Invesco Ltd. (IVZ) Q3 2012 Earnings Report, Transcript and Summary

Aaron Uhde - Director of Investor Relations and Assistant Treasurer Martin L. Flanagan - Chief Executive Officer, President and Executive Director Loren M. Starr - Chief Financial Officer, Senior Vice President and Senior Managing Director

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division William R. Katz - Citigroup Inc, Research Division Matthew Kelley - Morgan Stanley, Research Division Roger A. Freeman - Barclays Capital, Research Division Glenn Schorr - Nomura Securities Co. Ltd., Research Division Cynthia Mayer - BofA Merrill Lynch, Research Division J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division Eric N. Berg - RBC Capital Markets, LLC, Research Division Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division Christopher Shutler - William Blair & Company L.L.C., Research Division Marc S. Irizarry - Goldman Sachs Group Inc., Research Division Greggory Warren - Morningstar Inc., Research Division

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results for operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs, such as will, may, could, should and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q filed with the SEC. You may obtain these reports from the SEC website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

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

Thank you, and thank you for joining us today. And for those of you in the Northeast, I hope you and your families have made it safely through the storm. I would like to recognize and thank our employees in the Northeast for going above and beyond to deliver for our clients throughout the storm. And as always, our focus is on their safety. And as the case many of them had to work remotely because they couldn't get into the office, and they did work very diligently during the storm for the benefit of our clients, we appreciate that very much. And I'm sure that this appreciation is the same for all of you within your organizations, and I know it's been a difficult time. So on the call today with me is Loren, as was just mentioned, our CFO. And as is our practice, first of all, the presentation's on the website, if you're so inclined to follow it. I will review the business results for the quarter, Loren will go into greater detail of the financials. And as always the case, Loren and I will answer any questions that people might have. So I thought it might be helpful before getting into the numbers is to really provide a sense [ph] of the macro environment that we're operating in and that we were operating in within the quarter. And although the markets during the quarter were generally positive, lately, we've seen signs that investor confidence is under pressure again. And it's a variety of factors that are contributing to this. It's the deterioration in the economic environment in Europe, some continued softening in China, although it continues to be a very rapidly growing part of the world. But here, in the United States, uncertainty over the fiscal cliff, negative news that's coming in from abroad is really keeping investors on the sidelines. And again, this week, the weather in the Northeast did not help any of that investor confidence. In this uncertain market environment, what we've seen is advisors and consultants are focusing on managing risk as a major topic. We recently completed a survey with advisors in the United States, and 65 of them responded saying that managing risk and wealth preservation were the predominant philosophies for managing client assets. So again, people are in a very cautious position still. And as you would expect, the emphasis on risk management for preservation of wealth is driving them into yield-oriented capabilities and multi-asset capabilities, many of which are continuing to see positive flows across the industry. Invesco is well-positioned ahead of this trend, and it's really the broad suite of income capabilities and multi-asset capabilities that we have for our clients that is responding well to these needs. So moving on, let's take a look at the third quarter and some overview comments. Long-term investment performance was strong again across all time periods for the third quarter. And delivering strong investment performance to our clients contributed very solid operating results. And as we mentioned during the last quarter, we saw early signs of a turnaround in flows in July. And building on that early momentum, net flows grew to $11.7 billion for the quarter. And this was amongst the strongest net flows in the history of the company and most robust net flows since -- we've experienced since the second quarter of 2010. Invesco's quarterly dividend is now $17.25 per share, representing a 41% increase over last year's dividend and reflecting continued confidence in the fundamentals of our business. Return on capital to shareholders during the quarter totaled $118 million. And during the third quarter, we did take advantage of a number of opportunities in the marketplace to further invest for the future of our business. And let me hit on a couple of those. And as many of you know, we currently have a presence in India through the enterprise support location in Hyderabad and also with WL Ross & Co. having a location there also. We plan to build on that presence, and it was really by acquiring a 49% stake in Religare Asset Management and creating a partnership in India for us. This move will enhance our presence in an important and growing market and will expand again our comprehensive range of investment capabilities with these investment capabilities that Religare Asset Management bring to us. During the third quarter, we continue to build out our market-leading multi-asset capabilities with the addition of a multi-asset team in the United Kingdom. In the next year, we look to introduce capabilities into the marketplace that again will very much extend and complement the multi-asset capabilities that we have across the organization globally. We continue to invest in the brand in the United States. And where our awareness and brand equity score is now among financial intermediaries has risen to 10. And just 2 years ago, we didn't even show up in the results. And as we said, we do think it is very important for us to generate a level of awareness and brand equity in that marketplace. So good progress is being made there. If we move on and take a look at the summary results, let me start there. And it's really driven by very strong net flows of $11.7 billion during the quarter. Assets under management rose to $683 billion during the quarter, up significantly from $646 billion at the end of the prior quarter. Operating income was $250 million versus $249 million in the second quarter and the operating margin was 34.1%. Earnings per share were $0.42 per share versus $0.41 in the prior quarter. So a very key metric -- key metrics around investment performance and distribution were among the strongest they've ever been for the organization. And as a result, employee compensation rose in the third quarter, driven by strong, sustained investment performance and near-record flows. And as we said for some time, a major focus for the firm is to reinvest in the business and build on our strengths and to further enhance our competitive position, which we think we've done during this quarter. We also took advantage during this quarter of opportunities in the market, continue to invest in our investment capabilities, our brand, global platform and in our people in ways that we think again strengthen our business for the long term. Before I turn it over to Loren, let's take a look at investment performance. And as you know, we have an absolute commitment to investment excellence. And our efforts to build and maintain a strong investment culture has helped achieve solid investment performance in spite of a very volatile markets once again. And as you can see on Slide 7, 63% of the assets were ahead of peers on a 1-year basis, 67% of assets were ahead of peers on a 3-year basis and 78% of assets were ahead of peers on a 5-year basis, again, very, very strong. And again, we'd like to call out during this past quarter, 79% of our U.S. retail assets under management are currently rated 4 and 5 star by Morningstar. And that is an all-time high for the firm. So again, a good investment results. Taking a look at flows during the quarter. As I mentioned earlier, net long term flows totaled a near-record $9.4 billion during the quarter. We experienced solid growth in our active assets under management, with strong, broad flows across ABRA, high-yield munis, alternative fixed income and others. If you take a look at the passive flows during the quarter, they again were very, very strong for Invesco PowerShares, excluding the Q2 Qs. Flows were strong and product across low-volatility bank loans and other income-oriented ETFs, again very consistent with what we're seeing from a macro point of view in the marketplace also. But as an example of that, of these flows in traditional Invesco PowerShares, ETFs were $2.1 billion. And that represents an annual growth rate of 39%. So again, very, very strong results for Invesco PowerShares. Taking a look on Page 9 at flows again. And as you recall, during the prior quarter, we mentioned the very robust institutional pipeline. During the third quarter, we saw good momentum in institutional flows, which totaled $2.9 billion. And as a result, a good portion of the pipeline rolled off during the quarter, as some sizable commitments funded. But in spite of these roll-offs, we continue to see solid momentum in our institutional business recently that is rebuilding the pipeline to near-record levels. And if you take a look at how we've done on Page 10, taking a look at flows, we're very strong again during the third quarter for the U.S. retail business. Net flows, excluding the PowerShares' Q2 Qs, were nearly $6 billion, up significantly from the prior quarter. Gross sales were up 17%. Flows into the complex were strong across ABRA, munis, International Growth and again, a number of other capabilities, so very broad and deep improvements there. Redemption rates continue to be very, very favorable relative to the industry. We have a redemption rate of 20% versus 28% for the industry as a whole. So again, very good news. Taking a look on Page 11. Globally, the multi-asset suite of capabilities is generating tremendous interest from clients. We're attracted to the capability with the strong long-term performance it aims to provide, a high level of protection in these very volatile markets. The Balanced-Risk Allocation mutual fund in the United States did hit its 3-year track record and a 5-star Morningstar rating on a total return low-wave basis earlier this year. And we are seeing a growing number of clients add to this capability and putting it on their platform. As a result of this very strong performance of this capability, the multi-asset product suite flows have moved up quite nicely. Assets under management increased to $20 billion and flows in the third quarter were more than $4 billion, up substantially from the second quarter. So in spite of the mixed signals we saw in the market and the global economy during October, we do remain cautiously optimistic about the quarter ahead. We have a very robust culture that enables investment talent and delivers strong, long-term investment performance to our clients. Our market-leading asset allocation capability is enormously popular and provides a powerful catalyst for future growth. And we offer comprehensive depth and breadth of investment capabilities that enables us to provide solutions to meet the clients' needs in a variety of market environments, as we are proving. And as you might imagine, in this environment, we're seeing strong demand for income products. And Invesco is very well-positioned to meet these needs for clients seeking income with strong performance in these capabilities. As a result, sales of income products -- of our income products in the U.S. are up 76% year-to-date. So again, I think it positions us very well for the market that we are in. So with that, let me turn it over to Loren. And afterwards, we'll come back to Q&A.

