景順投信 (IVZ) 2013 Q4 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 on our most recent Form10-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 first-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. Thank you, everybody, for joining us. This is Marty Flanagan, along with Loren Starr. We'll be speaking to the presentation that's available on the website, if you're so inclined to follow.

We'll provide a review of the business results, and also the specific discussion around the UK. Loren will then go into greater detail on the financials. As always, we'll have Q&A.

So, let me start on slide 3, and let me hit some of the highlights of the Firm's operating results for the first quarter. Long-term investment performance remained very strong during the quarter. Strong investment performance and continued focus on clients contributed net inflows of $5.2 billion for the quarter, across a diverse range of investment capabilities.

Adjusted operating income was up 34.5% as compared to fourth quarter of the prior year. A continued focus on a disciplined approach to our Business drove improvement in our operating margin to 40.5%, almost a 500-basis-point increase from a year ago.

Assets under management were $778 billion for the fourth quarter, up from $745.5 billion in the prior quarter. Operating income was $347 million versus $328 million in the prior quarter. Earnings per share were $0.58, up from $0.55 in the prior quarter. The quarterly dividend remained at 22.5% -- excuse me, $0.225 per share. We returned $450 million to shareholders during the quarter.

Now, let me take a moment and look back at the achievements over the past year, which will provide insights into our long-range plans. First and foremost, of course, we remain very focused on delivering strong long-term investment performance to our clients, which continues to drive the growth in the Business. 83% of assets under management were ahead of peers on a three-year basis at the end of 2013. By delivering strong long-term investment performance to clients, long-term flows for the year were $34.4 billion.

We continue to invest in capabilities where we see strong client demand or future opportunities, such as multi-asset, fixed income, and liquid alternative capabilities in particular, and by hiring world-class talent, upgrading technology platform, launching new products, and providing additional resources. The ability to leverage capabilities to develop our investment teams to meet client demands across the globe, we believe, is a significant differentiator of our Firm. We will continue to bring the best of Invesco to different parts of the Business, where it makes sense for our clients.

We also successfully completed our joint venture with Religare Asset Management in India, divested our private wealth management business, and finalized the outsourcing of our European transfer agency process.

Before I go into more detail -- Loren goes into detail on the financials, let me take a minute to review investment performance. I am on page 7, if you are following the presentation.

Our commitment to investment excellence, and our work to build and maintain strong investment culture, helped us maintain a solid long-term investment performance across the Enterprise during the quarter. Looking at the Firm as a whole, 72% of assets were ahead of peers on a one-year basis, 83% of assets were ahead of peers on a three-year basis, and the softness in the five-year number reflect a rolling off of some very strong numbers in the fourth quarter of 2008 and a brief period where we trailed the market during the low-quality rally in 2009. Based on the strength of our recovery later in 2009, we would expect our five-year numbers to demonstrate steady improvement over the second and third quarters of 2014.

Now, turning to flows on page 8, you'll see gross sales remained strong during the quarter, and particularly strong numbers for active assets under management. These numbers also reflect the broad diversity of flows we saw across the global business during the quarter, which included continued strength in equities, alternatives and traditional ETF offering. Net long-term flows were $1 billion for the quarter. Although gross sales remained strong for the fourth quarter, redemptions increased. I will provide more detail in a moment.

We also saw upward trend in institutional channel, net the long-term flows, and continued demand in real estate and bank loans. Although clients, in particular institutional clients, continue to show interest in our asset allocation strategies, we saw a further shift towards risk-based assets in the quarter, which resulted in the slowdown in sales of IBRA.

As we've said in the past, in risk-on environments, clients shift demand towards equities and away from risk-parity strategies. This is exactly what we experienced. We saw $6.6 billion of improvement in equity flows in 2013 versus 2012, which more than offset the $6.2-billion decline in IBRA inflows in 2013 versus 2012.

It's important to note that our asset allocation strategies continue to perform well relative to risk-parity peers. We anticipate these types of flows during the type of equity rally we saw last year. That said, the choppiness we're seeing in the market currently is a likely favorable development for IBRA.

Gross long-term sales for our US retail business remained strong at $18.4 billion for the quarter, a 14% increase over the same quarter a year ago. The annualized redemption rate for Invesco remained favorable relative to the industry, as you can see on slide 11. Flows into the complex were led by strength in US equity, international global equity, traditional ETFs, and alternatives. Our Business has become increasingly diversified, as allocation in alternatives grew to 37% of sales in the quarter versus 28% during that same period two years ago. We saw 18 funds with net flows of greater than $100 million over the trailing 12 months ending 12/31 versus 8 in the same period in 2011.

We also took the opportunity during the fourth quarter to launch a number of new capabilities globally that will help support the future growth of the Firm. In fact, we launched more funds during the fourth quarter than we did in any full calendar year over the past five years. A number of these capabilities build on the work we've done over the past few years to strengthen our alternative offerings in the market. These products leverage 25 years of experience managing alternative assets for pension plans, separate wealth funds, and other institutions. These product launches are designed to further solidify our position as one of the largest managers of alternatives for US institutional investors with more than $83 billion in alternative strategies.

We launched the global total return funds in the UK, EMEA, the EMEA cross border and the US market as part of our effort to further scale our multi-asset capability globally. Multi-asset absolute return funds provide exposure to a blend of investment ideas across asset class, geographies, sectors and currencies; something Invesco's extremely well positioned to implement. We also took the opportunity to expand our suite of investment capabilities in the fast-growing China market.

We're pleased with the progress during 2013. We feel good about the momentum of our Business. We believe Invesco is very well positioned regardless of where the markets take us. As always, we continue to look for opportunities to strengthen our competitive and financial position over the long term.

Before I turn the call over to Loren for more in-depth discussion of the quarter's results, let me take a few minutes to provide an update on our business in EMEA. As I've mentioned, we are very well positioned for long-term success across the UK and continental Europe. We continue to execute our transition plan, which is going very well. The market has been extremely receptive to Mark Barnett, who has an excellent track record. Mark is supported by a strong Invesco perpetual investment team as he transitions into the leadership role for UK Equities.

