Invesco Ltd. (IVZ) Q1 2012 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 of our 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's 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.

Good morning, and welcome to Invesco's First Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now 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 thanks, everybody, for joining us. I'll speak to the presentation on the website, if you're so inclined to follow. And I'll go through business results, and Loren will get into the greater detail on the financials. And as always, Loren and I will address any questions people have afterwards. So if you happen to be following, I'm starting on Slide 3 of the presentation. To get started, long-term investment performance remained very strong for Invesco across the board in the first quarter. And again, we continue to see some areas of exceptional investment performance. And on the back of the strong investment performance, we contributed to a continued trend of positive long-term net inflows for the firm in spite of the continuing volatility in the marketplace. This is the seventh consecutive quarter of net positive long-term flows for the firm, which we think is quite strong in consideration of the marketplace that we evolve and operating in. And importantly, during the quarter, we're raising our quarterly dividend 41% to $0.1725 per share, reflecting continued confidence in the fundamentals of our business. And during the quarter, we've repurchased 3.1 million shares for $75 million. Taking a look at the summary results for the quarter. Assets under management ended the quarter at $672 billion versus $625 billion at the end of 2011. Invesco continued to generate a strong long-term investment performance for our clients during the quarter, which contributed to the net long-term inflows of $7 billion. This further extended the positive trend that we've demonstrated over the last several quarters. Operating income rose to $269 million versus $256 million in the fourth quarter last year. The operating margin was 36.6% during the first quarter, again, expanding over the fourth quarter operating margin of 35.8%. Earnings per share for the quarter were $0.44 per share, up approximately 5% quarter-over-quarter. And again, Loren will go into a much greater detail with the financial results. Let's take a moment and look at investment performance, and again, it's our continued commitment to investment excellence and the hard work to build and maintain the culture. The strong investment culture has generated this strong long-term investment performance across the enterprise. And if you take a look over at the firm as a whole, 65% of the assets were ahead of peers on a one-year basis and 77% of assets were ahead of peers on a 5-year basis. And as we mentioned the last quarter, the softness in the 3-year number reflects the rolling off of some very strong numbers in the fourth quarter 2008 and a brief period where we trailed the market during that snapback data rally in the early part of 2009. Based on the strength of the recovery later in that year in 2009, we would expect that 3-year numbers to solidify in mid-2012. Moving on to flows, again strong investment performance contributed to positive inflows in spite of the volatile markets. And as I've mentioned earlier, net long-term inflows totaled $7 billion for the quarter. During the first quarter, we saw a strong client interest in the balanced risk allocation product, real estate capabilities, ETFs and also in areas such as international equity, bank loans, munis, stable value. So it was really some broadness in the interest across the organization. Globally, the ABRA suite of product is generating tremendous interest from clients who are attracted to what is a very effective investment capability in this very volatile market. And also the top decile performance has been generated by the investment team. And as a result of the strong performance, ABRA flows were $3.4 billion during the first quarter. And this represents a 40% organic growth rate versus just last quarter. So it's an accelerating level of interest into this investment capability. The ABRA suite of products that's closing in our 3-year track record. That is during June that will happen. And as a result, we are seeing more clients add these capabilities to their platforms. We also saw a solid uptick in ETFs during the quarter as more investors put equity and higher yielding Fixed income capabilities back into their portfolios. And Invesco Perpetual corporate bonds continue to attract meaningful flows from the U.K. and continental Europe. And over the past 3 years, assets have grown in the strategy from $4.2 billion to just over $12 billion, a threefold increase during that period. In China, we saw increased interest in our Chinese equities capabilities, real estate, balance, asset allocation. In Japan, the Japanese advantage strategy has generated top decile performance over 1-, 3-, 5-year, and has generated strong net sales last year. And again, it looks like a strong pipeline there. So the point is, we are seeing in a really volatile challenging market some real interest in the investment capabilities. Taking a look at flows by channel. You can see gross sales across Retail and Private Wealth Management contributed to the positive net flows for Invesco as a whole. During the quarter, the institutional business saw a strong client interest in ABRA product, the commodities [indiscernable] product, real estate, bank loans and stable value. So again, a strong and growing pipeline. And we saw a substantial increase in the international growth product during this period too. Wins in these areas were offset by the $1.4 billion liquidation of the PPIP program, the treasury program and $1 billion in lower fee fixed income mandate that the client decided to internalize the capability. The decline in gross sales quarter-over-quarter was largely a timing issue, and our institutional pipeline continues to grow and be very strong and growing. And I just would like to come back to the PPIP program. It was, from our point of view, a great program. We were pleased to be in it. The team generated excellent results, so very good news, strategy. The Treasury was very happy to get the capital paid back at the pace that we did. And again, we came out of it as one of the top managers. And again, what you'll see in the active -- the $1.4 billion out of our active asset categories, but for that redemption, the results would have looked that much stronger. So in general, we feel very positive about the flow picture. And in spite of this trendless direction of the market, things are feeling quite strong for us at the moment. Moving on to Slide 9, I'd like to spend a minute talking about the U.S. Retail business. The depth and breadth of our investment capabilities are strong investment performance and focused client engagement efforts that resulted in strong momentum in this U.S. Retail channel during the first quarter. And in spite of the volatility, we saw the combination of strong performance and a number of high-demand capabilities to drive good momentum into the business. Early, I mentioned ABRA and the ETFs. We're also seeing demand for international growth products, emerging markets, munis, high yields. So again, we're starting to see a broad interest along different capabilities in the Retail channel. And as a result of the strong demand for these capabilities, we continue to see our market share gross sales increasing relative to the market and trending positive over the long term. The U.S. gross sales were 32% quarter-over-quarter and redemptions were significantly lower than the industry average. Ours coming in at 24% versus the industry at 32%. We still believe we're in the early process of achieving the full potential for our U.S. Retail business. The combination of solid performance and the number of high-demand capabilities are driving good momentum, and we're pleased with the progress we're seeing. And before Loren moves on to the financials, I'd like to take a moment to update everybody on our capital management priorities. And a number of you have been long-term holders of Invesco and know the direction of the company quite well. But it's really -- we have focused very much on the multi-year strategy to grow and strengthen our business. Our commitment to investment excellence enables us to deliver strong long-term investment performance to our clients. We worked to enhance the depth and breadth of our investment capabilities and have made successful strategic acquisitions that further expanded our capabilities. We also worked to further enhance the effectiveness of our global operating platform. And as a result of all of this progress, the depth, breadth and strength of our business has put us in a position to evolve our capital management priorities, which you'll see on Slide 11. And has been in the past, and has not changed, our first priority is to reinvest in our business in ways that enhance our ability to deliver strong long-term investment performance to our clients. Now in addition, the dividends are now featured more prominently among our priorities, which should provide a more committed level of return to our shareholders. This emphasis is reflected in our decision to increase our dividend 41% during this quarter. We came to this conclusion after a number of discussions with some of our very senior investors here, a number of our shareholders, good conversation with the board. And we feel very, very good about this direction. We think it's very positive and reflecting the strength in the organization. We will also continue the program of repurchasing shares. And as we've said in the past, our goal is to achieve a cash buffer of approximately $1 billion in excess of regulatory requirements. A key difference is that we have dropped acquisitions from the revised capital management priorities. All the acquisitions we have made to date have been strategic and focused on enhancing our ability to meet client needs. By revising our priorities, I want to make 2 points very clear. First, we don't need acquisitions to be successful. And secondly, we are not, and have not been, the consolidator of asset managers. These revised priorities reflect our confidence in our ability to meet our client needs. And based on meeting our clients needs, wwe're sure that we will continue to grow and further strengthen our capital position over time. I'll stop there and turn it over to Loren.

