Jul 24, 2008
Unidentified Company Representative
This presentation, and comments made by management in the associated conference call today, may include statements that constitute forward-looking statements under the United States securities laws. Forward-looking statements include information concerning possible or assumed future results of our operations, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, assets under management, acquisition activities and the effect of completed acquisitions, debt levels and the ability to obtain additional financing or make payments on our debt, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions.
In addition, when used in this release, words such as believes, expects, anticipates, intends, plans, estimates, projects and future or conditional verbs such as will, may, could, should, and would and any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees of performance.
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We caution investors not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, you should carefully consider the areas of risk described in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q, as filed with the United States Securities and Exchange Commission.
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Operator
Welcome to the Invesco Second Quarter Results Conference Call. (Operator Instructions) Now I'd like to turn the call over to speaker for today Mr.
Martin L. Flanagan, President and CEO of Invesco.
Mr. Flanagan, you may now begin.
Martin Flanagan
Thank you very much, and thank you everybody for joining us today for our second quarter results briefing. I am joined today with Loren Starr, our CFO and also Mark Armour, Head of our Worldwide Institutional Business.
This presentation we will be speaking today is available on our website if you are so inclined to follow along. I will give a brief summary of our business results, and Mark will focus on the Institutional Business the products they are making in the various focused areas.
Loren will go in a greater detail on the financials and then of course we will open up to Q&A. If I can, let me do a little context study again.
This is the second quarter that we had results in United States, and within that Invesco is one of the few global independent asset management firms in the world and we have a presence in many of the world’s fastest growing markets. We believe one of our greatest competitive advantages is the combined power by distinctive worldwide investment management capabilities.
With capabilities in virtually every asset class and investment style and with investment teams on the ground in 12 countries around the world, we think we are very uniquely positioned to compete. By building on this foundation, we believe we are well positioned for long-term success.
So, let’s take a look at the quarter. Let’s state the obvious; the markets were very, very volatile during the quarter.
But in this environment, we continued to focus on what we thought were the most critical initiatives that will continue to improve our competitive position in the market place. Broadly speaking our concentration was, improving our client experience expanding our offering for our clients, where we saw opportunities continued to strengthen our investment excellence capabilities and improving our organization to better position our business for the long term success.
As I said Mark and Loren will speak more specifically about these efforts as we go through the presentation. So, some of the highlights for the financial results for the quarter.
During the quarter, assets under management were roughly inline with the markets. We ended the quarter with $461 billion in assets under management.
The average during the quarter was $482 billion in assets under management, so you could see what happens as the markets depreciated during June in particular. Net outflows during the quarter were $6.2 billion in long-term outflows that is, and that compares favorably to the $8.4 billion of net outflows in the prior quarter.
We continue to see strength in the cash business, where we had net inflows of $4.7 billion. The second quarter results were in line with our expectations.
We think that they are good results particularly given the very challenging markets we saw in this quarter versus where it was a year ago. Our net operating margin for the quarter was 35.2% and this compares to 35.9% in the first quarter.
If you look back a year ago, again, when we were in a very different environment, operating margin was 37%. As I mentioned in the last quarter, we are going to use free cash flow to reduce our credit facility balance and buyback stock.
During the quarter we paid down our credit facility by $200 million and we bought back about $40 million of stock in the quarter. Lastly, our second quarter dividend is $0.10 per share and this is consistent with the dividend we announced in the first quarter.
If you look at quarterly flows for the organization, gross flows, our long-term funds were similar to the level experienced in the first quarter. Again, given the environment, that was a pretty reasonable outcome.
I think it's very instructive to look at the absolute level of redemptions, which were actually lower in this quarter than they were in the prior quarter. Again that we think is a pretty good indicator recognized in this environment that we have been in.
Our cash business again, as I mentioned earlier, a very, very strong quarter growing 5.8% during the period. Month-to-month growth was down, but again so positive net inflows $4.7 billion.
If you take a look at flows by channel, you can see that if you look at the retail business, again, gross retail redemptions improved during the quarter from the prior quarter with few redemptions generally. And the Private Wealth Management business had net inflows during the quarter and again this was an improvement over the prior quarter.
Institutional net flows also improved during the quarter in spite of a couple of sizeable redemptions during that period. But I think again the great color will come from Mark, when he speaks of the Institutional Business in greater detail.
If you look at performance, it’s really the most important thing that we look for in the longer term success; obviously short-term performance across the industry has been very, very volatile. But if you look at our long-term performance it continues to be very strong for the organization overall.
If you look at the combined view of investment performance of our retail assets versus peers and our institutional assets versus benchmark you will see that 71% of our assets under management have a strong three-year track record either been above the 30% peer group or above the benchmark, largely inline with the first quarter. Taking a look at investment performance, a little more specifically, not a whole lot of changes during the quarter, but if you look at the retail investment performance you saw some improvement on both Lipper and Morningstar versus the second quarter.
In Canada there was little change in performance again recognized in investment style as kept them out of energy there is the weak dollar in materials. So, that value discipline was lagging during that quarter.
In spite of the volatility the UK performance continues to be strong really on all bases and same as to Continental Europe and Asia-Pacific was strong longer-term performance. Within institutional equity, the capability to see some improvements on the one and five year basis, in particularly we had some the quantitative equity had a solid quarter, which is not unimportant given the pressure that they had done on to quantitative strategies over the last nine months and 75% of their assets under management were above the Peer Group.
