Martin L. Flanagan - Chief Executive Officer, President and Executive Director Loren M. Starr - Chief Financial Officer and Senior Managing Director.

Michael Carrier - BofA Merrill Lynch, Research Division Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division Daniel Thomas Fannon - Jefferies LLC, Research Division Kenneth B. Worthington - JP Morgan Chase & Co, Research Division William R.

Katz - Citigroup Inc, Research Division Brennan Hawken - UBS Investment Bank, Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division Craig Siegenthaler - Crédit Suisse AG, Research Division M.

Patrick Davitt - Autonomous Research LLP Greggory Warren - Morningstar Inc., Research Division Marc S. Irizarry - Goldman Sachs Group Inc., Research Division Eric N. Berg - RBC Capital Markets, LLC, Research Division Christopher Shutler - William Blair & Company L.L.C., Research Division.

This presentation and comments made in the associated conference call today may include forward-looking statements.

Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, 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 believe, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should, and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our 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 third 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 speaker for today, Mr. Martin L. Flanagan, President and CEO of Invesco; and Mr. Loren Starr, Chief Financial Officer. Mr.

Flanagan, you may begin..

bull markets, bear markets and markets that go sideways. And we're well positioned to deliver for our clients competitively, regardless of which markets we see in the fourth quarter and beyond.

It's also a time where a number of our investment teams look for periods of market volatility, which creates valuation anomalies and opportunities, which they exploit for the benefit of our clients. Historically, it's these periods of increased market volatility that clients seek the established capabilities of our experienced investment teams.

So with that, I'll stop here and turn it over to Loren..

Thanks very much, Marty. Quarter-over-quarter, our total AUM decreased $12.8 million ( sic ) [$12.8 billion] or 1.6%, and that was driven by negative FX in market of $14.8 billion, outflows from money market and the QQQs of $4 billion. These items were partially offset by positive long-term net flows of $6 billion.

Our average AUM for the quarter was $801.7 billion. That's up 1.5% versus the second quarter average. Our net revenue yield came in at 45.6 basis points, flat versus Q2. The benefit of an extra day in Q3 and higher performance fees was unfortunately equally offset by the decline in other revenues and the weakening of sterling versus the U.S. dollar.

Now I'm going to turn to the operating results. You'll see that our net revenues increased $12.7 million or 1.4% quarter-over-quarter to $913.7 million. That included a negative FX rate impact of $9.1 million. Within the net revenue number, you'll see that investment management fees grew by $16.5 million or 1.6% to $1.07 billion.

This increase was due to higher average AUM and the additional day in the third quarter compared to the second quarter. FX decreased investment management fees by $11.5 million.

Service and distribution revenues were up by $7.4 million or 3.4%, also in line with higher average AUM and the extra day as well as the continued strength in our cross-border products sold in Europe. FX decreased service and distribution revenues by $0.1 million. Performance fees came in at $10.3 million, an increase of $3 million from Q2.

This is about $5 million more than we had expected based on the guidance we provided in Q2. Performance fees were earned from a variety of areas, including the U.K., bank loans and quant equity. Foreign exchange decreased performance fees by $0.2 million.

And as I said in the past, performance fees continue to be one of the more difficult line items for us to predict with great accuracy. Other revenues in the third quarter came in at $34.5 million, a decrease of $4.4 million, resulting from the lower level of real estate transactions fees.

As you'll remember, we generated $6 million in nonrecurring transaction fees in Q2 as a result of our Japanese REIT launch. Third-party distribution, service and advisory expense, which we net against gross revenues, increased by $9.8 million or 2.4%.

This was in line with higher revenues derived from our related retail AUM and one extra day in the quarter. FX decreased these expenses by $0.2 million. Moving on down the slide. You'll see that adjusted operating expenses at $531.8 million grew by $7.8 million or 1.5% relative to the second quarter.

FX decreased operating expenses by $4.8 million during the quarter. Employee compensation at $349.5 million increased by $4.9 million or 1.4%, and this was a result of increased headcount and variable compensation quarter-over-quarter. FX decreased compensation by $3.2 million. Marketing expense decreased by $3.5 million or 11.3% to $27.4 million.

Advertising costs came in a little lower than we expected in the quarter. FX decreased these expenses by $0.3 million. Property, office and technology expense came in at $77.3 million in the quarter, which was up $1.2 million. This was about $3 million lighter than we had previously guided.

The increase reflects the higher outsourced administration costs in EMEA. And FX decreased these expenses by $0.6 million. G&A expenses came in at $77.6 million. That's up $5.2 million or 7.2%. This increase was due to professional service fees, driven by ongoing technology platform investments as well as an increase in indirect taxes.