UK experienced record gross sales during 2013, and is experiencing excellent momentum heading into the new year. We have many attractive, highly competitive funds across the franchise, which we will use to offset any outflows in the UK Equity Income funds.

Strong investment performance drove continued success in our cross border retail business, which experienced $10 billion of net flows across 2013. We also made progress further diversifying our Business during the final quarter of the year with strong net sales into global equities and European equities. We've also been pleased with investor response to the recently launched GTR fund, which has seen flows in excess of $250 million in a very short period of time. We continue to make further progress in promoting an experienced, capable, well-tenured fund management team in Henley.

Assets managed by our EMEA business totaled nearly $172 billion, as you'll see on slide 15. During the fourth quarter, net flows into EMEA, excluding UK Equity Income, were $4.3 billion, representing an annualized organic growth rate of 15%. Given our efforts to thoughtfully manage the transition, we are pleased to report that client reaction to the departure news has been [call on] professional, highly supportive of Invesco Perpetual's investment teams. From October 15 through the end of the year, redemptions from UK Equity Income totaled $4.8 billion, or approximately 10% of the total. This is good outcome.

We continue to see strong evidence that many clients are choosing to remain invested in the funds, as demonstrated by Tuesday's announcement from Edinburgh Investment Trust that is retaining Invesco Perpetual as the manager of the trust. We find the results encouraging. We continue to do everything we can to deliver good outcomes for clients, retain assets, and grow our EMEA business.

Now, I'll turn the call over to Loren to review the financials.

Thank you very much, Marty. Quarter over quarter, our total assets under management increased $33.2 billion or 4.5%. This was driven by positive market returns, and FX of $28 billion, and total net inflows of $5.2 billion, of which $1 billion were long term.

Our average AUM for the quarter was $761.7 billion. That's up 4.4% versus the third-quarter average.

Our net revenue yield came in at 45 basis points. That was an increase of 0.2 basis points quarter over quarter. The increase was a result of improved mix leading to a higher investment management fee rate, as well as greater performance fees compared to the third quarter. As a reminder, as we look forward into the next quarter, our fee rate, as it always is, will be negatively impacted by day count, as the first quarter has two fewer days than the fourth quarter.

Now let's turn to our operating results. Net revenue increased $40.9 million or 5% quarter over quarter, which included a positive FX impact of $10.4 million. Within that net revenue number, you will see that investment management fees grew by $44.8 million or 4.8% to $982.8 million. This increase was in line with our higher average AUM, and an improvement in the effective fee rate during the quarter. FX increased investment management fees by $12.9 million.

Service and distribution revenues were up by $9.4 million or 4.3%, roughly in line with the increase in average AUM. FX increased service and distribution revenues by $1.2 million.

Performance fees in the quarter came in at $11.1 million. That was an increase of $0.5 million versus prior quarter. Performance fees in the third quarter were driven by a variety of products and regions. FX increased performance fees by $0.8 million.

As you know, performance fees are difficult to predict, and can be volatile quarter to quarter. As we look towards Q1, we expect performance fees to be in the range of $5 million to $10 million. This range includes the recent change to the Edinburgh Trust contract in the UK.

Other revenues in the fourth quarter were $33.3 million. That was an increase of $0.2 million versus prior quarter. FX increased other revenues by $0.1 million. As we have said in the past, other revenues are difficult to forecast, but I will say that we expect the average to be approximately $30 million per quarter in 2014, although fluctuations quarter over quarter will likely exist.

Third-party distribution, service and advisory expense, which we net against gross revenues, increased by $16.1 million or 4.2%. That was roughly in line with the increase in retail and investment management fees, and service and distribution revenues. FX increased these expenses by $4.6 million.

So, moving on down to the slide, you'll see that our adjusted operating expenses at $510.1 million increased by $21.8 million or 4.5% relative to Q3. FX had an impact of $5.9 million on those expenses.

Within expenses, employee compensation at $332.3 million increased by $4 million or 1.2%, and was largely the result of FX, which increased compensation by $3.5 million. Looking forward, seasonal payroll taxes and a one-month impact from base salary increases will lift our Q1 compensation by approximately $15 million to $20 million. It will then decline by approximately $5 million into Q2, as the decrease in seasonal expenses are offset by a full quarter's worth of base salary. This assumes flat assets from the end of the year, importantly.

Marketing expense increased by $7.6 million or 32.3% to $31.1 million. The fourth quarter included $2 million of new product launch marketing costs, and $5 million in advertising and other marketing costs to support the ongoing business. FX impacted these expenses by $0.4 million. We expect run rate quarterly marketing expenses to be roughly in the range of $28 million to $29 million per quarter in 2014. Again, fluctuations will likely occur quarter to quarter.

Property, office and technology expenses were $74.9 million in the fourth quarter. That was up $2.2 million. FX increased these expenses by $1 million. Looking ahead, property, office and tech expenses should increase slightly to approximately $76 million to $77 million per quarter, reflecting continued investment in front-office technology platforms, and increased outsource administration costs due to the higher levels of business activity in EMEA.

G&A expenses came in at $71.8 million. That was up considerably; $8 million increase, or 12.5%. The fourth quarter included $4.5 million of new product launch-related costs, and also $2.5 million of what I would call other seasonal G&A costs. FX increased G&A by $1 million. We would expect G&A to decline to approximately $67 million per quarter in 2014, although, once again, variations should be expected period to period.

Continuing on down the page, you'll see that non-operating income decreased $7.9 million compared to Q3. The decrease was largely due to higher interest expense resulting from the refinancing of our long-term debt during the quarter, which happened mid-November. Then, we also had lower unrealized gains on certain of our real estate and private equity partnership investments. Interest expense will step up to approximately $18 million to $19 million per quarter, reflecting a full three months of interest expense impact.

