景順投信 (IVZ) 2014 Q1 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future 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 students 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 identified under the captions risks factors, forward-looking statements, and Management discussion and analysis of financial conditions and results of operations in our annual report on Form 10-K and quarterly reports on Form 10-Q which are available on the Securities and Exchange Commission's website at www.SEC.gov. All written or oral forward looking statements that we make or that are attributable to us are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turned 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'd like to turn the call over to the speakers for today, Martin L Flanagan, President and CEO of Invesco, and Mr Loren Starr, Chief Financial Officer. Mr Flanagan, you may begin.

Thank you very much and thank you, everybody, for joining us today. This is Marty Flanagan, and I am joined by Loren Starr. And I will be speaking to the presentation that is available on the website, if you're so inclined to follow. Today, as is our practice, we will review the business results for the first quarter, including a discussion regarding the United Kingdom, and then Loren will go into greater results on the operating results, and we will then open it up to Q&A.

So let me start by hitting the highlights of the Firm results during the first quarter. You'll find them on page 3 of the presentation. Long-term investment performance remained strong during the quarter. 81% of active managed assets were ahead of peers over a three-year period. Strong investment performance, a broad diversity of flows and continued focus on clients contributed long term net inflows of $6.5 billion for the quarter. Adjusted operating income was up 18.5% compared to the first quarter of last year. These numbers supported a further improvement in our operating margins to 40.9% versus 40.5% in the prior quarter and 38.4% in the same quarter a year ago.

Reflecting continued confidence in the strength and potential of our business, we're raising the quarterly dividend to $0.25, up 11% from 2013. Assets under management were $787 billion during the first quarter, up from $778 billion in the prior quarter. Operating income was $363 million versus $347 million in the prior quarter. Earnings per share were $0.60, up from $0.58 in the prior quarter. We also repurchased $120 million of common stock during the quarter representing 3.6 million shares, and, as I mentioned earlier, we are raising the dividend. Now, before I go -- before Loren goes into details on the Company's financial results, let me take a moment to review the investment performance.

I am now on slide 6. Investment performance during the quarter was strong across the time period, 81% of assets were ahead of peers on a three-year basis, and 73% of assets were ahead of peers on a one year -- over the past year. As we mentioned during the last quarter's call, the relative softness in the five year number reflects the rolling off of some very strong numbers in the fourth quarter of 2008 and a brief period where we trailed the market during the low-quality rally in 2009. We expect our five-year number to demonstrate further improvement over the second and third quarters of this year. As you might expect with numbers like these, the long-term performance of our investment teams across the enterprise was really quite strong with a number of capabilities achieving top decile performance.

Turning to flows. On page 7, you'll see gross sales remained strong during the quarter, nearly doubling gross sales from two years ago. An addition, redemptions tapered off -- which led to an improvement in net long-term flows. Importantly, gross sales with active AUM for the quarter also nearly doubled results from two years ago. As I mentioned, total net long-term flows were $6.5 billion during the quarter. These numbers reflect the broad diversity of flows we saw across our global business during the quarter, which included strength in fixed income, equities, alternatives, and ETF. So, obviously, very broad.

Gross sales within retail and the institutional channels were quite strong also. Institutional gross sales doubled from two years ago, and retail sales nearly doubled. The institutional channel saw continued demand on real estate and bank loans, in particular. During the quarter there was roughly $3.5 billion low fee redemption from a single client in one account which accounts for the lower net flow number. Gross sales for our retail business remained strong at $19.2 billion for the quarter, up 4% over the prior quarter. The annualized redemption rate for Invesco remained favorable to the industry. Redemptions also remained steady during the quarter which resulted in net sales of nearly $3 billion.

Flows into the complex were led by strength in our traditional ETF, US value and international growth equity. We continue to see a diversified mix of sales and moderating outflow picture for IBRA. Our US business has become increasingly diversified. We saw 14 retail mutual funds with net flows of greater than $100 million over the rolling 12 month period ended March 2014 versus 9 funds in that same period during 2012. Additionally, there were 21 power shares traditional ETFs with net flows over $100 million over the rolling 12-month period ended March 2014 versus 12 in the same time period in 2012.

We feel good about the momentum in our business. We remain confident in our ability to deliver a high level of value to our clients, and we believe the Firm is well-positioned regardless of where the market stake is. Before I turn it over to Loren for a more in-depth report of quarterly financial results, let me take a few minutes to discuss our positioning in the EMEA region. All of you are aware of two recent developments in the UK business, St James Place made a decision to transition approximately $13 billion out of Invesco Perpetual separate accounts which will impact the second quarter. On Monday the Financial Conduct Authority confirmed conclusion of its investigation of Invesco Perpetual's compliance with certain FCA rules and principals during the period from May 2008 to November of 2012. These issues are historical issues, and the FCA has noted that Invesco Perpetual acted promptly to enhance its systems and controls.

We are confident the systems and controls within Invesco Perpetual are now strong, effective, and compliant with that applicable regulations. The small number of impacted funds were fully reimbursed. This matter has been fully resolved with the FCA and is now closed. The financial penalty of approximately $31 million will not have a material impact on our business. We are pleased to have these issues resolved and fully communicated to the market so that we can focus further on building our momentum in EMEA. So let me spend a few minutes providing some perspective behind our confidence in this business.