About $2 million of the increase should not recur in Q4. And FX decreased G&A by $0.7 million. Going on further down the slide. You'll see that nonoperating income decreased $10.5 million compared to the second quarter.

The decrease is primarily driven by low or -- excuse me, lower realized gains on seed capital investments in Q3 and the liquidation of a CLO that occurred in Q2. The firm's effective tax rate on a pretax adjusted net income basis in Q3 was 26.6%.

Looking forward, we'd expect the effective tax rate to remain between 26% to 27%, which then brings us to our adjusted EPS of $0.64 and our adjusted net operating margin of 41.8%. Now before turning things over back to Marty, I'd like to just touch on the impact of the market and FX volatility on our earnings outlook.

In periods of uncertainty such as this, which we have seen before, we will try to manage our level of spend as best as we can without sacrificing strategically important investments. However, we simply can't adjust expenses down as quickly as revenues in a declining market.

We expect to remain focused on prioritizing our most important initiatives, and we will diligently manage our discretionary expense in this quarter.

Given that the markets have made our AUM a bit of a moving target, we don't believe it's very productive to provide explicit line item guidance in Q4, understanding, however, that we are committed to doing what we can without compromising our most important strategic opportunities. And so with that, I'll turn things back to Marty..

Thanks, Loren. So happy to open up to Q&A..

[Operator Instructions] And our first question comes from Michael Carrier, Bank of America Merrill Lynch..

Loren, maybe first question. Just on the expense that you were -- you were just going over.

When we think about the areas that you do have some flexibility, so whether it's on the marketing side or the G&A, just maybe just remind us -- or when you think about how much variability you do have if the environment does get -- and not talking about the fourth quarter but just meaning over the next year or so, if you get into a tougher environment, how much can you pull back versus what you would view as like longer-term view investments?.

Certainly, Michael. I mean, we have -- some of our expenses are somewhat fixed in nature, whether it's amortized, deferred compensation or related to rent. We clearly can move on some of those items over time. I think in terms of near-term ability, it's going to be around the discretionary expenses.

Marketing is also a lever that we can and will look at depending on the environment that we're in, where strong levels of advertising may not make as much sense in markets that are somewhat negative. So certainly, that level of $35 million, which I think we had originally guided in Q4, may be somewhat lower if we're successful in Q4.

But ultimately, we have more opportunity to affect 2015 than we do the fourth quarter because a lot of the spend is effectively committed within the quarter. So it is really to that point that we -- we'll certainly do what we can within the quarter to manage, but some of it is going to be locked in..

Okay. That's helpful. And then Marty, just on the flow picture, I mean, when we look at kind of the industry trends right now, things are pretty muted. You guys have put up results and -- whether it's on the European side, which is across asset class things have continued to do relatively well.

So where are you seeing some of that demand? And particularly, maybe into September, October because obviously, things got a little bit more rocky in the environment. But it seems like the strength continued, particularly relative to the industry. So just any insight, and that could be on the retail side or in the institutional..

Yes. It's a good question. And what I would say, it's, really, too early to tell if it's -- definitely what's going to -- what are going to be the reactions.

I think we're probably in a transitional period right now where whether it's institutional or retail investors are assessing, and I think their first move, which we all saw in the early -- let's say, their public numbers coming out, retail was -- you saw outflows.

And the first move is to do nothing, right? And I think that's really what you saw a number of people do in the United States in particular. But people assess -- get some sense of looking forward and have some judgment.

What -- from our point of view, what we think is ultimately is a good thing for our clients and an opportunity for the firm is that volatility is a part of markets. And having things like alternatives in your portfolio, liquid alternatives in particular, is something that is going to, I think, is going to be here for a long, long time.

And we're seeing it just with IBRA right here. IBRA has been -- institutions have continued to commit to IBRA but you're seeing, really, with these volatile markets, opportunities for IBRA that GTR funds for us. So we think it's really the broadening of the asset classes that will be the opportunity as we look forward..

The next question comes from Michael Kim, Sandler O'Neill..

First, maybe a bit of a more bigger-picture question. I know it's not a -- necessarily a big piece of your overall asset base, but just wondering how your bond funds here in the U.S. in particular might be positioned assuming we see some sort of dislocation in the credit markets.

Just curious to get your take on liquidity concerns across the industry and how you think about your funds assuming a potential downturn..

So let me start at the highest level. So if you look at the performance across our Fixed Income platform is very, very strong, and -- which is a good place to start. I -- with regard to what people do, and I think what you're suggesting is that people started to move from -- redeem from Fixed Income capabilities, what's the liquidity impact.

And it is a topic everybody is focused on. From our point of view, we feel like we're positioned very, very well. I mean, it's something that we look at. I mean, obviously, our portfolio managers deal with it every day and have done that for a very long period of time.