The Firm's effective tax rate on pre-tax adjusted net income in Q4 came in a little bit lower than guidance at 25.4%. Looking forward, we would expect to see the effective tax rate, again, being around 26% to 27%. That brings us to our adjusted EPS of $0.58. Again, as Marty said, our adjusted net operating margin of 40.5%.

I will now, then, turn it back to Marty to open it up.

Any questions, please?

(Operator Instructions)

Ken Worthington, JPMorgan.

Maybe first on the buyback. So you closed the CIBC deal at the end of the year. To what extent were the big buybacks this quarter a front end loading of the cash received from that deal?

Really, given the deal closed on 12/31 and there is more money coming in from, I'll call it an earn out, in the next couple months, is there still meaningful stock you'd expect to buy with the proceeds? Then, for the record, I do understand you bought back a lot more stocks than the total proceed from the deal in the quarter, so I get the math.

The buyback really did reflect the front end load of the value of the transaction, even though the money is spread over a couple quarters. That is what the $350 million represents, Ken. Again, in terms of our interest and buyback as we have in the past, we will be opportunistic and certainly be looking at a relative valuation and impacts on our stock due to market dislocations and other things. Again, we have a strong interest in being able to return capital to shareholders both through dividends and buybacks in 2014.

Okay. Great. Then, Marty, just on Neil Woodford.

So Neil was sort of concentration risk that you inherited when you came to the Firm. You have put Mark Barnett in charge of the assets. It looks like it is helping retain the assets.

You guys pointed out that he is being very well-received. But you also maintain that concentration risk. So as you position for Neil's departure in the next couple months, are there any steps that you either have taken or are taking to kind of minimize this concentration risk as we look forward into the future?

Yes. Ken, good question. I think the reality is, we'll take good money managers all day long.

Mark has been a part of that team for a long time. It's depth of the team that is there. We couldn't be this successful without that real depth. I think that often is something that gets overlooked throughout, not just our organizations, but a number of organizations.

You have to have a portfolio manager pulling the trigger. That's what we do and a very talented one supported by a very strong team. We think that is the right way to do it.

Ken, the only thing I would say is that, we've been extremely successful. We will continue to be working on continuing to grow other parts of the business in the UK so the diversification will happen largely through the success of our other teams. We've had great success in the corporate bond area and the global equity area and obviously, new GTR product, Global Total Return, has been off to a very strong start. So, I think you will see diversification created that way, primarily.

Okay, great. Thank you very much.

Craig Siegenthaler, Credit Suisse.

Can you provide us an update on how the Henley based multi-asset team is doing? I understand this is a pretty young team over at Invesco. But it would be helpful if you could provide some color on how sales activity has trended, both, in the UK. I believe you have a US mutual fund product within that fund now and also any CCAB Cross Border activity in continental Europe.

So, let me kick off. We are very early days, if you remember, the UK fund got launched in September of last year. I just want to call it -- the pace is not too different generally than the United States. It's usually three years. You have to have a good track record for three years and you keep going.

That said, the reputation of the team is strongly in place. As I mentioned a few minutes ago, we have seen $250 million already head towards that team. So we look at that as a very, very good development out of the box.

We have, as I said, just -- that's one of the efforts in the fourth quarter, the capability is now in the seek out product. It is now in the United States. It's hard to introduce in the retail markets in Asia just because of regulation around derivatives. But it is a global effort. We think it's a real strong compliment to the risk parity capability that we have. We think it's going to be a very, very strong capability for the Firm in total.

Got it. Then just -- I want to touch on performance views real quick.

Given the 1Q guidance, normally 1Q is a seasonally strong quarter, It seems that your performance fees will sort of trend maybe in the $30 million range next year plus or minus. Back five years ago, you used to be $70 million, $80 million, $90 million. Your alternative AUM is much higher. So maybe you can just help us think about what structurally has happened, in terms of why the performance fee on rate is lower than it used to be and not higher.

I guess, one thing, performance fees in aggregate have always been a small part of our overall revenues. That's kind of one point. We like that way. We like the predictability.

We haven't been sort of driving to increased performance fees overall as a function of our overall revenues. In some cases, they're part and parcel with the product. They're expected by clients and then in which case we'll certainly have them.

In the past, going way back, we had quite a bit coming from some of our Quant capabilities. Again, some of our Quant capabilities have done extremely well. But some of the new accounts that we have with institutions have been not performance fee based, but more straight management fee based, which again, I think, is probably more predictable and provides greater valuation credit to us in any event.

Looking forward, I would say that we would expect to continue to see performance fees, even in the first quarter guidance I feel in the $5 million to $10 million is probably the right level for us. There is still some opportunity to see performance fees that could show up through real estate.

Then over the longer term, we think the private equity fund -- Fund 5, Fund 4 -- they're doing very well, those funds. They are above their high water marks. Again, none of this is realized. None of it is stuff that we can be booking. But ultimately could be substantial in terms of performance fees if and when they get into the point where we could recognize that from an accounting perspective.

So, I do think performance fees will continue to play a part in our revenue stream. It's really just the UK element that is going to be more muted than you've seen in the past.

Thank you, Loren.

Certainly.

Dan Fannon, Jefferies.

Can you give a little bit more color on the Edinburgh Trust announcement, just in terms of the size? Then, what other institutional dynamic -- clients you've talked to or what other assets remain within the Perpetual franchise? How those conversations have tracked?

Yes. Obviously, Edinburgh Investment Trust is a very high profile investment trust in the UK. It's probably just under $2 billion US, a very seasoned experienced Board.

So we look at that as quite a -- a very public endorsement of Invesco Perpetual -- in Mark Barnett and the team. So we look at this very positive. Other institutions, as you know, they're confidential. They don't want to be talked about publicly. So again, I think, looking at that as a strong support of Mark and the team I think is a very good way to look at it.

Then I guess just thinking about the fee rate and what you guys are having success in selling products particularly some of your SICAV versions versus where you're seeing some outflows, whether that be IBRA or Perpetual. Taking market aside, as you think out over the next -- into 2014, are you looking at your fee rate improving based on where you see the demand and where you are seeing redemptions?

