富蘭克林資源 (BEN) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank-you for standing by.

Welcome to the Franklin Resources 3rd quarter conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

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As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, member of the Office of the President, Mr. Marty Flanagan.

Please go ahead, sir.

Thank-you.

Hi, this is Marty Flanagan, along with Greg Johnson.

And thank-you for joining us for our 3rd quarter earnings release conference call.

Before we get started, I'd like to read our policy on forward-looking statements.

Statements in this call regarding Franklin Resources business, which are not historical facts and/or that speculate about future events are forward-looking statements within the meaning of the private securities Litigation Reform Act of 1995.

These forward-looking statements are subject to a number of risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from those reflected in such forward-looking statements.

These risks, uncertainties and other important factors are described in more detail in our 10-K.

So, with that, let's get started.

We're going to follow the format that we have historically, where we'll talk about assets under management flows, highlights on the results of operations and some business highlights and then turn it into question-and-answer session.

So, in summary, I think we've made some real good progress in a difficult environment.

Operating revenues were $660 million this quarter as compared to $626 million last quarter.

Net income increased to $125 million this quarter as compared to $120 million last quarter or 48 cents per share as compared to 46 cents per share.

And we continue to see net in-flows across all major investment objectives, although asset center management were offset from market depreciation from the markets.

Assets under management were $270 billion at the end of June, down from $274 billion in the prior quarter, but average assets under management were $274 billion this quarter, up just under 3% from the prior quarter.

Needless to say, the market has had a negative impact on our assets under management posted September 30th.

But the composition and diversity of our assets under management are really working to our benefit.

At June 30th, equity assets represented 52% of our assets under management and when you look within that, 72% of those equity assets are value-type assets. 14% growth and the balance being blend.

Fixed income represented 30% of our total assets under management.

Hybrid, 14% and the balance, money market funds.

As I mentioned, flows continue to be quite strong with inflows of $5.6 billion during the quarter.

That represents the seventh consecutive quarter that we've had positive net flows.

Year to date, we've had net inflows of $16.6 billion and that compares to $8.9 billion of inflows for all of fiscal 2000 and outflows of $2.4 billion for all of fiscal 2000.

And one of the areas that we started to really see a pickup is in global international flows.

We've had the best flows into international portfolios since March of 1998.

And now I'd like to highlight a few areas in our operating results.

Investment management fees increased 5.2% in the quarter to $384 million and that is on the back of the higher average assets under management during the quarter, but also we saw the mix and -- of assets shift to higher yielding fees.

The effected fee rate was 56 basis points during the quarter as opposed to 54.6 basis points last quarter.

Underwriting distribution fees increased 8% quarter-over-quarter.

And although much of that was coming from a mix in different class shares.

We had more sales and class "A"-type shares in the United States.

Shareholder servicing fees were up slightly quarter-over-quarter.

We have 9.7 million shareholder accounts as compared to $9.5 million last quarter.

I do want to highlight a couple of areas.

Last quarter we told you we would have the closed accounts in Canada of about 365,000 accounts closed.

That did happen this quarter.

Last quarter, excuse me.

During this quarter, the U.S. shareholder accounts will decrease by $1.2 million but to put that into -- excuse me, 1.2 million shareholder accounts.

To put that into perspective, last year that number was 1.9 million shareholder accounts and the prior year was 1.8 million.

So, we all continue to see a net increase in number of shareholder accounts and decreased accounts in the period.

A couple items around operating expenses, comp and benefit did increase about 5% this quarter to $167 million.

That was driven by the reinstatement of salaries, most people recall we had rolled back prior in the year, fiscal year.

We had 6,457 employees at June 30th.

That's up slightly from last quarter by about 13 individuals.

In regard to advertising promotion, that increased about 15% during this quarter and that is on the back of our efforts to take advantage of the good news we have around our investment performance across all of our products.

The other area that increased was the other lines, largely G&A, we had a lot of activity going on last quarter.

There was a lot of travel and a lot of business initiatives that we were focused on.

Needless to say, we wake up in a very different place in the month of July and will be very focused on containing discretionary spending.

