Invesco Ltd. (IVZ) Q3 2011 Earnings Report, Transcript and Summary

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results for operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions, 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 website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Welcome to Invesco's Third Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to the speakers for today, Mr. Martin L. Flanagan, President and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, and thank you for joining us everybody. As we just mentioned, I'm on the call with Loren Starr, our CFO. And we'll be speaking to the presentation that's available on the website, if you're so inclined to follow. And this morning, as has been our practice, we'll begin by reviewing the business results for the third quarter, and then Loren will go into greater detail on our financial results, and finally, we'll open it up to Q&A. So let's get started. I'm on Slide 3, again. And to start with, long-term investment performance remains very strong across Invesco for the third quarter with areas of absolutely exceptional performance. And our strong investment performance contributed to a trend of -- a continued trend of positive long-term net flows for the firm, in spite of very volatile markets. And also during the quarter, we saw net long-term inflows across all distribution channels. And during the quarter, we increased cash by $136 million and reduced long-term debt by $194 million, further strengthening our balance sheet. And looking ahead, reflecting confidence in our fundamentals, we expect to purchase $100 million of Invesco shares during the fourth quarter, also bringing the total purchased shares during 2011 up to $443 (sic) [$433] million. So taking a look at the summary of the results for the quarter. Assets under management ended the quarter at $598 billion versus $653 billion at the end of the second quarter. Invesco continued to generate strong long-term investment performance for our clients during the third quarter, which contributed to net long-term inflows of $3.3 billion. This continues the positive trend we've demonstrated over the past several quarters. Reflecting the challenges in a very volatile market during the third quarter, adjusted operating income for the third quarter was $256 million versus $285 million in the second quarter. And again, Loren will go into greater detail of these financial results in just a minute. So now, let's take a minute and look at the investment performance during the quarter, and I am on Slide 6. So as we've discussed many times, the key strategic priority for us is to deliver strong long-term investment performance for our clients. Our commitment to invest excellence in our work to build and maintain a very strong investment culture had helped us maintain solid investment performance across the enterprise. Looking at the firm as a whole, 68% of the assets were ahead of peers on a 1-year basis. 78% of assets were ahead of peers on a 3-year basis, and 82% of assets were on the top half on a 5-year basis. So let's take a minute and look at these long-term results across the firm. We think the best way to highlight the depth and breadth of the strength of investment performance over long-term is looking at some key areas by investment objective. And also, what you'll note parenthetically next to each investment objective is the percentage of assets under management that's represented as a percentage of the whole Invesco assets under management. So at the end of the third quarter, 78% of U.S. core equities were ahead of peers on a 5-year basis. U.S. value equities, it was 96% of assets were exceeding peers on a 5-year basis. 94% of U.K. assets were at the top half of peers on a 5-year basis. And if you look on Slide 7, what you'll also see during the quarter, 78% of our global ex-U.S. and emerging markets' assets were ahead of peers on a 5-year basis. For balanced, it was 75% of assets, and for global fixed income, it was 78% of assets. So again, there's real depth and breadth of this very strong investment performance across the organization. And if you take a look at the total flows on Slide 9, you'll see that this net flow was really driven by the depth and breadth of the strong investment performance. And as I mentioned earlier, that turned into net long-term flows of $3.3 billion for the quarter. And if you take a look at quarterly flows on Page 10, what you'll see is there were strong growth sales across retail and institutional channels, which contributed to the positive net inflows for Invesco as a whole. And the private wealth management business, again, was in net flows during the quarter and continued this trend of consistent asset growth quarter-over-quarter for the past 4 years. So again, very strong results across the various channels. Now if you turn to Page 11, I want to spend a minute and take a look at the result of the depth and breadth of our investment capabilities, our strong investment performance and this very focused planned engagement effort that we've been on, which has driven solid momentum in our U.S. Retail business during the quarter. And despite a very volatile environment, we continued to gain traction in the U.S. Retail franchise during the quarter. Gross sales increased 9% quarter-over-quarter, and gross sales were up 40% year-over-year. Additionally, the redemption rates for Invesco's U.S. Retail business have been considerably more favorable than the redemption rates in the industry over the past year. And during the third quarter, that gap widened again, with redemption rates far below the industry average of 42%, while Invesco's rate was 28%. During the third quarter and continuing into the first quarter, we are seeing significant wins broadly across a number of capabilities, vehicles and channels. And we attribute this to the good investment results and the good efforts that I highlighted previously, which is giving us improved access cross many different platforms. And the best way to calculate that is just an ever-increasing RFP activity. And again, it's resulting in greater penetration in these different client key platforms. From our key perspective, we're very early still in the process of achieving the full potential of our U.S. Retail business, but the combination of solid performance and a number of high-demand capabilities are driving good momentum. And we're pleased to see the results so far. Before I turn it over to Loren, I'd like to turn your attention to Slide 12. And to highlight one of the capabilities that we're seeing strong demand in, and we think there's quite a bit of potential as we look forward. If you look at total assets under management around the world, it's up $54 trillion, 8% of that total is represented by balanced portfolios or what other people refer to as multi-asset portfolios. This obviously represents a $4 trillion global opportunity, of which $1.8 trillion in the U.S. and the balance of $2.2 trillion obviously outside of the United States. And what's happened during the last number of years during this crisis period and very volatile markets is that investors are increasingly focused on recognizing the need for downside protection in addition to being able to participate in enough markets. We're early participants in this market space, and Invesco has an industry-leading capability in what we called Premia Plus. And what you'll note on this is that if you think of traditional balanced portfolios, risk allocation is really driven by the weight of bonds and stocks in the portfolios. I think traditionally, 60% equities, 40% stocks. Our strategy is different, and it is a strategy designed to win by not losing and to avoid large drawdowns while participating in good markets. And we do this by focusing on risk exposure as opposed to asset allocation or class weights. The approach allows us to hedge against the equity on framing [ph] the outcome such as inflation and the recession. And if you take a look again on the next page, and you can see the results of this approach. From our point of view, it provides good upside participation, but just as importantly, very strong downside protection and a tremendous advantage in the various volatile markets that we've seen. And since inception, Invesco's performance has ranked within the top 3 percentile of similar capabilities worldwide. And for 2011, the strong performance of our capability has ranked us in the top 1%. And if this strong performance that has enabled us to grow this balanced risk asset allocation strategy from nearly 0 in the fourth quarter of 2009 to approximately $3.2 billion at the end of third quarter. We've also applied the same approach to a broader set of strategies that brings the total closer to $5 billion. Not going far, we will continue to look to expanding this application to areas where we think it makes sense. We continue to have a number of these strategies ready for investors in the not-so-distant future, and the strength of the industry-leading capability is helping us win the business, obviously, and broadening the appeal for the whole Invesco product capabilities set. And additionally, we've enclosed 2 additional pages of disclosure that are required as we talk of something so specific like Premia Plus, and again, you can read through that at your leisure. But for now, I'm going to stop there, I mean, and turn it over to Loren to go over the financials.