Yes. I will step up one level and then come back down to it. It was maybe three years ago, we started to talk about, we need some better jobs across EMEA and the efforts there.

You're now announcing very strong organic growth on the continent and as I said about 15% organic growth last year. We look for that type of growth to continue. It's a reflection of, not just, I want to call it the infrastructure work that we did, but really, if you look at the breadth of the capabilities in the SICAV product and its performance, it is really, really strong.

As Loren was pointing out, bonds, European equities, global equity equities, the addition of GTR. So, it is a very, very strong line up. We thought we were punching under our weight on the continent. We're starting to make some real improvement. So we look at it as a very, very strong dynamic for us.

Also, as Loren said specifically in the UK, if you look at the depth of the team, the quality of the team and the performance across the global equity team, European equity team, in addition to the other bond team which has just been strong. It's broad. It's deep, so that's also where we see money moving. I think we're positioned quite well.

I would answer just the fact that, yes, we do believe that the net revenue yields excluding performances fees -- I will just make that point, will improve year-over-year because of the dynamics that Marty just talked about. The performance fee is a bit of a variable that could keep it more flattish depending on how performance fees show up in the year.

Great. Thank you.

Sure.

Michael Kim, Sandler O'Neill.

First, just coming back to UK Equity Income, on the last quarter's conference call, you kind of talked about redemptions above the historic redemption rate were about $1.5 billion in the back half of October. So I am not sure if that's apples to apples versus the $4.8 billion of outflows you reported for the quarter. But just wondering if you could give us a sense of how those outflows tracked through the quarter? Then early read into January trends would be helpful as well.

Again, I think it is apples to apples. The $4.8 billion is consistent with the $1.5 billion that we talked about. It obviously has been sort of a -- there has been volatility in -- because of some institutional accounts who have decided to sort of terminate. Those can be a little chunky.

It's hard to read into a trend. I'd say generally most of the movements have been around institutional side. The retail side has been a much more slow kind of -- an even less material impact on the overall numbers which I think is encouraging. Because of the vast majority of the assets are retail based.

It has been sort of a general improving trend month to month I would say. But I don't want to read in -- to much into that because again, we all understand that this is something that's going to go through a couple of more events ultimately to really realize how much impact this is going to have. We're very focused on it. We are not complacent on the topic. Again, we are focused on doing what's right for the clients and making sure that we have Mark Barnett in front of all the clients that need to see him and get comfortable with him.

I am not going to comment on January trends because we don't want to be out in advance of anything that our own UK team is doing. But I'd say the bigger event generally will be at the time of actual -- Mr Woodford's departure, right? That would be the date that we think most of the noise and activity would happen. So that's the date I would look to as opposed to something else.

Okay. Fair enough. Then maybe focusing on your fixed income business.

Just curious to get your take on sort of the opportunity seemingly developing across institutional fixed income managers, just assuming pension plans increasingly shift into maybe a more defensive asset allocations now that they've gotten closer to being fully funded? How that might play out versus the potential for maybe some ongoing redemptions on the retail side of business?

I'd probably broaden it. I think if you look at, what are pension plans? What would you expect them to do?

With the rally and equities and those have participated, if they closed those gap you could really see more movement into asset allocation. In fact, one of the things we are seeing, continued interest in things like IBRA in the institutional channel and on the volume set because we saw it in retail but that makes a lot of sense.

The effort in fixed income around multi-credit is a core skill that we have in credit. That capability would be in market along with things like bank loans, our traditional strength in real estate. We think, we've positioned ourselves very well for what could be happening in the institutional market.

Okay. Great. Thanks for taking my questions.

Bill Katz, Citi.

Just in terms of -- puts and takes in terms of what's coming and what's going out? Geographically, where you are seeing strength, et cetera? Could you give us an updated -- I know you gave us a tactical guidance for first quarter on some of the line items for expense. But stepping back, could you gives us a sense of where you think incremental margin opportunity might be? Is it still north of 65%, or has anything fundamentally changed quarter-to-quarter?

Bill, sir, I would say again the -- first the incremental margins has a lot do with what sort of market we are in. I think again we will provide sort of a similar perspective, I don't think it's changed which is when markets are generally moving up strongly. We can see the incremental margins be at the higher end of the range of somewhere between 50% to 65%. We certainly think 65% is achievable, maybe even higher in the strong equity market.

In flat markets, which is what we normally plan for and hopefully we'll be surprised with better market. It sits more on the lower end of that scale, so you're into the 55% to 60% range. So depending on what you are viewing in the market, you can select what incremental margin would probably occur.

Okay. Thank you. That's helpful. Then just a follow-up question.

You have launched, I think you said, the most products cumulative in versus in the last couple years. As you think through 2014 and you put the Woodford assets to the side which feels very tactful to me. EMEA is doing well. It is liquid alts? Where do you see -- where would you expect to see the greatest rate of traction of some new business trends?

Yes. That's a good question. It pairs very well with Loren's commentary on what you see.

Where we see -- we have the world moving, alternatives will continue. We think we're strong there and we'll continue to be. The efforts in fixed income, in particular around multi-credit, I think, in addition to bank loans and the like is going to continue to be an opportunity for us.

But again I think you also have go back to what have we done over the years and whether it be getting into ETF business, moving into risk parity type capabilities. The effort right now around liquid alternatives, we think the depth and breadth of our --

We thought it very important to be holistic in getting the full range out there right now. Because the tick up time that we all know, so we think we're positioned very well in asset allocation, liquid alternatives, the continental Europe in particular I think is going to continue to be an opportunity for us. Our position in mainland China, quite frankly, is ever growing and will be something that will -- to say nothing of the DOD GF business. Our market share was about 4% last year as a percentage of gross sales it was 7%.

So we are growing the ETF business. We see that as a margin enhancer also. We're continuing to get further strength in the US retail business. So I do look at it as early days.

