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UPDATE 3-Invesco's quarterly profit falls 15.5 percent after UK fine

(Adds comment from analyst, updates share price)

NEW YORK, May 1 (Reuters) - Invesco Ltd, which oversees the PowerShares line of exchange-traded funds, said on Thursday its first-quarter profit fell 15.5 percent, pressured by an increase in operating expenses that included a fine from British regulators.

The Atlanta-based money manager said net profit fell to $187.8 million, or 43 cents per share, from $222.2 million, or 49 cents per share, a year earlier.

The company's Invesco Perpetual unit was fined 18.6 million pounds ($31.3 million) by British financial regulators who said the fund manager exposed clients to more risk than they knew about between May 2008 and November 2012, resulting in their losing money. The fine reduced Invesco's quarterly diluted earnings per share by 7 cents, the company said.

Excluding that charge and other one-time items, Invesco earned 60 cents per share. Analysts on average expected 55 cents, according to Thomson Reuters I/B/E/S.

Invesco shares closed up 2.3 percent at $36.02 on Thursday on the New York Stock Exchange.

Operating expenses, including the fine from the U.K. Financial Conduct Authority, rose 21.3 percent from a year ago to $1 billion. They also included $43 million associated with vacating leased properties and staff severance as part of business relocations during the quarter.

The Invesco Perpetual fine, announced on Monday, was another blow to the unit, which has already seen client defections following the announced departure of the company's best-known fund manager, Neil Woodford.

Woodford is leaving to start a new venture and Invesco Perpetual lost mandates to run 7.7 billion pounds ($12.81 billion) of funds for wealth manager St James's Place in April. Much of that money is following Woodford.

In addition to the April outflows, which will be recorded in second-quarter results, Invesco's U.K. equity income assets under management had first-quarter net outflows of $3.4 billion.

Some analysts say the biggest potential outflows following Woodford's departure are over, however.

REARVIEW MIRROR

"I think the best news of the day is that the worst of it is behind them in terms of institutional outflows," said Luke Montgomery, a Sanford C. Bernstein analyst.

Woodford, who joins Oakley Capital Management this month, is being replaced by Mark Barnett, who takes over management of Woodford's funds as head of British equities.

"The transition to Mark Barnett has gone very well," President and Chief Executive Officer Martin Flanagan said in a call with analysts on Thursday, noting the market has been "extremely receptive" to Barnett's leadership and team.

Net long-term flows at Invesco, not including flows into institutional money market funds, were $6.5 billion.

Invesco's PowerShares QQQ fund had net outflows of $1.3 billion during the quarter. PowerShares is the fourth-largest U.S. provider of ETFs by assets, following BlackRock Inc, Vanguard and State Street Corp.

"ETF flows can be really volatile," Montgomery said, noting that the bigger question going forward for PowerShares is addressing how to scale and diversify the platform. "Even as the number four player, they're still a distant fourth," he said.

Among other asset managers, BlackRock Inc reported a 20 percent rise in quarterly profit, while T.Rowe Price Group had a 25 percent rise.

Invesco ended the quarter with $787.3 billion in assets under management, up $8.6 billion from the end of December.

(Reporting by Ashley Lau in New York; Editing by Chizu Nomiyama, Meredith Mazzilli and Tom Brown)

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