Thanks a lot, Marty. During the quarter, the long-term net flows that we discussed added $3.3 billion, while Money Market funds had net outflows of $1.1 billion. The big story, of course, is the declining markets and the unfavorable FX that reduced our AUM by $57.5 billion during the quarter. So the resulting reduction in AUM quarter-over-quarter was $55.3 billion or 8.5%, leaving us with $598.4 billion in AUM at the end of Q3. Average AUM for the quarter decreased 3.1% to $632.7 billion, and our net revenue yield in Q3 ended up at 44.6 basis points, and that's a drop of 1.4 basis points. This was really due to 3 factors in the quarter: The first was lower performance fees and other revenues. The second was the impact of a full 3 months worth of fee waivers that were associated with the U.S. product realignment, and that was, as you know, largely completed in early June of this year. And the third is the market impact on product mix and our Equity AUM actually declined from 46% to 42% of total AUM, again largely due to the market. Next, turn to operating results. You'll see that net revenues in the quarter declined $45.1 million, that's 6% quarter-over-quarter, while unfavorable FX rates lowered net revenue by $4.3 million. If we drill down onto this, you'll see that investment management fees fell $40.2 million, that's 4.8%, down to $804.1 million. This was mostly due to the drop in our average AUM although once again, the fee waivers are related to the U.S. product realignment, and the mix shift also contributed to the fall. Furthermore, FX reduced our investment management fees by $6.1 million in the quarter. Service and distribution revenues were down $17.1 million or 8.3%. This was caused once again by lower average AUM but also by a decline in some of our TA fees from the U.S. product realignment. Performance fees in the quarter came in at $3 million. That's a drop of $5 million versus Q2. You may remember, we highlighted that we had some performance fees from the U.K. in Q2 that was about $3.5 million, and that did not reoccur in this current quarter. Other revenues in the third quarter came in at $26.7 million, that's down $5.6 million. Again, this is primarily explained by lower retained front-end load fees, as sales declined in Europe during the quarter. Third-party distribution, service and advisory expense, which we net against our gross revenues, decreased by $22.3 million or 6.6%. This was in line with the movement in investment management and service and distribution fees over the quarter. And foreign exchange has an impact of $2.5 million reduction to this line item in the quarter. Moving on down to the slide, you'll see that our adjusted operating expenses at $450.4 million declined by $16 million or 3.4% relative to the second quarter. In this case, FX accounted for $2.4 million of this decrease. Employee compensation at $306.3 million fell by $4.6 million or 1.5% versus the second quarter. FX contributed to $1.5 million of that decline. Marketing expense decreased by $2.3 million or 8.6% to $24.4 million. This was due to reduced sponsorship costs, as well as the lower levels of advertising in the quarter. FX marginally impacted that, with decline by $0.2 million due to FX. Property, office and technology expense was $62.8 million in Q3. That was a minor increase of $0.3 million. FX reduced the expenses by $0.3 million in the quarter. And then, general and administrative expenses came in at $56.9 million in the quarter, that's down $9.4 million. This was due to a variety of cost management and discipline activities. Lower travel, recruitment and professional expenses contributed as well. And FX amounted to about $0.4 million of that decline. Going down to the bottom of the page, you'll see that nonoperating income decreased $2.5 million quarter-over-quarter. This is due to mark-to-market of certain of our partnership investments, as well as due to lower level of realized gains on the disposal of seed capital during the quarter. Our effective tax rate came in on pretax adjusted net income at 22.5%. The third quarter's lower tax rate reflected a FIN 48 release for uncertain tax provisions. Going forward, we like to guide you to effective tax rate that we believe will fall in the range of 25.5% to 26.5%. And so, finally, our adjusted EPS was $0.42, a decline of 4.5% versus Q2, and our adjusted net operating margin came in at 36.2%. So before turning it back to Marty, let me just quickly comment on our capital management. During the quarter, our net debt declined by $330 million, which was resulting from the $194 million repayment of our credit facility and $136 million increase in balance sheet cash. We do continue to believe that our stock is attractive at current price levels, and therefore, we intend to purchase $100 million during the fourth quarter, making our total buyback of $433 million in 2011. With that, I will turn it back to you, Marty.