As you are aware, investment performance UK retail and Cross Border fund range has been very strong and continues to be. Our well tenured investment management team has been widely recognized in the market. The transition to Mark Barnett has gone very well. With his excellent track record, the market has been extremely receptive to his leadership of the UK Equity team, and the team is focused on delivering strong, long-term investment performance to our clients. We have a diversified range of highly competitive funds across the franchise, strong organic growth across EMEA, and a very well recognized brand in the region.

I am on page 12 for those that are following. In particular, Invesco Perpetual has a deep well tenured investment team that has consistently delivered investment excellence to our clients. We have talked about this in the past about the team's phenomenal performance. You can see during the first quarter, 97% of the assets across the business were above peers on a three-year basis. The five-year numbers were impacted by the markets' bounce off the bottom in the first part of 2009. Invesco Perpetual trailed in what would have been characterized as a low-quality rally at that time. The two primary strategies impacted were the high income and income equity funds, which represented 35% of our assets under management. Our projections show strong investment performance in both of these portfolios returning by June of this year, potentially achieving 98% of AUM in the top half over a five-year -- over the five-year period.

Investment performance for our Cross Border fund range has also been strong with 91% of our assets above peers on a three-year basis and 90 -- excuse me, and 89% on a five-year basis. The top six Cross Border retail funds by growth flows in the first quarter all had top quintile five-year performance track records with the Pan European High Income fund, Pan European Equity funds in the top 1 and 2 percentiles, respectively. Strong investment performance drove success in our Cross Border retail business, which experienced $10 billion in net flows across all of 2013 and approximately $5.1 billion of net inflows during the first quarter of this year.

We continue to make progress further diversifying our EMEA business with strong net sales into the European Equity and Fixed Income strategies. A key strength of our business across EMEA is the broad and highly diversified range of capabilities we provide to our clients. The increase in demand for Invesco's European Equity, Global Equity, Asian Equity capabilities together with the GTR fund has led to a more diversified UK retail business.

As you can see on slide 14, gross sales are meaningfully higher than a year ago driven by the long track record of strong investment performance. UK retail gross flows continue to increase in the first quarter to $3.6 billion, up approximately 25% over the same period -- same quarter a year ago. Importantly, flows into the funds have been highly diversified reflecting strong performance across the range. In 2009, 80% of gross sales came through four products. By the first quarter of this year, 80% of gross sales were driven by 16 products. We have been pleased by the tremendous support we continue to receive from the advisor market. We are seeing this in our sales numbers as well as in the conversations we have with the advisors everyday.

During the first quarter, we were in first place for gross sales on two of the largest platforms in the United Kingdom. I particularly like to note that investors' response to the recently launched Global Targeted Return fund has been very favorable. Performance since the launch, although recognize it's only two quarters, has been excellent and consistent with our expectations of how this strategy would behave in these market conditions. Assets under management in the UK and Cross Border GTR funds has raised $380 million by the end of March.

As you can see on slide 15, our Cross Border business has experienced tremendous growth due to strong investment performance and increased distribution effectiveness. Gross sales in the fund range have nearly quintupled over the past three years across a broad range of capabilities. A key strength of this part of the business is the diversity of flows we are seeing, most recently across Fixed Income, European Equities, Global Equities, Greater China, Japanese Equities, and Multi-Asset. Strong asset sales have helped drive a study growth in assets under management. Our focus on delivering a strong investment performance to clients has helped our Cross Border business improve its market share over this time, increasing from 2.5% in 2010 to almost 4% this year. Given our solid investment performance and strong focus on clients, we are optimistic we can continue to grow our EMEA business over time.

Assets under management of our EMEA business totaled $178 billion at the end of the first quarter as you can see on slide 16. During the first quarter, net flows into EMEA excluding UK Equity Income were $6.5 billion, representing an annualized organic growth rate of 21%. As I mentioned earlier, the market has been extremely receptive of Mark Barnett who has an excellent track record. Mark is supported by the strong Invesco Perpetual investment team in his leadership role for the UK equities. As a result, a number of key clients are choosing to stay the course including Edinburgh Investment Trust which announced that it is retaining Invesco Perpetual as the manager of the trust. We find these results very encouraging and will continue to do everything we can to deliver good outcomes to our clients, retain assets, and grow our EMEA business.

As I mentioned, we're very well positioned for long-term success across the UK and Continental Europe. First and foremost, our track record of delivering strong investment results to our clients is superb. We have an outstanding winning investment team and highly regarded investment culture. Given the strong investment performance, we are seeing solid demand for a broad range of diversified capabilities, which is supporting a high level of organic growth across EMEA. With some of the key issues resolved in the UK, we're focused on executing our strategy and building on the tremendous momentum across EMEA. With a little cooperation from the markets, we're very confident in our ability to continue delivering for our clients across the business.

With that, I'd like to turn it over to Loren to speak to you in more depth of financial results, and then will open it up for Q&A.

Thank you, Marty. Quarter-over-quarter our total AUM increased $8.6 billion or 1.1%. That was driven by positive market returns and FX of $9.5 billion and long-term net inflows of $6.5 million. These increases were partially offset by outflows in Money Market funds and the QQQs which amounted to $7.4 billion. Our average AUM for the quarter was $779.6 billion. That up 2.4% versus the fourth quarter average. And our net revenue yield came in at 45.6 basis points. That's an increase of 0.6 basis points quarter-over-quarter. The increase was a result of higher performance fees, service and distribution fees, and other revenues which was partially offset by two fewer days during the quarter.