And in those products where we think that liquidity could be more challenged, there is a greater cash capability -- greater cash levels in those funds. There's also liquidity elements that they have layered on top of it. So we think we're positioned very, very well for it.

So we're aware of the topic but we think we're managing very well and don't have a very large concern about it..

Okay. And then maybe if you could talk a bit more about product development these days, particularly as it relates to more solutions-oriented strategies and other products that might match up with some of the prevailing demand trends that you just mentioned earlier..

So look, I think we could be better positioned right now.

So if you look at the range of capabilities that we have, from the one at smart beta, we think smart beta is continuing to be an important part of portfolios that are put together, and then as you look at the active range of capabilities we have from the traditional loan only to maybe more traditional alternatives, let's say, private equity and real estate, it's really the suite of liquid alternatives that we introduced very broadly last year that put us in a very unique position.

So we think the combination of our active strategies all the way through alternatives and smart beta, there's very little that we can't address in meeting clients' needs.

And also, with our solutions group that -- with the larger institutions, you can have that broader range of conversations to understand what are they trying to achieve and what are the different combinations of investment capabilities that you could put together to meet those needs. So we really think we're positioned very well.

In one level though, to be clear, I do think we're, frankly, ahead of the market at the retail market with the range of alternative capabilities that we've had. People are very focused on it. But quite frankly, the uptake on the distribution platforms is probably slower than we would have thought.

And it's just them getting their hands around their internal -- things that they need to work through. But we think it's a very important opportunity for us and for our clients..

The next question is from Dan Fannon from Jefferies..

I guess, Loren, understanding that the market volatility and that you're -- it's difficult to forecast next quarter out.

But just wanted to talk about the fee rate and kind of the products that are selling and where you're seeing the flows if we can still see that fee rate grind higher x currency, x market based on just kind of the gross sales, gross redemption trends you're seeing, and then that corresponding impact obviously flowing through to -- through margins..

Yes. Thanks for asking the question, Dan. Absolutely. We've been -- sort of had a headwind with FX working against us.

I think it -- if it stabilizes and we sort of enter a period where we don't have that particular impact, we should continue to see our fee rate climb from where it is today as the flows that you've seen continue to be quite strong through the cross-border product line, which, as you know, tend to have a higher fee rate.

Certainly, some of these alternative products, as they take and get more traction, have a higher fee rate. So we do feel that the trend is still very much in our favor, to see fee rates climb going forward, absent any further continued strengthening of the dollar versus other currencies..

Great.

And then Marty, when you talk about asset allocation and the demand there, can you specifically talk about, is that including IBRA? Or is that just -- are those -- is that just separate products? And then can you talk about kind of where that demand is coming from, from the end clients?.

Yes, good question. So these definitional problems. So we would include IBRA in that. We'd include things like global total return capabilities. There's -- our versions of IBRA there. So it is really that suite that we have brought to market.

So where we are seeing demand -- so if you start with GTR, that was probably the next introduction after IBRA, and it's really only been in the market from a year ago, September. In the U.K., it's over $1.2 billion. That's pretty good for a very short uptake.

The interest that we're seeing institutionally and also, frankly, in the retail market in the U.S., GTR is really very, very strong. And the same thing on the continent. It's trailing the U.K. just because that was our initial launch. So we think that's probably going to be another natural one.

But again, it's really, what you're seeing now with the advisers on the retail side is they are looking to build broader portfolios. And they're interested in having lower-volatility type elements within there.

And Bill ( sic ) was asking a question earlier that it is also looked at as an alternative to some of the fixed income, from a stability point of view, within the portfolios. Institutionally, again, it just continues to be areas that some number of the institutions are looking to expand.

So it's early days for us, but again, the depth of our capability and the performance out of the box has been very strong. Now it's a long-term game, but it's always nice to start with your performance..

The next question is from Ken Worthington, JPMorgan..

On real estate. Real estate continues to be on fire for Invesco. It is cyclical based on the way you talked about your sales and when you get transaction and performance fees. We seem to be in the strong sales portion of the investor real estate cycle.

So are we getting late in that part of the cycle? And is the next step elevated performance fees, given you're a mix of kind of U.S.

core and international?.

Ken, I'll try to answer that question. I think we saw, and we have seen, a lot of good transaction fees coming through the funds being able to sell their holdings at a good price. So that's been helpful even though that's been somewhat of an outflow when every time something gets old.

We're seeing the pipeline, as Marty mentioned, the institutional pipeline is now really beginning to climb again. And so I think we are entering a sales cycle where that pipeline is going to begin to fill up with more won but not yet funded type of activity, which, again, don't translate into assets until those things start funding.

So I think we're very much into a building-up AUM as we sort of start into a buying phase as opposed to a selling phase. So that is going to continue to progress. I think with the realizations that I mentioned, yes, absolutely.