Alternatives and money funds continue to demonstrate strong performance on 1, 3, 5 year basis. What I would like to point out, if you look at fixed income against benchmark, 45% of the assets were beating the benchmark and those have to follow fixed income markets.
No, the benchmark has been a very, very difficult thing to beat in these credit markets and thus we can tell if you look at benchmark returns [Multiple Speakers]. I am going to stop there and turn it over to Mark.
Mark Armour
Thanks, Marty. Look, in the few minutes what I would like to do is just remind everybody of what it is that makes up that Worldwide Institutional business.
Marty mentioned performance, I would like to highlight some improvements there. I think more importantly that I would like to talk a little bit, if I could, about some of the new investment management capabilities and strategies that we are taking into the market, but I am also looking to add.
Then mention again, some of the good cross broader South that we have achieved, which is consistent with this strategy. We have been making sure that we get the best of Invesco to our clients.
So, as you can see on this slide from our perspective, we clearly think of ourselves as a leader in the institutional asset management globally. Critically in my mind, we do have the strength and scale will be relevant.
So, we have got, as you know we will have a $200 billion in assets under management. We have got clients spread across the globe in over 20 countries and I think as importantly, I am sure you aware of this, we do have a very broad and very deep investment capabilities build by strong investment teams.
As well, and I know we've spoken about this before, we do have a very strong range of alternative capabilities and these are needed in my mind to meet our client needs and having them helping us to get significant flows. Then finally, the global footprint that we have with major investment groups and sales capabilities around the world allows us to distribute our strong investment capability, those that are here based in the US to our clients globally and frankly those that are outside the US to bring them back in.
So, we really are looking to take our capabilities around the world. Over the past year, I believe we have improved our position in the market relative to peers.
Our investment performance is good and improving and consistently the strategy in taking, frankly advantage of the markets at the moment. We have been making good efforts in terms of upgrading our talent in specific areas and we are continuing to keep good watch I believe on cost, ensuring that we have the results is to capitalize on these best opportunities.
Turning now to Investment Performance, I think we did see some good improvement over the quarter and now the year to-date with a number of strategies looking to be in better places. Marty mentioned the quantitative group’s much better first half would now have got three quarters, 70% of our assets for the US-based strategies and outbound benchmark, which is really good.
The slide that you have there is, showing the change in one-year investment performance from the end of 2007 through to the most recent quarter. So, we are looking at the end of ‘07 comparing it to end of June and we are looking at it either relative to peers or benchmark.
And you probably discern I am bit demanding here, but what we are really trying to do is to identify, where it’s most relevant to look at peers and all the times I think it’s more relevant to look at the benchmark. So, for example our quantitative strategies really should be referenced against benchmark.
Where as for example, fixed income as Marty said as based against the benchmark, most of us have been underperforming over the last little while. You can see, for example in the liquid assets diversified core and so on, we have got good results against benchmark.
In alternative area, clearly very important for us and again I think you can see some, in a wide range it varies from their GTAA to a Multi-Strategy Fund, which is that sort of thing about it is an internal fund, hedge funds if you like. Equitized Market Neutral, which is that, run by a quantitative strategy group Global REIT and US REIT.
You can see that, in nearly all above the areas, the performance is either good or clearly looking to improve Cash shouldn’t go without a mention; the returns are not only good, but I think as people are well aware, we have genuinely had a lot of safety as well as liquidity in yield, in Karen Dunn Kelley’s term, in this group. The great job that our cash people have done should not be underestimated.
I would now like to move and talk a little bit, if I could about some of the things that we are doing in terms of capabilities and strategies. We continue to look to add capabilities and strategies that are going to help meet client needs in what clearly is a very challenging condition then.
What we are seeing is two trends: First and foremost the interest in alternatives is not (Inaudible), if anything it probably got stronger over the last 12 months; but at the same time the dislocation in the market has provided opportunities for us. So, moving on, you can see that in real estate area, we have got a number of new funds being raised globally at the moment, mostly in the direct space.
These would be funds in different parts of the world, either going to local clients or often times going to clients outside that domicile of the investments. Very importantly for us a Global REITs capability achieved the three-year track record up now.
A very strong record puts us in the top quartile and we are supported: We got some very good ratings from the major asset consultants. As I said, we are also introducing products both in the excellent return areas and also areas to take from came from the market dislocation.
I think many of you would be aware that we recently filed S-11 for the creation of an agency REIT in the United States. We are also fund raising in a number of other areas, strategies and vehicles, which are capitalizing on the credit market dislocation.
In the alternative space, one that you are going to see, is that we have created this what we call alternative data strategy. We are naming it Premia Plus, which is looking to provide fund of hedge fund top returns, but with much increased liquidity.
So, this is interesting. This isn’t an alpha strategy.
This is actually a beta strategy and looking at the beta from the risk side rather than return side. Very interesting, we have got a lot of interest in a short period of time here.
Finally, we are doing a lot of work especially; we all do in this industry, in terms of developing and delivering solutions that utilize the best of Invesco to meet more customers client needs. WL Ross & Co, Wilbur has been doing a lot.
This is clearly a new environment, in which even his people are close to nirvana with all this dislocation. So, they are being able to deploy capital really well at the moment for the funds that were raised last year.
So, there has been an investment in things such as heading back and moving to originality such as Option One on American Home Mortgage and also SpiceJet. And finally our Private Equity Fund, our fund team has been able to build on each capability, by identifying and investing in emerging private equity fund.