Before we discuss operating results, I wanted to provide a brief update on the second quarter flows. Marty already discussed the $13 billion SJP, St James Place, redemption that occurred in April. After adjusting for the UK outflows, I am happy to say that we continue to see momentum in the rest of our business. Our long-term inflows ex-UK in April were roughly in line with the monthly volumes we saw in the first quarter. So, with that said, let's go to the operating results.

Our net revenues increased $30.5 million or 3.6% quarter-over-quarter to $887.8 million, and that included a positive FX rate impact of $1.8 million within the net revenue number. You'll see that our investment management fees grew by $6.2 million or 0.6% to $989 million. This increase was in line with our higher average AUM after allowing for two fewer days in the first quarter. FX increased investment management fees by $0.9 million. Service and distribution revenues were up by $8.5 million or 3.7%, and the increase reflected higher average AUM. Again, after allowing for day count as well as a $6.5 million increase in ongoing asset-based service fees. FX increased service and distribution revenues by $0.1 million.

Performance fees came in at 300 -- I'm sorry, it's a big number, not that big -- at $33.6 million, an increase of $22.5 million from Q4. Our performance fees in the first quarter were, in fact, greater than expected, and they were driven by the UK, which contributed $27.6 million and by our Quant Equity and Bank Loan group, which contributed most of the remaining $6 million. FX increased performance fees by $0.8 million in the quarter. Other revenues in the first quarter were $35.7 million, and that was an increase of $2.4 million versus the prior quarter. The increase was due to higher front-end fees resulting from increased sales activity in Continental Europe.

You should note that these front-end fees in Europe are, in fact, passed through to third-party distributors and are netted within our third-party distribution expenses. FX had no impact on other revenues. Third-party distribution service and advisory expense, which [then we] net against gross revenues, increased by $9.1 million or 2.3%. This increase was in line with the day count adjusted retail investment management fees, service and distribution revenues, and higher front-end fees. FX had no impact on these expenses.

Moving on down the slide, you'll see that our adjusted operating expenses at $524.8 million increased by $14.7 million or 2.9% versus Q4. FX had no overall impact on our operating expense. Our employee comp at $353.1 million increased by $20.8 million. That's a 6.3% increase. This was driven by three factors. You had higher seasonal payroll taxes, an increase in variable compensation associated with our Q1 performance fees, and also there was a partial impact of base salaries and share-based compensation increases that went into effect on March 1. FX decreased compensation by $0.2 million. Looking forward, we'd expect compensation to decline by approximately $10 million in the second quarter and then remain flat for the remainder of the year. Importantly, this guidance assumes flat AUM from the end of Q1.

Our marketing expenses decreased by 6.9% or 22% to $242 million. FX decreased these expenses by $0.2 million. The marketing expense was, in fact, lower than we anticipated this quarter, and that was a result of delayed timing of spend. We expect market expense to increase by approximately $5 million to $10 million in the second quarter and then level off at roughly $27 million to $29 million per quarter in the back half of the year.

Property, office and technology expense came in at $77.7 million in the first quarter, and that was up $2.8 million. The increase reflected higher outsourced administration costs associated with increased sales activity in Continental Europe as well as continued investment in our technology platforms. FX increased these expenses by $0.1 million. Looking forward, property, office and technology costs will remain around $78 million to $80 million per quarter but may, of course, experience some variability due to sales activity in Europe.

General and administrative expenses came in at $69.8 million. That was down $2 million or 2.8%. The decrease was due to lower professional services costs related to new product development that occurred in the fourth quarter. FX increased G&A by $0.2 million. We expect our G&A line item to remain around that $68 million to $70 million per quarter level as we look forward.

Then continuing on down the page, you'll see that our nonoperating income increased slightly $0.4 million compared to the fourth quarter, and the Firm's effective tax rate on pre-adjusted net income in Q1 came out of 27%. This increase in the tax rate quarter-over-quarter was due to a one-time 0.8 percentage point increase resulting from new tax legislation enacted in New York State in the quarter. Looking forward, we expect the effective tax rate to remain between 26% is 27%, which leads us to EPS at $0.60 and our adjusted net operating margin of 40.9%. And with that I'm going to turn it back over to Marty.

Thank you, Loren. So, we will open up to Q&A.

(Operator Instructions)

The first question comes from Bill Katz, Citigroup. Your line is open.

Thank you very much and good morning. Appreciate the extra color for core trends into April. Just wondered if we could back up and just focus on the UK footprint for a moment. I guess there's been a couple more portfolio managers that have announced they are leaving to go join with Woodford. Maybe the broader question is what has been the general reaction into April particularly given the big outflow out of St James for retail at large, and than just tactically what are you doing here to stem any kind of further pm turnover?

Again, as I had mentioned earlier, I think the main thing to look at is what's the reaction -- you look at -- let the numbers talk. It's been known for a good long time that Neil would be leaving, and gross flows sales are up 25% year-over-year. You look at the diversity of the flows, it just gets stronger and stronger. That's really important.

Also, again, just during the first quarter and sort of the continued feedback we get, it's very strong from the advice channel. As I said, we actually had the highest place in gross sales on the two largest platforms during the quarter in the United Kingdom, so those are all very strong leading indicators of where we're going to go.