Thank you, Marty. So moving onto slide on assets. You'll see that during the quarter, we generated total net flows of $8.1 billion, $7 billion in long term and the remainder in money market products. Similar to prior quarters, the aggregate flows reflected continued strong client demand for ETFs, UITs and other passive products. In the category of actively managed assets, so we did see demand accelerate, as Marty mentioned, for balanced-risk but also for other income-oriented products in the quarter. These inflows, however, were offset by active equity outflows and also the previously announced $1.4 billion return of funds related to the liquidation of the treasury component of our PPIP fund. We also saw markets and FX continue to work in our favor in this quarter, and they added $39.4 billion in AUM. And resulting increase in AUM quarter-over-quarter was $47.5 billion or 7.6%, giving us $672.8 billion in AUM at the end of Q1. The average AUM for Q1 was up 5.9% to $658.2 billion. Moving onto net revenue yield. I just want to spend a little time with that since it's been a focus. Our net revenue yield in Q1 was 44.7 basis points. That reflected a decrease of 1.4 basis points quarter-over-quarter. The decline was due to the combination of 3 large factors. The first was due to, and the biggest, lower transaction fees and other revenues, accounting for 0.9 basis points of the decline. We saw lower performance fees in the quarter, and that accounted for 0.3 basis points decline. And then we saw a reduction in our gross management fee yields. Now this had a few things going on there. First, we saw our Invesco PowerShares QQQs increase from 4% to almost 5% of our average AUM. And that accounted for 0.2 basis points of the decline. And then we had 2 offsetting elements. We saw a fee expansion through asset mix, as equities expanded as a percentage of our AUM. However, that was offset by day count in Q1. And those 2 effects were roughly about 0.3 basis points offsetting. So next let's turn to operating results. Our net revenue grew by $19.5 million. That was up 2.7% quarter-over-quarter, and that included favorable FX rate of impact of $2 million. Looking further onto the line item, you'll see that investment management fees increased $41.3 million or 5.4% to $812.1 million. And this increase was roughly in line with the growth in average AUM we experienced from Q4 to Q1. FX accounted for $2.9 million of that increase. Service and distribution revenues were up $7.9 million or 4.4%, also in line with higher average AUM. And investment management fees and FX accounted for $0.4 million of the increase. Performance fees for the quarter were good. We came in at $21.2 million, but that was a decrease of $2.8 million versus Q4. The performance fees were generated primarily from certain of our investment trusts in the U.K., but also from our real estate portfolios. Other revenues in the quarter came in at $33.1 million, that was down $11.8 million, and this decrease was the result of lower transaction fees really due to our private equity business, which had strong transaction fees in the fourth quarter. Third-party distribution, service and advisory expense, which we net against gross revenues increased by $15.1 million or 5%. Again, this is largely in line with the increased investment management and service and distribution fees, and FX increased these expenses by $1.2 million. Moving on further down the slide, moving to operating expenses. They came in at $467.1 million. That was an increase of $6.6 million or 1.4% relative to the fourth quarter. FX increased operating expenses by $1.4 million quarter-over-quarter. Again getting into the line items, you'll see that employee compensation at $313 million increased $0.7 million or 0.2%. We saw seasonally higher payroll taxes offset by reduced variable compensation cost relative to the fourth quarter. FX increased compensation expense by $0.8 million. Again just to remind people, as is always the case every year at the end of February, the firm provides for salary increases and new deferred compensation awards to employees. The second quarter will therefore reflect a full 3 months worth of this impact related to these expenses versus only 1 month of impact in Q1. However, this increase should be offset by a reduction in payroll taxes in Q2. Moving on down, marketing expenses increased by $4.9 million or 22.2% to $27 million. And this increase was a result of higher advertising expenses in the U.S. and the U.K. And FX had a marginal impact of $0.1 million on this line item. Property, office and technology expense came in at $66.3 million. That was an increase of $4.4 million, and that reflected higher property lease expenses, as well as increased investment in portfolio management and client engagement technology initiatives in the quarter. And FX increased these expenses by $0.3 million. And then we got to G&A. G&A came in at $60.8 million, down $3.4 million or 5.3%. FX had an impact on G&A of $0.2 million, but you'll remember in last quarter we indicated a roughly $3.5 million of G&A would not recur and that in fact happened. So continuing on the page, you'll see that nonoperating income increased $8.3 million compared to the fourth quarter. And this increase was due to the mark-to-market of certain of our partnership investments, but we also realized some gains on the sale of C capital the during the quarter. And then we had the firm's effective tax rate coming in at 25.1%. That was in line with our prior guidance. And again going forward through 2012, we'd expect that tax rate to be between 24.5% to 25.5%, which brings us to our adjusted EPS, which we grew by 4.8% to $0.44. And then, as Marty mentioned, our net operating margin expanded about 80 basis points to 36.6% quarter-over-quarter. With that, I'm complete, and I'll turn it back over to you, Marty.