So, we have found some great interest in that space as well. Looking now at Worldwide Institutional from a global distribution perspective, this slide just highlighting some of the things that we have done over the last year.
As we are aware the institutions that we are dealing with are sophisticated and demanding and certainly not giving less. But I think that works frankly to our advantage because as a firm we do have Global REIT from investment capabilities.
We do have a broad range of investment capability and frankly having significant group teams on the ground in locations in which we are going to build strong personal relationships with these bigger institutions. So, we have spent significant time looking to distribute the best of Invesco to our institutional clients globally.
And I think as you can see on this page, we are having some real success in terms of distributing this capability to a broad range of different hard-served institutions in geographies in a broad range of geographies around the world. I think, I would like to finish on the distribution side, by saying that, we are working very hard right at the moment in terms of upgrading our talent in certain locations and frankly what's going on in the market has been good for us here.
I think we're able to access a better quality of people than maybe we were able to do a year or so ago when the markets were hot. And, finally, we are capitalizing, and I think we're doing an increasingly good job here in terms of capitalizing on our global footprint by ensuring that our sales efforts are coordinated to get the best of Invesco to these key clients.
So, to conclude, and this is a slide that you would have seen before. If we go to basics, what we believe that we have is strength that we have a wide range of investment capabilities.
I think we are able to package these up in vehicles to our clients as well as probably anybody and in turn take this head into a client’s. For us in the institutional space, we are taking advantages of this wide range of capabilities and the wide range of packaging options to be able to deliver to our institutional clients the solutions that value need.
I would now like to stop and hand over it to Loren Starr. Starr, CFO.
Loren Starr
Thanks Mark. Let me move on to a review of our asset roll-forward for the three months ended June 30th.
As Marty mentioned during the quarter, we do have net outflows of 6.2 billion and that was a $2.2 billion improvement compared to our Q1. Further more I would like to point out that just over half of this quarters net outflow was due to the natural maturity of a single CDO as well as due to the termination of one low fees fixed income account in Asia Pacific and that the blended fees for these two products was actually less then 10 basis points.
Furthermore offsetting much of these outflows was strong growth in our money market product, where we saw net inflows of 4.7 billion in the quarter and month to-date through July the demand remains quite strong for our money market product. We also saw a decline in markets reduce our asset levels in the quarter by $6 billion and therefore, as a result we finished June with $461.3 billion in AUM and that’s a decrease of 1.9% since end of March.
I should also point out that the June ending assets are 4.4% below our average AUM for the quarter, which was $482.6 billion and again, so obvious, but if sustained this would suggest that we are going to experience a lower revenue run rate for the third quarter. Additionally our net revenue yield, excluding performances fees, can possibly decline by about 1 to 1.5 basis points in the third quarter and this is all based on our current asset mix.
Obviously the markets are very difficult to predict and quite volatile and we saw the asset level actually drop below 460 in July and now its coming back. So, if anybody can guess where this ends… but we are very vigilant on this point, since it will have an impact on the Q3.
Let’s move to the operating results on the next page. You will see the total operating revenue grew 2.8% versus the prior quarter and this was primarily due to increased performance fees as well as other revenues.
Performance fees increased $11 million in Q2 and of the $22 million performance fees $13 million were generated by a real estate business with remaining $9 million coming from several other areas of the firm including an Invesco Quantitative Strategies, Invesco Perpetual, Asia-Pacific and our Bank Loan Group. The other revenues increased by $10 million now were largely driven by greater level of the transactions fees within our alternative area, which would include private equity and real estate.
Moving on down the slide you will see the total operating expenses for the quarter a $696 million grew by 1.9% in Q2, and within that number employee comp increased 3.7%. This as the result really due to a full quarter impact of annual salary increases as well as due to the amortization of New Year and differed share based compensation, both of which became effective on March 1st in the first quarter.
The decline in payroll taxes that everyone expected was offset by some increases in the bonus accruals inline with our higher operating income. Our marketing expenses decreased down 13% as Q1in general is our peek marketing quarter particularly in Canada and UK, so this is the seasonal decline.
Our property, office and technology was up 11.2% that should come at no surprise as we disclosed in last quarter, we had about 4.9 million property credit booked in Q1. The G&A line item did increase this quarter by 8%.
Importantly this is really a result of way we account for certain funds and many of our newly launched funds do not allow expenses to be directly netted against their associated revenues. An example of this would be some of the new ETF launches, which are now used in all unitary growth fees structure, which I will mean that we received a higher advisory fee, but we normally pay for these fund expenses that otherwise would have been paid directly forward by the funds.
Below the operating income line, we saw the equity earnings of unconsolidated affiliates decreased quite a bit 46.4%. This is due to lower average AUM in our joint venture in China.
As everyone has seen well publicized we had quite a decline in the Asia markets and China in the quarter. Interest income and interest expense both declined as we used our cash to pay down our credit facility largely during the quarter, although we did about 40 million of stock buybacks.
Then gains of consolidated investment products are offset by the minority interest of consolidated entities, these two line items are really a result of an accounting rule of FIN 46, which requires us to consolidate through these entities that we manage. Finally, other losses in the quarter came in at $1.1 million, that's a decline from Q1 '08 and that reflects a variety of items in the quarter that largely offset each other.
So quarter-over-quarter our EPS was up $0.02 to $0.41. So, with that, I'd like to turn it back to Marty for some final comments before we begin the Q&A.
