景順投信 (IVZ) 2013 Q3 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry and market conditions, AUM, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products, and other aspects of our business or general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs such as will, may, could, should and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from our expectations.

We caution investors not to rely unduly on any forward-looking statements, and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Welcome to Invesco's third-quarter results conference call.

(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. This is Marty Flanagan, and I am with Loren Starr, as was just introduced.

Today, we will provide a review of the business results for the third quarter, including a discussion regarding the United Kingdom. Loren will go into greater details on the financials. And, as always, is our practice, we will open up to Q&A. So if you happen to be following the presentation, I am on page 3.

And let me begin by highlighting the Firm's operating results for the quarter. They were very strong. First, it started with very good long-term investment performance. And it remained strong across all time periods during the quarter.

The strong investment performance, with a broad diversity of flows and continued focus on clients, contributed net inflows of $9.1 billion during the quarter. Adjusted operating income was up 34% compared to the third quarter of last year. And a continued focus on a disciplined approach to our business drove improvement in our operating markets to 40.2% from 34.5% in the same quarter a year ago. This is a 5.7 percentage point increase. So, very strong quarter.

Assets under management were $745 billion at the end of the quarter, up from $705 billion in the prior quarter. And you will remember from the second quarter that assets under management in the financial results during the quarter reflect our decision to treat Atlantic Trust as a discontinued operation, given that this is this pending combination with CIBC.

Operating income was $328 million versus $311 million in the prior quarter. Earnings per share were $0.55, up from $0.50 in the prior quarter.

The quarterly dividend remained $0.225 per share. And we returned just over $100 million to shareholders during the quarter. And reflecting confidence in the continued strength of the business, the Invesco Board authorized $1.5 billion of additional share repurchases.

And before Loren goes into details on the financials, let me spend a few minutes first on the investment performance in the quarter. I am on page 6 now.

Investment performance in the quarter was, again, amongst the strongest we have seen across the global organization. 82% of assets were ahead of peers on a three- and five-year basis. And 72% of assets were ahead of peers on a one-year basis.

And as you might expect with numbers like these, long-term performance of our investment teams -- for investment teams across the enterprise were quite strong, with a number of capabilities achieving top [desk] outperformance. Performance of our cross-border fund range remained strong during the quarter, with 87% of its assets in the top half of peers on a three-year basis, and 84% of assets on a five-year basis.

Turning to flows, you will see on page 7 that gross long-term sales remained strong during the quarter. In addition, redemptions tapered off, which led to an improvement in long-term net flows of $5 billion this quarter, versus $1.4 billion in the prior quarter. These numbers also reflect the broad diversity of flows we saw across the global business during the quarter, which included strength in equities and alternatives.

Continued strong gross long-term sales and improvements in gross long-term retentions led to net flows in our retail channel of $6.5 billion, versus $4.9 billion in the prior quarter. The institutional channels saw continued demand in real estate, bank loans, and IBRA.

During the quarter there was a $2.5 billion no-fee outflow related to a decrease in leverage in our mortgage REIT. The institutional pipeline of won but not funded mandates continues to look very strong.

Turning to page 9, I would just like to put things in perspective. Before the showdown in Washington undermined consumer confidence and put a damper on growth, we saw solid strength in the US economy during the third quarter. As a result of that, although clients continue to show interest in our asset allocation strategies, we saw a shift towards risk-based assets during the quarter, which resulted in a slowdown of IBRA sales.

I wouldn't characterize this as a great rotation. But there surely was a mild rotation of investors feeling more confident enough to take on additional risk, and you will see on page 10. Gross long-term sales for our retail business remains strong at $21.6 billion for the quarter, a 26% increase over the same quarter a year ago, which was also quite strong.

The annualized redemption rate for Invesco remained favorable relative to the industry. And redemptions also eased during the quarter, which led to net sales of $3 billion. Flows into the complex were led by strength in US value equity, international global equities, and traditional ETFs and alternatives. Our US business has become increasingly diversified as allocation in alternatives grew to 38% of sales in the quarter, versus 25% during the same period two years ago.

We saw 18 funds with net flows of greater than $100 million over the trailing 12-month period ending September 30, 2013, and this compares to 6 in the same period in 2011. So you can start to understand the broadening of the flows. And the benefit that we keep talking about are the broad diversity of investment capabilities where we can meet investor needs in different environments.

We feel good about the momentum in our business. We remain confident in our ability to deliver a high level of value for our clients. And we believe the Firm is well positioned, regardless of where the market takes us next. As always, we continue to look for opportunities that further strengthen our competitive advantage and our financial position over the long term.

And before I turn it over to Loren, I would like to go more in-depth into a discussion of our position in EMEA. So I am on page 12, if you are following the slides.

First, as everybody on the call is aware, we announced earlier this month that, after 25 years with the Firm, Neil Woodford will be leaving Invesco Perpetual on April 29 next year. We appreciate very much Neil's significant contributions to our Firm. He is leaving on very good terms with the Company. And he has been an important part of creating this well-thought-out succession plan, and is committed to helping transition the funds.

We have planned for succession for many years. And frankly, we have never been better positioned to manage this transition. We have a very experienced, highly tendered team that has built a world-class investment culture. Strong investment performance of the team, their focus on clients, and the tremendous breadth of capabilities has led to strong organic growth across our EMEA business.

So to put this into perspective, total assets under management for Invesco are $745 billion. We have seen $20 billion of net long-term flows into the business so far this year. And this represents an annualized organic growth rate of approximately 4%.

Assets under management for our EMEA business totaled nearly $165 billion. So far, and through 2013, through the September quarter, net flows into EMEA, excluding equity income, are nearly $9 billion, representing an annualized organic growth rate of 12%.

The UK equity income assets equaled roughly $48 billion at the end of the quarter. But we have seen net flows taper off over the past year, which resulted in a slightly negative organic growth.

Given our assets to thoughtfully manage the transition, we are pleased to report that client reactions to the departure news has been calm, professional, and highly supportive of Mark Barnett. The combined total of the two largest funds managed by Neil is $38 billion.

For the 11 days between the announcement and today, redemptions from these funds above the historic redemption rate were less than $1.5 billion, or slightly more than 4%. And let's put that into perspective just for the month of October. For the month of October, total Invesco had net flows of $2.7 billion, which includes the redemptions that I was just speaking of.

