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Invesco Ltd. (NYSE:IVZ)

Q1 2008 Earnings Call

April 24, 2008 9:30 am ET

Executives

Martin L. Flanagan - President and CEO

Loren Starr - CFO

Phil Taylor - North American Retail Business

Analysts

Craig Siegenthaler - Credit Suisse

Robert Lee - Keefe, Bruyette & Woods

Michael Kim - Sandler O'Neill & Partners

William Katz - Buckingham Research Group

Jeff Hopson - A.G. Edwards

Unidentified Company Representative

This presentation may include statements that constitute forward-looking statements under the United States securities laws. Forward-looking statements include information concerning possible or assumed future results of our operations, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, assets under management, acquisition activities, any effect of completed acquisitions, debt levels and the ability to obtain additional financing or make payments on our debt, regulatory developments, demand for and pricing of our products, and other aspects of our business or general economic conditions. In addition, when used in this release words such as beliefs, expects, anticipates intends, plans, estimates, projects and future or conditional verbs, such as will, may, could, should and would, and any other statements that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statement. In connection with any forward-looking statements you should carefully consider the areas of risk described in our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q as filed with the United States Securities and Exchange Commission. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update any of the information in this or any other public disclosure if any forward-looking statements later turns out to be inaccurate, whether as a result of new information, future events or otherwise.

Operator

Welcome to the Invesco first quarter results conference call. (Operator Instructions). Today's conference is being recorded. If anyone has any objections you may disconnect at this time. Now I would like to turn the call over to the speaker for today, Mr. Martin L. Flanagan, President and CEO of Invesco. Mr. Flanagan, you may now begin.

Martin Flanagan

Thank you very much. And thank you everybody for joining us for our first quarter briefing for 2008. I'm joined today by Loren Starr, our CFO; Phil Taylor, who heads the North American retail business for us; and Bruce Bond, President and CEO of Invesco PowerShares. And I will be speaking to a presentation. We all will be speaking to a presentation as available on our website, and we will do the best we can to keep you up to pace with us on the different slides. And if you take a look at the discussion topics for today, but you are recognizing we're still relatively new to the US market, I will start by giving a brief look at our focus over the past 2.5 years and give the business overviews.

Phil and Bruce will highlight some of the successes and focuses and opportunities that they are seeing. Phil is going to focus on the US and of course Bruce will focus on ETF and Loren will go into more detail on financials and then open it up to Q&A for everybody. So if you take a look at the next slide and take a look at our priorities, and if you go back, late 2005 we began this journey internally that is sort of building success from the inside out. We developed this strategic framework as a way to focus us to make sure that we could build momentum back in the business, and really as a way to lay the foundation for success going forward.

Over the past 2.5 years we have been very focused on executing against these our four strategic priorities and obviously first and foremost, very focused on achieving strong investment performance and strong deep investment teams. The other focus then is to deliver these investment management capabilities anywhere in the world that really meets a client need, supported by building a global operating platform underneath all of these capabilities as an organization. And then finally, as all of us within our organizations, very, very focused on building a culture that's very high-performance, very focused on talented individuals and the like.

So during this time over the last two years I think we have made great progress in transforming the business from really what was more of a holding company of asset managers into an integrated worldwide investment management organization. There's no question we have improved efficiencies and effectiveness in our global operating platform. Still more to go, but we have made great strides in the last 2.5 years.

Also, we've really strengthened our distinctive investment management capabilities over the last 2.5 years. And also, importantly at the end of this internal focus on the brands that more effectively represents the organization and more effectively gives us the ability to promote our global organization. And also we moved at the end of last year you will all know on this call, our primary listing to the New York Stock Exchange from the London Stock Exchange.

And also during this period, as there has been a focus to be more efficient, more effective, and when there were costs that we could take out of the business, we also were very, very focused in looking at ways to take those cost savings and reinvest them back into the business for future growth and that is something we have been doing and will continue to do. Also, since 2005 we feel we've accomplished what we set out to do.

We've really improved the client experience and we have built some momentum back into the business. And thanks to the hard work of really the organization, we think we're in a much better position today than clearly we were 2.5 years ago. And also very, very importantly we think the focus and hopefully foresight that we've had, we've avoided a number of these challenging or mistakes that have been made within the industry during this period. And we think the combination of these two really put us in a position where we believe we're much more capable of improving our competitive position in these very uncertain market times.

And it's probably worthwhile to spend a minute on that. So recognizing times are uncertain, our current efforts are having a focus on creating capacity within our business so we can find ways to invest in what we think are critical initiatives that will improve our competitive position and contribute to future growth and success of this organization over the long term. Broadly, the initiatives are in these categories.

The first primary focus is on our talent, making sure that we're motivating and engaging the top talent in the firm, giving them the best opportunities and the like. But also there's a lot of talent available in the marketplace today, and where we can attract talent and upgrade talent internally, we're very focused on that. Also we're still investing in growth markets, whether it be continuing some of our efforts in China or expanding other opportunities in Asia-Pacific. Also expanding offerings to clients where we're seeing opportunities today.

The recent lunch in Europe, the UK and Europe of ETF. We're also seeing great opportunities in stress restructuring alternatives areas through WL Ross & Co. We're also seeing opportunities in fixed-income and real estate, so those are areas where we see our capabilities match the need in the market, we're continuing to do that. And again, we're still moving forward with the efforts to strengthen and improve our global operating platform during these markets.

If you take a look at, sort of a view of our investment capabilities around the world on the next slide, it's a real focus of ours, and we think it's one of our great competitive advantages that the combined power of these distinctive worldwide investment capabilities give us. With these capabilities in virtually every asset class and investment style our investment teams are in 12 different countries, and we think this is one of the core strengths we have, and it puts us in a strong position to compete globally and compete very effectively locally at the same time. Our strategy is to continue to look for ways to deliver our investment expertise in ways that meet our client needs, regardless of the geography and regardless of the channel.

