Invesco Ltd. (IVZ) Q2 2014 Earnings Report, Transcript and Summary

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results for operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions and investitures, 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's 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 second quarter results conference call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'd like to turn the call over to the speakers for today: Mr. Martin L. Flanagan, President and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, and thank you, everybody, for joining us today. With me is Loren Starr, Invesco's CFO, and we'll be speaking to the presentation that's available on the website if you're so inclined to follow. Today, we'll provide a review of the business results for the second quarter. Loren will then go into greater detail of the financials and we will then wrap it up with Q&A. So let me begin by highlighting the firm's operating results for the quarter, which you'll find on Slide 3. Long-term investment performance remained strong across all time periods during the quarter. Strong investment performance, a broad diversity of flows and continued focus on client contributed to strong overall flows for the quarter. These were offset somewhat by a previously disclosed single client withdrawal in our U.K. business, which resulted in net long-term outflows of $6.9 billion. Excluding the single client withdrawal, long-term net inflows would have totaled $6.2 billion across our global business. Adjusted operating income was up 21.4% over the same quarter last year, and a continued focus on taking a disciplined approach to our business drove continued improvement in our operating margin to 41.8% from 39.3% in the same quarter a year ago, an increase of 2.5 percentage points. Assets under management rose to $802 billion during the quarter, up from $787 billion in the prior quarter. Operating income was $377 million versus $363 million in the prior quarter. Earnings per share were $0.65, up from $0.60 in the prior quarter. The quarterly dividend remained $0.25 per share, up 11% from 2013, and we've repurchased $50 million in common stock during the quarter. Before Loren goes into detail on the financials, let me take a moment to review the investment performance and some business highlights. I'm on Slide 6 now. Investment performance during the quarter was strong across all time periods. 80% of assets were ahead of peers on a 3- and 5-year basis and 72% of assets were ahead of peers on a 1-year basis. As you might expect with numbers like these, long-term performance for investment team across the enterprise was quite strong with a number of capabilities achieving top decile performance. Turning to flows on Page 7, you'll see gross sales remained strong during the quarter, although down from exceptionally strong first quarter. As we mentioned on our last call, there was an exceptional single client withdrawal in our U.K. business of $13.1 billion early in the second quarter, which resulted in long-term net outflows of $6.9 billion. Without this withdrawal, total long-term net inflows would have been $6.2 billion. These numbers also reflect the broad diversity of flows we saw across our global business during the quarter, which includes strength in real estate, fixed income, European equities, Asian equities and others. Gross sales in our retail channel were also strong during the second quarter, although off slightly from the exceptional first quarter. Continued strength in our European cross-border retail product range and solid gross sales across our business helped offset the previously disclosed single client withdrawal we experienced in the U.K. The institutional channel continue to -- saw continued demand for real estate and Asian equities across the globe drove positive flows during the quarter. Overall, sales during the period were typical for the second quarter and reduced redemptions led to long-term inflows of $1.3 billion. The institutional pipeline of one, but not funded mandate continues to be strong, principally in alternatives, real estate bank loans and non-U.S. active equities. Let me take a moment to highlight our global business, which you'll find on Slide 9. In the Americas, U.S. flows were driven by international growth and U.S. Value equities, high-yield munis and UITs. And the redemption rate was 22% versus the industry average of 27%. U.S. retail gross sales were up 29% over the trailing 12 months in 2014 versus the same period in 2013. And there was a 65% increase in the number of mutual funds and ETFs with more than $100 million of inflows. A client-focused effort on April flows and top quartile investment performance in the U.S. drove down redemptions and further eased outflows from $526 million in January to outflows of $72 million in June. In Asia-Pacific, we saw continued strong gross and net inflows with the exception of increased redemption in Chinese active equities where we saw some profit taking after the very strong results a year ago. The Shinko U.S. REIT and the Australian bond fund both enjoyed continued strong inflows. We also so good flows in Asia-Pacific institutional. Our EMEA business continued to become more diversified with significant flows to the Fixed Income, non-U.S. equities and our multi-asset capability. All driven by very strong investment performance. U.K. retail gross flows were higher year-to-date in the prior year and flows into the cross-border business were significantly ahead of last year. Assets under management by our EMEA business totaled $176 billion, as you can see on Slide 10. During the second quarter, net flows into EMEA, excluding U.K. equity income, were $300 million, which reflects the previously disclosed single client withdrawal earlier in the quarter. We're pleased to report that the client reactions to departure news has been subdued and we saw no spike in redemptions at the time of a competing fund launch in June. Given our efforts to thoughtfully manage the transition, assets in the 2 principal funds have fallen just 15% from the departure announcement in October of last year through the end of June. We expect future growth in EMEA to more than offset any potential outflows from the funds. Mark Barnett and the team continue to deliver outstanding results for clients. As of mid-July, the 2 funds were sixth and eighth out of 265 funds in their sector over 1 year. Redemptions from advisors, the largest component of assets in the funds, are returning to industry norms and have clearly not impacted fund performance. This is a good outcome and we remain cautiously optimistic as clients are choosing to remain invested in the funds. Meanwhile, 2014 gross sales across our broader U.K. retail franchise are at all-time high of $7.3 billion year-to-date in 2014 versus $5.7 billion during the same period in 2013. We find these results encouraging and we'll continue to do everything we can to deliver good outcomes for clients and grow the EMEA business. Now I'd like to turn the call over to Loren for a review of the financials.

