over the last 12 to 18 months, that lead indicators are getting more products on platforms, that has been broadening very, very much. And one indicator might be if you take a look at our top ten distributors, retail distributors, a year ago three of the ten were in positive flowson their platform.

At the end of this quarter, nine of the ten of, our distributors were net flows with us. So that is a really positive trend. We are seeing again, where are we seeing the flows? IPRA is the risk balance allocation because of marketplace and because of the performance is very, very popular, but we are seeing international growth, small cap had some good flows during the quarter, municipal bonds, high yield bonds, so it really is broad, but disproportionately it is around real estate, but it has been around the asset allocation risk balancing. But we don't, it is just getting broader than anything that we ourselves have experienced, so again, as confidence comes back into the market, we think we are going to be positioned quite well.

I did just mention that we are seeing strengths in terms of crossing the independent channel up 23% quarter-over-quarter in terms of mutual fund sales, the wire house channels, we are up almost 40% quarter-over-quarter in terms of mutual fund sales, and the broker dealer channel 34%. And then we when we look at our sort of our ranking within distributors, it is pretty much across the board that we are increasing our market share in every single name that we have a relationship with. Again, it is very encouraging. On then the platform side, the one thing we are really looking forward to is when IPRA gets a three-year track record it will actually get into models, which will be an important point to help even further accelerate interest in that product.

And I think, if you step back strategically with some of the products we have been talking about with all of you, our investors, is what we were responding to was a marketplace where advisors were becoming much more sophisticated in dealing with their clients. Yes we have a depth and breadth investment management capabilities, but they are also using different vehicles to meet those needs, yes mutual funds, but also the UITs play an important role, in some of the advisors that we work with, as do the ETFs. It is really that broad range of investment capabilities with vehicles to meet the advisors needs, and that again, is the positioning that we are putting ourselves in. We want to help the advisors be successful with their clients, and that seems to be gaining some traction.

Understood. Thank you for that. The other thing I would ask you about is on the ETF business, I think that one of the things that I have a lot of discussions about is the revenue margin versus the operating margin dynamic. I was just hoping, you guys obviously a lot of moving pieces in your operating margin right now given expenses and flows into different products, so could you give us a little bit of how you think about the business in terms of the underlying margin associated with the active versus passive side of the business directionally, and what any sort of inflection points might be?

Yes, so I would say that we feel very good about the margin prospects for our ETF business in general. The ETF business is sort of hard, because there are all sorts of pieces to our ETF business that we have talked about in the base, the one that is sort of misleading, I would say are the Invesco Power Shares Qs. They have no management fee but they have a marketing rebate. The way I view that is it is almost a margin accelerant to our traditional power shares, because it is something that we benefit from that, in terms of the broadband recognition that we get through the Qs. And so you put marketing sort of, being helped with that product.

In terms of the infrastructure, it is all there, it is built, and we are just getting bigger, and so we are seeing margin expansion as we see the operating leverage work for our ETF business. And I think, also important, we are more focused than we have in the past in terms of an all-weather type of ETF. ETFs that will be less sort of specifically [incumatic], and probably will serve across a long time, and that will help in terms of getting critical mass in those ETFs, which is important for profitability and margin expansion.

All of those things I would say gives me great sense that business is certainly on par with the rest of our mutual fund business, in terms of margin and should not, we have not seen price degradation or fee squeezing, unlike some of our competitors who are on very commoditized types of products, we have not seen that activity on our products, so we feel very good about that. Some of the other products that are passive, which would be our UIT business, have very fine financial characteristics. They are launched, they don't have a management fee, but through the launching process there is a very, I would say, good fee associated with that, and so you think about the margins on that and they are among the higher margin elements of our business. Again, feeling very good about that. Some of the other parts of the business that I would say are passive would really be related to maybe leverage associated with some of our structured products, and again, those can generate performance fees, and so it is not a big part of the passive story, it is a small part, and not one that tends to grow that much, really it is the Qs, the traditional products, and the UITs, and we feel good about those products in particular.

Great. Thank you very much.

Our next question from Cynthia Mayer, Bank of America. Your line is open.

