景順投信 (IVZ) 2012 Q2 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 on 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 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 second-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 I would like to turn the call over to the speakers for today, Mr. Martin L. Flanagan, President and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, and thank you, everybody, for joining us today. I'm on the call with Loren Starr. And I'll be speaking the presentation that's available on our website, if you are so inclined to follow. And it's our practice -- I'll review the business results for the quarter, and Loren will spend more time on the financials, and then the both of us will answer any questions anybody may have.

So if you happen to be following on the presentation, I'm on the overview slide. But before we go into the numbers, I'd like to provide a sense of the macroeconomic environment that our business has operated in in the second quarter. Clearly, investor confidence was under pressure, with deteriorating economic climate in Europe, and sluggish US growth, and even people's perception of the strength of China entered into the psyche of investors.

And in this uncertain economic environment, investors naturally were seeking safe havens and acting very defensively, quite a difference from the first quarter. We are spending a lot of time with our clients, as many are, trying to navigate the environment, but given our broad range of investment capabilities, we believe we're well positioned to provide outcome-oriented solutions to meet our clients' needs in this challenging environment.

But with that as a backdrop, let me highlight the Firm's operating results for the quarter. I am on slide 3 now.

Long-term investment performance was strong across all time periods for the second quarter. Our investment performance contributed to solid operating results in spite of the challenging markets. Invesco's quarterly dividend is now $0.1725 per share, representing a 41% increase over last year's dividend and reflecting continued confidence in the fundamentals of our business. Return of capital to shareholders totaled $153 million during the quarter.

Reflecting the challenge of operating in a volatile market, assets under management ended the quarter at $646 billion versus $672 billion at the end of the first quarter. Total net long-term outflows were $4.9 billion for the quarter.

Operating income was $249 million for the second quarter versus $269 million in the first. The operating margin was 35% for the second quarter as compared to 36.6% in the first quarter, and earnings per share were $0.41 versus $0.44 in the prior quarter.

Turning to investment performance, a continued focus on investment excellence and our efforts to build and maintain a strong investment culture helped us achieve solid investment performance in spite of the volatile market environment during the quarter. And as you can see, 73% of the assets were ahead of peers on a one-year basis. This is the highest number since August of 2009. 73% of the assets were ahead of peers on a three-year basis, and 77% of assets were ahead of peers on a five-year basis. So very, very strong investment performance across the organization.

And as I mentioned earlier, net long-term outflows were $4.9 billion, clearly reflecting the challenges in the market during the quarter as investors reacted to a barrage of negative economic news. But importantly, in the first few weeks of July we've seen a sharp turnaround in flows. And we'll talk about that in more detail.

Before I take a look -- before we look forward, let me highlight some of the movements of flows in the second quarter. And after a very robust quarter for ETFs, marketplace demand reversed and investor sentiment turned toward risk aversion.

Retail asset outflows were composed largely of $2.1 billion in assets related to PowerShares Qs, and another $900 million of PowerShares DB commodity products. Traditional PowerShares ETF business continued to be less volatile and saw $736 million of inflows during the quarter at a rate of growth well in excess of our industry market share.

Institutional flows were marked by one-off outflows of $3.2 billion in low fees, stable value, fixed-income assets and global equity assets, reflecting the risk off behavior we saw during the quarter. As I mentioned earlier, we saw a turnaround in the direction of flows during July, and we're confident of future organic growth in spite of the challenging quarter.

Contributing to our optimism within the institutional channel is a sharp increase in the number of buy ratings amongst US consultants in a broad number of capabilities. Buy ratings nearly doubled over the past year to an all-time high for Invesco, and there is still plenty of upside.

We're also seeing very strong RFP activity, with a 49% increase in momentum during the second quarter of this year versus the second quarter of the prior year. Specifically during July, we're already seeing strong demand with flows into real estate, international growth, bank loans, balanced risk, and stable value. We also saw strong demand in July for Invesco mortgage capital, with an equity raise which will result in $1 billion in assets under management. As importantly, yields on the inflows are significantly higher than the assets that outflowed from the business during the quarter.

Turning to page 9, again, the depth and breadth of the investment capabilities are strong. Investment performance and our focus on client engagement have resulted in solid momentum in our US retail business during the second quarter.

US net flows, and excluding the PowerShares QQQs, remain positive at $700 million and were driven by continued market share gains in gross sales and below industry redemption rates, where we're at 25% versus the industry's 32%. Also very importantly, 38 of our US mutual funds, representing 60% of our assets under management, are rated four and five star by MorningStar.

These funds include US and international equity; fixed income; alternatives; and asset allocation. The strong ratings for these funds, combined with solid growth in platform placements, are contributing to robust growth in our mutual fund and subadvise business.

While we experienced a modest slowdown from the first quarter, our year-on-year growth in the first half continues on a strong, positive trajectory after normalizing for the large stable value wins in the first quarter of 2011. US retail mutual fund gross flows were up -- excuse me, gross sales were up 28% in the first half versus the same period a year ago.

Moving on to page 10, global multi-assets suite of products has generated tremendous interest from clients all over the world to a capability with strong, long-term performance that aims to provide a high level of protection in a volatile market -- and you will find the appropriate footnotes regarding the performance in the appendix.

The balanced risk allocation mutual fund in the US achieved a three-year track record and a five-star MorningStar rating on a load weight basis in June, and as a result we're seeing more clients add this capability to their platforms.

As of June 30, one-year performance for the Class A share mutual fund in the US is top percentile and a three-year performance in top decile. As a result of this strong performance, multi-asset suite flows have moved up very nicely over the period, with assets growing steadily to nearly $16 billion.

And although we're pleased with the performance of our asset allocation capabilities, it's important to note that they represent only 25% of the first half mutual fund gross sales, while equities remained the majority, at 60%. And beyond IBRA, we've been focused over the past year on broadening the penetration of the risk parity suite, which includes the IBRA commodity product and also the IBRA premium income product.