Thanks very much, Marty. So quarter-over-quarter total AUM increased $15.1 billion or 1.9% and this was driven by positive market returns and FX of $23.9 billion and net inflows in money market funds of $1.1 billion and these increases were offset by long-term outflows of $6.9 billion and $3 billion of outflows from the QQQ. Our average AUM for the quarter was $790.1 billion and that's up 1.3% versus the first quarter average. Our net revenue yield came in at 45.6 basis points, which was flat quarter-over-quarter. The decline in performance fees from the first quarter reduced our revenue yield by 1.4 basis points and this was entirely offset by increases in our effective fee rate as a result of improved mix, one extra day during the quarter and higher other revenues in 2Q. Now before we turn to operating results as we always do, just a quick peek into our current flow trends. As of yesterday, we had $2.3 billion in long-term net inflows across diversified geographies and also diversified across our investment capabilities. The only caveat obviously is we're entering August so there tends to be some seasonality and also obviously there is some market volatility, but we're off to a very nice start into Q3. So now turning to our operating results. You'll see that our net revenues increased $13.2 million or 1.5% quarter-over-quarter to $901 million. That included positive FX impact of $6.6 million. And within net revenues, you'll see that our investment management fees grew by $65.5 million or 6.6% to $1.05 billion. This somewhat exceptionally large increase was due to several factors: first, in April, aligned with evolving industry best practices, our U.K. business took the proactive step to introduce a single fund management fee for their retail funds in an effort to address complexity in overall fund fee structures. This single fee replaced the separate annual management fee and fund registration fee. The results of this change was a shift, and it was purely a shift, of $29.6 million out of service and distribution revenues and into investment management fees. Excluding the impact of this shift, investment management fees would have increased $35.9 million or a 3.6%, which is consistent with our higher average AUM, an additional day during the quarter and again continued improvement in our effective fee rate. FX increased investment management fees by $8.6 million. Service and distribution revenues were down $23.9 million or 10%. As I just mentioned, the change in the fee structure in U.K. resulted in a decline of $29.6 million. Excluding the impact of this shift, service and distribution fees would have increased $5.7 million or 2.4%. FX increased service and distribution revenues by $0.2 million. So in the quarter, performance fees came in at $7.3 million and that was a decrease of $22.5 million from Q1. Foreign exchange had no impact on performance fees in the quarter. In terms of guidance going forward, the Q3 tends to be a seasonal low point for performance fees and we believe the range could be somewhere between $2 million and $5 million. For Q4 of this year and beyond, the picture is somewhat less clear. There are certain real estate and other alternative funds and institutional accounts that could generate meaningful performance fees, but recognizing this revenue is limited by the potential for contingencies such as clawbacks per our accounting policy. Other revenues in the second quarter came in at $38.9 million and that was an increase of $3.2 million. Invesco launched successfully a Japanese REIT fund in June, which resulted in $6 million of transaction fees in the quarter. The $6 million in fees should not be viewed as recurring, and as a result, I think other revenues you should think should fall to the level of $33 million to $35 million in Q3. Third-party distribution service and advisory expense, which we net against gross revenues increased by $5.3 million or 1.3%. That is in line with our higher revenues derived from REIT-related retail AUM. FX increased these expenses by $2.9 million. Moving on down the slide, you'll see that adjusted operating expenses at $524 million decreased by $0.8 million or 0.2% relative to the first quarter. FX increased operating expenses by $3.1 million during the quarter. Drilling down into expenses. On employee compensation, that came in at $344.6 million. That was a decrease of $8.5 million or 2.4%. The decrease in Q2 was a result of the normal reduction in payroll tax costs, which was partially offset by increased incentive compensation and a full quarter's worth of base salary increases that took effect on March 1. FX increased compensation by $2.1 million. Looking forward, assuming flat ending AUM, we expect compensation to increase by approximately $5 million to $8 million in the third quarter and then remain roughly flat into Q4. This change is consistent with the fact that our current AUM level is about 2% higher than the second quarter average AUM level. Marketing expense increased by $6.7 million or 27.7% to $30.9 million as a result of advertising and client-related marketing in EMEA. FX increased these expenses by $0.2 million. We expect marketing expense to remain flat into Q3 and then increase somewhere up to $35 million in Q4 due to our continued focus on EMEA-specific marketing opportunities. Property, office and technology expenses came in at $76.1 million in the second quarter, which was down $1.6 million. The decrease reflects lower rent and related costs due to vacating of leased properties in the first quarter. FX increased these expenses by $0.4 million. Looking forward, we'd expect property, office and technology costs will increase to $80 million to $82 million per quarter for the remainder of the year. This increase is a result of continued technology investments, a doubling of space taken to accommodate the continued growth in our Hyderabad office and variable costs related to our elevated sales activity in Europe. General and administrative expenses came in at $72.4 million. That's up $2.6 million or 3.7%. The increase was due to greater legal, training and other professional services costs incurred during the quarter. FX increased G&A by $0.4 million. We'd expect G&A to remain around $73 million to $75 million as we continue to launch new products and pursue business growth initiatives. Continuing on down the page, you'll see the non-operating income increased $12.9 million compared to the first quarter. The increase was primarily driven by realized gains on seed capital investments of $5.7 million and we also had $4.7 million gain from the liquidation of a CLO in the quarter. The firm's effective tax rate on preadjusted net income in Q2 was 26.5%. Looking forward, we expect the effective tax rate to remain between 26% to 27%, which brings us to our EPS or adjusted EPS of $0.65 and our adjusted net operating margin of 41.8%. And with that, I will now turn things back over to Marty.