Martin Flanagan
Great, thanks Loren and Mark. As we said all along, we feel very, very strongly that our long-term success is really dependent on and very focused on our strategy; a very aggressive execution of that strategy, which we continue to follow even in these difficult market.
I really feel that the steps we have taken to strengthen our business to be more effective as it has integrated global asset management business have positioned us very, very well and we are continuing to improve our competitive position in this challenging market. With that, why don't we open up to questions for Loren, Mark and myself.
Operator
(Operator Instructions) Our first question is from Dan Fannon of Jeffries.
Dan Fannon
Good morning, guys. Thanks for taking my questions.
In terms of the performance fee as well as the other income, Loren can you give us some color on what's rolled that I mean how should we look at going forward both in those revenue line and in terms of the sustainability in the levels of those revenue streams?
Loren Starr
Dan, that's a great question. I think they're generally bunchy, there is a difference I think between the performance fees we saw this current quarter versus a year ago, you might remember we had about $22 million in performance fees that came from China a year ago in the second quarter.
And that I think was largely a one off performance fees We actually generated performance fees from a variety of areas within the firm, which is what you'd expect given are significant portfolio a different businesses. Obviously the magnitude and how they comment is much harder to see, I mean I think there is a substandard level of some amount of performance fees, if you look at us historically every quarter we certainly seen some depend upon sharp generally around the first quarter and the fourth quarter.
I think that still largely the case however, as performance picks up certain of our businesses particularly IQS, Invesco Quantitative Strategies can generate quarterly performance fees and so that is something that obviously we look forward to, but its hard to predict exactly how big they are. In the fact that real estate is coming in with the large performance fee, I think is something somewhat a bunchy quarterly phenomenon, but we do expect more performance fees its just hard to say exactly in which quarter they are going to come in.
So, I know that's not a perfect predicted model, but we do think there is certainly a sustainable amount of performance fees that once in modeled into our numbers.
Dan Fannon
Okay. And in terms of the other income it seems like the transaction activity picked up and if you look at the comparison to 1Q, is it safe to say the 1Q level was more of a depressed level and what we are at today if you look comparison to '07 or what you did in this quarter is more of a standard type I'm right.
Loren Starr
Again I think it's a hard because there was a quite a bit that was come, I mean again the great color will come from different areas. We have real estate and then we had a private equity business coming in with these type of transaction fees and they're actually a variety of different ways that these things are, the transaction fees in broad return they cover as many different thing.
Again I hate to give you a forecast, I do think probably Q1 was at level. I am not sure if Q2 was that a run rate, but it probably somewhere in between is the reality.
Dan Fannon
Okay. And then lastly, in terms of the comp expense, your headcount was down about 2%, do you see comp going up.
Is there some mix issues as performance fees go out, in some of the mix of revenue will see comp go up or is it some of the things you just talked about some of the cost just coming in from higher salary increases.
Loren Starr
Yes, it really as primarily the salary, but even more so probably the amortization of the stock that coming in that they came effect of March 1st. So, I'd say, our bonus pool, cash bonus pool will generally move inline with operating income.
So I mentioned there was some growth in the bonus pool, which offset some of the payroll taxes, but the increase Q1 to Q2 is really due to the salary reason and the amortization.
Dan Fannon
Okay, thank you.
Dan Fannon
Sure.
Operator
Next question is from Ken Worthington, JPMorgan.
Ken Worthington
Hi, good morning. Couple of questions, in terms of performance, particularly in the US and in equities doesn't seem like its where it needs to be generate sales, you've been making changes to personnel.
Can you talk about what changes were made during the last quarter and other strategies or things you are doing over the next second say, half of the year, which go to address an improved performance in the US and equities buckets?
Martin Flanagan
Yes, this is Marty. We do the best we can give sort of a summary of investment performance in that some times because services as a whole.
Let's talk about it, if you look at each performance right now and this is asset weighted, so that has an impact and also, right now the core equity teams performing very, very well above top quartile 1, 3, 5 years. The growth team, as you know we've made some leadership changes earlier there in the year, the largest fund had been really a drag for us and maybe you should change there, the person taking it over manage as a fund that's of a top quartile performer of 1, 3, 5 years.
If you look at the growth line up, it's really quite strong other than this one fund, where again we made this leadership change that's it feel very good about that. The value suite is relatively under performing and it's not this similar to what we are sort of seen in this environment, we feel good about the team.
We think they are very talented, but they have suffered with the environment that we have been. The other thing that's happened is sort of the broadening of what's available in the suite and that was again over the last couple of years and introducing IQS team into it the Japan portfolio being managed out of Japan.
The China portfolio being managed out of China, etcetera, but again those are not large funds because they are relatively new. We did also realign IQS manages all with one funds available now in the lineup and again we've made some changes on a smaller global bond that's being managed out of a broader core equity team in Atlanta.
And also a very, very important the international team has a very, very strong three year, five year track record it is lag some year-to-date, but again its consistent with this strategy, but its still very highly ranked portfolio. So, when you get at the fund level and you look at the suite I thinks its stronger than, what these sort of roll ups on a asset weighted basis, so in that's the feedback we're getting and I really feel very good about our positioning ourselves there.
Ken Worthington
Okay, great. Thank you.
Then another initiative that you have talked about in the past of the cross-selling opening up different products to Invesco's various distribution channels and again there can we get an update for the quarter and then an outlook for the second half?