Secondly, strengthen our income suite of strategies and equities and fixed income. Thirdly, emphasizing our top-tier international growth products. And with this as a foundation, we're very well positioned for when clients begin to move towards equities.

Given the activity we're seeing in July, we are cautiously optimistic, as it appears clients are easing back into the markets, particularly in the United States. There are a number of reasons for that. One might be that housing seems to be lifting itself off the floor. US companies continue to perform quite well, and there is a growing concern that the Fed might be accommodative again in the third quarter.

More importantly, clients realize that the low level of returns provided by safe havens like US treasuries are not going to get them where they need to be. Earning a nominal 1% equates to a real loss over the long-term and won't provide growth that the pension funds needed to meet their commitments or individuals need for retirement.

I mentioned earlier, we're spending a lot of time with clients; certainly our balance-risk capability is part of the conversation, but we're also seeing strong interest across a broad range of asset classes, and our very competitive investment performance is helping us win additional mandates from clients, from current clients, and is also attracting new clients to the organization. So with that, even though it's been a difficult backdrop, we feel we're very, very well positioned in this marketplace.

So Loren, I'll turn it over to you.

Thanks, Marty. So turning to the financial part, we'll look at AUM. And you can see that AUM declined $26.2 billion quarter over quarter or 3.9%. That was a combination of the following -- market in FX, which contributed to $17.9 billion of the decline; long-term net outflows of $4.9 billion; and then net outflows from money market products of $3.4 billion.

Our average AUM for Q2 was down 1.1% to $651.2 billion. In addition, our net revenue yield in Q2 came in at 43.7 basis points. And that was the decrease of one basis point quarter over quarter. And this drop was due to the combination of three factors.

First, as lower transaction fees in other revenues, and that accounted for 0.4 basis points of the decline; lower performance fees, and that had an impact of 0.3 basis points decline; and then the mix, net of distribution, resulted in the final piece, which was a decline of 0.3 basis points.

Let's turn to the next slide and cover operating results. You'll see that net revenues declined $24.2 million or 3.3% quarter over quarter, and that included a negative FX rate impact of $3 million. Inspecting this a bit further, you'll see that investment management fees decreased $10 million, 1.2%, to $802.1 million, and this decrease was in line with the decline in average AUM we experienced from Q1 to Q2. FX decreased our investment management fees by $4.1 million quarter over quarter.

Service and distribution revenues were down $1.9 million or 1%, also roughly in line with our lower average AUM and investment management fees, and FX decreased this line item by $0.4 million. Performance fees came in at $15.5 million; that was a decrease of $5.7 million versus Q1. The performance fees earned in the quarter were generated primarily from bank loans and also our global quantitative equity group.

Other revenues in the second quarter were $26 million. That was down $7.1 million, and this decrease was the result of lower transaction fees from our real estate business as well as lower UIT revenues. As Marty mentioned, we saw a lot of uncertainty in the second quarter, and this uncertainty adversely affected both of these revenue streams. FX decreased the revenue in this line item by only $0.1 million.

Third-party distribution services advisory expense, which we net against gross revenues, decreased by $0.5 million or 0.2%, and FX had an impact of $1.6 million on this line item. Moving on down the slide, you'll see that our adjusted operating expenses at $463.1 million decreased by $4 million or 0.9% relative to Q1, and FX decreased operating expenses by $2.4 million.

Employee compensation at $306.5 million fell by $6.5 million or 2.1%. The first quarter, as we talked about before, includes seasonally higher payroll tax costs and retirement costs. The benefits of these expenses rolling off into the second quarter were offset by a full three months' worth of salary increases and deferred compensation increases that took effect in March 1. So the net reduction in the quarter was a result of variable compensation fluxing down. FX decreased compensation expenses by $1.3 million.

Marketing expenses decreased by $0.2 million or 0.7% to $26.8 million. The entire decrease was due to FX. Property, office, and technology expense came in at $67.8 million and an increase of $1.5 million, and that was due to a $1.7 million exit charge for lease space as we consolidated office space in the Chicago area. FX decreased these expenses by $0.5 million.

G&A expenses came in at $62 million. That was up $1.2 million or 2%. We have seen our professional services costs increase somewhat as we prepare for several new regulatory compliance requirements with the onset of new rules, such as FBCA, RDR, and [MISI 2], to name just a few. FX decreased G&A by $0.4 million.

Continuing on down the page to nonoperating income, we saw that decreased $3.4 million versus the first quarter. This decrease was due to negative FX impact on our intercompany loans as well as the non-cash write-down on certain seed capital during the quarter.

The Firm's effective tax rate on pretax adjusted net income in Q2 came in at 24.5%, consistent with our previous guidance. On going forward we continue to expect our effective tax rate to be somewhere between 24.5% and 25.5%, which brings us to our adjusted EPS at $0.41 and a net operating margin of 35%.

So before turning things back to Marty, I just wanted to point out some additional disclosures that we will provide as part of our regular quarterly press release, and which we hope you'll find and our investors will find helpful.

As you see in this quarter's release, we included a full balance sheet and cash flow statement. That fully eliminates the distortive noise of consolidated investment products. As you probably know, US GAAP forces us to consolidate about $7 billion of our investment products, consisting of many of the CLOs we manage.

The impact of these products that we consolidate ripple through all of our financial statements, and quite obviously provide a very misleading view of the Firm's true financial position. And we believe that deconsolidating these products from our balance sheet and cash flow will provide you investors with a more accurate picture of our financial position and will allow for a more appropriate comparison with our peers.

For example, based on our US GAAP balance sheet, you would think we're a highly-levered financial institution with a debt-to-equity ratio of 70.3%. In fact, that is what Bloomberg, FactSet, and virtually all of the other third-party data providers will show, because they are using the US GAAP numbers.

Our ratio without the consolidated product is only 16.9%. And in fact, we've seen an almost 20% improvement in our true debt-to-equity ratios and debt-to-EBITDA ratios over the last year. Our operating cash flow in the first half of 2012 has improved almost 200% versus the first six months of 2011.

