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Edited Transcript of IVZ earnings conference call or presentation 27-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Invesco Ltd Earnings Call

ATLANTA Apr 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Invesco Ltd earnings conference call or presentation Thursday, April 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Ryan Schlossberg

Invesco Ltd. - Head of EMEA and Senior MD

* Daniel Eugene Draper

Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds

* Loren Michael Starr

Invesco Ltd. - CFO and Senior MD

* Martin L. Flanagan

Invesco Ltd. - CEO, President and Director

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Conference Call Participants

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* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Christopher Charles Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Glenn Paul Schorr

Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst

* Kenneth B. Worthington

JP Morgan Chase & Co, Research Division - Senior Analyst

* M. Patrick Davitt

Autonomous Research LLP - Partner, United States Asset Managers

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Robert Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* William R Katz

Citigroup Inc, Research Division - MD

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Presentation

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Unidentified Company Representative, [1]

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This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market condition, AUM, geopolitical events and their potential impact on the company, acquisitions and divestitures, 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 the 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.

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Operator [2]

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Welcome to Invesco's first quarter results conference call. (Operator Instructions) Today's conference is being recorded. If you have an objection, you may disconnect at this time.

Now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [3]

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Thank you very much, and thank you for joining us today on the call. Just to point that out, that's Loren Starr, Invesco's CFO. And we'll be going through the first quarter results, and if you're so inclined, you can follow along to the presentation, which is on our website. As is our practice, I will do a review of the business for the first quarter. Loren will go into greater detail of the financials. But also today, with us is Andrew Schlossberg, who leads our EMEA business; and Dan Draper who leads our PowerShares ETF business, and they will help provide an overview of our efforts to further enhance our client offerings. And then of course, we'll get to Q&A.

So let me begin with the first quarter. So if you happen to be following along, I'm on Slide 4 of the deck. So let me highlight the first quarter results. Long-term investment performance remained strong, ending the quarter at 69% and 83% of assets ahead of peers on a 3- and 5-year basis. Our strong investment performance and our focus on providing outcome-oriented solutions to clients contributed to a strong long-term net inflows of $1.8 billion and an organic growth rate of 1% for the quarter.

Adjusted operating margin for the quarter was 37.7%, and we returned $115 million to shareholders during the quarter through dividends. And based on strong fundamentals in our business, we're increasing our dividend to $0.29 per share. This represents a 3.6% increase over the prior period.

Assets under management were $834 billion at the end of the quarter, up from $812 billion at the end of 2016. Adjusted operating income was $327 million for the quarter versus nearly $336 million in the prior quarter. Adjusted EPS for the first quarter was $0.61, up from $0.59 in the prior quarter. We did not purchase any stock during the quarter instead using the available cash for the transaction, we'll discuss in just a few minutes. And before Loren gets in the details on the financials, let me take a minute to review investment performance and flows.

I'm on Page 7 now. We continue to strengthen our investment platform to provide global expertise and support, minimizing distractions for our investment professionals so they can focus on delivering investment outcomes to clients. Our strong investment performance during the quarter reflects these efforts with 69% of assets in the top half of peers in -- on a 3-year basis, and 83% in the top half on a 5-year basis.

You'll see on Page 8 that passive flows are stronger in the quarter, while redemptions offset strong gross sales in active assets during the quarter. Flows into passive capabilities were driven by strong demand for PowerShares ETF with net inflows of more than $2.5 billion globally for the quarter. Although long-term flows were slightly negative on the active side, we saw strong demand for alternative capabilities, including senior loan products with more than $3 billion in net flows and GTR with nearly $2 billion in net flows during the quarter.

Retail flows were solid during the quarter, reflecting continuous strength in PowerShares and GTR. Our pipeline of won but not funded institutional opportunities remain strong, but the timing of those are spread out over the next several months. We saw solid demand for GTR and our senior loan products during the first quarter, the continuation of recent trends.

So with that as a backdrop, let me turn to Loren to review the financials.

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [4]

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Thanks very much, Marty. Quarter-over-quarter, our total AUM increased $21.9 billion or 2.7%. Now this is driven by a market gains of $23.1 billion. We saw a positive foreign exchange translation of $4.1 billion. Our long-term net inflows came in at $1.8 billion, and we also saw inflows from the QQQs of $1 billion and these factors were somewhat offset by outflows from the money market -- institutional money market product of $8.1 billion.

Our average AUM for the first quarter was $829.8 billion, that's up 2.6% versus the fourth quarter. Our annualized long-term organic growth rate in Q1 was 1% compared to negative 1.5% that we saw in the fourth quarter. Our net revenue yield came in at 41.8 basis points and our net revenue yield excluding performance fees was at 40.9 basis points, which was in line with the guidance we provided on last quarter's earning call. 2 fewer days in the period reduced the yield by 0.8 basis points. We also saw a decrease in other revenues, which accounted for the remaining 0.1 basis points.

On Slide 12, we provide the full U.S. GAAP operating results for the quarter. My comments today, however, will focus exclusively on the variances related to our non-GAAP adjusted measures, which will be found on Slide 13.

So let's go to 13. You saw, in 13, our net revenues increased by $3.3 million or 0.3% quarter-over-quarter to $867.1 million, which included a modest negative FX rate impact of $0.3 million. Within the net revenue number, you'll see that adjusted investment management fees increased by $8.5 million or 0.9% to $973.6 million. This reflects our higher average AUM during the first quarter compared to the fourth quarter of 2016, partially offset by the impact, as we've discussed in the past of fewer days in the first quarter.

Adjusted service and distribution revenues decreased by $2.7 million or 1.3%, again reflecting the higher average AUM offset by lower service revenue and fewer days in the quarter. FX increased adjusted service and distribution revenues by $0.1 million. Our adjusted performance fees came in at $17.7 million in Q1 and were earned from a variety of investment capabilities, including $12 million from bank loan products, $3.3 million from real estate and $1.2 million from our U.K. investment trusts.

Adjusted other revenues in the first quarter were $20.8 million, a decrease of $2.4 million from the prior quarter. This is generally due to $2.6 million less in transaction fees from real estate, which was offset by a $1.6 million increase in unit investment trust revenues. Largely driven by higher-than-anticipated UIT revenues, this line item came in above our stated guidance, if you remember, of $12 million to $15 million per quarter in 2017.

Next, in Q1, our third-party distribution service and advisory expense, which we net against gross revenues, decreased $5.1 million.

Moving on down the slide, you'll see that our adjusted operating expenses at $540 million increased by $12.2 million or 2.3% relative to Q4. These amounts were generally in line with the guidance that we provided on last quarter's call. Foreign exchange reduced adjusted operating expenses by $0.6 million during the quarter.

Adjusted employee compensation came in at $361.2 million, an increase of $23.3 million or 6.9%. This was generated by a normal seasonal increase in payroll taxes as well as retirement cost and 1 month impact of higher base salaries. Our adjusted marketing expenses in Q1 decreased by $10.4 million or 29.4% to $25 million, reflecting seasonal reduction in client events and other marketing activities. Our adjusted property, office and technology expenses were $85.6 million in the quarter, an increase of $0.6 million or 0.7% over the fourth quarter, due to higher outsourced administration costs. And then our adjusted G&A expenses at $68.2 million, decreased by $1.3 million or 1.9%. Now the G&A decrease was driven by lower professional services expense.