All right. Thanks very much, and operator, can we go to questions, please?

[Operator Instructions] Our first question is from Daniel Fannon, Jefferies.

I guess, just on the Perpetual products and more the equity income funds, you highlighted no spike in redemptions. I guess can you talk about kind of the gross sales dynamic in those products pre and post the competing launch. And then kind of the outlook, I think you said you're having the highest gross sale of all time in EMEA. Can you just kind of talk about what the top fund -- the top sales or funds that are driving those sales as well.

Yes, so let me start that and clarify, Dan. So what I was pointing was gross sales in the U.K. are at an all-time high. So you compare gross sales this year to date as compared to last year, year-to-date. Let me pull the numbers again. It was, as I'm paging through it, was -- so year-to-date gross sales in the U.K. were $7.3 billion versus $5.7 billion a year ago. And so the uptake has been a broad -- a real broadening of gross sales into the U.K. business. So that includes European equities, global equities, Asia -- Asian equities, the multi-asset strategies and just the fixed income continues to be very, very strong literally across-the-board. And if you look at the investment performance, asset class-by-asset class, it's just incredibly strong. And so the point that we're trying to make is the business has never been stronger. Yes, there's been a transition to Mark's results who put up some -- and team some really good numbers, but that is the main message there. And I don't have the specific gross flows of the U.K. equity income products, but what I can say is the redemptions are back to industry norms and typically when you go through changes like that, you start by being put on hold and some of the holds are being taken off and so you're starting to see gross sales pick up also. So it's a really -- again in the context of an important change, the business has never been stronger.

Great. And then I guess, Loren, just to clarify the comment around the fee change in the U.K. with regards to the management fees and I guess the impact on sales and distribution fees, is that ongoing when we think about the economics today and that impact is kind of the run rate from here?

Yes, Dan. Yes, it's purely a shift. It has nothing to do with RDR. It's really just the shift that is onetime, and then foregoing, it will continue on that same track.

And any change in client behavior as a result of that shift?

No, I mean, I think we've gotten very good praise from the industry, from regulators and others who care about this. So, so far, it's been well received and I think we are sort of out in front of many, many others in the industry first with this. We'll see how others follow.

The next question is from Chris Harris, Wells Fargo.

So a quick one on Perpetual. I know we've talked about the outflows for some time now and it's definitely good news that there's been no spike since you've launched the competing fund. But it doesn't appear to me that the outflows are slowing that material there either. Just wanted to maybe if you can confirm if that's accurate, number one. And then number two, do you think you have any sort of visibility on maybe when those might kind of decelerate in a more significant degree? I know it's hard, but maybe just many of your discussions with clients or what have you that might give you a little bit of comfort or color about the trajectory of that.

Look, Chris, I think what you're seeing is there's still some smaller platforms that are sort of making smaller moves, much, much smaller level of magnitude relative to what you saw with the SJP and that's really what you're seeing currently and that probably persists somewhere between now and the end of the year, quite honestly. We do think X those little kind of smaller platform positions, the overall trend in the core retail advisor-led book of business is definitely stabilizing. But we're definitely looking to increase our advertising in Q4 and marketing. And so we're not being complacent around everything is fine still. There's still work that we think should be done. But factually, we've not seen big spikes and it seems more of a business as usual addition in the U.K. than anything else.

Yes, that is definitely good news. Okay. Real quick follow-up then on the margin. Very specific guidance you've given us, but just more kind of broad, big picture question. Incredible improvement in the merger and you guys are kind of exceeding what you had said you'd do there. I know some of that is market related, but as you sit here today, where do you really think this number can go? I mean, do you think there's a lot more room to run on your operating margin?

So I think, Chris, as we've said in the past. It will have a lot to do with sort of marketing environment we're in and what sort of help we're going to get from equities versus fixed income-led type of environment. We have and can and will grow under sort of flat markets. We have very good product that will be very much in demand under a sort of volatile-type market environment. We think that when equity markets are stronger, however, we actually will fare even better generally and so our incremental margin is probably going to be higher when you're in an equity-led market than otherwise. But with that said, we're still sort of in that range sort of 55% incremental margin, 60% incremental margin, which should help us continue to drive the margin upward over time. So there isn't anything structural that would prevent our margins from continuing to expand as you've seeing them do right now.

