景順投信 (IVZ) 2014 Q2 法說會逐字稿

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

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

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

Welcome to Invesco's Second-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, Mr. Martin L. Flanagan, President and CEO of Invesco, and Mr. Loren Starr, Chief Financial Officer.

Mr. Flanagan, you may begin.

Thank you very much.

And thank you, everybody, for joining us today. With me is Loren Starr, Invesco's CFO. And we'll be speaking to the presentation that's available on the website, if you're so inclined to follow. Today we'll provide a review of the business results for the second quarter. Loren will then go into greater detail of the financials, and we will then wrap it up with Q&A.

So let me begin by highlighting the Firm's operating results for the quarter, which you'll find on slide 3. Long-term investment performance remained strong across all time periods during the quarter. Strong investment performance, a broad diversity of flows, and continued focus on clients contributed to strong overall flows for the quarter.

These were offset somewhat by a previously-disclosed single-client withdrawal in our UK business, which resulted in net long-term outflows of $6.9 billion. Excluding the single-client withdrawal, long-term net inflows would have totaled $6.2 billion across our global business.

Adjusted operating income was up 21.4% over the same quarter last year. And a continued focus on taking a disciplined approach to our business drove continued improvement in our operating margin to 41.8%, from 39.3% in the same quarter a year ago, an increase of 2.5 percentage points. Assets under management rose to $802 billion during the quarter, up from $787 billion in the prior quarter.

Operating income was $377 million versus $363 million in the prior quarter. Earnings per share were $0.65, up from $0.60 in the prior quarter. The quarterly dividend remained $0.25 per share, up 11% from 2013. And we repurchased $50 million in common stock during the quarter.

Before Loren goes into details on the financials, let me take a moment to review the investment performance and some business highlights. I'm on slide 6 now.

Investment performance during the quarter was strong across all time periods. 80% of assets were ahead of peers on a three- and five-year basis, and 72% of assets were ahead of peers on a one-year basis. As you might expect with numbers like these, long-term performance for our investment team across the enterprise was quite strong, with a number of capabilities achieving top [quartile] performance.

Turning to flows, on page 7 you'll see gross sales remained strong during the quarter, although down from an exceptionally strong first quarter. As we mentioned on our last call, there was an exceptional single-client withdrawal in our UK business at $13.1 billion early in the second quarter, which resulted in long-term net outflows of $6.9 billion. Without this withdrawal, total long-term net inflows would have been $6.2 billion. These numbers also reflect the broad diversity of flows we saw across our global business during the quarter, which includes strength in real estate, fixed income, European equities, Asian equities and others.

Gross sales in our retail channel were also strong during the second quarter, although off slightly from the exceptional first quarter. Continued strength in our European cross-border retail product range and solid gross sales across our business helped offset the previously-disclosed single-client withdrawal we experienced in the UK. The institutional channel saw continued demand for real estate, and Asian equities across the globe drove positive flows during the quarter.

Overall, sales during the period were typical for the second quarter, and reduced redemptions led to long-term inflows of $1.3 billion. The institutional pipeline of won-but-not-funded mandates continues to be strong, principally in alternatives, real estate, bank loans and non-US active equities.

Let me take a moment to highlight our global business, which you'll find on slide 9. In the Americas, US flows were driven by international growth in US value equities, high-yield munies and UITs. And the redemption rate was 22% versus the industry average of 27%.

US retail gross sales were up 29% over the trailing 12 months in 2014 versus the same period in 2013. And there was a 65% increase in the number of mutual funds and ETFs, with more than $100 million of inflows. The client-focused effort on IBRA flows in top-quartile investment performance in the US drove down redemptions and further eased outflows, from $526 million in January to outflows of $72 million in June.

In Asia-Pacific, we saw continued strong gross and net inflows, with the exception of increased redemption in Chinese active equities, where we saw some profit-taking after the very strong results a year ago. The Shinko US REIT and the Australian Bond Fund both enjoyed continued strong inflows. We also saw good flows in Asia-Pacific institutional.

Our EMEA business continued to become more diversified, with significant flows in fixed income, non-US equities and our multi-asset capability, all driven by very strong investment performance. UK retail gross flows were higher year to date than the prior year, and flows into the cross-border business were significantly ahead of last year.

Assets under management by our EMEA business totaled $176 billion, as you can see on slide 10. During the second quarter, net flows into EMEA, excluding UK equity income, were $300 million, which reflects the previously-disclosed single-client withdraw earlier in the quarter.

We're pleased to report that the client reaction to the departure news has been subdued, and we saw no spike in redemptions at the time of the competing fund launch in June. Given our efforts to thoughtfully manage the transition, assets in the two principal funds have fallen just 15% from the departure announcement in October of last year through the end of June. We expect future growth in EMEA to more than offset any potential outflows from the funds.

Mark Barnett and the team continued to deliver outstanding results for clients. As of mid-July, the two funds were 6th and 8th out of 265 funds in their sector over one year. Redemptions from Advisors, the largest component of assets in the funds, are returning to industry norms and have clearly not impacted fund performance. This is a good outcome, and we remain cautiously optimistic as clients are choosing to remain invested in the funds.