Thanks very much, Marty. Moving to the slide on the asset roll-forward. You'll see that AUM increased $36.4 billion quarter-over-quarter. That was 5.6% growth. It's a combination of the following elements: market and foreign exchange, that contributed $26.4 billion of the increase; the long-term net inflows of $9.4 billion; we have net inflows -- the Money Market products of $2.3 billion. And these increases in AUM were slightly offset by dispositions of $1.7 billion, as we sold off some of our European CLO management contracts in the quarter. Average AUM for Q3 was up 2.6% to 66 -- $667 billion. And our net revenue yield in Q3 came in at 44 basis points. This was an increase of 0.3 basis points quarter-over-quarter. And the increase was due to a combination of the following factors. The first is product mix and an extra day, as well as the expiration of fund mergers related to fee waivers. And that added 1.1 basis points in aggregate. We also saw this offset, however, by lower performance fees in the quarter. That reduced our net revenue yield by 0.7 basis points. And also, we saw lower other revenues, which had a negative impact of 0.1 basis points. I think the good news, however, is that our net revenue yield before performance fees was up substantially quarter-over-quarter, and that obviously sets us up nicely for Q4. Moving to the next page. You'll see that net revenues increased $22.6 million or 3.2% quarter-over-quarter. That included a positive FX rate impact of $3.2 million. Looking at this a little bit more closely, you'll see that investment management fees increased $37.8 million or 4.7% to $839.9 million. This increase was in line with our higher average AUM but also in line with an expansion of revenue yield. FX increased our investment management fees by $4.3 million. Service and distribution revenues were up by $9 million or 4.8%, also in line with the increase in investor management fees. And FX increased service and distribution revenues by $0.4 million. Performance fees came in the quarter at $3.4 million, represented a decrease of $12.1 million versus Q2. And other revenues in the third quarter came in at $24.4 million, that's down $1.6 million off of Q2. The decrease was the result of continued level of lower transaction fees from our real estate business. And again, obviously, this was a little bit slower rate of transaction fee realization than we had previously hoped or anticipated. Our third-party distribution service and advisory expense, which we net against gross revenues increased by $10.5 million or 3.3%. And FX increased these expenses by $1.7 million. So continuing down the slide, you'll see that our adjusted operating expenses at $484.3 million increased by $21.2 million. That's 4.6% up relative to the second quarter. And foreign exchange had an impact of an increase of $1.8 million on that line. Moving into the detail. You'll see that employee compensation probably was the biggest mover. That was at $327.7 million, also increased by $21.2 million, and that was up 6.9%. The growth in compensation, as I mentioned, required a little [ph] explaining that just given its magnitude. The increase in the third quarter reflected an $8 million catch-up accrual for the first half of 2012, driven as Marty said, by the sustained long-term -- strong long-term investment performance that our teams are delivering. As you know, there's also a certain amount of variability and performance in AUM in the first half. But given where we are in the year today, we're able to forecast our full year results with more confidence. And hence, that's why we took the adjustment now. The impact of the first half catch-up was roughly $0.015 per share and approximately 100 basis points of operating margin. There was also a step-up in the run rate of variable compensation in Q3 that reflected about $4 million of the increase. In addition, given the significant increase in sales and net flows in the quarter, our commissions were up substantially, approximately $4 million versus Q2. We also saw some other expenses, including medical insurance and relocation costs in the quarter that accounted about $3 million of the increase versus Q2. And then finally, foreign exchange increased compensation expenses by $1.5 million. Moving off of compensation down to marketing. You'll see that, that expense increased slightly $0.3 million or up 1.1% to $26.5 million. FX increased these expenses by $0.1 million. Property, office and technology expense came in at $69.3 million in the third quarter. That was an increase of $1.5 million. The third quarter increase included effects of technology expenses associated with continued investment in portfolio trading and risk management systems across the firm. FX also increased these expenses by $0.2 million. G&A expenses came in down $60.8 million. That was down $1.2 million or almost 2%. So continuing on down the page. You'll see that our nonoperating income increased $8.2 million compared to the second quarter, and that increase was due to the realized gains of certain of our CLO products in the quarter. The firm's effective tax rate on pretax adjusted net income in Q3 came in at 25.8%. The rate was slightly higher than the previous guidance, and that was a result of one-off adjustments to our tax reserves. Going forward, we expect the effective tax rate to be back down between 24.5% to 25.5%, which brings us to the adjusted EPS of $0.42 and our operating margin of 34.1%. So I'm going to turn it back to Marty now.