It is early days. But the redemption experience has been very much towards the positive end of the scenarios we modeled and planned for, and considerably less than what we have seen reported in the media. We find the results encouraging, and we will continue to do everything we can to deliver good outcomes for clients, retain the assets, and grow our EMEA business.

As I mentioned, we believe we are very well positioned to manage through this transition. Invesco Perpetual has a deep, well-tenured team that has consistently delivered investment excellence for clients.

We have talked in the past about the investment team's phenomenal performance. In the third quarter, 98% of the assets across the business were above peers on a five-year basis. And if you look at equally related investment performance, 87% were above peers over a five-year period also.

And 49 out of the 52 Invesco professionals-managed funds achieved positive returns over the past five years, in spite of the financial crisis. The team has been named the best investment group of the year, and of the decade, by numerous publications and organizations.

Mark Barnett, who will assume the leadership of the UK equity income funds, has a phenomenal track record. He will lead an exceptional team that has helped manage the funds over the years. We will focus now on introducing Mark to clients and sharing the very positive facts we have with clients, the media, and others.

And to give you further perspective on slide 15, it shows you the depth and breadth of our investment capabilities within Invesco Perpetual, as well as the experience of tenured teams supporting those capabilities. The average industry experience for the entire team in Henley is 17 years. The average length of time with Invesco is more than eight years.

We continue to build on our highly experienced, capable, and stable teams to meet clients' needs. We added a multi-asset team in late 2012 that will launch its first product, Invesco Perpetual Global Target Return Fund, in early September.

The team takes an unconstrained, conviction-led approach to multi-asset investing, consistent with the approach taken by the Henley-based funds across equities and fixed income, and using Invesco Perpetual's highly experienced investment capabilities. We look at this as an important additional investment capability to the Organization.

As you will see on slide 16, Invesco Real Estate has a significant profile in EMEA, with more than $6 billion under management in six offices across the continent. Additionally, the leadership for Invesco Quantitative Strategy is headquartered in Frankfurt, Germany. IQS oversees approximately $23 billion in assets under management and offers a full range of strategies.

And as I mentioned earlier, investment performance for our cross-border fund range has been quite strong, with 84% of the assets ahead of peers on a five-year basis. And you can see also, 87% are beating peers on a three-year basis. So very strong.

Strong investment performance in an effort to bring the best of our investment capabilities to continental Europe have resulted in organic growth rate of 26% year to date for the cross-border fund range. We have very strong facts to share with clients that start with Mark Barnett's excellent track record and his 17 years of working alongside Neil. Mark has a truly exceptional performance record, and we are extremely confident in his ability to succeed Neil as Head of the UK Equities team.

We also have a robust investment culture in Henley that is focused on delivering strong, long-term investment performance for our clients, a brand that is very well recognized. We have strong business in EMEA; a highly experienced, talented investment teams; market-leading capabilities; and the resources of the global organization to support this success.

We have planned for succession for many years. Our primary focus is to manage through the transition in the most thoughtful, disciplined way, with the goal of continuing to do an excellent job for our clients, and thereby ensuring long-term success. I have every confidence in our investment team and the business to manage this succession in a very thoughtful, meaningful way. And we will continue to have great outcomes for clients, and also for our shareholders.

So, with that as background, I would like to turn it over to Loren to go through the financials.

Thanks very much, Marty. Quarter over quarter, our total AUM increased $39.9 billion, or 5.7%. This was driven by positive market returns and FX of $30.8 billion. And total net inflows of $9.1 billion, of which $5 billion were long term.

Our average AUM for the quarter was $729.4 billion. That was up 1.3% versus the second-quarter average. And our net revenue yield came in at 44.8 basis points. That's an increase of 0.9 basis points quarter over quarter. And this increase was a result of improved mix, one extra day for retail assets, and higher other revenues, as compared to the second quarter.

Now, let's turn to the operating results. Net revenues increased $26.1 million, or 3.3%, quarter over quarter, which included a positive FX impact of $4.9 million. And within the net revenue number, you will see that investment management fees grew by $32.8 million, or 3.6%, to $938 million. This increase was in line with our higher-average AUM, and an improvement to the effective fee rate during the quarter.

FX increased investment management fees by $6.4 million. Our service and distribution revenues are up $5 million, or 2.3%. And that was roughly in line with the increase in average AUM. FX increased service and distribution revenues by $0.5 million.

Our performance fees came in at $8.5 million, a decrease of $0.5 million from Q2. Performance fees in the third quarter were driven by a variety of products and regions, and FX had no significant impact on this line item.

Our other revenues in the third quarter came in at $33.1 million. And that was an increase of $4.2 million versus the prior quarter. And this increase was driven by higher real estate transaction fees. And FX increased other revenues by about $0.1 million.

Third-party distribution, service and advisory expense, which we net against gross revenues, increased by $15.4 million, or 4.2%. And that was roughly in line with the increase in retail investment management fees. FX increased these expenses by $2.1 million.

Moving on down, you will see that adjusted operating expense at $488.3 million increased by $8.6 million, or 1.8%, relative to the second quarter. And FX increased operating expense by $1.4 million.

Employee comp at $328.3 million increased by $5.6 million, or 1.7%. This increase was due to higher variable compensation, which was slightly offset by declines in sales commissions, seasonally lower payroll and retirement costs, and a full quarter's worth of staff cost reductions from the outsourcing of our European transfer agency.

FX increased compensation by $0.8 million. Marketing expense decreased by $0.8 million, or 3.3%, to $23.5 million. FX increased these expenses by $0.1 million.

Several new product introductions had been expected in the last half of this year, spread evenly between Q3 and Q4. And this is the basis for our original guidance for marketing expenses of $27 million per quarter in Q3 and Q4. The planned launches are on track, but now are expected to occur mostly in Q4. And as a result, we would expect marketing expenses to increase in Q4 by approximately $5 million to $6 million.

Property, office and technology expense was $72.7 million in the third quarter, which was up $4.3 million. The increase was driven by a full quarter's worth of expense associated with the outsourcing of our European transfer agency, and by continued investment in technology systems. Foreign exchange increased these expenses by $0.2 million. Consistent with our guidance in Q2, we expect this line item to level off at about $74 million in Q4.