As Michael was mentioning earlier, if you look at our capabilities, it matches up very well where the institutional market could be going. Again I think a lot of -- the things to pay attention to is, we can't predict markets. But at one level, it really doesn't matter to us because we think we have the capability set to participate. I would look at the next three years, as we are positioned very, very well for where we think clients could be going.

Okay. Thanks for your perspective. I appreciate it.

Thanks, Bill.

Luke Montgomery, Sanford Bernstein.

So the operating margin is looking pretty healthy above 40%. Not withstand that, we have talked a little bit about how maybe less scale on product suite might be holding down the margin relative to some of your peers.

So, just wondering what levers you might pull to address the scale issue? Whether that means the rationalization of products and redeployment of human capital -- seed capital? Or is this really just more about getting the flows up? If it's the later, you touched on it just a second ago, but what are some more obvious opportunities by distribution channel or geography to increase that scale?

Yes, you are on the topic. I think again, what'd I point to is just and we have talked about it. Here is an example of it right now.

We are taking -- to the degree that we can take best in capability to take them around the world more concurrently, that's going to make quite a difference. I think you can see from what we're talking about this quarter, that is a real effort in that way. We think by organic growth, with the quality of the team, this is the long-term performance of those teams. That's where we see the real opportunity for us. Yet, we agree with your observation.

Could it be a little bit of both? Is there some rationalization of products in redeployment of capital?

We always do that. If you add up the number of things we have rationalized over the years, it's quite stunning honestly. But we'll continue do it. There's probably less rationalization but we are always paying attention to that.

Same thing, we deploy resources whether it be seed capital or talent to those things that we think have highest probability of success. That's what we think we are doing right now.

I will also just mention, maybe the areas where we have seen less scale -- there has definitely been a benefit just generally in terms of the flow activity. All our regions are improving in terms of profitability. There isn't a particular area that I would say is a real problem or there is something going wrong some place. So we are seeing really good traction just in terms of bringing the flows in and the top line is making it happen.

Okay. Thanks.

Then, on the comp, even with the FX impact that you called out this quarter, it looks like comped revenue is the lowest its ever been. So first, do you expect any continuity in that FX impact? I know you don't target a specific ratio, but what's the likelihood you can keep the comp ratio down at this level?

I think we -- given the guidance, I think obviously, we get a sense of confidence or we wouldn't provide it. It is something where we don't manage to a comp ratio looking at compensation to revenues. Again, we provide a lot of detail on how we think about compensation should work in some compensation. But ultimately, we do feel that this is sustainable good level with the variations around payroll taxes and then the obvious decline coming in for the second quarter as payroll taxes roll off.

Yes. Okay. Great. Thank you very much.

Michael Carrier, Bank of America, Merrill Lynch.

Loren, maybe, you might have hit on this. I just wanted to check, just on the buyback activity. You obviously got the pick up this quarter, just in terms of the 2014 just in terms of what to expect? Should we just be going back to that normal run rate that you have -- I think it's about 30 year cash flow. But I just wanted to get an update there.

Yes, I think that's a good starting point to think about what to expect going forward. However, honestly, we are not driven formulaically in our thinking on buybacks. We will have some variation quarter-to-quarter.

We have said and this will still be the case where we do have some of the equity grants that get issued is on a deferred basis to employees in the first quarter. Certainly, we would do our very best to try to mitigate any dilutive impact by certainly focusing on buyback as a strategy.

Okay. Thanks.

Then, Marty, you gave pretty good updates in terms of what you guys have been doing on the EMEA side and then also on the balance or the asset allocation products. When I look at the US business, you kind of gave it the same updates. Over time, post the Van Kampen transaction, there was maybe a period of one to two years where -- whether it was launching products, consolidating products, improving performance, gaining on traction on the distribution platforms. Then we gradually saw the flows improve.

In EMEA and in this -- the balance risk or the allocation products, I guess just kind of a similar maybe color in terms of -- you got maybe one issue in each of those segments. But on the flip side, you are doing a lot to grow those businesses. I just wanted to get a sense of where you see Invesco in terms of the inning of the growth in both of those, whether you want to call it product areas or geographies, to partially offset some of these narrow term issues.

That's a good question actually. Let me provide the perspective.

If you go back, if an inflection point was the Morgan Stanley Van Kampen transaction, we weren't anywhere in the US retail business at that time. We laid out a perspective of where we're going. I'd still say in the US retail business, it's going very, very well.

But I'd say we're flipping. If you want to use the headlines where we're recognized by -- as a brand, It's -- we're now ninth, tenth in the US retail channel. When we did the first survey, they couldn't find our name. So that's a tremendous change in a short period of time. We still think we've got to move up a handful of notches and that will make a big, big difference.

EMEA actually, or Europe in particular, is somewhat of a replay. We are in the first inning of where we think we can go. Now, last couple years when we started to highlight this as an area where we're spending time and money, we had a lot of plumbing type work do. The outsource and the TA and things that you might think are sort of maybe not interesting -- well, the fundamental fact, if you don't have strong operating infrastructure it gets in the way of success.

A lot of the plumbing that's now in place, there's a lot of rework on the product range. Again I mentioned a few minutes ago, it's broad, it's deep, it's strongly performing. But we are still very early penetration with principal distributors on the continent.

Now, there are areas of real strength. In Italy we're really, really strong. In Germany, we should just be dramatically stronger than what we are. We have been in Germany for decades. Also Switzerland again, we're very much under shooting our weight.

So we look at the continent as a real opportunity for us. The analogy is probably a very good one that you pulled out.

Okay. All right. Thanks a lot, guys.

Brennan Hawken, UBS.

You guys have described IBRA as more conservative than a bunch of the peers. Clearly January has started off as a much more risk-off type market. I know you indicated this was likely favorable.

But could you give us maybe a little more specifics on whether or not what you have seen in January -- obviously the performance has bounced nicely, but from a flow perspective, has that bounce in performance stem the trends that we saw in the fourth quarter?

Brennan, I think there is probably a little bit of a lag in terms of how people respond. So again generally, we are still seeing a strong interest in equities in January. So again how long that persists? It's a good question.

