景順投信 (IVZ) 2014 Q3 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry 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 believe, 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 or intended to identify forward-looking statements. Forward-looking statements are not guarantees and they involve risks, uncertainties and assumptions.

There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements, and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC's website at www.SEC.gov.

We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

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

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I'd like to turn the call over to the speaker for today, Mr. Martin L. Flanagan, President and CEO of Invesco and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thanks, very much, and thank you for joining us today. On the call with me is Loren Starr, Invesco's CFO, and we'll be speaking the presentation that's available on our website, if you're so inclined to follow.

Today, we'll provide a review of our business results for the third quarter. Loren will go into greater detail of the financial results, and then the two of us will open up to Q&A.

So let's begin by highlighting the firm's operating results for the third quarter, which you'll find on slide 3 of the presentation. Long-term investment performance remained strong across all time periods during the quarter.

81% of actively managed assets were ahead of peers on a three and five-year basis. Strong investment performance, combined with a comprehensive range of strategies and solutions we offer to help clients achieve their investment outcomes, contributed to net long-term inflows of $6 billion during the quarter.

Adjusted operating income was up 16.4% for the same quarter last year, and with a continued focus on taking a disciplined approach to our business, improved our operating margins to 41.8% from 40.2% in the same quarter a year ago, an increase of 1.6 percentage points.

Assets under management were $789.6 billion, down from $802.4 billion at the end of June, reflecting the late quarter volatility in the markets. At the same time, operating income rose to $382 million from $377 million in the prior quarter.

Earnings per share were $0.64 versus $0.65 in the prior quarter. The quarterly dividend remained at $0.25 per share, up 11% from 2013. We repurchased $50 million in common stock during the quarter.

Before Loren goes through the detail on the financials, let me take a moment to review the investment performance and highlights of the business around the world. I'm now on slide 6.

Investment performance during the quarter was strong for all time periods. 81% of the assets were ahead of peers on a three and five-year basis, and 76% of assets were ahead of peers over one year. It's also important to note that 52% of the assets were in the top third of peers on a three-year basis, and 65% of assets were in the top third over five years.

On page 7, to put this in historical context, I mentioned that investment performance is very strong today, and currently the percentage of assets under management rate of four and five star by Morningstar runs 70% for our US retail franchise, 96% for our retail funds in the UK, and 82% for our cross-border range. Importantly, in the US, 97% of all the assets are rated three stars or better. In the UK, 100% of the assets are rated three stars or better, and the cross border range, 94% of the assets are three stars or better.

Our tremendous focus on achieving investment excellence across the globe has produced consistently good long-term performance, and if you look back a decade, you've seen some dramatic improvements in some of the regions around the world.

Turning to flows on page 8, you'll see gross flows remain strong during the quarter and overall redemptions declined, leading to net long-term inflows of $6 billion. I want to point out this is also the strongest active organic growth rate we've seen since the first quarter of 2013, and these numbers reflect a broad diversity of flows across our global business during the quarter, particularly among our active strategies.

Gross flows in our retail institutional channels were strong during the third quarter, as we continue to deliver strong investment performance to our clients. The redemption picture improved significantly in the retail channel, and combined with strong gross flows growth, net long-term flow is substantially higher.

The institutional channel continued to map for real estate, bank loans, equities, and asset allocation capabilities across the globe, which drove positive flows during the quarter. Institutional redemptions were driven partly by the successful dispositional realizations within private equity or real estate. And the institutional pipeline of one, but not funded, mandate continues to look strong and, as importantly, is concentrated in real estate asset allocation, international equities, and alternative [fixing capabilities], so very broad there also.

Let me take a moment to highlight our global businesses, which you'll find beginning on slide 10. In the Americas, US net flows were $1.3 billion during the quarter, and were driven by international growth, US value equities, high-yield immunities, diversified dividends, and UITs.

The redemption rate of 20.6% in August was favorable to the industry average of 28.6%. US gross flows were up 9% from the prior quarter and we are working very diligently, as you would imagine, to build the awareness and shelf space for our liquid alternative capabilities, which are gaining traction amongst advisors and platforms.

As we've mentioned on previous calls, institutional flows into IBRA have remained positive driven by top [four] performance. And on the retail side, strong client engagement effort and the current market volatility are driving improved gross flows and reduction in redemptions. With the strong institutional flows and improving retail picture, we believe we'll see a positive -- return to positive total net flows in the US in the next two quarters.

In Asia Pacific, we saw continued strong gross in net flows during the quarter. Key drivers of the strong results include the Shinko US REIT and the Australian bond fund in Japan, cross border funds in greater China, and institutional flows [such as] real estate, agent equity, and Invesco quantitative strategies across the region.

Investment performance across EMEA remained strong during the quarter, and in some cases exceptional performance, as we discussed earlier. Mark Barnett and his team continue to turn in strong numbers for the high income and income funds, which ranked amongst the top 10 in their peer group with 262 funds year-to-date. As a result, outflows from the UK income are steadily returning some normal redemption rates, with $1.9 billion of net withdrawals during the quarter.

Our GTR fund also continued to see strong flows on the back of strong investment performance, crossing the $1 billion mark early in the quarter and reaching $1.2 billion by the end of the quarter. Strong investment performance and continued focus on meeting client needs contributes to strong EMEA long-term net flows, which were $3.3 billion for the quarter.