Martin Flanagan
Yes, maybe if you want have Mark talk about that as he has been very instrumental in helping to get a number of those. If you can, Mark that would be great to sort of.
Mark Armour
Yes, thanks Marty. In the slide, the slide that had on achieving global institutional distribution.
I mentioned then we highlighted some of the successes there. The difficulty for me is maintaining the confidentiality from client level, but actually we've had major [sources] because we have seen here from our US based investment management groups, into European, into Asia particular.
I think we're seeing some significant interest and certainly obvious areas, the areas with large amounts of assets. We've had very good ongoing success with IQS with the international and global products, They are now selling those in 15 or 20 different countries around the world.
A Global REITs capability is one that again has got large take up globally and frankly the interest notwithstanding what's going on in the markets at the moment is only got bigger and better. In the absolute returns space of the private equity space say, people are aware that will this fund last year was distributed globally.
I think is looking forward, I can't say too much, but as new funds come forward I think you'll see that as we have got a global distribution machine particularly on the institutional side, frankly humming a little bit better than it might have been in the past. I think you're going to see that the globalization of the distribution is only going to get better.
I think we've also made a lot of progress in terms of working with our cash folks. I think we've got a great, great capability there.
Again we're broadening the scope of what we're doing on the cash side. So, we've got some significant mandates in the truly institutional space in Asia for example, billions of dollars over the last quarter.
So, we are really starting to see what I believe is increasing momentum there in terms of taking in particular the major capabilities that US headquartered if you like that also bringing some of that specialist capabilities in other parts of the world, say for example, out of Asia, out of Japan, out of China and out of Europe to the rest of the world.
Loren Starr
And I think also Ken, if you look at other elements, that ETF, which were launched earlier in this year, again we think that's a longer term phenomena, but those also would be introduced in Europe at the beginning of this year. They'll be introduced into Canada shortly here and though again, I think its and if you look at the other make up of the different investment teams, where they are seen success it just continues abroad, if to be clear its not what we wanted to be and that is what we looking at is a great, great opportunity.
Ken Worthington
Thank you.
Operator
Next question is from Jeff Hopson of Stifel.
Jeff Hopson
Okay, thank you. Can you comment on the alternative flows maybe a little bit softer in this quarter and in general can you give us a sense of the institutional pipeline across the board in a toughest environment?
Martin Flanagan
Okay. Look I think if we look at the, just in terms of flows for the quarter on the alternative space, the numbers that have been reported have been heavily biased by the fact that, there was major CDOs that comes maturity in the quarter.
So, that was sort of frankly hiding what was actually going on in the alternative space. We're asking in alternatives is, if you got area by area so lots of activity on the real estate side, I mean the commitments so this will run ahead off of investment.
So, what we are going to see is in terms of report you are aware that this going to be a lag between up doing fund risings, which for example happening over 2008. But given the market conditions, the investment of those funds may not happen in a big way until we get through.
I know what I intend, but a lot of activity on the real estate side, which has been happened and among because of lot of these private market thing I can't actually talk to you in detail about them. Secondly, on the private equity side, we factually have been, again, increasing the amount that's going into both the fund size WL Ross & Co we know is not that we can talk about right at the moment.
But I know that over the next 12 months they will be think that will happen in the space, when we cancel to bad if we will. We are also doing some things in the hedge fund area, so that was a good wind from outside, which I think public in to Wilbur's from they make public fund sort of these case to the US in to the Wilbur hedge fund, so that will be funded.
We'd expect the funding to be this quarter and so on. I think what I will be saying is that the momentum there, the flows within the alternative space a bit a lots of performance fees they going to be, they going to be lumpy, but the trend there in turns of the revenue that's coming from the alternative is going to continue to be increasing trend.
I think in that regard it is important to recognize that, if you look at the sort of total institutional flows and what we are seeing negatives there, do understand that we had flows, which was still obviously had some either side had, say they even some other fixed income areas much, much lower than the inflows we've been receiving and so on. And that the revenue base, a revenues in institutional frankly continuing to increase.
Jeff Hopson
Okay. And how much was the CDO?
Martin Flanagan
Nearly 1.5.
Jeff Hopson
Okay. And then on the money market business, any near term expectations for that business it seems like it soften overall in June, but any thoughts on the direction of money market.
Martin Flanagan
Yes, Loren might want to add something here as well. But do remember that we have gone over major quarter ending with June and so what's happened is that virtually in all couple of weeks of June, we see some significant outflows and its come back in.
So, if you to look at where they are in today, its going to be meaningfully different in the right direction then it was at quarter end. So, but trend continues to be there and I think from my side what's important is that working with Karen's cash team it was just fabulous Karen Dunn Kelley's cash team.
We really are doing a meaningfully better job in terms of globally distributing this capabilities then we have got a very strong presence in the US market place include our presence outside that presence is expanding in. And frankly the way that group is being able to manage the cash portfolios means that outstanding within that market statement is continuing to improve.
So, I wouldn't, the trend and impact is well outside is really a quarter end phenomena for the June quarter.
Jeff Hopson
Okay, great. Thanks a lot.
Operator
Our next question is from William Katz of Buckingham Research.
William Katz
Hi, thank you. Good morning, everyone.
Couple of questions, firstly I guess in terms of capital management, looks like you had a preference for debt reduction this past quarter. So I wonder if you could help us.
Thinking ahead, is the one point some-odd million shares you repurchased this quarter, which is down pretty sharply from where you are running in last four quarters or so. Is that a new trend, so curious of the slowdown in light of the, what's happening with the share price.