Great. So we'd like to open up to any questions anybody might have.

[Operator Instructions] Our first question does come from Ken Worthington of JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: On the direct real estate business, how much money have you raised, but maybe not invested yet? And how quickly are you putting dollars to work here?

Ken, we have several billion dollars won, but not yet funded real estate assets, and that's a pipeline that continues to expand. It does take a while for it to be invested, so it could take anywhere between 0.5 year, perhaps even longer, depending on the opportunities. They are patient in terms of looking for the right investments. But it is something that has been sort of being put to work and continues to be put to work quite at a good clip. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And then on the institutional business, I know this is lumpy. But can you talk a little bit about what happened in this quarter? It looks like redemptions were normal, but the gross sales dropped off a lot. And I think maybe, is PPIP on the redemption side that give back to the government? And I don't think you make fees there, but was that recorded in the Institutional gross redemption line?

Yes, all right. So in terms of the first question, there are a couple of factors. One, just generally, sales and redemptions, quite honestly, are lumpy in Institutional, and so it is hard to sort of be a straight line progression all the time. But if you remember, there was, I think we've talked about it in the fourth quarter, about $3 billion of real estate sales that took place. It was in the Passive side of the business, on the Institutional side, and this has sort of separate real estate properties that we manage that showed up on the sales side in the fourth quarter. And that wasn't something that recurs. So that was about $3 billion. You take that out, it sort of becomes more flattish quarter-over-quarter at least comparing to the fourth quarter. But in reference your second question, yes, absolutely, the PPIP was and is reflected in the institutional outflows. And again, we think it's a good story. It was sort of a planned redemption in terms of what we're looking for. About $1.1 billion of that is in Active, $0.3 billion of that is in the Passive category, so again just to give you some color. Overall, I'd say, in terms of the institutional pipeline, just to give you some more color on that, I do think it's one that we feel is strengthening and is in fact probably higher than we've seen in recent history and it's broad based, so it's across many of our different categories of capabilities, whether it's balanced-risk, Real estate, bank loans, global equities. It's a very, very positive story for us at this stage. And so we feel pretty good even though the first the first quarter didn't necessarily reflect it in terms of the absolute numbers. We feel that it's looking pretty solid for us. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Great. And then just lastly, the Japanese REIT business, obviously beginning of last year was a big, big tailwind for you. In the quarter, how did it do? Is it a headwind now? Is it really not doing anything? Where does your Japanese REIT business stand?

It's actually doing pretty well. I would say in the quarter, there was $470 million of redemptions related to that particular capability. That was the net outflow number in the quarter. The first month, April, I think it was about $50 million, so it's actually at a better pace into the second quarter, so we feel pretty good. Again, we don't think that there's this big sort of pent-up desire for redemption on this product. And in fact, we have been very successful in terms of providing this product through a variety of distributors to -- with stickier sort of time horizons than others in that space. So we think that we have a pretty good situation there. And quite honestly, we're also working with the distributors in Japan to look at other products that ultimately, if it makes sense, could serve as a way to replace those assets if they wanted to redeem.

Our next question does come from Bill Katz of Citigroup.

A couple of questions. First one, on the marketing spend, how much of that is tactical given the performance and some of the momentum of the gross sales versus more structural given the broadening of the platform?

A couple of comments. The vast majority has been a broad recognition-type marketing spend. And that is in place, it's going to continue. And as we've said in the past, we just know we have work to do to catch up there. There has been some specific, if you want to call it, tactical marketing, but largely around in the United States, around the good performing Equity products, the equity income products, the International product, and we'll continue to do that. But the vast majority is really broad.

Bill, there may have been about $1 million or something related to the U.K. launches of the global Balanced-Risk product. So a little bit of tactical, and there probably will continue to be a little bit of tactical as we continue to roll out those products.

Okay, that's helpful. And so my follow-up question is just in terms of capital management. So it seems you seems very clear that you're not looking to do anything of size that's not to your liking. But conversely, as you look at your footprint now and you see what's growing and what's not, are there other areas that might be pruned that could be reinvested into faster growth parts of the business?

Bill, we continue -- I mean, you've followed us for a long, long time. I mean that has been our history for the last number of years and we'll discontinue to do that, and where we feel really good about the depth and breadth of the capabilities around the world. There are just areas that we would like to get stronger in and we're just always looking at that, and that's always what we try to do. So we'll stay on that path.

Our next question does come from Robert Lee of KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Maybe actually a follow-up to Bill's question and will be a little bit more direct. I mean, obviously, there's been reports about Atlantic Capital, and I've also seen some reports here or there about speculation about you're maybe even looking at the CLO business as a business you maybe no longer want to be in. So I guess more directly, given that you don't have a slide here showing that it had inflows, should we be thinking that Atlantic Capital remains as kind of a strategic important business for you? And more broadly, is it possible that we could see more businesses kind of be pruned like CLOs and things like that?