So it's our hope that by going forward and -- going forward, that these new disclosures will provide a more accurate picture of the Firm's financial position, and that the investment community will see this.

And now I will now turn it over to Marty.

Thank you, Loren, and we'll just open up to Q&A, please.

(Operator Instructions). Michael Kim, Sandler O'Neill.

First, can you just maybe dimension the snap back in flows thus far in July that you mentioned earlier, and then talk a little bit about which products or channels are generating those flows?

Michael, it is Loren. The snap-up has been pretty dramatic. I wouldn't use the word. I don't like to use such a superlative hyperbole. But it's been pretty Dramatic. So we're definitely seeing something that was much more like I'd say, the first quarter than what we saw in the second quarter, just to give you a sense of the size. Obviously, we're only into the quarter so many weeks, so again, we're cautiously optimistic that we're going to see a continuation.

It's across many different products, so it's certainly that Qs -- you can see those numbers pretty clearly, but it's not just the Qs. It's definitely across some of the real estate, bank loans, the RDR we talked about. So it's across many, many different categories and geographies, I would say, as well.

Okay, that's helpful. And then just thinking about retail distribution as IBR continues to broaden the fund's reach, particularly with the three-year anniversary. Is there maybe an opportunity to showcase some of your other funds as you have these discussions with the gatekeepers? Or is this something your wholesalers are already out there doing?

You are talking about the IBRA, not the IBR, right? The balance risk of the --

Yes, that's right.

Thanks for asking. I was trying to make that point. I think very, very importantly, just to come back to a couple of comments -- one, if you just look at gross sales in the first half of the year, 20% of the sales are represented by the IBRA suite -- 25% by the IBRA suite.

60% still are represented by our equities. And if you then look at the ratings, as I said, 38% of our retail funds representing 6% of the assets are four and five star rated. We have for over a year been focused with our distribution partners on a broad range for our capabilities -- our flagship funds, the equity income products, the international products, the high yield munis. So a very, very broad range of capabilities.

And I think that's very important, just from -- by the way you're asking the question, we think it's the right thing to do for clients. And we have a very, very strong range of opportunities for the different firms, and we're very, very focused on that.

Okay. And then just finally, it seems like you're more focused on streamlining the franchise. Just given the potential for regulatory reform and the outlook for rates, how are you thinking about the money market fund business these days? What's the argument here for continuing to absorb the fee waivers and the outflows?

Just on one point -- I would say the fee waivers that we've had with our money market has been minimal, probably about $5 million, maybe a little bit more, for a full year. So because we really -- it's been most institutional basis.

In fact, we're seeing repo rates improve. And so the fee waiver topic has actually been a little bit alleviated, generally, for the industry, I would say, just coming into this quarter. And obviously, the outflow you saw this quarter, I think, was a little bit of an anomaly.

I think it was one client who -- there's a lot of specific sort of one-client activity that caused some of the outflows. Generally we think that the money market business will continue to grow, ex any regulatory overlay or topic. That's still a very important product for institutions, and they are using them.

And I would just add from where we are in this conversation -- first and foremost, the money fund product is an excellent one. The reforms the SEC put in place in 2010, they are absolutely working. There's clear evidence of that.

There is -- you could be responding a lot of noise from the regulators right now about further reforms. And again, we and the industry continue to make the very valid and accurate comment that the reforms are working; it's a great product; it should stay in place. And as you can see from the recent public comments from a number of the SEC commissioners, they are also uneasy with moving forward with further regulation in something that seems to be working very well until -- to give these reforms more time to continue to prove they've been successful. And you have to have a robust cost-benefit analysis.

So again, if you just come back to us specifically, our money fund team is very, very strong, and we think it's a great product and it's doing good things for clients. So we're happy where we are.

Okay. Thanks for taking my questions.

Michael Carrier, Deutsche Bank.

Thanks, guys. Marty, you hit on some of the unusual items just in the quarter, when we look at the flow number.

Yes.

And maybe a little additional color. It just seems when you look at the overall performance, things are good, particularly just given this environment relative to a lot of the peers.

And so when you look at where the outflows were coming from, is it more product-specific? Is it more certain clients? And probably more importantly, are there some of those trends that you're likely to continue to see? Or like you said, in July, you've seen a pick back up in activity.

But just more like the outlook. Is there still decent demand in some of the products versus what you saw in terms of some of these anomalies in the second quarter?

Yes, it's a good question, so let me try to refine my comments. So I believe that the world is going to exist. I believe that the markets are actually going to be ultimately be positive. And that there will be greater clarity of confidence for investors to move forward.

Every time that we have these scares, right, we're still coming out of a crisis period where clients -- it seems to be -- they get scared, and they stop. And so you saw it in the second quarter really this fear enter into clients again. And not just retail, but also institutional clients, where they stopped a number of decisions or they would make a risk-off move.

So our basic view is you have to separate that from what we're trying to point out is the underlying growing strength of the business, whether it be the broad, deep investment performance of the organization; the buy ratings, the number of buy ratings being increased; the number of RFPs that are being picked up. So when you look at RFPs, buy ratings, there is definitely a movement towards people wanting to make decisions. They know they can't be earning 1% in a cash product. So it's really -- when confidence is in place, they'll move forward.

Then if you look just specifically for us, and again, I think it was an area where you had a big stable value decision where a firm decided to go to money market fund from a stable value -- a movement out of a big global equity decision was a risk-off type decision. So again, they look exaggerated in a quarter when people continue to make these strong moves -- risk on, risk off.

I personally think we have a couple of big topics, whether it be Europe or our fiscal situation in the United States, but I think frankly, you can see the end of the tunnel, and looking into next year, a pretty good outlook.

Another thing I would add is all the things they're pretty chunky, right? So things come in and things come out. They really do create some noise within the quarter. I think, as Marty said, when things get volatile, things slow down in terms of coming in, you'll tend to see more coming out.

But on balance, the stuff we see on the horizon, the big chunky things coming in, by far outweigh stuff that might go out. So I'm not saying things don't go out; things will go out still. But by far and away the stuff coming in that we're seeing is well in excess of those elements going out. So that's why we're confident.