Great, Loren. Thanks very much. And I think you can get the sum of the quarter. It's led by continued good, very good, investment performance across all of Invesco. And really, we think the trend of -- continued trend of long-term net inflows across all the channels was very strong in spite of a very, very volatile quarter. And with that, Loren and I will answer any questions anybody might have.

[Operator Instructions] The first question comes from Michael Carrier with Deutsche Bank.

Maybe 2 questions on the revenue side. I think the other bucket, a little bit more volatile this quarter than what we're used to. I guess, you mentioned some of the drivers of that in terms of some of the weaker European sales. But just wanted to see, is there anything like seasonal in that line item when we think about the fourth quarter? And then the other line would be just the performance fees. Obviously, it's something that's hard to predict but just given the improvement that we're seeing across the franchise on performance, some of the products like Perpetual, EMLP [ph], PPIP, Real Estate, just trying to gauge any expectations as we head into the fourth quarter relative to the $3 million we're at today, the bias for performance fees at least for the fourth quarter and maybe in the first quarter?

Michael, let me try to address that. In terms of other revenue, it was really predominantly driven by the front-end load. The retained front-end load sales were down significantly in Europe and the U.K. So that had an impact there. Again, that was really, I think, in the height of the concerns around Europe. So I'd hope we'll see that abate, and then we'll begin to see that number come back in Q4 and beyond. In terms of performance fees, I think you're right. I mean, performance is very strong, as we highlighted. We do have some seasonality around performance fees, as you've seen, particularly in the U.K. and in Atlantic Trust. There tends to be a Q4 opportunity for performance fees in the U.K. also in Q1. That's kind of very short term. But I'd say generally, we think performance fees, we would expect to see more across all of the platform of products that generate them. And I think in the near term, we'll expect to see certainly some improvement also at this current level, even into Q4. Hard to quantify, I feel sort of uncertain about giving you real numbers on that one. But again, I think given the performance that we're seeing in our products, it would certainly be a good expectation to see it go up.

Okay, that's helpful. And then, just on the expenses maybe, the G&A just seemed much lower. Anything unusual in there that we shouldn't expect to continue? Obviously, if the environment improves, then travel and those types of expenses will go up, but anything that was unique in the quarter?

Based on our forecast, we think the G&A line item is sort of a good run rate. It's not even the potential for less going into Q4. We're very focused on managing our cost in this current environment, a lot of uncertainty. And so, it's a major theme internally to make sure that we're prudent in how we spend, certainly, the discretionary line items. So again, I think if you look at our current numbers, there's nothing unusual in terms of thinking about it into Q4.

Okay, and then just final one on the flow side. The Alternatives, Fixed Income continue to see some strength in line with the industry, the Asset Equities were a little bit weaker. Just any color whether it's the Canada business, the Trimark, any additional outflows on the Quant side? Just trying to figure out on the Asset Equity side what was driving that during the quarter.

Michael, just picking up on that. So if you go back a few quarters, sort of the topics were what's going on in the Quant world and what was happening with us. And I'd say, again, if you look at the performance of our Quant team, it's actually been quite strong now. I mean, it literally, I think as I talked to a couple quarters ago, as the world looked at fundamentals more is really -- October, November of last year, where it started -- the performance had started, do what it was meant to do and continue to generate out for the portfolio. So it feels like that headwind has left us from the standpoint of clients moving totally away from Quant to an area where it went sort of flat. But frankly, you're starting to see some interest coming back in Quant, and I wouldn't want to get anybody too excited, but you're starting to see that in Europe in particular. So that's a nice change from what was a year ago early this year. Also see, when you look at the investment performance of the Canadian investment teams, it's really strong. So I mean it's just very, very different than what we've had in the past couple of years, which is a very important topic. And also, when you look at Canada, a handful of things are going on. One good investment performance, a broad view of what's available in Canada, the ETFs are really -- early days, starting to make a difference. Also, the Institutional business, where we had our focus previously, again early days. But again, you're starting to see some indications of rising RFPs in the marketplace. So we're feeling much better about where we are there. And again, so the level of confidence that is increasing for us is in Institution.

The next question comes from Ken Worthington with JPMC. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: On the Institutional side of the business, on Slide 10, you should at gross sales pick up, our gross receptions fell again, so you've got a nice trend there. Can you talk about both sides of the net flows picture? So what's going rates on the products and regions, in terms of what's getting traction? And then, what has fallen west out-of-favor than it had in the past in terms of products from regions on that Institutional side? I assume Real Estate is one that continues to do quite well, but what are the others?