The next question is from Bill Katz, Citigroup.

Just to follow up on that thread of question, just to work it the other way. Given such high incremental margin and a good performance of the platform on what appears to be overcoming the Woodford attrition nicely, why not step up the spending earlier to really capitalize on the positioning of the platform and maybe trade a little unit growth for margin?

So I'm surprised you asked that question, Bill. The fundamental fact is what you're seeing with the margin expansion, what is going along with it is strong reinvestment in the business right now. We've continued to do, it but we're getting margin expansion while reinvesting in the business. And the areas that we've talked about over time, Continental Europe was a focus and you can see things coming from that. Fixed income has been a focus. You can see the investment performance in fixed income is very strong right now. That was another area that we think were followed by flows. Also very important to us is the alternative platform, which has been, really, we think it's a core strength of the organization. And we've been expanding that and taking it globally. And so we're trying to be very, very thoughtful in our expansion, investing while at the same time generating the returns that you would expect of us as good stewards. So I appreciate the thought, but we are very much investing.

I can confirm that.

Okay, that's more of a devil's advocate question. The second question I have is when you look in Europe, and maybe I did the math a little too quick this morning, I think it was about 30% annualized rate of growth in new business. What is it that's driving it? Is this a further market share opportunity, broader geography reach, better distribution, a combination thereof? What are some of the key drivers to that solid growth?

So yes, again that was one of those overnight successes that we started 4 years ago and it was across-the-board. And you should go back a few years, you'll look at it so redoing the servicing platform, which was fundamental; realigning the product lineup, and if you look at it right now, this is very robust product lineup with the investment performance being extremely strong across the asset classes there; and with, frankly, a strategy that you would hope, very concentrated on those areas that we think we could make a difference and sales execution and taking care of clients. And that's what you're seeing happening. And I think importantly, if you look at the flows there going into, we should want to call it, core asset classes, which years gone by it was much more smaller asset classes. So again, we just feel the robustness of where we are and the future opportunity is very, very strong for us in the continent. So we don't think we're done.

And just one last one. When you think about money market reform, a couple of your peers have sort of commented on what the implications might be. It's obviously early days. Just based on your mix, how do you sort of see any impact on the business and maybe what are you hearing from clients?

So good question. It's hard to believe what started in 2008 is finally coming to an end. I'd say in the -- again, put on your analyst hat in the worst case, if all our prime went away, it's what, Loren?

$30 billion, about $30 billion AUM.

Yes, so it's not...

11 basis points.

11 basis points. So it's not a huge financial impact, but let me -- but here's the reality. We don't think that's going to happen to us. If you look at the suite of money fund capabilities we have, they're very, very competitive. We think we're going to be really very fine in it. And again, I think we'll be positioned very, very strongly in the changes as they come through. And clients are still trying to -- look it's been a -- it's not a new story. So clients are banging [ph] their heads around this potential outcome probably for 24 months, I'd say, already.

So I mean, we've created other products that would be nice alternatives to prime fund option, which we think would capture a significant amount of people who want to find something of a similar nature. We obviously have a government fund where people might go to initially. So in terms of the loss of the full $30 billion, I think that is sort of the very tail of risk to the business.

The next question is from Michael Kim, Sandler O'Neill + Partners. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: So first, just in terms of flows. Loren, you'd touched on this a bit earlier, but just looking ahead, do you feel like you really need sort of a sustained favorable market backdrop to really drive organic growth to the next level, if you will, understanding that there are still areas of the business that can continue to grow even assuming the markets remain somewhat choppy?

Yes, I mean, I think we have close to 48% of our assets, something around there, in equities. So the reality is for us to be able to grow our AUM as a percentage, sort of organic growth rate, equities need to somehow be plain enrolled there. Otherwise, we can grow and we have certainly huge diversification growth of other asset classes that would be in demand when we weren't or not in an equity-led market. But we do think, overall, our ability to get organic growth to the highest level would probably be under on an equity-led market. But again, it's all relative, right, to peers and competitors. So we still think we should and we obviously aspire to do better than our competitors under all markets in terms of being able to grow.

And I'd probably add to that, Michael. So Loren is especially correct when you saw that happen this quarter where it was less of an equity-led market this past quarter. And we still did quite well, but getting back to the point I made earlier, I think if you were looking out a couple of years, you have to expect some volatility. You have to expect rates to go up at some point and a pullback in the equity markets. And so that gets back to this point of we thought it really, really important to have a broad suite of alternative capabilities that were in place for those types of markets, focused much more on outcomes for clients. And so again I think the diversity of the business and the strength of the alternative capabilities along with fixed income and equity just put us in a very unique position regardless of the market. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Got it, that's helpful. And then just on the capital management front, continue to repurchase shares, cash continues to build. So just curious to get your thoughts on sort of the regulatory front across regions, and how that may be playing into your capital management thinking, if at all?