Assets under management by our EMEA business totaled $170 billion at the end of the third quarter, and as you can see on slide 12, during the quarter net flows into EMEA, excluding UK equity income, were $5.3 billion. Driven by strong investment performance, our wider UK retail business has continued to demonstrate strength, with an increase in gross flows year-over-year. The business has strong momentum and continues to become more diversified, with increased flows in global equities, European equities and multi-assets, to highlight a few.

Our retail clients and advisors in the region remain optimistic regarding the recent market volatility; activity, both gross flows and redemptions, declined for a couple of weeks but we've seen no particular impact on the net flows.

In general, what we've seen over the past few weeks of market volatility confirms our long-term business strategy. Invesco is one of the few investment management firms in the world that offers institutions and individual investors a comprehensive range of strategies and solutions that help them achieve their desired outcomes. We provide capabilities for all markets: bull markets, bear markets and markets that go sideways. And we're well-positioned to deliver for our clients competitively, regardless of which markets we see in the fourth quarter and beyond.

It's also a time where a number of our investment teams look for periods of market volatility, which creates valuation anomalies and opportunities, which they exploit for the benefit of our clients. Historically, it's these periods of increased market volatility that clients need the established capabilities of our experienced investment teams.

So with that, I'll stop here and turn it over to Loren.

Thanks very much, Marty.

Quarter over quarter, our total AUM decreased $12.8 billion or 1.6%, and that was driven by negative FX in market of $14.8 billion, outflows from money market, and the QQQs of $4 billion. These items were partially offset by positive long-term net flows of $6 billion.

Our average AUM for the quarter was $801.7 billion. That's up 1.5% versus the second quarter average. Our net revenue yield came in at 45.6 basis points flat versus Q2. The benefit of an extra day in Q3, and higher performance fees, was unfortunately equally offset by the decline in other revenues and the weakening of sterling versus US dollar.

Now I'm going to turn to the operating results. You'll see that our net revenues increased $12.7 million or 1.4% quarter-over-quarter to $913.7 million. That included a negative FX rate impact of $9.1 million.

Within the net revenue number you'll see that investment management fees grew by $16.5 million or 1.6% to $1.07 billion. This increase was due to higher average AUM, and the additional day in the third quarter compared to the second quarter. FX decreased investment management fees by $11.5 million.

Service and distribution revenues were up by $7.4 million or 3.4%, also in line with higher average AUM and the extra day, as well as the continued strength in our cross-border products sold in Europe. FX decreased service and distribution revenues by $0.1 million.

Performance fees came in at $10.3 million, an increase of $3 million from Q2. This is about $5 million more than we had expected, based on the guidance we provided in Q2. Performance fees were earned from a variety of areas including UK, bank loans, and quant equity.

Foreign exchange decreased performance fees by $0.2 million. And as I've said in the past, performance fees continue to be one of the more difficult line items for us to predict with great accuracy.

Other revenues in the third quarter came in at $34.5 million, a decrease of $4.4 million, resulting from the lower level of real estate transaction fees. As you'll remember, we generated $6 million in nonrecurring transaction fees in Q2 as a result of our Japanese REIT launch.

Third-party distribution service and advisory expense, which we net against gross revenues, increased by $9.8 million or 2.4%. This was in line with higher revenues derived from our related retail AUM, and one extra day in the quarter. FX decreased these expenses by $0.2 million.

Moving on down the slide, you'll see that adjusted operating expenses at $531.8 million grew by $7.8 million or 1.5% relative to the second quarter. FX decreased operating expenses by $4.8 million during the quarter.

Employee compensation at $349.5 million increased by $4.9 million or 1.4%, and this was a result of increased headcount and variable compensation quarter-over-quarter. FX decreased compensation by $3.2 million.

Marketing expense decreased by $3.5 million or 11.3% to $27.4 million. Advertising costs came in a little lower than we expected in the quarter. FX decreased these expenses by $0.3 million.

Property, office and technology expense came in at $77.3 million in the quarter, which was up $1.2 million. This was about $3 million lighter than we had previously guided. The increase reflects the higher outsourced administration costs in EMEA, and FX decreased these expenses by $0.6 million.

G&A expenses came in at $77.6 million. That's up $5.2 million or 7.2%. This increase was due to professional service fees driven by ongoing technology platform investments, as well as an increase in indirect taxes; about $2 million of the increase should not recur in Q4. FX decreased G&A by $0.7 million.

Going on further down the slide, you'll see that nonoperating income decreased $10.5 million compared to the second quarter. The decrease was primarily driven by lower realized gains on seed capital investments in Q3, and the liquidation of a CLO that occurred in Q2. The [firm's] effective tax rate on a pretax adjusted net income basis in Q3 was 26.6%. Looking forward, we'd expect the effective tax rate to remain between 26% to 27%, which then brings us to our adjusted EPS of $0.64 and our adjusted net operating margin of 41.8%.

Now before turning things back over to Marty, I'd like to just touch on the impact of the market and FX volatility on our earnings outlook. In periods of uncertainty, such as this, which we have seen before, we will try to manage our level of spend as best as we can without sacrificing strategically important investments. However, we simply can't adjust expenses down as quickly as revenues in the declining market.