So Ken, good question. The earlier few quarters in last year, it was really Quant that was really the institutional topic on the redemption side. And I just said, it feels like that's really changed. What we continue to see on the RFP side throughout different parts of the world, really, I'd say sort of across the spectrum, it's Real Estate, direct real estate, global REITs. This combination of Premia Plus asset allocation multi-assets strategy products are really taking hold institutionally. I'd say that's pretty broad in different regions of the world. Bank loans is another area that you continue to see continuing activity. And then, in different parts of the world, the merchant markets, you're actually seeing people look at the Japanese equities, you're actually seeing people look at some of the core U.S. Equity portfolios, but more dividend related-type op products. So it's ever broadening, I'd say, and I think that's a good sign, frankly, for the industry also. And actually I should add one. I did mention bank loans, but credit-related Fixed Income continues to be sort of topical. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay, great. In terms of Premia Plus, when does the retail version of that get its 3-year numbers? And what distribution platforms open up to you when you get those 3-year numbers? And this is -- Is this a big deal or is just kind of not that big a deal, the 3-year Retail side?

So I think it is. So it's June of next year that you get the 3-year number. But you're already seeing, as I mentioned, the results into it even without a 3-year number aren't really quite surprising. I mean, that's usually sort of the starting point to get a 3-year number. But we're -- even without that, we're seeing some very good results. And I think it's the result of a couple of things: One, yes, the team has a good long history, high-quality team. There was an institutional track record exits to 3 years, I think, in November, December this year. So people have looked at that. Again, it's getting traction ahead of its time, but again, just the fundamental theme of downside protection is something that is very broad. So we would expect just even when you hit that 3-year number, just continually broadening of the mandate. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. The last question is just on REITs. REITs have been incredibly successful for you, and I think you'll continue to just blow it out in terms of getting new assets. At some point, there's something like too much of a good thing. Where do you stand in terms of being able to deploy all the REIT assets that you're getting in the front door, and is there any validity to this being, getting more difficult for you guys to manage the big numbers coming to Invesco?

Yes, that's a quick question, so let me make a couple of comments. One, the investment team is absolutely superb. And they are very good managers, long, long-term track record, been together for a very long time. And first and foremost, with them and with any team, as soon as they get to a period where they say, "We can't," if they don't think they can handle anymore, we shut the doors. We absolutely stop it. And it's a team that is very dedicated to their clients. So I don't have that concern. Again, they're also very conservative on how they manage the portfolios. But there will be a time when they will probably say, we've talked out, and we'll just have to see how much longer that is. And I don't know, Loren, if you would add anything from your conversations.

I think everything you said is what I -- has been reflected-to me, too. So there's definitely more room to go, but there is a point where it flows, and so again, that's something that we're not at the point to quantify.

And Ken, just to underline a point here, we don't want to be one of those place where too much of a good thing becomes a problem. So we'll be telling you that we're stopping it before that happens.

The next question comes from Bill Katz with Citi.

Just going back to the U.S. product realignment, could you quantify how much in sort of foregoing revenues or earnings might be from any of your plans, and then what might be the timing for the fee waivers to roll off?

So Bill, I think I got your question. The fee waiver number is about $30 million per year. And so, that was put in place with the combination of the funds. And clearly, when you had higher funds merging with lower-priced funds, for the rising [ph] for clients was to waive fees down. It's a discussion that occurs at the fund board level, so it's not something that we directly control. And so, again, in terms of what could happen, in terms of those fee waivers, it would be presumptuous for me to sort of talk about what the dialogue is going to be around the fund boards. But again, there is the potential for the fee waivers to drop, and that would create some relief off of that run rate.

That's helpful. And just my follow question, just on comp, sort of, you think the overall cost control relative to the revenue environment. As we look at comp relative to revenues on adjusted basis, that was a 43% ratio, the highest ratio in well over a year. I'm sort of curious, why you did a good job on the G&A side, what's your outlook for comp? What are some of the drivers we should be looking at from a modeling perspective?

So Bill, yes, I think -- I mean, a couple points on comp though, one, I think we've mentioned it several times during the presentation, our investment performance continues to improve. And so, we have a direct linkage between compensation and investment performance with our teams. And so, that's one element in our story in terms of what is driving our comp numbers. The other, again, is we try to forecast and provide a very smooth compensation picture as we for -- every month, every quarter, we forecast where assets are going to be and we accrue based on that estimate. And so we really, I mean, we try to avoid having any sort of catch-ups or things that happen in the quarter or something that's not sustainable. So we try to give you that smooth view. So the number that we showed on compensation are a good sort of proxy going forward. I mean, again, given the fact that there's probably 3 quarters of lower assets as opposed to one month, you could see further decline in that number into the fourth quarter. But again, it's something we manage closely, but it's very much aligned to investment performance as well.

Actually, just one follow-up. Marty, share us your view on 2 areas, just sort of regulatory change. One maybe an update on the Money Market business. There seems to be a lot of flux on where that is right now. And secondarily, could you talk a little bit about any kind of risk to the regulatory environment on the ETF business?