I think we're seeing sort of a consistency in the IBRA, flip side to that where that's been more on an outflow perspective. I don't think we are seeing any change in behavior in January per se at least in the flow data. Again that's something where within a week you could begin to see something shift perhaps. It's just a month so it's hard to really say where it's going.

Sure. That's fair. Thanks.

I would just mention, it's probably worth just having us point out that in the month of January, we have more flows in the month of January -- long-term flows, than we saw all last quarter. It's been relatively a good month for us.

That's terrific. Thanks for that.

Then a follow-up to Ken's question. I know that with Woodford, you guys didn't have some of the protections like non-compete and such agreements. The assumption would be that you guys learned from that with Mark Barnett. Is that correct?

I don't think so, no. Again everybody has terms of employment, in UK in particular. It has the traditional, what would you say -- things that are in place generally. Again it is a free world.

So we're very happy to be successful going forward with the depth and the breadth of the team that we have. We think we are very well placed.

Okay. All right. Great. Thanks a lot.

Roger Freeman, Barclays.

Just one more on Woodford. I think, Martin, you touched on this and pointed people to look at the departure date, paid by when the -- maybe the ball go flows could come out, if they do. In other cases it seems like we've seen I guess a tail on that even a couple of quarters beyond. I am wondering because you kind of have a transition taking place over, call it a six month period, before whether maybe that mitigates the potential tail effect?

Good question. Here is the reality.

The reality is, I have said this previously, there is two types of outcomes, right? That you have seen traditionally when there is change. It's sort of unplanned, unpleasant departures in that, usually no one does well. The clients don't do well. The organizations don't do well and ultimately the individuals don't either.

This we think is very, very different. It has a plan that's been in place for a very long period of time. We are executing that plan over what is many, many months. What is happening is what we would hope happen in that you are seeing Neil had a great 25 year track record but it also overshadowed the depth and breadth of the team.

I understand that from growing up, working for Sir John Templeton. They have big trees. The truth is there is a lot of talent underneath there. That's what's happening. The point of having a long transition is to have the market place fully recognize the depth and breadth of the talent. Mark and the team are being recognized very, very nicely for well-deserved recognition and their depth of history.

The reality is we don't know, right? I think importantly, we are doing all the right things to do good things for our clients. If do you that, you get better outcomes than you might have otherwise.

So, again, we wish we could be specific. The truth is, we just don't know.

No. Fully understood. Thanks.

I guess, Marty on the US retails for brand recognition, you mentioned the answer at 9% or 10%. Correct me if I am wrong, it seems like you have sort of been around that level maybe 1 year, 1.5 years half now. You have said in the past that the hardest part is kind of moving up in that top ten. I hear you saying you would like to move that a couple or few rungs higher.

I am wondering how you are thinking in terms of maybe time frame? Does that come at a much higher advertising expense?

Good question. As I said, we went from, you couldn't find us on the list, to moving to 10% and sort of 9%, right on the cusp. It doesn't look -- we're going to stay on the path we're on, right?

It is really driven by investment reputation and client engagement. We are doing all those types of things. From my prior experience, it just takes longer than you would think reality would suggest.

What I do know is, if you go to the leadership of the distribution partners -- we are very, very strongly placed and recognized as a very, very important partner because of what we are doing for their clients. It's harder when you get to tens of thousands of FAA throughout the country. That's what takes longer. So it's really just more of the same, keep working, keep doing a good job, keep generating good performance, keep generating -- taking care of clients and they'll grant your product. We'll push it up a few more notches.

Okay.

It should not be a -- we're going to stay on the track that we are on spending wise.

Okay. Got it. Loren, just real quickly. I heard you mention new product costs a couple of times, running through the numbers earlier. Just wondering -- thinking about it on sort of a full year basis, how do you think about new product costs, say, 2014 versus 2013? I am just trying to get a gauge for the significance of the new launches this year, given you're calling some of that stuff out.

Yes, I think it was rather exceptional in terms of what we did this fourth quarter. Normally, they get spread out. But I think just the sheer number was also somewhat extraordinary. In terms of the G&A impact, we sort of guided I think to a number that should be a little bit lower than sort of backing out the extraordinary amount in the fourth quarter.

Okay. Great. Thanks a lot.

Thank you.

Eric Berg, RBC Capital Markets.

I wanted to start with the situation in the UK. I wanted to sort of sharpen and make sure I have the right understanding about how you are characterizing the December quarter results. Are you saying that the $4.8 billion outflow net is encouraging? Consistent with your expectations?

Are you saying that it's discouraging, but that you are doing so well elsewhere that on balance, you are pleased with the results out of EMEA? I want to make sure I understand your characterization of that $4.8 billion number, because 10% for a situation in which the manager hasn't left yet, does seem like a lot.

Yes. We are extraordinarily encouraged with the results in EMEA. We are extraordinarily encouraged by the results ex-UK Equity Income.

We would think that a 10% redemption is not that extraordinary considering the history and the reputation of Neil. That it was not anticipated in the market. So that's how we would characterize it.

Okay. Switching gears to your global equity business. While you did have positive flows in your global equity business, it looks like Company wide the flows were on a net basis $1.5 billion. It also looks like, if one subtracts out the effect of the passive equity business that sort of your active equity business was actually in outflow mode.

Now, maybe that's reflecting what's happening in the UK, maybe not. But I would have thought that given the strength of your performance in your equity business and given the general renewed interest in common stock investing by both institutions and individuals that you would have enjoyed positive flows in your equity business?

So Eric I would say, I think, you answered your own question in a sense that if you add back the $4.8 billion associated with the impact on the equity income that would give you a different result, one that would be more in line with what we are talking about.

Lastly, as you think about what's happening in fixed income and the seeming growing interest -- sorry, growing interest in equities, decreasing interest in fixed income because -- traditional fixed income, because of what's happening in the interest rate environment, do you perceive a difference in the way that institution versus individuals are behaving in response to this increase in interest rates?

It's a very good question. What are we seeing in all of us? Right?