With regard to the three individuals that left, we actually anticipated that these individuals might leave. They were junior people. They were not long tenured. Importantly, they were not contributors to Mark Barnett's excellent long-term track record. Only one of them managed money. His responsibilities have been assumed by an individual who works very closely with Mark and the core team. Mark has been building up his support team, and since the start of the year, he's added three highly regarded individuals with strong backgrounds.

We view these departures as very manageable. As I said, they were not fully -- you know, we somewhat anticipated these.

And, Bill, just specifically in terms of equity income, other than the SJP announcement, it has been no different trend than what we've been seeing generally, pretty muted response. I mean, still outflow but not anything that is sort of spiking up or doing anything different.

Yes, tough one. Just one follow-up, Loren, and thanks for that. A lot of moving parts, guidance is helpful. When you think about flows coming in versus what's going out, looks like it's pretty high incremental margin year-on-year in the quarter. How are you thinking about incremental margins maybe? What's sort of a reasonable range of expectation here?

Bill, I think we're still sort of in that roughly 60% incremental margin range that we have been. If markets are strong, it would be moving up probably to 65% and perhaps higher. [Slim] markets we'd say sort of 55% to 60% was the right range for you to be thinking about. You know, we think 60% is probably a good place to focus.

Thanks for taking my questions.

Thanks, Bill.

The next question is from Ken Worthington, JPMC. Your line is open.

Hi, good morning. I wanted to dig into EMEA a little bit. What has led to the big improvement that you have been seeing here? Basically, sales have been accelerating at a really rapid pace over the last 12 months. We had thought that this might be a transition from fixed income to equity, but your fixed income EMEA business is doing well. So I guess the question is, if performance has been good for a while, what has really changed, again, in the last 12 months?

Thanks for the question, Ken, because you probably won't remember, but if you go back to one of these conversations probably almost three years ago, we told everybody that, you know, we really wanted to make a difference in the cross-border markets. Europe was going to be a focus of ours, and it has been a broad, deep effort over the last three years. And what that included was looking at the range of products we had available.

There has been a pretty broad revamp of those products. The performance has been very, very strong. We actually redid the servicing model to drive service levels up for clients and also a much greater focus on the improvement of our distribution capabilities and how effective we were. So it's three years of effort that starts to show up in the last 12 months, which is very typical. It's hard to have that all come together.

As I've said we've been in that region for a long time. We were not happy with where we were, and we'd still say as we look over the next three years, we look to just continue to get stronger in that market.

Okay. Any specifics you can give us in terms of the expansion of the sales force for the cross border products?

I don't have those specific numbers, but what I would say, which might be sort of boring to you, but it is really taking the best practices that we have in different parts of the world and taking them to continental Europe and just being much more effective, if possible, on how we execute with our clients. So there's been a tremendous amount of effort there, but I don't have a specific change in wholesalers, et cetera.

Okay. And maybe, Loren, for you, in terms of performance fees, why were they better than you had guided to? I had thought that the majority of performance fees in the UK really came from the Edinburgh Trust, and I thought that was restructured when they kind of renewed their contract with you. So if you can just help us with some of the details there. Thank you.

Absolutely, Ken. Of the performance fees, the $33.6 million, $27.6 were related to the UK. $13 million was specifically related to the Edinburgh Trust. That was the part that I would say would not recur. There is about $20 million that is the rest of it, and $14 million of that came from actually a fund that Mark Barnett -- close to $14 million of that came from a fund that Mark Barnett himself manages.

It is one of these things that that performance of that of a fund that showed up was very, very good, better than we had anticipated. It showed up as a performance fee that was not in our original forecast. Hopefully, that's helpful.

Yes, perfect, thank you.

The next question is from Daniel Fannon from Jefferies.

Good morning. We have the expense guidance, but just generally speaking, given your outlook for what you're seeing in April in terms of flows and thinking about the fee rate and then kind of the margin outlook as you progress through this year and some of those headwinds in so many markets are flat. Just based on kind of where demand trends are, how should we think about that?

I mean, so I think in terms of margin outlook, we talked about incremental margin, roughly 60%. Certainly, we expect to continue to grow organically, and we've been seeing good, strong growth. Obviously, the reality is we do have an outflow that's known in the second quarter of $13 million -- billion that is going to take our average assets down.

The good news is we are seeing offsets to that through growth in Europe and elsewhere. For us, even though we have some benefit of market, we are obviously balancing out against the known outflows. We think the 60% incremental margin for this year target is probably a good place for analysts to put in their models.

Your comments about April in comparison to Q1, should we just assume that kind of the inflow trends are pretty consistent throughout the first quarter to kind of get a sense of the other segment of your business in April?

Roughly, yes. Obviously, things shift around a bit. The things that have been flowing strongly are continuing to strongly flow like bank loans, real estate, some of the pan-European equity, some of the bond funds in Europe as well. Those are definitely still providing us the lift in April.

Great. Thank you.

The next question is from Brennan Hawken, UBS. Your line is open.

Good morning. So net flow number for active was really solid. Do you guys have insights into what drove the incremental increase in redemptions? Is there anything behind there? Maybe you can help us understand?

Well, we had the one large redemption that Marty talked about, the single account, $3.5 billion low fee. That was an act of mandate that was definitely a hit to the active.

So that was active but low fee?

Correct.