Although, one important point, we are feeling the impact of some expenses which we can't control, largely around increasing insurance rates and I think that will not be unique to us, but to everybody that is in the industry.

Another area to highlight is investment and other income was up strongly, about 22% quarter-over-quarter.

Much of that is a result of the weaker dollar having a positive impact on our Canadian business and our European business as we translate that back into U.S. dollars. -- during the last quarter.

And then, our operating margin was 23% this quarter, relatively flat for the last three quarters.

We think that's really quite good considering this, once again, very volatile environment that we're in.

And so, in summary, we think we've made progress in a difficult environment and the results reflect that.

We think they're good results in this environment but post-June 30th, clearly we find ourselves in a much more difficult environment.

We will be very focused on delivering good results for our clients as we always are and doing everything we can to ensure that we're operating most efficiently and effectively as possible.

And we think we're going come out of this challenging period in a very, very strong position.

So, with those comments, I pass it on to Greg.

Thanks, Marty.

And good afternoon, everyone.

I'm going to start highlighting the investment performance for the -- for the past quarter and then talk about some of the business unit developments.

First of all, in the investment performance, things still looked very good.

Obviously some of the numbers here in July have gone into negative territory for year to date, one-year numbers, but still, on a relative basis look very strong.

Looking at our overall rankings for our long-term retail mutual funds, approximately 80% of our assets in the top two quartiles, consistent with the prior quarter, getting more awards than any other company.

And in the 10-year period we increased from 76% of our assets up to 87% for the past two quartiles, so we're pleased with that .

And Templeton continues to have strong relative performance as well as mutual series.

We look at some of the larger funds for the numbers -- year to date numbers, we're still in positive territory through June.

Obviously that has changed, but even through June is very strong when you're looking at Templeton foreign fund up 4% and growth up 2%.

We're continuing to see a lot of momentum on the international side.

I thought I'd touch briefly just on the Morning Star ratings, that's something that obviously everybody is concerned with going forward and what impact will it have on retail and mutual fund flows.

Looking at our case in particular as reported in the "Wall Street Journal", on an overall asset base, we went from 71% of assets at four and five-star rated funds to 53%.

But if you really look at where the underlying changes occurred it was more in the tax-free bond area with the change of methodology there and going to four categories.

We saw a lot of our larger funds go from four and five to three stars.

I think it's important to note that in the -- in the municipal bond area it is very hard to measure returns and four and five-star funds tend to have less of an effect.

Because obviously they're sold more on yield.

We run ours with yield first in mind with stability of principal.

Sometimes you will have other funds with lower yields guessing durations and things and having slightly better total returns.

But we really haven't seen any impact to date, even in July we've had very strong municiple bond inflows.

The other area effected was mutual series, with a couple of funds moved to three stars.

And really, again, if you look at the lippor categories, ranked against multi-cap, which is the appropriate relative category for that group, the new morning stars categories don't have a multi-cap and were put into a mid-cap, resulting in them being a little bit lower than the lippor averages.

The Templeton funds actually had an increase where the developing markets increased from 2 to 4 stars and all the other funds were relatively unchanged.

Net/net, we think this is a good step for the industry, it is a better rating system to look at relative comparisons and really, if you look at the lippor rankings, a better measurement of performance, our funds still have been performing quite well across the lineup.

Looking at the business units and U.S. retail, we've really solidified kind of the number two position behind American as far as growth sales for the year.

Some of the big initiatives we've had are paying off with regard to cross-selling financial advisors and getting them to sell three or four asset classes and we're measuring that very carefully.

And those metrics are increasing with our top producers and another initiative was to get more core growth funds.

We've seen that increase 60% for the four funds we've been focusing on from the prior year levels.

On the service front, things look very good again with the metrics we look at and all the service ratings are very strong for the transfer agency.

Looking at the other business units, the private client group, sales remain strong for the quarter and total accounts reached all-time high by quarter end and we were pleased to see we recently got a new mandate in for an all-capital multi-discipline combining Templeton and Fiduciary Trust.

And that was recently added to Salomon Smith and Barney's consulting group.