We expect to remain focused on prioritizing our most important initiatives, and that we'll diligently manage our discretionary expense in this quarter. Given that the markets have made our AUM a bit of a moving target, we don't believe it's very productive to provide explicit line item guidance in Q4. Understanding, however, that we are committed to doing what we can without compromising our most important strategic opportunities.

With that, I'll turn things back to Marty.

Thanks, Loren. So, I'm happy to open it up to Q&A.

Thank you.

(Operator Instructions)

Michael Carrier, Bank of America Merrill Lynch.

Thanks, guys.

Hey, Loren, first question, just on the expenses you were just going over. When we think about the areas that you do have some flexibility, so whether it's on the marketing side or the G&A. Maybe just remind or is there -- when you think about how many variability you do have if the environment does get, and not talking about the fourth quarter, but just meaning over the next year or so. If you get into a tougher environment, how much can you pull back versus what you would view as longer-term new investments?

So then, Michael. I mean we have, some of our expenses are somewhat fixed in nature. Whether it's advertised, deferred compensation or related to rent, we clearly can move on some of those items over time. I think in terms of near-term ability, it's going to be around the discretionary expenses. Marketing is also a lever that we can and will look at depending on the environment that we're in where strong levels of advertising may not make as much sense in markets that are somewhat negative.

So certainly that level of $35 million, which I think we had originally guided in Q4, may be somewhat lower if we're successful in Q4. But ultimately, we have more opportunity to affect 2015 then we do the fourth quarter because a lot of this spend is effectively committed within the quarter. It is really at that point that we certainly do what we can within the quarter to manage, but some of it is going to be locked in.

Okay, that's helpful. And Marty, on the flow picture, when we look at the industry trends right now things are pretty muted. You guys have put up a result and whether it's on the European side which is across class and these things you continue to do relatively well.

Just where are you seeing some of that demand and particularly maybe in the September, October, because obviously, things got a little bit more rocky in the environment. But it seems like the strength continued, particularly relative to the industry. Any insight? And that could be on the retail side or the institutional.

Yes. It's a good question.

And what I would say, really too early to tell definitively what's going to have -- what are going to be the reactions. I think we're probably in a transitional period right now where whether it's institutional or retail, our investors are assessing. I think their first move, which we all saw in their early public numbers coming out in retail was, you saw outflows and the first move is to do nothing, right? And I think that's really what you saw a number of people do in the United States in particular. But, people will assess, get some sense of looking forward and have some judgment.

From our point of view, what we think is ultimately good things for our clients and opportunity for the firm is that volatility is a part of market and having things like alternatives in your portfolio, liquid alternatives in particular, is something that's going to be here for a long time.

And we're seeing it just with IBRA by year. IBRA has been, institutions have continued to commit to IBRA. But your seeing, really with these volatile markets, opportunities for IBRA, the GTR fund for us, so we think it's really the broadening of the asset classes that will be the opportunity as we look forward.

Okay. Thanks a lot, guys.

Yes.

Michael Kim, Sandler O'Neil.

Hello, guys. Good morning.

First, maybe a bit of a more bigger picture question. I know it's not necessarily a big piece of your overall asset base but just wondering how your bond funds here in the US, in particular, might be positioned? Assuming we see some sort of dislocation in the credit markets.

Just curious to get your take on liquidity concerns across the industry and how you think about your funds, assuming a potential downturn?

So, let me start at the highest level. If you look at the performance across our fixed income platform, it's very strong. Which is a good place to start.

With regard to what people do, and I think what you're suggesting is when people start to move from redeem from fixed income capabilities, what's the liquidity impact? And it is a topic everybody's focused on.

From our point of view, we feel like we're positioned very well. It's something that we look at. I mean, obviously, our portfolio managers deal with this every day and after a very long period of time. And in those products where we think that your liquidity could be more challenged, there is a greater cash capability -- greater cash levels in those funds.

There's also liquidity elements that they have layered on top of it. So we think we're positioned very well for it. We're aware of the topic but we think we're managing it very well and don't have a very large concern about it.

Okay. And then, if you could talk a bit more about product development these days, particularly as it relates to more solutions oriented strategies and other products that might match up with some of the prevailing demand trends that you just mentioned earlier?

So look. I think we could be better positioned right now. If you look at the range of capabilities that we have from one end, Smart Beta. We think Smart Beta is continuing to be an important part of portfolios that are put together. Then, if you look at the active range of capabilities we have, from the traditional long only to maybe more traditional alternatives, let's say private equity and real estate, it's really the suite of liquid alternatives that we introduce very broadly last year that put us in a very unique position.

We think the combination of our active strategies all the way through alternatives and Smart Beta, there is very little that we can't address in meeting clients needs and also with our solutions group with the larger institutions, you can have that broader range of conversations. Understand what are they trying to achieve and what are the different combinations of investment capabilities that you could put together to meet those needs. We really think we're positioned very well.

In one level though, to be clear, I do think we're frankly, ahead of the market at the retail market with the range of alternative capabilities that we've had. People are very focused on it, but quite frankly, the uptake on the distribution platforms is probably slower then we would have thought. And it's just been getting their hands around their internal things that they need to work through. But we think it's a very important opportunity for us and for our clients.