Oh, I see. And then when we think about IBRA, I think you guys highlighted that outflows moderated here in the quarter. This was -- it seemed like a good quarter for IBRA given that you guys have highlighted it as a conservative strategy. And we saw some volatility here in the quarter. Is what you're experiencing here this quarter in improving on maybe some color on the sales versus redemptions? Did you see increasing interest on that product given what we saw in the markets?

Let me make a couple comments and then Loren can get more specific. So the good news about sort of volatility year-to-date is that people remember why IBRA was an important part of their portfolio and that has been an important reason for the slow down in the outflows. I think also, you know, realizing that in the retail market, the peer groups really sort of a hodgepodge.

But when you look at risk parity, it is a very, very strongly performing capability and where the interest continued was in the institutional market. Again, as we've always said, sort of more challenging markets. You'll see people focus on IBRA. But in a rising equity market individuals will go to equity capabilities, and we saw that change. Again, I think it's a very good product, positioned very strongly and it's being understood that way in the market place.

I'd say generally the level of redemptions has moderated, so it's certainly been helpful.

I guess were sales pretty stable?

I think sales have been stable and the biggest change has been lower redemption rate.

Last one for me. So we heard about reports of Woodford's new fund getting delayed, and I was hoping maybe you could help me think about it. I'm not -- I'm struggling whether or not that's a positive for you guys or a negative. If delays, it drags the whole process out. If it gives you more time with the clients, maybe an opportunity to show better results and keep more AUM. How do you think about that?

Actually, we don't think about it. The reality is he went from a colleague now to a competitor as of May 1. We compete with some very talented organizations that have been in the market for decades with enormous resources, and we're going to do just fine. And I think that's what we showed.

I think -- really, to your point, I think the bigger institutional sort of single trigger mandates, we think we are largely through them. I think the way you should be thinking about this is post second-quarter the tough stuff is behind us. So I think that's really how you should be thinking about it.

Fair enough. Thanks a lot.

The next question is from Michael Kim, Sandler O'Neill. Your line is open.

Hey, guys. The morning. So, Marty, first, just sort of a big picture question. Just be curious to get your take on how you see the underlying mix of the franchise evolving over time from a geographic standpoint. Clearly, momentum continues to build in Europe and Asia, and the UK business ex-Woodford continues to really strengthen. But at the same time I'd imagine the US retail business is picking up just assuming investors continue to move up the risk curve.

Just taking all of those things together, what is your footprint look like a couple years down the road, and what might be the implications for sort of the economics of the business?

Very good question. Maybe I'll put it in the context with what we've talked about in the past. So, one bigger thought was we wanted to do much better in the United States a number of years ago when we had these conversations. We are starting to do that. We are strongly, strongly positioned here, and we would anticipate with the performance and our serving clients from the distribution service levels, we would just look for the US business to continue to strengthen.

We did point out three years ago that we wanted to be much stronger on the Continent, and we are showing that result. I'd still say we are third inning using a baseball analogy of where we should get to. One of the strongest parts of the business, quite frankly, is our position in greater China. I think there are some people that have a macro view that China is a headwind. That may be the case in the short-term, but when we look out three to five years, it is a force, and we could not be more -- better positioned into that.

And then if you look at, again, maybe some what's happening within the marketplace, our ETF business goes from strength to strength, and we would continue to see that as a big contributor. I think also importantly -- again, you've asked this looking out three years. It is very clear to us that the advice channel, retail advice channel, is focusing much more on outcomes for their clients.

With that evolution there, looking at a much broader range of investment capabilities and if you want to think historically equity fixed income. Clients are seeking lower volatility. They want some inflation protection and all of these different types of things. So what you saw from us at the end of last year, in particular, was the introduction in the United States of arguably the broadest range of liquid alternative capabilities that will complement very much our traditional asset classes and focus on this evolution in the advice channel, which is not dissimilar to what the institutional market has done.

That focus is not limited for us to the United States. We are taking that approach in the UK, on the Continent, and Asia is coming on also with it. It is just more complicated to get to the market there. So, we think we are positioned for where the market is going looking out three years, and, again, I think you just have to look at the depth and breadth of the investment capabilities and the performance. It's just very strong and would be supportive of strength over the next three years.

Okay. That's helpful. And then just a follow-up on IBRA. You touched on this earlier, but just curious to get an update on maybe where you stand in terms of marketing those strategies into the institutional or the non-US channels. Just trying to think about the growth opportunities and where you are in that process.

Remember, IBRA actually started in the institutional market. It was really the phenomenon that it was accepted strongly in the retail market. The more recent flows have been a continuation in the institutional market with IBRA. It is available in the United Kingdom. It is a great complement to the GTR fund, and it is also been in the SICAV lineup, and again it's also being received very well. It is a more competitive product in Asia just because of the regulators aversion to derivatives. So, but for Asia, we think it is positioned really quite well for the long-term.

Okay, great. Thanks for taking my questions.

The next question is from Patrick Davitt from Autonomous Research. Good morning.

Hey, guys, good morning. We all kind of were aware, obviously, of the sleeve of SGP's mandate that was with Woodford fund, but I think everybody was a little surprised by the big slug that was moved to Threadneedle. Have you guys got many more color on what drove that decision and whether its performance issues or price issues or just something else?

