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Invesco (NYSE:IVZ)

Q4 2010 Earnings Call

January 27, 2011 9:00 am ET

Executives

Martin Flanagan - Chief Executive Officer, President, Executive Director and Member of Standing Committee

Company Speaker -

Loren Starr - Chief Financial Officer and Senior Managing Director

Analysts

Chris Spahr - Credit Agricole Securities (NYSE:USA) Inc.

William Katz - Citigroup Inc

Glenn Schorr - UBS

Craig Siegenthaler - Crédit Suisse AG

Michael Kim - Sandler O'Neill & Partners

Michael Carrier - Deutsche Bank AG

Robert Lee - Keefe, Bruyette, & Woods, Inc.

Kenneth Worthington - JP Morgan Chase & Co

Marc Irizarry - Goldman Sachs Group Inc.

Daniel Fannon - Jefferies & Company, Inc.

Cynthia Mayer - BofA Merrill Lynch

Roger Freeman - Barclays Capital

Company Speaker

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, acquisition, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believe, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs, such as will, may, could, should, and would, as well as any other statement that necessarily depends on future events 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 expectation. 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.

Operator

Welcome to Invesco's Fourth Quarter Results Conference Call. [Operator Instructions] 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.

Martin Flanagan

Thank you very much, and I want to thank everybody for joining Loren and I today. We'll be speaking to the presentation that we've made available to everybody. And this morning, we're going to take a few minutes and provide some perspective on the global business and how Invesco's position in key markets around the world, and then Loren is going to review the business results. And as we traditionally do, we will open it up to Q&A after that. And those that are following the presentation, I'm now on Page 3.

And as we've discussed on previous call, we believe Invesco's very well positioned to capture the enormous opportunities created by the global demographic and industry trends. And through a variety of economic and market environments, our progress over the past several years says markets have significantly strengthened our competitive position, which is driving strong business momentum as we head into 2011. And in addition to the work that we did in 2010 to further enhance the business, our recent acquisition significantly strengthened our competitive position here in the United States as well as in Japan, Australia and most recently in the Asian real estate market. Going into the new year, we remain focused on building our presence in the fastest growing and most attractive markets across the globe.

And on Page 4, if you take a look at Invesco's presence around the world, we believe our global presence is a very important competitive advantage for us. Invesco has meaningful in expanding market presence in the world's fastest growing and wealthiest regions of the world. Our strong U.S. presence and growing global presence represents a significant long-term prospect for our business. We are among a very small number of firms that are well positioned globally to continue to grow our business and to build success over the long term.

And on Page 5, what you'll see is the assets under management around the world. And our belief is that, that broad diversification across asset class, distribution channels and domestic domiciles and other key competitive advantage for our firm. This diversification enables us to weather the different market cycles that benefits our clients, our shareholders and the business itself. I think what you'll all note is our diversification across asset class and domicile is very well aligned with the industry and also with client demand on a global basis.

Our multi-year focus on our strategic plan, combined with our global presence, has produced strong financial results over the past five years, driven by strong investment performance and improved market environment and the successful integration of the Morgan Stanley/Van Kampen business, Invesco reported a 55% increase in adjusted earnings per share year-over-year ending 2010.

And our commitment to investment excellence has helped us deliver strong investment performance for our clients. And if you look at the firm as a whole, 78% of the assets were ahead of peers on a five-year basis, 68% of our assets were ahead of peers on a three-year basis, compares very, very favorably to the year 2005. Year one results are less strong and it is the result of the market run at the end of the year vis-a-vis the competitive positioning of a number of our portfolios that we feel very confident about our investment teams and the long-term investment capabilities.

Strong investment performance has contributed to continued trend of positive long-term net flows for the firm. And the flow picture has improved steadily over the past two years. Our flows are now well balanced across the firm, with positive net flows in nearly every part of the business in 2010.

Taking a look at Greater China and Japan, Invesco has a leading competitive position in Greater China and Japan with more than $40 billion in client assets in the region. We're physically located in 12 countries in that region. Invesco Japan is now the fifth largest global manager, and we ranked eighth out of all managers in Japanese equities in this huge pension market in Japan. The acquisition of Morgan Stanley in Japan further strengthened our Japanese investment capabilities and enabled us to expand our relationship with top-tier clients. The Japanese team is just extremely capable with a very a strong long-term track record.

Regarding Greater China, we are the first U.S. joint venture asset management company established in the important [ph] Chinese market. The joint venture's known as Invesco Great Wall. We have a leading position in Chinese equities, with strong investment performance and are well positioned to benefit from China's growth. We also have robust momentum in the Chinese Institutional business, with $2.5 billion in new institutional wins in Greater China market over the past year.

Driven by strong investment performance and a very sharp focus on our clients, Invesco occupies the leading position amongst global competitors in retail Chinese equities. Our strong investment performance is driving momentum and long-term flows for both Greater China and Japan.

Invesco has a very competitive position in the Continental Europe market as well. Invesco currently has more than $35 billion in assets in Continental Europe. We are physically located in 12 countries across the continent. We are one of the leading firms in this fast-growing and huge cross-border market in Continental Europe, which is an important focus for our firm and growth in that region. We were ranked in the top quartile by net sales of leading cross-border investment managers in Continental Europe and due to the strong local presence and competitive range of investment capabilities is driving this result.

Invesco has a broad set of investment capabilities in this cross-border product range and is among only 7% of firms with distribution capability that span more than 20 markets. As one of the leading cross-border managers, Invesco is well positioned to take advantage of these opportunities in this growing market.

And as we've discussed, there are enormous opportunities across the globe. At the same time, given the dominant size and opportunities here in the United States, we need to get it right in the U.S. as well. Our highly competitive investment performance -- Invesco is very well positioned to grow in this critical market. And the acquisition of Morgan Stanley/Van Kampen asset management has expanded the depth and breadth of our investment capabilities that we can offer our clients and significantly strengthen our market presence.

Throughout 2010, we worked to deepen the relationship with clients and consultants across all channels, and segments remain very focused on delivering investment performance. Our global operating platform and the scale of our business greatly enhance our ability to compete in the U.S. market.