Got it. Thanks for taking my questions.

Dan Fannon, Jefferies.

Thanks. I guess, Loren, understanding that the market volatility and it's difficult to forecast the next quarter out, but just wanted to talk about the fee rate and the products that are selling and where you're seeing the flows? If we can still see that fee rate grind higher? Currency X market based on the gross sales, gross redemption trends you're seeing and then that corresponding impact flowing through margins?

Yes. Thanks for asking the question, Dan.

Absolutely, we had a headwind with FX working against us. If it stabilizes then we enter a period where we don't have that particular impact. We should continue to see our fee rate climb from where it is today as the flows, as you're seeing, continue to be quite strong through the cross-border product line. Which, as you know, tend to have a higher fee rate. Certainly, in some of these alternative products as they take and get more traction, have a higher fee rate. So we do feel that the trend is still very much in our favor. See fee rates climb going forward absent any further continued strengthening of the dollar versus other currencies.

Great. Marty, when you talk about asset allocation and the demand there, can you specifically talk about is that including IBRA or is that the separate products? And then, can you talk about where that demand is coming from the end clients?

Yes. Good question.

Again, these definitional problems. We would include IBRA in that. We would include things like global total return capabilities. There is versions of IBRA there. It is really that suite that we had brought to market. Where we are seeing demand, if you start with GTR, that was probably the next introduction after IBRA and it's really only been in the market from a year ago September, in the UK it's over $1.2 billion. That's pretty good for a very short uptake.

The interest that we're seeing institutionally and also frankly, in the retail market in the US, of GTR is really very strong. And the same thing on the continent. It's trailing the UK just because that was our launch, our initial launch. We think that's probably going to be another natural one.

Again, it's really what you're seeing now with the advisors on the retail side is they are looking to build broader portfolios and they are interested in having lower volatility type elements within their bill assessment. The question earlier that, it is also looked at as an alternative to some of the fixed income from a stability point of view within the portfolios.

Institutionally, again, it just continues to be an area that a number of the institutions are looking to expand. It's early days for us, but again, the depth of our capability and the performance out of the box has been very strong. Now, it's a long-term gain but it's always nice to start with the performance.

Great. Thank you.

Ken Worthington, JPMorgan.

Hi. Good morning.

On real estate, real estate continues to be on fire for Invesco. It is cyclical based on the way you calculate your sales when you get transaction and performance fees. We seem to be in the strong sales portion of the Invesco real estate cycle, so are we getting late in that part of the cycle? And is the next step elevated performance fees, given your mix of US core and international?

Hi, Ken. I'll try to answer that question.

I think we saw and we have seen a lot of good transaction fees coming through the funds, being able to sell their holdings at a good price. That's been helpful even though that's been somewhat of an outflow any time something gets sold. We're seeing the pipeline, as Marty mentioned, it's just the pipeline is now really beginning to climb again. So I think we are entering a sales cycle where that pipeline is going to begin to fill up with more won but not yet funded type of activity. Which again, don't translate into assets until new things start funding.

I think we're very much into a building up AUM as we start into a buying phase as opposed to a selling phase. That is going to continue to progress. I think with the realizations that I mentioned, yes, absolutely. The idea that we're going to begin to be able to realize performance fees in the real estate area is something that I think we talked about in the past and we certainly have expectations that we're going to see some of that roll through. Specifically around the timing, as I mentioned, it's a little problematic for us to figure out exactly what quarter they're going to occur. But we know that they're done a great job in terms of performance and so there is a lot of built-up performance fees in the real estate pools.

Thank you.

And then, can you talk a little bit about the investing environment in Europe and the UK, given changes in the economic outlook for both? You had a really strong third quarter. The outlook in those regions seems to have weakened economically.

What does this mean for Invesco in terms of sales and investor appetite and are you in the right distribution channels with the right products to weather any change, persistent change in environment if the current chopping market conditions continue?

Ken, let me pick it up on start maybe on the comments. Europe has been a topic. We started the conversation three or four years ago of the opportunity there and it's starting to become realized over the last year and a half.

We still believe we're relatively early stages of success on the continent. With all the progress we've made, there's more progress to be made and it's really, we're not on all the platforms that we want to be on. We are getting on more and more of them. We have good reason to believe that we'll continue to expand the breadth of platforms.

As I pointed out, the performance in that cross border range is very strong and very broad so it's very attractive to distribution platforms. Just our ability to help our distribution partners be successful is also in place too. I look at it as a continuing growing opportunity for us.

With regard to what might happen with investor appetite, I think if you asked me a couple of years ago when we thought the EU was discussions of it breaking up, I would never have thought we would have seen the client demand for investment products as we saw. It's really been a surprise and continues to be.

But they look to funds as the way to invest and save and they feel that really solid and thoughtful way to look after themselves. Which frankly, we think it is too.

Again, I come back to the range of capabilities to as demand moves, we do think we have the capabilities to give clients the alternatives. If they want to get out of European equities they can look at things like GTR, they could look at things like IBRA, the fixed income capabilities is very strong and in fact, there's flows there.