Meanwhile, 2014 gross sales across our broader UK retail franchise are at all-time high of $7.3 billion year to date 2014 versus $5.7 billion during the same period in 2013. We find these results encouraging, and we'll continue to do everything we can to deliver good outcomes for clients and grow the EMEA business.

Now I'd like to turn the call over to Loren for a review of the financials.

Thanks very much, Marty.

Quarter over quarter, total AUM increased $15.1 billion or 1.9%. And this was driven by other-than-market returns, an FX of $23.9 billion, and net inflows in money market funds of $1.1 billion. And these increases were offset by long-term outflows of $6.9 billion and $3 billion of outflows from the triple-Qs.

Our average AUM for the quarter was $790.1 billion, and that's up 1.3% versus the first-quarter average. Our net revenue yield came in at 45.6 basis points, which was flat quarter over quarter. The decline in performance fees from the first quarter reduced our revenue yield by 1.4 basis points. And this was entirely offset by increases in our effective fee rate as a result of improved mix, one extra day during the quarter,, and higher other revenues in 2Q.

Now, before we turn to operating results as we always do, just a quick peek into our current flow trends. As of yesterday, we had $2.3 billion in long-term net inflows across diversified geographies, and also diversified across our investment capabilities. The only caveat, obviously, is we're entering August; so there tends to be some seasonality. And also, obviously there's some market volatility. But we're off to a very nice start into Q3.

So now turning to our operating results, you'll see that our net revenues increased $13.2 million or 1.5% quarter over quarter to $901 million. That included positive FX impact of $6.6 million. And within net revenues, you'll see that our investment management fees grew by $65.5 million, or 6.6%, to $1.05 billion.

This somewhat exceptionally large increase was due to several factors. First, in April, aligned with evolving industry best practices, our UK business took the proactive step to introduce a single fund management fee for their retail funds in an effort to address complexity in overall fund fee structures. This single fee replaced the separate annual management fee and fund registration fee.

The result of this change was a shift -- and it was purely a shift -- of $29.6 million out of service and distribution revenues and into investment management fees. Excluding the impact of this shift, investment management fees would have increased $35.9 million, or 3.6%, which is consistent with our higher average AUM, an additional day during the quarter and, again, continued improvement in our effective fee rate. FX increased investment management fees by a $8.6 million.

Service and distribution revenues were down $23.9 million or 10%. As I just mentioned, the change in the fee structure in the UK resulted in a decline of $29.6 million. Excluding the impact of this shift, service and distribution fees would have increased $5.7 million or 2.4%. FX increased service and distribution revenues by $0.2 million.

Though in the quarter performance fees came in at $7.3 million, and that was a decrease of $22.5 million from Q1, foreign exchange had no impact on performance fees in the quarter. In terms of guidance going forward, Q3 tends to be a seasonal low point for performance fees, and we believe the range could be somewhere between $2 million and $5 million.

For Q4 of this year and beyond, the picture is somewhat less clear. There are certain real estate and other alternative funds and institutional accounts that could generate meaningful performance fees, but recognizing this revenue is limited by the potential for contingencies, such as clawbacks, per our accounting policy.

Other revenues in the second quarter came in at $38.9 million, and that was an increase of $3.2 million. Invesco launched, successfully, a Japanese REIT fund in June, which resulted in $6 million of transaction fees in the quarter. This $6 million in fees stopped being viewed as recurring; and as a result, the other revenues you should think should fall to the level of $33 million to $35 million in Q3.

Third-party distribution service and advisory expense, which we net against gross revenues, increased by $5.3 million or 1.3%. That is in line with our higher revenues derived from related retail AUM. FX increased these expenses by $2.9 million.

Moving on down the slide, you'll see that adjusted operating expenses at $524 million decreased by $0.8 million, or 0.2 %, relative to the first quarter. FX increased operating expenses by $3.1 million during the quarter.

Drilling down into expenses, on employee compensation, that came in at $344.6 million; that was a decrease of $8.5 million or 2.4%. The decrease in Q2 was a result of the normal reduction in payroll tax costs, which was partially offset by increased incentive compensation and a full quarter's worth of base salary increases that took effect on March 1. FX increased compensation by $2.1 million.

Looking forward, assuming flat ending AUM, we expect compensation to increase by approximately $5 million to $8 million in the third quarter, and then remain roughly flat into Q4. This change is consistent with the fact that our current AUM level is about 2% higher than the second-quarter average AUM level.

Marketing expense increased by $6.7 million, or 27.7%, to $30.9 million, as a result of advertising and client-related marketing in EMEA. FX increased these expenses by $0.2 million. We'd expect marketing expense to remain flat into Q3, and then increase somewhere up to $35 million in Q4 due to our continued focus on EMEA-specific marketing opportunities.

Property, office and technology expenses came in at $76.1 million in the second quarter, which was down $1.6 million. The decrease reflects lower rent and related costs due to vacating of leased properties in the first quarter. FX increased these expenses by $0.4 million.