I don't think we're -- it's business as usual on the capital management front right now. We are, obviously, keenly observant and listening to -- and observing on what's going on, on the regulatory front, as you said. But there isn't anything imminent that we're seeing that is going to affect our business-as-usual approach, but it is something that we are smartly watching. Marty, I don't know if you have any further...

Yes -- no, I agree with that. So we're on the -- our stated capital policies that we have been on. But I think it would be unwise to ignore the regulatory focus and we're very engaged in trying to understand what's possible. But again, we're still heading down the path that we've been on at the moment.

The next question is from Glenn Schorr, ISI.

On the alt front, we talked -- danced around that a little bit. So I want to do 2 things: one is talk about the new product launches that happened, I guess, over the last 2 quarters, particularly on the liquid alt front just talk about performance, talk about what you've been able to muster up in terms of sales; and then, two, at a broader level, performance at least on what we can see on the equity side of alt isn't where you wanted to be. Just talk through what particularly you see the most positive outlook on the alt front?

Sure, so let me get started. So it has been, as you point out, end of last year versus part of this year, so introduction of really suite of alts more broadly not just in the U.S., but in the U.K., in the offshore range also. Our view is, as we said in the past, when you introduce capabilities you have to think that it's a 3-year outlook and if it happens before that, you're quite fortunate. But that's been our framework. That said, if you look at the teams, these are teams who've been managing close to the same strategies for a very long time institutionally with some very, very good track records. That's a very helpful element, too, and some of them are extensions of what's been done in the past whether it be around IBRA and different extensions there. So that's helpful. I'd say the shorter-term opportunity probably looks more with the GTR capability, global total return capability that's getting some traction. But again, I'd say early days. It will be -- the first launch in the U.K. was September a year ago, so you're coming up on 1 year, performance is very, very strong. And it's that type of asset class or product that people are looking at is more a less volatile targeted return and...

I think we have about $1 billion in that capability.

$1 billion so far. So again, our view is 3-year view and we'll have some likely positive surprises within that period, but it's hard to identify.

I think we're also having great, I wouldn't say success, but early success with our long/short capability, which the performance is very, very strong. So there may be something we'll see, but these are all small products right now. It takes a while. And then on your question on the equity side of alt, I'm not sure exactly what you're referring too, Glenn, but when you look at our performance, I think you may be looking at the REITs more than in an equity part. So maybe can you just clarify what you're talking about, Glenn?

Sure, just Slide 18. It just shows those little ring charts on percent of assets in the top half, first bottom half.

Core, is that what -- so you said alts or you said core?

Alternatives.

Okay. So that is dominated by -- because alternatives, the way we capture this information for performance is when you have publicly available peers that we can compare to. And so the vast majority of our alternatives don't have public -- publicly available peers that we can talk about relative ranking. So this one slide is really being dominated by the REITs that are publicly traded. So it's not really an equity. It has to be -- everything to do with the way we manage that REIT product is very conservatively managed with some strong positive fall has been, I mean, we're generating sort of billions of sort of interest in that product. So it hasn't affected the demand for the product. So it's a little misleading, I think, when you look at that slide and you sort of broadly brush alternatives in terms of the performance.

Okay. Last quickie, if I could. It's good to see the buyback and the share count down 3% year-on-year. And I know you guys are planning conservative, but you've got a lot of cash, you keep making more every quarter and the stock is cheap. I'm just curious on just increasing the pace at some point. Meaning, if things are going well and your producing a lot of cash flow and the stock is cheap, if not now, when, is, I guess, the question I get?

So I think we've been of the mind that sort of being opportunistic when we think about buybacks and we continue to do so. We've also seen sort of rushing in and doing big buybacks can often lead to poor choices around the timing of markets. So the consistency of sort of averaging it through over periods of time has generally seemed to work better than sort of rapid step-ups. And so we have continued in terms of aggregate amounts to continue to buy back more of our stock. You should expect us to continue to do so, but I think it is in terms of what we said earlier, our priorities have not shifted in terms of how we see the needs of our capital and we continue to focus on sort of reinvesting in the business as our number one draw. And we have seen, more recently, some bigger needs around some seedings and co-investments as some of these alternative products have been getting off the ground.

And I would add the other thing, which you would know very well. What, 2 years ago, we made a permanent change to materially increase the dividend and sort of make a permanent commitment to paying back to shareholders. And so when we looked at it, it was a totality of giving back to shareholders and a much heavy emphasis on dividends, not to say that we won't do stock buybacks. We'll continue to do it, but I think that was another strong message we are trying to get across.

The next question is from Ken Worthington, JPMC. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: So Marty, I think you undersold this, so this I'm going to give it another shot at it. So you launched a host of new products in the U.S. The uptake of GTR has been excellent, even though it's really young product. So how far along is the product in terms of getting on new channels in the U.K. and Europe? You took in, I think, over $0.5 billion last quarter. So given the young age of the fund, why has it been so successful because it seems like the launch is doing even better than IBRA did and IBRA kind of peaked at $30 billion. So...