We think we're really well placed and just in the UK, again, we're an absent top firm there and performance just continues to just be very strong. So we're everywhere we need to be in the UK and we're very well positioned there ourselves. We look at it as continued strength in the UK and growing opportunities on the continent.

And maybe, Ken, I'll just pile on a little bit. We saw in EMEA, generally, still good strong flows in the quarter. As you can see through our roll forward, a lot of products contributing the full range, actually, balanced product, equity product and European equity was also strong even though maybe others in the industry didn't see quite as much strength. We continue to see strength there.

Real estate, fixed income, corporate bond, Euro corporate bond, all doing well and through even October. That cross border and EMEA is a strong good positive flow.

We think that is a continued opportunity for us that may slow down a little bit relative to what we've seen in the past just as people are trying to figure out what to do given the market environment. But we have such a great range of product at such high performance levels that we think we are going to be able to continue to sell through all types of whatever the market throws at us. I think we're going to probably still do pretty well there.

Great. Thank you, very much.

Bill Katz, Citigroup.

Okay. Thanks very much. First big picture question, you seem to have a lot of momentum across products and geographies and distribution channels. And maybe its too pointed a question, but I'm sort of curious, is there something structurally going on that you're starting to see the unit growth coming in terms of net flows? Is it market share gains? You mentioned, Marty, maybe some more distribution channels, but why? I know it's been a five year in the making, but specifically, what seems to be the linchpin now that's really reflecting the flows?

Where in particular, Bill?

I think Europe and Asia, in particular, seem to be quite strong looking at your data.

I think you're really hitting on the real point. There is no one thing. It really has been a number of years in the making and it is a combination of, again, the range of capabilities are attractive, the performance is consistently strong, along with the business support that we can help our institutional clients be more successful or our distribution partners on the retail side.

I wish I could tell you what the one thing is, but it's just many things and but to be more specific, what does it mean? If you look at all of our institutional ratings, there are many and they're strong. If you look at the number of platforms drawn around the world, they continue to grow.

The UK has always been strong, right? It's really the continent and the other parts of Asia joining the US, which we've been talking about for a number of years, and so it's really the US, Europe and Asia continuing to strengthen.

Okay. The second question dealing with [pack fill]. Just curious, in the UK now Europe has two dynamics underway. Some of it underway and some of it still to come between two of the shift of RDR as well as the Mitra 2, some consternation about how to treat equity research.

How do you think that might impact your business? Because some of your peers, the stock price have come in a fair amount. I think investors have been worried about that and given you're a pretty big player in the UK, just trying to see what the economic impact might be to you on a go forward basis.

So with regard to RDR, it's still early days. But I think what we have said as we were imagining what RDR would be in practice, that we would say we're -- we thought we'd be well placed and we are. And it's really, again, it's the recognition of the organization and just the depth of capabilities. So, we're doing just fine within the RDR world.

Now, is it meeting the expectations of the policymakers? That's probably a different topic. I don't believe that the cost of going down through the investors and actually, good point too, it's probably gone up. I don't think that was part of the plan.

So with regard to the topic with regard to research, I know everybody's very focused on it and I think the conversations that I'm aware of and that the undertakings is that there is now quite a thought of do no harm to the capital markets.

The unintended consequences of trying to take pieces and modify them I think has become front of lines of the regulators. And I think where you'll probably end up is much more and greater disclosure and therefore, the and investors. And again, we'll see it's going to take some time. I think that's probably where we'll probably end up.

Brennan Hawken, UBS.

Good morning. Thanks.

You gave a lot of color on EMEA and the flows and thanks for that. That was really helpful. I was just curious as we think about the UK and potential retail flows with perpetual, is there any kind of seasonality we should think about through retail flows that might be a consideration going forward?

Brennan, I think there may be some degree of seasonality. The tax on season, but I think that is largely a very modest impact and probably the biggest thing that we can see and we're seeing it every month, is this normalization that is happening around our redemption rate. Things are getting back to normal.

And really, in the UK the client reaction to that transition is almost old news now. I think that's probably the bigger impact, is that we're carrying into more of a business as usual situation in the UK. Which will be quite helpful for us in terms of continuing to turn those outflows into inflows.

Perfect. Thanks for that, Loren.

Apologies if you hit on this before, but given some of the volatilities in yield in October, have you seen any change in the IBRA flows quarter to date?

We're seeing much stronger interest in IBRA. So the redemption rate is certainly dramatically down. I think the level of interest around IBRA, both institutionally and retail, is seeing new levels. It is somewhat at an inflection point, where you'd say, if you just follow this through into next couple of quarters that would be going quite positive. But again, you're not just drawing a line here.

It has been every month you're seeing significant improvement in the IBRA position and that's not a surprise to us. As people are looking for greater stability and predictability around and less risk in their portfolios, it's a natural place for people to go.

Loren, thanks for the color and taking my question.

Sure.

Chris Harris, Wells Fargo.

Thanks. Hello, guys.

So we spent some time talking about EMEA. Wanted to talk a little bit about the US part of your business. It sounds like the outlook is getting a little bit better there but just kind of curious if you guys could characterize for us why that region maybe isn't flowing a little bit better than it is?

I know you guys rank pretty favorably to a lot of peers, but just wondering if you can expand on what's going on in the US? Why we're not seeing a little bit better growth?