As with our Global business, diversification is a source of strength in the U.S. The increased diversity created by the combination with Morgan Stanley/Van Kampen business strengthened our U.S. business across mutual funds, DC, insurance, ETFs, UITs in roughly equal increments.

In the challenging equity mutual fund environment, this diversity provides us with a balanced offering that provides clear benefits to our business. As you can see, it would be a mistake to view Invesco as just a domestic Mutual Fund business in the U.S. We are a broadly diversified Global business with a competitive range of investment capabilities, which provides tremendous competitive advantages here in the United States and around the world.

We continue to see solid momentum in our U.S. Retail business, driven by investment performance, a focused-plan engagement effort and a strong diversified mix of assets. The incremental impact of the combination on our business is clearly positive. As expected, the combination increased Invesco's relevance as a top 10 manager in the U.S., which is enhancing our presence in the marketplace in driving new business. Post-close, average monthly gross sales are up 59%.

Now let's talk a moment about the expected outflows created from the combination. When we first announced the transaction and, based on historical experience, we estimated outflows resulting from the combination to be approximately $10 billion. The three key milestones we believe would drive this number were, first of all, the perceived transaction risk that comes with any combination; secondly, the announcement of fund mergers; and then finally, when the proxies finally come to a vote. And, based on our early integration success, we lowered that initial estimate to $5 billion in early 2000.

We did not see an increase in the redemption rate relative to the industry through the second milestone, the fund mergers. Additionally, we've been very pleased with the speed and effectiveness of execution in integrating the organizations and our abilities to deliver for clients from day one. As a result, we have further lowered our estimate to $2 billion. And the final milestone, the proxy, will drop soon, but based on the attractiveness of our funds, our success in bringing the organizations together, we believe $2 billion in outflow is a worst-case scenario.

As you can see on Page 16, this provides a more holistic view of the momentum across the U.S. business. Our combined U.S. Retail and Institutional business continued to demonstrate strong momentum through the third and fourth quarters, with average gross sales of 72% for Institutional business from the first half of 2010.

Taking a look at performance, Invesco's strong long-term performance positions the firm very well for the expected returns domestic equities. Performance of our equity assets is very impressive, 77% and 80% of our U.S. retail assets ranked in the top half of Lipper over three and five years, nearly 60% of the assets are rated 4 and 5 star by Morningstar. If you look at the 20 largest Invesco U.S. mutual funds, 91% of the assets are in the top half of Lipper over three and five years, and more than 70% are rated 4 and 5 star by MorningStar.

So we believe when the movement comes back to U.S. equities, we are strongly positioned to do well within that. Our strong presence in the U.S., Asia-Pacific, Europe and our broad diversification represents significant long-term growth prospects for the business. During 2011, we continue to focus on delivering strong investment performance and further building on our broad global presence to further strengthen our business for the long term.

And now I'm going to hand it over to Loren to talk about the results.

Loren Starr

Thanks, Marty. So on Page 19, we'll show some highlights for the fourth quarter. You'll see that AUM was up 2% versus Q3, with average AUM up 5.6%. Long-term flows had the headline of out $17 billion, but as we had previously disclosed, this is -- we had a large passive outflow in Asia. Excluding this, we actually had a net inflow of $1.6 billion.

Overall, we saw improving operating results, 14% increase in adjusted operating income quarter-over-quarter, 49% looking at versus the fourth quarter of last year. Importantly, our adjusted net operating margin is close to 37% in Q4. We also continued our active capital management. We added $77 million of cash to our balance sheet moving from the third quarter. We repurchased $65 million of stock and we paid down $79 million of our credit facility.

Moving to the next slide, just focusing on quarterly flows. I want to just note that on these charts, to eliminate the noise, we excluded the Q2 inflow and the Q2 outflow of that one Japanese passive mandate I discussed. You'll see that we stepped down a bit from our Q3 numbers of $4.9 billion to $1.6 billion, with AUM, ex ETFs and UITs passive declining, but we do not see this as a continuing trend. This is really a function of one-off client actions, and, in general, our pipeline suggests that we should see continued positive improvement in net flows going forward, obviously excluding any potential impact from the VK/MS breakage that Marty discussed earlier.

Moving to the next page, we show our net flows by distribution channel. I'll just point out that we're particularly pleased to see the strong gross sales across all our distribution channels. So the momentum continues.

On Page 22, just highlighting some of the investment performance. Again, we really saw great strength in our -- across enterprise with certain pockets of truly exceptional performance in our U.S. Retail business. 90% or greater of our U.S. Value Equity AUM are in the top half of peers and beating benchmarks for both three and five years, 94% of our AUM beat benchmark in the fourth quarter. 98% of global ex US and emerging market AUM are beating benchmarks over the five years and 94% of AUM are in top half of the peer group over five years.

In addition, our global fixed income capability continues to achieve truly outstanding performance. We added 77% of its AUM in the top half of the peer for three and five years. Asian equity also quite strong, 95% of AUM beating benchmark for five years. And the MorningStar ratings the for U.S. retail range from an all-time high with 57% of retail assets rated 4 and 5 stars. I should just point to out that post-product integration, we will see these numbers continue to improve within much of 7% or 8% increase. Again, assuming no changes from where we are, just due to the product integration.

So let me now move to the financial results, get in a little more detail. Obviously, we saw some market gains in the quarter, $24.2 billion, foreign exchange added $1.4 billion. We also saw about $5 billion due to acquisitions net of dispositions.

I already talked a little bit about the flows. Really, on this page, all I want to highlight is our net revenue yield in Q3 was up a basis point to 49.5 [ph] basis points, again driven by some [indiscernible of our?] by performance fees.

Moving next to operating results. Let me go to net revenues. You will see that our net revenues increased $54.6 million or 7.7% quarter-over-quarter. This was primarily due to increases in investment management fees and performance fees. We had favorable FX rates, which added $5.3 million to net revenues. Looking a little bit more deeply we saw investment management fees by themselves grew 6.7% to $50.4 million of that was due to that investment management fee increase. And FX was about $6.8 million of that $50.4 million.