Yes, I don't have really any more feedback than really the question you are asking. It was a much larger switch than what we had thought. The performance of, frankly, all the capabilities is very, very strong. There had been a review on more the balance mandate, and that was really probably the outcome. So it was some more strategic view that they were taking on how to have that managed than anything else. That said, we feel very strongly that we would've done an exceptional job, but that was their decision.

Okay. That's helpful. Thanks. And then in PowerShares, a broader question I guess around operating leverage and contribution to the whole. You've, obviously, had a nice expansion of the breadth of flow there away from QQQ. I'm curious if you kind of have an idea of what the non-QQQ AUM level is for that business to really -- where you really feel like you're at a scale that the operating margin or operating leverage really kicks in there.

So, Patrick, I think we're at that level already. You know, we are seeing significant flows -- continued significant flows into our traditional power shares AUM. In aggregate, we are sort of $40 billion at least, -- $50 billion -- probably $50 billion of AUM in our traditional PowerShares.

And because the fee rate on those products are higher than the so-called pure market cap weighted type of index, which tends to be 10, 12 basis points. We are in the 35 to 40 basis point average. We are absolutely at scale now. And contributions are significant in terms of helping our margins expand as that asset base grows.

Okay, great. Thank you.

Your next question is from Chris Harris, Wells Fargo Securities. Your line is open.

Thanks, guys. Another follow-up on Europe. Just wondering if this region -- we know has been performing really well; flows have been great. I imagine it is high fee relative to the other parts of Invesco, but how should we think about this region in terms of incremental margin? I know you gave 60% guidance for the firm overall, but would you say that this particular region has maybe higher incremental margin than the firm on average, or is it a little more complicated than that?

I think, obviously, it's growing faster, which is great, and it's achieving significant scale to that growth. The fee rates in Europe tend to be higher, and so I'd say, generally, it's at the high end of that range. And because they tend to be, again, assets that are managed through existing teams, pretty good strong operating leverage. I don't want to get into specifics in terms of saying where it is, but it certainly is operating at probably the higher end of the range of operating leverage for us.

Okay. Excellent. And then just a quick follow-up on maybe capital management plans. You know, just kind of wondering what your appetite is now for incremental buybacks, especially now that St James is kind of leaving, maybe how you think about that relative to, perhaps, the overall level of the market.

Some of your peers haven't been buying as much stock back as we would've thought, and I think there's been some pause due to where the market is trading right now. I don't know. Does that enter into your thought process at all? Maybe just a little more color on that would be helpful.

Certainly, the opportunity for us to purchase our shares at a what we see is a discount because of people's reactions to the current news is always attractive. Generally, I'd say our position around capital management is based on our policy or philosophy around capital, which is, first, we're going to use our cash to seed our organic needs, then we obviously are supporting an ongoing ever-increasing dividend. What's left over is available for buybacks.

Certainly, we are seeing as we're growing, more opportunity to return capital to shareholders, and that's obviously sort of seen in our dividend -- continued dividend growth. So I'd say, generally, our opportunity to continue to return capital we think is growing. We have not seen any real great opportunities, nor do we have a strong strategic need to do acquisitions, which we've talked about, so that sort of takes that off the table.

We certainly have locked in our debt levels by going out long, so we're not into any process to delever So, barring any other initiatives, we are well-positioned for more capital return. We still are working to achieve our goals to maintain sufficient cash on our balance sheet to give us ultimately what we're looking for with target financial flexibility. We are not quite achieved those levels yet.

Again, I think the only other thing in the backdrop is the continued discussion, regulatory discussions, around capital requirements for financial institutions and, specifically, asset managers is something that we are paying attention to, as it might have some impact on our thinking around capital management.

Thanks, Loren.

The next question is from Michael Carrier, Bank of America Merrill Lynch. Your line is open.

Michael?

Sorry about that. Can you hear me now?

Yes.

All right. Thanks. First question, just on the one institutional redemption. Just curious if you had any color on asset class, like bucket or region?

It was equity. Equity, and it was in Asia-Pacific.

Okay. All right. So I guess when I step back and I look at the retail number that you guys know, reported. And I look at the organic growth in retail. It's coming in at 6% or so. I think if you adjust for the UK stuff, it's even higher than that. It just seems like it's a very strong number relative to what we've seen in the industry, particularly this quarter. I know you mentioned Europe being strong outside the UK and the cross-border and the US, but I guess does anything really stand out when you look across the products or the regions?

I know, Marty, if we look over the past couple years since you did the Van Kampen thing in the US and investing in distribution here and then doing the same thing on the cross-border, like there's been a lot of investment to drive the growth. It just seems like that level is a lot better, just given the volatility that we saw in the market. I was just curious if it was all of that kind of playing out, or is that something that specific that really drove it this quarter?

I'd say eight years later it is an overnight success. I think you are on the core of it. We have been absolutely focused to build an independent global asset management with a diverse range of investment capability to meet client needs. I know that sounds so simple, but if you have to look underneath and it's really the diversity of the flows by region, by channel, by asset class, it's really the fundamental strength.

And we have had -- we had some big holes to address. We think we've really addressed them, and we think we are in a position that we think we're going to continue to do well through really almost any market cycle -- obviously, some are going to be more favorable than not. I'd still say when we get to more of an equity tail wind we are extremely well-positioned for that.

The one other thing I would mention, obviously, we have great opportunity in Europe and in Asia Pac as well as in the US, but when you are large in a particular location, it's hard to grow organically, consistently, at a high level. But we are still, I would say even though we are well positioned, the opportunity for us to grow outside of the US is enormous. And so we think in terms of our ability to grow, really more quickly, it's probably more likely to happen outside the US than in the US. And we, obviously, have a great position there.