Looking forward, we'd expect property, office and technology costs will increase to $80 million to $82 million per quarter for the remainder of the year. This increase is a result of continued technology investment, a doubling of space taken to accommodate the continued growth in our Hyderabad office and variable costs related to our elevated sales activity in Europe.

General and administrative expenses came in at $72.4 million; that's up $2.6 million or 3.7%. The increase was due to greater legal training and other professional services costs incurred during the quarter. FX increased G&A by $0.4 million. We'd expect G&A to remain around $73 million to $75 million as we continue to launch new products and pursue business growth initiatives.

Continuing on down the page, you'll see that nonoperating income increased $12.9 million compared to the first quarter. The increase was primarily driven by realized gains on fee capital investments of $5.7 million. And we also had $4.7 million gain from the liquidation of a CLO in the quarter.

The Firm's effective tax rate on pre-adjusted net income in Q2 was 26.5%. Looking forward, we expect the effective tax rate to remain between 26% to 27%, which brings us to our adjusted EPS of $0.65, and our adjusted net operating margin of 41.8%.

And with that, I will now turn things back over to Marty.

All right, thanks very much.

Operator, can we go to questions, please?

(Operator Instructions)

Daniel Fannon, Jefferies.

Good morning. Just on the Perpetual products and, more, the equity income funds. You highlighted no spike in redemptions. Can you talk about the gross sales dynamic in those products, pre and post the competing launch?

Then, the outlook -- I think you said you're having the highest gross sales all-time in EMEA? Can you just talk about what the top fund -- the top sales or funds that are driving those sales, as well?

Yes, good. So let me start and clarify, Dan. Greg's pointing out was, gross sales in the UK are at an all-time high. So you compare gross sales this year to date as compared to last year, year to date -- let me pull the numbers again. It was -- as I'm paging through -- it was -- sorry, Dan. There. So year to date, gross sales in the UK were $7.3 billion versus $5.7 billion a year ago.

So the uptake has been a real broadening of gross sales into the UK business. That includes European equities, global equities, Asian equities, the multi-asset strategies, and just fixed income continues to be very strong, literally across the board. And if you look at the investment performance, asset class by asset class, it's just incredibly strong.

And so the point that we're trying to make is, the business has never been stronger. Yes, there's been a transition to Mark, who's also put up some -- and team -- some really good numbers, but that is the main message there.

I don't have specific gross flows of the UK equity income products, but what I can say is the redemptions are back to industry norms. And typically, when you go to changes like that, you start by being put on hold, and some of the holds are being taken off and so you're starting to see gross sales pick up also. So it's really -- again, in the context of an important change, the business has never been stronger.

Great. And then, Loren, just to clarify the comment around the fee change in the UK, with regard to management fees and the impact on sales and distribution fees. Is that ongoing when we think about the economics today, and that impact is the run rate from here?

Yes, Dan. It's purely a shift. It has nothing to do with RDR. It's really just the shift that is one time. And then forward going, it will continue on that same track.

And any change in client behavior as a result of that shift?

No, I think we've gotten very good praise from the industry, from regulators and others who care about this. So, so far it's been well-received, and I think we are out in front of many others in the industry first with this. We'll see how others follow.

Great, thank you.

Chris Harris, Wells Fargo.

Thanks, good morning, guys.

Good morning, Chris.

Quick one on Perpetual. I know we've talked about the outflows for Woodford for some time now, and it's definitely good news that there's been no spike since he's launched the competing fund. But it doesn't appear to me that the outflows are slowing that material there either. So just wondered if you could confirm if that's accurate, number one.

Then, number two, do you think you have any sort of visibility on when those might decelerate in a more significant degree? I know it's hard, but maybe just in any of your discussions with the clients, or what have you, that might give you a little bit of comfort or color about the trajectory of that?

Chris, I think what you're seeing is, there's still some smaller platforms that are making smaller moves, so a much smaller level of magnitude relative to what you saw with the SJP. And that's really what you're seeing currently. And that will probably persist somewhere between now and the end of the year, quite honestly.

We do think X those little smaller platform positions, that the overall trend in the core retail advisor-led book of business is definitely stabilizing. But we're definitely looking to increase our advertising in Q4, and marketing. So we're not being complacent around everything's fine still. There's still work that we think should be done. But factually, we've not seen big spikes, and it seems more of a business-as-usual position in the UK than anything else.

That's definitely good news. Okay, real quick follow-up then on the margin. Very specific guidance you've given us. But just more broad, big-picture question. Incredible improvement in the margin, and you guys are exceeding what you had said you'd do there. I know some of that is market-related. But as you sit here today, where do you really think this number can go? Do you think there is a lot more room to run on your operating margin?

I think, Chris, as we said in the past, it will have a lot to do with what sort of market environment we're in, and what sort of help we're going to get from equities versus fixed income-led type of environment. We have and can and will grow under flat markets. We have very good product that will be very much in demand under volatile-type market environment. We think that when equity markets are stronger, however, we actually will fair even better, generally.

So, our incremental margin is probably going to be higher when you're in an equity-led market than otherwise. But with that said, we're still in that range of 55% incremental margin, 60% incremental margin, which should help us continue to drive the margin upward over time. So there isn't anything structural that would prevent our margins from continuing to expand as you're seeing them do right now.