So why don't we open up to any questions people might have?

[Operator Instructions] Our first question does come from Ken Worthington of JPMorgan. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: I wanted to start with the sales question. You had particularly strong sales into Fixed Income. Maybe you can talk about why Fixed Income is flowing so well? And if you could mention Perpetual, those products seemed to be performing particularly well. How are Perpetual sales, in particular, for the quarter -- Perpetual, Fixed Income sales for the quarter?

So Ken, I think the fact that our Fixed Income is doing well is probably consistent with what you're seeing in the industry. It's nothing, I'd say, that's so unique to Invesco. I think we are very well-positioned, particularly around some of the alternative fixed income offerings that we have, whether it's mortgage products or our bank loan capability. Stable value continues to do very well. The high-yield products and high-yield muni products, doing very well. So we are benefiting from the interest in those types of products. And we have very good performance in those type of products as well. And that's a trend that we see continuing into Q4. And then in terms of Invesco Perpetual product, we are seeing really good strength in sales in some of the Fixed Income products, particularly as they're selling not just within the U.K. but also across Continental Europe. And then the traditional Equity Income products, again a sort of mainstay in terms of what people are looking for in the U.K., are doing very well. And the performance is extremely strong, as you mentioned. So I think from a competitive position, we are feeling good about where we are in the U.K. in particular. We're also looking at, as Marty mentioned, some of the multi-asset capabilities. And so we think there's an opportunity to continue to expand offerings within the Invesco Perpetual sort of footprint. And so that's work in progress, still too early to say how that's going to go, but that's pretty exciting.

And I think I'd add to it. If you look at some of these macro factors as people are -- as I said, it's a cautious environment still. But if they move more towards credit-type products, we do very, very well and same thing with Equity Income-oriented capabilities. Again, we do very, very well with that. And if you just use the U.S. as a barometer and look at where a lot of the Fixed Income flows go in the United States, it was in intermediate bond category. We're still -- that's not playing to our strength, right? And so these results, I'd say, are really, really strong when you consider that the world is just starting to move to really where our strengths are. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And then management fees rose a bunch this quarter, both on the active side and the passive side. I know there's like a million things that influence it. But as we look forward, based on what you know, what is the outlook on both the active and passive side? And obviously, you don't know what the markets are going to do or how the mix is going to affect it, but there's a lot of other things that you do have insight into. So what's the kind of near- to intermediate-term outlook, if you can share that?

So again, I think if you agree with the macro observation that people, if they do start to move more towards this broad category of income capabilities, and to me, that's Equity Income capabilities but also you have more credit-type capabilities, we'll do very well in that. And our effective fee rates are higher in those products. You move into -- if there's a continued appetite for multi-asset strategies, which we think is not a short-term trend but a long-term movement in the market, we do very, very well in that area. And again, the effective fee rate is higher there. And even within PowerShares, where you've seen the movements, where people were first starting to get exposure to the equity markets, really using the QQQ capability, which is a very good capability. As you know, it is -- for us, it's really an expense reimbursement-type situation, where we had tremendous growth. And our traditional PowerShares capabilities, I said up 39% with again much greater effective fee rate. So if we agree with the macro theme, we should do reasonably well in the quarters ahead. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Great. And then just a little one, Loren, on the tax rate. Usually 3Q is the best quarter of the year for the tax rate being low. It actually perked up a little bit. I think if my calculation is correct, it was the highest we've seen this year. What influenced the tax rate this quarter? And again, what is the outlook going forward?

So the historic sort of benefit we've seen in the third quarter were really sort of statute of limitations on certain sort of tax reserves. And those got released, and so that kind of wound down, and there wasn't anything else left. So it wasn't sort of something seasonally happening, it was really specific to kind of certain tax positions that we've had. This, in particular, went the other way. So this was a sort of an increase in a reserve that we took related to Canada. There's nothing specifically to point out, but it was a one-off reserve adjustment. So we'd say it's easy to -- I mean, it's always hard to predict where the tax rate ultimately comes out. But right now, we believe the guidance we just gave at 24.5% to 25.5% is good for Q4 and going forward.

And Ken, as I think about your question some more, I think it's also very important for everybody to understand. So this is a more short-term, intermediate movement towards income. We think that's going to be here for a long, long time. But also importantly, if you believe the world is getting stronger, we are -- again, our asset strength are equity capabilities. And if you look at the performance of our international capabilities and emerging markets capabilities and our domestic equity capabilities, they're very, very strong. And that again should bode very, very well for the organization.

Our next question does come from Michael Kim of Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, Marty, just to follow up on some of your comments on risk management. I guess, one of the reasons behind the strong demand for the ABRA products has been sort of that phase increasingly looking to outsource asset allocation services. So just wondering if the markets remain constructive and maybe retail risk appetite start to rebuild a bit, could you see somewhat of a reversal in that trend, as advisors maybe get more comfortable sort of picking their own strategies again?

I find that not likely. But I think what is more likely, I do believe these multi-asset strategies are here for the long haul. And I'd say we're still very early on what ultimately where they will go. That said, you could see the flows being less dramatic than what you've seen and movement much more into, again as I was just mentioning, international capabilities, domestic equity capabilities. And again, I think that's fine. I think that's -- if it's good for the clients, that's good news. And by the way, we happen to match up very, very well against that. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Got it. Okay. And then you mentioned earlier, kind of the institutional pipeline rebuilding. Can you just give us some color in terms of where you're seeing the demand? Is it still kind of mostly centered in bank loan and stable value and maybe real estate? Or have you seen any signs that U.S. or non-U.S. investors are maybe getting a bit more willing to take on some more risk?

So what we're seeing sort of globally, it's still largely alternatives, some multi-asset strategies, fixed income, it's broad categories, and as you say, some of the natural [indiscernible]. There are real estate bank loans, and it's more preservation of capital income type. That said, we are starting to see, and it depends on where in the world, global equities within EMEA is actually getting quite a bit of attention, I think, which is a good thing. But there is still an income appetite of really around the world.