Thanks, guys. And then Loren, just on a couple items -- just in terms of the waivers, not on the money funds, but just on the core funds that you're likely going to get that benefit, just wanted like any update on that. And then some of the items that tend to be more volatile, like the Other revenue line, or anything in expenses that stood out this quarter that might not be recurring?

So our waivers, the good news is that's going to happen. And so you'd expect to see that starting -- well, it's already happening. So we're looking forward to seeing that improve our revenue yield into the last half and going forward.

The Other revenues that you said was probably the biggest surprise. It wasn't really a surprise in the sense that we've seen it in the past, and when markets get volatile, transactions slow down, and sellers become less willing to sell and buyers become more cautious.

And that is kind of what we saw. We think that will recover somewhat, but again, I think we need to be realistic that it could remain at somewhat lower levels into the last half of the year, depending on what sort of market we're going to see. But I would be hopeful that we'd see some lift off of the current number being closer to high 20s, 30, as opposed to mid-20s.

So that's something -- I think it's hard to model. I couldn't tell you exactly what to put in there other than -- I'm hoping it's going to be somewhat better, certainly given what we're seeing in July. Generally there seems to be a lot -- slightly better mood in terms of the market.

So I think that is one part. In terms of the expenses, I think -- we highlighted there was a one-off, $1.7 million exit charge. Obviously, that would not be recurring. I don't think there's anything that I would say is particularly noteworthy in the quarter that I need to point out as being unusual, or falling away, or coming in.

Okay, that's helpful. Thanks a lot.

William Katz, Citigroup.

Thanks. A couple of questions. First one, just you mentioned you're seeing a nice pickup in both the RFP as well as the number of consultants that have you on their recommendation list. Can you talk a little bit about maybe some of the dimensions that's driving qualitatively the increase? It's obviously a very good development.

Let's see. From a qualitative point of view, I think, Bill, it's a combination of consistent, good long-term performance. That allows you to have the conversation with consultants and clients, right? That's the prerequisite to it.

And at the same time, over the years, the consultant team has now been in place probably a year and a half, and they are dramatically improved from what we have had in the past. And they are very, very capable, and they're doing a very good job connecting with the consultants.

And then thirdly, I'd say just from the RFP pickup separately from existing clients or new ones, it's really frankly, again, just the combination of the performance of the Firm, the stability of the Firm, and the range of capabilities of the Firm. And I think those are really the qualitative factors that are ultimately driving what we're seeing.

Now, with the RFPs being much higher, obviously we still have to win them, but it's a very different -- and the same thing, just getting a buy rating, five-plus rating, doesn't mean you're going to get the business, but they are absolutely prerequisites for success.

Just within that, is there a way to qualify what your win rate might be among those RFPs? And what is the lead leg when you get onto a consultant new buy recommendation, perhaps?

So I don't have the win/loss ratio, Bill. And again, this is probably -- from the lead times to conclusion, they just tend to be quite a bit longer institutionally, right? And they can be a couple of quarters, just because that's the timing of the meetings with the different consultants.

And again, I just want to reiterate how important it is to have the buy ratings in place. It doesn't mean necessarily that you're going to -- it's going to be a dramatic uptick in flows in the next quarter.

And then just one last question; thanks for taking them all. Obviously, you're very well positioned with the risk premier platform. Broadly, where do you think the industry itself stands, particularly in US retail in terms of adoption of the product?

It's obviously been a very strong product for a bit of time now. Is there any ease or let up that you're seeing in any of the distribution channels away from the allocation, or is that still full-speed ahead?

No, it is full-speed ahead. I think what we've talked about in the past, Bill, and I think everybody on the call would realize, what has been abnormal about it is that it's usually -- you need a three-year track record before you move forward. And it's been great success prior to a three-year track record. And yes, it's frankly, because of the quality of the team that's been together so long, I think was something. But it was still very unique.

So even post -- look, it's only a few weeks post the three-year track record, but all indications are the platforms -- it wasn't on because of it, they are going to go on. And there just continues to be interest.

And I think even more broadly, the marketplace, the financial advisers are -- there is a broader movement, I think, going forward, and I don't think it's a three-month, six-month phenomena, but probably a multi-year phenomena that they're looking more to asset managers, more and more, to be solutions providers for them, and asset allocation type capabilities are going to be here for a long time.

Okay, thanks for taking my questions. Very helpful.

Ken Worthington, JPMorgan.

You changed the head of the retail distribution with Peter Gallagher. Can you maybe talk about what he brings to the table? And obviously the goals are better retail sales, but what are maybe his more specific mandates in improving and growing the retail business?

Yes, thanks, Ken. So I wouldn't put it necessarily around an individual. There are a number of changes that we made during the quarter, and frankly, what it was more responsive to -- to the marketplace, of all things. So we just see a much tighter integration between marketing, sales, product development execution. And so a number of the changes were much more reflective of trying to mesh up that way.

Peter is obviously a very important part of that, driving the sales component; very talented, been with us for many, many years. And so we think, again, we're responding to strategic directives in the marketplace, and we have -- it's really building on success. And we think we've been effective over the last number of years. We think this approach will make us even that much more effective.

On the same line, the Van Kampen performance numbers look particularly good. And as you think about market conditions, changes that have happened at Invesco in distribution over the last couple of years, how do you capitalize on that? How confident are you that you can capitalize on that?

Or is this a situation where market conditions are still really the real driver here, and it's always nice to have better performance than worse performance, but it's hard to have conviction that this can turn into a turn in sales, even if it persists for -- the good performance persists for a while?

That's a good question. So here's been our approach. They are very strong performing. There is a market condition that is adverse to equities, generally.

That said, what have we been doing and we've been doing it, again, for over a year, is that we're focused on what is the right answer for clients, and looking at how should the clients be positioned into the markets going ahead. And that we, frankly, are concerned that you could get -- a client could end up upside down if they are -- have too much money in fixed-income products.