Continuing on down the slide, you'll see that our adjusted net operating income increased $18.5 million compared to the fourth quarter. This increase was primarily due to earnings from our real estate partnerships and lower mark-to-market gains on our seed money investments. The first quarter included a $7.8 million gain realized on our pound sterling U.S. dollar hedge, which was similar to what we saw actually in Q4 as well.

Moving to taxes. The firm's effective tax rate on pretax adjusted net income in Q1 was 26.6%. The first quarter tax rate included a 0.4% rate decrease related to our excess tax benefits on share-based compensation related to vesting of our annual share awards, which then brings us to our adjusted EPS of $0.61, and our adjusted net operating margin of 37.7%.

So before turning things over to Marty, I just want to mention a few additional items. The first is related to our pound hedge. Given the recent run-up in the pound, we took the opportunity to extend our pound hedges through the end of 2018. As a reminder, these hedges are in the form of put-option contracts designed to hedge approximately 75% of our pound-based quarterly operating income out of the U.K. and are all set at the same strike level of 1.25% -- I'm sorry, $1.25.

Additionally, I'd like to provide an update on our business optimization work that began in late 2015. Given the size of the opportunities, including potentially the outsourcing of back-office functions, we expect the optimization work to continue past the original targeted completion date, and to incur -- we will incur additional cost of approximately $38 million through mid-2018. However, in terms of reporting and consistent with our past practice, an approach with dealing with material and one-off expenses, that $38 million related to the incremental optimization charges will be adjusted out of our non-GAAP presentation, and are all detailed and tracked, of course, in each quarter in our U.S. GAAP reconciliation within the earnings release.

At the end of the first quarter, we have recognized approximately $28 million in run rate savings due to optimization with the additional work being performed, as we speak, that we expect to exceed our high-end of the initial targeted savings range, and which we described as $30 million to $45 million. We expect to come in with a run rate savings of approximately $50 million once these efforts are fully implemented. And we believe this additional optimization work will help make Invesco an even stronger company, further increasing our effectiveness and efficiency of our operating platform, but importantly will allow us to continue to fund our most crucial strategic initiatives.

Next, I'd like to just quickly turn to MiFID II. So on the regulatory front, one of the questions that frequently comes up is Invesco's planned approach on the implementation of MiFID II slated for early 2018. As you may know, we are a very strong believer that research is the key contributor to our investment process and results. Our preferred approach with respect to MiFID II will be to use commission sharing accounts, or CSAs, to fund the research payment accounts contemplated by MiFID II to the extent permissible under the final rules. Now note there are still a number of legal and regulatory inconsistencies, which regulators must address together with potential competitive developments, which create uncertainties to -- regarding the degree to which our preferred approach may be fully implemented.

And while it's possible that we will be required or possibly choose to purchase certain research on a hard-dollar basis. And we are monitoring developments in this area closely. And ultimately, we expect to be able to clarify our approach in any financial impact to our business as we get closer to the implementation date, and as the current regulatory uncertainties are resolved.

Buybacks. So the last time, I might want to provide an update on -- was around our capital allocation policy and specifically buybacks. We do not purchase -- repurchased any shares in Q1, given the seasonal cash needs in the first quarter along with the upcoming need to seed new products. And obviously, given the recently announced acquisition of Source, we elected not to repurchase shares in the quarter. I would like to point out though that this should not be viewed as a change of our capital priority, and we will continue to maintain opportunistic -- remain opportunistic around our timing and the extent of -- to the extent of repurchasing shares. This also has no impact on any other capital priorities or reinvestment, dividend growth or the strength of our balance sheet.

And with that litany of things, I'm going to turn it over to Marty.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [5]

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Okay. Thanks, Loren. So we want to get back to the announcement that we made today about the combination with Source. And as we've discussed before, we are intensely focused on helping clients achieve their investment objectives, and it's really through our comprehensive range of active, passive and alternative investment capabilities that's been constructed over many years to help institutional and retail clients achieve their investment objectives. We believe our ability to provide meaningful solutions to clients for a broad array of capabilities and the vehicles is inherent strength of the firm and sets us apart from marketplace. And with that as a backdrop, I'm going to hand the call over to Andrew, who will speak to the EMEA business.

And then Dan, who'll highlight the strengths of our factor investing. Andrew?

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Andrew Ryan Schlossberg, Invesco Ltd. - Head of EMEA and Senior MD [6]

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All right, thanks. Thank you, Marty. This is Andrew Schlossberg, and I lead our business here in EMEA. And I'll pick up on Page 16 of the materials that were distributed. As many of you know, we have a strong and highly regarded position across the markets here in EMEA. We built that platform through our investment reputation here over many, many years, maintaining a strong and consistent investment culture that's been built by the depth and tenure of our investment teams here, clear philosophies and consistent processes. And all of this has enabled us to deliver top-tier returns for our clients with 88% of our client AUM in the region performing in the top half of peers over the past 5 years. As a result, we've developed a diverse all-weather products range that is well positioned to meet client needs across asset classes end markets. And our brand, as such, is highly rated in the region and our market penetration has expanded over time. We're currently #2 in the U.K. retail market, and we're growing in Continental Europe, where we've been -- where we're ranked in the top 10 within 8 of the markets on the continent.

We continue to see growth despite -- in the region, despite the volatility of Brexit and other macro headwinds. Notably, our net flows in the region here in EMEA have actually -- were actually up $2.1 billion in positive net flows since last June 23, 2016, in the U.K., when the Brexit referendum was announced. So growing at a decent clip.

Furthermore, the diversity and the strength in our business has allowed us to achieve March ending AUM this year as measured in British pounds that set a high watermark for us in the EMEA region as a whole and in each of our respective client channels across institutional U.K. retail and our cross-border retail businesses, respectively.

I call your attention to Page 17 in the presentation deck. And core to our long-term strategy is really being focused on markets and channels where we believe we can be highly relevant, while maintaining a close proximity to our clients and innovating with the broad range of capabilities that will meet their demand. And over the past 5 years, we've been able to maintain our quality while growing, as I just referenced to high watermarks, and diversifying our business, as you can see on this chart here. Notably, you can see on the left-hand side of the chart that we have maintained leadership in the U.K. which has been a dominant position for us, while also expanding our AUM in EMEA ex to the U.K. from 45% 5 years ago to 60% of our regional client and AUM today.

Furthermore, as you'll see in the middle part of the chart, we are more evenly balanced between fixed income and equities, and we've rapidly grown our multi-asset and alternative capabilities in the region, which now represent nearly 1/3 of our assets under management for clients in the region.