Hi, good morning.

Hi, Cynthia.

So on the expenses, and I apologize if you covered this, but how sustainable is the cut in the variable comp, and what drove that?

We tend to see variable comp decline a little bit in the first quarter really as an offset to the payroll taxes. It is not something that we would say is a large number. If you are thinking about compensation going forward, I think it is going to be sort of roughly in line with this quarter based on current levels. It could move around a bit. We talked about the offsets of payroll taxes going down, but a full quarter worth of salary increases and deferred compensation. The other thing that can move it around, of course, would be performance fees, and those are sort of when they were done in the quarter, it is reflected in the compensation in terms of bonuses, and so that number will move around based on levels of performance fee, and we hope they go up because we hope performance fees go up. And hopefully that is helpful for you.

Yes, that is helpful. On the retail flows, it looks light the gross sales up in the quarter, but they were also up a year ago in Q1. I am wondering if you can tease out how much of that increase you think was seasonal versus greater traction?

There is no question there is some degree of seasonality in the first quarter. You are right that is a good comparison. Just to remind people, in the first quarter a lot of the sales that we saw were through stable value types of sales. and so that was a much lower fee type of product. Typically 11 basis points maybe even less, the sales that we are seeing this quarter are not in that category, they are more along the lines of 90 basis points. So it is a very different revenue profile than we saw last year.

Okay. And maybe on the stable value, what were the flows to that?

Oh. I couldn't put my fingers on that offhand right now, but they were significant in the first quarter of last year. Billions if I remember. We may need to address that offline with you. Maybe it is $3 billion, is that, I don't know, we will address it offline. Sorry about that.

Okay. Lastly, in terms of fee rates, can you tell us maybe what impact fee waivers had this quarter, and what the outlook is there?

The fee waiver impact we had said, related to the fund mergers, is roughly $30 million on a annual basis. We are obviously seeing that in this quarter. We will see it in the next quarter. It is really going to be in the middle, second half of this year that those we expect would fall away. Obviously, that is still a discussion that needs to be completed with the fund boards, so I don't want to get ahead of the fund boards, still things may happen there, but that is our current expectation, so again in the first quarter, it would be, obviously, a part of that $30 million being reflected there.

And money market fee waivers, are those improving at this point?

Those are not improving or getting worse, quite honestly. It is a small part of what we see, because we have institutional product, which tens to be at a lower fee rate, 11 basis points, and so our waivers are not material, certainly I think across the year maybe they are $5 million to $10 million, in that range at most.

Okay. And then if I could just ask one last question, a very general one, you have a lot of new investors in the balanced risk allocation fund. I am just curious what you think their return expectations are, and what you think to the extent they are substituting it for something they already own, are they substituting for an equity fund, a bond fund, or an alternatives fund, and what do you think the best benchmark for that is?

Cynthia, I don't have that level of granularity. The answer is you are getting some element of all of that, and it is really, I think how I would really respond is that the financial advisors are looking at this balanced risk allocation product as just another important tool in the toolbox as they are meeting the investors' needs. One of the elements that is important is that there is less volatility associated with it. One thing that has come out the crisis is that people are less inclined to have the volatility that they have had in past. I am sure as years go on and things stabilize, it will probably be less of a focal point, but you are just getting people that are seeking greater returns than what they are getting in the cash accounts, and trying to get some greater equity type like returns.

There is a hypothesis which is maybe people who are in balanced products, fixed balanced products, equity versus fixed income, maybe going into this type of product, which is more dynamically allocated across a more, wider range of investment opportunities. Again, that is a hypothesis, it is hard to really say who is redeeming out of what for us.

Great. Alright, thanks a lot.

Michael Kim of Sandler O'Neill, your line is open.

Okay. First question. You guys have been pretty good about identifying allocation trends and sort of getting out in front of them, so that you have the right strategies in place when demand ultimately picks up, so just wondering what sort of products or strategies are you currently working on, or have in the pipeline that you think could be ultimately meaningful growth drivers drown the road?