G&A expenses came in at $63.8 million, down $0.5 million, or 0.8%. FX increased G&A by $0.3 million. This line item is affected by new product introductions and, accordingly, we would expect to see G&A increase by approximately $2 million or so in Q4.

Continuing on the page, down the page you will see that our non-operating income increased $10.6 million compared to the second quarter. The increase was due to unrealized gains on certain of our real estate and private equity partnership investments, as well as a realized gain on our investment in a CLO, which liquidated during the quarter.

The Firm's effective tax rate on a pretax adjusted net income basis in Q3 was 26.6%. Going forward, we continue to guide the effective tax rate to be around 26.5% to 27.5%. And that brings us to our EPS -- our adjusted EPS of $0.55. And as Marty mentioned, our adjusted net operating margin of 40.2%.

And with that, I will turn it over to Marty.

Thank you, Loren. So, operator, we would like to open it up for questions, please.

(Operator Instructions)

The first question comes from Bill Katz, Citigroup.

Thank you very much. And thanks for all that extra detail. Very helpful today, for sure. Marty, it looks like you got your margin target a little earlier than expected. Maybe some unusual items along the way in the P&L, but really not so much from my perspective.

As you look out into 2014, just given the flow dynamics that you are seeing between EMEA equities, alternatives -- active, if you will, versus some further attrition in the UK footprint, how do you see the margin dynamics playing out next year? So the root question is, is there still nice incremental margins from here?

You have seen the framework that you laid out. So if the market continues that way, we are anticipating continued expansion in the margin. As we have said in the past, there is no reason that we don't continue to have margin expansion. And as you point out, the flows are broadening, the performance is very strong. But for a market pullback, something like that, we just don't see that we can continue on the path we have been on.

Bill, this is Loren. And the other thing I would say, and Marty highlighted it on some of the slides, some of the fastest-growing parts of our business are across-border in EMEA, also in Asia Pacific.

And these have very high fee rates, similar to equity income fee rates. And the incremental margins are excellent on those, similar. So I would say it is certainly a reasonable expectation that our incremental margin guidance or whatever -- the output of 60%, 65% is absolutely intact.

That's very helpful. And then the new news is that pulling in five new repurchase authorization. How should we think about deployment of that? Particularly the way the stock is trading right now.

Would you expect the share count to rateably go down? Or it's still built in, I see from the press release. But what are your thoughts in terms of the uses of that?

The $1.5 billion certainly gives us room to run around, so to speak, on the buyback. And we are watching our relative stock price, compared to competitors, closely. Certainly the stock took a fair beating in the recent last quarter. And then we are paying attention to it.

We are out of the market in Q3 because of the realization that we have, obviously, of Mr. Woodford leaving. And so we weren't in a position to buy back stock. But we are certainly now in a position to do so. And you certainly would expect to see us, at a minimum, be back in the market in a strong way.

Okay. And just last question. Thank you for taking all my questions. Just in terms of -- very tactfully. In your G&A, as you are looking into the first quarter of next year, some of these launches, if you will -- is that G&A level -- should that trend down a little bit? Or is that a new starting level to which you would grow off of?

I think it will trend down. So there is clearly these product introductions got bunched up in Q4 versus Q3, Q4, which was the original thought. So that extra $2 million would certainly move down.

Okay, thank you for taking my questions.

Thanks, Bill.

The next question comes from Brennan Hawkin, UBS.

A couple just quick questions on Woodford. Thanks for all the additional detail there. It certainly is good to hear that the outflows have been better than the press reports.

But just be helpful to hear about what you guys think, as far as the drawn-out, six-month time period that he is going to stick around. Do you think that, that might mean that there is going to be a couple waves of outflows? Or how do you think about that?

It is a good question. I would answer it this way. As I said a minute ago, this has been very thought-out. We think the best way to transition is to have, through April next year -- Neil will be very involved. And it allows Mark Barnett -- who again, has been here 17 years, spectacular track record -- adjust to work into that.

And so we think if you look at history, when do you have good transitions? You have very good transitions when the funds are performing well. You have [off those] succession plan, with very capable individuals that have very good track records. And that is what is in place.

And we talk about Neil, we talk about Mark. But it is a very deep team that has been in place for a very long time. So we can't predict what the outflows are going to be. But what I can tell you from my experience, this is [intact] to be a very successful transition for clients.

Okay. And is the idea behind the six-month period that it will give the team a chance -- both Mark and Neil -- to get around and get in front of clients and therefore make the transition easier?

Since the announcement, obviously there has been a lot of discussion around the thought process behind this transition. Because it seemed rather unconventional to a lot of investors. So maybe if you could help us understand that, too?

Yes. So that is exactly the case. As I said, Mark has done -- he has been a part of Neil's team, worked side by side with Neil, know each other very well, exact same investment philosophy, as you would imagine, on a team. If you look at the portfolios, they are not wholly different, as you would imagine.

So the knowledge of the stocks is very high. And what it really is doing is just allowing investors a chance to get to know Mark more thoroughly. And that is what we are doing.

Yes, the other thing I would just say is, obviously to the extent that people felt the transition was shorter, the impetus to make a decision and move obviously becomes greater. So time is our friend here, for sure. And as people get to know the team -- and they are very impressive -- it is certainly our hope that we will be able to retain significant assets through this process.

Cool. And then the last one on this -- and sorry to have so many questions on this. It has just been a very big topic on the mind of investors here, as you can imagine. Can you help us understand what he is going to be doing -- Neil, in his new venture? Is this going a different direction strategically? Or is he going to be courting very similar client base, as to the current fund? Can you help us maybe understand that a little, too?

Fair question. The answer is, I don't know. As Neil said in the press release, he does intend to establish a new business after he departs on April 29. And there have been no discussion of what his plans are. So I really don't have any insight into that.

Fair enough. Thanks for taking my questions.

Michael Carrier, Bank of America Merrill Lynch.

Thanks, guys. Just a question on the flows. On the institutional side, it looked a bit weaker than maybe what we expected. And maybe part of it was just the pipeline.