Finally, you'll see on the right-hand chart that from a client channel perspective, we've increased our relevance in the institutional markets and we've broadened our retail strength beyond just the U.K. to have even more robust pan-European retail profile over the last 5 years. And while -- I'll say while we're pleased with the strong foundation that we've built, we believe that there's exceptional growth potential in the region for asset managers that are focused on being truly active and factor strategies asset managers that provide exceptional in-market client service and maintain scalable platforms to manage through dynamic markets, no doubt, in this part of the world.

So with that, let me hand it over to Dan Draper, who'll expand a bit more on our factor and ETF profile in particular.

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [7]

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Thank you, Andrew. I am Dan Draper, and I head up the PowerShares ETF business. Based on more than 40 years of experience, Invesco is a market leader in factor investing. And then as you'll see on Slide 18, we have more than $175 billion in assets under management in terms of factors. We're the fourth largest ETF provider globally, and have significant market positions in our quantitative strategy and unitrust businesses. Our expertise, product breadth and global profile provide a number of key competitive advantages. First, we're diverse, time-tested and have across our investment strategies. Number two is, we have experienced product specialists and tremendous field wholesaler depth. And three, strong global profile with key strengths in key markets.

If you move over to Slide 19, I really want to use this chart to compare kind of growth and give you some idea of the EMEA ETF growth market compared to the U.S. And as you'll see, the EMEA ETF market is one of the fastest growing areas in asset management today. And as you'll see again on this slide, basically the growth trajectory in EMEA ETF, as you see on the left chart, and then we overlay that with the historical growth in the U.S. on the chart on the right on Slide 19, you can really see a very common pattern. There may be an approximate 7-year lag in that chart on the right but you can really see the growth that has been experienced. So as overall, ETFs in EMEA have grown at a 23% compounded annual growth rate since 2005. And as Morningstar states here, it's projected to reach $1 trillion by the end of the decade.

I think with that, I'll turn it back to you, Marty.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [8]

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And thanks, Dan. Thanks, Andrew. And so now let's talk about Source within the context that Andrew and Dan went through and we'll open up to Q&A. So you saw the announcement this morning. We did sign a definitive agreement via Source, a leading independent ETF specialist focused in EMEA. We're very excited about the opportunity, which we believe will meaningfully enhance our ability to meet client needs across the globe and specifically in EMEA.

Source brings to Invesco additional expertise across the entire ETF chain, strong talent in London and on the continent, and I guess specifically the transaction of $18 billion of Source-managed assets under management plus $7 billion in externally managed funds. The combination of Source and Invesco significantly benefits clients by further expanding the depth and breadth of our factor-based strategies and ETFs, adding to the comprehensive range of investment of active, passive and alternative capabilities Invesco offers in EMEA and across the globe, enhancing Invesco's expertise and ability to meet needs of institutional and retail clients in EMEA with the addition of dedicated on-the-ground ETF specialists spanning sales, marketing, capital markets, product management and development, strengthening Invesco's position in EMEA, while achieving additional scale and relevance in a growing ETF market globally that Dan just addressed.

And as you can imagine, our focus over the past several weeks is really just been getting to signing the definitive agreement. Our focus today and over the next few days will be engaging with clients of both firms, speaking with all of you, reaching out to regulators, index providers and others to bring them up to speed of our plans. We'll then turn our attention to the integration of the 2 firms, building on Invesco's significant expertise in bringing companies together for the benefit of clients, employees and shareholders. And as I mentioned, we're all very excited about this opportunity. We think it's going to meaningfully enhance our ability to help clients across the globe and meet their investment objectives.

And with that as a backdrop, I want to open it to questions. And that'll be -- again, so it's myself, Loren, Andrew and Dan. We'll all be available. Operator, can you open?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Carrier of Bank of America.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [2]

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Marty, just first on the Source transaction. A lot of things that you said make sense in terms of the product distribution. Just wanted to get a sense, when you think about Invesco's positioning in factor, in smart beta, it seems like you're already one of the leaders to why maybe couldn't you do what you're thinking of the opportunity is with Source without it? Meaning is it -- the products are really differentiated, is it more the distribution within Europe on that they have a better penetration and to that where you can increase your kind of foothold in that new geography? I just wanted to get a sense because it seems like you already have a pretty good new traction there.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [3]

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Yes. So I agree with the points. I think one of the strengths that is becoming more evident is we have a 40-year track record in factor-based investing, and PowerShares now over 11 years has been a meaningful contributor to us. As Dan pointed out, and Andrew, I mean, the ETF business actually in -- on the continent is quite different. And we've been making efforts over the last number of years, more recently, turned our attention there. It's just a very different market and what Source does is it rapidly advances our presence there from where we were with scale, lots of talent. It would take us multiple years to get close to what Source offers on [the start] of Day 1. And we think it has every elements of the great success that PowerShares brought to us over a decade ago.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [4]

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Okay, that's helpful. And then as a follow-up, Loren, just on, I guess, some of the line items that sometimes you provide a little bit of guidance on anything on the expenses, I guess, comp, we get the normal seasonality, and then maybe G&A. And then the other just given maybe the dynamics in the UIT market in terms of the outlook versus what you guys were thinking last quarter, just any change there?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [5]

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So I think you're going to see and you've seen a little bit in first quarter just normal flexing due to incentive compensation growing as operating income grows. You also saw, or you will see probably as we move into the second quarter impacts around foreign exchange, right? So those are the things that I'd say are going to happen just naturally and mechanically. In terms of the guidance right now, I think, we're sort of generally saying that what we put in place in last quarter call stays right now. And maybe we'll be in a position to provide a more thorough and robust update midyear, particularly after the Source transaction is closer in terms of happening. So -- but I mean, we're pretty much on our path to continue along the strategy that we've described in the past. And so there is no big change or need to adjust guidance at this point. I think around the UIT business, where the only thing we got a little surprised on, on the upside was better revenues around UIT than we had originally anticipated. I would like to -- I'd like to believe, although I don't at this point, that that's a continuing trend right now. I think we're happy to see that, maybe we'll continue. Still too early to say definitively that the UIT business is going to sort of pullout yet, the DOL rules are still sort of very much in flux and how people are reacting to them are still in flux. But I would say that's probably the greater level of uncertainty around the revenue line item than we had in the past with some potential upside.

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Operator [6]

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Our next question is coming from Ken Worthington of JPMorgan.

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Kenneth B. Worthington, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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One of your competitors has been more vocal about steep rates in fee cutting and active management. So maybe how does Invesco see its positioning in terms of fees? And do you think Invesco's organic growth could be enhanced with some targeted fee reductions? And maybe is that something under consideration?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [8]

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Yes. So I'd say the headline to that is the active management is not easy, right? And I've made a comment that those that are strong active managers generating the returns that they're meant to will continue to do well. We are on extended period of this beta run that we've all talked about. I still see great opportunity for active management, but let me get more specifically. I think from some of the fee cuts that you've seen, the media, in particular, maybe the analyst community, very quick to extrapolate that price cuts is the answer to everything in the marketplace when I think when you actually look at it firm by firm, the price cuts announced by these firms have really been more substantial in nature relative to investment performance and the like. And then in some just not being properly priced within the marketplace. And we believe the question is and always has been, our clients receiving value for money. And so we look at it, we have a spectrum from cap weighted indexes all the way through alternatives. And you pay more for value for money. And the only way that a client can ultimately generate excess returns, manage downside risk is with active. And so we think it's really a combination of active, passive and alternatives is the right answer. I don't think fee cut is slow. You have clients, and I think some and I think where you're going, Ken, some are [viewing] of their future state of the industry where asset owners won't care about value for money. I just think that's false and it's the best way to generate the returns for clients is the combination of active, passive and alternatives. And I think within the context, value for money matters. If you're doing a good job, you're going to get paid for it. Let's not to ignore the industry pressures. And I think what I've really focused on, Ken, is the enemy of active is not passive. The enemy of active is bad active managers. And so flushing out bad is probably a very good thing. And if you looked at our results over extended period of times, we've done a very good job generating value for money.