Let me respond to a couple. Again, first, we don't ever speculate on any of these sites' activity. It is amazing to see the attention here. But around Atlantic Trust, I mean you have seen they have another great quarter of net inflows. They've done a spectacular job for their clients. It is a very unique well-run business. And you can see why people are interested in it. But again, we're going to continue to stay on the path that we've been on with them, and they've done a great job. So we can't say anything more than that. And again, we continue to be very, very committed to the bank loans CLO business. It's done great things. It's a great team and we see continued opportunity there. Where CLOs in particular, they literally dried up over the last number of years, but it is something that -- it of looks like it'd be an opportunity again over the next -- in the coming years. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And then maybe just one follow-up. Would it be a positive on the kind of ETF business a little bit more, the Passive ETF side of the business, a little more granularity? And sense of how much of the flows there were kind of straight ETF products versus, say, some UIT products and maybe even the QQQs?

No problem. So of the -- we saw net flows on ETFs broadly of $6.5 billion in the quarter. $2.1 billion of that was our traditional ETF products at the higher fee. $4.2 billion of that was the Qs and $0.2 billion were the Invesco PowerShares DD product. So that's the breakout.

Our next question does come from Dan Fannon of Jefferies. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: I guess focusing on flows here. If you could talk about, first off, it looks like Asia you had a change there in terms of going into outflows in the quarter. And then also within Alternative's, you also saw a moderate change and talk about what's the products that are redeeming in both those areas, please?

So Dan, in Asia, it was again largely the -- what we saw the U.S. REIT product go out. So there was some pressure there. There was a little bit of institutional outflow we saw in Australia, was a factor. On the Alternative side, it was really PPIP. It was the $1.4 billion that you're seeing there. And maybe there was, what, CLO that redeemed. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Okay. And then it seems like a fair amount of moving parts that you walked through with regards to the revenue yield. And so just want to think about it going forward, all else being equal given the number of days going into the second quarter plus just kind of the movement of average assets. As I said all else equal, we should see the revenue yield kind of move higher here into 2Q?

Yes. I mean I think it won't have the day count impact affecting it, again barring any further movement in Qs and so forth, which can obviously have some impact. There would be an uplift of some fee rate into Q2. And then obviously, we talked about the fee waivers falling off, which is our expectation still in the second half of the year among some other things that we think will be helpful for the fee rate.

Our next question does come from Michael Carrier of Deutsche Bank.

First question. Just on the expenses, so it seems like maybe on the marketing and then on the occupancy, you guys mentioned some of the drivers there. But I guess, just looking at where we're at currently going forward. Any items, one that will be coming out of there? And then probably more importantly, any new initiatives that you're looking at to be picking up? Or are these fairly good run rates going forward?

Mike, I would say that they are fairly good run rates going forward. The marketing at current levels, I think is probably the right way to think about it going forward. Property, office and technology could see a little bit of noise here and there. But I do think it's just one of these numbers that we'll be fine. There's a big moving piece to this, so I'll just remind people. That we'll explain, but it's offsetting, which has to do with our European infrastructure transformation where we're going to see some properties being exited. We're going to see an outsourcing of our transfer agencies so -- and then, a reduction in salaries. So you'll see that line item, property, office and technology increasing through the last half part of the year, but it will be offset through some employee compensation, as we really moved to the outsourcing arrangements, which gets completed at the end of the years, but we will explain that. But again, just so you understand, there will be some sort of offsets there. G&A, we feel pretty good about, so I don't think there's any real need to point anything out there. Again, we continue to try to manage closely and it will depend on what sort of market environment we're in to some extent, but based on where we are today, they're pretty good.

Okay, that's helpful. Then when I look at your flows and going across channels, adjusting for the PPIP, it looks like you will had flows probably across all of them, on products kind of the same thing. You get inflows across each of the categories and then regions x the Asia, you had some outflows in Canada, but there's still inflows across. And the only area that -- it's been challenging for the industry and you guys are no different with being on the active side, just fixed income maybe not as strong in equities a bit, but in line with industry trends. But when you look at where you guys are and the products where you're seeing inflows versus where you're seeing outflows, do you still categorize it as still just industry trends? Or are there certain products where you're seeing some momentum or you're seeing some improvement in performance where either you could start to see that kind of an inflection point? Obviously, it's going to depend on the market and sentiment around outflows. But just more specific to among your product lineup, anything that's turning or changing either that you're seeing?

Yes, you're asking exactly the right question, and we have a conversation all the time not just amongst ourselves but also with clients, and I know you all do too. And as we look at it right now, we just start by looking at the depth and breadth of the capabilities. It's broad. It's deep. We like what we have, strong performance. And what you're seeing is still the market unclear investors of what they want to do, right? And it's -- we agree with the theme that fixed -- core fixed income is not the place to be in the next 12, 18 months. And the way that we look at this as the flows, the asset allocation capabilities getting an awful lot of attention, the risk parity in particular. And that's very consistent in our minds that people starting to move away, try to get some greater returns than what we've had, while also trying to maintain risks. And if you see where some of the other folks get the municipal bonds and sort of -- you can see why people are starting to do that for yield, but also thinking where tax rates might be going. Emerging markets, we're starting to see some of that also. And bank loans again, very interesting, real estate very interesting, but that's very consistent with people moving -- trying to move towards generating greater returns. We personally think the idea that world's passive from now until 30 years from now is just not accurate. I think this is a very natural evolution. It's slower than what you've seen in the past, which is not surprising, continued to the magnitude of the challenge that we came out of. And if you'll look at our flows, you're right. They're broad. They're-- we are in net flows across many categories. But we are still in a position. If you look at the -- where the net outflows have been, it's largely been in U.S. equity products, and that is a real strength of ours. And when you look at our assets under management, we have disproportionate U.S. equity, more so than the industry. So when people start to move into U.S. equities, we should benefit very, very strongly from that because of the depth and breadth of the capabilities. So again, we think the right answer is very hard to pick markets, but having a broad set of capabilities are performing well. You should do well. And I think that's what you're seeing right now from Invesco.