So I think we're seeing strong pockets of growth. Obviously the US is a big thing when you look at it. Particularly the way we disclose it to you. It does hide the real stories within stories that exist.

What we've seen, in terms of the greatest strength in the US and North America, real estate, direct real estate. We've certainly seen a continued strength in the Invesco PowerShares offerings and we have quite a wide range there.

We have great capabilities around alternative fixed income. Particularly around bank loans and CLOs. And then fundamental equity, international growth and values is quite strong. These have been somewhat offset recently in terms of numbers where we've seen some outflows in certain products that I'm sure you're familiar with around, let's say bank loans, where people have knee-jerked out for those types of products. Which again, has masked some of the underlying strengths.

Other areas where we had and then have seen some outflow would be more based on when the equity markets were moving quite strongly. Some of our core, more safety oriented equity offerings, were not performing in line. But they're going to become more interesting in this type of market. So that's a little bit of context.

We have such a wide range and diverse set of products that for us to be at a consistent high flow in the US is hard for us to achieve because they're very diverse in what they offer.

Yes, okay. That makes sense.

And wondering if you guys can give us an update, not just for the US but for the entire franchise, what flows look like so far in October?

Today there is modestly negative for us. Not anything that I would get alarmed about and progressively getting better. Each day that come by through recently has been a benefit to the flows. I already told you that we're seeing some of the most important, in terms of fee rate, parts still driving forward like EMEA, we have this very strong institutional pipeline that is, I think it's up close to 70% higher than it was in the prior quarter. And some of that is going to begin to fund, whether it's into fourth quarter or into 2015.

So again, we feel reasonably good about where we are in the flow picture. And we don't have the industry data yet, but I gather that we're probably doing as well if not better.

Got it. Thanks.

Robert Lee, KBW.

Thanks. Good morning, guys.

Good morning.

I have a question on the liquid [all] side, maybe there's a few things in here. I mean, as you roll that out, you've certainly seen in the industry pretty strong demand for retail and liquid all products. But, I think it's probably easy, my perception is it's probably fairly easy for investors and advisors to be confused about what the difference between these products. And some peers would probably put IBRA in their liquid all bucket and you have it in your balance.

So, what can you do or what are you doing to with maybe in the retail world and with advisors to make sure that they understand what they're buying and how to compare it? One of the things I think you always fear is that people buy something that they don't understand it. They ultimately get disappointed and that has negative consequences down the road.

Yes. You're on a very important topic, and I'm -- So, that was really what I was trying to highlight. It's actually quite -- it is going slower than what you might be reading in the papers, right? What I would say is, there's an absent clear recognition that for the retail investor, the ability to have access to alternative capabilities, I look as more broadening the asset class that they can invest in and also introducing some lower volatility type offerings to them, is viewed as important and necessary.

We have spent an enormous effort on education. Before they came to the market internally and then with our distribution partners tied hand and glove on how their positioned, what they're meant to do, what you should expect in different markets, how it modifies your portfolio and that you're achieving what you want to achieve.

We even have an internal consulting group that's been signed with the distribution channel to help out with all the advisors be successful with it. We think education is a really important part and that's why I'm saying it is an important opportunity but it's not a two, three quarter opportunity. It's going to be looking back from three years and see where it is in total.

Also, and I say rightfully, the advisors or distribution partners, they are slow in putting capabilities on platforms because they want to get it right too. I think that's really important. That's good for everybody. You got to get it right for the clients first. I'd say it's progressing in a thoughtful manner.

Great. And maybe just a follow-up. You've clearly have good flow momentum in a variety of places across the firm and I'm going to guess you probably don't look at things in this manner, but I guess I'll ask it anyway. If you look at the breadth of your franchise and geographically product wise and size, what do you think is a natural organic growth rate for your firm?

Do you think it's 3%, 5%? At peak it could be better than that? How do you -- do you have any thoughts on that?

Yes. It's a good question. You're asking the unknowable. What I think is, if you look at the firm right now, if you look at, again, depth of capabilities, performance, what we think we should be able to accomplish, there's really no reason that we shouldn't be over whatever a reasonable timeframe, 3% to 5% organic growth rates. Are there periods that you can be on top of that? I believe that is the case.

We've yet to see that all in risk on investor mindsets and that is exactly, that is where we are best positioned. We have had these results without having it go straight to our strong suits. So, that's a period that you would expect even greater organic growth.

On the other side, we're all talking now, how are clients are reacting, how are they thinking. If people slow down and just stop for a couple of quarters, you're going to be below that. So again, there's a market sentiment topic to where the market is that over a good period of time, there's no reason why we shouldn't be in that 3% to 5% organic growth bucket.

Great. Thanks for taking my questions.

Yes.

Craig Siegenthaler, Credit Suisse.

Hello. Thanks. Good morning.

Just a follow-up here on the UK equity income business. Do you believe retail distribution review could have temporally aided the UK equity income retail business over the last 12 months? But as more accounts convert to the new fee structure, because many brokers actually have been avoiding the transition, that UK retail equity income redemptions could actually pick up or remain elevated into next year?

Interesting question. We have no evidence of that and so it would be just total speculation. I mean, I think what I really think is the fact is that the reputation of Invesco professionals are very strong.