Sales and distribution revenues increased by $10.4 million or 5.4%. This is no surprise largely in line with our increase in average AUM. Performance fees came in stronger in the fourth quarter than we had previously anticipated. It came in at $18.7 million compared to $2.5 million in the third quarter. This was being driven largely by our private wealth management group as well as European real estate.

Other revenues increased by $1.3 million or about 4% relative to Q3. Again, largely driven by real estate transactions. Our third-party distribution services advisory expense, which we net against our gross revenues, increased by 23.7%, and foreign exchange amounted to $2.5 million of that increase.

Moving on down the slide, let's go into operating expenses. We had $481.5 million operating expenses, which was an increase of $20.2 million or 4.4% versus Q3, $4 million of that was due to foreign exchange. Employee compensation expenses increased by $7.4 million or 2.5% versus the third quarter. Initially, the function of increased variable compensation, but also including bonuses linked to the fourth quarter performance fees. Foreign exchange increased our compensation expense by $2.7 million when compared to third quarter.

Marketing was up a little bit more in the fourth quarter. It increased by $6.8 million or 15.1%. This was largely due to increased advertising and client activity in the U.S. As we previously discussed, we expected to begin investing incremental advertising dollars in the fourth quarter with a full year run rate of $50 million [ph] in 2011. So you saw some of that activity in this quarter.

Property, Office and Technology increased by 3.3%, with FX being $0.5 million of that. G&A expenses came in at $58.2 million in the quarter. It was about $3.9 million, up versus Q3. Foreign exchange was $0.5 million of that, while the remaining $3.4 million expense variance reflected largely new product launches and a general higher level of [indiscernible] activity.

Moving on down the page, let's talk about our tax rate. You'll see our effective tax rate on a pretax adjusted cash net income for Q4 was 26%. That was up versus 23.1% in Q3. You will recall that in the third quarter, we had the release of the FIN 48 provision for uncertain tax positions. Going forward, we would expect that our effective tax rate to hold steady around 27% to 28% with no significant quarterly variations, assuming again everything flat, no major changes. Our adjusted EPS was $0.44, an increase of 12.8% versus Q3, and again our adjusted net operating margin was 36.8%, an improvement of 200 basis points.

So before I turn it back to Martin, I just want to point out a few things related to Q1 2011. As a reminder, compensation expenses should run about $10 million higher in the fourth quarter, again all things equal at current asset levels, that really reflects the seasonal payroll taxes. I just want to make sure people remember that. In addition, the first quarter has two fewer days in Q4 -- that does affect the retail revenues, and that should be about a 2% reduction in revenues just due to day counts on the retail side.

Finally, new equity grants to Invesco employees, which is really part of our annual compensation plan, will be made in the middle of the first quarter, and new shares will show up in February. In line with our stated capital priorities, we will look to buy this issuance in over the course of the year. And as you have seen, we have an opportunity to be buying [ph] in our shares. We spent a total of $192 million in the second half of 2010.

So with that, let me turn it back to Marty for any final comments before we open up to Q&A.

Martin Flanagan

Why don't we go to Q&A? That would be good.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question does come from Michael Carrier of Deutsche Bank.

Michael Carrier - Deutsche Bank AG

First question would just be on, I guess, a little bit more color on the flows, and we strip out the $18.6 billion. And when I look at the different channels and the different products, it looks like what you'd expect, meaning you had a little weakness in retail, and there's some noise going through with the mergers and then you had some strength in the institutional and by product, you had some strength in fixed income and all and some weakness in equities. I'm just trying to -- I don't know if you can quantify, but particularly like in the equity bucket, like how much of that is being related to some of the fund mergers and just the Van Kampen side of business? And then what's more core, anything lumpy in that number?

Loren Starr

Michael, good question. And obviously, something we looked at very carefully. When we were thinking about what was related to the integration and the potential announcement and when we announced the integration in November, we were looking at what the fallout might be. We did not see any spike up in our redemption rates relative to the industry level. And in fact, we've been tracking this and certainly, not off of the industry level. So it's hard for us to point to breakage due to these announcements if we're really tracking where the industry is on the asset classes that we have, right? So again, we have a higher proportion of domestic equity. It's not been in favor. Obviously, our international equity has been an inflow [ph], and that's where the industry inflows happen. So again, we've looked at it very closely from asset class to asset class to see if we've seen anything, and that's why we're optimistic again. And we move from $5 billion down to the $2 billion kind of worst-case breakage number because we've really haven't seen any fallout yet.

Michael Carrier - Deutsche Bank AG

And then on the institutional side, you mentioned the pipeline, you're still pretty healthy. Just from a product mix, where are you seeing the interest? Any update there?

Loren Starr

I think the focus still is very much where it has been. We see a great deal of interest in the alternative bucket generally. Specifically real estate is probably the area where we've seen the most degree of interest on the institutional side, but we are seeing greater interest from the commodity types of products, asset allocation types of products. Stable value is another element that is featuring very nicely because we're very competitively position there, and we're performing extremely well. Bank loans are also an emerging theme. So again, it's broadening out, but it's still somewhat concentrated on some of those asset classes that we've discussed in the past.

Martin Flanagan

I think also emerging markets equities is starting to get a lot of attention. So you're starting to see -- what you've seen is our retail flows happening institutionally at the same time. So it is broadening the interest.

Michael Carrier - Deutsche Bank AG

And then last one, just performance fees are obviously strong in the quarter. Any color on the drivers of that and just an elevated level or just more seasonality in certain products?

Loren Starr

I think we would probably characterize it as obviously exceptionally good performance in Atlantic Trust and it was centered around one product in particular. And again, I don't know if we would necessary say -- we did see that product perform last year. I think it was about $6 million or $7 million of the performance fee. And it was even higher this year. So I'm not saying it wouldn't necessarily occur again. And in the next quarter, but as an [ph] annual type of fee calculation, so you wouldn't expect it to show up in either quarters coming forward, Q1, Q2 or Q3. The real estate fees again is probably more potential for seeing performance fees in real estate generally, and they do occur sort of, off-cycle. So and that was the smaller piece of the performance fees, but it is one that has become more elevated than we've seen in the past.

Operator

Our next question does comes from Michael Kim of Sandler O'Neill.