All right, Ken, well, thank you. You're correct. And so let me put it in more context. So the U.K. is really certain. Again, that was the first launch last September. First, let me say this, across-the-board performance is very, very strong. And on the back of our client -- we came this way because we thought, in time, clients will be looking towards broadening their -- how they build their portfolios and this would be another important part in it. I'd say we're really early days in that development. That said, flows are really strong in U.K., as you pointed out. On the Continent, too, they are taken up much quicker than we thought they would. So again, as we look out to the next 12 months, we'd anticipate that would be another market where they would really probably do well. And I'd say, the teams reputation is more recognized in the U.K. and on a continent, as you would expect, coming from the U.K. originally. So those are probably be the 2 early markets where you'd see continued expansion and acceleration of flows. In the U.S., again, relatively early. There's quite a bit of interest. There's emerging, as you would imagine, institutional demand and that could probably be the area in the States where it might pick up more rapidly than in the retail channel. But again, I think it's a really attractive product with good performance. And again, you can do the extrapolation on IBRA, I won't. But again, it's strong performing and we think it's a very big opportunity. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: How far along is it, though, in terms of getting on platforms because it's a new product. Is it half the way? Is it all the way? Is it 10% of the way?

So I think in the U.S., it's on a lot of the platforms, if not most of the platforms, but it is not yet sort of been sort of gatekeeper approved in terms of the models. So it is one of these things that just getting on the platform doesn't mean that it's -- we're going to be able to sell. And so it is one of these things, it's the first step of many to really have this product succeed in the U.S. But don't take this from saying that -- I mean, we're definitely working it hard. We think it's a huge opportunity both on a global basis. Kenneth B. Worthington - JP Morgan Chase & Co, Research Division: Okay. And then just second question. The income in high-income funds got downgraded after Neil's departure. Based on your experience, how long would it take for those funds to kind of get back on the preferred list and recommended list if the performance remains? And I think those funds under Mark, more recently were in redemptions. What do you think needs to change to actually push those products to actually generate net new flows? Is it a simple as just keeping the performance where it is?

Good question. So I don't have all the specifics on the radius, but you can -- look, you can read publicly, people are actually already considering, already putting it back in the buy list. So as you said from the beginning, Mark is highly experienced. The team is highly experienced. Great track record. So I think the wholes will participate more rapidly than you would expect in a different situation because of that. And so you're seeing early [indiscernible] But let me put this in perspective, Ken. So those 2 funds were in net redemptions before Neil's announcement and I think it's a really important point because these funds, they are very large, they're very old and when you look at the historical redemptions because of the age of the holders, redemptions are a material thing each and every year. So just to get into net flows, the level of sales that you have to meet because of the sheer size is material. So if we move back to the flow levels, preannouncement, which we are getting close to, that's not a horrible thing. Now our goal is not just to remain there, it's to get back into net flows, and we think, in time that will happen. So I think that's an important point to look at also. And if you look at, take -- I don't have the specific numbers, but if you look at the combined, those 2 funds combined, they still represent, I think, they're in the top 5 of gross sales selling funds in U.K. today. So I think that's really the perspective. They're just very large and very old client base. But again, we're moving into a very relatively very good spot at this stage of it. So long winded and hopefully that's helpful.

The next question comes from Chris Shutler, William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: Just a quick question on IBRA. So the performance there actually has turned around nicely for this year. So just want to get your updated thoughts on the pipeline, both retail and institutional there?

So Chris, I think we're seeing redemption rates continue to drive lower on that IBRA product. I think it was on actually out of July on a global basis, I think the flow has turned positive. So again, I think it's -- I hate to say it's a turnaround now and declaring it fully, but certainly the performance on 3-year number -- 3-year track record year-to-date are sort of in the top quartile. So the product itself is becoming, I think, far more sort of attractive again to clients who are looking for what we originally promised to give, which is a sort of balanced risk across different asset classes. And it's -- I think sales are still sort of lower than we've seen them in the past. It's actually -- that's correct on a global basis, but the flow picture has been improved largely through and much lower redemption rates. So again, the goal was obviously to drive sales higher in that product over time, if we can. Christopher Shutler - William Blair & Company L.L.C., Research Division: Okay, got you. And then a totally different question, bigger picture. With the PowerShares franchise, it's mainly a retail business today, I believe. So just curious to get your take in the ETF business of the institutional opportunity. So for instance, UBS was recently in the news. For putting a big portion of your DB plan and noncap-weighted indices, which is a lot of what PowerShares does. So -- but I believe they're mainly partnering directly with the index providers instead of using off-the-shelf product. So just want to get your take on institutional opportunity in terms of alternative weighted ETFs.

So we do think it's an opportunity. It is one of those areas that, when I went through the litany a few minutes ago, that I didn't address but that's within it. So it's been very, very successful for us. There are further opportunities and really would be in the institutional market and it has not been an area where we have historically focused more recently we have headed down that path, so we think not just in the U.S., but in a couple other important markets we think that is an opportunity for us. So we think that will just continue to add to the ongoing success in PowerShares.