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Kenneth B. Worthington, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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With Source, you're clearly focused on kind of focused M&A. As we think about the industry, maybe can you share your view on large scale M&A? We've seen a few examples of large-scale deals, they appear to be ripping out a lot of cost. I guess, does large-scale consolidation make sense? And would you expect to see more of it over the next, I don't know, call it 12 to 24 months? And if we do see more -- I'm sorry, and if we don't see more deals, what might be the leading issues holding back that sort of large scale M&A?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [10]

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Yes. Look, Ken, you and I and many on the phone have talked about this. Since I've been in the industry, there's been declarations of massive consolidation. I do think though this time, there are a set of factors in place that weren't in place before where scale does matter. Largely driven by the cost coming out of the regulatory environments and the low-rate environments and cyber and the like. And you have to be, as a firm, you have to be able to invest in the future. And I think a number of smaller-sized firms are finding that hard. They can -- they're really just investing and keeping up with the sort of regulatory environments, cyber and the like, you just lose your competitive positioning. So getting to your question, intellectually, you would suggest that large-scale combinations make sense. The reason why we've not seen lots of consolidation in the industry is because it's very difficult. We are fiduciaries and taking care of clients comes first. And clients have choices. And done poorly, it becomes a melting ice cube. And so I think consolidation for solely to -- for cost saves is not the answer to success. If 2 firms get together and they're poorly performing, not doing a good job for their clients, taking cost up doesn't do anything, in fact, I think it probably could accelerate client departures. So all in all, I guess my point is, intellectually, it makes sense. They're very difficult to do. I think there'll be fewer and farther in between just because people are wise enough to know how difficult it is. And I come to one more point and then I'll stop. We've been and the management team here for decades has been involved in various combinations of some of scale and you have to have the expertise of properly pulling the firms together. And I think, the other thing to pay attention to if firms don't have a history of success, it's another warning sign as far as I'm concerned.

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Operator [11]

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Next question is coming from Patrick Davitt of Autonomous.

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M. Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [12]

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On Source -- I have a couple of questions on Source actually. Is there a lot of redundancy here? Or is there -- is it -- or do you feel like you really need the double platform in Europe? In other words, could we expect some expense synergies? And the second question is around the PIMCO-branded funds. To what extent do you have assurances those are locked up because I imagine they will view you as more of a competitor? And do you think there's a risk that they want out of that, I guess, agreement post deal?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [13]

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Yes. So let me make an overall comment, then I can turn it to Andrew and Dan. And we look at this as a tremendous opportunity. It fills a gap of expertise on the continent for us, Dan pointed to the prospects of growth in the ETF market in EMEA, we believe that very, very strongly. We think the combination of the 2 firms together can rapidly expand from where we are today. I look at it a little bit analogous to PowerShares 11 years ago that you put the platforms together, and you can be very, very successful. So it's very much a -- we look at it as a growth opportunity. And I -- we think that's all the makings of PowerShares combination within EMEA. But with that as a backdrop, Andrew, do you want to pick up on it? And Dan...

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Andrew Ryan Schlossberg, Invesco Ltd. - Head of EMEA and Senior MD [14]

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Sure. Yes. Yes. Sure, Marty. And just building up on what Marty was saying, and it's clearly we're looking at this as a growth opportunity, not as a cost savings opportunity for us. And Marty mentioned some of the growth drivers behind this. Clearly the market's growing at a good rate and we think it's in the early stages of growth, as Dan pointed out. We think there's opportunity to expand the distribution of Source's strategies through some of the market that I described and the positions that we have complementing what Source has. We see opportunity with distributors is they want to do more business with firms that can bring a whole range of capabilities and frankly packaging vehicles as well which this helps us with. And then the combination creates an even more scaled platform in the ETF space. And there are some efficiencies, but more importantly, that whole ecosystem of how an ETF comes to market and how you scale, especially in a part of the market that we're in, where innovation matters, all those aspects are key and Source brings depth and talent there that will help us build what we've started here in Europe and complement certainly what we've done around the world. I think that as we look at -- well, Dan, do you have anything you want to add to that?

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [15]

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No, I just think exactly what you described. What I would say is a crucial difference between Europe and the U.S., again, comparable growth rates. But the fact is that the institutional market demand really dominates in Europe versus the financial adviser and intermediate retail demand in the U.S. has really grown. So I think that's really where, if you will, the buy versus build or especially the inorganic approach to Europe, really something you have to consider much more so as you're able to show up in the markets that Andrew mentioned at scale and have large enough products in front of institutional clients who can really buy into that. So I think it's just a crucial difference.

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Andrew Ryan Schlossberg, Invesco Ltd. - Head of EMEA and Senior MD [16]

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And I think relating to the question about partnerships that Source has, a big foundation of the ETF industry has been a series of partnerships. PowerShares, as we built it over time, also has a number of partnerships that it works with across all parts of the ecosystem I described. And so we're just getting to know all Source's partnerships a bit better and spending time with them and the team and we're going to look to develop and expand them on many different levels. But it's kind of early days in those conversations.

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Operator [17]

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The next question is coming from Glenn Schorr of Evercore.

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Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [18]

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Looking for a little more color on the institutional side. I think this was one of the lower gross sales and flows quarters in a while. Curious if you're seeing trends like in-sourcing and going passive like we've seen in some other places? But also you mentioned the won but not yet funded pipeline is pretty good. And I don't know if you can throw numbers at that, but I'll appreciate it.

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [19]

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Glenn, it's Loren. Yes, the -- I think of this as just sometimes as we've seen lumpiness in timing. Some of the elements within the quarter that I think kind of stood out on the downside, there was about $1 billion withdrawal with the sovereign wealth related situation there at least. So I mean, I don't think people understand that dynamic, but that was kind of a one-off thing that hits EMEA and equities. We also saw about a $700 million Japanese passive real estate, a very low-fee outflow in the quarter. And then there was about $1.2 billion of quant outflow that cut across the Asia-Pac and the Continental Europe all in equities going active, so that's kind of a little bit of highlights on what just happened that took that quarter down. In terms of the pipeline though, I mean that actually is very robust. The revenue yield is definitely at a level we haven't seen in a long time. I mean, really, really high, highest that we've seen in the last 5 quarters for sure. And so the revenue run rate is right in line with what we saw last quarter. And so I think again, just in terms of timeliness, I'd say the second quarter is probably going to be much more robust than we saw in the first quarter just because of the way the timing is working.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [20]

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I just want to add here, so continues to be an area where I am just growing confidence in its contribution to the business in time for all the reasons we've talked about. Sort of the leadership that's in place, the breadth and capabilities that we have, so I just look at it as being really just a continued relatively rapidly more growing part of our business. And as we all know, I -- we all wish things were neat and happened quarter-by-quarter, but it just doesn't happen that way with institutions as you know. So -- but the picture for the whole year looks very, very strong and we expect it to just...