Michael Kim - Sandler O'Neill & Partners

Given some of the data we've seen from the ICI, the last couple of weeks, it does seem like retail investors are starting to warm up to equities, broadly speaking. So assuming that, that trend continues to play out, I'd be curious to get your take on where you think your biggest growth opportunities might be, whether it's value, core, growth, alternatives or what have you?

Martin Flanagan

Yes, Mike, I think that's the case. It's not a big run towards them yet, but as you're seeing and what we're seeing too, you're starting to see people become more interested in it. And I think as you, and probably others, have all done the work, when you look within the categories of U.S. equities, the largest outflows over the last quarter are going into the year were large-cap growth, large-cap value in those areas. So those, ultimately, will be the drivers of larger flows, and we think we're very well positioned with the range of products we have in the performance against that. But again, predicting where individuals will go is a hard one. And I think also if you look at the international and global equity categories, again, if you look at the categories within it, the vast amount of flows were going into diversified emerging markets where we have very strong capabilities as a firm. But in the retail channel, our product is right now closed to new investors, which is the right thing for the investors that we have, but doesn't open it up for those there. But you literally saw world stock funds and European stock funds being net outflows within those categories. So again, I think the headline is people are starting to move, I think cautiously into equities and U.S. equities in particular. And I think we're very well positioned for that. And also, international equities would be the secondary.

Michael Kim - Sandler O'Neill & Partners

And then just in terms of compensation, it looks like that line was relatively flat after you adjust for maybe a step up related to performance fees this quarter. So just wondering if you could talk a little bit about how you've been able to kind of remain disciplined on that front?

Loren Starr

We forecast every quarter what we think operating income comes in based on current assets. And so we're always sort of looking ahead, and we don't believe in sort of catching up in the fourth quarter. So we -- if we're forecasting, we try to have a relatively smooth kind of progression on compensation other than sort of one-off performance fees, which we really have a harder time predicting. So again, I think we had -- we're not surprised that it was relatively flat. We think it makes sense relative to what we're doing. Again, some of it is a function of who's earning what, where and performance in different investment teams. But again, it's a diversified portfolio teams, and so there shouldn't be great movement from quarter to quarter generally.

Michael Kim - Sandler O'Neill & Partners

Finally, if I could touch on kind of the Muni Bond business from Van Kampen, I'd be curious to get your take on how kind of the PMs are positioning the portfolios these days? And then also more broadly in terms of the fixed income flows, are you able to kind of quantify the outflows related to muni bonds this quarter? And then if you look at kind of the residual inflows, where were you seeing strong demand? Was it kind of focused on stable value or other areas of the business?

Martin Flanagan

You're hitting on an interesting topic. I think if you look at the fourth quarter last year where the headlines were very nerve-racking to investors around municipal bonds. You saw you have the Tax-Free segment within the industry and net outflows, quite frankly, creating, I'd say now, some pretty attractive situations for investors, but that's a personal point of view. And so we saw that too. We weren't immune to that. The team is a very, very good team. They do great at work, and I feel very good about the portfolios that we have and the holdings within them, and I think it's a very attractive time for investors, personally.

Michael Kim - Sandler O'Neill & Partners

And then just the residual fixed income growth?

Martin Flanagan

Stable value has been a very, very important segment for us. It's just been a very strong performing part of the business and it probably [ph] recognizes the leading capability in the industry – we’re [ph] top couple for sure, and we've been benefiting from that.

Operator

Our next question does come from Roger Freeman of Barclays Capital.

Roger Freeman - Barclays Capital

I guess, just again back on the flows related to Van Kampen fund mergers, why do you think that you actually haven't seen anything measurable in the outflow in front of you? You had thought that advisors might be biased to move customer funds out of these funds, avoid a lot of proxy noises and other noise and then come back in and sounds like that hasn't happened.

Martin Flanagan

Look, we've all been in the industry for a long, long time and when we came up with that $10 billion number of expected outflows, as I mentioned, we didn't pull it out of the air. I mean, it was literally mathematical calculations based on historical information we had and industry information we picked up. And again, I'm repeating myself, but there's always perceived transaction risk. There's usually -- it's hard work to do and the combination of the fund merger process. Now they aren’t drivers where you get redemptions. I personally attribute it to just very, very good communication with the clients. But also, the integration just went very, very, very well. And the idea that all the systems are converted at the day of closing, as best I can tell, has never happened before. And I think that's a huge driver. And at the same time, you have the management, investment management teams, weren’t distracted there. We put them in a position where they could focus on the clients and drive performance. And I think that's really seems to be what's driving these results. So we view at it as a very unique outcome.

Loren Starr

The other thing I would just add, Marty, I think the performance of the products that are stronger than we had even anticipated in terms of, we've got a lot of product that were coming over and matching them into the right product buckets to the extent that you're taking the strong performing products and you might put into a lesser performing product, there's always issues there. It's not really been the case. Our products are performing and even improving in their performance. So it's allowed us to get greater confidence that we have no issues in terms of our, again -- we're keeping the $2 billion as a safety net here. I think...

Roger Freeman - Barclays Capital

Is there any netting in there in any of the new business that you’ve awarded or expect to start to fund in there already? Or is that -- you're really not going to start until after the mergers are complete?

Loren Starr

We are getting flows in and so we are getting inflows in that net against outflows. What we're really talking about though is specific breakage related to the fund mergers, and that's what we're not seeing.

Roger Freeman - Barclays Capital

Lastly, as you look at sort of 2011 besides Van Kampen, the Van Kampen mergers and everything around that, what would you say the other couple of three biggest priorities for you as a management team are? I mean, you've had a lot of number of initiatives in place, like you revamped your institutional sales force. Is there anything there that we are going to be able to sort of track or retail focus on getting into model portfolios? I mean what are your other priorities?

Martin Flanagan

You've seen on a number of them, as I talked about earlier, what we're -- Europe is a great opportunity for us. We take our [ph] position very well, and we're focused on doing better in Continental Europe. And Asia-Pacific, we think, we’re uniquely placed there, and we'll continue to probably do better there. And if you look at some of our capabilities, not just emerging markets, but our Asian capabilities, our Chinese capabilities, I think those are asset classes and categories that will, in time, just continue to stand out as investors continue to look to expand their exposure in those areas of the world. And that's really the conversation we're trying to have. I think, generally, the most public information you can get to is U.S. mutual funds and so that's what people focus on here. And if you focus simply on the U.S. Mutual Fund business, you're missing the point. And that's what we're trying to get across today.