You mentioned, I think, $2.5 billion that was -- and I might get this wrong -- but something on leverage on one of the products. So I just wanted to understand that. Maybe it was with the liquidation of the CLO. But understand that. And then just, when you look at the institutional pipeline in the outlook, where is the demand? Where are you seeing some of these outflows? I am just trying to get a better gauge on the outlook. Because it sounds like the pipeline is still pretty healthy.

Michael, this is Loren. I will take that question. So there was $2.5 billion associated with a reduction of leverage in our mortgage REIT to IBR, as you would know it by the ticker symbol. And that -- there is no fee associated with the leverage. So it is one of these passive assets that is counted in our AUM and in our flows. But it really has zero impact on revenues.

And so, if you back out the $2.5 billion, we are in positive flows and active flows in institutional. And that is coming from real estate, bank loans, as well as our IBRA capability, and actually, commodities capability.

So we are continuing to see in the pipeline consistent strength along largely along those same asset classes. And so we feel that. And obviously, the leverage was [noise]. But you back it out, we are on a good trend.

Okay, that is helpful. And then, just on the expenses and the margin. The only area where it seems like it has been trending differently is more on the distribution margin, if you want to look at it that way. Just the revenues versus expenses. I think you hit on it. I think you mentioned, just on the retail, it's driving some of those expenses higher.

But I just want to get a sense of -- when I look at the revenue line and the expense line, just the outlook, you know, for those two. Because it seems like the expenses are trending a bit higher than the revenues.

There is no trend of increasing distribution expenses. It does move in line with retail AUM, and there was an extra day there. So again, you will see a pick-up in retail management fees, as well as those types of expenses.

So that was in line. And though it looks a little bit off compared to the total management fee line item, again, it is disconnect between retail and institutional. So there is no trend. We wouldn't guide you that this is going to continue to increase.

In fact, it will be one day less in Q4, so you are not going to see -- no, actually no. I think it is a similar day, forgive me. So you will see a similar ratio of Q3 and Q4 based on retail. So we maintain day rates.

Okay. And then, just last one. On the retail side, in terms of the flows in the quarter, it just seems like it came in a lot stronger, given what we saw in the industry on the muni side. And then also on the IBRA product, that is moderate. So I just wanted to get any granularity. Because the strength that we have seen on the retail side, it seems better than expected.

So just which products are working? What is the traction that you are seeing there? You hit a lot on the US distribution problem. But just want to look -- any other color there?

Yes, and that is the point that we have been making historically and we continue to make. And IBRA is a very important capability here, it will continue to be. But as we always said is, investor confidence comes back, and they are going to go to more risk assets. And we said we are prepared for it.

And the point I was making was just that. If you -- the depths of -- the broadening of the capabilities in the retail channel that is gaining traction is very broad. And as I pointed out, literally, 18 funds had net flows over $100 million. And that compares to six funds two years ago, when you do that comparison.

So we just continue to get stronger in that channel. And we would expect that to continue.

Okay. Thanks a lot, guys.

Craig Siegenthaler, Credit Suisse.

I think there is a lot of focus here on the loss of potential AUM and revenues from Woodford. But not as much focus on the other side of the equation, expenses. I know this is very difficult to talk about. But is the best way for us to estimate the offset here sort of a comp ratio basis, when we think about the offsetting expense here?

Yes. I think if you think about incremental margins, it is the best way to think about it. The 60% to 65% is the right way to think about what is the impact on expenses. It is really largely managed in aggregate for the Firm as a whole. It is not one particular team.

And so thinking of it on a team basis is not the right way to think about the impact overall. That is the way I would guide you, Craig.

Got it. And if you see our expectations really deviating here, it might even make sense to provide comp guidance at some point next year. But just a follow-up question here. Is there any unique expense initiatives you have in the plan, like the European transfer agent that you did this year?

Craig, there are always things we are looking at. I guess two offhand that I know about. One is -- I don't want to call it expense initiative. It is more just the way we operate. But it fits our continued use of enterprise centers, which have been a real asset for Invesco.

As you know, we have a 650-person group in Hyderabad, India. We just took on more space that would allow us to bring up close to 1,000 people. So we think that over time, that scenario, where we will continue to see leverage overall, in terms of keeping effective and efficient operations.

The other part I would mention -- and we may have talked a little bit about it in the past -- is just around our footprints, in terms of properties. Again, if you had a clean sheet of paper, where we have every single office and every single location that we have today, you'll probably not. And ultimately, there is a need for us to continue to rationalize our location and our footprints to reflect the business today.

And so that is something that you will probably hear more from us in the near term. About how we plan to continue to manage that line item. Which ultimately, if it's unmanaged, continues to escalate. So it is certainly on our radar screen.

And Loren, I saw you guys had about 50 more employees, quarter over quarter, roughly. Was most of that India?

No, that is very seasonal. So there is a ramp-up typically around transfer agency activities. And so those numbers will go down, too, over time. I wouldn't read that as a permanent headcount.

All right, great. Thanks for taking my question, guys.

Pleasure.

Michael Kim, Sandler O'Neill.

First, just based on management commentary that we have been hearing from some other firms and some of the data we have seen across the industry more recently. It does seem like retail investors are starting to move up the risk curve. So maybe more of a mild rotation, as you put it.

So just wondering, assuming that that sort of environment persists and investors are coming back into more traditional equity strategies. Where you could see the biggest step-up in flows. And then also, how you might be thinking about the organic growth profile of the Firm, particularly versus prior cycles?

It's a good question. And I think we would all love that day when that -- it is a challenge for us. But again, what we have said in the past is, we have all anticipated at some point, people will take on risk assets. And we couldn't be more well-positioned for something like that.

And again, not just in the United States, but as Loren is pointing out, on Europe, that is a very good thing for us. Quite frankly, in Asia it is a very good thing for us. And you started to see that in this quarter. So it would result in just stronger outcomes for us, that's for sure.

But if you are asking -- so what would the organic growth be -- it's really hard to answer the question without knowing what the environment is. But I would just come back to the facts that we keep pointing to. Broad range of investment capabilities, strongly performing set of investment capabilities available through the Americas, through EMEA and through Asia Pacific. And I think that just sets us up very well for that environment.

Okay, fair enough. And then, just coming back to IBRA. Any color on the relative returns? Particularly versus the other risk parity strategies?