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [21]

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Strengthening.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [22]

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And strengthening, and it will just get stronger next year too...

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [23]

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Qualified opportunities is an all-time high, which is again you can't bank those, but those are the ones where our team comes out and says these are the prospects that seem quite viable and seasonal. So...

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Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [24]

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Excellent. But maybe the follow up is, thankfully, the exact opposite question on the retail side. You had 20%-ish growth -- sales growth over last year, then last year was a great quarter, but still it's a good number. It's near a high there as well. You mentioned GTR but I'm curious: a, what else drove the strength? And b, can it sustain itself? April seems like a good environment so far.

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [25]

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Yes, great question, Glenn. So yes, we saw a variety of things kicking in. Obviously, PowerShares just generally continues to do very well so that's been a very strong contributor across a variety of asset classes, variable rate, preferred. We saw bank loans as well. We saw a lot of the strength in senior loans just generally. I'd say the bank loan capability was in high demand, as you can imagine, in the quarter. But we continue to see strong interest in some of the products that are yield-oriented like diversified dividend. And GTR, as well, continued to flow very strongly. I think GTR, in total, is about $21 billion in size now. Again, both attractive as retail and institutional and continuing to find strength. Muni was another area where we saw high yield muni flow nicely. So those are some elements within the retail picture and one that, I think, has been good. I'd say on the flipside, just to explain, we did see some outflow in [Inchinko], that was the global -- I'm sorry, the U.S. REIT is about $1 billion just out of Japan, actually is like $1.1 billion out. I think that's a temporary thing but that also sort of took a little bit away from the retail story. UITs, even though it was stronger, was out $800 million again, so it has been an outflow and continues to be a little bit of a negative on the retail picture. The other thing I would like to just mention since everyone expects it and if I don't say it, it's a problem, is we're in positive flow through April. We have the latest April numbers. It's modest again. It's certainly around $200 million, in that range. A lot of which is driven a lot by PowerShares. PowerShares has been extremely strong through April. I think it's about $1.1 billion in aggregate, and that continues to flow, but also importantly, our cross-border business is doing very well in Europe, about $1 billion. And so some very strong elements within the second quarter shaping up.

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Operator [26]

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Dan Fannon of Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [27]

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Loren, you mentioned a handful of reasons for the draw -- or the uses of capital with regards to the seed and obviously to the acquisition. Can we think about, I guess, how should we characterize the buyback? Kind of you've been pretty consistent the last several quarters thinking about it going forward. Is this something we should be modeling or until the deal closes we should kind of see a bit more of a pause?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [28]

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I think the reality is I mean, it's probably a little bit of a pause until the close. I think we've talked about some substantial feeding, $200 million-ish net increase, and then obviously this transaction, which incidentally, I know the question will come up that is substantially less than the number that's been discussed in the media in terms of what the prices, but there's obviously a real cash need to fund that. The good news is that it's all been drawn out of existing cash out of the European subgroup. So there's no need for us to draw down and finance this, other than using existing capital in our European business that's already there. So I think the general message will be it is business as usual around our capital policy and our implementation of the capital policy other than sort of probably just first half of the year, and then we'll sort of obviously regroup and provide some more thoughts. The other thing I would say that we will continue to be opportunistic. But that doesn't mean we're not doing any buyback this quarter, forget about it, I mean, if we see opportunities, we'll absolutely be opportunistic as we always have been because we're not sort of living quarter-to-quarter, right? But sort of some self-impose sort of restrictions on using our cash.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [29]

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Great. And then I guess, some follow-up on Source. Can you talk about the trajectory of growth in terms of flows? And then from an economic perspective, the difference in fee rates between, obviously, their managed AUM versus the externally managed AUM? And how we might think about that from an economic perspective.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [30]

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Loren, why don't you get the fee rates? And then Andrew and Dan, will you pick up on the growth opportunity?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [31]

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Yes. For the fee rates, there's obviously a big difference between the Source-managed assets and the externally managed assets. So of the $18 billion which is Source managed, that's roughly 30, 31 basis points in line roughly with kind of where PowerShares is, again, this is a very good fee. On the $7 billion externally managed, it's about 6 basis points that comes to Source, and so that averages about 24 basis points in aggregate across the $25 billion. And then in terms of the growth prospects, maybe Andrew or Dan can talk about it.

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Andrew Ryan Schlossberg, Invesco Ltd. - Head of EMEA and Senior MD [32]

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Yes, I mean, I touched on them categorically before, but maybe just a few more specifics. I mean, the Source run rate growth has been -- had been good, it's been growing rapidly. We've a relatively small ETFs business here in PowerShares that also experienced sort of its record growth last year in terms of net sales. So both have momentum. Our focus here, as I mentioned before, is to build on that momentum. The Source product line is 70-plus products, I think, and it's pretty well diverse across a number of asset classes. So part of the thing that appealed to us was that it has some diversity across all sorts of unique access, smart beta, some active strategies and so we see it able to kind of weather through a variety of market conditions like PowerShares has over the last several years. A few things maybe where we see some opportunity immediately, in particular in the European markets, as I said we're -- we have top position at Invesco, top 10 position in 8 markets on the continent, good momentum and really sort of deep relationships with fund to funds, and private banks who are increasingly larger users of ETFs and Source has done well there too. We view those as opportunities to accelerate together in the future. And you look at the U.K., where our adviser channel is quite strong across our business in the U.K. from an active and fundamental perspective, and we're going -- we see factor strategies picking up in use of growth there, so we think there is opportunity there as well as the financial institutions in the U.K. So I don't know, Dan, if you have anything else you want to add?

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [33]

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I'll just add anecdotally that, I mean, you look year-to-date Source has contributed with strong inflows, net inflows, and they launched particularly commodity product at the beginning of the year that's proven to be very popular. So we continue to see just ongoing growth in the Source business.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [34]

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I guess, just a follow-up. Is there any numbers on the LTM or year-to-date just in terms of what the total flows are for Source?

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [35]

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I think we'll have to just see what we can disclose at this stage, and then get back to you.

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Operator [36]

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Bill Katz of Citi.