Yes. I would just say, I mean, we won $1 billion mandate in Germany. It's a Quant mandate. It's really very interesting to see that happen since Quant had been largely ruled out as a category for a long time. And so clearly, that's an equity exposure. Japanese equity is still of interest. We're seeing wins there. And then maybe not institutional, but Canada, by the way, just won a $330 million mandate, which is across equity products, which would include Canadian equities, small Canadian stocks, global endeavors as a broader equity mandate, and then International Growth. So I don't think equity is sort of a dead category. It's still not where it should be and where it can be. But it's certainly still making headway. And again, generally around the institutional pipeline, it's been strengthening -- strengthened relative to the second quarter, I think about more than 20%. And then versus a year ago, I think it's up substantially, I think closer to -- just to get the number. I think it's 30% off of last year. So good growth in the pipeline. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Got it. And then just one final one to follow up with Loren. How does the step-up in the bonus accruals this quarter potentially impact maybe performance fees looking into the fourth quarter and into next year? And then also, just any guidance in terms of how we should be thinking about the other revenue line going forward as well?

Okay. Well, I mean, the bonus accrual was really reflective of where we are today in terms of this performance for the full year and where we think we're going to end up. But it doesn't include any magic assumptions of the performance fees coming in, I mean, so it's just a pretty conservative view. When we forecast forward, it's really reflective more of where we are from an average asset perspective. Generally, in terms of performance fees though, we do see in the fourth quarter and we have seen in the past, good performance fees related to our high net worth business, where I think people are all familiar with, that they have an MLP product, which as a category, is doing very well. And our MLP product is doing even better than the category. So that could be of a similar magnitude that you've seen in prior years. And then I think the transaction and other revenues, that's one harder to predict. We thought it would step up this quarter. It's obviously did not. We do see a higher level of transactions in the pipeline for Q4, which should mean maybe there's some pickup off of that line item. But again, I think it's real hard because of the timing of these things are very difficult to predict. And so again, I think the run rate of transaction fees and other revenues is probably safe -- it would be safer to sort of take where we are today and assume maybe there's a small pickup, a couple of million off of that benefit into Q4. But that's about as much as I sort of offer up.

Our next question does come from Dan Fannon of Jefferies. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: I guess, Loren, just to clarify on the comp. Is the $8 million accrual step-up, is that the starting point we should think about 4Q? Or is it -- should that be backed out to kind of as a run rate?

So take our current comp. Obviously, there's $4 million of sales commissions as well, so hopefully we continue to perform so that might continue, that would be good. I think the $8 million, you should back out. That was definitely a catch-up for the first half and should not be seen as a recurring cost going into Q4. So take the number and subtract out the $8 million, and then you can sort of figure how that might increment up or down based on performance fees coming in or average assets up off of where we were off of Q3. And again -- but the normal sort of operating margin, operating leverage would be existing at that point. So you'd begin to see margin increasing into Q4 if we stay where we are today in terms of asset size. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Okay. That's helpful. And I guess, just a clarification as to why we didn't see that in 2Q, just in terms of the timing issue, the way you think about comp.

Yes, I think it's just because of the volatility of performance. I mean, as you know, we have risk-on, risk-off. And that actually has an impact on some of our teams in terms of other position from a performance perspective. And obviously, assets were rather volatile through the second quarter. So again, it's hard to really figure out when to make the move. And then we saw such a large pickup in assets into Q3. We felt it was obviously pretty evident to make it in Q3. So again, it's part of the difficulty of forecasting to know when to ease that in. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Understood. And I guess, just thinking about the environment we're in and your guys' focus on margins, in an environment where your sales are strong, is it hard to think about margin expansion, given the kind of the payouts and the way that just works with regards to the compensation?

I don't think sales -- obviously, the big factor was the catch-up in the quarter. If you back that out, you'd be back at 35.1% margin. So you'd be back in the 35%, and then you'd see step-off into Q4 with higher margins. So again, I think the sales was an element, but it's not one that should depress margins normally. It's just that was one element within the picture but not the biggest one.

Our next question does come from Bill Katz of Citigroup.

Just sort of come back to that margin discussion for a second. If I did my math right and I haven't adjusted for anything other than the $8 million catch-up, it looked like you had a 60% incremental margin. It seems pretty robust in the construct of spending on brand equity, as well as the variable [ph] computation rate of sales. Is that the right way to be thinking about the incremental margin on a go-forward basis? Or are there any other operating efficiencies probably to be kind of anticipated?

So yes, I mean, we talked about incremental margins, which again we don't manage quarter-to-quarter. It's more of a sort of a result as opposed to something we manage to. And again -- but generally, the concept is you'll see a lower incremental margin. If the market is not helping us, you'll see a higher incremental margin. If the market is helping us, because it's increasing assets without having to do a lot of marketing and sales activity and new product development. So it really will depend on what sort of market we're going into going forward. I think the range of 50% to 60% is still probably a decent one for people to think about. And we are still investing in the business and we have intentions to continue to invest in the business. But again, we're hoping to be able to offset some of those expenses by those efficiencies that you suggested we're doing. And it's a continuing theme for us to look for those across the firm and position our operations in the best location that gives us the best unit cost, so to speak, of production. And that's an ongoing dialogue. We have been talking about outsourcing our transfer agency in Europe and U.K. and that's going along. That project is actually probably going to spill into Q1 of next year, as opposed to ending this year just because of the magnitude of it. But that has some nice run rate savings that we'd expect, $10 million to $15 million in that range coming off of that. So all those things are factoring into our thinking to try to develop and deliver margins that will expand even if the markets are flat.

That's very helpful. And then Marty, a quick question. If you're still curious, perhaps a couple things, sort of why you're gaining some share in the United States. But just the conversation on the multi-asset being here for a bit of time, can you tell me where that's coming from in terms of what's shifting within the retail distribution? Is it just a shift from product sales? Is it a specific asset class? Is it share gains? I mean, what's your sense of what's driving that unit growth?

Yes. It's really very broad, Bill. I mean, we're seeing it from retail to institutional and really around the world. And I think really what it's doing is -- and again, it's going to be different in different parts of the world why they're doing it. But much of it is bringing that capability across different asset classes, which is not necessarily inherent, I'd say. I would say it's also the repositioning of really the advisors in the channel, where they are much more taking on a broader role and a very constructive role of broader advice and asset allocation, and these really work within it. And as we've been doing some of the capability extensions and to income elements around it, and there's elements of commodities capabilities within it, so you're really getting some asset class exposure and some constructions that meet the investment needs of the different clients. So it seems it's going to be here for quite a while.