And then also, can you just give us an update or some color on flow trends for the IBRA strategies and the institutional channel and outside the US? Just trying to get a sense of the prospects for the overall business, assuming US retail net flow trends remain flattish here.

So again, I don't have the most current data on the relative performance of IBRA versus peers. But it had been really quite strong. And I would imagine it would be very difficult that, that has fallen off really much at all during that period. So that is the important thing there. There is still continued interest in IBRA institutional. And that is pretty broad.

I think also that we have talked about in the past -- the team is very strong. There are natural extensions of the team's capability. Those are things that we are spending more time with clients on.

And also, as I had mentioned earlier, early days. But we have just started, with the Invesco professional multi-asset team, with the Global Target Return Fund. And all of those things are going to be -- we just think they are permanent parts of the landscape going forward. We are strong in the area, and we just intend to get stronger.

Okay, that was all I had today. Thanks for taking my questions.

Dan Fannon, Jefferies.

Thanks. Just a question on the $2.7 billion you mentioned in October. Just wondering if there was anything lumpy in there with regards to institutional wins.

And then also, we have been reading a fair amount in the press about what the intermediaries in the UK have done subsequent to the announcement. Just curious as to any more color around feedback you have had from either consultants with the small component that is institutional, and/or those intermediaries that have sold Neil's products in the past, thus far?

Dan, maybe I will pick up the one, the first part. And then Marty, I don't know if you want to address the second one. But ultimately, it is pretty diversified in terms of where the flows are coming from. It is across Asia Pac. Retails that will be local equities. And the Asian capabilities. EMEA is strong. Real estate is a good chunk of it as well. So I would say that is about $800 million of it. Americas continues to do very well.

So it's got -- within the traditional power shares is definitely factoring in there about $550 million. So it is spread over a lot of different capabilities. Probably not too unfamiliar to the -- or dissimilar to what we did in Q3.

Yes. And again, I don't know that I can add much more color to the feedback than -- or the change that I mentioned. The feedback so far from advisors and clients is, those that know Mark have a lot of respect for Mark. They are very aware of his very strong track record. And so, as I said, the engagement has been very professional, very thoughtful.

And back to the point we made earlier. The whole idea of having a long transition is, it allows those that don't know Mark and the team very well, a real good chance to understand the depth and capabilities and track record that they have. And we think that is just an important part of the plan that's been put in place.

Okay, thanks. And then just the follow-up on the timing of the Atlanta sale. Is that -- and the proceeds, we should assume that those should be directly applied to a buyback upon closing?

Dan, yes, definitely. That is our intention for sure.

Okay, thank you.

Thanks, Dan.

Glenn Schorr, ISI.

Thanks very much. Curious on your comment earlier on the increasing investor confidence -- many move into riskier assets and its impact on April flows. Are you able to track what goes out and what you actually capture into your own equity funds?

Obviously equity in retail was a strong performance. But can we assume that you are actively courting the third-party distributors and managing that transition? Do you have any metrics you can throw at that?

Yes. So let me answer it this way. The engagement with the advisor community is very broad-based. And we try very hard to understand what their needs are, and offer a range of capabilities to meet those needs. So it is not like the old days, 15 or 20 years ago, where you are pushing this fund or that fund and the like.

And so for a long time, we have been putting -- long time meaning the last few years. If you could hear the range for capabilities from IBRA through the equity capabilities. And always has been a commentary that we have had with you and others, and the clients, is that you will have different allocations during different times. And that is exactly what we are seeing. The numbers bear that out.

And that was the point I was trying to make. Whether or not I did it very well. That as people get more confidence, they will probably have lower allocations to IBRA right now, and increasing allocations into things like value equity or international. And that is exactly what is happening.

Okay, good. Can we talk alternatives for a second? If you look at your performance slide, it is so strong across almost every product. That is one area where performance has lagged, and you have had some outflows.

Anything you can talk to, in terms of any visibility on the outflows? That being what your plans are a little longer-term, in terms of broadening the product set there?

So Glenn, this is Loren. So alternatives we saw in this quarter, $1.4 billion in positive net inflows. I think we are actually seeing strength. It's in bank loans, it's in real estate.

What you are seeing on the performance side is misleading. But it is consistent in the sense that a lot of these capabilities do not have natural benchmarks. They are not available as a peer groups, peer analysis that allows us to compare. So you are actually not seeing the true relative performance of our direct real estate, for example. There is no comparable direct real estate benchmark that we can use. And that is $50 billion.

So I honestly would guide you not to look closely at that. I think that particular one may be around some of our REIT capability, where there is a benchmark. But obviously our REIT capability has been flowing strongly in this quarter and for the last several quarters. So it certainly is a considerably positioned product relative to some of the competitors. And I think that is exactly what clients have been looking for.

Yes. And I think Loren is picking on the [spiff], the one in particular. The real estate capability is just so strong. And again, it is this benchmark that leads you to thinking that there is a problem there, and it is just quite the opposite.

And if you look at alternatives, generally, it is about $87 billion right now within the Organization. It is a growing part of our capabilities. And we are very focused on it. And I would say over the next 6, 9, 12 months, you will just continue to see greater extensions of our existing institutional capabilities into retail channels in different parts of the world. So we are uniquely positioned in the area.

Very helpful, thanks. The last quickie was, I'm sure it is a short period of time, so I'm sure the answer is retail. But I just figured I would check on the outflows that you have seen in the UK products. I am assuming it is all retail at this stage?

Yes. I think in the UK, it is predominantly retail-oriented in terms of the funds. There may be some the pseudo institutional relationships. But it is all relative to the retail products, really.

Okay. Thanks very much.

Thank you.

Patrick Davitt, Autonomous Research.

I have heard some speculation that, because of the nuances around RDR, there could actually be a financial incentive for FAs not to move their money from Woodford's fund because they would lose their trailing commission. Could you give us an idea of how much of the AUM has significant trailing commissions attached to it in Woodford's fund?

Patrick, I think it is a great question. And it's one that I think is a bit of a difficult one to answer on this call. Because the RDR rules on how those trailers work is more complicated than what you just said.

I think -- I would say, first off though, from a high level, you are correct that, that is fundamentally the right way that it will work. So if someone moves out of the existing products, they will lose their trail. So you can decide whether that is going to be a motivation or demotivation for that to occur.