Okay. That's helpful. And then just to follow up. I guess any clarity or guidance, I guess, on a few items. Performance fees. Obviously, that'll come down. Just anything we should be thinking about in the second or third quarter from a more seasonal versus the others?

And then same thing in the other expenses. Obviously, I know it's extremely volatile. And then just on the institutional outlook, just given that redemption, when we look at the pipeline, whether it's on the real estate, the alternative fixed income side. Just any color there?

In terms of performance fees, obviously, the step down will take place in the second quarter and third-quarter relative to the first quarter, because we don't have the UK trusts kicking in. But we certainly have been able to generate a reasonable amount of fees from bank loan products and real estate products and other products in Asia. Again, very hard to predict, but I do think sort of more in line with the $5 million level is probably more realistic.

I mean, there's always the opportunity to do something bigger, depending on if a particular fund kind of hit the target and so -- but those are difficult for me to ultimately predict. So I would just sort of suggest think about the $5 million level as sort of a general performance fee placeholder for the next couple quarters.

Then on the other revenues, once again, I think probably we had a good quarter in other revenues. It may drift down a little bit into future quarters, but nothing material I think in terms of major changes there. And then, finally, on institutional flows in pipeline. I think we certainly have seen the SJP come and announce that one's gone. Beyond that, the pipeline looks good. We see continued strong interest in our products and RFP activity is high.

Again, we feel pretty good, pretty confident that the institutional picture is going to improve and certainly w don't have any sort of large sort of Asiaesque -- that particular outflow that we talked about, the $3.5 billion, there's nothing like that on our future that we are worried about.

Okay. Thanks a lot, guys.

The next question is from Robert Lee, KBW. Your line is open.

Good morning. Thanks for your patience with all the questions today. I guess I have a question -- you mentioned in the press release taking some actions in some businesses --

Robert, you're breaking up. Can you speak into the phone?

Is this better?

A little bit.

I think I just have a bad connection. In the press release, you talked about some business optimization initiatives, took some charges. Could you maybe flesh that out a little bit? Should we be expecting more of that, and kind of how should we think about that kind of impacting margins going forward? Do you have a specific type of cost savings initiatives or objectives out of those initiatives?

Rob, I'm happy to answer that. It was an initiative. There isn't anything like that that you should expect going forward. This is something we've been sort of planning, thinking about for some time. It really, as you can imagine, we have a lot of offices in many different countries, and our footprint is somewhat tied to actions taken 10 years ago when we might have put a lease in place.

Ultimately, the firm continues to evolve and change, and one -- a perfect example would be as we continue to leverage our Hyderabad office more, we are adding more space there, continuing to grow that. Some of the other areas where we might have been doing some of the activity that we expect will be done in India is shifting, too. Basically, this was a cleanup that allowed us to sort of align who is doing what where better.

So a lot of the color, so to speak, was around other shared service office where we had something in Dublin, for example. That was -- we vacated some of the space there as we are using more space in Hyderabad.

Great. And maybe as a follow-up, if I think about the revamping of really the whole business into the last seven or eight years, whether its distribution or infrastructure or products, you know, I'm just curious how you're thinking about, you know, product pricing has maybe evolved. For example, you had a large product, a large account leave last quarter, $3 billion of assets but low fee.

If you're sitting where you are today, is that the kind of account you would take on today if it was a very low fee structure? And how have you thought about or changed your thinking about willingness to take on large low fee mandates?

Is a good question, and I think you have to start by what is the asset class. We feel we're in a position right now that we have highly competitive teams with real talent. We, frankly, do look at capacity of teams. And if it's a high-performing team and there's limited capacity, and somebody wants us to enter something below market, we're just not going to do it. And, again, you only get to that position by strong investment performance and the like, and we're just really focused on total alignment with the clients.

It should be fair for both parties, because ultimately if it's not you get bad outcomes. And so we just think we're just -- we're very systematic in how we think about pricing and capacity and the team's ability to manage money. For example, if they say we can't manage their money, then we just stop. So you just really have to be client focused. I think that's the really the main theme that we would say.

And, again, I think if you -- certainly, even though it's low fee doesn't mean it's bad business. I didn't mean to indicate low fees, bad business. If you can get scale in a particular account or a particular asset class, it very well may be the smart and economically correct thing to do to do that. We do look at that. We do have a discipline around that. Again, I think we do it pretty well.

Great. Thanks for taking my questions.

Thanks, Rob.

The next question comes from Luke Montgomery from Sanford Bernstein.

A quick one on the operating margin. How might we think about adjusting for the performance fees? Maybe you could remind me what the comp ratio is against those fees? And then assuming a lower level of fees, would you margin have actually been sequentially higher this quarter?

All right. So on the performance fees, the only thing I would say, I'll repeat -- there's about $13 million in this quarter that's nonrecurring. It's probably going to go away. Of the $27.6 million, I would expect $13 million to not be there. And then on [copit] it really varies from location to location and team to team.

I don't think it's a great sort of practice for us to sort of go in and talk about what the comp ratios are for each performance fee. So if it's okay, I'll probably just beg off on that one.