The idea that we're going to begin to be able to realize performance fees in the real estate area is something that, I think, we've talked about in the past. And then we certainly have expectations that we're going to see some of that roll through, specifically around the timing, as I mentioned.

It's a little problematic for us to figure out exactly what quarter they -- are they going to occur, but we know that they are -- have done a great job in terms of performance. And so there is a lot of built up performance fees in the real estate pools..

And then, can you talk a little bit about the investing environment in Europe and the U.K. given kind of changes in the economic outlook for both? You had a really strong third quarter. The outlook in those regions seems to have weakened economically.

What does this mean for Invesco in terms of sales and investor appetite? And are you in the right distribution channels with the right products to kind of weather any change, a persistent change in environment if the current choppy market conditions continue?.

So Ken, let me pick it up and start maybe on the continent. So we -- kind of Europe's been a topic. We started the conversation maybe 3 to 4 years ago of the opportunity there, and it's starting to become realized over the last 1.5 years. We still believe we're relatively early stages of success on the continent.

So with all the progress we've made, there is more progress to be made. And it's really -- we're not on all the platforms that we want to be on. We are getting on more and more of them. We have good reason to believe that we'll continue to expand the breadth of platforms.

As I pointed out, the performance in that cross-border range is very, very strong and it's very broad. So it's very attractive to distribution platforms. And just our ability to help our distribution partners be successful is also in place, too. So I look at it as a continuing growing opportunity for us.

With regard to what might happen with investor appetite, I think, if you ask me some -- a couple of years ago when we thought that EU was -- discussions of it breaking up, I would never have thought we would have seen the client demand for investment products as we saw.

So it's really been a surprise and continues to be -- they look to funds as the way to invest and save. And they feel that's a really solid and thoughtful way to look after themselves, which, frankly, we think it is, too.

So -- and again, I come back to the range of capabilities, too, as demand moves, we do think we have the capabilities to give clients the alternatives. If they want to get out of European equities, they can look at things like GTR, they can look at things like IBRA. The fixed income capability is very, very strong. In fact, it's -- flows there.

So we think we're really well placed. And just in the U.K., again, it's -- we're an absolute top firm there, and the performance just continues to be just very, very strong. And so we're -- we're everywhere we need to be in the U.K. and we're well positioned there. So we look at it as continued strength in the U.K.

and growing opportunities on the continent..

balanced product; equity product; Pan European equity was also strong, even though maybe others in the industry didn't see quite as much strength, we continued to see strength there; real estate; fixed income, corporate bond; euro corporate bond, all doing well.

And through -- even the October, that cross-border in EMEA is in strong, good positive flows. So we think that, that is a continued opportunity for us that may slow down a little bit relative to what we've seen in the past just as people are trying to figure out what to do given the market environment.

But we have such a great range of products at such high performance levels that we think we're going to be able to continue to sell through all types of -- whatever the market throws at us. So I think we're going to probably still do pretty well there..

The next question is from Bill Katz from Citigroup..

First big-picture question. You seem to have a lot of momentum across products and geographies and distribution channels. It may be too pointed of a question.

But I'm sort of curious, is there something structurally going on that you're starting to see the unit growth coming in terms of net flows? Is it market share gains? You mentioned, Marty, that there may be some more distribution channels.

But why -- I know it's been a 5-year in the making, but specifically, what seems to be the linchpin now that's really inflecting the flows?.

Where in particular, Bill?.

Well, I think Europe and Asia in particular seem to be quite strong, looking at your data..

Yes. No, it's -- I think you're really hitting it on the real point. There's no one thing. It really has been, yes, a number of years in the making.

And it is a combination of, again, the range of capabilities are attractive, the performance is consistently strong along with the business support that we can help our institutional clients be more successful or our distribution partners on the retail side. So I wish I could tell you what the one thing is, but it's just many things.

And -- but to be more specific, what does it mean? If you look at all of our institutional ratings, they are -- there are many and they're strong. If you look at the number of platforms we're on around the world, they're -- they continue to grow. Now the U.K.

has always been strong, right? So the -- it's really the continent and other parts of Asia joining, really, the U.S., which we've been talking about for a number of years. And so it's really the U.S., Continental Europe and Asia just continuing to strengthen..

Okay. The same question, just a little more technical. So still curious. In the U.K. and now Europe, there's 2 dynamics underway. Some are underway, some are still to come between sort of the shift of RDR as well as on the MiFID II, some consternation about how to sort of treat equity research.

How do you think that might impact your business? Because some of your peers, the stock price have come in a fair amount. I think investors have been worried about that. And given you're a pretty big player in the U.K., just trying to sort of see what the economic impact might be to you on a go-forward basis..