Yes, I see. On the money fund side of the focus on regulators, they have still -- yes, 2 comments, I'd say. I mean, this is probably what -- 6 months ago, they were happy with the regulatory changes put in place for the money funds. But they still wanted something else to be accomplished, something more to ensure that there is further ability to mitigate any runs in the market. And the first point that I would make about that is that during this European debt crisis -- we'd like to refer to it as that -- from what March on of this year, I think the regulators actually feel very, very good about the outcome of money funds during that period. It was a very stressful period on money funds, and they did extremely well. So the changes put in place were a good thing. And I think you'd probably expect -- yes, but I think the goal is at the end of the year and the first quarter of -- yes, one more change to money funds. And my sense of it, it would be something that is very manageable for the industry that ensures that you'll continue to have a very broad group of people in the money fund industry and not frankly ruining what has been a very important vehicle within that sort of ecosystem of the financial world. So I think right now, the outcome could just be a very positive one for all parties concerned. But again, it can change on a dime, but that's where I'd say we are right now. And then with regard to ETFs, I think obviously, there's a lot of focus on volatility in the marketplace and what is driving that. There's probably 2 areas that I think are getting a lot of attention. Most recently, it has been ETFs, but it's really -- high frequency trading is really, I think, a very, very, very important area where there's a lot of focus. From regulators' point of view, is that -- yes, the question is, is it contributing to what in fact you're supposed to accomplish, which is a capital market environment that is for long-term investors and capital formation. So that's the question around that. And then with regard to ETFs, the issue of -- really, I think the focus is on leverage ETFs in particular, and I think that is going to continue to be a topic in the focus. But the conclusion on that would be the absolute broader ETF market, the vast majority of the ETF market will not be impacted by that conversation. And I would see the ETF participants are very focused on making sure that it continues to be a very viable and strong industry going forward. So I think that regulatory outcomes in both of those areas could be good for investors and good for participants.

The next question comes from Michael Kim from Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Just a couple of questions. First, just to follow up on capital investment, it looks like you opted to kind of focus more on deleveraging last quarter and then maybe more of a focus on share repurchases this quarter. But in this type of environment, it does seem like there might be some opportunities to take advantage of some attractive M&A opportunities. So can you just kind of talk about how you're thinking about using capital going forward, and then maybe if you're starting to see some more distressed or more motivated sellers looking to dispose of their embedded asset management businesses more recently?

Yes. Let me make a couple of comments. I think Loren will talk also in addition to capital management, but I'd say our broad strategy has absolutely not changed, that first and foremost, we're going to look to reinvest in the business and improve the business that we have. And again, I think if you look across the business, it looks very broad, very strong, good performing, so fewer gaps. We do look at opportunities as they emerge from time to time. But it is a very, very high bar for us, and that will continue to be our focus as we go forward. But Loren, you want to?

Yes, actually, I mean, one of the points is probably worth just pointing out is as Marty said, time to time, we'll see opportunities in the market, and in fact, that was one of these cases this last quarter. And when such things happen, we are restricted from continuing on with our share buyback program. The fact is we didn't do anything in terms of this opportunity. And so we are out of that restriction, clearly, given our announcement. But in case you were wondering why we weren't actively buying shares in the last quarter, it was really due to us being tied up in this restriction.

But again, I just, Michael, to your point and I want everybody else here -- it's extremely high bar for us. And I think some of the properties that are coming on the market or rumored to be on the market, they frankly -- headline level look are more distressed than what we're interested in. But again, we'll just continue to pay attention. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay. That's helpful. And then just secondly, given the lower AUM base and assuming markets remain under pressure, are there any specific areas where you can or you're looking to may be further cut back on some costs or some expenses just to maybe defend the margins to some degree?

Let me make a couple of comments, and Loren can chime in. Again, I think if you look back over the years, we are very, very focused on ensuring that we run on a good effective business and very focused on cost management. That said, where we are, probably like many firms, looking at where the environment is and unsure of what it might look like. There's sort of a two-pronged focus for us as an organization. First of all, we're looking at -- we feel we're probably better positioned as an organization than, I can say, at least the last 6 years that I've been here, and that, clearly, we are slowing down some areas, where the opportunities slowed down, when the market slowed down, but there's still many opportunities for us, and we're trying to strike the right balance on those that are still filled, closer that we are continuing to move forward on it. But we're doing the right things, and yes, we focus on discretionary spending in particular. That said, if the world falls apart, we will respond accordingly. But we think it would be unwise to literally shut everything down right now. We just think it would be not the right thing to do. We just want to make sure that we can run with the opportunities in front of us, but those that are less opportune because the market will slow down or just put on hold.

Yes. I don't think I have much more to add. That's exactly the process we can go into the market now.

The next question comes from Roger Freeman from Barclays Capital.

Marty, I guess I just want to follow up on that comment you made about M&A opportunities. I guess some of the potential ones may be more distressed than you'd like. Is that a function -- I assume it's a comment about Europe, and it's that, that if you buy an in-house proprietary platform that the parent institution is a risk to the customer base disappearing.

Yes, I think it is more. And again I, because everybody -- it's sort of fundamentally thinking that where Europe sits right now, many of the European asset managers might become available. And there's twofold. It has tended to be very proprietary distribution. That becomes a topic and a very important topic. It can sometimes work to your advantage and disadvantage. But at the same time, when you have duplicative platforms, and you compare the duplicate investment management capabilities, it's your investment management capabilities, it really gets to something the industry has not done a lot of, and that's just absolute consolidation. And it's worked well. That's with thanks to when they roll up sort of the deposit platforms. It's different when you start to get to the clients out of the money management business, and I think that becomes a bigger consideration for any firm that will be looking at those. So I don't think it extends to the financial stability of what would be the selling institution. I think there's always ways to protect yourself against that. Again, every situation will be different.

Got it. Maybe just on the Van Kempen, speaking of your own prior deals, has there been any additions to your model portfolios, recommended list during the quarter as institutions or distributors that have been holding back have come back?

Yes. I don't have the specific numbers in front of me. But what I can tell you is just if you just look at RFP activities that put you on platforms, it's probably from a year ago, despite there've been 100 additions to platforms. And obviously, some of those happened within the quarter. So it just continues to get broader and stronger.