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William R Katz, Citigroup Inc, Research Division - MD [37]

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Just staying on Source for a moment. You mentioned in your press release that this was a de minimis to not material to earnings. I'm just trying to counter that with franchise that seems to be growing and it's possibly for some synergies internally. So how should we think about the go-forward financial impact? And then I have a follow-up question.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [38]

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Yes, let me make a comment, then I'll turn it to Loren. Bill, I -- we give Source a lot of credit for what they've accomplished in 8 years. I mean they definitely -- they've created something very, very competitive in the marketplace. They did it very rapidly. And so they were definitely in investment mode. And as I said, we could not replicated anything like this in that period of time or short period of time. So we strongly believe that we are going to see contribution to the overall operating results in the not-too-distant future with the combination of Source and Invesco. Loren, do you want to?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [39]

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Yes, I mean, I think, the -- it's -- we will probably be in a position to provide some guidance midyear, specifically around some of the elements, revenues and costs. I think it's obviously we need to develop a plan around the growth, but it is more of a revenue growth opportunity than a synergy discussion for sure. There's not an anticipation of that the synergies being are extracted because we really think that this is going to provide us with a platform to grow. So again, I think that -- that's why there's no immediate accretion expectations and it's really just how quickly can we grow the business which is obviously our expectation is to grow it rapidly.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [40]

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And let me just add, I don't know how -- Loren did make a comment. I just want to come back to it. So we did pay substantially less than what's being bantered about in the media, and I think that's important. And we're not disclosing the details for competitive reasons, which you'd know. That said, you will see the financial impact of balance sheet cash flows, et cetera, in the not-too-distant future after we close. So...

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [41]

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Yes, it will become very apparent.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [42]

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Yes.

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William R Katz, Citigroup Inc, Research Division - MD [43]

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Okay, great. And here's the follow-up. Just being within the U.K. just generally. We are seeing a lot of pricing pressure, not a lot, but to your point, some pricing pressure on the active and mutual fund business? We're seeing it in certain parts of alternatives, and we've seen it obviously at the market cap-weighted level of ETFs. Could you talk a little bit how you sort of see it playing out in the smart beta segment? It seems like you and many of your peers are incrementally focused on that space. Sort of wondering if there will be any reason to think that pricing will come down as competition picks up.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [44]

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Yes, let me make a comment, then turn it over Dan. I do, Bill, I think that's a really good comment and I would just encourage everybody to -- you really have to look at each instance specifically within the context of the firm and the action. I think the sweeping comments I think aren't necessarily helpful and again I just think any firm that is generating value for money, along that spectrum from cap weighted through alternatives, and they're competitively priced, they're going to continue to do fine. If you are outside of that band, you're going to be in trouble. And I don't think that it's always been the case, it might be more acute these days, but it's not going to change. But Dan, you want to pick up on that?

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [45]

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Sure, Marty. I think just to differentiate from kind of the market cap for both beta space, and if you look where I think smart beta and factor products really found a strong places with fee-based advisers if we're really focused on client outcomes and solutions. So I think that's what's interesting. As if you take that kind of end solution which again a lot of regulators around the world are kind of pushing, that kind of fiduciary standard, then if you thinking about portfolio completion, it's really, as Marty said from the beginning, it's the kind of the products that add value and the outcome. So I think that along with the Invesco solutions business focusing on giving better asset allocation advice, that's where positioning smart beta products like low volatility or products that generate higher income or perhaps a better quality, this is really where I think the smart beta tilts, if you will, really start to have impact. And never say never but I think that's where once you look at the value add of those products compared to frankly just kind of a core market cap-weighted approach, that's really where you're getting either some combination of better returns or lower risks. And again, I think this is as the world moves to again this more kind of fee-based advisory type world, that's where the placement and use of those smart beta products really come into play. And what I'd also just add at PowerShares specifically, we've been doing versions of smart beta factor investing before those terms were around, for over 13 years. And so I think when you're bringing these kind of nuanced strategies rather than relying on back testing, you know you need to have the track record, the size, liquidity that investors are looking for when they're putting a solution together and just as a reminder, over 70% of our U.S. smart beta range has more than a 5-year history.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [46]

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And let me, Dan is making a really good point and I think it's something to pay attention to. I -- Dan's fond of saying barriers to entry are very low, the drivers that affect are very high. And factually there are very few firms that have decades of experience in factor base investing, have the long track records, and people look at fees, but the liquidity of the products matter an awful lot. And so the incumbents are in a much stronger position to continue to be successful going forward. And again, I think that's a very important dynamic that maybe doesn't get enough attention in the space.

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Operator [47]

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Brennan Hawken of UBS.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [48]

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So I just wanted to follow up on a question that Dan asked on the $7 billion piece that is subadvised for Source. So do you -- are there plans to adjust the arrangements with those external managers? Does Invesco have the capabilities to allow for those to be shifted to in-house management? Is that part of your plans? And when you move forward here?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [49]

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Andrew, you want to pick that up?

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Andrew Ryan Schlossberg, Invesco Ltd. - Head of EMEA and Senior MD [50]

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Yes. I -- and I think maybe in the release, we bifurcated the numbers just to give clarity. It's about USD 18 billion in managed AUM by the Source team and $7 billion in what -- in this -- in the platform assets that are being referred to that are largely managed by PIMCO. And there's probably 2 things to keep in mind. One is the relationship between Source and PIMCO without getting into all the details, the revenue stream that's generated by Source in that relationship is relatively small. And Source plays a very distinct role around the product and PIMCO and other. And so those, as I said, the relationship and the discussion, we need to get into it more. And it's really our whole decision on the product line and the partnerships is going to be guided by clients and by investors. And our focus is going to be on them in the first instance. And we'll work through the issues from there, but I did want to point out that it is a relatively small revenue source.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [51]

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Then on MiFID. Loren, you completely get that there's a great deal of uncertainty, regulatory and competitive. But is it possible maybe just to frame the issue? And appreciate that you guys want to use the RBAs as a solution, minimally disruptive, that makes a lot of sense but if that turns out to be either competitively or from a regulatory perspective, not a viable outcome, what's the worst-case scenario impact for hard checks getting cut in payment for resource -- research rather to Invesco?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [52]

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Yes. I don't think that's a number we're at this point ready to sort of lay out because we don't think that's actually realistic in terms of happening. And it is something that's because it is just so dynamic, there's something that we would not expect to be that worst case is not even an outcome that we're focused on. I do think there are variety of outcomes within where we think is a likely outcome. And I'd say from completely not material to something that's a little bit more material, but we're not talking about hundreds of millions of dollars, we're talking about tens of millions of dollars. And so right now, based on where we're seeing this landing, it's hopefully going to be in that latter part. And it is something where is perfectly manageable within our current units business as usual operating plan and budget. So that's kind of the message that we'd like to leave you with as opposed to a number that is we think is probably not realistic.