Yes. So with regard to RDR, I mean, it's still early days. But I think what we had said is we were matching what RDR would be in practice. We would say, we're -- we thought we'd be well placed and we are. And it's really again, it's the recognition of the organization and just the depth of capabilities. And so we're doing just fine within the RDR world.

Now is it meeting the expectations of the policymakers? That's probably a different topic. I don't believe that the costs have gone down for the end of investors. And actually good point, too, it's probably going up. So I don't think that was part of the plan. So with regard to the topic -- with regard to research, I know everybody's very focused on it.

And I think, the conversations that I'm aware of and that -- the undertakings is that, there is now quite a thought of do no harm to the capital markets, right? The unintended consequences of trying to take pieces and modify them, I think, have become front of mind of the regulators.

And I think where you'll probably end up is much more in greater disclosure and -- for the end investors. And again, we'll see. It's going to take some time. But I think that's probably where we'll probably end up..

The next question is from Brennan Hawken, UBS..

On -- you gave a lot of color on EMEA and the flows, and thanks for that. That's really helpful. I was just kind of curious, if we think about the U.K.

and then potential retail flows with Perpetual, is there any kind of seasonality we should think about for retail flows that might be a consideration going forward?.

I think there may be some degree of seasonality that tacks onto it. But I think that is largely a very modest impact.

And probably the biggest thing that we can see, and we're seeing it every month, is this normalization that is happening around our redemption rate, and how, as things are getting back to normal and really, in the U.K., the client reaction to that transition is almost old news now.

And so we're -- I think that's probably the bigger impact, is that we're turning into more of a business-as-usual situation in the U.K., which will be quite helpful for us in terms of continuing to turning those outflows into inflows..

Terrific.

And then, apologies if you hit on this before, but given some of the volatilities in yields in October, have you seen any change in the IBRA flows quarter-to-date?.

We're seeing a much stronger interest in IBRA. So the redemption rate is certainly dramatically down. I think the level of interest around IBRA, both institutionally and retail, is sort of seeing new levels.

So it is somewhat at an inflection point where you'd say, if you just follow this through into next couple of quarters, that it would be going quite positive. But again, just drawing a line here. But it has been very month -- every month, you're seeing significant improvement in the IBRA position, and that's not a surprise to us.

As people are looking for greater stability and predictability around -- and less risk in their portfolios, it's a natural place for people to go..

The next question we have is from Chris Harris from Wells Fargo..

So we've spent some time talking about EMEA. Wanted to talk a little bit about the U.S. part of your business. It sounds like the outlook is getting a little bit better there. I'm just kind of curious if you guys could characterize for us why that region maybe isn't flowing a little bit better than it is.

I know you guys rank pretty favorably to a lot of peers, but just wondering if you could expand on what's going on in the U.S., why we're not seeing a little bit better growth..

So I think that we're seeing strong pockets of growth. Obviously, the U.S. is a big -- it's a big thing when you look at it, particularly the way that we disclose it to you. And so it does hide the real stories within stories that exist. What we've seen in terms of the greater strength in the U.S. in North America, real estate, direct real estate.

We've certainly seen continued strength in the Invesco PowerShares offerings as -- and we have quite a wide range there. We have great capabilities around alternative Fixed Income, particularly around bank loans and CLOs. And then fundamental equity, international growth in values is quite strong.

I mean, so these have been somewhat offset recently in terms of numbers where we've seen some outflows in certain products that I'm sure you're familiar with around, let's say, bank loans, where people have sort of knee-jerked out of those types of products, which again, sort of masked some of the underlying strength.

Other areas where we had -- and have seen some outflow would be more based on when the equity markets were moving quite strongly. Some of our core, more sort of safety-oriented equity offerings were not performing in line. But they're going to become more interesting in this type of market. So I mean, that's a little bit of context.

We have such a wide range and diverse set of products that for us to be at a sort of consistent high flow in the U.S. is hard for us to achieve because they're very diverse in what they offer..

Yes, okay. That makes sense. And wondering if you guys can give us an update, not just for the U.S. but for the entire franchise, what flows look like so far on October..

So I say, to -- today, there, is modestly negative for us. Not anything that we'd get alarmed about, and progressively getting better. Each day that's sort of come by through recently has been a benefit to the flows. I already told you that we're seeing some of the most important, in terms of fee rate, parts still driving forward like EMEA.

We have this very strong institutional pipeline that is -- I think it's up close to 70% higher than it was in the prior quarter. And on -- and some of that is going to begin to fund whether it's into the fourth quarter or into 2015. So again, we feel reasonably good about where we are in the flow picture.

And I mean, we don't have the industry data yet, but I gather that we're probably doing as well, if not better..

The next question comes from Robert Lee from KBW..