Operator

Our next question does come from Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG

If we think about the fee rate and we think about the Wilbur Ross sort of the alternative flows in the end of the fourth quarter, we look at bringing out -- that's a positive. Then we look at some fund consolidations, which may serve as a negative to the fee rate, but then also we look at the market performance, the shift back to kind of risk assets in the fourth quarter, a little bit in the first part of the first quarter. How should we think about this fee rate trending in the first quarter? I know, Loren, you mentioned that there's less days, but if we already account for that, should there be a somewhat a step up in the first quarter?

Loren Starr

I think that, generally, excluding performance fees with equity markets growing, which they have been, that does have a very positive impact on our fee rates. So that's actually one part of it. The other thing that's definitely going to happen is you have the passive fees that sell out in the fourth quarter, and that was at a very, very low fee rate. And for that, we'll have sort of just obviously a mathematical benefit to the first quarter relative to the fourth quarter. The general flow into passive is always something that could shift things around a little bit. And again, it’s because that people are gravitating back to some of the domestic equity mutual funds, that will be a very positive thing as opposed to potentially other types of passive products or ETFs. But we have continued seeing strength in ETFs, but they're at a higher fee, so again I don't think that necessarily won't dilute our traditional ETFs. That will dilute our fee rate. So again, I'm optimistic based on where the market is going. We will certainly see a benefit to the fee rate going forward.

Craig Siegenthaler - Crédit Suisse AG

Also, you mentioned how well this company's positioned from kind of an AUM standpoint for an economic recovery. But when I look at your income statement, it seems a lot more weighted towards fixed cost than peers, especially when I look at some of the lower expense items. And even the component of comp, which you did a lot less cutting on the downturn, so maybe you have to add less in the upturn. But can you maybe quantify or qualify some of those statements? Do you believe you have a fairly large concentration of fixed expenses, which will allow revenues to be offset with less expenses in the recovery?

Loren Starr

I think our fixed expense relative variable expense is about 2/3 fixed, 1/3 variable. And that is something that, I think, will provide us with great operating leverage on the upside. What is it a function of? It's a function of one, this being a global company, which is inherently more, we’ll have more infrastructure to do as opposed to operating from one city and one product. So again, I think the operating leverage will work in our favor. We could try to variableize the fixed expense. But we don't think that's the right answer. We really think that the brighter idea is to keep a lot of the back -- I don't want to say the back office because it's the wrong way to describe it -- but the platforms and keep driving the cost down and we can add value to that process. If you farm that off to a third party, you variableize that, but you lose the margin upside. And we think we have the opportunity through just normal market growth to see our margins continue to expand from where they are today. And we're hoping that that's going to be the case, and we think that's what our investors want to see as well.

Operator

Our next question does come from Glenn Schorr of Nomura.

Glenn Schorr - UBS

Just figuring out -- wanted to ask one more question on the redemption issues. So if you look at on your Slide 20, if you look at gross sales are obviously a great leading indicator of picking up. But redemption seemed to be going a little lockstep with them. Even just even netting up the muni issue in the quarter and some of the fund consolidations stuff, what do you think is driving the pickup on redemptions there? And can we get to the nirvana point where you keep charging those gross sales and actually redemptions settle in?

Loren Starr

I think, Glenn, there a couple of one-off things on the institutional side. I mean you'll see it on Slide 21, probably more so where it wasn't so much a retail redemption point, it was more sort of a spike in the institutional side. And again, there were some one-off things that I could point to that we don’t think are going to be sort of recurring themes. So again I think the point on the retail side is that we will expect to see, obviously certainly at a minimum moving in line with industry and hopefully doing better than the industry ex any breakage. And high net worth sort of private wealth management continues to drive forward. And on the institutional side, our pipeline -- everything we've seen both in terms of one, but not yet funded, as well as qualified opportunities that are both growing double digit kind of growth rates and versus Q3 versus prior December. So again, we have every reason to feel that this fourth quarter may just be a little bit of a noise point.

Glenn Schorr - UBS

And I guess, those some one-offs on the institutional side add up to something that we think is relevant, right?

Loren Starr

It is. It's in the billions. So again they are low fee though, and we talked a little bit about in our December release that there some outflow in the institutional side. And again, some of our products are sort of designed to be low fee, but they will generate other types of revenues. But again, it's something that I don't think you will see have a material impact on our revenue, if anything it will improve our yield.

Glenn Schorr - UBS

Headcount was a little bit higher. Curious if that's all in the growth markets that you started out in the presentation talking about, and what to expect there given you're part way through the integration?

Loren Starr

Yes, I think the headcount is a function of the integration depending on where you're looking, obviously. But we did do some acquisitions through the course of the fourth quarter. So there was some headcount pick up there, which again AIG, a Real Estate business was the one piece, among others. So I think some of it is the acquisitions. And then finally, we are prepping for moving our Indian office over to our books. Right now, it's all being done through a third-party provider. And we've already started that process, and some of those headcounts that were in Indian sort of outsourced relationship are now on our books. And so you'll see actually the headcount jump to –- just a heads up -- in the first quarter, up probably close to 500, even more heads when we bring those individuals over. It's again not going to do anything from a P&L perspective. It may move some things around in terms of where it's located between Property and Technology into compensation. But again, it's not material in terms of …

Operator

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

Cynthia Mayer - BofA Merrill Lynch

Could you give us a little more color on flow trends at perpetual? Because looking at the earnings release, it looks like you didn't have any flows in the U.K. this quarter, and performance is challenged from one- and three-year periods based on the appendix. So I'm wondering could that turn to outflows from what you're seeing? And, also, is the underperformance there due to any particular positioning so it might reverse in a different market environment?