That was my first question and then second question it's looks like headcount is down again sequentially about 2%. I understand the seasonality and the impact of amortization, but how should we thinking about conversation leverage on a go forward basis as well?
Loren Starr
Bill on your first point I think that we had telegraphed in their first reported that, we were going to use some of the cash to pay down some of our credit facility, which ended, at the end of first quarter around $387 million. So, it's back its down about $187 million now, so again with the markets being, where there were assets going down, the debt ratio it actually, the credit ratio is actually took a step back because we had completed $130 million contingent payment for PowerShares, there was a contingent payment associated with WL Ross business as well of our capital hierarchies as we already said you will need the cash first for growing organically if we can.
The next will come from acquisition, we never said we were going to do acquisitions and we are ought to acquisition. So, in the way peoples should think about these contingent payments, these are going to be used, when we using cash flow to obviously pay for acquisition as suppose to taking on debt generally and that's the way to think about it.
I say we're did pretty much take a big dent out of the credit facility. Our capital priorities remain intact.
So, again in normal markets I say we will be using the both of our cash flow really to do stock buyback These have been anything, but normal markets however, I do think we are not going to say quarter-by-quarter this is our commitments to start buyback. We do think the price is interesting and interacted one, but there has been a degree of sort prudent supplied to take that leverage down.
So, again I think the broad messages our capital priorities are intact. This was a largely doing what is everybody do in terms of paying back for the acquisition and then beyond that we are largely maintaining our capital priority.
I don't know…
Mark Armour
Yes, I agree. Bill just on that and this also on the competition there, I think the point you're trying to identify too what would sound like inconsistencies with where we are in the market.
And the stock grants were granted based on the last years' result. They kick in just by the time you get through all the internal prophecies at this time.
So we continue to be very focused on people management, but what we are doing is upgrading talent at the same time. So there's not an inconsistency with how we're managing the business, it's just the timing of these things more than inconsistent actions.
I hope that helps, but that's.
William Katz
I didn't think it was inconsistent. I'm just sort of curious if, with sequential decline and that we would see some further operating leverage as revenues for repair?
Martin Flanagan
Dealing with the question, it literally when they just heard or when the math started to kick in as opposed to look at work. Our overall compensation philosophy is in place and we are less -- the bonus portion will be less.
And if we are more, there'll be more.
William Katz
Okay. So from here just you give quite a lot there Loren.
From here, where are the contingent payments that are left with WL Ross or PowerShares. And so if that slows for a bit of time, then all others being equal, buyback would step up?
Loren Starr
Well, yes. I think the one other wild card in all this is and with our second priority is to do acquisitions if they strategically make sense and if they hit certain hurdles that's always a wild card, and I think in these markets obviously opportunities do seem to be surfacing quite a bit.
I'm not saying we're looking at acquisitions, but I do think it is one of these things that if we're going to live by our capital priority, we're going to continue to look at these types of opportunity as well. But again, ex acquisition, yes.
Absolutely stock buyback are back in the number one priority.
William Katz
Okay, true. Thank you.
Operator
Our next question is from Cynthia Mayer of Merrill Lynch.
Cynthia Mayer
Hi, Good morning. Just a couple of solid of questions.
Could you go over one more time the gains, I know you said FIN-46, but what assets are moving that around, and is it possible to break it out in to buckets? Is that Canada?
Loren Starr
No, no it's really related mostly into two private equity fund investments that we had, and so in the second quarter gains that we saw, really rose from evaluation increases into investments. Clearly volatile sole category is pretty also in terms of evaluation.
The other thing is to bear in mind that those gains are about $1 billion portfolio, so it's really not that material when you look at it as a return of that billion. So hopefully that's a little helpful but its all in the private equity area and that's were they are coming from.
Cynthia Mayer
And so that's all mark-to-market as oppose to a realized gain.
Loren Starr
Some are mark-to-market and some are evaluation if they are not public stock. Again then again the important thing is that, it's been offset completely by the minority.
So in terms of the P&L, the way to think about that FIN 46, is more immaterial to our earnings, it is there because we need to disclose it for FIN 46 purposes, but it is either other entities obviously that we are just bringing it in if we have to.
Cynthia Mayer
Got it. Okay and then on the new funds and ETF launch cost, is that line item you would just sort of expect to built forward.
Those are one time cost associated with launches, but do you have a pipeline of launches that you think will make that go up some where.
Loren Starr
Well I think that those are more than one time cost, I think they are sort general servicing cost. It is the mixture of some one time and some services in that number.
Again importantly those expenses are being offset by revenues and also if we are going to the unitary fee essential you are getting a higher management fee or advisory fee all in fee that's offsetting these costs. And prior to that you basically had new cost been taken for directly by the funds.
The ETFs that we are launching are all now using the unitary fee, so as we grow ETFs, you would expect to see that line item potentially grow. Again offset by revenues apart.
Cynthia Mayer
Okay. So I guess it's like headwind to your margin because of that.
Loren Starr
Yes –Yes, it is true.
Cynthia Mayer
Okay. And then on the equity efforts, I'm just wondering to what degree to think the changes you've made in terms of leadership actually are causing some of the outflows.
Martin Flanagan
Cynthia actually, strangely enough, I mean to the contrary Morningstar is actually [seeing] some really positive reports of out there, the leadership changes, which is great. So I think quite frankly if you look at the absolute redemption levels, they are actually going down not up, and the redemption rate staying about the same.