I have a question on the liquid alt side. Maybe there's a few things in here. The -- I mean, as you roll that out, I mean, you've certainly seen in the industry pretty strong demand for retail and liquid alts products.

But I think it's probably easy -- my perception is it's probably fairly easy for investors and advisers to be confused about what's the difference between these products, and some peers will probably put IBRA in their liquid alts stock -- and you have it in your balance.

So what can you do or what are you doing to -- with may be in the retail world and with advisers to make sure that they understand what they are buying and how to compare.

Because one of the things I think you always fear is that people buy something that they don't understand it, they ultimately get disappointed and that has negative consequences down the road..

Yes, you're on a very important topic. And so that was really what I was trying to highlight.

It's actually -- it is going slower than the -- than what you might be reading in the papers, right? So what I would say is there's an absolute clear recognition that, for the retail investor, the ability to have access to alternative capabilities, as I look at it is more broadening the asset classes that they can invest in.

And also, introducing some lower-volatility type offerings to them is viewed as important and necessary. We have spent an enormous effort on education just -- before they even came to the market.

Internally, then with our distribution partners sort of tied hand in glove on how they're positioned, what they're meant to do, what you should expect in different markets, how it modifies your portfolio and that you're achieving what you want to achieve.

So we even have sort of an internal consulting group that spends time with the distribution channel to help the -- all the advisers be successful with it. So we think education is a really, really important part. And that's why what I've been saying, it is an important opportunity but it's not a 2-, 3-quarter opportunity.

It's going to be looking back for 3 years and see where it is in total. And also, and I say rightfully, the advisers or distribution partners, they are slow in putting capabilities on platforms because they want to get it right, too. And I think that's really important. That's good for everybody. You've got to get it right for the clients first.

So I'd say it's progressing in a thoughtful manner..

Great. And maybe to follow up, you've clearly had -- have good flow momentum in a variety of places across your -- across the firm. And I'm going to guess you probably don't look at things in this manner, but I guess I'll ask it anyway.

If you look at the breadth of your franchise and geographically, product-wise and size and -- how -- what do you think is kind of a natural or organic growth rate for your firm? Do you think it's in the 3%, 5%? Do you think at peak it could be better than that? How -- do you have any thoughts on that?.

Yes, it's a good question. You're asking the unknowable. But yes. what I think is, if you look at the firm right now, if you look at -- again, depth of capabilities and performance, what we think we should be able to accomplish, there's really no reason that we shouldn't be over -- whatever a reasonable time frame, 3% to 5% organic growth rate.

Are there periods that you can be on top of that? I believe that is the case. We have yet to see that sort of all-in, risk-on investor mindset, and that is exactly -- that is where we are best positioned. So we have had these results without having it go straight to our strong suit. So that's a period that you would expect even greater organic growth.

On the other side is, if we're all talking now, how are clients reacting? How are they thinking? If people slow down and just stop for a couple of quarters, you're going to have -- you're going to be below that. And so it's -- again, so there's a market sentiment topic [ph] to it, where the market is.

But over a good period of time, I think there's no reason why we shouldn't be in that 3% to 5% organic growth bucket..

The next question is from Craig Siegenthaler from Crédit Suisse..

So just a follow-up here on the U.K. equity income business. Do you believe Retail Distribution Review could have temporarily aided the U.K. equity income retail business over the last 12 months? But as more accounts convert to the new fee structure, because many brokers actually have been avoiding the transition, that U.K.

retail equity income redemptions could actually pick up or remain elevated into next year?.

Interesting question, here. We have no evidence of that, and so I -- it would just be total speculation. I mean, I think -- what I really think is -- the fact is that the reputation of Invesco Perpetual's very, very strong. Mark Barnett and his team have had a tremendous track record on their own for a good period of time.

And factually, they have performed very, very well. And so that, in combination with our advisers, to be able to have a broader range of capabilities within the franchise, I think those are the vastly dominant factors of why we've got to where we've gotten to. But interesting question. I just can't -- really, it will be speculation on my part..

Marty, and then just a quick follow-up. So we're heading to the fourth quarter here, we've had a few quarters of sort of lumpy redemptions from the equity income business in the U.K.

Given kind of your visibility, are there any sort of larger losses, platform losses that maybe could occur in the fourth quarter? Or should the fourth quarter really be the first clean quarter without any significant redemptions from that business?.

Okay, Craig, I'll answer that one. I think what we're seeing from the data factually is that it's getting less and less of a topic. And we have not certainly heard of any large -- not been notified. We had no expectations of anything to happen, which is great news. For us -- that doesn't mean that it can't or it won't.

And there is always a year-end to kind of -- who knows, right? People may reevaluate their portfolios. So I don't want to sort of say we have 100% certainty on any of these redemptions. Because as soon as you think you do, you'll get surprised.