Most financial advisors will be doing what's right for clients, as they should. And there is a lot of regulatory requirements for them to do that.

So I don't know if I want to read a whole lot into that rule, as to whether that is helpful or not. Other then, I think it is a good point, and one that is -- probably we will see to what extent it actually has an impact or not. But it would be a little hard for me to speculate whether it is really going to have an impact.

Right, okay. Understood. And then more broadly, I think a key component to the growth of your margin will be this feeling of non QQQ power shares. Could you help us a little bit with a better framework around what the margin experience is for a fund? Given how many newer funds you have, as it moves from, say, 500 AUM to 1 billion AUM, to 2 billion AUM to 3 billion AUM to 5 billion AUM. How powerful is that margin expansion?

Yes, it is powerful. So I would say it is -- it's a major help in terms of incremental margins. It has been helping our margin expansion as we have seen the traditional power shares grow. And so the fact that we have more size and scale in our existing set of products, as opposed to a lot of new smaller products, which is the case right now, it is very helpful. So I would expect it to continue to contribute very positively to our margin expansion story, as those products are continuing to grow.

The other point is, certainly a lot of the products that have been growing have been at a higher fee rate. So that has also been net helpful for us, as opposed to on the lower end of the scale.

I mean, would it be fair to say that a lot of those newer products are coming from something close to zero percent and accelerating to something about what your current [formite] margin is?

Yes. I mean, when you start out with a new product -- typically, it is not a big moneymaker right off the bat. Probably think of it more as break-even, as you said. But yes, as it goes to $500 million or so, it becomes extremely powerful, in terms of incremental margins. And that whole business as a whole has improved significantly, in terms of the overall margin characteristics, just in the last year.

Right, okay, great, thank you.

Ken Worthington, JPMC.

Hi, thank you for taking my question. To beat a dead horse and follow-up with Craig's question. On Perpetual, how does what may or may not happen at Perpetual influence the setting of incentive awards on PCBOI? I think you and the Board set incentive awards each year, and there has been a reasonable range over time. So might a change in profitability at Perpetual influence the setting of that ratio?

And then Marty, how do you think about balancing the need of employees versus the demands of shareholders with regard to incentive comp here?

I think the best way to answer the question is, look at what we have done in the past. The facts and circumstances is what drives our actions. And we will continue to have that as the driving force.

And we just are absolutely committed to be staying on the same path that we are on. And that is, do great things for clients and great thing for shareholders. And again, I think the best way to -- I can't speculate of what's going to happen, as I have been saying the whole time. But what I do know is, look at what we have done in the past. We will continue to do that and just be very thoughtful.

Yes, maybe just more clear. Ken, under a reasonable set of scenarios -- and even is you assume some asset outflow, but it's under some period of time, it is more of a business as usual-type of situation for us. Right? So there is not a need to knee-jerk to something different, right? We can manage through it.

And particularly as we are able to grow strongly in areas like cross border and Asia in other parts of the Firm, it is quite feasible that you will continue to see -- you know, it's all going to be revenue growth, asset growth. And you won't even see this, right? And then that really, obviously would be a great outcome for everybody.

Okay, great. And then maybe just a follow-up on -- I think it was Patrick's question. In terms of RDR, rules have gone into effect for some of the channels, but not for others. And I think in terms of platforms, the rules have not yet gone into effect there. So how big are the platforms for the UK business versus the other channels where RDR may have already gone into effect?

Again, it is a very good question. A little specific. Sorry, I am losing my voice here. But I would say platform business is a big part of our business. So I don't want to minimize it. It is probably in excess of -- I don't know, 50%, perhaps.

Okay, awesome. Thank you very much.

Great. Thanks, Ken.

Chris Harris, Wells Fargo Securities.

Thanks, guys. You talked a little bit about new products driving some of the expense list next quarter. And just wondering if you guys can talk more broadly about the pace of new products, how it is compared today versus maybe the recent past? And where you see the most opportunity to launch new products.

Yes. We are probably, again, in sort of a unique phase on product development. You know, largely it's exiting earlier -- these extensions of existing capabilities within the team really focus in the alternative area. We have strong capabilities there. We think broadly, in most parts of the world, it is an important area and a growing area.

So you are going to see, as Loren pointed out, through this quarter through the first quarter of next year, probably some of the most comprehensive product introductions that we have had in a very long time. And the question was asked earlier, the way we understand -- you know, conviction on where the need is and where the growth is in this area.

So that is where we are going. And it does change -- the way that we think about it is, think of it as three years before you see success broadly within any product capability. That is the typical timeframe that you would look to. And every once in a while, you get something very successful before that timeframe, like an IBRA and the like.

But we are being very thoughtful about it. And we think we are positioning the Firm very strongly to a growing opportunity.

Okay, excellent. Maybe a few follow-up questions then also on Perpetual. Kind of curious to get your thoughts -- you mentioned this. But it doesn't really sound like the business was growing. The data we looked at -- even back in 2012, it didn't look like Woodford's business was growing. And the performance was kind of there. So just wondering why you guys think that is.

And then, when you get the PM changes, what is going to be the strategy to actually get Perpetual in a growth mode again?

Well, I think you are talking about one exit class, one category. And you know, the equity income category is a very important one. And we are very strong in it because of the history.

It has not been a growing part of the sector, of the overall industry. And in fact, if you look back from 2006 through this past year, if you look at that sector's -- the gross sales have dropped in half, basically, within the sector. That is very important.

But again, what we are trying to point to is, we want to be as strong as we have ever been. And we think we absolutely are with the team that we have. But no different than anywhere else in the world.

You have to understand what clients' needs are and expand those capabilities and address them. And the point you are making, if you look at the depth and breadth of the investment management team at Invesco Perpetual across a broad range of capabilities, they are very experienced, with very good performance. And quite frankly, during this past quarter, the global team has had some really good -- not just results, but actually flows coming into the area.

So we are expecting a broadening of the flows across Invesco Perpetual, with -- where investor needs are and desires are, against the capabilities we have. And in addition, we also thought that introducing a multi-asset team into Henley was very important. Because a core capability in the global total return fund was that they literally use existing investment teams in Henley.