Okay. And then you also talked about, with respect to the Premia Plus balance product and more new product coming, can give us a sense for how -- kind of how active that pipeline is? Maybe number of funds.

Yes. I have to be a little careful about that just because of, yes, where they are and sort of that process. But again, I don't think of -- it's going to be investment pieces driven, and it needs to be long-term viable solutions, and so it would be an extension of some of these ideas. So don't think media investment needs as opposed to sort of run into the market with launches, that's not our approach. But again, it is something, it's a very strong team, and it is a combination of needs that people want to be out there. So it feels like it's probably going to be around for a while.

Okay. And lastly just on the expenses, on the marketing piece, how much of that decline sequentially was just cost coming off and maybe any seasonal changes in ads spending versus sort of the discretionary component of the cost management?

Yes. So I think the piece that's reflected it coming off -- it came off to the end of August till it got one-month of benefits, it's sort of a $6 million run rate. So that would be $0.5 million the benefit for non-[ph] sponsorship in the quarter.

The next question comes from Glenn Schorr, Nomura.

Just a quick question on investor appetite on alternatives and just triple checking that the Wilbur Ross Fund is still in capital raising mode, is that correct? So can't say too much, rather?

We can't talk about any capital raising activities, as you know, just from SEC regulations and the likes. I hate to say it, that's all I can say.

In general, it's been sluggish in the industry on Alternatives. Obviously, the market got cratered in the third quarter. But is there anything more behind it than just slow markets, because maybe the glass-half-full approach would be in markets where up 10% so far in October?

Yes. So let me talk about industry and investment opportunities, how is that? So it is a fact, fund raising in the Private Equity area, the fundraisers are taking twice as long, and they have been raising about half of what they did sort of the prior round. And one of those is this numerator- denominator effect with the institutions that you've seen where some plans are less interesting alternatives, others just because of the markets working against them, they've sort of hit their quota. That said, the investment opportunities that the WL Ross & Co., the team there, the pipeline is extremely full. They are finding fantastic set of investment opportunities. The team could not be busier and more excited about what's in front of them. And that's a very, very good thing, and they're very active, they'll continue to be very active. And there's going to be very, very good results for the people in the existing funds. That bodes very, very well, I think, for ongoing client opportunities.

Okay. A quicky on Premia Plus. Just curious, the Institutional product, what kind of fee rate are we talking? Whether it be the actual number or relative to traditional balanced funds? And then follow-up would be how retail is going to be priced.

Glenn, I don't think we have the ability to just kind talk about the pricing right now on this stuff, but it is something. The retail, I think, is public -- it's like 60 basis points, something in that range. So rather that I not get specific on the Institutional side of this point, if that's all right.

No problem. No problem. The final one is just when you look at the fee rate or the revenue yield x performance fees, it obviously comes down in the quarter when markets get beaten up. Ending assets are below average assets, so you expect more pressure. However, like I said, October is up a lot. So should we expect, still 2 months to go, but somewhat leveling off on that net revenue yield x performance fees?

Yes, I mean, I hope so. I mean, again, it's a great question, and it really does depend entirely on where equity markets go from here. And so yes, sort of more of stability more recently, sort of moving to the right direction would tend to allow me to agree with that comment. But again, we have to see how the rest of the year goes through, and FX may have some impact as well. So I'm hopeful that we'll see stability in that line item.

Right. I think what I would do, though, confirming your point, though, so that was what the market is and the few rates are changing quarterly. So the thesis is still in place as the markets respond positively. The effective fee rate would run back, so we don't want you to come away with not thinking that's the case.

I think I'm a little too positive.

The next question comes from Dan Fannon with Jefferies. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: I guess, Loren first, what is the right level of leverage we should think about you going forward, and maybe a little bit color on how you came up with $100 million, thinking about the buyback for 4Q?

All right. Well, in terms of, I mean, leverage going forward, we've discussed some debt to EBITDA ratios at one or somewhat below. We feel very comfortable at those levels. We were at somewhat higher levels after the second quarter when we stepped up the buyback. So again, I think you'll see those ratios decline over time. And so I'd say think about one-times as a general thought. Beyond that, the opportunity to delever further, it's always the conversation doesn't makes sense or take on more leverage. And you wouldn't take leverage on just to take leverage on. It would be done in the context of some opportunity, typically is why we would take on leverage. And for such opportunities, you could see a higher degree of leverage than we have today, in fact. So it is a dynamic conversation, but sort of business as usual, I think about one-times. The $100 million really is really just looking at total kind of payouts of the cash flow and where we feel comfortable. And we think $100 million makes sense. It puts our sort of payout of cash flow and operating income at the higher end of the range that we've done historically but certainly not in an uncomfortable way, and we think it makes a lot of sense, given where the prices. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Okay. And I guess on a quarterly basis, what are you viewing as your kind of excess cash flow these days on your run rate?

Well, again, quarter-over-quarter, it will vary because every quarter, we have bonus payments and then tax payments, and then while dividend is back from Europe and others. So it doesn't really work quarter to quarter. I mean, you can average it out for the year. But I mean, if we're generating about $100 million of free cash flow -- I'm sorry, $900 million of free cash flow, you can sort of calculate the dividends as already sort of baked to $200 million, $250 million. We have some need to build up some cash on the balance sheet as we've discussed, and I think we're on our way to do that. So we do want to continue to do that. How much we would deploy for buybacks, again it's sort of dynamic number. But I think best way to answer that is if you look at our history and what we've done, these payout ratios, as if we're paying out maybe 1/3 of our cash and dividends. And you could see 20% to 30% in buybacks, another 20% to 30% in buybacks, so $300 million buybacks per year, take it, divide it by 4, I mean that would be one way to do it, just see that today.