Okay. And just last one, I'm just curious, any update on how [ph] Money Market performed [ph]? I guess, there's been some movement to more of a select redemption gate at the board level, just sort of curious. And any thoughts of what you're hearing in the regulatory discussions?

Really not so much at this time. I mean, I think, yes, there are -- there continues to be ongoing conversations within the industry, as it had been for the last 4 years. And again, I think it's a very constructive set of dialogues. And we'll just have to see what the ultimate outcomes are. But again, I feel that the money fund vehicle is a very good one and is going to remain one. But it will continue to play out, I think, over the next months, quarters and well into next year.

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

So I just wanted to come back to the margins, sorry for beating a dead horse here. But just looking at your operating margin versus the overall industry, arguably, you're at as strong of a point you have been in the recent past for flows and performance. Do you think your margin relative to peers could substantially grind higher? Like, if we're thinking about 35% now, is 40% out of the realm of possibility? How do you kind of think about yourself versus the industry-wide margin?

Yes, so Matt, we definitely would not view 35% as sort of the margin that we aspire to or where we're forced to be at. We would absolutely expect to see operating margin -- our operating margins increase over time as our assets grow and as our net revenue yield hopefully begins to continue to increase and trend forward. So it's been -- if you go back and you try to figure out what happened to Invesco, why margins are where they are, I mean, we did have seen our net revenue yield decline substantially over the last several years. And despite that, we've kept the assets growing, and so margins have probably stayed roughly flattish. And so that has been the real situation. For us to be able to see our net revenue yield increase over time will require, obviously, the continuation of some of these new products with higher fees that are in very significant demand. And we are seeing that now, which is a very positive trend for us. And we also believe that if you do continue to see equity markets sort of stabilize and maybe improve from here, we'll begin to see the net revenue yield increase. I mean, 1 basis point obviously is a huge topic, right. I mean, it's $65 million in a year. If we can sort of continue to see that trend on top of good organic growth, margins will expand and we'll see them into the 40% and above.

Yes, I agree with that. And I would also add to it, if you do look during this period that Loren talked about, So I am going back to '05, and look at operating expenses as a percentage of average assets under management, and I don't have the numbers in front of me, you'd think I have them indelibly in my brain, they have dropped quite dramatically during that period, I mean, substantially. And as Bill was asking earlier and others, we continue to be very focused on always be more efficient, more effective all the time, and we do that. But we are not going to have that magnitude level of efficiency gains that we created over the past 5, 6 years. But again, if the same time you just do the math and do -- watch the effective fee rate during that period, it dropped dramatically. And if we had not been as strong as operators as we were, it really been a really bad outcome. But to Loren's point, we think there's no reason that we shouldn't start to see the effective fee rate increase based on the capabilities we have and where we think investors are starting to move, make their asset allocation decisions and where we think they're going to go going forward. And you get any wind at your back, and it could be quite a good story for the margin.

Okay. And then I wanted to ask you guys about the team you hired from Standard Life GARS in the U.K., I've seen the press releases about how much they were managing over there. What are your plans for folding them into your multi-asset platform? Is it going to be more of a new fund? Or are they going to kind of dovetail off the balance risk platform? Or how do you think about that?

I don't know if I got the question in total, Matt, but I think it's what are the plans ultimately. So they obviously have a tremendous reputation, and it's going to be some time before we're in the market with the capability in United Kingdom. It will be into next year just for all sorts of various reasons. Initially, the focus is going to be a suite of -- around the existing Invesco Perpetual capabilities, which again are very highly regarded as -- just your background in the United Kingdom. And we think that's a very, very strong complement to the existing multi-asset capabilities that we have. And that's how we're looking at this really around the world, what can be global and how do we meet some of the local needs. And we think this is going to be a very powerful one in the United Kingdom. And from there, we'll just see where it goes. Again, they have a great reputation. We think it's extremely complementary and a part of -- to what we have. And again, it's part of the overall plan that we're trying to accomplish.

Okay. And then just one quick last one for me. Just on the PowerShares platform, be curious to get your thoughts for future expansion there. Do you think you're pretty well set up with your current product lineup? Or any products you think you would be interested in adding or potentially subtracting from your existing platform? And how much associated operating leverage do you think you can get from that platform as well?

Well, if you look at the lineup over the last couple of years, I think the team's done a very good job in sharpening it and both from strategically introducing capabilities and quite frankly, winding down some that we didn't think were -- made sense anymore. So that's from a U.S. perspective. And they'll continue to be natural product development over time, but it probably will not be as robust as the activity you saw over the past few years in the United States. What you've seen is an extension into different markets, into Canada, that's been very successful. We have some recently good plans into Greater China area, in particular. We think we're positioned very, very well there. And Europe continues to be an area that we're looking at. It's an area that's gone through -- we've been there for some period of time. We've not made the inroads that we would have hoped. But again, it's a very, very tremendously changing environment as you would know in that part of the world. But we think we're still early days on where we're going to go with our ETF capabilities globally.

Roger Freeman of Barclays.

I guess, first on the ABRA [ph] products. I think they were -- you said they were 43% of long-term flow this quarter, 25% last quarter. I think you just hit the 3-year performance benchmarks right before your earnings call in July. Just wondering if this is a run rate reflective of that or still in the ramp process. Probably still is, right?

Yes, it's always fun to see exponential growth extrapolated. We definitely view there -- I mean, there's definitely continued demand for the product. And we -- it's hard to sort of say whether it sort of stays at the same pace. I mean, sometimes we saw it sort of takes a breather and then it comes back. And so there's probably some degree of seasonality in terms of even how the platforms take on these products in terms of their selection. And I think October and May maybe times when they start thinking about these things. So it is certainly something that we think is going to continue to grow. And even globally, we think it's got huge opportunity, not just within the U.S. So I'm not going to put too much cold water on the trend, other than just -- I can't say fourth quarter is going to be exactly as strong as the third quarter because that was certainly a very exceptionally strong quarter.

Okay. And then I guess, Marty, I think you had mentioned earlier that you have gotten up to sort of #10 on brand recognition. I think you said that's where you were back on the 4Q call in January. And I'm just wondering, and you also said the hardest part is going up from 10 and really working the way up the ladder. I'm just wondering where you are in sort of pursuing that. Maybe you haven't done an updated market survey if you have moved up since then [ph], but just thoughts around that?