And so if you think of the asset classes that they manage with the absolutely outstanding performance, and you put that in the knowledge and the history of the multi-asset team, we think we are positioning ourselves very strongly within the United Kingdom alone. To say nothing of continental Europe. And that is why we brought that out. It is into the cross border capability, which we think -- you know, we are early days of where our success is there.

And there are a number of those capabilities in Henley that will be used in different parts of the world, whether it be the global equity capabilities -- and they are already -- the Asian capabilities, or the multi-asset capabilities. So we are very excited about the prospect.

Okay, great. Thank you very much.

Robert Lee, KBW.

I apologize up front for going back to the topic of the day. I'm just curious, Marty. In the announcement, it hinted at -- at least I took it this way. That maybe Neil thought there were certain things he wanted to do in the fund business that maybe he couldn't do at Perpetual, or at least within the existing fund Company structure. I don't know if you have any sense of where that difference came up, or what that may be?

And then as a follow-up to that. While you had certainly prepared for this and have a transition in place, and prepared for the transition personnel-wise for a while, is this episode causing you to go back and look at other teams around the world? Or other key managers? And maybe rethink or start to approach differently how you have them under lock and key, so to speak? Or any other places thinking they need to make some changes?

Yes. I appreciate the question. And I really can't -- obviously, Neil and I and others have had a very broad range of conversations. I would be totally speculating on what his interest is with this new business. And again, he is very dedicated to being focused through April 29 of next year on the business at hand. And that is really -- I wish I could give you more insights. I can't.

Secondly, the idea of -- let me answer it this way. It is an Organization where -- when is this Organization successful? When people are proud to be here. When they are excited about coming to work. When they are doing good things for clients. They enjoy that camaraderie of being with one another. And what we call the total employee body proposition.

Now, no question you have to get compensation right. I understand that. Everybody does. We think we do. With that said, it's got to be the total environment that is exciting. So the idea of even thinking that locking people down and the like -- we just don't want to be an Organization like that. The reason why people stay is when they are proud and they can do very good things. And I think that is the Organization that we are. And we will just continue to do that.

And we do a number of things. I will just -- for example, every 18 months, we do employee surveys. We have been doing them since I have come here. The employee survey -- we benchmark it obviously against history, against financial organizations, what they call global high performers. This last one, our employee engagement was higher than the global high performers has been for the last three times we have done it. The employee engagement is off the charts. We are at or higher on every single measure over the global high performers.

And that is what is creating the excitement at the Organization. And those are the things that matter. You have to look at it holistically, and that is what we do. I'm glad you asked the question. It is a fair question. But that is how we look at it.

Okay. I appreciate the color. And I have an easy one for Loren. I will save the easy ones for Loren.

Good. Thank you.

And I apologize if you had mentioned this earlier in the call. But could you give any guidance about what your thinking for performance fees next quarter?

Yes. We haven't given guidance on performance fees because the way it is [hard]. Obviously, the one thing that we can say is that you are not going to see the traditional performance fee coming from Atlantic Trust. Because that is now in discontinued ops.

So performance fees have been good, generally, because performance has been excellent. And so I think -- again, if you look at our run rate, and you can probably discount it a little bit because I'm not sure if you can -- I mean, I can't forecast it perfectly. But there is some level -- $5 millionish -- that probably is a reasonable amount to put in one's model for Q4.

All right, great. That was it. Thanks for taking my questions, guys.

Sure.

Thanks.

Matt Kelly, Morgan Stanley.

I wanted to ask first -- Loren, actually, one for you. Kind of easy as well. But on the distribution margin. We talked last quarter about some institutional mandates funding could help that. And I'm just wondering where we stand now with retail sales remaining high. Should we expect the current quarter to be a run rate for the distribution margin? Or is there anything that they could bring that down, or actually take it up?

I think the ratio -- again, we don't break out retail management fees from our institutional management fees. But I would say that, since we are talking about the same day count going from Q3 to Q4, there will not be this disconnect of the retail management fees being up more than institutional management fees, inherently. Because retail measurement fees are based on day count. And going from Q2 to Q3, there was that extra day. That really was the big driver of the difference. So again, you just have to pay attention to the day count. But the ratio should be about the same, assuming everything else is flat.

Got it. Okay. And then, one for either of you guys. Just in terms of -- I have heard a lot about active managers potentially looking to launch actively managed ETF recently. And I know -- I think T. Rowe had put out a comment letter to the SEC about the transparency and disclosure required. I'm wondering where you guys stand on that.

You have given the power shares as a unique differentiator product set. Where do you see that evolving? And if active funds are launched into the market more frequently, is that something you are going to look to participate in?

Yes. So we have had the ability to active ETFs for a number of years. We were one of the very few Firms that had the license in place to do it. And we launched -- I'm getting distracted there by calling it three active ETFs -- it must be almost five years ago now. And you don't hear much about it because it's not been very successful.

So I know there is raging debate how successful they will be and won't be. I still question the success and growth in active equity ETFs. I think it is more likely to be successful with fixed income products, quite frankly. And you can see some evolution, where some movement on use of indexes and those Firms that can create their own indexes and the like.

So there will be some evolutions. But I -- is it the great next thing? I would be skeptical at the moment. Not so say it won't evolve over time.

Yes. I think most of our equity managers would not want their portfolios disclosed daily. And so there is work that has been done to see if you can create an active ETF without disclosing daily holdings. So that is just an evolution of that thing.

If it turns out that the rules change in some way, it is something we could certainly pursue. But right now, it is a little too conceptual to be interesting.

Okay. And then one last one for me. Just another product question here. You had an announcement out recently on liquid alternative launches. And I'm just wondering what areas within the liquid alts -- because that is a very broad description the industry tends to use. But what areas do you think will be the strongest sellers there?

And do you feel like you have everything you need here? Or there could be more product launches from here for you?

Yes. I just have to be careful of where we are in various registrations. You can look to the registrations -- I'm not trying to dodge the questions. But I will think about a higher level.

As I said earlier, if you look at our investment teams, they have been managing a number of alternative capabilities for a very long time. And we think there are a number of capabilities that make sense to be -- and a mutual fund wrapper. And people are for more liquid alternatives.