Okay, that's helpful. And this might be -- maybe it's a little too early, but just on the -- your restructuring, any update there, timing, just any color there? And like I said, it might be too early?

Yes, I think it's really going to be a second half discussion. So again, I think it is a little too early to have that other than it's on track. We're doing well. Everything has been signed in, so progressing. So we do think it is going to help transform our business. It is just sort of an operational part of the overall transformation. We have talked about what we want to do in Europe generally, and I think we're seeing good traction with the flows. But I mean, quite honestly, we pulled back a little bit on some of the initiatives we were focused on because of the market that we were in, and it didn't seem to make a lot of sense to significantly increase advertising for example, in Europe when people were certainly, as an industry, not necessarily buying product. So there is more to come, I think, on the European story overall that, that we'll be happy to tell at the right time.

Our next question does come from Matt Kelley of Morgan Stanley.

I was hoping you could talk a little bit more about your efforts on the Retail side, working with different platforms and specifically, what products, financial advisers are most excited about offering at this point in your discussions with some of the different Wirehouses would be helpful?

So let me go through it. It's a little bit repetitive, Matt, so I apologize for that. But what we are seeing, as I discussed earlier, I mean you can just see quarter-over-quarter, gross flows are quite dramatically and it was 32% quarter-over-quarter. What that is reflective of is the conversation we've been having over the last 12, 18 months that lead indicators are getting more products on platforms that's been broadening very, very much. And one indicator might be if you take a look at our, what you call it, our top 10 distributors, retail distributors, a year ago, 3 of the 10 were in positive flows, us on their platform. At the end of this quarter, 9 of the 10 of our distributors were in net flows with us. So that's a really positive trend. We are seeing again, where we're seeing the flows. ABRA is this risk balanced allocation because of the marketplace and because of the performance is very, very popular, but we are seeing international growth. Small cap adds some good flows during the quarter and municipal bonds, high-yield bonds. So it really is broad. But disproportionately, it's around real estate, but it's been around the asset allocation risk balance. But we don't -- it's just getting broader than anything that we ourselves have experienced. So again, as confidence come back into the market, we think we are going to be positioned quite well.

And I just mentioned that we're seeing strength in terms of crossing the independent channel, up 23% quarter-over-quarter in terms of mutual fund sales, the Wirehouse Channel, I think we're up almost 40% quarter-over-quarter in terms of mutual fund sales. And the broker deal channel, 34%. So -- and then when we look at our sort of rankings within distributors, it's pretty much across-the-board that we're increasing our market share in every single name that we sort of have a relationship with. So again, it's just very encouraging. And then on the platform side, the one thing that we're really looking forward to is when ABRA gets the three-year track record and actually get onto -- into models, which is going to be an important point to help even further accelerate the interest in that product.

And I think if you step back strategically, add some of the things we've been talking about with all of you in our investors is that what we were responding to was a marketplace where advisors were becoming much more sophisticated in dealing with their clients. And so, yes, we have a depth and breadth investment management capabilities, but they also are using different vehicles to meet those needs. Yes, mutual funds, but also the UITs play an important role in some of the advisors that we work with. As do the ETFs, and it's really that broad range of investment capabilities with vehicles to meet the advisors' needs. And that, again, is sort of the positioning that you're putting ourselves and we want the -- we want to help the advisors be successful with their clients, and that seems to be -- it's gaining some traction.

Understood. The other thing I'd ask you about is on the ETF business, I think they're one of the things that I had wanted a discussions about is the revenue margin versus operating margin dynamic. And I was just hoping you guys, obviously there are a lot of moving pieces in your operating margin right now, given expenses and flows into different products. So could you give us a little bit of how you think about the business in terms of the underlying margin associated with the active versus passive side of the business directionally? And how -- what any sort of inflection points might be?

Yes. So I would say that we feel very good about the margin prospects for our ETF business in general. And firstly, the ETF business is sort of hard because there's all sorts of different pieces to our ETF business that we've talked about in the past. I mean, the one that is sort of misleading is I'd say, or the Invesco Powershares QQQs, right? So they have no management fee, but they have a marketing rebate. And the way I view that is, is it's almost a margin accelerant to our traditional PowerShares. And because it is something that we benefit from that in terms of the broad brand recognition that we get through the QQQs. And so you put marketing sort of being helped with that product. In terms of the infrastructure, it's all there. It's built and we're just getting bigger. And so, we've seen margin expansion as we see the operating leverage work for our ETF business. And I think also importantly, we're more focused now than we have in the past in terms of -- an all weather type of ETFs. The ETFs that will be less sort of specifically thematic and probably will serve across a long time. And that will help in terms of getting critical mass in those ETFs, which is important for our profitability and margin expansion. So again, all those things I would say gives me a great sense that, that business is -- it's certainly on par with the rest of our mutual funds business in terms of margins, and should not -- we haven't seen price degradation or fee sort of squeezing unlike some of our competitors who are on very commoditized types of products. So we haven't seen that activity on our products. So we feel very good about that. Some of the other products that are passive, which would be our UIT business have very fine financial characteristics. They are launched. They don't have a management fee, but through the launching process, there's a very, I'd say, good fee associated with that. And so, you think about the margins on that. They're among the higher-margin elements of our business. So again, we feel very good about that. Some of the other parts of the business that I'd say are passive would really be related to maybe leverage associated with some of our structured products. And again, those can generate performance fees. And so it's not a big part of the passive story. It's a small part it's not one that tends to grow that much. So really, the QQQs and traditional products and the UITs and we feel good about those products in particular.