Loren Starr

Cynthia, I think we obviously have seen significant inflows come in from the U.K. It's been broadly across a variety of product categories, which is good news. We still see good sales there, but the redemption rate has sort of moved more in line with industry averages and that really was kind of the story for what happened in the fourth quarter. I don't think we are sort of concerned about outflows. And certainly, there's been some underperformance when you look at the numbers really due to some of the high-convention [ph], kind of investing that happen with our teams there. It can move around quite a bit, depending on which market environment you're in and we’ve seen it. So it can go sort of from best in class to the lower of that just based on where markets are moving in particular sort of day or week. So again, we feel good about the flow prospects overall just given the diversification of products and the high performance that we have across that broad spectrum. Generally, when we've seen underperformance in the U.K., we've not seen significant outflows when that’s happened. People understand the style that's being provided. And I think the vast majority of people have great faith in the management of the team there. So again, it's something that we're still looking at. I'm not saying it couldn't happen, but I'd say at this point, we are not concerned, we feel confident that, that's a good story in the U.K.

Martin Flanagan

I'd just add, it's a world-class investment team across categories. The performance is very consistent with their investment philosophy and approach and I just feel very confident that, in time, that performance will do very, very well.

Loren Starr

I mean, obviously the run-up in the markets, which have been really driven by, I guess, some might say lower quality kind of movements as the theme that obviously has affected the performance in the U.K. and some of the other areas within the firm generally that have sort of a longer view on managing their position. So again, I don't think we're concerned. We don't really think that the one-year numbers are going to drive flows. And the longer-term track record, particularly in the U.K., is just outstanding. I think that will count for more.

Cynthia Mayer - BofA Merrill Lynch

And also in terms of equity rotation, it seems as if a lot of the discussion is focused on the rotation in the U.S. And since you guys are so global, I'm wondering if you're expecting a rotation towards more equity outside the U.S? And if so, where? Or were allocations outside or at least in the market you operate in, are they more sort of based on other factors?

Martin Flanagan

It's interesting, Cynthia. When you look at it from the data we see, the U.S. has been the most pronounced difficult equity market at a retail level. And if you look at Continental Europe, there were some very, very strong concentrated flows and global bond funds. But you still have equity inflows. But I think what you are going to see on the continent, in particular, is probably rotation back to equities and by European equities, we'll be a very, very important part of that. And again, we think we're positioned very, very well for that. And we're seeing in Japan, frankly, the Japanese equity team continues to get more interest again. So we expect that to be another area. And there's been continued interest in the Greater China area into equities. But interestingly again, some of the categories are, we might classify as more energy-type sectors or precious metal-type sectors, which are more sector-driven, which is I wouldn't say how people in the United States would generally look at things. So we do think the equity theme is beyond the United States.

Operator

Our next question does come from Ken Worthington from JP NZ [ph].

Kenneth Worthington - JP Morgan Chase & Co

First question on Canada, you highlighted kind of the China growth and the Japanese growth. But it seems like Canada is still the problem child and if you can just plug the hole there, you’d double sales. So my question is, the performance has gotten better. When do you think -- what is it most likely that, that business can turn? And is there anything you guys are doing beyond behind the scenes to kind of move the progress along to try to reduce the redemptions?

Martin Flanagan

Yes. Ken, you hit on the first very important topic, improving investment performance is a very, very important thing and that's happening. Canada also is a very different market than what we've seen almost anywhere else in the world, where in my view, there's almost been the sort of separation of manufacturing and distribution as sort of a common theme around the world. You'll see it to the extent of financial institutions getting out of money management and this is exactly counter in Canada where the banks have done a very, very good job in money-management and they are getting stronger and sort of the distribution element they are distributing and managing, and that is very unique trend in the world. And so generally, what you're seeing is you have independent asset managers that don't have distribution – this has been a challenge. This has been a big compounding factor. So with that as a theme, what we've also seen though, too, what's important is we've had a very narrow product offering in Canada that's being broadened within that channel, which we think is helping and will continue to be helpful in that marketplace. Also, we have been frankly has had really no position in the institutional market in Canada, and that is an area where we are focusing on as an organization very early days. But we think we're going to see some -- that's another area of success for us. So we think it's an important market for us. We think in time, we will do well, but there is this overall industry phenomenon going on at the same time.

Kenneth Worthington - JP Morgan Chase & Co

You have been beefing up the retail institutional distribution capabilities, adding resources there. If we could like just scratch beneath the surface a little bit, I'd love some more details on what's happening particularly on Retail, can you talk about maybe progress you made this quarter or expect to make next quarter with the independent brokers versus the regionals versus the wirehouses? And then on the institutional side, I think one of the metrics is really getting the funds rated. Any progress made on getting more funds rated this quarter? And again, what kind of progress do you expect to make there maybe over the next quarter or two?

Martin Flanagan

Let me try to get some of those, Ken. On the institutional side again there's been -- let me first step back and say all of the investment capabilities we look to make available in both retail and institutional channel when it makes sense. And within that, this notion of getting platforms or getting rated by consultants is an important factor. There is -- I feel very good about the institutional leadership we have in this organization right now. I'd say it was being put in place throughout last year and it really, by mid-November was sort of the end of -- just want to call it the positioning of the team. They're very, very focused broadly in doing the things that you’d want them than to do, a segment of that being on consultant ratings and there is a plan to continue to broaden and drive those ratings up in the consultant channel. That is like anything a longer dated effort, but I think we'll make some good progress during the year. And then within the platforms in the United States, I would say there's some ongoing focus and progress. I don't have specific numbers.

Loren Starr

I do know that we're continuing to make progress. I've had the opportunity to speak to our Head of Distribution and he's provided definite anecdotes that, yes, our product is being sort of promoted, been put on preferred in terms of models, being said, The products that you should be buying. These are large distributors. I don't want to name names, but we definitely are getting traction there. We're having a lot of our products approved and some of the wirehouses, I think we just recently had six new won approvals and some of our products that are really getting traction too are some of the asset allocation products that I think our track record is really amongst the best and have a differentiated capability. And RFPs really are moving significantly higher from where they were at the earlier part of the year, more than doubling. So again, we're seeing the right sense of progress. We have every reason to continue to be optimistic that we're getting traction, and until I do think again if the market environment comes into play, that's favorable to the assets that we have to offer. [indiscernible]

Operator

Our next question does come from Dan Fannon of Jefferies.

Daniel Fannon - Jefferies & Company, Inc.