We recently announced a creation of a new retirement division, which really ties together many different efforts and many platforms that we have with our strategic alliance group that, historically focuses on investment only and some advisory relationships as well as 529 plans.

And combine that with our fully-bundled 401K into a retirement division.

We think that's important.

We have 81 billion in retirement assets.

We think it really creates more visibility for Franklin Templeton as the retirement choice.

We were pleased to see in the U.S., we received Worth Magazine's Editor Choice for Favorite Mutual Fund Family in the U.S..

That speaks to the breadth of products and the overall performance.

Looking at the institutional business it continues to be very strong.

The pipeline for Templeton and the Global Mandates continues to look good as far as the pipeline and potential of new business coming in.

We talked about winning the Calper's Mandate that, will be funded in this quarter it was not funded last quarter.

As well as a new account combining Templeton and Fiduciary in a global core strategy, a new area that we can now offer.

We received our first mandate on an institutional level there.

Looking at the quarter again, we've been very pleased in a relatively difficult environment and look at July flows and -- and again, I think relative to the industry we're going to look very well.

We're probably about flat for month to date as far as flows look and munis continue to be strong in the shaky market environment.

Now I'd just like to open it up for your questions.

Thank-you.

Do we have any questions?

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Our first question comes from Henry McVey with Morgan Stanley.

Please go ahead, sir.

Good afternoon, just a couple of questions.

One, other expenses jumped up quite a bit, what happened there?

A lot of it was, you know, T&E during the quarter, we have many, many initiatives and conferences going on during the quarter and then also started to feel the impact of increasing insurance rates.

Those were the two main elements within that.

And half to insurance and half to T&E?

More T&E?

Probably more T&E.

Second thing was on the -- you guys went for the 5% increase last quarter, I think, and we had thought it was going to be around $2.5 million.

Was it -- was it for the -- all three months or two months?

Can you just remind me where we were on that?

We had two elements, if you remember.

We had the -- the 5% crowd it was two of the three months within the quarter.

Okay.

And then the remaining group that had sort of the 10% crowd, based on our test of assets on our management through June 30th, we were well ahead of the target we had set.

We reinstated that.

That impact will come in this quarter, probably bad timing, but that's what we did.

So, that will -- that didn't hit until July 1.

Right.

Right.

Okay.

And then a couple other knick knacks, just on the shareholders fees, I think last year it fell, you -- you liquidated 1.9 --

1.9 last year.

And wasn't it off by $8 million or something, I think was the number, it fell pretty dramatically, 54 to 46, something like that.

Should we expect the same type of drop-off?

And then the last thing just to Greg, when you said the flows were flat in July, which was an impressive month to date, does that include the two big awards or is that excluding those?

Well, let me do the first part.

On the shareholder accounts it should be less.

The courage will be 1.1 million shareholder accounts this quarter compared to last year.

Greg you wanna pick up?

On the flow number, that's just the retail U.S. mutual fund numbers.

It did not include --

Just one last one for you guys.

When you think about just given what we have seen, just what you saw in July, just with the market depreciation, how are you thinking about even the performance has been solid and you're gaining market share, but how do you think about the business in terms of, you know, just that we're operating potentially at 15, 20% less than where we were 30 days ago in terms of cost and just running the business.

Right.

We both have a couple of comments there.

Clearly, what happened in the last couple of weeks is very rapid and also dramatic.

You know, we would agree, also, that, you know, we were finding ourselves in a very strong position with relative performance with the flows, et cetera, et cetera.

You know, that's being challenged in the last couple of weeks.

We will continue to be very thoughtful about, you know, our opportunities going forward.

We think we're in a very strong position.

But the point you're getting to, what is the balance between, do you want to call it investing for the future versus current -- current operating results?

And, you know, frankly we're working through that right now, but I think we've shown over the last couple of years that I think we've done a pretty good job of that balance and we'll continue to focus on that.

Thanks a lot.

Our next question comes from Ken Worthington with CIBC.

Go ahead, sir.

Hi, good afternoon.

Talking about cash, how much do you have on the balance sheet right now and how much is at the parent company?

And what did you do with your cash last quarter?

Were you buying back stock at all?

And are you in the market right now buying back stock?