It is going to be the iPad 4. No. In all seriousness, we are not in a position to have those conversations, and we are always looking at, really it is we respond to client needs, and we really think what we have out there right now is pretty broad, and I think we are on the mark. I appreciate the confidence and the thought, but no real magic.

Okay. Fair enough. And maybe if you could Loren, talk a little bit about other revenues you mentioned the lower PE transaction fees in the first quarter, but what is the outlook for deal flow there?And how should we be thinking about that line going forward?

Yes, I think it is one that we knew it was PE stuff is our one-off, but the biggest piece in that line item, or pieces are related to the real estate transaction fees, which again, we feel good about the growth there. The UIT business, the revenues associated with that business, going in that line, and the UITs had a very strong quarter, in fact for the industry as a whole, the UITs had the strongest quarter they had in a very, very long time, and we saw that as well, so we think that is going to help to continue to contribute to that line item. So overall, I think we think somewhere between $30 million to $35 million is the right run rate level in that space. It will move that around, I am not that good that I can actually tell you when the real estate transaction fees happen. and what quarter they happen in, but we do think that is sort of the overall level will be in that range.

Okay. That is helpful. Thanks.

Our next question from Jeffrey Hopson from Stifel Nicolaus.

Thanks a lot. I am curious in terms of the US retail market. What are your wholesalers out there talking about? Obviously, they want to capture sales and see where the interest is, but are they talking about equities, trying to position for when there is potentially some interest?

Yes. That is a good question. I am really glad you sort of asked it. I would say ourselves, and I suspect the vast majority of the firms that are doing well, the idea of sort of product pushing is long gone. I mean, I think that is, and it is much more going into a consultative advice engagement with the clients. It is very broad, very deep, and we have not just recently, but even somebody asked earlier about, if you just look at some of the marketing materials even last year, we were getting people focused on where we thought the great opportunities in equities. International equities, large cap, dividend equity income type products, and so we have been on it for quite a long time, with the idea of just trying to understand investors' needs, and where we think the opportunities are, and wanting them to be thoughtful moving ahead and not reactive to the market.

We do it in multiple different ways whether it be through things, even power share, universities, we came over with Van Kampen and Van Kampen consulting team that actually is educational sources for different advisors in the marketplace. We are doing it quite broadly with white papers on investment thought pieces. Having our investment teams in the markets talking to them. Maybe that is too much information, but the real point is, we really want to work and partner with the advice channel, and having them solve longer term needs for their clients.

Okay. And if I could follow up, your US retail business, if I assume that maybe it is not at ideal scale, can you get there if equities continue to lag? Obviously, the allocation products are helping, but any thoughts on that?

Again our focus is on quality not quantity. If you look at all of our conversations, and all of our focus has really been on generating consistent good long-term performance on broad capabilities and that is what I think we have accomplished. If do you that, there is no question in my mind in time you will meet client needs, and will you end up serving more clients broadly and that is what you are seeing. A little bit to the conversation we were having earlier, investor preferences will move over time, and having the depth and breadth of the capabilities really matters, and that is what we think we have accomplished, and ready for multiple different multiple cycles, and we think we are doing very fine right now in a very difficult market. If there is a greater sense of confidence by investors we will just do that much better.

Okay. Great.

Thanks. Our next question from Craig Siegenthaler from Credit Suisse, your line is open.

Good morning. I have a follow up on the economics of the passive business. You did answer some of this earlier. But I will ask it very simplistically. If you have a dollar of additional revenues going into passive, and a dollar going into active, on average, I know that there are a lot of different pieces there, but what is the differential between the incremental margin between the two?

I think it is largely the same, Craig, that is the way to think about it.

Got it. As you move across the passives, you did a little bit on this earlier, but as you at UITs, retail, ETFs, and institutional passes, what is the difference between the incremental margin between those three? Is one higher that the other?

So passive within institutional?

Yes.