The declaration of great rotation really has not happened. There has been some movement to risk-on assets. You would think over time if in a rising interest rate environment, it's really traditional fixed income that's going to be under the most pressure of that sub sector.

We are, so let's compare -- retail investors, we saw much more risk on appetite. As we talked about earlier, this movement from -- that's what we saw, risk parity in two equities in particular, we think that's frankly a good sign. Contrary to that -- again it's plan by plan sponsor, they are continuing to be in a risk-off mode.

So you could understand if you have closed your underfunded gap why you would do that. To have a underfunded pension plan that's in risk-off mode, I just don't understand. But that continues to be the case.

So I would say, institutionally you are still seeing much more of a focus on low volatility, alternative type capabilities, fixed income, multi-credits, those types of things. Again, there are many, many pension plans that are deeply underfunded. Not to be having equity exposure, quite frankly, is surprising to me but that is what you are seeing.

Thank you.

Thanks for the questions. Appreciate it.

Chris Shutler, William Blair.

One question on the UK and then Asia. On the UK, you had about $4 billion of net outflows, but gross sales were actually very consistent with the rest of the year. I was hoping maybe you could talk about that dynamic. Is the consistency in the gross sales a function of equity income continuing to see consistent sales since October 15? Or have other products been picking up that slack?

I think there are some other products that are picking up the slack. The global equity product in the UK has been really -- seen a lot of this. So I would say equity income to sales, it is certainly declined somewhat on equity income but it's not as big an impact as the redemption, obviously, that we've been talking about.

Okay. Then in Asia, obviously, nice flows there once again. So can you just talk about what products have been most successful there? I am assuming it's a healthy mix of alternatives and maybe some others?

Absolutely. It's exactly. We have seen bank loans. We've seen real estates and equities as well. All those three are -- probably represent 90% of what we are seeing there.

All right. Then if you don't mind -- if I can sneak one more in here on the Edinburgh Trust contract. Is there anything more you can say about the specifics of how that contract may differ now versus the old terms?

I think that's public information. So it is essentially a -- there's a reduction of the management fee of 5 basis points. Going forward, there will be no performance fees other than in Q1, where there is reduction of about, I think about GBP10.4 million off of what otherwise would have been paid. So that's the, I think, the bottom line on changes there.

Okay. Thanks guys.

Robert Lee, KBW.

I appreciate your patience with the long line up of questions. This question, on the ETFs business, which I guess to Marty's point, people maybe it seems forgotten a little bit lately. But it's been doing pretty well. But can you give us some update on how that's progressing outside the US?

I know that had been a priority for a while and maybe hadn't lived up to your hopes or expectations. Are you starting to see more traction with that business outside the US? Or is it still pretty much this being driven by the success in the US?

The US is a driver, little question about it. Canada has also been really quite strong. What also gets hidden though is that it's frankly hard to track.

Institutions from around the world buy the US listed ETFs, right? We have investors from frankly almost 150 countries in the ETF business in the US listings. The non-US is broader than you would expect.

But let me be specific to your question. A number of years ago, we started an effort on continent. The continent has become a very complicated place as they -- to serve, the ETF environment is changing very, very much.

We still look at that as an opportunity. It just needs to settle down from its evolution. We are looking that as -- we have not given up.

We just -- as we were talking early, you want to focus on places where you can make a difference. We thought it was too unsettled to try to drive that forward in that change. But we think that will be an opportunity for us also.

Asia's an opportunity but again, not to the same degree as continental Europe. But again, the lion's share of the activity is the US as far as we're concerned.

I think the other thing I would just say is -- part of it is our focus on ETFs have been in the smart beta and specific access. Some of the interest on these ETFs outside the US have been more focused on traditional cap weighted products. We didn't really have a product that maybe was understood or accepted.

I'd say that is shifting rapidly in that we are seeing more and more interest and understanding of some smart beta products. I think in terms of the demand and the market, it is opening up to us. But we were sort of a little bit early, I would say, when we first entered. It was not a product that was in demand or understood.

Maybe the follow-up question, I don't know how you would specifically track this. But do you have a sense of how much -- when you talk about US retail, how much of the improved traction there or how much of the flows to your ETF products are being driven by your greater penetration of the US retail market through your various platform relationships or wholesaling relationships that -- you wouldn't think of that -- like a wholesaler is not maybe going to write a ticket on an ETF or maybe he does.

How is that translating into better ETF flows? Your better US retail distribution?

Yes. That's a very good question and sort of fundamental to our business.

When we bought it, what we thought it was interesting and somewhat unique, it was that it was focused on the US retail business. We saw an evolution in the financial advisor channel more to comprehensive plans for their clients, whether it be a combination of starting to think about core equity product or a balanced risk product at the core and people using things like ETFs around it. That has proven to be true.

So, our strength is in the retail market in the United States. That is not traditionally where the ETF business has come from. It is no question, self reinforcing our traditional retail business with the ETFs -- mutual funds ETFs and frankly, UITs. So the combination thereof is really, really strong for us.

I'd guess to the prior question you were talking about, when you leave the United States, quite frankly, it's not a retail market. It's much more an institutional market. Where we went to Europe with the idea that it would also evolve as a retail market, we were, quite frankly, too early in that development.

Great. Then maybe one last kind of broad industry question for Marty.

The OFR put out that piece a few months back. It seems like there has been a lot of back and forth between the SEC and the FSOC. So I'm just kind of -- maybe your take from your conversations with, whether it's powers that be in Washington and elsewhere, what's your take on how you see this thing kind of evolving over time?

Also, I am just curious to the extent that you are domiciled in Bermuda. Does that feel like -- if anything does come down the pipe that provides some level of insulation from some of these things they have talked about?

Yes, let me start with Bermuda. I think not. The regulators are interesting, where you might have thought after the crisis at one level regulation was getting more local, but at another level, it is actually becoming more global at the same time with the various risks oversight bodies working together. So it is a global topic.