I will give you some -- let me address each of those.

We, you know, there's a summary sort of balance sheet that was in the press release.

That's as far as we'll go right now.

Clearly we're in a strong cash position.

With regard to buybacks, I know it's a topic for everybody but my answer right now is clearly we can't respond whether we're in the market or not at the moment and you will see in our next disclosure, you know, what activity might have gone on by the time we make the next filing.

I wish we could be more specific, but we just can't.

Okay, thank-you anyway.

Our next question comes from Daniel Goldberg with Bear Stearns.

Please go ahead, sir.

Good afternoon, guys.

Three quick questions, first of all, other revenues were up.

I believe $5 million was due to securitization gains.

Can we anticipate more securitization ahead?

Or what is a good run rate for that line item?

They've been running every other quarter recently and we'll probably stay on that path.

It's clearly going to depend on the marketplace and also originations.

Okay.

Second of all, advertising expense was up 15%, where can we go with that in terms of run rate for the 4th fiscal quarter?

Well, I think if you look at the -- the pattern over -- or historical pattern of advertising spent, this quarter generally is a bit lower than the third.

We would expect to see that, you know, advertising as a component of that line and that's a piece of it.

You know, we'd expect to continue that trend of -- of the dropping in the last quarter.

Okay, and just finally, tax rate was up slightly, what was the reason for that?

And then going forward what tax rate would be good to use?

As -- you know, what we try to do, I'm repeating myself for many people, you know, take a look at where we think the business is going to be, you know, a year from now and determine what our effective tax rate has done.

That's how we came up the 25% tax rate and I think -- I would stay with that.

Clearly, once again, what could have an effect that is the changes in the market, but for what we know at the moment, you know, I think that's an appropriate level to stay at.

Thank-you.

Our next question comes from Mark Constant with Lehman Brothers.

Please go ahead, sir.

Thanks.

Good afternoon, guys.

A couple of questions to follow-up on some of the comp issues.

One, obviously, the compensation levels and numbers of people in the sort of 5% to 10% salary increase categories are not the same.

Can you give us a sense of order of magnitude, relevant significance.

Sure, about -- the rollback was annualized $15 million and of that, $12 million was the 5% group.

So, about $3 million is the 10% group.

Okay.

And can you give us a sense to how much of the -- this quarter would have seen the year 1 to year 2 transition and the runoff of amortization from the Fiduciary retention poll was, you know, give us a sense of how material that runoff was?

Yeah, the runoff, we're really going to start to see it next year because it is April to April.

Remember?

So, from when it closed, from April 1st to April 1st and then again.

Next April is when you will see the runoff.

Did I get your question, Mark?

Yes, okay.

I was just writing here!

Also, on the -- is -- for the general sort of comp policy, there's, you know, obviously head count factor, a salary factor, a relative performance factor and I assume a company performance factor consistent with the prior policies.

In looking at this number, did that reflect a sort of optimism reward to the -- to the -- to the pool accrual to reflect sort of 1st half's great performance that may be, you know, may be rethought a little bit in light of the revenue pressures that have presented themselves in the last couple of weeks?

Sure, a couple of things.

One, you know, we were in the sort of net -- no new hiring policy.

We cheated on it a little bit and added all of 13 people more from the last quarter over last quarter.

But, you know, two factors were the principle increase in comp this period, so, the -- you know, the reinstatement of salaries and also there are some of the portfolios, the compensation pulls are directly tied to our performance and incentive fees, also going through the lines, too.

Relative performance, right?

Yes, relative performance.

The overall bonus pool is largely based pre-operating tax income and you saw that --

That should be variable on the way down then, too?

Right.

And lastly, the securitization gain -- the $5 million; that gross or net?

That is a gross securitization gain number.

Okay, so -- Different -- you're talking about the prior quarter and we talked about $8 million.

Right.

So, yeah.

So, what -- is that -- is that comparable to the $8 million, then?

It is not.

You're going to ask me what the comparable number is, I don't have it in front of me, Mark.

It will be in the 10-Q.

Okay, thanks.

Our next question comes from Brian Bidell with Salomon Smith Barney.

Please go ahead.