Yes. So again, we've made great progress from, frankly, no recognition. And our view is that we don't aspire to be #1. We think that would just be -- we don't think we need to be, and we don't want to spend the money to be. We don't think you get that benefit. 10 is an important place mark. Quite frankly, if we were, we'd probably think if we're sort of somewhere 4 to 7. That's a pretty fine place to be. And so we're going to continue to work very hard to build our reputation. But again, we think the reputation largely gets built by generating very good investment performance. And it's really recognized leadership through investment performance, and we're going to do it. But don't worry, we are not hell-bent on -- we're an investment management organization driving investment results, and it's not -- we're not hell-bent on becoming Coca-Cola. So...

Okay. And I guess then, just certainly maybe tied to that lastly, in retail, you pointed out the redemption rates came down a lot. It did for the industry as well, over a number of quarters. Over the past year, you've kind of widened the gap. In other words, your redemption rate has been lower by a greater degree sequentially. They were again this quarter. I'm just wondering if the moves are more sort of industry-related with a number of firms are kind of pointing this out. Or if you're seeing any sort of incremental benefit to that Van Kampen combination in terms of some of the older funds that were underperforming, seeing those redemption rates comes off as people move into stronger products. Just anything along those lines?

Yes, so I sure hope it's an industry trend for decreasing redemption rates. I mean, I just think it's the exact right thing for clients, first thing. So that's the first place I start. We have been very fortunate to have our redemption rate be quite low. It is a combination of, again, starts with a very strong investment performance across the complex. There's no question the Van Kampen combination has been a very important one for us, bringing in investment talent into the organization and other talent generally. So that has been a positive also. And at the same time, when you're growing and you have capabilities that are of interest to clients and investing in them, those are all 3 add up to a relatively lower redemption rate than that of the industry. But I would come back to that I sure hope there is an industry trend down because I think that's really good for investors ultimately.

Glenn Schorr of Nomura.

Loren, are the Van Kampen fee waiver roll-offs fully in the run rate now? I just don't remember where we're at in that process.

Yes, Glenn, they are. So that's $7.5 million per quarter is in there. So that's part of the 24 basis points, I think, is what that translates to on an annualized basis. So that's some of the benefits going from -- on our never [ph] yield before performance fees increase.

Okay. Cool. I think you noted it before, but there seems to be a real divide between real strong performance in U.S. equity and then other outside the U.S. I'm curious, a, I expect that flows kind of treat the same. In other words, you just have a little bit better flows going on inside the U.S. versus out. And more importantly, is there a common thread on the investment theme across the non-U.S. geographies that is leading to the underperformance?

So you're looking at some of the charts that show some underperformance in some of our regions? Is that right? Some of our [ph] regional equity?

Correct. Slide 20, I think, is the best one.

Yes, I mean, I don't think -- it's hard to say there's one basic theme that captures what's going on there. I think when you look -- I mean we have some spots of underperformance, but they're not connected or related. I mean, the Asian equity bit, maybe some of our Chinese equity. China has been depressed. And probably the impact has been worse there than people anticipated with our investment team as one example. But there isn't any theme, and Marty, jump in if you...

Yes, there's one area in particular that there's -- we have a very, very good Japanese investment team that in fact, they came over from Morgan Stanley during that combination. They have a very good long-term track record, very good investors. And a lot of their investment focus has been sort of an export-oriented theme. And it's relative performance has been hurt over the last 12, 18 months with some of the challenges in Japan in particular. But again, it's a very strong team, but they're the ones feeling the relative underperformance at the moment.

Yes, and I also say in Canada, which is another example, it's a great turnaround story. You don't really see that in that chart, but they're probably performance is going to increase as we get towards the end of the year. Their whole performance profile has really dramatically improved. So the 1- and the 3-year numbers look fantastic, and the 5 years are going to follow. So again, these probably get everything equal performance to another [ph]. If you did it on the asset weighted basis, clearly it's not as equal.

Yes, it's a single-digit percentage to AUM. It's just -- that's why I asked the question on if it's a heavier percentage on the flows. Anyway, last question, a lot of people dance around the margin issue. I guess, if you decompose this, this really comes down to comp ratio, where you stand out towards the high end versus a bunch of peers. And I just don't know if it's something related to pay out either, a, on the Van Kampen deal; or, b, just more broadly on how comp is structured. When you comp yourself relative to the peers, are there a few things that would tend you to be on the high end on the comp ratio side? And as this continues to bruise the way you did this quarter, does that kind of abate over time as you, I guess, grow into your strong performance?

So I mean, what I'd say is, I mean, we -- the vast majority of our competition is driven by investment teams. They're the heart of the company in terms of what they're ultimately delivering. And I think we have a common philosophy that maybe more unique to Invesco than some of our peers in that we pay more on investment performance than we do on sort of a revenue share concept. And so people who pay on revenue share will have a higher percentage of their comp directly tied to revenue, have a different philosophy around how they want to pay their investment teams. And we think ultimately, it's the right thing for our clients to provide incentives that are linked to what the clients want as opposed to sort of something dropping out due to where the markets are going today. And so that, I think, is maybe some elements of what's unique. And perhaps the other element which is, again, the strength of the firm and one that we feel really good about is that we have many different capabilities across the globe that ultimately give us a better, diversified offering to our clients than many of our peers. And so we should be able to grow more effectively. We should be able to provide solutions to our clients in a better way as a result of that. But that's a more expensive proposition than just having one thing which, again, I don't say our peers just have one thing, but we probably have more of capabilities than some of our peers.

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

I guess just briefly on RDR, I think we're in the final quarter before it goes into effect. And I'm wondering if you expect any impact to this quarter, maybe front-loading of sales. And then when it does go into effect, would you expect -- what kind of impact are you expecting at this point in terms of sales and redemptions? If the share class, for instance, is grandfathered, would you expect lower redemptions ahead?

Yes. I mean, those are really good questions, Cynthia. We obviously have set up share classes that respond to the requirements to only have a management fee associated with the products that will be flowing. And so all of the new flows coming in off of Jan 1, 2013, will be in this new share class. But you're right, existing assets and products with clients are grandfathered. So I think the real question that we need to see what the advisers, the IFAs, do in that context. And in some cases, they may rather just transfer everyone into the new share class as opposed to having the 2 share classes. But we don't know yet really how that's going to work. It doesn't have an impact on our business from a profitability perspective one way or another. We're still netting the same management fee under both scenarios. It could sort of create some activity in terms of people switching and exchanging, but that should not do anything really in terms of ultimately the bottom line, we don't think. So we're watching it carefully. We're so -- hard to predict exactly what happens. But I don't think it's going to happen in a dramatic way. I think it's going to be people are going to take some time to sort of think about how it's going to go.

Great. And then maybe just in terms of the revenue yield, when you look at your near-record pipeline and you look at the mix of that, is the mix of that any different from your current revenue yield?