A good example of this is taking our industry-leading positions in industrial quantitative strategies or through our worldwide fixed income group, which just recently in the last couple of weeks they've been introduced through actively managed ETF through Invesco PowerShares. These actively managed ETF really enable us to provide clients with further access to investment management capabilities with the convenience of an ETF. And so again, an absolute focus of ours is to align our capabilities to the market needs, and trying to find ways to match our investment capabilities to what our clients are focused on.

And if you look at the next slide, it is really just aligning our investment capabilities and delivering them to clients however they want them. We don't care if it is a mutual fund, an ETF, a separate account, a Comingled Trust, and by the way, we don't care what part of the world it is in. If it makes sense for the clients and we're capable of doing it that is what we want to do. So we will continue to look for ways to strengthen our diversified investment strategies and delivering them to clients in the way that they want them.

Also, if you look on the next slide, just a fundamental strength we think we have as an organization is diversification. We think it makes sense within a portfolio, and it is not a horrible thing to have your business run that way also. And we think that's showing up in the operating results of the organization to date. Right now 40% of our clients are outside of the United States, ranging from Asia through Europe. More than half of our total assets under management are outside of total traditional equities from cash to alternatives.

And then finally, if you look at the distribution channels, they are equally split between retail and institutional about 48% a piece, the balance being in Private Wealth Management. Now why don't we move on to sort of a summary of the first quarter results, and that is on the next slide if you're following that way.

Let's state the obvious. It has been a very challenging market environment for the financial services industry. We think our results are quite strong within that context. And maybe best expressed if you observe our operating results for the period, we're roughly in line with that the same period a year ago, which we think is impressive. When you look at the current market environment today versus what was a very positive market environment a year ago.

During the quarter assets moved roughly in line with the market. We ended the quarter at $470 billion. And although assets under management are down. Total flows for the quarter were a positive $1.2 billion, driven very much by the strong money market fund business within the organization. We think we're better positioned to compete than we were a year ago. And in spite of the lower long-term assets under management we had in this first quarter, net operating income and the net operating margin slightly exceeded those from the same quarter a year ago. Loren, of course, will spend much more time and provide greater clarity in that.

We also recently completed a $500 million stock repurchase program, which was initiated a year ago, expressing continued and further confidence in the organization. The Board has approved an additional facility of $1.5 billion stock buyback program. This is very much consistent with our ongoing capital policy. We're not doing anything different. This is sort of a tool in our capital management hierarchy, and you should look at this facility as sort of a multiyear facility. But again Loren will spend more time on that making it very clear to everybody.

And also, part of the transition to the New York Stock Exchange, we're moving to a quarterly dividend from what was a semi-annual dividend. First quarter dividend will be $0.10 per share and if you annualize that it is about a 4% increase over the full year 2007 dividend. So why don't we move on to the quarterly flows and spend some time there.

As I mentioned previously we did see total inflows from both long-term and short-term or money funds of $1.2 billion during the period. Gross sales of long-term funds declined during the quarter driven by lower demand for equity products, but not inconsistent with what you saw across the industry. I think also probably what is instructive to look at, if you look at the absolute redemption levels, this period they are lower than the prior quarter, but again if you look at a year ago they are probably, they are pretty well flat with absolute redemptions a year ago. All in all we think that's a pretty good result. Again, the cash management business had a very, very strong quarter, growing 13% year-to-date through March. And we have seen record level assets under management for the fixed income team.

Now if you take a look at flows by channel, our retail gross sales were down quarter-over-quarter primarily to lower sales in the equity products as I had mentioned that you saw globally. And within the US it was a very challenging market in the quarter, but we did not see an overall increase in outflows versus the industry, and we think that's a good sign. We didn't improve our position, but we didn't move back.

The other important market the UK, where we are leading retail manager there, we continue to see positive flows during the quarter. And also on the institutional side of the business we have seen some relative improvement in the redemptions and net flows as the stable value situation has stabilized. And we continue to see a good pipeline within our institutional business, pretty broad ranging, from enquiries on quantitative real estate alternatives and fixed income. So I don't know what the future hold, but it looks somewhat positive right now considering the markets we're in.

Let's take a look at investment performance and as we all know, short-term investment performance has been very volatile for the industry, and that's also reflected in the results that we've had too. At the same time if you look at our long-term performance, and if you take a look in sort of a three year as a focal point, it has been very strong for the organization overall. And if you take the combined view of our investment performance and retail assets versus the peers, and our institutional assets versus the benchmark, you can see that 72% of our assets have quite strong track records over three years. Now recognizing this is at the highest level of the organization and lots of moving parts within that, but as a macro picture we think that's really quite strong.

And if we drill down a little bit into it, if you look at the overall performance over one, three, five years in sort of the broadest categories again within the context of the markets that we're really strong, really weak and volatile in the first quarter. The S&P was up 9.5%. Global markets were down, some of them down double-digits.

In spite of that volatility again the UK team has strong performance over one, three, five years. We also saw strong performance in Continental Europe, Asia-Pacific, and also on alternative continue to demonstrate strong long-term performance. By way of example, the US in global REITs we're ahead of benchmarks over all relevant periods during the first quarter and also strong, very strong against peers.

These are the types of things that we think position us well as we look going forward. If you take a look at the next slide, and I will give it a little more insight. If you look at the US retail business, percentage of assets in the top half remain relatively flat this quarter to prior quarter, but as you can see, they have fallen off from a year ago. And the headline here is that if that there is a large percentage of assets under management just outside the top half and if you look at the one year there is other 14% just outside the top half. Three years, another 10% just outside the top half. And five-year number another 11% just outside the top half.

But if you again sort of drill down into it you can see the US core performance is really very, very strong. We're very confident in the leadership of the growth team and from large cap, mid cap, small cap we had think we have a very strong lineup of talent and some real strong performance within that category. International continues to be strong. And again, you can see some of these sector performers for us are also strong.

Always room for improvement, but we're really seeing real strength emerging across that product lineup. Another area that we have been talking about over the last few quarters is Trimark's investment performance. You can see that during the quarter their relative performance improved quite a bit as a number of the headwinds that we have been talking about, currency and lack of emerging market exposure, began to reverse and became somewhat of the tail win.