Thank-you, good afternoon.

Can you tell me for Fiduciary, what portion of assets are outside of the hybrid category that you categorize on that?

And what categories would they be in?

Greg, you want to --

I'm not clear on the question.

In looking -- I'm trying to track the Fiduciary's assets.

I know you how categorize the assets, you know, your hybrid categories I think is a large representation of what Fiduciary's in.

My question is, I guess, what portion of Fiduciary's assets are in the hybrid category?

What portion is outside and roughly what segments are they in?

I don't have that breakout in front of me.

I don't know if we break that out.

Brian, your -- it's largely hybrid, which is to your point.

We don't have the details in front of us.

At least 3/4 hybrid or something like that, or more?

I think 3/4 is a good estimate if you will take as that.

Okay.

Okay.

And the -- just one quick question on the comp point, of the incentive compensation, what portion is, you know, for the -- for the PMs -- I guess the compensation for the firm, roughly what portion is for the investment performance versus profitability?

Of the firm?

You know what?

We have not gone there publicly.

I think I have to, you know, not go that far, but largely, what you can feel assured upon is that our bonus pool is based on company performance and then portfolio managers are on consistent long-term performance, also, with other factors.

Right.

Okay.

Talk about the -- in the U.S. distribution channels, you said you're seeing a continued increased of class "A" share sales versus the other classes and that's effecting the underwriting distribution category.

Are you seeing that as a long-term trend or just a blip at this stage?

In other words, are you seeing a trend away from "B" share sales?

Well, some of the "A" shares, too be would be investment only has picked up quite a bit as people reallocated 401K plans, that's going to go into the "A" share number.

Probably that's a fair statement, too, as far as an industry trend, you see more "A" and more "C" relative to "B," anyway.

But --

Right.

It's a general statement.

And you mentioned, Greg, $81 billion in retirement assets altogether.

Right.

What portion is in the 401K segment?

Probably about half.

Half in the 401K, mostly investment only, right?

Right.

Okay.

And then what are, again, I ask this every quarter to get the -- just the current sense of what's going on, but for the Templeton funds, what -- are the brokers that are selling that in the U.S. more, you know, in sense chasing performance or are they saying their clients are really looking to increase overall long-term allocation to international products?

I think if you look at the overall industry trends, clearly we hit a high after 93 between 25 and 30.

We hit a low of just under 10% for the whole industry and that continues to trend upward.

We're probably at 15 to 20 today and we think that's going to continue there.

Was a sense you didn't need to investment outside of the U.S. not only investors, but the brokers, as well.

And I think today, you know, we have seen somewhat of a decoupling, you look at how the emerging markets have done.

They have a lot of renewed interest.

You look at the benefit of the dollar that was one of the key drivers, you know, today with the benefit of a weaker dollar on international investing.

So, that's a real trend and one that we're in a unique position having more of the value bent and not hedging historically with Templeton.

When I look for it next year, that's probably the greatest opportunity and biggest trend in the retail industry right now.

Uh-huh.

And then you're seeing it would have been in the institutional segment as well?

Right, right.

And last question, what -- what portion of the flows overall are coming from Europe and Canada?

Non-U.S. flows are about 40% in the past quarter.

So -- strong.

Mostly Canada?

No it, it would be actually outside of Canada.

Really, okay.

Great.

Thanks very much.

Our next question comes from William Katz with Merrill Lynch.

Please go ahead.

Thank-you, good afternoon everybody.

Just following up on that point of non-U.S. flows, can you breakdown, if you sort of back away the -- the attrition of the account closures it looks like the account closures were 23% annualized.

First off, can you just let me if that's that the right number?

And if so, can you separate it between U.S. and non-U.S. accounts?

Bill I don't have that in front of me, but largely, I mean the vast majority of shareholder accounts are U.S. accounts.

And I would say to the tune of, you know, round numbers about, $6 million U.S., 2.5 million Canadian and the balance being non-U.S. -- or non-North American.

Okay.

Can you talk a little about, Greg, you were talking about your initiative to bolster up some of the cross-selling initiatives.

Did you have specifics in terms of successives and quantify some kind of metric just so we can get a sense of how you're doing today versus a year ago?