It's better. It's improving. So we are very pleased by the net revenue yield coming in at a higher rate and certainly and also the, to be conservative [ph], redemptions, those are the lower rate. So we're seeing lower fee product coming out and higher fee product going in, and a lot of these alternative products and certainly the balance risk types of products are at a fee rate that's sort of at or higher than our current rate.

Great. And then just maybe finally, I think you mentioned, and sorry if you mentioned this already, that G&A stepped down a little bit. Is that G&A sort of a sustainable level for 4Q?

We think it is. I mean, we're seeing some of the benefit of the Minerva -- I'm sorry, that's the code name of it, forgive me. It's the outsourcing of our transfer [ph] business, forgive me for using code names. But that is -- we're beginning to see some of the benefit of that fall into our G&A line item. We'd expect to see more. We said it is something that's going to move into the first quarter. So the ultimate positive impact of run rate savings will sort of achieve as we get into 2013, but we're going to begin to see -- we're beginning to see some of it in this quarter and some into the fourth quarter as well. So I think the G&A numbers should stay. Now the only offset to that is we, and we talked about it last quarter, regulatory requirements and legal and all these things associated with sort of positioning ourselves in the geographies that we're in is becoming more and more expensive. And so that's sort of a counter theme to some of the savings that we're expecting to get from this outsourcing activity.

Jeff Hopson of Stifel. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: The balance risk product, not sure if you gave us any sense of the geographic breakdown U.S. versus non-U.S., and any change in kind of the momentum of some of those products in Europe and the U.K.

All right. Good question. So they're going to be mostly U.S.-based at this point. So as of the third quarter, 75% is U.S. domiciles. We got 12% in Canada and about 13% in the offshore in the U.K. So again, growing piece outside, but it is still the minority. And that's why we think this opportunity is pretty large that we could -- we obviously do what we did in the U.S. in these other regions. It will be truly amazing. And yes, just back in the fourth quarter of 2009, it was all U.S. So that just gives you a sense that it's beginning to grow. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And so is it an issue of track records in those regions, or just how long the product's been really focused on? Or what are the issues as far as why it isn't bigger over there and why it could be bigger in the next quarter or years?

So I mean, let's say for Canada, for example, obviously the market is only so large. So it's -- but I mean it's been -- the take-on has been huge. I think it's one of the fastest-growing sort of capabilities in that space that we're doing very well there in terms of caching a really good flow. I think outside of the U.S., it's doing well in Europe. So I think that's one that is sort of getting fully sized. The U.K. is a pretty new concept. And so there's still a fair amount of education, which was the same as it was in the U.S. And that takes probably a year at least, and it was only launched, I think, in the beginning, maybe February or some time. So there's definitely time that needs to sort of go by for ultimate results to sort of take hold. But we have good hope that it will and certainly, some of the new hires that we have there will also help sort of expand our presence in the U.K. in terms of all the offerings in the multi-asset sector. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And you mentioned about the institutional pipeline. But any other sense of kind of what has happened here in October in terms of flows across the regions, what are investors doing any different, I guess, in October versus the previous few months?

Yes, I think it's a little hard to drill down in a particular month. Probably much better to sort of look at it within core [ph] because what happens in a particular month has a lot to do with just sort of noise on timing and things of that nature. So I'm just going to defer on that one, if that's okay, Roger, just to sort of -- Jeff, sorry, to avoid sort of making a statement on the trend that doesn't really exist. J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. But have you seen any change in behavior, I guess, of investors generally, would you say?

I don't know. I mean, obviously there's the macro theme of coming up to election and people sort of being a little bit skittish about where to put their money because they don't understand what's the fiscal cliff going to mean to the market and so. Yes, I mean, I think there's probably some sense of a little bit risk off relative to what we might have seen a little bit earlier. But again, I don't know what's going to happen after the election. Maybe it'll be something else.

Our next question does come from Eric Berg of RBC Capital.

You talked at length about, repeatedly and in detail about the growth of the asset allocation product and the rise of your international business. But it's also the case that the domestic business, at least for the industry, U.S. equities, has been an outflow for the industry for many, many months. Indeed, if you look back for 10 years, it appears that this outflow phenomenon from domestic equity funds is really not new. It even predated the financial crisis. So my question is, what's your latest thinking on what it's going to take to get to reinvigorate U.S. domestic funds? Or maybe this is a permanent trend away from them that we are seeing. I'd like to get your thoughts.

Yes, good question. I wouldn't bet on the it's a permanent trend. And I think what you have -- and again, I think it's easy to come to that conclusion. I think what you would do though, if you look at flows into equities in total, and in total meaning active and passive, you get a different outcome. I think an awful lot of people are extrapolating that to say active equity -- U.S. equity investment [ph] in the United States is dead. And I think it's a misread. I think it is movement into passive is really a first step on to risk on. But I think the more relevant fact, if you look at what's happened in the marketplace post the crisis, and if you look at the correlation of returns to market events as opposed to stock-taking events, it's very, very high. And I'm going to forget that it's basically a 90% correlation of returns coming from macro events as opposed to stock-specific events. That's probably 25, 30 -- 25 percentage points higher than historical. That is the same phenomena that you saw at the end of the '80s, post the '87 crash into '90s. And so when you get these correlation periods, you don't get paid for -- active investors have a harder time generating alpha. And so I personally think that is the thing to pay attention to. And we would go to a -- I think as we look forward and if probably the United States is probably further ahead on healing itself economically. And if that's the case, I think active equity investors are going to generate alpha again. You will see more broadly they will. You will see money flow back into active U.S. equity capabilities. So yes, that's my perspective, and I think it is important and something to take a look at the correlations of returns.

Our next question does come from Robert Lee of KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Most of my questions were asked, but one question. I mean, on the call a couple of weeks ago, BlackRock's talked about merging their [indiscernible] the U.S. retail sales force. Could you maybe update us on how -- remind us that you integrate the PowerShares products into your retail distribution, or if there's any need to change how it works out?

We've been doing that for years, so that's not a new thing for us. When we bought the idea of ETFs, we had made the observation in 2005, '06 that we thought the advisers were moving much more to a holistic approach and advising their clients. And that it would be a common -- first and foremost, it's meeting the investment objectives, and then they would look at the different vehicles that did that. And naturally, asset allocations and meeting those needs for a combination of vehicles. So we've been doing that really almost from the beginning of the combination with PowerShares. So we say that's a good idea.