And we really think a broader allocation into equities, equity income type products, yes, and fixed income. And so we have had a program for over a year with head offices -- again, head offices understand this; they're working it very hard. But so are we.

So our conversation is not a single-threaded fund, it is a broad range of capabilities, of which I would call our flagship funds, and yes, Van Kampen equity income value type products are an important part of that -- have been a part of that dialogue. And again, we are thinking that we're probably going to be closer to that being attractive again for individual investors than not.

We're not going to let -- we are not ignoring it. We think it is the right thing for clients, and we think it will ultimately do very well.

Okay, great. And then for Loren -- just a little one. For the bank loan performance fees, is a payout here, or is there any component of compensation associated with that element of performance fees?

There is, Ken. There is a small percentage. Usually performance fees could be 15% comp paid out, but it can range up to 50%. So it depends on the area. I don't want to get into specifics about what our bank loan group gets paid, but yes, there is a comp element.

Okay, great. Thank you very much.

Jeff Hopson, Stifel Nicolaus.

Thanks a lot. Could you maybe drill down a little bit from a geographic standpoint and give us the highlights, low lights in the UK, Europe, and Asia, please?

You're talking about for the quarter?

On the flows, yes. In the quarter.

Because we certainly do provide some detail on the back, and I think -- or in the presentation. So we saw outflows across most of the regions other than continental Europe, if I'm correct here. And we -- some of the one-off things that Marty talked about ripple through the geographic elements.

The stable values will be a US phenomenon. There was certainly some -- we talked about in the past, in terms of the UK. There was one placement, one platform placement that adjusted the amount of corporate bond product that we had. So that was probably the biggest piece of what was going on in the UK.

Canada is actually an improving story. I would say that the outflows continue to get less, and we're seeing more growth in sales and performance -- I would just highlight -- we didn't talk about it. It continues to improve significantly across the timeframes that people would care about.

So I would say Invesco Canada, Trimark product are all really on the right trajectory to say that we're seeing improvement here. The Continental Europe positive flows were off of a lot of the balance risk product and also some of the fixed-income product.

And then and Asia we saw some outflow. It really was one capability that was really Australian equities. And that is fairly limited. So that is not something that is going to recur. So I would say one-off things around each region, generally good strength across all the regions if you back those pieces out.

Okay. And on premium plus in Europe and the UK, I think the UK was just more recently added, so the question is how significant are the flows outside the US, and would you say that can ramp up?

So outside the US, the biggest element would be in Canada and in continental Europe. I think within -- the biggest one will be continental Europe. Out of the two right now, I think that was probably somewhere around $500 million within continental Europe for the IBRA product. And that is one we think will continue to grow, and we do think the (technical difficulty) will continue to grow.

The UK is pretty new. The introduction was -- just happened at the beginning of the year. They have spent some time introducing the product. I think it will take more time before it will take -- get traction. But it's one that I think if you would ask the UK team, they are very optimistic that it has a lot of potential to grow. But it just takes time. It took a lot of time in the US; it will take time in the UK.

We have recently introduced it into Asia as well, I think in Japan. That's also pretty new. So it's going to take some time there, as well. But overall, I think there's a lot of demand for this product, and it's one that -- it is our hope we'll see what happens in continental Europe will also happen in each of the regions.

Okay, great. Thank you.

Daniel Fannon, Jefferies.

Loren, first, just in regards to buybacks and capital, you paid down some debt this quarter. How should we think about the mix going forward for the remainder of the year?

Yes, I think we -- you'll see we did about half in buyback and half in dividends. I think we've said we are trying to make dividends the bigger feature in terms of how we return capital, so read into that dividends will be more of the feature going into the second half than buybacks, I'd say, in a vacuum.

Obviously, we do pay attention to the stock price. We do look at opportunities, and so we don't have some sort of formulaic approach to how we would do buybacks. So we will take advantage if we see an opportunity.

So again, I think we're -- our interest is probably still pretty high in terms of buybacks, just generally because the price seems depressed, and relative to our level of optimism, there's a disconnect there. But we are, obviously, going to be disciplined in terms of how we use our capital and return capital. And we do have some desire to continue to work on the credit facility, which picked up a little bit in the second quarter. So I do think it's going to be a balanced approach through the second half.

Okay, that's helpful. And then one of the other segments you talked about was real estate in terms of pickup, I think in July. Does that mean you're basically deploying more capital in terms of investment activity picking up?

Well, I think in terms of the level of new fund launches and the things that were supposed to happen in the second quarter that didn't, that got pushed in the third quarter, that stuff is happening now. And so I'd say we feel very optimistic about the pipeline there on real estate.

I think generally in terms of the speed with which they are deploying capital I think may still be at a slightly lower level than what we've seen historically. But in terms of the interest of the products and the win rates and the RFPs, that is going very strong.

Great. Thank you.

Roger Freeman, Barclays.

I guess on IBRA, I think I heard you say it's been about 25% of flows year to date. I'm wondering if that curve is steep. And I think the flagship one hit its three-year performance mark in June. I'm wondering if you've seen any acceleration on that yet, or is it too early?

Roger, it's like the day after that three-year record we got, I think, two huge -- two large platforms that came in. So it definitely had an impact.

I'd say we do think it's going to have continued impact going forward. We obviously got the MorningStar rating, too. It took a little later after we got the three-year record. I think there's going to be some advertising promotion around the five-year -- you know, we got a five-star rating load-waived on that product. And so that probably will also help accelerate the knowledge of this product, which is, again, pretty new on the scene.

Okay. And broadly on the US retail equities mutual fund complex, just the redemption rates, obviously, are still below industry norms, but seemed to tick up slightly versus the industry staying flat -- and I'm just wondering, as we think about Van Kampen and the continued synergies around that, and getting on new platforms, has that at all plateaued? Do you have new products that were launched, or platforms launched in the quarter, or is it just more a function of your product mix and how that played out?