So those are for me, call it small wins, but I feel really confident about some of those changes. And again just to beat that, we are getting from gate keepers and the platforms wins we are winning are besides they've ever been.
So yes I understand they are sort of hitting it there, but you have the timing of when they are hitting alike. But those important indicators that we are looking to for the other future.
Cynthia Mayer
Okay and one last small one. You said that their marketing spend are seasonal, do you expect that to pop backup next quarter?
Loren Starr
Again I think probably there's a bigger potential in fourth quarter, third quarter it maybe a little bit higher than the second quarter. It's hard to predict exactly, I just think that it's certainly coming off for the first quarter.
First quarter was more the anomaly than the second quarter.
Cynthia Mayer
Okay. And tax rate, is this the good run rate?
Loren Starr
Yes, exactly.
Cynthia Mayer
Okay, thank you.
Operator
Next question is from Mike Carrier, UBS.
Mike Carrier
Thanks guys. Recently you have been pretty active on the new product front with the active EPS and then you had the Wilbur Ross, the partnership, and in the agency security IPO.
Just curious, do you see more products or opportunities in the pipeline, given certain client events. And then also any type of color around the size or fee structure on these alternatives, particularly like the Wilbur Ross.
And then finally just, do you have any gaps that you feel like, I think in the past there really haven't been any big gaps that you wanted to fill. But just what we are seeing in, I'd say the financial services sector with particularly banks needing to raise capital and offload their asset management arms to raise capital.
Would you be potentially interested in some of those opportunities, if they came up at pretty good prices or do you feel like you are pretty good in terms of your product capabilities?
Martin Flanagan
Just on the product launch side, that's where the balance we are striking right now. We have a leadership position on ETFs we believe in and we want to continue to go forward with that and where there's client demand, we'll respond to it, with light in the face of that is, in a tough environment you want to spend the money.
Our view is we really want to take advantage of the things that we can right now, and so we need to continue to focus on introducing product where it make sense to the market place. Secondly, our private equity capabilities are strong and there is no fee pressure, its just highly in demand skill set in our distressed capabilities.
So we don't see that. And I think as Lorren has addressed there is a lot of abilities in the market place as to what might be happening in the financial services dislocation.
And again our first priority is organic improvement and growth, but again if there are opportunities with our strategies it makes sense, we will pay attention to them.
Mike Carrier
Okay and then one final one, you mentioned and its not specific to Invesco, but just the pressure on the average AOM going into the third quarter we are only in the 27 days into the quarter, but given what the markets did in June, the revenues will be under pressure. When you are looking at your expenses whether it's on comp, marketing or G&A.
Is there anything in the short-term that you feel you guys can manage down for the second half of the year or are there still things that you guys needs to invest and then spend in and there's just not going that much possibility?
Loren Starr
Yeah I think we're committed to continuing to invest in the areas that are going to be very important for our future, and so that's not going to be sacrificed and we're going to do that through funding it from areas that are quite unclear, probably less important. So that's an ongoing process, its one that we've been engaged in for several quarter, and actually even longer than that since it really started with the whole transformation of the organization.
I think the obvious areas like discretionary spending are areas that we continue to look at closely, and I don't think there's always more than you can cut at someplace but for us we have a pipeline of projects that we believe will help us find our growth coming into the second quarter and into 2009. So we feel good about the environment in the sense of being prepared for it.
We had presumed that the markets were going to be this way and the fact, unfortunately, its coming true, so I think we did feel like we were well-prepared for where we are today.
Mike Carrier
Okay. Thanks, guys.
Operator
Next question is from Robert Lee, KBW.
Robert Lee
Thanks. Good morning, everyone.
Just curious, could you comment a little bit on you're China JV, at least in 2007 maybe somewhat before that, that would've been a nice contributor, I believe its including your assets under management, its have been a nice contributor, some growth there to flows and sales. Can you, maybe bring us up to speed on what's been happening there lately and how you think about that at least over next several quarters?
Martin Flanagan
Maybe I'll make a couple of comments. Again, Greater China is we think a real strength of ours, China in particular is a real strength of ours.
And we think if you look at those JVs I would just call them Invesco Great Wall, we are one of the very few, in fact the only one that leads with our name, and we have 3.5 million clients in China investing in local Chinese securities. We know what's happening in the other markets there obviously, so that clearly had an impact on contributions to our businesses here.
But long-term we just think it's a great, great opportunity. And out of that we are seeing, as Mark talked about earlier, we are participating in a number of these which I would call more institutional-type wins coming out of that area.
So we are just very-very excited about the opportunities there in a longer-term?
Mark Armour
Obviously the assets were impacted just through the market's anomaly and redemption rates spiked up a little bit. But it is actually given decline it's not been a terribly bad experience, people are still buying funds in China.
There has been a general lack of new fund launches, so people are actually buying existing funds. So that's been a very a positive trend.
My understanding is, given the Olympic and given where things have been with the earthquake, that lot of the new fund launches have just been on hold until that clears out. So we are actually, I would say, optimistic about the Asia Pacific business going into the last half, probably better positioning than in the first half.
But we still maintain the dominant position as Marty mentioned and we are still continuing to invest in that business with the expectation of its coming back.
Robert Lee
Okay. And may be a follow-up, I know you've spoken a bit about PowerShares continuing to roll up products there, could you may be just give us little bit more color, I am assuming the trends are ordained differently else where, but in that business are you experiencing more volatility in that business, I don't mean from an asset perspective but kind of creation and redemption?