Mark Barnett and his team has had a tremendous track record on their own for a good period of time and actually, they have performed very well. That in combination with our advisors to be able to have a broader range of capabilities within the franchise, I think those are the vastly dominant factors of why we've gotten to where we've gotten to.

But interesting question. I just can't really -- it'd be speculation on my part.

Thanks, Marty. And then just a quick follow-up.

So we're heading into the fourth quarter here. We've just have a few quarters of lumpy redemptions from the equity income business in the UK. Given your visibility, are there any larger losses, platform losses, that maybe could occur in the fourth quarter? Versus the fourth quarter really be the first clean quarter without any significant redemptions in that business?

Hello, Craig. I'll answer that one.

I think what we're seeing from the data factually is that it's getting less and less of a topic. And we have not certainly heard of any large -- we've been notified, so we have no expectations of anything to happen, which is great news. For us, that doesn't mean that it can't or it won't and there is always a year-end -- who knows, right? People may reevaluate their portfolios.

I don't want to say we have 100% certainty on any of these redemptions because as soon as you think you do you'll get surprised. But I'd say in terms of our level of confidence and feeling that we're moving into a normalized period, I'd say, absolutely, and we certainly have no knowledge of any large or even small platform redemptions in our future.

Great. Thanks, guys. Thanks a lot.

Yes.

Patrick Davitt, Autonomous.

Good morning, guys. Thanks.

On the news this morning that you're ending the agreement with Deutsche Bank around the commodities PowerShares product, will that mean you'll equate change your economic from that product?

Let me pick up the first part and Loren can pick up the second.

We're not ending our arrangement with Deutsche Bank. We're modifying it. It's been a very good partnership and what we're really doing is just changing some of the responsibilities around. Now we'll be taking complete responsibility for the product range including portfolio management, distribution operations. They will continue to be a very important partner on the underlying indexes and the like and we'll continue to work together for a good number of years.

In terms of the financial impact, it really is not a material topic. I would not disclose the nature of the relationship but it is an ongoing relationship where we will continue to partner with Deutsche Bank as we develop and continue to grow our product line. But we have internalized, as Marty said, the management of the product as opposed to be largely a distribution relationship that we had before.

Okay. That's helpful.

And then we've talked a lot about RDR and the ebbs and flows of that in Europe and the UK. Could you talk a little bit about the PowerShares that specifically and passive specifically, to what extent the process of that adoption is occurring because of the regulatory changes in Europe?

So Patrick, I will tell you, the RDRs, as I think we talked about in the past, is does somewhat open the opportunity for greater use and take on by advisors of these types of products. Where to the extent that they're going to be paid for advice directly by the end client, the use of such products become easier for them to use.

And so, we have said that for the UK and EMEA generally, it is a major focus of ours. One that we are very organized around trying to develop. And it's one that you probably, realistically, you're not going to see true results or impacts for somewhere between 12 to 18 months because it takes that long to really make an impact. We're very focused on it. We think it's a great opportunity for people who have ETF capabilities which obviously, we do.

And again, to be clear, our focus in this space is continued promotion of this smart data alternative type of ETFs, as opposed to the normal cap weighted type of products that are very much in focus by Vanguard and Blackrock and others.

Right. Thanks a lot.

Greggory Warren, MorningStar.

Yes. Thanks guys, for taking my questions.

Craig Siegenthaler touched on some of the questions I had about Neil Woodford and what was going on with equity income in the UK. I was kind of curious, as we look out and we look at what they've done with the pension reforms in the UK, the removal of their requirements for the annuities, how much do you feel that there's growth there to replace what you lost with Woodford's departure?

Yes.

Look, as we've been trying to point out, it's a very strong set of investments teams with superior investment performance and whether it's across fixed income, broadly, GTR, European equities, Asian equities, European equities, it is probably, I'd say, that we've got some of the strongest capabilities in the United Kingdom period. So, it's a very important part of our business and will continue to be. And, by the way, those capabilities are now being used more broadly throughout the world.

You know, European equities, fixed income, et cetera, they are a very important part of what's happening in the continent and also different parts of the world for some of the global capabilities and the like. It's been a tremendous success and it's going to continue to be a tremendous success.

You're actually pointing out something important, with this door opening up that investments beyond annuitization, that's a very good thing for us. That's not a next quarter or the quarter after that but a few years ahead it's really quite a good opportunity for us.

Good. And then something we don't really talk about all that often, Canada. Can you guys give us a feel for what the market looks like now with kind of the challenges you're facing? I've noticed that ETF growth has been pretty explosive the last couple of years. The banks have gotten a lot more aggressive about going after mutual fund assets. So just curious how you guys feel your position within the Canadian market right now.

Yes. I'd start again with performance. If you look at the performance of the teams they're really very strong. The success in the retail channel has improved quite dramatically and it was a combination of things. One, getting performance to a very strong level, which it is and has been for a good period of time.

You are pointing out, the have the banks are very dominant. It's probably the one place in the world that they're so dominant with asset management within them. We have done vastly better than we where we were a few years ago.

As you point out, it's the addition of ETF's force and the like that make us much more competitive and put us in, frankly, we think we have some competitive advantages in the marketplace.