One thing I do want to make absolutely clear is that the Trimark approach is a long-term approach focused on concentrated positions. So we don't want to focus too much on the short-term performance during the quarter, but again it is consistent with what we've been talking about over the last couple of quarters, so we thought it worthwhile to bring it back to your attention. But with that, I'm going to stop there and pass it over to Phil Taylor, and he is going to focus on those when he gets to the detail business.

But again, let me give a couple more headlines as we get into it. If you take a look at the cash business and the fixed income businesses, which were combined under Karen Dunn Kelley's leadership, now one of the largest fixed income groups in the industry. The platform is stronger today. It's more competitive today. And actually over the past year assets have grown $5 billion as compared to a year ago. Much of that is driven by the cash business strength, but again, just we're doing just a heck of a job.

If you look at performances, top quartile performance in the money fund categories over all time periods as I mentioned, assets increased 13% during the quarter, outpacing the industry growth of 12%. Also within the portfolios that they manage, core, full discretion core, MBS products demonstrated strong relative performance to peers over one, three and five years.

Obviously we think this is a prerequisite for success in that business. Again, we continue to benefit by smart investment decisions made by the team, avoiding exposure to a number of the troubled areas, SIVs, SFX, CPs, CDOs, the prime exposure and the like and probably the latest area that's been problematic for the industry is auction rate preferred, another area that we just have not had the exposure, so the team has done just an outstanding job for clients.

Our strategy within the fixed income group is to continue to leverage the experienced team, global footprints and the scale and capitalize on the opportunities that are making themselves available in the marketplace. The other area that I would like turn your attention to is the Invesco quantitative strategies.

Recently been renamed from what was Global Structured Products, we think this more actively reflects who they are and terminology used in the market. They've been together for over 20 years. And so again just sort of linking current terminology. The team manages about $30 billion globally for clients in 30 countries around the world. Very strong capabilities in alternatives strategies including market neutral, portable [alpha 13030] and the like. And versus peers again, performance is quite strong. Structured core equity is a top 10% performer, since inception top quartile on a three-year, five-year basis.

Capital Shield, another top 10% performer versus peers over a three-year period. And the market neutral product also is a top 10% performer over three, five year. So again these longer-term performance numbers are really strong in some areas that are of great interest.

Bruce Bond is going to, again, after Phil talks, talk about our efforts to provide clients further access to Invesco quantitative strategies and also Worldwide Fixed Income capabilities when he talks about the ETF. But let me stop there now and turn it over to Phil, so he can talk about the US business.

Phil Taylor

Thank you, Marty. I'm on page 17 and what I am going to do is share with you our strategy for Invesco AIM, a retail US business, and highlight some of the progress we're making here. So let me start with the strategic framework and review our strategic priorities on slide 17. And that really shows what we're focused on in North American retail, including Invesco AIM, and how these priorities are inline with the four Invesco strategic priorities that Marty described earlier that are shown on slide number 4.

Number one, of course, is being known for having a strong investment reputation. And the elements to this are having a well-defined and repeatable investment processes underpinned by oversight within a strong investment culture. And this is a significant priority because this is the foundation upon which our business rests. We are in a maturing industry where investment reputation really is a key differentiator.

Our second priority is to have a broad and compelling product lineup that's all-weather and beyond conventional mutual funds. This is an important priority, because while conventional mutual funds are and will remain a core business, significant growth opportunities exist in other products and investment areas. This is a real competitive advantage that we have in packaging Invesco AIM's and Invesco's management capabilities within our own propriety products or the solutions of our distributor clients.

The fourth priority is having strong relationships with our clients. We strive for strong and coordinated relationships really from the home offices all the way through to the financial advisers in the field. I think this is important because no longer does every salesperson have unfettered access to every financial adviser to sell the entire product line. Now it is much more of an institutional type sales process, where a high degree of expertise is necessary to get pass the increasingly sophisticated home office research and due diligence screens in order to obtain shelf space with our distributor clients.

And the fourth priority is becoming well-known for putting investors' interest first. And that's really a common thread that we try to ensure runs through our business. And really this is just a sound business principle, where we are fiduciaries and having a clear line of sight to the interest of the end investor really helps us ensure that we maintain a long-term perspective for our business, so that we make the right decisions for our investors, sometimes even if it's inconvenient for us in the short term.

An example could be closing a fund when its size starts to impede the investment process and compromises the expectations we've set.

Turning to the next slide, 18, it looks specifically at Invesco AIM. Fundamentally we've worked hard to distance ourselves from how our US retail business looked in the past. And what that really means is moving away from being known as a US mutual fund company that specializes in growth style funds. That's kind of our heritage, but it is in the past. We have taken a number of actions where we can demonstrate to the market now that Invesco AIM is part of an integrated global investment manager, offering a broad product line that taps into Invesco's distinctive worldwide capabilities globally. And our new branded entities really better reflect the global scale and scope of our business, that is changing from the corporate name AMVESCAP to Invesco a year ago, and examples at the end of last month, changing AIM Investment to Invesco AIM and PowerShares to Invesco PowerShares.

This really wasn't or isn't an overnight or mere marketing transition, it's a fact based effort that reflects the work we've done over the last two years to move Invesco from, very tangibly from a holding company with a collection of discrete business units to an integrated manager. We've been really changing our messaging about Invesco AIM to the market to increase awareness about our global reach, diversified investment strategies and product packaging options that we have. And that's really we think a key competitive differentiator for our business.

If I start with the four priorities that I mentioned before, let me start with investment reputation. Our results really have improved over the years. As we've got two-thirds of our assets in the top half on the important three-year period. And the Morningstar Report at the beginning of this year showed that Invesco AIM Fund complex had the third best investment performance improvement of the top 20 fund companies over three years based on a three year return. So we are really seen seeing better results from the investment side, and we continue to work hard at this.

And over the last 12 months we've made significant changes to the Invesco AIM senior investment leadership, turning over this group of 6 by 50%. And noteworthy is the appointment of Juliet Ellis as CIO, Chief Investment Officer, of our domestic growth sleeve, about $25 billion to $27 billion in assets. Juliet is not only a top quartile manager with a strong investment process, but a good mentor and developer of talent.