The next question comes from Eric Berg, RBC Capital Markets.

You indicated that of the 13 approximately billion dollars of withdrawal that took place in the U.K. related to St. James's Place, that just over half of it related to the equity income funds being managed by Neil Woodford and his team, what's the remainder?

So the other half, I think it was about $5 billion in what -- I think it's called a distribution fund, which is some mix between equity income and our corporate bond offering. And the remainder is in global equities.

Okay. So just to provide a rough sort of back-of-the-envelope reconciliation of where we are now relative to where we stand, how are those numbers go? And by that I mean start with how much money, please, Neil is managing at the time he announced his departure. I realized he remained with the organization for many, many months before departing and ultimately starting in his new place. But if you could just really in synopsized form start by telling us how much money he was managing in dollar terms, how much was lost to the institutional business, I think it's close to all of it, and where we stand on the remaining money, which is the retail side?

So Eric, I think originally, preannouncement, it was around $48 billion was the amount and it's currently at $37 billion roughly. So we obviously have the big institutional redemption of $13.1 billion. I think in terms of the retail outflows, generally they've been somewhere around $0.5 billion to $1 billion a month, just normal. We're just getting a lot of that. It's consistent with what we've seen historically, so nothing different than what we've seen in the past. So again, I think you could probably take that and do the math here or someone smartly doing it for me. We had $17.7 billion of outflow in the time frame. And how much of that was retail versus institutional, I think probably most of it is going to be institutional largely.

So you started -- in the short/long, you started with $48 billion.

Yes.

The redemptions have been in $17 billion. That takes you down to -- so you wouldn't, therefore, $37 billion. You'd have $48 billion minus $17 billion or 31, is that correct or...

We had market and FX that have helped to offset that.

Okay, okay. And of the $17 billion in redemptions, most of it has been institutional. But just to be clear, while you talk about redemptions returning to more normal industry levels in the equity income funds, are the -- I just want to clarify, sort of triple check, the funds are in that redemption mode still, but at a lower rate than they have been. Is that kind of the point?

That's absolutely right and maybe the net redemption since 2011. So just factually, again, this is what Marty said that's part of the fabric of being biggest in the industry. But I think, yes, they've sort of returned to more normal levels. They're still, as I think we may have mentioned slightly, some elevated levels that are 2 smaller platform outflows that could still occur. But not material in any sense of close to the magnitude of the St. James's Place. And we believe, again, broadly, in the context of EMEA business, that we can grow flows to more than offset that going forward.

The next question is from Patrick Davitt from Autonomous Research.

We've heard anecdotally that the marketing of PowerShares in the U.K. pre-Woodford was fairly low. And I can't remember if you confirmed or denied that, but can you, I guess, talk about what is being done to improve the profile of that business there, particularly as it does look like the passive opportunity has gotten a little bit more interesting over the last year or so.

So we actually had not been in the U.K. The focus have been on the continent for us. A number of years, it's probably 2007 that we went to the ETF markets. As you know, the market was very, very different than that of the United States and has gone through tremendous change from sort of derivatives-based ETFs to really cash-based ETFs. So we think there is quite a big opportunity within EMEA, within between the U.K. and Continental Europe, in particular. And that is back to one of the earlier questions, we see the institutional opportunity being one in the U.K., in particular, to be something very, very attractive and smart beta, in particular, seems to be not just confined to ETFs, but institutional clients as an opportunity that we think we should be successful in over time.

Do you think it's fair to say that, I guess, the thinking around, I guess, how much weight you want to put behind marketing PowerShares specifically in the U.K. has changed since the PM changed? Or is that not the case?

No, our effort has nothing to do with -- first, I'll say it's the strategic focus. Again, originally focused on the continent. We think one of the opportunities in the U.K. really has come -- is emerging because of RDR. The emergence of RDR actually, we think, is an added opportunity to the ETF markets, smart beta and also the institutional market. And U.K., as you're obviously noting is a very, very important, large ETF market that we have not historically participated in.

The next question is from Brian Bedell, Deutsche Bank.

Great. Kind of actually have my question on the PowerShares, but maybe just to -- just an extension of that, how should we think about timing. You are underpenetrated in that area and the opportunity seems pretty compelling, like you said, Marty, post, especially post RDR. Should we be thinking of that as a bigger effort over the next, I don't know, 12 to 18 months with a potentially stronger ramp throughout that period? Or is this is a much longer-term group?

I'm sorry, you're breaking up some. Let me just confirm. So it's the ETF opportunity, what's the timing of it?

Yes. Sort of the pace of that given that it's been more of a newer effort in terms of post-RDR that is. So I’m trying to get the sense of timing now that were through the RDR process.

You're exactly right. So I would be, again it's probably the next 12 to 18 months that you'll start to see we're clarifying how we want to play what we think the opportunity is. And again, you'll see what we choose to do over that period of time.