But I'd say, in terms of our level of confidence and feeling that we're moving into a normalized period, I say, absolutely. And we certainly have no knowledge of any large or even small platform redemptions in our future..

The next question is from Patrick Davitt from Autonomous..

On the news this morning that you're ending the agreement with Deutsche Bank around the commodities PowerShares product.

Will that meaningfully change your economics on that product?.

Let me pick up the first part, and then Loren can pick up the second. So no, we're not ending our arrangement with Deutsche Bank. We're modifying it. I mean, it's been a very, very good partnership. And what we're really doing is just changing some of the responsibilities that's around.

Now we'll be -- take complete responsibility for the product range including portfolio management, distribution operations. They will continue to be a very important partner in the underlying indexes and the like. And we'll continue to work together for a good number of years..

And then in terms of the financial impact, it really is not a material topic. We've not disclosed the nature of the relationship, but it is an ongoing relationship where we will continue to partner with Deutsche Bank as we sort of develop and continue to grow our product lines.

But we have internalized, as Marty said, the management the -- of the product as opposed to being largely a distribution relationship that we had before..

Okay. That's helpful. And then we talked a lot about RDR and the ebbs and flows of that in Europe and U.K.

Could you talk a little bit about PowerShares specifically and assets specifically, and to what extent the process of that adoption is occurring because of the regulatory changes in Europe?.

So Patrick, I'd say, the RDRs, as I think we've talked about in the past, it does somewhat open the opportunity for greater use and take-on by advisers of these type of products where, to the extent that they're going to be paid for advice directly by the end client, the use of such products become easier for them to use.

And so we have said that for the U.K. and EMEA generally, it is a major focus of ours, one that we are very organized around trying to develop. And it's one that you probably -- realistically, you're not going to see true results or impacts for somewhere between 12, 18 months because it takes that long to really sort of make an impact.

But we're very focused on it. We think it's a great opportunity for people who have ETF capabilities, which obviously, we do.

And again, to be clear, our focus in this space is continued promotion of sort of the smart beta-alternative type of ETFs as opposed to the normal cap-weighted type of products that are very much in focus by Vanguard, BlackRock and others..

The next question comes from Greggory Warren from Morningstar..

Craig Siegenthaler touched on some of the questions I had about Neil Woodford and what was going on with equity income in the U.K.

But I'm just kind of curious, as we look out and we look at the -- what they've done with the pension reforms in the U.K., the removal of the requirements for the annuities, how much do you feel that there's growth there to sort of replace what you lost with Woodford's departure?.

Yes. I -- look, as we've been trying to point out, it's a very, very, very strong set of investment teams with superior investment performance. And whether it's across fixed income, broadly, GTR, European equities, Asian equities, European equities, it is probably, I'd say, some of the strongest capabilities in the United Kingdom, period.

And so it's a very important part of our business, it will continue to be. And by the way, those capabilities are now being used more broadly throughout the world.

European equities, Fixed Income, et cetera, they are a very important part of what's happening on the continent and also different parts of the world for some of the global capabilities and the like. So it's been a tremendous success and it's going to continue to be a tremendous success. And you're actually pointing out something important.

This -- with this door opening up that -- investments beyond annuitization, that's a very good thing for us. Now again, that's not next quarter or the quarter after that, but if you look years ahead, it's really quite a good opportunity for us..

Good, good. And then something we don't really talk about all that often, Canada. Can you guys give us a feel for what the market looks like now with kind of the challenges you're facing? I've noticed that ETF growth has been pretty explosive the last couple of years. The banks have gotten a lot more aggressive about going after mutual fund assets.

So just kind of curious how you guys view your position within the Canadian market right now..

Yes. So I'd start again with performance. If you look at the performance of the teams there, really very, very strong. The success in the retail channel has improved quite dramatically, and it was a combination of things. One, again, getting performance to a very strong level, which it is and has been for a good period of time.

You are pointing out, yes, the banks are very dominant. It's probably the one place in the world that they're so dominant with asset management within them. We have done vastly better than where we were a few years ago.

So we -- and again, as you point out, it's the addition of ETFs for us and the like make us much more competitive and put us in, frankly, a -- we think we have competitive advantages in the marketplace. And the other opportunity for us that we're early days is the institutional market in Canada is very big, very important.

And the capabilities that Canadians are looking for in the plans suit us very, very well when you start to look at the range of alternatives that we have. So it has been an important part of our business and we look at it to be a growing part of our business once again..

The next question is from Marc Irizarry from Goldman Sachs..

Marty, I'm curious on just the IBRA.

And maybe just largely fixed income and just concerns about market structure changes on liquidity and maybe how your funds are responding to that, either in terms of disclosure or maybe just some views on what -- how you're thinking about more stress scenarios, maybe where liquidity conditions could change and given investors' responses to rates and what that might mean for a fixed income manager for you guys..