If you take a look at the growth team, it is really very strong. Paul Rasplicka at the Midcap, disciplined, and Bob Shoss and Geoff Keeling on the Large cap. So we feel pretty good about this group right now. And also feel very good about the quality of our four group CIOs we have in place. So Juliet is one, the other three being responsible for the value core and international growth investing disciplines.

In addition, we made changes to the Large cap growth team, hinging several managers and appointing Rob Lloyd, who is also a top quartile manager in the Large cap growth space to be lead manager of the AIM Constellation Fund, which is about a $7 billion fund. In addition, we made leadership reporting or location changes to foster greater interaction between our technology and health care sector teams and the Houston-based domestic growth teams. These sectors are growth oriented, so we really want the sharing of ideas and a closer collaboration among these teams.

Really moving them beyond sector funds alone, which will really help up the entire domestic growth complex. So the teams are stabilized focused on investing, or strengthening the investing culture and improving performance over the long term. So in summary we've seen improved investment standing, obviously with more to come. We're in a much stronger foundation, and we'll continue to make the necessary changes to build our reputation.

Then the second area I would like to address is our product range. If you go back in time, a snapshot of our business in 1999 would show something like 60% of our assets in growth products, another 9% in sector funds. And those being mostly in growth areas like tech, telecom and health care. So we were very heavily weighted with growth style products. But we've engineered or reengineered our product line to a point where growth now accounts for less than half our assets, and value core asset allocation account for about one-third of our assets.

Again, this wasn't something that occurred overnight. It was over a number of years. There were over 100 fund mergers, mandate changes, which reduced on a global lap the concentration of growth funds, the complexity of our lineup, and increased the asset concentration. And we also launched 30 new products to introduce more balance to the product line, like asset allocation and target risk maturity funds. And mandates really access the other distinctive investment cultures around Invesco.

But we use eight of the investment centers now in addition to Invesco AIM. In the past culturally AIM would have hired its own managers instead of drawing on the strong expertise available in our company around the world. So if we were looking to introduce a China fund a number of years ago, now it is natural for us to look at our in-house expertise in this market. And that's what we did. But several years ago this really wasn't part of the organizational culture.

As Marty said, we're really just beginning to explore the huge potential of our global franchise. You will hear from Bruce Bond after me. And adding PowerShares ETFs has really made our product line much more compelling and unique, since ETFs are/or have quickly become an integrated complement to stocks and mutual funds within investors' portfolios. And known as industry leaders and innovators, Invesco PowerShares now have the second-largest ETF product suite in the market. Launched in the UK and Europe in December, and as you will hear from Bruce, recently launched four groundbreaking active ETFs.

Well in summary, we're no longer a US based mutual fund growth shop, but a broad or weather product line beyond mutual funds, and have access to our distinct Invesco investment disciplines around the world that we can put to work for clients. On the relationship side, with the better investment results and with a stronger product line in 2007, we saw the best net sales results since 2002.

So on a twelve-month rolling basis as of the end of this quarter gross sales were up 31%, redemptions were down 3.5%, and our net outflows were cut in half. And as with investment, we've replaced the senior leadership team in sales. Made some structural changes that consolidated similar functions and streamlined the management structure, so we feel we've got the building blocks in place to show further progress here.

And the last item is investor's interests first. And compared to five years ago our product line is now much more competitive pricewise for our investor's. Just under two-thirds of our funds and assets are now below the [lower] medium. And really we continue to look for ways to reduce fund expenses. And its a couple of examples we have moved some of our processing to lower-cost environments, where we can pass on savings to our investors. And we're taking advantage of our regional and global scale, and as an example we expanded the relationship that we've got with a major supplier we use in the US to our Canadian business, and for our increased scale managed to rework some of the aspects of the contract on a more favorable basis. And we were able to pass on the benefits to our clients.

To close, we're in a much, much better position and much better position than we were a couple of years ago. Investment performance has improved and flows are turning around. And really it's because we have changed from being a US based growth fund complex to being part of a global investment manager that really offers a more compelling product lineup to our clients. But going forward we're going to continue to focus on these priorities with the aim of further improving our business.

I am going to turn the call now over to Bruce Bond, who is CEO of Invesco PowerShares. And Bruce will discuss our ETF business, and in particular the launch of our new active ETFs.

Bruce Bond

Thank you, Phil. Just to get started here, I wanted to maybe give a little perspective on the ETF industry to kind of give you a sense of where we are and then we can talk about where it's going. Currently the assets worldwide are approaching $800 billion and I think that we saw last year $230 billion in new AUM within the worldwide industry, and 457 new ETF listings on exchanges. So the industry continues to expand rapidly.

Within the US alone first quarter of '08, we still saw $17.25 billion in net new flows into the industry and I think of the about $800 billion globally, 70% of those assets are within the US Many of you may have seen there has been several estimates out there that expect the industry to achieve a $2 trillion by the end of 2011. And I think we still believe that is reasonable to expect that by the end of 2011 the industry will hit $2 trillion, and that there is a likelihood that we could pass $1 trillion in 2009. Some of the reasons that the industry continues to do well is that the adoption rate among financial advisers are accelerating at this point.

You may have read many of the articles about this, but one example of this is Investment News, you may be familiar with, does an annual poll. And advisers or investment professionals have rated ETFs now as the second most important product to have in their arsenal to invest their client's money buying only mutual funds. Another reason for this adoption rate is that the major wire houses continue to move swiftly and purposely toward UMA platforms, or these unified platforms where you can own multiple types of products.

And ETFs fare very well in those marketplaces. And advisers that are doing consulting and advisory type work like to use ETFs within these wrap type programs. The other reason we think that the $1 trillion by 2009 and $2 trillion by the end of 2011 is very achievable for the industry is that, although the market has been -- has struggled here recently and flows have slowed a bit, with this adoption rate and with this focus by advisers and firms on ETFs, we believe that when money does come back into the market, comes off the sidelines, we except a substantial piece of that will come into ETFs as advisers look to get back to work and put their client's money to use. Invesco PowerShares, we continue to be very well positioned within this marketplace as a value-added leader, or the value-added leader.