Next question does come from Chris Shutler of William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: Just one quick one. It looks like the performance in U.S. core growth remains challenged on both the 1- and the 3-year basis. So I certainly recognize that it takes time to rebuild those capabilities, but those categories certainly aren't in favor today. But I just want to get your thoughts on performance there and how you're feeling about the teams and products you have in place.

Let's see, 2 things, and it's back to almost a question before, 2 questions ago. If you want to see where the bulk of the outflow is coming in the U.S., it's large-cap U.S. growth as a category. For us specifically, the team running large-cap, mid-cap has been with the organization about 2 years, we think they're really very, very talented people and have good investment capability. And this gets back to a little bit of my answer earlier where a lot of their investment philosophy is driven by stock picking, and it's been challenged in this environment. So that said, we think the team's very, very good, and they have had a history prior to being with us that's having very, very good results. And we think they will generate them in time, but this has not been the environment for their investment philosophy. That said, if you look at the small-cap growth capabilities, it is very, very strong and continues to be.

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

Marty, can you just talk a little bit about the alternative business for you guys, how you think about building out strategies there, sort of what's weighing on the flows, where you're seeing some success? And how do you think about sort of building versus buying in that business?

So again, I think you have to go asset class by asset class and some will be repetitive. But I feel very good with real estate. We feel very good about private equity, feel very good in bank loans, feel very good about some of the extensions that we have through our multi-asset suite, our asset allocation capabilities, whether it be commodities or some other areas there. So we just continue to look at it and look at where demand is. And if we're capable of meeting client need, we will respond. In fact, one of the turns that people have talked about, and I won't get too excited about it, but if you -- there are alternative capabilities that are appropriate and growing quite dramatically in the retail channel and we've seen that ourselves. And we are continuing to develop that. We've just introduced in the last couple of months another really alternative capability into the retail channel. It is directed towards high net worth individuals, qualified investors. So just being very appropriate. And so I think we'll continue to see those things. But we think we're positioned really quite well to do strongly throughout the alternatives capability as a firm, and we'll just continue to respond where necessary.

Our next question does come from Greggory Warren of Morningstar.

I'm glad you guys touched on the issue with the U.S. stock flows because I think it's an opportune or situation where people tend to focus on the headlines and just the active side. And if you really roll up the passive flows and strip out American funds, which has a heavy influence on that active side, the flows don't look as dire as the picture that gets painted with the headlines. So I'm glad you pointed that out. And I guess my question follows on kind of where we are with the flows. How do you guys, from a sort of a longer term perspective, think about allocating resources given what's going on now? I mean, it's easy to sort of throw money at your Fixed Income or a multi-asset class products or structure products in an environment where those things are selling. How do you think about allocating capital to equities? Because we've seen a few of your competitors year-after-year come out and do sort of marketing campaigns or other programs to sort of say, hey, equities are still here.

Yes, so let me see if I can answer that in 2 ways. One, we just -- we start from a position of what are we trying to do for our clients. And our view is that we're committed to having a broad, very broad and deep capability across asset classes, equities through fixed income. We are very strong in equities, in particular. And to your point, even if you, as you were more articulate than I was describing sort of the U.S. equity picture, we have very good strong teams. We're committed to the strong teams, and we just know asset classes go in and out of cycle. And so we're just absolutely committed to them through the cycles, and we want them dedicated to delivering against the investment philosophy that they're known for and that they delivered. So to your final point, so what do we do about it. And if you look at, again, our -- how we -- and I'll answer more from a [indiscernible] more from a retail channel point, but it's not limited to that. If you look for the last 2 years, what have we been communicating with our investors, with our clients is that we have been showing them the benefit and making very clear the benefit of a combination of capabilities, whether it be a U.S. equity capability, dividend -- U.S. income capability and international capability. So we've been doing that for more than 2 years. And we think it's -- you just want to be very thoughtful and appropriate in making sure that you're giving investment guidance that makes sense for clients over the longer term and not be responsive to where flows go because that gets you in trouble.

Okay. Okay. And I guess sort of thinking about equities overall, when I was looking through the flow data third quarter, you saw outflows pretty much on par with what we saw last year in third quarter. And a huge difference in performance in the markets, and yet there's a fiscal cliff coming. There's the elections, but I don't think it was as dire a situation. So when I started looking at the performance numbers overall for active funds, it seemed to be that on a relative basis, pretty much every category was underperforming this year like it was last year. And I'm wondering, do you think it's a matter of, say, performance getting better? I mean, if you start having active management outperform the markets, that's sort of is the catalyst to get people back in?

Yes. So I think the relative performance active versus passive is back to the comment I made earlier. I just think it's really the market environment we are in is the 90% correlation to sort of macro events [indiscernible]. And to your point that you're appropriately pointing out earlier, and I've talked about the point of it's much better if we are giving -- the advice channel is encouraging people to be invested for the longer term, you take a 3- to 5-year time horizon, I really want to be invested in U.S. equities. I think it's going to be one of those things you're going to look back 3 years from now and say, "Why didn't I have greater exposure to U.S. equities?" That said, I would be going to the managers that, again, you all from what you do, are committed to very good teams, very good long track records, very thoughtful investment philosophies and processes. And you're going to do very, very well. And I think the reason why the money is not going into active equities is more, it feels like a bigger commitment on an investor's part and I think you cannot underestimate still how nervous investors are to invest for the long term in the environment that we're in.

Matt Kelly of Morgan Stanley.

Just one quick follow-up from me on the capital management side. You have a pretty sizable amount of debt coming due in late February. I just wanted to touch on it because I don't think we've discussed it this quarter. What are your sort of thoughts there in terms of extend or retire or some of both? Or how are you thinking about it at this point?

Matt, it's a good question. I think we are looking at it. Obviously, it's a unique opportunity in terms of you could issue debt and replace it at a very, very low cost. Or you could let it expire and just put it on the credit facility. They both can make a lot of sense. So I would just say it's something we're looking at. We haven't committed to one way or another as to, certainly, where we're going to go on this one. But we are -- definitely we've been looking at it quarter-by-quarter, and we will continue to pay a lot of attention to that opportunity. But overall, we are committed to sort of keeping the debt levels sort of flat or declining over time as we want to, continue to deleverage and show continued financial strength and certainly build up some more cash on the balance sheet. So that is still part of our objectives on the capital side, combined with, of course, continued dedicated return on capital through dividends and buybacks as we -- as you've seen us do and as you will continue to see us do.

At this time, I show no further questions.

Well, thank you very much, everybody, for the engagement and the dialogue, in particular. And I will be speaking with you next quarter. Have a good rest of the day.

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