Building a little bit on the last question with regards to some of the comments you gave in the presentation around improvement in the monthly sales and some of the retail activities. Can you give us a sense of kind of where that's coming from potentially from a specific distribution partner or from certain channels? Just kind of get a sense of where we think there is still opportunity or where acceleration could come from?

Martin Flanagan

I think the headline is there's opportunity in all the channels. I would -- I don't think any one of us feel that we sort of hit the potential in any one of the channels, and I think that's a general theme, not just in the United States, but in different parts of the world. Again, I've come back to Europe and Asia, in particular. And again, I think as Ken had asked just before and what you're following up on, our absolute ongoing efforts to do everything that we're supposed to sort of broaden that and make that more successful. But if you …

Loren Starr

I think the area where we've seen a lot of very good progress just generally the retirement channel and insurance some of the incentivized capabilities that we can plug-in. And there hasn't been a lot of disruption there. I don't think there's been general disruption and some of the broker-dealer wirehouse areas and so it's harder to sort of move ahead we sort of talk about they’re working out their own situation and at same time. In terms of kind of our key partners, we're seeing again progress, very definitive progress and so we feel good about that. The other area that generally is working for us too, is just an area of sort of U.S. retail on the ETFs and UIT continue to be really a strong capability for us and a differentiating capability, and I think that's something that, again, we're not going to slowed down.

Daniel Fannon - Jefferies & Company, Inc.

And then just thinking about 2011 on the expense side, Loren, we have guidance I think for another $10 million coming out from Van Kampen. Any just kind of thoughts with outside of compensation in terms that more fixed cost base in terms of levels or I guess, just in terms of trends as we see that building throughout the year?

Loren Starr

I mean, I think again, we continue to work on expense management across many different levels in many different projects. There's nothing that's significant other than probably the biggest moving piece has been our ability to leverage our Indian operation more fully. And that's just a theme that I think we'll continue to see. You'll see it in kind of the growth of that area. And obviously, there's savings in that process. And beyond that, there's nothing sort of dramatic that I can really talk about other than just, obviously, the basic blocking and tackling.

Martin Flanagan

What I would add, though, Dan, and I for think everybody too is we would never stop this effort of continuous improvement becoming more efficient, more effective every year. It is just absolutely essential I think for a business to constantly challenge itself and become more efficient, more effective for all the obvious reasons. And again, compared to five years ago when there was sort of a focus on low-hanging fruit we’re just at a very, very different place as an organization. But again, it's always going to be a continued focus for the firm just to get better and better.

Operator

Our next question does come from Bill Katz of Citigroup.

William Katz - Citigroup Inc

First question is just on the institutional pipeline you talked somewhat qualitatively and somewhat quantitatively. Can you put any kind of hard numbers around that –- you seem to be working with some small numbers with some good growth rates. But just trying to understand from an absolute sense what kind of pipeline you might be talking about?

Loren Starr

Well, Bill, we've never really historically provided that level of detail and I guess, I'm hesitant to start now. So obviously, when you think about how an institutional business works, I mean, we have a good sense of what's going to [indiscernible] in terms of the sales. When you look at our sales, that’s kind of representative of what we're bringing in every quarter. Generally we're not funding more than multiple quarters in advance. So again, size-wise, it's within our quarterly sales number, but it's something that, again, I'm not -- I think at this point we'll pass on that question if that's all right.

William Katz - Citigroup Inc

Did you give any kind of update around Wilbur Ross and Wilber Ross 5 [ph] recovery fund in terms of where we stand in either marketing or capital raising.

Loren Starr

Unfortunately, we're not able to talk about that specific fundraising for the reasons that we've discussed in the past. So I can't get into any specifics about what the raise or when the rest can be raised once it gets closed without getting afoul of …

William Katz - Citigroup Inc

There was nothing in this particular quarter for the fourth quarter?

Loren Starr

Again, even as much as I’d even talk about it, I can't even tell you what could fund in the quarter. I know it's kind of frustrating for everyone, but I just can't specify anything specifically to that fund.

William Katz - Citigroup Inc

You guys give a nice update earlier around the world as to where your footings are. From a requisite size [ph] perspective, one of the things that seems to be playing out in the industry is taking a [ph] bigger proportion of market share. As you look at your franchise around the world, do you feel like you are at the requisite size that can fully leverage the pretty strong performance that’s developing?

Martin Flanagan

Yes, I really do. Again, this is not a new attribute of Invesco. It’s one of those very, very deep and important elements, and it goes back decades. And when you look at the relative positioning of this firm in Asia, greater China in particular and more recently with the addition of Morgan Stanley, Japan combination, we are very, very strong, very strong in that part of the world. And also, the deep history in Continental Europe, it’s not, again, an overnight idea. It’s decades of being there and very, very capable group of people on the ground there and you've just been focused on trying to broadening our success there, I think it will be we will be quite strong there. So I feel very good about our positioning.

William Katz - Citigroup Inc

When you think about Canada and I guess, your comments where you have sort of the move more to [ph] a closed loop rather than an open loop, and given the performance and flowchart [ph] there. Any thoughts to potentially shed that asset and maybe reinvest the proceeds into passive-growth markets either outside the United States or taking advantage of some market share in the United States?

Martin Flanagan

Canada is a very, very strong capability for us. We think there's great opportunity in total in Canada. We've not historically taken advantage of the total Canadian opportunity and we intend to. And we just think it's the capabilities used throughout the organization and we like the talent, it contributes and we're committed to be very successful in that market.

Operator

Our next question does come from Robert Lee

of KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc.

First, I guess, maybe for Loren on capital management. If I think back to immediately post the deal, my impression had been that the real focus was going to be kind of pretty aggressively pay down the short-term debt related to the deal. And really what you've seen, I guess, the last couple of quarters is you’ve paid down some short-term debt, but been really much more aggressive on share repurchase. I mean, given the strength of your cash flow, how you feel, I mean, should we -- I don’t know if this is a fair question, but should we think that for the time being that you're probably going to continue with a more balanced approach given how the stock’s been trading, the low cost of that debt -- maybe happier leaving that short-term debt there for a while?