So again, passive within institutional I think will be generally at a lower fee rate and perhaps a lower margin. We don't have that much of it so it is not something that we're position for. We have some. But it is really leverage that is associated with a real estate fund could have some leverage. We break out the assets associated with that fund into the passive and active pieces. It is a little unfair, because you can't really have the fund without the two pieces together, and we have broken it out just because we think it is important to see as those assets grow, what the impacts are. It is not really something that we just have leverage, right, it is always with a fund. Passive for institutional isn't all that relevant, I think in terms of the conversation, it is really the retail side that we have just been talking about, which is a very fine business with excellent financial characteristics.

Okay. And then just a kind of financial question, the fee waivers step down on the merged funds I thought was June 15, so roughly in 2Q you will have 15 extra days of higher fees, and the bigger step up is in 3Q. Do I have that right? I thought when you were explaining that to Cynthia's question, you actually referenced the first quarter?

Maybe I was saying in the second half is when you will see the fee waivers fall away, and basically you will get the pick up. I was using rough, yes, it is spread in a couple of dates. I think you probably got those dates generally correct, but I think in terms of the bulk of it, it is sort of end of June.

Got it. Alright. Great, thank you for taking my questions, guys.

Our next question does come form Marc Irizarry of Goldman Sachs, your line is open.

Thanks. Can you talk about IPRA a little bit more, in terms of how it could evolve as a franchise for you if preferences remain the same, in particular as you get past the three year anniversary here, get your three-year numbers, do you think that is going become more of a institutional product potentially for you, are you going to grow in the DC channel with that product, maybe you can just talk about how you see that evolving, if preferences stay the same for retail investors?

Yes. IPRA is a subset of our multi-asset strategy, and we could maybe talk about it more holistically next quarter if that is helpful, but in that context, and I think it is important to note, this is a very attractive product in this market, right, sideways to up market, it has obviously been very, very attractive. As I mentioned early, if you look at the punch ratio quarter-over-quarter it is 40%. We have net flows of $1.5 billion last quarter, and $3.4 billion this quarter. It is really quite dramatic.

To your point, from a franchise point of view, if you look at it by channel, it was really introducing institutional channels at the end of 2009, so recognizing much smaller assets. It was 60% in the institutional channel, 40% retail, and if you look at it today, it is 90% retail, and 10% institutional but it has really just been the pace of the uptake, and it is through those different areas that you are talking about, it makes a lot of sense in the DC , it makes a lot of sense for an individual asset allocation plan, and I think that is what you are seeing. And I would also note from a franchise point of view, when we introduced it, it was introduced in the United States, so 100% of the assets were in the United States. Today 30% of the assets are outside of the United States. That is a development. That has been introduced and trailing the US, and I think Loren mentioned earlier it has been just a month or six weeks ago that it has been introduced in the UK. I am going to lose track of the time, but some number of months ago into Canada, and into what we call our CCOP product, that gets it into kind continental Europe and parts of Asia.

It's a capability, a global capability, and that is what we have been doing with it and there are natural extensions off of it that we have talked about, whether it be a commodity sleeve which has been gaining some real attraction, and also the same idea of them introducing an income version of it, and that was introduced in the retail market in December of this past year. Very early but that is exactly, again this is a subset of the total multi-asset strategy capability that we have been on for a period of time, and it is making an awful lot of sense. And I think, I think it is important to note that we do feel the depth and breadth of the capabilities are very, very strong. This is sweet spot at the moment. What could you expect?If you have a Bull Market start to kick in, this is going to start to slow down. The good news is, where does the money go, it will go into our very strong equity type products. Again, it is back to the conversations we were having earlier, just broadly being positioned to meet investor needs around the world and within channels and that is what this is really

And I would just note, certainly for the US, allocation as an asset class which it falls into is $820 billion in size. The world allocation piece of that which is what this is classified in as a subset is $252 billion, it is a big pool of assets we are obviously just touching the surface now. If you aggregate all of our asset allocation across what we have got, it is roughly $12 billion, something like that, and growing rapidly. We are still at a very small market share of a pretty big pool, that is pretty exciting for us.

Great. Marty, your comment on acquisitions falling off or falling significantly lower on the capital priorities, what does that say about, maybe it is the fact that you do have all of the capabilities that you need, or is it something regarding sort of the environment out there with the deals that are out there, relative to what you are trying to accomplish now, I am just curious in terms of your commentary around acquisitions sort of falling off the priority list for you?