I think with the introduction of actively managed funds we will only further establish ourselves as a leader in this category. PowerShares, if you go to the next slide with me on the actively managed ETFs, PowerShares is the only sponsor -- there were recently four sponsors that received some relief from the SEC to introduce actively managed ETFs.

But PowerShares is the only one that received both equity and fixed-income relief from the SEC. And because of that, you saw the recent -- or may have seen that the four funds we launched recently, three of which were equity based and one which was fixed-income based. So really began this era of actively managed ETFs. We think that really the big opportunity here is uniting Invesco's world-class investment capabilities with PowerShares, ETF and product expertise and delivering Invesco's capabilities via the ETF platform to advisers in today's marketplace.

We're very well positioned to do that. And we think that this is going to be a tremendous partnership together to be able to bring these valuable products to the marketplace. So I think as the industry gets -- continues to develop, we will see more and more acceptance of advisers for the actively managed ETFs.

Let me explain just quickly what is an actively managed ETF, and how does it differ from an index-based ETF. An actively managed ETF, by and large what the SEC has done, the SEC has come out and said if you're willing to disclose your holdings and have transparency on a nightly basis of the ETFs that you own, or of the holdings within the ETF, then you can have an actively managed ETF. Now, what that means is that a manager would be able to adjust or change his positions during the day, or whatever he feels is necessary to achieve his investment objectives, and then in evening there is a basket that is put out that shows all the positions within the fund.

The next day it is basket is what is used to create and redeem shares within the ETF in the primary market. This transparency is very important for ETF in order for them to trade properly and for shares to be able to create redeem in an orderly fashion. The reason that we think that actively managed ETFs are going to be embraced by the public is for these benefits in the structure, this is really -- the opportunity in ETFs is not really about whether it should be passive or active or down these lines, it is really a discussion around this new structure.

A structure that allows you to provide some benefits that aren't currently available in other structures, those being the tax efficiency, transparency, low-cost, near instant liquidity and this trading right at or near NAV. These are the things that investors are very interested in today. Just as -- we believe that just as a majority of the investors have used ETFs for their passive investing, we have seen that industry grow tremendously here over the last few years.

We believe that as quality managers, such as Invesco, bring investments in ETFs that are actively managed, investors that are looking to put money to work in an actively managed format will look at ETFs because of the structure and the benefits that ETFs can provide them that they may not have available in other places.

So, it is the combining of these things in the active managed world, with these benefits in the ETF structure, bringing them together to make a very high-quality product that we think is going to be tremendous for investors and advisers. As I mentioned, the products we brought out, two of which are managed by Invesco, one is a mega cap portfolio and the other is a low duration portfolio.

As with any new introduction like this, it is going to take a little time as we educate the public, help them understand what it is, how it works, and get them comfortable with the approach, we think that the adoption will start and will pick up pace efficiently over time. If you look at the mutual fund world, and one of the reasons we think this is a tremendous opportunity, 85% of the assets in the mutual fund world are actively managed. And only 15% of those assets are passive or index-based.

Because of that, we know that investors are inclined to look for an opportunity to outperform and to look for quality managers and if we can do together, Invesco PowerShares can bring this offering that proposes to do the best for them, not only on the actively managed side, but also on the structure side, and for efficiencies from taxes and costs and things like this, we think that that is a winning combination and we will do very well in the future.

So with that, I want to turn it back over to Mr. Marty Flanagan.

Martin Flanagan

Thanks, Bruce, very much, and Phil, Bruce thanks both of you. As I said at the outset, one of our key strategies for Invesco is to deliver investment capabilities anywhere in the world to meet our client's needs. And I think both Phil, by the investment capabilities coming to the US and at the same time Bruce is showing you of taking the active capabilities we have through active ETFs in the market. So, we think it is early days for us. We think it's core strength of ours. We think it offers a lot of potential for our clients and for us as an organization. So hopefully everybody found that helpful.

And let me turn it over to Loren now.

Loren Starr

Thank you, Marty. Let me start with a quick review of our asset roll forward for the quarter. Marty had mentioned earlier we added $1.2 billion of AUM to total net inflows. By far and away the biggest impact on our assets under management was essentially outside of our control, declining markets in the quarter. That took away $33.5 billion or about 6.7% of our beginning AUM. So as a result we ended the quarter with $470.3 billion in assets under management, with average AUM decreasing 6.5% quarter over quarter.

Moving on to the bottom of the page here, you will see the net revenue -- net revenue yield, excuse me, excluding performance fees, decreased 2.6 basis points to 56.5 basis points in the first quarter. This was a result of the change in our asset mix.

Again, as the markets declined globally, we saw our higher fee equity assets decrease. And we also saw growth in our institutional money market product increase, and this product carries a lower fee.

Let's move to the next page and review our operating results. You can see that investment management fees were down 9.7% versus the prior quarter. Again this decline is readily explained by our lower average AUM, but also the shift in our asset mix, as I just mentioned, due to the market impact on our equity AUM.

At the end of 2007 our equity assets under management represented about 50% of total AUM and at the end of March this number had dropped to 46%.

Performance fees in Q1 came in slightly below the Q4 level at $11 million. And similar to the prior quarter most of these fees were generated from our UK business.

Service and distribution fees were down in the quarter, in line with lower AUM levels. Other revenues also declined by $21 million, and this was due to front-end sales loads falling in line with lower gross sales in our offshore product range, which we sell primarily through Europe and Asia-Pacific. So, with lower operating revenues and falling 11% in the quarter, you'll also note that total operating expenses fell more rapidly, declining 12.5% in Q1.

Within total expenses you will see that employee comp decreased 4.7%. That was due to lower levels of variable compensation, but also slightly lower headcount. Third-party distribution, service and advisory, decreased 13.3%, again driven by lower investment management and service and distribution fees.

