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Invesco gets a new look as its global ambition becomes a reality

FUNDS REPORTER

For several years after the Internet bubble burst in 2000, the battered stock of global mutual fund giant Invesco Ltd. kept treading water.

Invesco suffered from net outflows from its U.S. business because of the bear market and underperforming funds. It was loaded with debt from an acquisition spree that included Canada's Trimark Financial Corp. And it struggled with market timing charges that ended with a $451.5-million (U.S.) settlement with regulators.

"It was the perfect storm," recalled Robert Almeida, a fund manager with AIC Ltd., who holds Invesco stock in the AIC Advantage funds.

Invesco - formerly known as Amvescap PLC, based in London - had a vision of being a global asset manager, but it was really a collection of independently run businesses in North America and abroad, Mr. Almeida said. "It was a good strategy, but it wasn't being executed."

That began changing after Martin Flanagan, a former co-chief executive officer of rival Franklin Resources Inc., was hired as CEO in 2005 to whip the Anglo-American fund company into shape.

And some analysts see Invesco as an attractive turnaround play. A survey by Bloomberg indicates that five analysts have a "buy," while six rate Invesco as a "hold." The stock, which peaked at $50.60 in 2000, closed yesterday at $23.14 on the New York Stock Exchange.

Under Mr. Flanagan, Invesco - which is now based in Bermuda with its executive offices in Atlanta - has slashed costs at its U.S., British and Canadian fund operations. He is building up an asset management presence in China through a joint venture with Great Wall Securities Co. Ltd.

And the money manager has diversified its product line beyond conventional mutual funds through key acquisitions. In 2006, it bought exchanged-traded fund provider PowerShares Capital Management LLC and W.L. Ross & Co., a storied private equity shop.

"This is a results-focused management team" that pared costs, but hasn't fully capitalized on cross-selling to its various units, said analyst D.J. Neiman at Chicago-based William Blair & Co.

Because Invesco is diversified by asset classes, clients and locale, "it opens up opportunities," said Mr. Neiman, who has an "outperform" rating on Invesco.

W.L. Ross raised $4-billion in January for its private equity fund, the largest amount in the firm's history, he said. "Part of that was driven by the vast marketing and the infrastructure support that Invesco could provide."

Analyst Michael Kim of New York-based Sandler O'Neill Partners is upbeat on Invesco because it is "leveraged to the higher-growth" areas of the industry in the non-U.S. market.

"Forty per cent of their asset base comes from investors outside of the United States, including Canada," said Mr. Kim, who has a "buy" and a one-year target of $31.

Credit Suisse analyst Craig Siegenthaler, who rates Invesco as an "outperform" with a one-year target of $35, expects more investors will follow its stock once it has become a member of the S&P 500.

"We estimate it will be by June," he wrote in a report. "This transition will decrease the stock's volatility and increase its relative valuation."

Mr. Neiman said Invesco is also attractive because its shares trade at a 20-per-cent discount to its U.S. peers, but argued that is "unwarranted" given its exposure to faster-growing parts of the industry.

But Invesco "is not a squeaky clean story," he added. Its U.S. fund arm has been suffering from net outflows in higher-margin long-term funds (excluding money market investments) since 2001, although the magnitude of the cash leaving is less, he said.

And its Canadian business, AIM Funds Management Inc., continues to face net redemptions - $1.8-billion (Canadian) for the first quarter - because of its out-of-favour Trimark value-investing style and concerns about the departure of three key fund managers.

"The magnitude of those flows fortunately hasn't been so great that strength in Invesco Perpetual's business [in Britain] or strength in the budding Asian business hasn't been able to make up for it," Mr. Neiman said.

AIC's Mr. Almeida says Invesco is appealing because it is a "pure-play" as opposed to some rivals that are also in the investment banking business and taking writedowns because of the subprime mortgage crisis. "The risk is relatively low when compared against entities that are both asset manager and investment bank."

*****

By the numbers

2007 profit

$673.6-million (U.S.)

2006 profit

$482.7-million

Employees

5,475, down from 7,000 in 2002

Assets under management

$470.3-million at March 31

52-week stock price

$32.25-$19.78

Price/earnings ratio13Market capitalization

$9.8-billionDividend yield

1.9%

© 2007 The Globe and Mail. All rights reserved.

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