Yes, Roger, I think it's going to be mostly a function of existing product mixes. We have merged a few -- there were some other fund mergers, and there's definitely some closed-end fund mergers that took place. So I don't want to say everything is completely done, because we still have a little bit of activity that completed -- needs to get completed by Q3. But I'd say, generally, it's not about new products and new positioning; it is really just execution on the existing set of relationships that we have.

Okay. And then lastly, on the institutional side, you commented as you look out, the wins exceed losses. But is that not almost always the case? The lead time, obviously, on new wins has to be a lot longer than what kind of warning you get when money is going to come out.

I'm wondering if maybe you can answer that, and somehow quantifying on a weighted basis, thinking about what odds do you think you have of winning business that you're prospecting right now, how that compares to, say, a year ago. How much is that up?

Yes, so if I'm understanding the question, as I said, the RFP activity is up quite dramatically period over period, along with all the buy ratings. To your point, yes, we probability weight them and all those different types of things.

I would not have the confidence to publish those, by any stretch of the imagination. But I also think you are also very much on the right point, where we also like any good organization, you're always trying to pay attention to the client. And when you have a topic, whether you are relatively underperforming, or a client is going through a re-think of their asset allocation, you're engaged in those processes.

But by the way, the least transparent bits of information you get are when you're going to be terminated. And they can literally happen -- and that is where we just have very imperfect information. I think that is probably broadly across the industry.

We're trying to stay on top of it, but it happens very specifically. And that would happen again this past quarter, right -- when it was literally driven by two things recently, I'd say. Recently over the last year and a half, it would be derisking within portfolios, and then all of a sudden liquidity-driven type reallocations.

So again, we try to get better and better at it, but again, that is the hardest part of the whole thing.

Okay, thank you.

Craig Siegenthaler, Credit Suisse.

As we look over into the third and the fourth quarter, can you help us think about performance fee potential composition, just in terms of seasonality? Because there's some products that only pay out in certain quarters. So just -- which products have the potential to pay out in the third and fourth quarter?

And also maybe help us think about which of these products were at high watermarks or above high watermarks that could actually generate fees.

So I guess in terms of things that would pay out in Q3, I think there is an emerging hope, I would say, on our side that we're going begin to see more quant performance fees. We saw some small performance fees coming in. Their performance has really dramatically turned.

So I'd say they're moving closer into the territory where we might begin to see performance fees coming back on that capability. It's still too early, I'd say, to declare that, but it's -- if you remember, it featured a lot in our prior performance fees historically, and then it stopped for a while. So that is one element.

Q4 you'd see the UK and you'd see Atlantic Trust as two elements. The product in the high net worth business, Atlantic Trust, that has generated performance fees; the MLP product is doing well. It's above its benchmark. And so it's -- certainly, at this point if you were to stop the music, you'd see a nice performance fee there. But it's very volatile. So again, it's hard to predict and hard to forecast.

The UK would also have some amount of performance fees. It tends to be more of a first-quarter than a fourth-quarter event.

And then real estate is another element that could definitely show performance fees. We've seen some good performance fees coming from real estate. I think we would hope to continue to see performance fees coming from real estate. It could be Q3; it could be Q4. But the performance is very good there. And so that would be another place.

Bank loans can also generate it, as I mentioned, and we saw some this quarter. But that usually is associated with a wind down of an existing sale rolled into another one. And so those don't happen all the time, but when they do you can definitely see those fees come in.

Got it. Great color, Loren. And then just on the Van Kampen Invesco fund mergers. June 15 was one of the numbers you had talked about previously, but can you talk about the potential for pickup in fees and revenues in Q3 versus Q2? And just help us think about if some of these actually close maybe a little bit later, how we should think about the step-up in fees?

Well, I think we had said that the fee waiver was $30 million annualized. That was the impact. So we see coming in $7.5 million a quarter in revenues Q3 versus Q2. So that would be the numbers I'd point to. I think that is largely directionally correct, plus or minus. It's probably not much more complicated than that.

Got it. And if I can just ask one more, how should we think about the run rate of alternative flows? You've had kind of two weak quarters in a row here, but then you have some potential drivers, some areas that are actually raising assets. How should we think about how alternative flows should trend over the next few quarters here?

Yes, it's a good question. So when we think about alternative flows, we have to pull it into its various pieces. Some of the noise that you had been seeing in terms of that flows had been related to the Deutsche Bank PowerShares products, which are the commodity products. And so commodities -- they were out, as Marty mentioned. I think $0.8 billion or something like that -- $0.9 billion in the quarter. So that can run plus or minus, depending on what people are doing with -- thinking about commodities.

The real estate is another piece. And as I mentioned, I think that's one that we'll continue to run. We did see a little bit of slowdown in terms of acquisition activity being the funds acquiring new assets just because of the volatility in the market. We're hopeful that that will lift a little bit into the second half, which could help flows come in, because we don't recognize those commitments until they translate into investments. So we think that will help.

We saw some private equity come in this quarter; that probably is not something that would continue. Obviously, that was related to just the fund five.

And then Bank loans would be an area where I think we would hope to see more activity. We're seeing a lot of interest emerge in Asia and other places for this capability. It's one that had been put on buy-plus ratings with our consultants. And so we think it is in a good position because we are one of the market leaders in that space right now.

Great. Loren, thanks for all the color.

Sure.

Glenn Schorr, Nomura.

This is Kevin Chan in place of Glenn Schorr. I'm just wondering if you could comment on the new rule by the European Securities Market Authority that's going to eliminate securities lending profits for funds that operate in Europe. What is the potential impact for IVZ? And maybe additionally, commentary on the other rules on the ETS? Thanks.

So for us, it's obviously a very European-focused topic. And so two levels. One, we don't have a lot of exposure in European ETF, so it's not applicable. But secondly, just as a practice, that's not what we do. So if we securities lend, all the benefit goes back to the funds, which we think is, frankly, appropriate.

So yes, there would be no impact to the Firm.

Yes.

-- if this rule took place, in terms of lost revenues or P&L.

Appreciate it. Thanks.

Robert Lee, KBW.