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Operator [53]

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Alex Blostein of Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [54]

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A question to Loren just around the fee rate dynamic. I guess at a high level, obviously, the active bucket as a whole, so a little bit of a challenging quarter this quarter again. But I guess taking a step back, it really does feel like some of the higher fee products are growing significantly faster than maybe perhaps some of the stuff that's outflowing even within the active equity bucket. So can you help us dissect that a little bit more kind of how the evolution of the mix shift within the active bucket could look like taking into account, a, what you're seeing from GTR and the loan product, but also the comments you made around the institutional pipeline?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [55]

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Yes. I think it's really a function of the value for money. We're able to create a lot of value for our clients and that generally allows us to charge a somewhat higher fee, right? So in terms of the solutions and the alternatives, capabilities, I mean, those are the fastest growing parts of our business. I'd say geographically too, I'm very pleased to see cross-border product beginning to pick up. Europe just generally feels much healthier and that's a very important part of our business and one that tends to have a higher fee. Where we don't really focus on a lot of commoditized capabilities, ones that are in price war or we're having to cut fees and so we're not really having to deal with that dynamic within our mix. So I think, I mean, for those reasons and then we build it from the bottom up in terms of the sales forecast, the products that are really interesting to institutions and to retail are either in the alternative capability, bank loans, some real estate, GTR, these are things that are unique and differentiated, not everyone has those capabilities, and we are very good at managing those products. And then on the retail side, again, I think there's a lot of interest in bank loan and other products that provide uncorrelated returns like GTR, plus if we are able to provide some of our ETFs factor-based, I mean, these are again not commoditized ETFs, these are the ones that have tend to have higher fees and as I've discussed kind of have a more than 30 basis point type of fee, those have very good margin dynamics as well. The other point I would just like to mention on fee rate, which is important for people to realize because they look at our numbers and they kind of sense that there's a lot of pressure on fee rate, there's been about a 2-basis-point drop over the last 2 years excluding performance fees. I'd say 70% of that is just due to foreign exchange. And as we discussed, the 10% improvement in FX particularly say around the pound gives us about a 0.8-basis-point lift and we're seeing the pound beginning to improve. So I'm not saying that the pound is going to -- on their way up, but we are seeing some very favorable things within sort of foreign exchange that's actually going to be net helpful for our fee rate going forward. And so it's mix and it's hopefully nothing negative on FX and more positive on FX, those things should help us at least achieve the guidance that we talked about, we're reviewing the fee rate pickup through the last half of the year, if not do better.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [56]

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Got it. And then the second question just around comments you made around potentially some upside to the kind of the $30 million to $40 million number in costs center or cost savings from the program you outlined earlier. I guess one of the things you highlighted was potential outsourcing. I was wondering if you could provide more color on kind of the middle back-office, what specifically around this part of business you're looking to outsource. And is that kind of included in the $50 million of potential total savings? Or that would be on top of that?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [57]

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Yes. I think it goes back to 2015 when we started this thing where we benchmarked a lot of our internal capabilities, and we wanted to see were operating kind of the best of the best in terms of the metrics. We challenge ourselves across any, I mean there are a lot of different areas of the firm that got involved in this process, and still are involved. And in certain cases we saw an opportunity to do better by centralizing to a single location, going to a single processes using technology more effectively. And so that is part of that optimization work. We did in certain cases say there are others who could do it better. And so for example, we outsourced the private equity back-office because we didn't think that we were going to be able to do -- build the scale and be able to do it as cheaply and as effectively. I mean, that's the nature of the work that's being done. I think in terms of other large parts of the organization, looking at that, those definitely in scope. And I think that is actually part of the $50 million that we're talking about. I don't want to get into too much specifics right now because we're still in the midst of it. And then unfortunately, it's taken a little bit longer as all these large projects do to fully understand, but no question when we get to a point of announcement, you'll know about it as we sort of get to certainty. So hopefully, I know it's not exactly answering your question, but it's definitely part of it.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [58]

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And maybe it's in the context of we just look at process improvement, generating efficiencies, effectiveness as a core activity of the firm, always has been, always will be, and there's no end date to things like that. And again, I think good progress to date, but we'll just continue to embrace the best talent and technologies available.

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Operator [59]

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Brian Bedell of Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [60]

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Just want to get back to Source again. Obviously, it's a play on boosting the capabilities in Europe but can you talk about whether there's actually a global dimension to this? Is there enough differentiation in the Source product? Or do you plan to keep the brand name separate? And then potentially market that globally throughout your franchise?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [61]

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Andrew, Dan, why don't you guys take that?

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Andrew Ryan Schlossberg, Invesco Ltd. - Head of EMEA and Senior MD [62]

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Yes, maybe I'll start, Dan, then you can pick up from your end. As I mentioned, the product. The product line from Source is robust and diverse. Complements lots of aspects of what we do globally with PowerShares. I think it creates a set of building block products that we can take directly to our clients as we normally would. Also as the growth of solutions both internally here at Invesco and multi-asset strategies in general across the industry grow ETFs factor strategies and in particular, the source of ETFs that Source and PowerShares have, we think are going to be growing parts of those solutions. And so we see opportunity to leverage these building blocks that way. Dan, you might want to pick up on other growth opportunities on the ETF side and maybe the brand too.

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [63]

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Sure. Yes, I think in terms of just global synergies, you think that starting at a product range level, we see a lot of potential, the combining on both sides whether it's in EMEA or actually back in the U.S. I think clearly the U.S. market is a little bit ahead in terms of smart beta and specifically factor investing. So clearly for us to be able to globalize a lot of our success and low volatility, quality, all those different factor and even factor combinations, high dividend, low vol what have you, as we've down to continue to take that and then you really look at the at-scale distribution of Source, that's pretty exciting. And then if you actually look at Source, some very unique products on their side, for example, a leadership position in commodities within Europe, particularly in precious metals. And again, that's something where in -- we have a very big commodity platform in the U.S. but we don't have precious metals. So the product line synergies really work, we think, on both sides over the Atlantic. I think in terms of brand, obviously, we just signed the agreement a number of hours ago. I think clearly, we want to be able to kind of transition through that and really consider what makes the most sense. But I think absolutely, thinking from an Invesco perspective, we tend to really want to get the maximum efficiency and scalability from the global platform, most notably portfolio management, products, capital markets, operations, all those areas we think are big differentiators and ultimately if executed well can really improve operating leverage for Invesco.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [64]

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Maybe and then just one question on DOL, Marty, maybe if you can talk, and if Loren also, talk about what you're seeing given the shift or the delay of the DOL rule to June, and if you're seeing incremental different behaviors on advisers and more people are rushing to meet that deadline in the second quarter. And then also Loren, you mentioned on the flow side in the second quarter, so far, I think where you got $2 billion of inflows, I don't think you mentioned GTR in that, assuming they're inflowing what is then conversely outflowing to get to you back to that $200 million?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [65]

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Yes, with regard to DOL, I don't know if I can -- those were great insights, but I think we got here pretty consistently, the 60-day delay was not very helpful, right? I think people are anticipating that ultimately there will be delay, and the incoming Chairman of the SEC made the comment recently that the best outcome would be a comprehensive fiduciary rule for the industry. We are very supportive of that idea, but we're a long way from that. So ourselves and our distribution partners are continuing to be prepared for the fiduciary rule to go to in effect, some version of what it is right now. And again I think people are hopeful that there's something different but it's just an awkward time for that. Probably more importantly though, I think the most important dynamic to come back to is there is a movement that will not stop and that is the movement to advisory and distribution partners view that as the future, they view that as the best way to provide services to their clients and every money manager will participate in that movement. So we're managing our business accordingly. And I think that's probably the main headline that you should probably focus on. So behaviors will not change.