But what I would say, just with the first report that came out, I would say -- let me say it this way, the fundamental facts are very different than what the report might have talked about. I think what you are going to see is the industry do a very, very good job of communicating in a very just clear way with the oversight regulators of what this business is and what it isn't and pointing out that it's not a big risk to the world.

That said, we would also face an industry where there are areas where we can improve, we're going to improve. We want to be constructive in it. But again, I think it's going to be a long conversation. I think the industry facts are very, very strong.

Great. Thanks for taking my question.

Marc Irizarry, Goldman Sachs.

Marty, on IBRA, I'm curious if you have some perspective at the retail level? Are you seeing a portion of the outflows? Are they staying, you think, within the asset allocation category?

You mentioned that obviously there is a rotation into risk and you are seeing pick up in equities. But I am curious within the allocation category, it looks like the grosses have come down along with redemptions picking up. Just I sort of want to get perspective on how you view that category and product and building out product within balance.

Yes. Let's see -- approach it two different ways. (inaudible) as we talked a handful of years ago, when we introduced this. We were very clear. We thought one, there'd be a rally in the equity markets.

On risk-on, we thought there would be movement towards equity products. We saw that. We saw it very much in our complex since I talked about it earlier. So, not surprising.

We also think though January is reminding people there is a volatility in the market. That we look at asset allocation products in particular, low volatility type products, also just that broad range of asset allocation capabilities. It's here to stay.

It will more and more be part of retail investors, one of their core holdings. Going forward, again, that's back to why we were so focused on making sure that we had our -- start the clock ticking on the track records for the full range of capabilities. So, again I don't think we should extrapolate a quarter into or probably January into long-term trends. I personally think asset allocation is here to stay.

Okay. Then just two quick ones. Is there any concern -- there's been a lot of retail money into floating rate funds. Any concern around bank loan capacity in your products?

No, we have not had that concern. But what I will say, just very explicitly, the team knows that it's clients first and ensuring that they stay dedicated through investment process. If they ever feel that there is not enough inventory, they just put their hands up and we'll stop. But that's not been the point of view as yet.

Okay. Then just real quick on the retail liquid alternative distribution in the US. I am curious expense wise, if you are sort of building the voter incremental resources on the distribution side? Or if it's leveraging what you have already?

Then also from an allocation perspective, where do you expect that those products fit into the portfolio? i.e, where do you think the share is going to come from?

Yes, again, we're utilizing our existing resources, right? So as long as stocking -- that said, there has been over the last couple years -- but last year in particular, with the new products, lots of effort on training, not just internally, but also into the retail channel. Probably a governor on absolute growth in alternatives will be, really, the educational process in the retail channel. Again I'd look at this as just growing over time, not a tremendous straight up, which is frankly a very good thing.

I'm sorry, I just forgot the rest of the question. Where is it coming from?

We think very much that what you have seen happen with the asset allocation, some of the things that have been more short-term fixed income capabilities that people have had in their portfolio, it's gone into alternatives. It's also come out of some of the more -- well, frankly, everywhere. Some in core fixed income has moved into it because several low volatility capability.

I think how many firms are positioning to their clients is, think of it as an anchor in your portfolio. That's probably the predominant way that we are seeing it positioned. Whatever people thought their anchors were before, are being some of the sources for this.

Okay. Great. Thanks.

Thank you.

Patrick Davitt, Autonomous.

I just have one question. I think you said last quarter that more than 50% of Perpetual's assets were platform related. We have seen a lot of un-bundling announcements in the last few weeks from them. It does look like they're being pretty aggressive in terms of the fees that they want from the managers?

How are those discussions going from your end? Do you think that's a meaningful headwind to your fee rate in that business?

Patrick, I'd say those discussions have been around for a long time and probably will continue in the future. We have been fortunate in terms of our business having really high quality products with super performance. That, relative to others, is a very nice moat that prevents too much of that kind of conversation pushing through. I don't want to say it doesn't happen because it does.

But we feel that is still very much in place. So I don't think anything has really changed overall in terms of that dialogue. They always are aggressive. I don't think that's going to stop.

So essentially the RDR and un-bundling hasn't really affected that pressure? It's not incrementally higher or anything?

Yes. I don't think it has. Again, we have certainly delivered a track record in the past of having excellent value for clients for the fees that we have charged. As long as we can continue do that, I think, we're going to be largely safe from (inaudible) erosion.

Okay. Thanks a lot.

Bill Katz, Citi.

Just two quick follow-ups. Marty, on the ETF side, there seems to be a little bit more interest in the market place around non-transparent ETFs. So, I'm wondering if you can comment on how vibrant of an opportunity that might be?

Then separately, any updated thoughts on money market reform? We have heard from one of your peers, I'm curious, how your bigger perspective might be?

Non-transparent ETFs.

Again, the non-transparent ETF has been a conversation along for a while. There seems to be more developments there with New York Stock Exchange also joining the fray. Again, I think the developments may happen. Our -- I'd go back to a couple things.

We were early on in launching inactive equity ETF. I am losing tracks of years now. But it might be four or five years ago. The level of assets is very low in it.

It's still the same.

It's still the same. So it may evolve over time and with an amount of transparency that could be another development. The way that I look at it is that -- I don't have -- there is a place for ETFs. There is a place for open-ended mutual funds. For the vast majority of the active managers, the open-end mutual fund is a very good way do it.

Again, I understand the non-transparent would have -- replicate some of that, but again, that's not why a lot of people buy the ETFs. I think that's really the core point from my perspective. Now you can see active ETFs evolving more on the fixed income market. That makes more sense to me.

But again, I don't view it as the holy grail that some might be thinking right now. If it evolves to be important, we'll be there.

As regards to money fund reform, I think we're all just sitting tight right now. We suspect an outcome that will be very manageable for the industry.

Okay. Thanks for taking the extra questions (inaudible).

Yes. Thanks very much. Again, on behalf of Loren and myself, thank you very, very much for your time. Your questions are very valuable to us.

We will talk to you next quarter. Take care.

This does conclude today's conference. Thank you for attending. You may disconnect at this time.