Excellent. Thank you very much.

Bill Katz, Citigroup.

Okay, thanks very much. Just to follow up on that thread of question, just to work it the other way. Given the triangular margin and the good performance of the platform in what appears to be overcoming the Woodford attrition nicely, why not step up the spending earlier to really capitalize on the positioning of the platform, and maybe trade a little unit growth for margin?

I'm surprised you asked that question, Bill. (laughter) The fundamental fact is, what you're seeing with margin expansion, what is going along with it is strong re-investment in the business right now. We've continued to do it, but we're getting margin expansion while we invest in the business.

The areas that we've talked about over time, right, continental Europe was a focus, and you can see things coming from that. Fixed income has been a focus. You can see the investment performance and fixed income is very strong right now. That was another area that we think will follow by flows.

Also very important to us is the alternative platform, which has been -- really, we think it's a core strength of the organization. And we've been expanding that and taking it globally. And so we're trying to be very thoughtful in our expansion, investing while at the same time generating the returns that you would expect of us as good stewards. So I appreciate the thought, but we are very much investing.

Got you.

I can confirm that.

Okay. That was more of a devil's advocate question. The second question I have is, when you look in Europe -- and maybe I did the math a little too quick this morning -- I think it was about 30% annualized rate of growth in new business. What is it that's driving it? Is it just a further market share opportunity, broader geography reach, but a distribution accommodation thereof? What are some of the key drivers to that solid growth?

Yes, so again, Bill, it's one of those overnight successes that we started four years ago. It was across the board, and we should go back a few years to look at it. So redoing the servicing platform, which was fundamental. Re-aligning the product line-up -- and if you look at it right now, it's a very robust product line-up, with the investment performance being extremely strong across the asset classes there.

With, frankly, a strategy that you would hope very concentrated on those areas that we think we can make a difference in sales and sales execution, and taking care of clients. And that's what you're seeing happening.

I think, importantly, if you look at the flows there going into -- if you want to call it core asset classes -- which, years gone by, it was much more smaller asset classes. So again, we just feel the robustness of where we are, and the future opportunity is very strong for us on the Continent. So we don't think we're done.

And just one last one. Thanks for taking my questions, Marty. When you think about money market reform, a couple of your peers have commented on what the implications might be. It's obviously early days. Just based on your mix, how do you see any impact on the business, and what are you hearing from clients?

Good question. It's hard to believe what started 2008 is finally coming to an end. I'd say, again, put on your analyst hat -- in the worst case, if all our prime went away, it's what, Loren, a little --

About $30 billion AUM -- 11 basis points.

11 basis points. So it's not a huge financial impact. But let me -- but here's the reality. We don't think that's going to happen to us. If you look at the suite of money fund capabilities we have, they're very competitive. We think we're going to do really very fine in it.

Again, I think we'll be positioned very strongly in the changes as they come through. And clients are still trying to -- look, it's not a new story, so clients have been getting their heads around this potential outcome probably for 24 months, I'd say, already.

So we've created other products that would be nice alternatives to the prime fund option, which we think would capture a significant amount of people who want to find something of a similar natural. We obviously have a government fund where people might go to initially. So in terms of the loss of the full $30 billion, I think that is the very tail of risk to the business.

Okay. Thanks for taking my questions, guys.

Thanks, Bill.

Michael Kim, Sandler O'Neill & Partners.

Good morning. So first, just in terms of flows, Loren, you touched on this a bit earlier. But just looking ahead, do you feel like you really need a sustained favorable market backdrop to really drive organic growth to the next level, if you will? Understanding that there are still areas of the business that can continue to grow, even assuming the markets remain somewhat choppy?

I think we have close to -- was it 48% of our assets? -- something around there, in equities. So the reality is, for us to be able to grow our AUM as a percentage, so again a growth rate, equities need to somehow be playing a role there. Otherwise we can grow, and we have certainly a huge diversification across other asset classes that would be in demand when we weren't -- or not in an equity-led market.

We do think, overall, our ability to get organic growth to the highest level would probably be under an equity-led market. But again, it's all relative, right, to peers and competitors. So we still think we should and we obviously aspire to do better than our competitors under all markets, in terms of being able to grow.

I'd probably add to that, Michael. At the launch -- it's factually correct, and you saw that happen this quarter where it was less an equity-led market this past quarter. And we still did quite well.

But back to the point I made earlier, I think if you were looking out a couple years, you'd have to expect some volatility. You'd have to expect rates to go up at some point, and a pullback in the equity markets. And so, that gets back to this point of we thought it really important to have a broad suite of alternative capabilities that were in place for those types of markets, focused much more on outcomes for clients.

So again, I think the diversity of the business and the strength of the alternative capabilities, along with fixed income and equities, has put us in a very unique position, regardless of the market.

Got it. That's helpful. And then, just on the capital management front. Continued to repurchase shares, cash continues to build. So just curious to get your thoughts on the regulatory front across regions and how that may be playing into your capital management thinking, if at all.