Our next question does come from Cynthia Mayer of Bank of America.

So on the expenses, and I apologize if you covered this, but how sustainable is the cut in the variable comp? And what drove that?

We tend to see variable comp decline a little bit in the first quarter really as an offset to the payroll taxes. It is not a -- something that we would say is a large number. If you're thinking about compensation going forward, I think it's going to be sort of roughly in line with this quarter based on current levels. It can move around a bit. We talked about the offsets of our payroll taxes going down but the a quarter worth of salary increases and deferred compensation. The other thing that can move it around, of course, would be performance fees and those are sort of when they were done in the quarter, it's reflected in the compensation in terms of bonuses. And so that number will move around based on levels of performance fee. And we hope they go up because we hope performances go up. But again, hopefully that's helpful for you.

Yes, that is helpful. And on the Retail flows, it looks like the gross sales were up in the quarter, but they were also up a year ago in 1Q. So I'm wondering if you can tease out how much of that increase you think was seasonal versus greater traction?

Yes. I mean, there's no question. There's some degree of seasonality in the first quarter, so you're right that that's a good comparison. But just to remind people, in the first quarter, a lot of the sales that we saw were through stable value types of sales, and so that was a much lower fee type of product, typically 11 basis points, maybe less. The sales that we're seeing this quarter are not in that category. They're more along the lines of 90 basis points, so it's a very different revenue profile than we saw last year.

Okay. And maybe on the stable value, what were the flows to that?

I couldn't put my fingers on that offhand right now. But I mean, they were significant in the first quarter last year, billions if I remember. But let me -- maybe one that we have to address offline with you, Cynthia. I mean, maybe it's $3 billion, is that -- I don't know. We'll address it offline, sorry about that.

Okay. And just lastly, just in terms of the fee rates, can you tell us maybe what impact fee waivers have this quarter and what the outlook is there?

Well, the fee waiver impact we had said related to the fund mergers is roughly $30 million on an annual basis. And so we're obviously seeing that in this quarter. We'll see it in the next quarter. It's really going to be in the second half of this year that those we expect would fall away. Obviously, that's still a discussion that needs to be completed with the fund board. And so I don't want to get ahead of the fund board. Still, things may happen there, but that is our current expectation. So again in the first quarter, it would be obviously a part of that $30 million as being reflected there.

And money market fee waivers, are those improving at this point?

Those are not improving or getting worse. Quite honestly it's a small part of what we see because we have institutional product, which tends to be at a lower fee rate, 11 basis points. And so, our waivers are not material. Certainly, I think across the year or maybe they're $5 million to $10 million in that range, at most.

Okay. And then if I could just ask one last question, just a very general one. You have a lot of investors in the Balance Risk Allocation fund. I'm just curious what you think their return expectations are? And what you think, to the extent they're substituting it for something they already own. Are they substituting it for an equity fund, a bond fund or an alternative fund? And what do you think the best benchmark for that is?

Cynthia, I don't have that level of granularity. I think the answer you're getting some element off the all of that. And it's really, I think how I'd really respond is that the financial advisers are looking at this balanced risk allocation product as just another important tool in the toolbox that they're meeting the investors' needs. And one of the elements that's important is that there's less volatility associated with it. And I think one things that's come out of the crisis is that people are less inclined to have the volatility that they've had in the past. Now I'm sure as years go on and things stabilize, that will probably be less of a focal point. But you're just getting people that are seeking greater returns than what they're getting in the cash accounts and trying to get some greater equity-type like returns.

I mean, and I think I'll only say, there's a hypothesis which is maybe people who are in balanced products, fixed balance products equity versus fixed income, maybe going into this type of product, which is more dynamically allocated across some more wider range of investment opportunities. So -- but again, that's it's a hypothesis. It's hard to really sort of say who's redeeming out of what for us.

Michael Kim with Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First question, you guys have been pretty good about identifying allocation trends and sort of getting out in front of them, so that you have the right strategies in place when demand ultimately picks up. So just wondering what sort of products or strategies are you currently working on or having the pipeline that you think could ultimately be meaningful growth drivers down the road?

It's going to be the iPad 4. No, in all seriousness, we're not in a position to have those conversations and we're always looking at -- really, we respond to client needs, and we really think really what we have out there right now is pretty broad. And I think we're on the mark, but I appreciate the confidence and the thought, but no real magic. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay, fair enough. And then maybe if you could more on just talk a little bit about other revenues. I know you mentioned the lower PE transaction fees in the first quarter. But what is the outlook for the kind of deal flow there and how should we be thinking about that line going forward?

Yes, I think it's one that -- we knew there was PE stuff, it's sort of one-off, but the biggest piece in that line item or pieces are related to the real estate transaction fees, which again, we feel good about the growth there. The UIT business, the revenues associated with that business go in that line. And the UITs had a very strong quarter. In fact, for the industry as a whole, I think UITs had the strongest quarter they had in a very, very long time. And we saw that as well. So I think that, that's going to help continue to contribute to that line item. And so overall, I think we think somewhere between $30 million to $35 million is kind of the right run rate level in that space. It will move around. I'm not that good that I can actually tell you when the real estate Transaction fees happen and what quarter they happened in, but we do think that sort of the overall level will be in that range.

Our next question does come from Jeff Hopson of Stifel, Nicholas. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: So I'm curious, in terms of the U.S. Retail market, what are your wholesalers out there talking about? So obviously, they want to capture sales and see where the interest is. But are they talking about equities trying to position for when there potentially is some interest?