Thanks. Just a question on Perpetual in the UK. I'm just curious -- big important business for you. Can you maybe talk a little bit about some of the trends you're seeing there? Are you seeing similar trends there as maybe you've talked about, with some pickup in the US and the US retail business? Maybe just give us an update on that business.

Yes, so obviously, a very, very strong business. We have a couple of different factors going on, so maybe the macroenvironment in the UK being a little more pessimistic than the United States. That is a driver on flows.

That said, strong equity performance, and obviously, traditionally through the equity income products. But also, importantly, the Asian product has been very attractive. The global equity product is something that we're feeling very, very strong about in the area, too -- the Japan product. So there's a range of things emerging there.

Earlier we talked about the beginning of the introductions of multi-strategy asset allocation capabilities. Early days there. We anticipate doing more in that area. We think that same phenomenon that is going to be emerging in the United Kingdom for a handful of reasons, some of the same reasons here in the United States, but also coming out of RDR, the regulatory developments in the area.

So we feel we're positioned very, very well in what is a difficult macroeconomic environment, but also a broad regulatory change in that area also, driven just by the strong, strong, strong investment reputation of the Firm.

I mean are at all much risk that that business -- you have a lot of good things going on in the US in the retail business. Any concern that that's just going to somehow be like a drag on overall results, just given the more pessimistic environment there?

No. No, look, I think we're in the strongest position, I would argue, in the UK of almost any firm. Worst case, we're top three. But I think, again, I think we'd just could not be better positioned. I think maybe what you are getting to, Rob, is the economic environment is so bad that people take their money and put it somewhere else. And I don't know that the banks are -- I think we're seeing just the opposite, actually. People are putting money into funds away from the banks.

I think the other thing I would just mention is a lot of the teams in the UK are now managing assets that are being sold into Europe, actually into Canada, into the US now. So there is a flow of assets that are coming in, not just from the UK. And that is going to support positive flows for that team.

Great. That was it. Thanks for taking my question.

Yes, absolutely.

Cynthia Mayer, Merrill Lynch.

Thank you. Maybe just a couple of questions on PowerShares. Could you talk a little about why you think ETF flows and industry-wide, too, slowed in Q2, given the volatility went up?

And also, there's been some discussion on other calls this quarter about ETF fees and market share gains, so I am just curious whether you see any fee pressure for PowerShares. And to the extent that some of the bigger players in the industry lower fees, would PowerShares feel a need to do that?

So let's see. Just on the more -- some of the macro things that you are seeing on the fee side. So we largely do not compete in the traditional commodity-type areas. And that seems to be where there is a lot of the fee pressure.

We feel we're positioned very, very well and really a leading position -- the fundamental unique assets type alternative ETFs. We continue to see our market share actually increase in those areas, and it's going to continue to increase, as best we can tell, so we think we're positioned very, very well there.

And again, this gets -- it's interesting to watch ETFs from a sentiment point of view. And I think what you saw in the second quarter was when the risk-off element came on, what you saw happened was much of the flow started to move into fixed income quite dramatically, beyond the typical asset allocation into fixed income in the area. And we are seeing the exact opposite happen in ETFs, moving into July.

So again, it's probably going to be for everybody the most volatile area, because they're used in such different ways and people are responding to exposure.

I'd also just mention that what we saw -- the Qs and the Deutsche Bank PowerShares tend to be lower fees, lower -- more economics. So it's not one that I would say is totally material to our P&L, even though generally it's big headline numbers.

Okay. I guess as a quick follow to that, is RDR an opportunity for PowerShares, or do you think it's really more -- pertains more to Perpetual and positioning Perpetual for that?

Cynthia, that's a great question, and actually our team is actually spending time on that, too. And we just -- frankly, again, it's one of those strategic topical things that we are focused on.

That said, at a more macro level, we feel as disruptive as RDR is going to be, a firm like us, which from all the information we see is the most highly recognized investment Firm in the retail market, will do very fine in a move to RDR, and brand recognition is going to matter an awful lot.

Yes, and to your point, Cynthia, the fact is before -- advisers would not necessarily sell ETFs in the UK, because they weren't effectual -- there wasn't any way for them to get paid to do so. So with RDR, which says that essentially the client is going to pay the advisor directly for managing their accounts, there is a way now for the advisor to get paid to use ETFs, whereas before it really didn't exist. So I think it is the potential for an opening of ETFs in the UK that we have not seen in the past.

Great. Thanks a lot.

Chris Schulter, William Blair.

Just one big-picture question. I know you guys have said in the past you'd like to develop a bigger presence in global and international funds. And we obviously saw that you're going to be leveraging the asset allocation team to do that with a new fund in the next couple of months. But just hoping to get a little bit more additional color around what you're doing to increase your exposure to those areas? Thanks.

Yes, so again, we have a range of existing very, very good capabilities. The one probably most well known to you is -- and others -- is the international growth capabilities into emerging markets. Just a world-class team. They'll continue to do very, very well.

Loren talked about the quantitative team, and it's really a fundamental quantitative capability and a global capability. It's long and it's a very good track record. And it's traditionally operating in the institutional market, and been, frankly, more successful outside of the United States than inside of the United States.

So we see that as another opportunity for us. And again, we talked about a little bit earlier the Invesco Perpetual global equity capability, global income equity capability, is one that is coming on a three-year track record. And we think, obviously, a very, very strong team; very, very capable.

So those are areas that we think have a lot of room for us to be just much more successful in total as an asset class than what we have been. So to your point, we have very strong existing capabilities that we just need to be more successful with our clients.

Great. Thank you.

Matt Kelley, Morgan Stanley.

Thanks for taking my question. So Marty, you gave some good color on clients, institutional clients, and specifically, pension funds. So realizing the returns aren't high enough in treasuries, and you said when confidence comes back in place, potentially the outlook looks better heading into next year.

So I'm just curious to get a sense from you as to how you think the ramp-up in risk taking will take place for these clients. Will they gradually increase risk? Or are these clients that you think could move from treasuries into alternatives? Where on the scale of risk do you think they go first?