I think we're -- it's just business as usual on the capital management front right now. We are obviously keenly observant and listening to and observing what's going on, on the regulatory front, as you said. There isn't anything imminent that we're seeing that is going to affect our business-as-usual approach. But it is something that we are smartly watching. Marty, I don't know if you have any further color on that?

Yes, I agree with that. So we're on our stated capital policies that we have been on, but I think it would be unwise to ignore the regulatory focus. And we are very engaged in it, and trying to understand what's possible. But again, we're still heading down the path we've been on, at the moment.

Great. Thanks for taking my questions.

Glenn Schorr, ISI.

Hi, thanks a lot. On the alt front, we talked -- to dance around that a little bit -- so I'm wanting to do two things. One; is talk about the new product launches that happened over the last two quarters, particularly on the liquid alt front, just talk about performance, talk about what you've been able to muster up in terms of sales.

Then, two, at a broader level, performance, at least on what we can see on the equity side of alt, isn't where you want it to be. Just talk through what particular you see the most positive outlook on the alt front.

Sure. So let me just start. It has been, as you point out, the end of last year, first part of this year, so introduction of, really, suite of alts, more broadly. Not just in the US, but in the UK and on the offshore range also. Our view is, as we said in the past, when you introduce capabilities, you have to think that it's a three-year outlook. And if it happens before that, you're quite fortunate. But that's been our framework.

That said, if you look at the teams, these are teams that have been managing close to the same strategies for a very long time institutionally, with some very good track records. That's a very helpful element, too. And some of them are extensions of what's been done in the past, whether it be around IBRA and different extensions there. So that's helpful.

I'd say, the shorter-term opportunity probably looks more with the GTR capability -- global total return capability -- that's getting some traction. But again, I'd say early days, it will be -- the first launch in the UK was temporary a year ago. So you're coming up on one year. Performance is very strong. And it's that type of product that people are looking at, is more a -- less volatile targeted return.

I think we have about $1 billion in that capability.

$1 billion so far. So again, our view is -- it's a three-year view. And we'll have some likely positive surprises within that period, but it's hard to identify them.

And we're also having great -- I would say success, but early success, with our long-short capability, which, performance is very strong. So there may be -- something we'll see, but these are all small products right now. It takes a while.

Then on your question on the equity side of alt, I'm not sure exactly what you're referring to, Glenn. But when you look at our (multiple speakers) performance, I think you may be looking at the REITs more than -- and an equity part. And then -- can you just clarify what you're talking about, Glenn?

Sure. Just slide 18. It just shows those little ring charts on first-line of assets in the top half versus bottom half.

So you'd said alts or you'd said core?

Alternatives.

Okay. Yes, so that is dominated by -- because alternatives -- the way we capture this information for performance is when you have publicly available peers that we can compare to. And so the vast majority of our alternatives don't have publicly available peers that we can talk about relative ranking. This one slide is really being dominated by the REITs that are publicly traded, so it's not really an equity.

It has to be -- it has everything to do with way we manage that REIT product; it's very conservatively managed. It's in a strong positive [fall] -- it has been -- I mean, we're generating billions of interest in that product. So it hasn't affected the demand for the product. So it's a little misleading, I think, when you look at that slide and you broadly brush alternatives in terms of the performance.

Okay, last quickie, if I could. It's good to see the buyback and the share count down 3% year on year. And I know you guys are planning conservative, but you've got a lot of cash. You keep making more every quarter, and the stock is cheap. I'm just curious on your thoughts on just increasing the pace at some point. Meaning, if things are going well, and you're producing a lot of cash flow and the stock is cheap, if not now, when, is the question I get?

I think we've been of the mind that being opportunistic when we think about buybacks, and we continue to do so. We've also seen rushing in and doing big buybacks can often lead to poor choices around the timing of markets. So the consistency of averaging it through over periods of time has generally seemed to work better than rapid step-ups. And so we have continued, in terms of aggregate amounts, to continue to buy back more of our stock. You should expect us to continue to do so.

But I think it is -- in terms of what we said earlier, our priorities have not shifted in terms of how we see the needs of our capital. And we continue to focus on re-investment of the business as our number one draw. And we have seen more recently some bigger needs around some seedings and co-investments as some of these alternative products have been getting off the ground.

And I would add the other thing, which you would know very well. What -- two years ago, we made a permanent change to materially increase the dividend and make a permanent commitment to paying back to shareholders. And so when we looked at it, it was the totality of giving back to shareholders and a much heavier emphasis on dividends. Not to say that we won't do stock buybacks -- we'll continue to do it. But I think that was another strong message we were trying to get across.

All fair. Thank you.

Thanks, Glenn.

Ken Worthington, JPMC.

Hi, thank you. So Marty, I think you undersold us, so I'm going to give you another shot at it. So you've launched a host of new products in the US. The uptake of GTR has been excellent, even though it's a really young product. So how far along is the product in terms of getting on new channels in the UK and Europe?

It took in, I think, over $0.5 billion last quarter. So given the young age of the fund, why has it been so successful? Because it seems like the launch is doing even better than IBRA did, and IBRA had a peak that's $30 billion.