Marketing was flat. Property, office and technology declined 16.9% as we continue to manage our resources tightly in the current environment, but we also benefited from lower rent costs due to vacant office property, and that amounted to about $4.9 million credit in the quarter.

G&A decreased 34.2%, and that shouldn't be entirely surprising, since we mentioned during the Q4 call that G&A was unusually high. And that was due to the $22.6 million previously mentioned related to the re-listing and the legal settlement costs, as well as to other largely onetime items during the quarter.

So with operating revenues down 11 and operating expense down 12.5%, our operating income declined only 6.4% quarter over quarter. Moving on to other income, you will see that the equity earnings of unconsolidated affiliates fell 14.8%. That was largely a result to lower AUM in our joint venture in China as the Asian markets corrected in the quarter.

Other gains and losses came in at a loss of $6.5 million. This was due to $3.5 million unrealized losses as we mark-to-market, certain of our CLO products and the remainder of the loss in the quarter was due to FX on intercompany loans. Our interest expense was marginally higher in the quarter as we utilized our credit facility to pay $130 million contingent payment for PowerShares.

We also benefited from a 2 point drop in our effective tax rate in the quarter, falling to 32.2% as the statutory rates in both the UK and Canada declined in the year. So we ended up with EPS of $0.39, 3.9% less than Q4.

Given the timing, let me now actually just turn it over to Marty, and probably open it up to any final comments.

Martin Flanagan

Thanks, Loren very much. Invesco's results during the first quarter, we think were quite strong kind of considering the market environment we are in and again, as you compare to the prior year quarter, we think very, very much in line with that period of time. Based on our efforts to strengthen the business over the past two years, we do think we're well positioned to improve our competitive advantage in this current market environment. And we remain very committed to our multiyear strategy to continue to focus on creating capacity within the business so we can continue to move forward with key initiatives that will continue the future growth in the business.

So, with that, we'll open it up to Q&A for Loren, Phil, Bruce or I.

Questions and Answers Session

Operator

(Operator Instructions). Our first question comes from Craig Siegenthaler.

Craig Siegenthaler - Credit Suisse

Good morning and thanks for my question. On the compensation margin, I noticed that while revenues are down 11% sequentially, compensation was only down about 5%. Is there an opportunity to more closely align these two metrics in the future? And maybe on expenses as a whole, is there still a high level of expense overlaps between Invesco's subsidiaries where expense reductions can be made?

Loren Starr

Again, Craig, hi this is Loren. I guess in terms of compensation, obviously compensation includes salaries and benefits, and obviously payroll taxes are generally higher in the first quarter. I think it was probably about $9 million higher versus the prior quarter. So again there some noise that rolls through the quarter. We don't target a particular ratio of compensation to revenue. We have a variety of investments planned for our investment teams, and they reflect the results, the performance of the various investment teams.

So, I don't think -- that's not the way we're managing compensation, although there is a reality check to our ultimate cash bonus accrual and how much stock we generate or provide our employees at the end of year that reflects the overall investment or the overall performance of the firm.

Craig Siegenthaler - Credit Suisse

And then on the expense overlaps?

Loren Starr

Yes, we continue to work on the opportunity to move to global operating platforms, remove to the extent there is any redundancies that may still exist, where we have separate teams doing largely the same activities. Over the last two years we've done a lot of work there. We have removed; I'd say the easy low hanging fruit elements. There are still probably elements of opportunity within the organization, but they're not as large as -- certainly as large as the ones we have seen over the last two years. But we continue to look at every area is focused on creating efficiencies and looking at ways to do things better, and doing things together as one organization. So, I would expect to see continued successes in that area, but they may not be nearly as visible as the prior ones.

Craig Siegenthaler - Credit Suisse

Got it. And then just a quick question on your $1.5 billion announced buyback. Is Invesco going to roughly use free cash flow as the lever to buy that stock here, which is I'm estimating maybe a little under $500 million per year, or is there -- and that's excluding the dividend, or is there an opportunity to lever up the balance sheet here, or reduce cash levels currently on the balance sheet?

Loren Starr

Hey Craig, great question. Thank you for asking that. Our current policy capital management approach is exactly the same it has been before. Obviously we generate a fair amount of cash as an organization, and we will use that cash flow first to invest back in our businesses to the extent that we can help support our business. The next opportunity would be acquisitions, if and only if they make strategic sense, and if and only they pass financial hurdles that we have set internally.

And the next two opportunities are going to be dividends, using the cash to pay dividends, and then an ever-increasing dividend, and then doing buybacks. So this is really the concept is to use free cash flow. We have no intention of levering up the balance sheet and accelerating the buyback. Really you should think of this $1.5 billion as just a continuation of our existing approach to thinking about buybacks. And so we are just going to -- since we used up our capacity, we needed to authorize something new and so again this has no stated maturity or expiration, you should think of it as a multiyear capability.

Craig Siegenthaler - Credit Suisse

Great, thanks a lot Loren

Operator

Our next question comes from Robert Lee.

Robert Lee - Keefe, Bruyette & Woods

Hi, good morning everyone.

Loren Starr

Hey Rob.

Robert Lee - Keefe, Bruyette & Woods

A couple of questions, some modeling, some strategic. First one, the 32% tax rate, should we think of that is being fully loaded? I guess my understanding is that I guess the UK or Canada; they were first going to be dropping their tax rate I think starting around now.

Loren Starr

Right, Rob yeah, you should assume that's the general rate for the full year, and that is sort of a full year, fully loaded impact.

Robert Lee - Keefe, Bruyette & Woods

Okay, great. And the $4 million credit, is that a sort of a onetime event?

Loren Starr

It is. On the property that is a onetime credit.

Robert Lee - Keefe, Bruyette & Woods

Okay, and I had a question on how we should be thinking of flows in Asia-Pacific and I guess the joint venture in particular. I mean obviously, markets in China got hit pretty hard in the first quarter. And I'm assuming sales slowed, but is it possible to just get some color if -- did they -- did you have outflows there? Do you think that has been actually relatively stable or just maybe some color around that would be helpful?