The next question comes from Robert Lee with KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Is it possible -- I just wanted to maybe get a little bit more color on ETF business? In particular, I know you had renewed efforts to expand the business outside the U.S, over to Mexico, I guess some time this past year. Maybe some updates on the progress maybe you're seeing there in different markets and kind of what we should be thinking about that, contributing to the business flows over the coming year?

Just broadly again, we I feel really, really good about our ETF business and the way that we're positioned within that market. And again, largely more value-added ETFs in the marketplace we think is going to be a growing part of the ETF business in the United States or around the world. And as you just mentioned, risk in Mexico, the Canadian effort, which is probably one of the more recent ones and more broad, continues to broaden for us where originally it was ETFs within the Mutual Funds than purchasing ETFs on the New York Stock Exchange and then more recently just getting TSE-listed ETFs. And Europe is an area that we continued to -- we've been in it in a relatively small way, but it's a market right now that is under pressure just broadly just because of what's going on there. And also back to the question earlier, there are some broader questions in Europe just around the structure of the ETFs with leverage within the ETFs and that. But that's in longer-term, we think Europe is an area that will continue to be an opportunity and probably longer-term, different parts of Asia for us. So again, it is absolutely a principal focus of ours as an organization. And again, today has been a very focused conversation here largely on the U.S. Retail business simply because of our most recent efforts there. But the front and center for us is the ETF business, and we think we're going to continue to purchase in that way going forward. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Right, great. And Loren, some couple of simple really kind of modeling questions, I mean, if you look at the adjustments, your intangible, amortization and the deferred taxation, I mean, that kind of, well I guess, the intangible amortization has been trending up. Has that been just as you kind of finalized some of the accounting from prior acquisitions, kind of what's been driving that? And for the deferred taxation, that's kind of been bouncing around within quarter-over-quarter?

Yes, I mean that there's a variety of things that go into that. It's probably a fairly detailed answer. Maybe you'll just catch up later. I'll give you kind of some insight into that. But again, there are a couple of factors driving those bits.

The next question comes from Craig Siegenthaler of Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: Just want to start here with a P&L question. A few other guys asked from the comp and compensation expenses. But I'm wondering, how do the underlying components change? When we think about some of the more fixed cost items like based comp and healthcare costs and then we separate them from some of the variable items like bonus accruals and stock-based comp, what was the rough kind of delta in those items quarter-over-quarter if the total comp changed about 1.5%.

That's a fairly specific question there, Craig. We generally don't breakdown into those levels of detail on our our compensation line items. But I think -- I mean, what we've said in the past is variable compensation is about 1/3 of our total compensation. That didn't change quarter-over-quarter. There wasn't any extreme sort of changes in hiring or sort of -- I mean, I think you'd find the salary components and the fixed components to be fairly fixed, right? So what you saw in the quarter was really just the flexing of the variable component. And again, that's the cash bonus fees is the one that actually has an impact in the quarter. Whereas, obviously we do provide some deferred compensation for our professionals at the end of the year. That gets amortized over 4 years, and that's a future expense. So again, hopefully, I can just answer your question by saying there wasn't anything unusual happening in any of those line items other than the variable fees, the cash fees flexing down. Craig Siegenthaler - Crédit Suisse AG, Research Division: All right. That's helpful. Then just moving over to Alternative flows. I know there's a bunch of different asset classes in that group, Real Estate, fund to fund. Can you kind of help us think about the sequential change in alternative flows and what really drove that?

Yes, Craig. I think you're going to find it's going to be largely the Real Estate piece, and it's both direct Real Estate and sold [ph] globally. There's also the REITs that we discussed a little bit on the call. There's been a strong interest in REITs in Asia. And so, that's been a big driver of that line item. There have certainly been other elements within that -- bank loans and other things that Marty talked about. But I think the largest piece certainly would be the Real Estate component that drove the quarter. Craig Siegenthaler - Crédit Suisse AG, Research Division: And there's nothing from the Private Equity side?

Not at this point.

The next question comes from Jeff Hopson with Stifel Nicolaus. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: On the U.S. Retail business, September flow is positive, obviously helped by the allocation products. Do you think that you've turned the corner in U.S. Retail, or is it the environment too volatile to suggest that?

You're asking the question we all want the answer, too. It's a hard one. I mean, so let me leading the way for us, for the least is, this Premia Plus type products, there's little question about it. But absolutely factual what you're seeing within the channel, disproportionate interest in Equity income-type products, whether it's the RFPs, placements on the different platforms, flows into the products. And if you look at what you have, where the flow is going, it tends to be those products. And I'd say, if you're on the sideways, the bias-up market, I think you're going to continue to see real interest in that range, frankly across the industry because at some point, once people think that they've sort of limited their downside, they're going to get out of cash products. And that's probably the next range of where they're going to put the money, and that has been consistent with what we've seen. And it was pleasantly just surprising to see some continued flows into those areas. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then a follow-up. On the U.K., flows were a little bit weaker. Is that all macro environment? That kind of performance has been good on key products. Anything to update there?