All right, Ken, well, thank you. You're correct. And so let me put it in more context. So the UK is really starting -- again, that was the first launch last September. First of all, let me say this: across the board, performance is very strong. And on the back of what clients -- we came this way because we thought, in time, clients will be looking towards broadening how they build their portfolios, and this will be another important part in it. I'd say we're really early days in that development.

That said, flows are starting to be really strong in the UK, as you point out. On the Continent, too, they're taken up much quicker than we thought they would. So again, as we look out at the next 12 months, we'd anticipate that would be another market where they would really probably do well.

I'd say, the team's reputation is more recognized in the UK and on the Continent, as you would expect, coming from the UK originally. So those would probably be the two early markets where you'd see continued expansion and acceleration of flows.

In the US, again, relatively early. There's quite a bit of interest. There's emerging -- as you would imagine -- institutional demand. And that could probably be the area and the space where it might pick up more rapidly than in the retail channel.

Again, I think it's a really attractive product with good performance. And again, you could do the extrapolation on an IBRA; I won't. But again, it's strong performing and we think it's a very big opportunity.

How far along is it, though, in terms of getting on platforms? Because new product -- is it half the way, is it all the way, is it 10% of the way?

I think in the US, it's on a lot of the platforms, it's on most of the platforms. But it has not yet been gatekeeper-approved, in terms of the models. So it is one of these things that -- just getting on the platform doesn't mean that it's going to be able to sell.

So it is one of those things that it's the first step of many to really have this product succeed in the US. But don't take this from saying -- I mean, we are definitely working it hard. We think it's a huge opportunity, both -- on a global basis.

Okay. And then, just second question. The income in high-income funds got downgraded after Neil's departure. Based on your experience, how long would it take for those funds to get back on the preferred list and recommended list if the performance remains?

I think those funds, under Mark more recently, were in redemptions. What do you think needs to change to actually push those products to actually generate net new flows? Is it as simple as just keeping the performance where it is?

Good question. So I don't have all the specifics on the radius, but you can -- look, you can read publicly, people are actually already considering already putting back on the buy list. As you said from the beginning, Mark is highly experienced; the team is highly experienced. Great track record. So I think the holes will probably dissipate more rapidly than you would expect in a different situation because of that.

So you're seeing fairly, in some instance. But let me put this in perspective, Ken. Those two funds were in net redemptions before Neil's announcement. And I think it's a really important point, because these funds, they are very large, they're very old. And when you look at the historical redemptions, because of the age of the holders, redemptions are a material thing each and every year.

So just to get into net flows, the level of sales that you have to meet because of the sheer size is material. If we moved back to the flow levels pre-announcement -- which we are getting close to -- that's not a horrible thing. Now, our goal is not just remain there; it's to get back into net flows. And we think in time, that will happen. So I think that's an important point to look at also.

If you look at -- I don't have the specific numbers -- but if you look at those two funds combined, they still represent -- I think it's -- they're in the top five of gross sales-selling funds in the UK today. So I think that's really the perspective. They're just very large and very old client base.

Again, we're moving into a very -- relatively very good spot at this stage of it. So long-winded, and hopefully that's helpful.

Okay, great. Thank you very much.

Chris Shutler, William Blair.

Good morning.

Hi, Chris.

Just a quick question on IBRA. So the performance there actually has turned around nicely so far this year. I just wanted to get your updated thoughts on the pipeline, both retail and institutional there.

So Chris, I think we're seeing redemption rates continue to drive lower on the IBRA product. I think it was on -- actually, as of July, on a global basis, I think the flows turned positive. So again, I think it's -- I hate to say it's a turnaround now and declaring it fully, but for certainly the performance on a two-year number, three-year track record, year to date, are in the top quartiles.

The product itself is becoming, I think, far more attractive again to clients who are looking for what it originally promised to give, which was balanced risk across different asset classes. I think sales are still lower than we've seen them in the past. Actually, that's correct on a global basis. But the flow picture has been improved, largely through -- and much lower redemption rates. So again, the goal is obviously to drive sales higher in that product over time, if we can.

Okay, got you. And then, a totally different question, bigger picture. With the PowerShares franchise, it's mainly a retail business today, I believe. So just curious to get your take on the ETF business of the institutional opportunity.

So for instance, UPS was recently in the news for putting a big portion of their DB plan in non-cap-weighted indices, which has a lot of what PowerShares does. But I believe they're mainly partnering directly with the index providers instead of using off-the-shelf products. So just want to get your take on institutional opportunity, in terms of alternative-weighted ETFs. Thanks.

We do think it's an opportunity. It's one of those areas that -- when I went through the litany a few minutes ago -- that I didn't address. But that's within it. It's been very successful for us. There are further opportunities, and really would be in the institutional market. And it's not been an area where we have historically focused. More recently we have headed down that path.

So we think not just in the US, but in a couple other important markets, we think that is an opportunity for us. So we think that will just continue to add to the ongoing success of PowerShares.

All right, thank you.

Eric Berg, RBC Capital Markets.