Yes, and a great question, because I think, Matt, it is all over different, right? But let's talk about it.

So I think where you can start to see it already, and we've seen bits of it over the last 18 months, it's broadly what you would say -- I'm talking about investors generally -- you see them first move into ETFs and probably risk-on type ETFs into the equity.

So that was something we saw probably over a year ago, all of us, as an industry. Where we then start to see the natural progression -- so you are seeing it in credit; you're seeing it in high yield. And a US phenomenon, high yield munis, is another area, strangely, that -- I shouldn't say strangely, but uniquely has an opportunity there.

But then again, something that we've just been talking about really we think is to -- core for us are our equity income-type capabilities. We think that is -- there is a very strong bias towards -- it's a little bit back to the future -- equity -- high-yield dividend type capabilities. So our diversified dividend products, the Van Kampen value products we talk about have income.

So we see that is going to be an area -- along, frankly, with international and emerging markets within it. So that's really the progression.

So then when you then get into the pension plan world, the B plans, it's going to be a slow-moving. And quite frankly, the consultants are advising clients to really derisk. I personally question that. I think that -- it feels a day late and a dollar short and really missing the whole point of it.

That said, what we are seeing -- that's not all consultants, but some of them -- but what we are seeing, actually, within some of our DC plans are they are adding -- where we are seeing -- and again, this might be unique to us; I don't want to suggest it's an industry-type thing. But we're seeing more additions of our international products, our US equity products, again, with more of the dividend buys to them. So I don't know if that's helpful, but that is what we are sort of seeing.

Very helpful. And then just one follow-up for me. I understand the value proposition for premium plus, and obviously you guys have a very strong performance track record there.

When you're talking to new clients there, what's the explanation for how the performance has been as strong as it has? Are they asking that question, or do they fully understand how the product has been able to outperform benchmark by so much?

Oh yes, no -- thanks for asking the question. This is just core to what we want to do as a firm, and I think everybody has an industry. It is absolutely incumbent upon us to make sure that clients understand what the product is and what it isn't, and what type of returns you should expect in different types of markets.

What the clients are responding to in a very real way coming out of the crisis is the fundamental idea of allocating risk. And so it does resonate, right? So if you allocate risk, they can understand that more, and it resonates quite nicely with clients, and it has a place. And it has a nice place next to traditional -- whether it be long-only equity products, or more traditional asset allocation-type capabilities.

So it is -- we spent a lot of time on it. But by the way, this is where I'd say the home offices of the distribution channels do an excellent job. The consultants, frankly, do an excellent job of it, and we are focused on it too. And I think it's a nice positive evolution for the industry.

The one point that's interesting, in the market we're in, which is sort of off, it's down, risk on, risk off trend must -- this product does very well, because it really does have a balanced approach in terms of its exposures. And so it's not taking a huge upsized bet on equities coming back or fixed income.

I think the point that we've said if there is a big equity rally, we probably will see this product slow down, because it will not perform like an equity product. And so it is right now the perfect product in this type of market. We hope we don't stay in this market forever, but to the extent we are, this product does seem to have the right legs to continue to appeal to people.

And let me just make one more point, and I have said it earlier today, and I have said it in the past -- but I think importantly, it has been a very strong performing product unto itself. It is a suite of capabilities that we have built out, but also what we spend time with clients on is understanding what their needs are and putting forward a broad range of solutions, of which this is one component.

And we have been for an extended period of time looking at this same combination with a diversified dividend capability, or an international capabilities, or if it's individual, maybe a high-yield muni. So I think that gets back to the heart of who we are of a firm with depth and breadth of investment capabilities. And again, we keep talking about performance. If you look at the depth of good performance, one, three, five years, those are really what we think are foundational for ongoing success for our clients, which means we as a firm and obviously, very importantly, shareholders, will do very well by that.

Marc Irizarry, Goldman Sachs.

Great, thanks. Just on fees, just given everything that you mentioned, Marty, about the institutional -- what looks like more institutional strength and maybe a little more beta on, but maybe coming a bit more through some passive product. How should we think about the outlook for fees?

And maybe, Loren, if you can give us also an update on the Wilbur Ross and what we should expect -- should we expect a step-up in the second half from fees from Wilbur's new fund?

So just generally on fees, I think we, as you and everybody -- you can look at the effective fee rate as an indication of profitability, but I think importantly effective fee rates doesn't necessarily translate to profitability.

So I think that's -- that's really getting to the core of one of the topics. The institutional fees tend to be lower, but there is an awful lot less cost associated with an institutional capability. So the profitability is still very, very attractive to us.

So we don't see that being a topic. And then, frankly, within maybe what you're talking about -- you've seen ETFs for short and for passives -- as we just continue to grow, profitability will be supported there. And we would imagine increasing profitability if our ETF business continues to expand.

And on Wilbur Ross's fund five close, just to be clear, we did see the fund close this quarter. So the total raised -- I think it was about 2.2. But within that 2.2 there was the fund itself, the partnership was about $640 million.

So just to be clear, that is the one that has the 150 basis points, in terms of what you're going to see on those things. And there were separate accounts that were raised alongside that, which was fee raising by about -- so a total of about $1.2 billion.

There was about $1 billion that was coming in through co-investment that we're not going to see fees on. So in terms of the modeling, the biggest number that has an impact would be the $640 million. Not all that came in in the quarter. There's about $190 million that came in because some others of the assets had funded earlier. So 150 basis points on the $190 million is probably the biggest impact in terms of modeling for your purposes.

So did this quarter include the catch-up, or is there a catch-up in -- ?

There is a small catch up, pretty minor, because it was not big coming in. I think it was about $1.5 million or something -- or $1.3 million, something like that was the catch-up. So non-material.

Okay, thanks.

At this time we show no further questions.

Well, thank you. And on the behalf of Loren and myself, I want to thank you very much for your time, the engagement, and look forward to speaking to everybody next quarter. Have a good rest of the day.

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