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [66]

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Yes. And I would say around GTR, particularly I think as we mentioned the GTR product has reached a year track record at the end of last year, which puts it into the position of being able to use in U.S. platforms, there'd been a lot of dialogue, lot of engagements on the product. I think there's still unfortunately really the derivative rule that would be required to understand is the product going to be able to be used in the current form. It's still not definitively understood yet, and so that's been a little bit of a headwind on moving forward, but there's a lot of enthusiasm and excited about being able to bring the product into the U.S. channel as soon as that becomes more and more clear, so definitely they are waiting but again, this general delay around regulatory certainties has not been helpful.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [67]

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And then just on the flipside, and it will be the balance of the inputs you mentioned I think, PowerShares and I forgot what the other one that was...

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [68]

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It was PowerShares and in the cross-border where...

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [69]

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Cross-border. That's right. Is the U.S. equity still outflowing then, I guess?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [70]

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The U.S. equity is in positive flow if you take the PowerShares, but yes, excluding PowerShares it's like negative outflow, yes.

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Operator [71]

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Chris Shutler of William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [72]

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Just 2 real quick ones on Source. So I know Source was started by a handful of large banks. Warburg, I think, had owned about half the company. Can you give us a rough sense of is there much AUM concentration amongst those former bank owners?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [73]

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Andrew or Dan, do you want to take that?

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Andrew Ryan Schlossberg, Invesco Ltd. - Head of EMEA and Senior MD [74]

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Yes, Dan go ahead.

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [75]

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Yes. I was just going to say, well, if you think about the -- because you mentioned the 5 investment banks actually formed, and you're right, formed the company and then later Warburg Pincus bought a majority stake. I think if you look in practice, the AUM that would have been held and remember, these were the investment banking arms of these 5 investment banks that they would just normally hold maybe seeding and inventory for the trading and their market-making purposes. So aside from that, there wouldn't be strategic holdings coming from that, so just like not only those banks but other market makers as well would normally hold some level of inventory for market making purposes.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [76]

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Okay. And then just looking quickly at the product list on their website, it looked like they have maybe, let's call it, $8 billion somewhere in that range of S&P 500 ETFs. I just want to confirm those assets are not included in their AUM?

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [77]

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Those assets are included in their AUM.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [78]

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Those are, okay. And they're at like 5 basis points?

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Daniel Eugene Draper, Invesco PowerShares Capital Management LLC - MD of Global Exchange Traded Funds [79]

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That's correct, that would be their core range of above better profits.

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Operator [80]

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Robert Lee of KBW.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [81]

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I just have 2 quick ones. First, I mean, I guess just going back to Source. Knowing you don't -- you can't talk about the financial arrangements with too much specifics, but just curious, is it reasonable to assume this is somewhat structured like you did with PowerShares? With a moderate upfront payment but earnouts based on some aggressive asset growth targets?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [82]

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I think you can assume as an upfront payment with some contingent earnout based on growth. I wouldn't characterize it exactly like PowerShares, but I mean, conceptually, yes.

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Robert Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD [83]

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And then maybe on a different topic. We all talked about the active to passive shift ad nauseam over the last couple of years. And could you maybe compare and contrast what you're seeing outside the U.S. as it relates to that, particularly in the retail channels? Maybe your thoughts on the trends there?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [84]

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Yes. I'd say the debate is most acute in the United States, and it probably is because of the relative size of the cap-weighted index providers in the United States. And but it is -- let me put this way, what we are doing as a firm is we do actually believe that right answers are a combination of active, passive and alternatives, and we'll just overlay that Loren was talking about, and we do think it's the way of the future, and it will be varying degrees in different markets. And probably again most acute in United States, probably followed by the U.K. The least along those ways would be Asia at the moment.

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Operator [85]

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Michael Cyprys of Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [86]

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Just coming back to the optimization work. Just curious how we should think about those savings flowing to the bottom line versus, I guess, keeping margins flat or maybe even expanding that versus how you're thinking about investing in the business?

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Loren Michael Starr, Invesco Ltd. - CFO and Senior MD [87]

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Yes, I think again we'll probably in a position to give you a bit more color about how that might manifest itself. We've generated about, as I mentioned, 30 -- roughly $30 million of run rate savings so far. You haven't seen a lot of that drop to the bottom line. That's because it helped to offset some of the acquisition cost associated with some of -- Jemstep and with our Religare business. So again, it is more likely than not that some of that is going to go to allow us to invest beyond our most critical investments while keeping expenses reasonably stable and flat. So that's really the greatest opportunity for us is to free up funding as we've always have done, but in a much more significant way as the need to invest is probably never been greater in this market than we've ever seen before with so much opportunities and so much change. So again, we'll give you more color as we probably get to midyear around what to expect and then Marty...

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [88]

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Yes, let me stay on that point, that again we've talked about it at various times on these calls. And let's get back to it, Ken's comment earlier on the call about the M&A environment. And this is probably the worst time for firms not to invest for the future. And the good news is we started investing here more than a decade ago in alternatives and passive and in ETF business, et cetera, et cetera. And so we've been able to continue to invest while still being very responsible in delivering returns for shareholders. And Loren raised a very good point so the efficiency that we gained, it is allowing us to continue to develop the business strategically today. And obviously one comment on Jemstep, we're relatively -- so a year into it, the highlight, what I would say, is we're going to be much more impactful than we probably imagined at the time. It is creating opportunities that we didn't even imagine. And again, it feels like it was all the opportunities for what PowerShares did for us 11 years ago when we bought it. And again, we'll be more clear later in the year on that. But you have to make those strategic investments and when you end up getting some of the outcomes which might accrue with something like Jemstep, I think that's what creates competitive advantages for firms. And the ability to do better jobs for your clients.

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Operator [89]

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Chris Harris of Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [90]

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Just a quick one. I wanted to follow up on the active versus passive discussion ex-U. S. You guys really do have a great chart in here on Slide 19, just showing the growth of ETF in EMEA. And if we do expect that trajectory to hold and have a similar path as it's had in the U.S., what are the implications for your active business in the region, in EMEA? And I guess what I'm really wondering, is there a reason to think that this penetration in EMEA might not be as disruptive as it's been in the U.S.?

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [91]

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So what I would say for ourselves is, we have an absolutely outstanding set of investors in EMEA, I'd say some of the best investors quite frankly in the world, and Andrew talked about the success and penetration, and that only happens because of doing a good job for clients. We look at this probably very similar to again what happened in the United States if these are complementary vehicles and products to active management, and all it did for us was strengthen our core business, and so we see our active business only getting stronger on the back of this. And needless to say, we're very excited about the future and the opportunity.

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Operator [92]

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And speakers, there are no more questions on queue.

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Martin L. Flanagan, Invesco Ltd. - CEO, President and Director [93]

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Okay. Well, thank you very much. Thank you, everybody for your time and the questions, and as always, so we appreciate your time and your efforts following the company. We'll speak to you very soon.

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Operator [94]

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That concludes today's conference. Thank you for participating. You may now disconnect.