Thanks very much, and good morning. You indicated that of the 13 approximately $1 billion of withdrawals that took place in the UK related to St. James' Place, that just over half of it related to the equity income funds being managed by Neil Woodford and his team. What was the remainder?

So the other half -- I think there was about $5 billion in what -- I think it's called a distribution fund, which is some mix between equity income and our corporate bond offering. And the remainder is in global equities.

Okay. So just to provide a rough back-of-the-envelope reconciliation of where we are now relative to where we stand, how would those numbers go? And by that, I mean, start with how much money, please, Neil was managing at the time he announced his departure.

I realize he remained with the organization for many months before departing and ultimately starting at his new place. But if you could just really -- in synopsized form, start by telling us how much money he was managing in dollar terms, how much was lost to the institutional business -- I think it's close to all of it -- and where we stand of the remaining money, which is the retail side. Thank you.

Eric, I think, originally pre-announcement -- it was around $48 billion, was the amount. And it's currently at $37 billion, roughly. So we obviously had the big institutional redemption of $13.1 billion. I think in terms of the retail outflows, generally they've been somewhere around $0.5 billion to $1 billion a month, just normal. Which is -- again, a lot of that is consistent with what we've seen historically, so nothing different than what we've seen in the past.

So again, I think you could probably take that and do the math here, or -- someone is smartly doing it for me. We had $17.7 billion of outflow in the timeframe. And how much of that was retail versus institutional -- I think probably most of it is going to be institutional, largely.

So you started -- in short, Loren, you started with $48 billion.

Yes.

The redemptions have been $17 billion. That takes you down to -- so you wouldn't have, therefore, $37 billion. You'd have $48 billion minus $17 billion, or $31 billion. Is that correct?

You have market and FX that had helped offset that.

Okay. And of the $17 billion in redemptions, most of it has been institutional. But just to be clear, while you talk about redemptions returning to more normal industry levels in the equity income funds, are the -- I just want to clarify, sort of triple-check -- the funds are in net redemption modes still, but at a lower rate than they had been? Is that the point?

It's actually right. And they've been in net redemption since 2011. So just actually, again is -- as Marty said, it's part of the fabric of being the biggest in the industry. But I think, yes, they have returned to more normal levels.

There are still, as I think we may have mentioned slightly, some elevated levels that are through smaller platform outflows that could still occur. But not material in any sense of close to the magnitude of the St. James Place. And we believe, again broadly, in the context of EMEA business, that we can grow flows to more than offset that going forward.

Thank you. Very helpful.

Patrick Davitt, Autonomous.

Good morning. Thanks for taking the question. We've heard anecdotally that the marketing of PowerShares in the UK pre-Woodford was fairly low. And I can't remember if you confirmed or denied that. But can you talk about what is being done to improve the profile of that business there, particularly as it does look like the passive opportunity has gotten a little bit more interesting over the last year or so?

We actually had not been in the UK; the focus had been on the Continent for us. A number of years ago -- it's probably 2007 that we went to the ETF market. As you know, the market was very different than that of the United States, and has gone through tremendous change from derivatives-based ETFs to with the cash-based ETFs.

So we think there is quite a big opportunity within EMEA -- between the UK and Continental Europe, in particular. And that is -- back to one of the earlier questions, we see the institutional opportunity being one -- in the UK, in particular -- to be something very attractive. And smart beta, in particular, seems to be not just confined to ETFs, but institutional clients, as an opportunity that we think we should be successful in over time.

Do you think it's fair to say that the thinking around how much weight you want to put behind marketing PowerShares, specifically in the UK, has changed since the PM change? Or is that not the case?

No. Our effort has nothing to do with personnel changes. The strategic focus, again, originally focused on the Continent. We think one of the opportunities in the UK really has come -- is emerging because of RDR. The emergence of RDR actually, we think, is an added opportunity to the ETF market's smart beta, and also the institutional market. And the UK is, as you're obviously noting, is a very important, large ETF market that we have not historically participated in.

Great, all right. Thank you very much.

Sure.

Brian Bedell, Deutsche Bank.

Great, thanks. Good morning.

Good morning.

Pat actually asked my question on the PowerShares, but maybe just an extension of that. How should we think about timing? You are under-penetrated in that area, and the opportunity seems pretty compelling, like you said, Marty, especially post-RDR. Should we be thinking of that as a bigger effort over the next, I don't know, 12 to 18 months, with a potentially stronger ramp throughout that period? Or is this a much longer-term group growth?

I'm sorry. You're breaking up, so let me just confirm. The ETF opportunity -- what's the timing of it?

Yes, the pace of that, given it's been more of a newer effort, in terms of post-RDR, that is. So I'm trying to get the sense of timing now that we're through the RDR process.

You're exactly right. So I would be -- again, it's probably the next 12, 18 months that you'll start to see -- we're clarifying how we want to play, what we think the opportunity is. And again, you'll see what we choose to do over that period of time.

Okay, great. And shifting gears to the defined benefit market, just some color on -- obviously, you have a very good product set for the potential outflows, and active equity in the shift towards passive, and the increased bar-belling that we're seeing through some alpha products, and more liability-driven investing. Maybe just some color on how you're positioned there. Should we see potential increases in mandates for you on that side? Or do you view it as more of a balanced risk for your franchise overall?