Fair enough. And then I just want to make sure I understand you correctly. Between Edinburgh Trust and St James, we can conclude that pretty much all of the Woodford institutional money is either experienced redemption or has been renegotiated at a lower fee rate, and then it seems like the commentary on the UK business implies retail flows are basically flat in April. So can you confirm just seeing that picture clearly?

So I would say you're largely correct on the institutional side that pretty much everything, big stuff is out. There may be smaller -- small time platforms, but, again, largely, that was big news. In terms of the retail side, we've been in outflow, so I think my point was more that we continue to be in outflow in April but nothing has spiked up. There's been no reaction that's been sort of overt around any news, particularly around the FCA announcement that we've seen so far.

Okay. And then final one. You've talked a bit in recent quarters about your efforts to increase recognition inside third-party distribution channels. I'm talking about the US here. I think you've been slightly frustrated by the progress there given your strong performance. Maybe an update on how that's going and your general thoughts around sustainability of distribution advantages and how those like yourselves coming from a less strong position can cope with that?

Good question. I think, you know, we continue to work very hard to sort of get the recognition in the United States. I'd still say depth, breadth of the organization of relative performance is still not fully appreciated within the marketplace. We continue to make all the efforts to do that.

I think the reality, as we've talked in the past, is it's always frustratingly slow closing that gap. That said, we're putting our heads down and thinking through how fast we can close that gap. And, frankly, from sustainability of our distribution positioning, I think, it does -- the totality of it all -- it has to start with, breadth of capabilities are strongly and consistently performing. And I think we've now shown that for any number of years. But you do have to have distribution excellence. And I'd say the quality of our distribution capabilities throughout the organization but in particular in the United States is up quite dramatically.

We think we are as strong as any competitor in the marketplace; how we think about it, how we serve our clients, the breadth of coverage, the value added to the marketplace. Again, I think the competition -- if your -- if you don't have the resources to compete on the distribution side, I think you're going to be relegated to a second-tier status. As the years continue, it's just getting much more competitive. But we think we are very well placed against that thought.

Thank you very much.

The next question is from Marc Irizarry, Goldman Sachs. Your line is open.

Thanks. Marty, can you talk a little about the institutional business by -- I guess by client domicile? If you look at your gross inflows in institutional, they've stepped up. I'm curious what asset classes and regions are you seeing the most -- the biggest wins there. Is that sort -- are we sort at a new level just given where you are in terms of your product breadth and your institutional capabilities across regions?

I'll pick up on some of that and then Loren can add. I'd say an overall theme pretty much globally, real estate bank loans are -- there's a desire globally, but then when you start to move into other regions, you can get more specific. On the Continent, there's an equity focus where we've seen some big, strong mandate wins through our quantitative capabilities. Even things like Japanese equity are very -- our mandates that we are winning in the Continent.

When you go out to Asia, again, you get bank loans real estate, again, global equities is a topic there. Asian equities is a topic there. So it just becomes broader in different asset classes in the different regions.

We talked about IBRA is another one you're seeing institutionally continue to have interest. Probably not far behind that right now, emerging interest in the GTR capability, institutionally specifically in the United States and the UK and on the Continent and we would imagine probably in time in Asia too. So it is just the broadening of the mandates around the world is a very important element over there.

We are also seeing some of the alternatives like [porter ross], transportation fund. That's funded. Again, it's in the US that's probably more of a US focus thing, stable value in the US. So could vary from location to location.

Great. I'll leave it there. Thanks.

Your next question is from Eric Berg, RBC Capital Markets. Your line is open.

(technical difficulty) I'll give you a minute to turn to it.

You got cut off in your first part of your sentence. Sorry.

Can you hear me now?

We can hear you now.

Good, if I cut out again, just go to the next speaker, because I have a bad connection, but let me try my best. I was saying that it would appear that you have remaining in the equity income fund in the UK $44.5 billion. First, can you give me the split between institutional and retail at this juncture?

In equity income, post the departure of SJP, it's like probably 99% retail.

Okay. I really had one question only. Going back to Marty's comment earlier, and I'm paraphrasing, that the really tough stuff is behind us. What is the basis for that comment in the sense that we now have approximately $44 billion that includes the $13 billion. Right? Is that correct?

The $44 billion was the end of Q1. As of April, you've got to take the $13 billion out.

Right. Yes, so the number is now in the neighborhood of $31 billion, virtually all of which is retail. Why is the war over? Why is the tough stuff behind us? Why won't there be an enormous struggle for these retail assets?

My point, Eric, is that the -- what I said was the large single trigger asset pools, which tend to be institutional, which tend to move almost immediately, those decisions have been made. The secondary point that I would say is we're in a battle every single day with a broad range of competitors that have been in the market for decades that are strongly tenured, high-performing money managers, highly resourced, and we will continue to do that, and we do that very well. That's my point.

And would you say that the -- last question. Would you say that loss of assets -- the percentage loss of assets institutionally provides an indication of what will happen on the retail side, or by no means?

Say the question again. I'm sorry.

Does what happened institutionally provide a cue or an indication for what will happen on the retail side?

I don't think it can do that. No, that's not the experience we have had historically.

Thank you very much.

Thanks very much.

And I'm showing no further questions.

Okay. Well, thank you very much, everybody, and thanks for the breadth of questions and the depth of questions. Again, we think we had a very solid quarter, and we're looking for good things in the quarters and years to come. Thank you very much. We'll talk to you soon.

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