Yes. So again, I might be repeating myself a little bit. But if you look at the capabilities and what we do on a daily basis, we're always looking at liquidity. Liquidity management has always been an important part of what we do.

The portfolios are stress tested on a very regular basis to get some sense of what is the range of possibilities under different scenarios. The portfolios are then positioned accordingly, if that is a concerns -- some portfolios literally have liquidity -- access to liquidity outside the portfolio.

So again, it's something that we think we're absolutely on top of that we're doing very, very well. And by the way, I think the industry does it very, very well. And I think that's something for everybody to really understand. It's worth probing and pushing.

But I really think that the industry's really focused on it, and they're really trying to do a very good job with it..

Your next question is from Eric Berg from RBC..

Marty, my question is going to be purposefully a general one.

You've talked a lot in this call at various points about how the conversation between investors and their advisers here, meaning in the United States, has changed, given the extremely low level of interest rates, given the volatility in interest rates and given the major swings intraday in the stock market.

It would be helpful to me if you were to sort of focus on the most important ways in which the conversations both here -- well, here have changed. I'd love to know what you would think are the most important ways the conversations have changed, and if you would provide the same answers for Europe.

Contrasting how the conversations have changed there to here, I would -- it would be very helpful..

I think it's a good news development. I think for some of us that were around the TMT period where, if you remember, advice was dead, everything was going online, and there's no room for advisers. Needless to say, that didn't happen, and it's exactly gone the exact opposite way.

There's something like 85% almost 90% of all individuals have some form of advice given to them. And I think it's also gotten much more sophisticated over the years and very focused on understanding clients' time horizons, risk tolerance, et cetera, et cetera. Things that we all collectively know quite well.

And that they're building robust portfolios around that and using a range of capabilities if it was historically 60-40 equity, fixed income, loan only.

The addition of being able to have greater access to a broader range of asset classes and also capabilities that are lower-volatility type capabilities and -- is really, I think, a very, very, very good development. I think it's gotten to, what you're pointing out, I think post-crisis, it's a little bit back to the future.

Different names are being used. But people are looking for income. They are looking for capital preservation, et cetera. And I think that, again, is a very good thing, at end of the day, for shareholders. Europe, I would say, is behind that, but it is evolving quite a bit to that.

To a degree I'd say, the advice channel in the States is probably as well-developed as anywhere in the world..

The next question is from Chris Shutler from William Blair..

So on the topic of bank loans, just quickly, I wanted to ask a couple of questions. So first, I was just hoping you could give us the kind of the total assets that you have in bank loans, the rough split of retail versus institutional, and then how the flows have trended recently. And then in addition, the -- just interested in the credit rating.

From a credit ratings perspective, just -- if you take the portfolio as a whole, how aggressive has your team been in kind of investing down -- further down the credit rating spectrum?.

Chris, so we have about $30 billion, I think, in aggregate around the bank loan capability, both institutionally and retail. The retail bit is the smaller part of that, so I think we're probably somewhere around $7 billion in AUM on that and the rest is institutional. And the current flow picture is -- it's an interesting one.

We're seeing continued interest in bank loans on the institutional side, very much so. The retail side, we saw modest outflows. I think it was about $0.5 billion in the quarter related to -- maybe a little bit more, $600 million, related in the retail side.

So that's kind of the trends that we've seen, nothing alarming, nothing that is necessarily unexpected. And in terms of how the portfolios are being managed, I know they're being managed with a fair amount of conservatism because of the topics that Marty and everyone has obviously raised around liquidity and managing through stress periods.

And so the idea that we are selecting securities that were -- that are most liquid, that are easy alternatives to straight bank loans or using affiliated types of products in those portfolios is very much top of mind. So again, I'd say, our level of sort of management around the conservative side is at a heightened level, as you would expect..

Okay, great. And then a similar question just on real estate.

Could you just give us a quick update where you are there in terms of AUM and how flows have trended over the last couple of quarters?.

So AUM is roughly $62 billion. We've been trending higher consistently in every quarter, both again split between retail and institutional. We're seeing a lot of interest and demand on the retail side, particularly around the geographies that are most interested in income-oriented types of products, and that would be in Asia and Japan as well.

Direct real estate is a global phenomenon that we're seeing in terms of interest and take-on. That really, as I said, sort of continues to pick up, as our capability is one of the few truly global capabilities among asset managers and also one that has done a very good job for its clients historically..

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

That's great. Thank you very much. And Loren -- on behalf of Loren and myself, thank you very much for participating and the questions, and look forward to talking to you next quarter. Have a good rest of the day..

Thank you. And this does conclude today's conference. All parties may disconnect..