Loren Starr

I think it's very much a function of what we see the value in the stock we'll eventually come out opportunistic. We never said our hands are tied in terms of how quickly we're going to pay down the credit facility. And so, again, if we see value in terms of buying the shares, I think we will do that and we will balance it in a very prudent way against the other priorities, and paying down the credit facility is a priority, don't get me wrong, but again, there's not sort of we got to get it done by Q3 of next year type of mentality, I mean, we do want to make progress. So, again, I think you should expect us to continue to be very balanced and opportunistic in terms of how we deploy our capital again with the goal to maximize shareholder value overall.

Robert Lee - Keefe, Bruyette, & Woods, Inc.

Quick question on the ETF business, can you maybe just briefly update us on the success you’re having in kind of broadening that business outside the U.S., whether Asia or Continental Europe? I know it’s been in process a couple of years, but I guess my impression from, maybe, several quarters ago maybe you hadn't quite lived up to your earlier expectations. Are you seeing any improvement there?

Martin Flanagan

Fair question. And I think you’re on the mark. I feel really good about the progress we've been making in the United States with ETFs. I think it's really just a great combination for us. In Europe it’s probably been three years ago when we first entered the market. I mean the fundamental fact is, during the crisis period we did slow down on additional development in Europe -- whether that was smart or not -- we can judge that in a few years. But again, we do think that it's an important attribute that we have and it is going to continue to be a focus of ours in Europe. Canada actually has, again, it was about a year ago that we started in Canada and has been some really good early successes. And it's about $1 billion of assets that have come out of Canada, the ETF market in Canada for us. And again, we just look at it. We are looking globally, we are paying attention globally and we will respond when we think the markets are ready and there's an opportunity for us to do it. But again, I think what you would see over -- again, so we've not given up on it but your observation is the correct one.

Robert Lee - Keefe, Bruyette, & Woods, Inc.

Just kind of the big picture – 12b-1 fees have been quiet a little bit for a while. I know the SEC commentary I believe ended a month or so ago. Any sense –- any rumblings you’re hearing on how long you think it's going to take the SEC with all they've got on their plate to actually come up with some final recommendation?

Martin Flanagan

Yes, I think just within your question, I think is the answer. I think we have a new division Director coming in right now. So yes, there's an awful lot of work done on the recommendation. There was an enormous amount of feedback on the recommendation. And I think by some estimates, there was more feedback on that recommendation of any proposal that’s ever come out of the SEC. So you put that in combination: new Director and the feedback they have but also with all the things that they put on their plate with the new regulation have to deal with, I think it's going to be quite a while before they get back to 12b-1 topic.

Operator

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

Marc Irizarry - Goldman Sachs Group Inc.

I guess it's a question for both Loren and Marty. Your growth market initiatives, you obviously have a significant amount of non-US presence. Can you just rank the margins in some of the growth markets or just give us some perspective on when you the overall company operating margin? We're entering a point in time where the margin accretions from some of those growth markets is going to accelerate. Clearly, you have a lot of boots on the ground there. But what is sort of the incremental margin opportunity on those growth markets?

Loren Starr

Mark, I'll give you a little help on this one. We provide some insights -- you can see our joint venture just as an example because it's all kind of fully disclosed in our asset-related [indiscernible] and you can see the margins are very healthy there, I think 16% in that range and higher. So again, some of those markets to the extent that they really begin growing could be extremely helpful for us in terms of asset margin expansion. The other sort of element to margin is scale. And so the areas where we have the greatest scale and probably largest mutual funds tend to be higher margin. And you can look to obviously the U.K. as an example of an area where you see that type of phenomenon. But with that said, I mean generally, although offshore product is high margin for us, it's a higher fee than some of the U.S. products. And so we've driven a dramatic difference between Continental Europe and also the U.K. as a general point. So where we've seen sort of lower margins have been the small areas that are more asset size and really are not operating outside of their own local area. And so those are our opportunities to cross-sell products in and sort of become bigger in those locations. I don't want to name names. But again, you can look to our map and you can probably see some certain locations where we've done some things back in Australia to improve our scale and that's very helpful for margin. Japan is another example where we've obviously taken a conscious act to try to grow scale there. So that's going to be our approach is when you look at where we are and be relevant in the markets that we're operating.

Marc Irizarry - Goldman Sachs Group Inc.

Marty, maybe just one of the areas that just stands out relative to growth markets is Latin America, is there any sort of strategy there to continue to build your global footprint?

Martin Flanagan

There isn't currently, and it's not for lack of discussions as I mentioned earlier. Like any business we look every year all the time where should we be placing our emphasis and our conclusion has come to the next incremental dollar we ever – the management time we think we invested back in the countries that we're in right now is a much better result for our clients and shareholders than going into a place like Mexico or Brazil right now. And the path that we’re on probably for the foreseeable future unless things change.

Operator

Our next question does come from Chris Spahr from CLSA.

Chris Spahr - Credit Agricole Securities (USA) Inc.

Do you guys have a stated dividend payout ratio or just guidelines you want to shoot for and do you think you’ll have another dividend announcement sometime this spring like you've done in the past?

Loren Starr

Yes, Chris. Our dividend policy is really to have our dividends grow under all markets steadily. And so we target sort of single-digit growth rates for dividend and could be somewhere between 4% and 6% generally year-over-year [indiscernible]. We do not target a specific payout ratio, but we do want to make sure that we never have to cut the dividend or have to reduce it. And again, I think if you look at how we've done it in the past, it's actually served us quite well even through the whole credit crisis.

Chris Spahr - Credit Agricole Securities (USA) Inc.

And the normal announcement date is usually in the spring, that will probably …

Loren Starr

We would announce for the first quarter increase sometime after the earnings call for the first quarter.

Operator

And we show no further questions. And Sir, I'd like to turn the call back over to you for closing comments.

Martin Flanagan

Well, again, I want to thank everybody for their time and interest. And again, we feel it's a very good year, very good quarter. We're very optimistic as we look forward for the opportunities for the organization. And again, we just feel we're placed very, very well globally and strong range of investment capabilities, a very dedicated organization. And again, I think we should have a good 2011, and I hope we all do. So thank you very much and have a good rest of the day. Take care.

Operator

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

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