Yes, that's a good question. I'm really glad you sort of asked that. I mean, I'd say ourselves, and I suspect the vast majority of the firms that are doing well are -- the ideas of product pushing is long gone. I mean, I think that's -- and it's much more going into a consultative advice, engagement with the clients and is very broad, very deep. And we have not just recently, but even somebody asked earlier about if you just look at some of the marketing materials, even last year, we were getting people focused on where we thought -- that the great opportunities in equities. And international equities, large-cap, dividend-yield, equity income-type products. And so we've been on it for quite a long time. And with the idea of just trying to understand investors' need and where we think the opportunities are and wanting them to be thoughtful moving ahead and not reactive to the market. And we do it in multiple different ways, whether it be through things even PowerShares Universities. We have -- we came over with Van Kampen of Van Kampen Consulting team that actually is educational sources for different advisors in the marketplace. We're doing it quite broadly with white papers, investment buck pieces. Having our investment teams in the markets talking to, so maybe that's too much information, but the real point is we really want to work in partner with the advice channel, and having them solve the longer-term needs for their clients. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And if I could follow up. Your U.S. Retail business, if I assume, that maybe it's not an ideal scale, can you get there if equities continue to lag? Obviously, the allocation products are helping. But any thoughts on that?

Our -- again, our focus is on quality, not quantity. And if you look at all of our conversations and all of our focus has really been on generating consistent good long-term performance around a broad breadth of capabilities. And that's really what, and I think, we have accomplished. And if you do that, there's no question in my mind in time, you will meet client needs and you will end up serving more clients more broadly. And that's what you're seeing. And a little bit to the conversation we're having earlier, investor preferences will move over time. And having the depth and breadth of the capabilities, it really matters. And that's what we think we've accomplished and ready for multiple different market cycles. And we think we're doing very fine right now in a very difficult market. And if there is a greater sense of confidence by investors, we'll just do that much better.

Our next question does come from Craig Siegenthaler of Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: I just had a follow-up question on the economics of the Passive business. So you did answer some of this earlier, but I just want to kind of ask it very simplistically. So if you have $1 of additional revenues going to Passive and $1 going into Active. On average, I know there's a lot of different pieces there, but what is the differential between the incremental margin between the 2?

Yes, I think it's largely the same, Craig. That's a way to think about it. Craig Siegenthaler - Crédit Suisse AG, Research Division: Okay, got it. And as you move across the passive, and you did comment on this a little bit earlier, but as you look at UITs, Retail ETFs and Institutional passive, what is the difference between incremental margin between those stories, one higher than the other?

So Passive within Institutional? Craig Siegenthaler - Crédit Suisse AG, Research Division: Yes.

Again, Passive within Institutional, I think will be generally at a lower fee rate and perhaps a lower margin. We don't have that much of it, so it's not something that we are positioned for. We have some, but again, it's really sort of leveraged. That's associated with a real estate fund. We could have some leverage. We break out the assets associated with that fund into the passive and active pieces. So it's a little unfair because you can't really have the fund without the two pieces together. And we've broken it out just because we think it's important for you to see, as those assets grow, what the impacts are. But you can't -- I mean, it's not really something that we just have leverage, right? It's always with the funds. So passive for Institutional isn't all that relevant, I think in terms of the conversation. It's really the retail side that we've just been talking about, which I think is a very fine business with excellent financial characteristics. Craig Siegenthaler - Crédit Suisse AG, Research Division: Okay. And then just a kind of financial question. The fee waiver step down on the merged funds I thought was June 15. So roughly in 2Q, you're going to have 15 extra days of higher fees and then the bigger step up is in 3Q. Do I have that right? Because I thought when you were explaining that to Cynthia's question, you actually referenced the first quarter?

Okay. So maybe -- I was saying in the second half is when you're going to see the fee waivers fall away and basically you get the pickup. I was using rough, sort of rough -- yes, it's spread in, so there's a couple of dates. I think you've probably got those dates generally correct, but I think in terms of the bulk of it, it's sort of end of June.

Our next question does come from Marc Irizarry of Goldman Sachs.

Marty, can you talk just about ABRA a little more in terms of how it could evolve as a franchise for you if preferences remain the same, in particular as you get past out of the 3-year anniversary here and you get your 3-year numbers. Do you think that that's going to become more of an Institutional product potentially for you? Are you going to grow maybe in the DC channel with that product? Or maybe you can just talk about how you see that evolving if preferences stay the same for retail investors?

Yes, ABRA is a subset of really our multi-asset strategy and we can maybe talk about it more holistically next quarter, if that's helpful. But yes, in that context, I think it's important to note, I mean, this is a very attractive product in this market, right? Sideways to up market, it is obviously been very, very attractive. And as I mentioned earlier, if you look at the punch ratio quarter-over-quarter, it's 40%. I mean, we had net flows of $1.5 billion last quarter, and $3.4 billion this quarter. So I mean it's really quite dramatic. And to your point, from a franchise point of view, if you look at it by channel, it was really introducing the Institutional channel at the end of '09, and so recognizing much smaller assets, but it was 60% in the Institutional channel, 40% Retail. If you look at it today, it's 90% Retail, 10% Institutional, but it's really just been more of the pace of the uptake, and it is through those different areas that you're talking about, it makes a lot of sense in the DC plan. It makes a lot of sense for an individual asset allocation plan. And that's what you're seeing. I think also what I would note just from a franchise point of view, when we introduced to, we're introduced in the United States. So 100% of the assets is from the United States. Yet today, 30% of the assets are outside of the United States, and that is a development. It's and introduced in trailing the U.S. And I think Loren mentioned earlier, it's just been, I don't know, a month or 6 weeks ago that it's been introduced in the U.K. Maybe I'm going to lose track of the time, but some of them are months ago into Canada and into what we call our C Cap product that gets it into kind of all Europe and actually in some parts of Asia. So it's a capability. It is a global capability, and that's what we've been doing with it and there's national extensions off of it as we've talked about whether it'd be a commodities leave, which has been gaining some real attraction. And also the same idea had been introducing an income version of it, and that was introduced in the Retail market, December of this past year. So very early, but that's exactly -- again, this is a subset of the total mall passes strategy capability that we've been on for a period of time. And it is making an awful lot of sense. And I think, I think it's importantly to note that we do feel we have the depth and breadth of the capabilities are very, very strong. This is a sweet spot at the moment, and some of the -- what could you expect? If you have a bull market start to kick in, this is going to slow down. But the good news is where the -- where's money going to go? It's going to go into our various strong equity-type products. So again, it's back to the conversation we're having earlier, just broadly being in position to meet investor needs around the world and within channels, and that's what this is really representing.