We think we are going to be very well-positioned in that category. And again, I'm -- it is not a great secret. It is just more the registration process (multiple speakers) --

Probably more to come on this in the future, is the best way to describe it. But certainly everything you have said is correct, and in terms of our interest and the opportunity.

Yes.

Okay. Thanks very much, guys.

Marc Irizarry, Goldman Sachs.

Loren, can you just give a little more color on the incremental margin targets or guidance that you put out there? What organic growth expectations are embedded in that, and/or market expectations? And then also, how should we think about performance fees and/or transaction fees, when it comes to that incremental margin? Thanks.

Okay, good question. So when we are thinking about incremental margins, obviously we don't manage to an incremental margin. It is more of a result of what has been flowing and what was happening with markets. And I think we have said, generally, when we are seeing strong market support -- FX, whatever those types of elements that are boosting our asset base, the incremental margins are at the high end of the range. So you are probably at 65% or even higher.

If it is done through new product introductions and organic growth, as we talked about, there is cost associated with that. You are probably at the lower end of the range, which could be more of the 60% -- even 55% to 60%, depending on what type of product it is.

So again, it is a little hard to say exactly what the right guidance is. But I would say, based on everything we are seeing -- let's say market is flat, but you are seeing growth in excellent products, in terms of their characteristics in margins -- ETFs, cross border, Asia -- you are probably in that 65% range, right? And you probably can do that on organic without -- 60% to 65%.

And then in terms of your -- I'm sorry, your second part, which is performance fees and transaction fees. Again, I find it very difficult to predict these, so I do apologize. I would like to be more clear if I could. But again, our performance, as you have seen, is pretty good. And so there is an opportunity to generate good performance fees. How much will come? The biggest providers in the past have been in the UK. Performance is excellent there still. So that still is an opportunity, possibly in Q1. But I don't want to give out a number, as to what the right number -- because it obviously can shift quite a bit, depending on what is happening in the marketplace.

And in terms of transaction fees, also a little hard to do, to predict. But we have been seeing good growth in Europe, in Asia, in real estate. And a lot of those funds that operate there do have transaction fees.

So again, if we can continue to see that type of activity, I would say, the path we are on -- on the other revenue side -- is constructive, right? We think it is probably at similar levels. Maybe a little bit lower, just to be conservative.

Okay. And then just getting back to Perpetual for a second. I think you have said that probably about 50% or so of the assets are platform-driven. Where are we in the cycle of you being put on watch, if you will, or on hold, for many of those platforms? I mean is this something that you expect over the coming quarters to be revisited? Or did all that happen up front?

Yes. Marc, it is obviously a very fluid situation right now. And so getting into minute detail as to the number of platforms or who was saying what to whom is -- it is really not something that I think we are wanting to go into at this point in time.

I guess the good news, if there is good news, generally, about this is, the reaction has been one of conservatism, and not knee-jerk to leave the fund. And that, we believe, is absolutely a favorable result, and gives us time to get people comfortable with clearly a big transition. Which we can't underestimate. And everyone is seeing [Neil leaves] is obviously wanting to meet the new team. And so they are going to, so to say, stay put. But let's meet the new team. So we are in that process right now.

Great, thank you.

Yes.

Gregory Warren, Morningstar.

Just, again, not to beat a dead horse here. On the Invesco Perpetual thing. There's a lot of numbers floating around on AUM levels and stuff. And I know you guys touched on it a little bit this morning, noting that Neil had $38 billion in the two funds. But what is his overall responsibility on Invesco Perpetual, from a numbers perspective?

And then the other thing is, you were just talking about being conservative and cautious. And we really appreciate that sort of attitude when you did the Invesco deal. Do you expect to be getting us an update 4Q earnings on where you are feeling the outflows might be? Or is it just something that is going to be trickling out over time?

Greg, I will answer, and then Marty, if you want to answer the other part. So it's about $50 billion, is the total size of assets with Neil directly named. So pretty close. I mean, the two large funds are the predominant piece, as you might imagine. So that is the amount.

Okay.

Yes, and look, the information will continue to be available, as it has in the past. So people will be able to come to their own conclusions. And obviously each quarter, if there is something material or additional that makes sense to discuss, we are happy to discuss it. And we will bring it up if necessary. So (multiple speakers) with our past.

Okay, good. Just switching gears then. I noticed on the fixed income side, you guys had a bit more of an outflow issue then I was expecting, given the shift in the fixed income markets mid to late September there. Was there anything responsible -- was it more of an institutional issue during the third quarter? And the question is, how are you feeling about flows this quarter and as we get through next year, given that rates are likely to go up and nobody knows when?

So Greg, that fixed income outflow is actually similar to what we were talking about on the institutional side. Which is, this leverage related to this one product they need the mortgage REIT. So that was $2.5 billion of outflow in fixed income, with no fee associated with it. So again, I would caution people not to read too much into that.

And ultimately, fixed income continues to do very well on the active side. And we have seen positive flows in third quarter. And we will continue to see good flow in fixed income capability into October. So we do think active fixed income still has got legs. And certainly, we have great capabilities in that space.

Okay, good. Thanks for clearing that up.

Certainly.

Chris Shutler, William Blair.

I was hoping to get a little bit more color, not on Perpetual, but actually on the bank loan market. So I know that has been a strong area of flows for Invesco over the last several quarters. And so just curious what you are seeing in terms of supply in that market right now. Because I know there are conflicting views out there as to, to what extent supply may be getting constrained and what that might mean for flows down the road.

Yes, you are right. It is a strong team here and they continue to do very well. There continues to be lots of client interest quite broadly in different parts of the world, actually. So I wish I had more specific information. I have not had any feedback that we are running into capacity constraints.

We have heard this question a few times. And I think that the topic is an interesting one. We are still not the dominant player in that market. And so maybe others who have been seeing order of magnitude difference in flows have had a greater -- more difficulty in terms of finding how to invest in that market. Our team, I think, is feeling very comfortable that, given the flow pattern, that they have enough opportunity.

Okay. Thanks a lot, guys.

Certainly.

At this time, there are no further questions.

Good. Again, Loren and I would like to thank everybody for engaging in the questions. Very robust. We appreciate it very much. And we look forward to talking to everybody in the near future. Take care.

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