Martin Flanagan

Obviously, this is a topic -- we were just talking obviously internally, and Andrew Lo who runs the area. You should see the market pullback obviously in a strong way, not to anybody surprise. I think it has stabilized right now. There is a sense that on balance the focus in China is for growth, and with that again cautiously we think that it is at least a stable environment going forward. And again, I sort of predict the world, but we have put it tentatively more in the positive outlooks considering the environment we are in, that's helpful.

Robert Lee - Keefe, Bruyette & Woods

Okay, and One of the things I noticed, if I looked at the data correctly, is that it seems like your performance in the equities business, I believe it is, at least in Europe -- I mean, outside the UK seems like it has held up pretty well. Yet I know that's been a geographic region that's been challenging for the Company for awhile.

Can you maybe update us on, are there some changes that are taking place there, or if you just think that's not a front burner priority. It is more important to get the US and Asia right, or how are you thinking about that?

Martin Flanagan

Oh, it is an absolute priority and I think if you look at industry flows, dissect them some in Europe, it has been challenging generally. On the equity side of the business it has been more of a fixed-income region that has been up-and-down because there was lot of flows into those short duration type fixed-income portfolios and the like and but what is an absolute focus of ours is having sort of a core equity product that does well in that marketplace.

And we have three equity products there managed by the quantitative team, the Invesco AIM, the (inaudible) product, but importantly the Invesco Perpetual was an equity portfolio that I think is going to be really a core product for us in that market also. But its focus it's not where, we have not had the flow success that we wanted, but it is really also getting the lineup right, which we think is now right.

Robert Lee - Keefe, Bruyette & Woods

Okay, and maybe lastly, Marty, you mentioned at the beginning of the call that I guess the institutional pipeline, I think it was, seemed pretty decent. Is it possible to just get some more color around that? I don't know if you can quantify it or give us a sense of what products or --?

Martin Flanagan

The products -- and probably not a huge surprise, the alternative areas, obviously there is the distressed areas and interesting, there's been much of it from WL Ross. Obviously it is very topical real estate is actually getting a lot of focus again. The quantitative business is getting focus again also. Fixed-income type things, not just cash but also looking at distressed opportunities in fixed-income are the other areas that are also of focus right now. And also the other is then fund-to-funds.

Invesco had a fund-to-funds product for the past 15 years, and it is really just been the focus in the last six months that focused again in the marketplace and it had some nice wins. So, again, what our -- like for all of us in the industry, what our pipeline looks as strong as it has been. Does that turn into reality? That is where we just want to not to get too far out on our (inaudible) but there is definitely interest on the institutional side of the business right now.

Robert Lee - Keefe, Bruyette & Woods

If I could maybe just follow-up, you mentioned that you are seeing obviously fixed-income distressed, and I guess current opportunity should, are you actually outside of WL Ross contemplating or actually rolling out other kind of specialized products to take advantage of the opportunity, whether it is in the real estate or somewhere else sort of fixed income?

Martin Flanagan

I can't speak specifically about product launches, but what I can say is where the activity and interest is, and we have the skill set is real estate and then within fixed-income beyond cash, it is really in sort of these beat up opportunities that I think have a proven track record, and we are hopeful that we will participate in that.

Robert Lee - Keefe, Bruyette & Woods

Alright, great, thank you.

Operator

Our next question comes from Michael Kim.

Michael Kim - Sandler O'Neill & Partners

Hey guys, good morning.

Martin Flanagan

Hey, Michael

Michael Kim - Sandler O'Neill & Partners

The first question I had just kind of deals with retail fund flows more generally. We see volumes obviously remain pretty volatile on a monthly basis thus far this year. How do you think about, how quickly sales could reaccelerate I guess, both here in the US and particularly outside of the US just given kind of more favorable equity markets going forward and particularly considering the fact where money market fund yields are currently sitting?

Phil Taylor

Hi, it's Phil here. Retail, if I just take a look at retail sales in Canada, as Marty said, it is clearly tied to the discipline that's very valuation oriented. And if you look at where the frothiness is in the market, it is areas that the Trimark discipline avoids because of the valuation, so commodities, energy and that sort of thing right now a little more heavy weighting in the financial services and consumer discretionary. And this is actually how you would expect the discipline to perform. And so it will -- once the performance turns back then we will see the flows.

Not a bad first quarter in terms of performance going back, but again we need something for the long-term. In the U.S. there has certainly been a slowdown over the last quarter in terms of gross sales into the market. And if you look at our cash management business, it has really bloomed, so I think is a bit of a flight to safety right now.

For us international growth is still very strong for us. And if you look at our core business, it is a very defensively positioned discipline and its come back to kind of top (inaudible) performance, so we expect to see some traction there. And with the rework of the growth team, we would expect over the medium term that we will gain market confidence in that discipline.

Martin Flanagan

I think Michael, if you just -- the context of speed and your estimation is probably as good as ours. You saw it just drop off dramatically and if you go across the categories in the US, the vast majority of the equity ones are in net redemptions and I think the speed of change it always a little slower coming back. But our main focus, because we can't change the industry activity, but our main focus is just making sure that we are improving ourselves in the meantime.

Michael Kim - Sandler O'Neill & Partners

Okay, and then in terms of the revenue yield, obviously the broader equity market declines played a big part in kind of the sequential decline of the overall yield. But were there any kind of other drivers, as I think about it from a distribution channel or perhaps a geographic standpoint that led to the sequential decline?

Loren Starr

Michael no, this is Loren. It really was mostly driven -- you could tap into it almost entirely just through what was going on with the mix.

Michael Kim - Sandler O'Neill & Partners

Okay, and then just finally on expenses, maybe to follow-up on a prior question, just with the recent market volatility, have you found yourselves kind of paying even more attention to costs more generally or is it just basically kind of continuing to make progress on streamlining the business? I guess has there been a step up and kind of really taking a look at some of the discretionary spending or perhaps some longer-term investment spending plans going forward?

Martin Flanagan

Yeah, Michael, its Marty and the answer is of course. And again, I think what you're trying to -- the context is we have been on -- the broader effort that I tied to outline at the beginning is streamline the organization, more efficient, more effective, etcetera, etcetera. But also, like us, like all hopefully all organizations during difficult times, you have to pay attention to discretionary spending too. It doesn't make you a better company, but you've got to pay attention to that and we absolutely are.