And the other opportunity for us that we're early days, is the institutional market in Canada is very big, very important, and the capabilities that Canadians are looking for in the plans suit us very well when you start to look at the range of alternatives that we have. It has been an important part of our business and we look at it to be a growing part of our business once again.

Good. Thanks for taking my questions.

Great.

Marc Irizarry, Goldman Sachs.

Great, thanks.

Marty, I'm curious on just the IBRA and largely fixed income concerns about market structure changes on liquidity and maybe how your funds are responding to that either in terms of disclosure or maybe just some views on how you're thinking about more stress scenarios? Maybe where liquidity conditions could change given investor responses to rates and what that might be for a fixed manager for you guys?

Yes. So again, I might be repeating myself a little bit, but if you look at the capabilities and what we do on a daily basis, we're always looking at liquidity. Liquidity management has always been an important part of what we do. The portfolios are stress test on a very regular basis to get some sense of, what is the range of possibilities under different scenarios?

The portfolios are then positioned accordingly if that is a concern. Some portfolios literally have liquidity, access to liquidity outside the portfolio. Again, it's something that we take -- we're actually on top of that we're doing very well.

And by the way, I think the industry does it very well and I think that's something for everybody to really understand. It's worth probing and pushing. But I really think that the industry's really focused on it and really trying to do fairly good job with it.

Okay, great. Thanks.

Eric Berg, RBC.

Thanks very much.

Marty, my question is going to be purposely a general one. You've talked a lot on this call at various points about how the conversation between investors and their advisors here, meaning in the United States, has changed given the extremely low level of interest rates, given the volatility in interest rates and given the major swings intra-day in the stock market. It would be helpful to me if you were to focus on the most important ways in which the conversations both here -- well, here have changed?

I'd love to know what you would think are the most important ways the conversations have changed and if you would provide the same answer for Europe contrasting how the conversations have changed there to here, it would be very helpful. Thanks.

I think it's a good news development. I think for some of us that were around the TNT period where, if you remember, advice was dead, everything was going online and no room for advisors. Needless to say, that didn't happen it has exactly gone the exact opposite way. There's something like 85% at most 90% of all individuals have some form of advice given to them and I think it's also gotten much more sophisticated over the years and very focused on understanding clients time horizons, there's tolerance, et cetera.

Things that we all collectively know quite well. And that their building robust portfolios around that and using a range of capabilities if it was historically 60/40 equity fixed income long only. The addition of being able to have greater access to a broader range of asset classes and also capabilities that are lower volatility type capabilities is really I think of very good development. I think it's gotten to, which your pointing out, most places it's a little bit back to the future.

Different names are being used, but people are looking for income. They are looking for capital preservation, et cetera and I think that again, is a very good thing at the end of the day for (technical difficulty)

Europe, I would say is behind that, but it is evolving quite a bit to that degree. I'd say the advice channel in the states is probably as well developed as anyone in the world.

Thank you. Helpful response.

Chris Shutler, William Blair.

Hey, guys. Good morning.

Good morning.

On the topic of bank loans, just quickly, I wanted to ask a couple of questions. First, I was just hoping you could give us the total assets that you have in bank loans, the rough split of retail versus institutional and then how the flows have trended recently.

And then in addition, just interested in the credit rating. From a credit ratings perspective, just if you take the portfolio as a whole, how aggressive has your team been in investing further down the credit rating spectrum? Thanks.

Hey, Chris.

We have about $30 billion in aggregate around the bank loan capability, both institutionally and retail. You know, the retail bit is a smaller part of that. I think we're probably somewhere around $7 billion in AUM on that and the rest is institutional.

The current flow picture is, it's an interesting one. We're seeing continued interest in bank loans on the institutional side, very much so. The retail side we saw modest outflows maybe of about $0.5 billion in the quarter related to -- maybe a little bit more, $600 million, related in the retail side.

So that's kind of the trends that we've seen. Nothing alarming. Nothing that is necessarily unexpected.

And in terms of how the portfolios are being managed, I know they're being managed with a fair amount of conservatism because of the topics that Marty and everyone has raised around liquidity and managing through stress periods. The idea that we are selecting securities that are most liquidated that are even alternatives to straight bank loans or you being affiliated types of products in those portfolios is very much top of mind. I say our level of management around the conservative side is at a heightened level as you'd expect.

Okay. Great.

And then a similar question just on real estate. Can you give us a quick update where you are there in terms of AUM and how flows have trended over the last couple of quarters? Thanks a lot, guys.

AUM is roughly $62 billion. We've been trending higher consistently every quarter both split between retail and institutional. We've seen a lot of interest and demand on the retail side. Particularly around the geographies that are most interested in income oriented types of products and that would be in Asia and Japan, as well.

Direct real estate is a global phenomenon that we're seeing in terms of interest and take ons, that really, as I said, continues to pick up as our capability is one of the few truly global capabilities among asset managers and also one that has done a very good job for its clients historically.

All right. Thank you.

I'm showing no further questions.

That's great. Thank you very much and on behalf of Loren and myself, thank you very much for participating in the questions and we look forward to talking to you next quarter. Have a great rest of the day.

Thank you and this does conclude today's conference. All parties may disconnect.