Let me try to answer the question, if I understood it. So if you look at our capabilities, very much focused on active investing. And whether it be -- it went from alternatives through our historical capabilities, whether it be equity or fixed income, and broadening of the alternatives capabilities more broadly around the world, as we talked about.

Where we then see an opportunity for ourselves is the strength that we have with our quantitative teams and with PowerShares around where people are referring to smart beta and variations of that. And we think the combination of that range is very strong and competitive globally, but also within retail channels, as you're speaking of.

Okay. So on the defined benefit side, you feel that you can be a net winner over the next two to three years versus some other more plain active equity managers that are losing share to rebalancing?

No question.

Okay, great. And then, one quick one on the UK, and it has already -- to beat a dead horse on this. But I think just using -- looking at the math of the UK equity income product, it looks like you had $3.3 billion in outflows in the quarter. Just trying to get a sense of that trajectory over April, May and June, and whether that sounds like it's improving, that outflow place, into July?

So Brian, I think that's one that we're probably going to be somewhat better than at pace, we would hope. Again, it's not getting worse. We think it's one that's going to continue to improve through the course of the year. But again, it's a little hard to say with great certainty, because there are these smaller types of platforms that may make decisions along the way. And those can be $0.5 billion here or $0.25 billion there.

But overall, I think what you're saying, is that level and improving through the course of the year. And then probably by the end of the year, we'll have much better clarity in terms of just a -- all that will be more solid in terms of whether people are coming or going or leaving.

Okay. Super helpful. Thanks so much.

Gregory Warren, Morningstar.

Yes, good morning, guys. Thanks taking my questions.

Sure.

Just on Perpetual -- a housekeeping note. They were no non-compete agreements that we need to worry about, where six months or year from the road now that he'll go out and start booking more of your clients. Is that an issue for you?

That's a great -- I think what -- we're used to fighting on the retail battlefield, whatever. And so in terms of loss of clients -- and we compete with M&G, we compete with many others. So there's nothing that will prevent anybody or Neil's fund to take clients from us if they win them fair and square.

So I think it is one where we think that we're well-positioned to compete and we have significant marketing dollars and we have significant sales force strength and we have obviously a fantastic investment team that is tried and true. So we think that, that will win, and we don't necessarily have to worry about structural, legal non-competes or anything like that.

Okay. So basically, it's fair game right now then?

Fair game, yes.

Okay. And the other question I had is, it looks like your net revenue yield before performance fees, it came down -- or came up actually, pretty considerably, quarter over quarter. Was part of that the shift in the institutional, the outflows on the institutional side? It doesn't really seem -- I mean, equity AUM seems to be about the same level as it was in the first quarter. I'm just curious to know what caused that shift in the net revenue yield.

Yes, about 0.6 basis points was just due to day counts. So that's a normal second-quarter to first-quarter impact. But we definitely have a mixed benefit that is still driving forward. And it has more to do with geography than it does what type of asset class, as we continue to flow strongly with gross sales, record sales, outside the US. Which is where the fee rates tend to be higher, that is helping to drive our mix and our yields to higher levels.

Good, thanks. That explains that. Okay, thanks for taking my questions

Thank you.

Sure.

Brennan Hawken, UBS.

Thanks. All my questions have been asked at this point. Thanks.

Thanks, Brennan.

Robert Lee, KBW.

Thanks. Good morning, guys.

Hi, Robert.

I appreciate your patience with all the questions, and also, you may have touched on this earlier, but have been jumping around different earnings this morning. The only question I had was related to the PowerShares. Some of your competitors and whatnot out there have -- in the ETF business -- have been fairly loud or noisy or however you want to describe it, about why they would not do or don't think things like bank loans are appropriate for an ETF structure. And I know that's been a pretty successful product for you in PowerShares.

So to what extent do you see that as you're comfortable with some of the concerns that they raise? Or how do you view those -- how would I -- how should we put those comments into context?

Thanks for the question. So look, you would know -- and just everybody else -- we have a very strong bank loan team. They manage $30 billion in assets, more or less. They've been doing it for decades. We've actually have had an open-ended bank loan fund since the 1990s. It is something we are -- feel very comfortable managing. I think it is something that we're not concerned about.

Also when you look at the liquidity within the ETF, up to 20% of it is in very liquid assets, which would probably meet anybody's idea of redemption. On top of that, there is a line of credit if there were something beyond that. So the idea that this is much different than other open-ended funds, I think -- whether it be bank loans or high yield, or you could go to small-cap stocks, it is just part of what comes with managing various funds.

If you look at the sheer size of the market and the redemptions, it was less than 1% of the redemptions that you saw in the bank loan market during the period where there were some redemptions in bank loans. So again, I don't see it different than how we manage our business on a daily basis.

Great. That was it. That's all I have.

Good, thank you.

And so with that, I'm showing no further questions.

Well, thank you much for joining us, everybody. I appreciate the engagement and the questions, and we'll speak to you next quarter.

Thank you. And this does conclude today's conference. All parties may disconnect at this time.