Martin Flanagan
Yes. It wouldn't be precisely correct, but generally correct, I mean, since we teamed up with the PowerShares I think almost everyday that I look at net flows, we have net flows every single day to varying degrees as the market fell off a slowdown but literally through June in particular we saw days of net outflows, so the volatility did, general trend downwards, investor preferences but then had some outflows but again yet it has sort of gone way.
Still has been more volatile, but the real opportunity for us is that we think we are very early into where would this part of the business will end up. It is a vehicle and its not to make any other vehicles go away, but the fact is its here to stay.
And having more, as it gets more adopted by the advice channel with more solutions within them is really the opportunity going forward. So, we think the mid to long-term horizons very, very strong.
But yes it has been volatile on the short term.
Mark Armour
And just one more point to be more specific, actually, first PowerShares were ahead in the second quarter versus the first quarter by almost $1.5 billion and is actually little bit more than $1.5 billion, and the redemption rate, which was high in the first quarter actually has come down quite a bit. So I would say we are looking actually more normal with our ETF flows than been in the first quarter.
Robert Lee
Okay. And just one quick follow-up on PowerShares, I mean do you have feel, do you have an effective way to track as your wholesalers and I am assuming they are out there talking about PowerShares and how browser should use them in portfolio, do you think you have an effective way to really track about how that's been working.
Martin Flanagan
It is difficult thing there is no question about it, it's just not near where, in the mutual fund world its all very well, delineated and clear, its much less clear, just because of the nature of the vehicle, of course you need to figure that out and we have done the best we can to figure it out and incentivize people appropriately within their suite of skills, but yet you are right on the topic, that's unique.
Robert Lee
Do you feel comfortable that even though it's tough to track, that's been having an impact?
Martin Flanagan
Yes, no question, absolutely, there is an impact.
Robert Lee
All right, great. Thank you very much.
Martin Flanagan
Thanks very much.
Operator
Your final question is from Michael Kim of Sandler O'Neill.
Michael Kim
How are you guys? Good morning.
Martin Flanagan
Hi, Michael.
Michael Kim
I apologies for missing this, but just for clarification, you had the $1.5 billion redemption from the CDO product and then a sizable fixed income outflow during the quarter, can you just clarify what the size of that fixed income account loss was and kind of the rationale for the closure there?
Loren Starr
I think the fixed income was somewhere under $2 billion and I think it was inflation going from fixed income product we had in Australia. I don't have the rationale for why it is still…
Martin Flanagan
I mean it was two things, it is very big client that we've had in Australia. They have been changing their investment strategies, they have been doing two things in terms of taking some assets in half and this was an example of that.
And they are also changing some of their strategic asset allocation more in line with some of the trends that we have pitching the clients with. So this was one that our Australian colleagues were notified about more than, we've known about this for more than a year, it's just the exact timing as to when it was going to occur.
So, it had nothing to do and this is always frustrating, I mean couple of them very long term clients. Also in the IQS there is this year where we have delivered two mandates plus they are making strategic asset allocation changes often times, to move, say, from (inaudible) index and we have had a couple of those this year which have been to that of institutional side.
Mark Armour
And again that was a pretty low fee mandate.
Michael Kim
Okay. And then just more broadly, I understand the markets have pretty volatile really across all regions during the quarter, but aside from UK, it seems you've got ongoing outflows really across Europe and Asia.
Can you just talk a little bit about where the redemptions are kind of focused either by product or channel and then do you think this is just really a function of kind of the overall market weakness as oppose to kind of a longer term shift in risk appetites more generally?
Mark Armour
Well I will just talk very quicker. On the institutional side, frankly our inflows are very much in line with their expectations, the outflow is a little bit above and where they have been above it's been often because of these completely unexpected of some of these strategic assets allocation changes.
So on the institutional side there is no trend. I think it is different though on the retail side.
And we are seeing just the normal reactions to the volatile markets. And so, if you look at the net numbers I mean typically what's going on, its not that the outflows have increased, but rather that the inflows have slowed, which is frankly typical retail investor behavior in market conditions like this.
Marty?
Martin Flanagan
Let me just add to that. I think we have seen kind of year or so ago, just on the strategic side, you did see structured notes really take a meaningful part of largely mutual funds, lowest like in the last 12 months, 18 months, so that was probably more the macro factors that you were talking about, what was out there.
So therefore a difficult market in total there but we're still positive on the outlook. Again we think things like introducing ETFs into that market will serve us very, very well and side by side to our opening the products there, with some of those changes.
Asia again, what's happening in those markets and generally more that retail the behavior is such though. Mid to long term we are positive, I think risking appetite will come back here.
The question is when? And I'm sure all of us on the phone have a different sense of when that is.
But the best thing that we can do in the meantime is just keep pushing forward to making ourselves better or you see lack of that gross market change, its really the platforms the institutional client for in particularly they just continue to make their decision. So, we would expect that client to continue to move forward and more quickly towards this product and what we sell to our client.
Michael Kim
Okay. That's helpful thanks.
Martin Flanagan
Okay. Well, thank you very much everyone.
Again we thought in light of the environment a good quarter we are again just recognizing environment we are in so we are keeping our heads down, but at the same time we are very, very focused on continue to move the business forward and putting us in a position to be just that much more competitive when this market environment changes. We expect it will.
So, thanks very much have a good rest of the day.