Just know -- I mean, it's too late for the U.S. allocation as an asset class, which this falls into is $820 billion in size. The world allocation piece of that, which is what this is classified in at the subset is $252 billion, so it's a big pool of assets. We're obviously, I think just touching the surface now. I think if you aggregate all our asset allocation across what we've got, it's roughly $12 billion, something like that and growing rapidly. So we're still at a very small market share of the pretty big pool that is pretty exciting for us.

Great. And then just, Marty, your comment on acquisitions sort of falling off or falling significantly lower on the capital priorities, what does that say about maybe it's the fact that you do have all the capabilities you need? Or is it something regarding sort of the environment out there with the deals that are out there relative to what you're trying to accomplish? I'm just curious in terms of your sort of commentary around acquisitions sort of falling off the priority list for you?

It's probably both of those, right? I mean, if you look at the company today as compared to 6 years ago, the depth and breadth of the investment capabilities are just vastly stronger. And much of it was done organically. But by the way the combination of WL Ross or ETS [indiscernable] addition or Morgan Stanley/Van Kampen thing, they're really driven by meeting strategically investor investment capability gap. So there's just fewer gaps, right? And yes, that's a big message but I think also, to your point, for some reason, it seems that there's a perception that's the bulk that were consolidated. We've never ever, ever done a consolidating transaction. It's always been strategic, and we just don't want anybody confused. And always our first priority has been to reinvest back in the business and organically improve ourselves. And -- but again, we just want that very, very clear in the marketplace.

Our next question comes from Roger Freeman from Barclays.

Just maybe a couple of follow-ups on other questions that have been asked, and then maybe following on the capital allocation. So as you reconsider the mix of dividends versus buybacks, obviously, your conclusion is dividends are more important. But relative to one another, not having the -- your cash flow statement in front of me last year, the last few years as you think about what you spend to reinvest in the business? And then, that excess capital -- that excess cash flow remaining, how -- a, how much of that do you see distributing out? And b, the mix?

So Roger, I think in all honesty, how much of our cash flow we use and return will vary depending on the sort of market we're in. Obviously, whereby upping our dividend, we're committing -- to a more committed amount of sort of a payback outdoor cash flow. In terms of what we've done in the past, I think it's ranged from 50% up to 100%, and it will vary. But in terms of how we think about it, I mean, it's obviously within that range as the way you should be thinking about it. It could be at the midpoint of that range or a little bit lower for us going forward. But again, in terms of just how much we do in a particular year, we'll have a lot to do with ultimately how the year sort of plays out. But I would look through our past history to understand what you should expect from us. And really, it's more business as usual. All we're really doing here, and the way you should be thinking about is just transferring a little bit of what we did in buyback into the dividend bucket. I think it's all the magnitude. It's pretty much the same.

Yes. Okay. Yes, that's what I was getting at. So that's easier. So okay. And then secondly, on the progress around the Van Kampen integration and new product sales, did you have any new product additions on platforms? Or how many did you have during the quarter? And importantly, was there anything of significance on the model portfolio front that you've added?

Yes, I think the ABRA [ph] -- all of the platforms have been marginally placed. We're still waiting for the big impact on models. And I think we're really thinking it was going to be one that is going to get into these models once we hit the 3-year number. That's the one that should have the biggest impact in terms of moving the dial. But we continue to make progress, obviously, in terms of the market share. We've been very pleased. And it's happening tomorrow. It's just happening through our sales force effectively, working with the advisors at sort of their office levels. So again, we're pleased with the impact in terms of the transaction, the integrations done. We are now really just seeing the benefits of that coming to fruition as advisors and home office really understand our products and us better.

Okay. And then lastly, you made some upgrades to the Institutional sales force a couple years ago. And it sounds like the pipeline is strong as it's been in a while. Is that reflective of, I assume, the incremental penetration you're getting with the gatekeepers? Is that progressing as you thought it would?

Yes. We feel really good about the Institutional leadership, and Eric Johnson and the team he's brought on. And it's just getting stronger and stronger. And it's a combination of investment capabilities that are meeting investor needs along with a really talented group of Institutional sales leaders. And I think many of the people on the phone know that. I mean, it just makes a huge difference and they're making a huge difference for us.

Our next question does come from Cynthia Mayer of Bank of America.

I just wanted to clarify. I think you said earlier in your prepared remarks something about April flows, $3.4 billion, but I wanted to clarify that.

No.

No. Was that from you, Cynthia? That -- I mentioned that was the ABRA flows for the quarter.

ABRA flows, okay. That makes more sense. I was going to say, that would be unusual for you to discuss April flows.

Yes. I don't want to break with history.

At this time, we show no further questions.

Again, on behalf of Loren and myself, thanks very much for taking the time and we look forward to talking to everybody in the next quarter. Take care.

Thank you. Today's conference has ended. All participants may disconnect at this time.