Michael Kim - Sandler O'Neill & Partners

Okay, that's helpful. Thanks.

Operator

Our next question comes from William Katz.

William Katz - Buckingham Research Group

Okay, thank you and couple of questions. I think there is a couple left. Just coming back to capital management for a second, the dividend increase was relatively nominal in the scheme of either if you think about yield or to your cash flow. I am just sort of curious, as you think about the priorities for cash flow what are the major uses as you look forward over the next several years? I guess, it does seem like most of it would go to buyback and given, you think you will buy back I guess 75% as fast as you said you were going to do your first one, could we see an expedited buyback of this $1.5 billion? It is a sizable number relative to your market cap.

Martin Flanagan

We can't get into the business of predicting. I think we have tried very hard to lay out our capital management priorities, and we're going to stay intact with them. I think what we have shown is that we will reinvest in the business. If there is an opportunity acquisition-wise, we will take advantage of it. And we'll pay an ever-increasing dividend and the excess we will use for capital buybacks beyond that. So it is just hard to predict each one of these. I don't think we could have predicted the opportunities of a PowerShares or for WL Ross, so that's why it just gets very, very hard.

Loren Starr

The one point I might just actually add is we do have about -- we borrowed about $387 million under our credit facility right now, due to the things PowerShares and we paid bonuses out. Probably one of the priorities is to take that down to going flat. It has never been our intention to maintain a balance on our credit facility. So that is just another thing to keep in people's models that we're going to paying that down.

William Katz - Buckingham Research Group

Okay, and then maybe a question for Bruce. It is provocative presentation once again. Just curious, a two-part question. One is how do the margins look on the active ETF relative to a passive ETF? And then relative to sort of a growth curve, if you will, how do think the adoption plays out compared to some of the passive mandates today?

Bruce Bond

Well, I think as far as the margins go, I think they're going to be fairly consistent with where you see PowerShares today. So we think that they're going to be -- the equity funds that we introduce have a total expense ratio of 75 basis points, and so we would expect about 50 of that to be available as management fee. So, we expect it to be about where we are and as far as the growth curve, we see that there is going to be an education period here where we get people comfortable with the concept and help them understand the benefits and then we would expect it to pick up well after that.

So a little bit of a slower period here at the beginning as we get products in the market, educate the marketplace, and then picking up here in the next six, twelve months and then thereafter.

William Katz - Buckingham Research Group

Okay, and then maybe just one final question. Again, a little bit narrow scope, but the stable value had another $2 billion of outflow. I presume that may have related to outflow in '07 that was already announced but it took to '08 to sort of work its way through. But is that fair assessment or is there still risk to those assets?

Loren Starr

Hey, Bill, this is Loren. No, that was always expected. That was part of the original $16 billion roughly and so right now going forward, any redemptions coming out of stable value are really just business as usual type of activity. And so we sort of had been through that entire pipeline. So, its fair to say that what you are seeing going forward is just business as usual.

William Katz - Buckingham Research Group

Okay, I apologize. I do have one more. Wilbur Ross was on the news the last few weeks about possibly raising another $4 billion fund. Marty, I am sort of curious, your commentary about the institutional pipeline, if you were to exclude that observation as a potential part of the flows, how does the pipeline look away from Wilbur Ross?

Martin Flanagan

And again, I can't speak in numbers and also I think be careful about what you read in the papers too. There's no question there is investment opportunities and WL Ross has been taking great advantage of it. I would not -- the papers could have gotten ahead of themselves on this fund -- on a fund. But, as I was trying to say earlier, where we are seeing it is, again I can't speak to the numbers, but we're clearly getting as good of interest that we see in the institutional business and strong areas.

Yes, in cash but outside of cash, it is -- the quantitative part of the business, the real estate part of the business, fund-to-funds with some nice wins there. And even within fixed-income some of these other -- the more distressed fixed-income areas that we are seeing opportunities for ourselves. So again, what looks like attention in pipeline is not in the bank, but we're getting a lot of activity there.

William Katz - Buckingham Research Group

Okay, thanks very much.

Operator

Our next question comes from [A.G. Edwards]. your line is open you may ask your question. Sir please check your mute button. We'll move on to the next question. Mr. Jeff Hopson, you may ask your questions.

Jeff Hopson - A.G. Edwards

Okay, thanks. I may have missed this. Did you talk about flows in the UK? And the rest of Europe, any thoughts on the environment there?

Loren Starr

Hey, Jeff, hi it's Loren. We actually have continued to see strong inflows in the UK. Obviously a little bit more moderated than in the fourth quarter, but our business there is doing very well. And in fact, it is not just in the core types of products that people know our business Invesco Perpetual buy, but also in fixed-income products, which I think is probably about 30% of the flows in Q1, maybe compared to something below 20% in the prior quarter. So, it is a very good story. It is one that I think Invesco Perpetual is known as being conservative and certainly a safe place to put one's money and so it is a perfect sort of opportunity for them to continue to grow. So we feel pretty good about where that business is going into '08.

Jeff Hopson - A.G. Edwards

Okay. And any sense of kind of the industry flows in the UK, to put that in perspective?

Loren Starr

I think it is a little hard because the data is not as clear. But we think we are actually getting a fair amount, I don't want to be overly overstating it, but a significant portion of the flows are coming to our business.

Jeff Hopson - A.G. Edwards

Okay. Great, thank you.

Martin Flanagan

Okay. I want to thank everybody very, very much for joining myself, Loren, Phil and Bruce. Again, we do believe we're very well positioned to succeed in the marketplace and also we're very, very focused in these uncertain times. And we're going to be continued to be very disciplined in trying to improve our competitive position especially during this period. We all appreciate all your time and your questions. And we will be in touch next quarter. Thanks very much.

Operator

This concludes today's presentation. Thank you for your participation.

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Source: Invesco Ltd. Q1 2008 Earnings Call Transcript
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