Yes. I think -- I mean, Jeff, I think it's macro. There's really nothing that was within the portfolio that would indicate that the product is less attractive than it's been in the past. So then people have just been running to the hills, generally. But even then, we didn't see sort of a dramatic reduction in flows.

The next question comes from Cynthia Mayer, Bank of America.

Just maybe a quick flow question, follow-up on that. Looks like the Fixed Income flows were lower this quarter than in the last couple of quarters. And I'm wondering if that's a function of particular products like munis or maybe an area like U.K, or is it a function of the performance, which if you look at Page 24 is a little bit off in the last year? Or are there any large lumpy institutional impacts? Any color you could give would be great.

We've continued in the -- money funds, money funds, excuse me. Muni bonds continue to be sort of an area that have been more net outflows. It's less than where you saw it earlier in the year when people were so scared, but that would probably be the bigger area of...

I mean, the other thing that I would point is, I mean, we had a lot of growth and stable value in the early part of the year, and there was a lot of wrap capacity to accommodate the demand. Wrap capacity continues to be a scarce commodity, and sort of put a little bit of a capacity constraints in terms of how much stable value we can do. So that's probably the other elements within the quarter.

Okay, great. And then maybe just on the FX. If you look at the FX impact revenues and the FX impact on expenses, what would be the net impact on operating income this quarter?

Yes. So I think it's just those 2 numbers, [indiscernible]. It's a couple million bucks, right? $4.3 million.

$4.3 million?

Well, I'm sorry. $4.3 million was the impact on revenue, and operating expenses was $1.9 million?

Yes, $1.9 million.

Is the net number a year ago?

Yes.

All right. $1.9 million was the impact on operating income.

The next question comes from Marc Irizarry with Goldman Sachs.

Marty, it looks like the U.S. fund flow picture is doing well and maybe the rest of the world seeing a little bit of pressure particularly in Continental Europe. Can you just give us some perspective on how flows are tracking in Continental Europe so far this quarter? And then Asia, strong. How much of that is really driven by the REIT story out there?

Let's see. Just thinking of -- starting in Asia. REIT has been very, very positive in Asia, but I would say, just our position, Asia is very, very strong. And in Japan now, very strong. Greater China, very, very strong. And I just think that's going to continue to be an ever-growing positive part of Invesco's long-term success. So again, anybody that’s been out there again even recently. It's just a very, very different environment than if you're in Continental Europe. So that's going to continue and probably just continue to broaden. And Asia was one of the areas, as I was speaking earlier, that you're literally seeing greater mandates and things like Japanese equities, even into greater China, interest in U.S. equities in Greater China. So things that you wouldn't necessarily think are top of mind, actually in the region, so very strong. And obviously, the continent in particular, I mean, it's been an area that people, consumers, investors have rightfully become worried, and that makes sense. That said, it's such a huge part of this. We talked about it on our last conference call. It's such a huge part of the asset base in the world that you have time to continue to focus on and make sure you're positioned well for a time when it improves, and we're not giving up on that. And we think this is a time to make a difference. It's no different than our approach in the United States, where we look to strengthen the U.S. business during a very difficult time, and I suggest that, that's worked out very well for us. We expect the same in Europe.

And then just on the continent, what have you seen in terms of maybe the progression of flows as you moved through the third quarter and then maybe early in the fourth quarter?

Yes. So -- I mean, sales were down a little bit, maybe 10% quarter-over-quarter. But redemption rates were the story. And so not again surprisingly, people were moving cash into riskless assets. We've seen some -- obviously, some turnaround in the market and in the environment. And so again, it's too early to say whether we're reversing that trend fully into this quarter. But again, I think given the breadth of the products and different types of products that we have, we have a Premia Plus type of product in our European line office, well, that we think we can continue to really generate some very good performance and flows for our clients there, even if they're not necessarily wanting equities, which again has not been a huge piece of our picture and continental European equities where we don't do -- we haven't done a lot of that in Europe. It's really been around other types of products, Asian equities and other elements.

The last question comes from Jonathan Casteleyn with Susquehanna.

Just a question. As everyone works their way through the European credit crisis, just wondering what additional processes or risk checking you had to instill within your Money Market business to ensure liquidity and et cetera?

We've not made any changes, but let me put that in context. I mean, yes, it's a very, very, very strong money fund team. It's a very, very strong credit team. And during the crisis here in the U.S., maybe you've heard me say, we didn't have a single credit that was downgraded in the portfolios that we had. So again, we just continued the processes that have been in place for many, many years, and it's worked just fine during this period for us.

Okay, great. And just one follow-up on that, a technical question on the fundraising for Wilbur Ross. Does the fund have to be raised before October to qualify for the earnout or is there -- it cannot be extended on the earnout side?

Yes, I'm sorry. We just can't talk about any fundraising activities. It's not that we don't want to, it's just the SEC prohibits us from doing it. But what I will say, the team is very, very strong, doing a very, very good job of finding great investments. And I think that the existing clients and the existing funds are going to have a very, very good outcome again. And again, I'm sorry, we can't be specific. We're just prohibited from doing it. And just again, thank you very much, everybody, for joining us today. And again, it was a good set of questions. And again, we thought it was a very strong quarter on the back of good investment performance and ever-improving flow opportunities for the organization. And we appreciate it, and we'll talk to you next quarter.

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