It is probably both of those, right. If you look at the Company today compared to six years ago, the depth and breadth of the investment capabilities are just vastly stronger. Much of it was done organically, but by the way, but the combination of WL Ross or ETSB more vehicle addition, or the Morgan Stanley bank cap thing, they were really driven by meeting strategically investment capability gaps. There are just fewer gaps, right, and that is a big message. But I think also to your point if for some reason it seems that there is a perception that has evolved that we are a consolidator. We have never, ever, ever done a consolidating transaction, it has always been strategic. We just don't want anybody confused, and always our first priority have been to reinvest back into the business, and organically improve ourselves, but again, we just want that very, very clear in the marketplace.

Great, thanks.

Yes.

Our next question comes from Roger Freeman of Barclays, your line is open.

Hi, a couple of follow-ups to other questions that have been asked, and maybe following-up on the capital allocation. As you reconsider the mix of dividends versus buy backs, obviously your conclusion is dividends are more important, but relative to one another, just not having the cash flow statement in front of me the last few years, if you think about what you spend to reinvest in the business, and then that excess cash flow remaining. A, how much of that do of you do you see distributing out, and B, the mix?

Roger, I think, how much of our cash flow we use and return will vary depending on the sort of market we are in. Obviously by upping our dividend, we are committing to a more committed amount of sort of payback outdoor cash flow. In terms of what we have done in the past, I think it has ranged from 50% to 100%. And it will vary, but in terms of how we think about it, it is obviously within that range is the way you should be thinking about it. It could be at the mid-point of that range, or a little bit lower for us going forward. But again, in terms of just how much we do in a particular year will have a lot to do with ultimately how the year plays out. I would look to our past history to understand what you should expect from us, and really it is just more business as usual, all we are really doing here and the way you should be thinking about it is just transferring a little bit of what we did in buy back into the dividend bucket. The total order of magnitude is pretty much the same.

Okay. That is essentially what I was getting at. Okay, and then secondly, on the progress around the Van Kampen integration and new product sales, did you have any new product additions on platforms, or how many did you have during the quarterly, and importantly, was there anything significant on the model portfolio front that you added?

I think all of the platforms have been marginally placed. We are still waiting for the big impact on models. And I think we are really thinking IPRA is going to be one that is going to get into the models, once we hit the three year number, that is the one that should have the biggest impact in terms of moving the dial. We continue to make progress obviously in terms of the market share, we have been very pleased and it is happening through our models, it is happening through our sales force, effectively working with the advisors at sort of their office level. Again, we are pleased with the impact in terms of the transaction, the integration is done, we are now really just seeing the benefits of that coming to fruition, as advisors in the home office really understand our products and us better.

And lastly, you made some upgrades to the institutional sales force a couple of years ago, and it sounds like the pipeline is as strong as it has been in a while, is that reflective of, I assume the incremental penetration you are getting with the gatekeepers, is that progressing as you thought it would?

Yes. We feel really good about the institutional leadership, and Eric Johnson and the team that he has brought on, and it is getting stronger and stronger. It is a combination of investment capabilities that are meeting investor needs along with a really talented group of institutional sales leaders. I think many of the people on the phone know that. It makes just a huge difference, and they are making a huge difference for us.

Alright. Great. Thanks.

Our next question does come from Cynthia Maher from Bank of America. Your line is open.

Thanks for letting me ask a follow-up. I wanted to clarify, I think you said earlier in your prepared remarks something about April flows $3.4 billion, but I wanted to clarify that?

No.

No.

Okay.

Is that from me, Cynthia? I mentioned this it was the IPRA flows for the quarter.

IPRA flows, okay, that makes more sense. That would be unusual for you to discuss April flows.

Yes. I don't want to break with history.

Okay. Thank you for clarifying.

At this time, we show no further questions.

Again, on behalf of Loren and myself, thanks very much to taking the time, and we look forward to talking to everybody during the quarter. Take care.

The conference has now ended, all participants may disconnect at this time.