Okay. Okay, great. And then maybe shifting gears to defined-benefit market. Maybe just some color on -- obviously, you have a very good product set for the potential outflows and active equity and the shift towards passive and increased barbelling that we're seeing through some alpha products and a more liability-driven investing. Maybe just some color on how you're positioned there. Should we see potential increases in mandates for you on that side? Or do you view it as more of a balanced risk for your franchise overall?

Let me try to answer the question, if I understood it. So if you look at our capabilities, very, very much focused on active investing and whether it be -- it went from alternatives through our historical capabilities, whether it be equity or fixed income and broadening of the alternatives capabilities more broadly around the world as we talked about. Where we then see an opportunity for ourselves is the strength that we have with our quantitative teams and with PowerShares around what people are referring to smart beta and variations of that. And we think the combination of that range is very, very strong and competitive globally, but also within retail channels as you're speaking off.

Okay. So on the defined-benefit side, you feel that you can be a net winner over the next 2 to 3 years versus some other more plain active equity managers that are losing share to rebalancing?

No question.

Okay. Okay, great. And maybe just one quick one on the U.K. and it has already beating a dead horse in this, but I think just using -- looking at the math of the U.K. equity income product, looks like you had $3.3 billion in outflows in the quarter. Just trying to get a sense of that trajectory over April, May and June and whether that sounds like it's improving that outflow pace into July.

Yes, so Brian, I think that's one that we probably are going to be somewhat better than the pace, we would hope. Again, it's not getting worse. We think it's one that's going to continue to improve through the course of the year. But again, it's a little hard to say with great certainty because there are these smaller types of platform that may make decisions along the way and those can be $0.5 billion here or $0.25 billion there. But overall, I think what you're saying is sort of that level and improving through the course of the year and then probably, by the end of the year, we'll have much better clarity in terms of just say all that will be more solid in terms of whether people are coming or going or leaving.

The next question is from Greggory Warren, Morningstar.

Just on the Perpetual sort of a housekeeping note. There were no non-compete agreements that we need to worry about where 6 months or a year from the road now that he'll go out and start poaching more of our clients. Is that an issue for you?

Yes. So Gregg, I think what we're used to fighting on the retail battlefield whatever and so in terms of loss of clients and we compete with them, and gee, we compete with many others. So there's nothing that will prevent anybody or Neil's fund to take clients from us if they win them fair and square. And so I think it is one where we think that we're well positioned to compete. And we have significant marketing dollars and we have significant sales force strength and obviously a fantastic investment team that is sort of tried and true. So we think that will win and we don't necessarily have to worry about structural sort of legal non-competes or anything like that.

Okay, okay so basically, it's kind of fair game right now then.

Fair game, yes.

Okay. And the other question I had is it looks like your net revenue yield before performance fees came down -- or came up actually pretty considerably quarter-over-quarter. Was part of that the shift in institutional -- the outflows in the institutional side? It doesn't really seem, I mean -- equity AUM seems to be about the same level as it was in the first quarter. I'm just kind of curious what caused that shift in the net revenue yield.

Yes, about 0.6 basis point is just due to day count, so that's a normal second quarter to first quarter impact. But we definitely have mixed benefits that is still driving forward. It has more to do with geography than it does sort of what type of asset class as we continue to flow strongly with growth sales -- record sales outside the U.S., which is where the fee rates tend to be higher that is helping to drive our mix and our yields to higher levels.

The next question is from Brennan Hawken, UBS.

All my questions have been -- has, I think, been asked at this point.

The next question is from Robert Lee, KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: And also if you may have touched on this earlier, but I have been kind of jumping around different earnings this morning. The only question I have was in, I guess, it relates to PowerShares. I mean, some of your competitors and whatnot out there have an ETF business, have been, I guess, fairly loud or noisy, however you want to describe it, about why they would not do or don't think things like bank loans are appropriate for an ETF structure and I know that's been a pretty successful product for you in PowerShares. So I don't know, to what extent do you see that as you're comfortable with some of the concerns that they raised? Or how do you view those -- how would, how should we put those comments in the context?

Thanks for the question. So look, you would know and just for everybody else, we have a very, very strong bank loan team. We manage $30 billion in assets more or less. They've been doing it for decades. We've actually have had an open-ended bank loan funds since the '90s. It is something we are -- feel very comfortable managing. I think it is something that we're not concerned about. And also when you look at the liquidity within the ETF up to 20% of it is in sort of very liquid assets, which would probably meet anybody's idea of redemption. On top of that, there is a line of credit if there is something beyond that. So the idea that this is much different than other open-ended funds, I think, whether it be bank loans or high yield or you could go to small-cap stocks, I mean it is just part of what comes with managing various funds, and if you look at the sheer size of the markets and the redemptions that was less than 1% of the redemptions that you saw in the bank loan market during the period where there were some redemptions of bank loans. So again, I don't see it much different than how we manage our business on a daily basis.

And sir with that, I'm showing no further questions.

Great. Well, thank you very much for joining us, everybody. I appreciate the engagement and the questions, and we'll speak to you next quarter.

Thank you, and this does conclude today's conference. All parties may disconnect at this time.