And what your goals might be and what it that might mean for your incremental flow capacity?

Yes, we just look at a -- we set a goal for the year and looked at where we were, you know, in the prior year, in the percentage of our top producers that sell three or four asset classes and it's gone from about 18% last year up to 23% today.

So, that's, you know, meaningful progress for us and we think, when we look at retention strategies that's where we concluded that the best relationships and longest term assets sell more in that class and historically, people think more of our organization, as well, I use Templeton or use munis or use small cap.

There wasn't a converted cross-selling effort to be sure we got the other products there and make easier for them have one place to do business with.

So, we are measuring it very specifically and have targets for each region where we measure it per wholesaler and they're compensated at a year-end bonus pool based on how they've done meeting those goals.

Any specifics in where you think that can go?

How many of your top producers can get there and what it means for asset growth?

We'd like to see it at 50% if possible, but those are numbers -- we know we had an opportunity there and at the end of the day it's something we want to try to do.

I don't think there is any magic say this is the number.

I know that, you know, American funds has been very successful by offering it.

We changed our marketing approach to, what they have a triad or triage campaign out there, we do something similar.

We're showing packaged or combinations of funds and how they can solve specific problems and packaging three or four different styles together.

By doing that, that's where we'd seen, you know, the biggest pickup in reps doing more than just one category.

Uh-huh.

And just to your point on, you know, the phenomenon of more allocation to the international; there a broader allocation or reallocation going on within the institutional channel you can see, maybe specifically in the 401K given the market test in the last couple of years?

Absolutely.

I don't know what the exact numbers are, but we talked about it in prior calls, you tend to see the institutional side move a bit faster.

That's where we saw the pickup a couple of quarters ago and now the retail is starting to catch up.

But clearly, this year, one of the biggest swings we've seen in any of our specific distribution channels would be investment only plans that we're already in.

So, that means people are looking at their statement, seeing relative performance and reallocating their money or shifting around assets into more international.

Okay, thanks, guys.

Our next question comes from Michael Lipper with Lipper Advisor Services.

Please go ahead, sir.

Good afternoon, gentlemen.

Michael.

Two questions.

First, trust companies normally have a somewhat but not totally predictable amount of dollars that leave them every year through the settlement of estates.

Also, some of the retirement plans that may have been at Fiduciary the number of employees is dropping.

So, the first question is not on a net basis, but on a gross basis -- what would you think annually your need to replace dollars or -- at Fiduciary.

Second question, is you've been doing very well particularly in Europe, European pricing and -- are fund through third party distribution seems to be becoming much more creative.

What do you see the trends are?

And what do you see the opportunities are for you to expand your distribution in Europe and almost as a card, what do you think the opportunities are for people who are less well-established to enter the distribution systems in various European countries?

Maybe I can focus on the European one and then maybe Greg can try the Fiduciary one.

We have been focused on Europe for many, many years and probably starting in the early '80s in Germany in particular and it has evolved in pricing structures have evolved quite a bit.

Our view would probably be multiple classes and the like and there is some version of everyone'slooking around the world, whether to the United States or Canada or more developed markets.

And so that's probably going to continue to evolve.

With regard to our opportunities, we think they are very, very strong and think we've shown that we put good progress there.

It probably has gotten to the point where starting in Europe these days in particular on a retail basis, there is one extremely costly and probably the various entry is probably as strong as they've been because of the competition has gotten so much stronger there.

We can define ourselves in a pretty good position there and we think that will show up in our results in the years to come.

And I just think to add, I mean when you look at Europe, again, you're talking about many markets in are at various stages of development and clearly, you know, some of them are just emerging where the retail opportunity and we've seen how quickly it can -- it can grow and we think that's obviously going to continue to happen especially in southern Europe.

The -- the question on trust assets and obviously I don't have a number that would -- that -- on the tip of my tongue to tell me how much we need to replace.

I would make the statement when you look at Fiduciary's business model and why that type of business was so attractive to our organization is you're talking about family relationships and generational wealth transfer and trust can take different forms, but if you retain the relationships with the families over generations, you will retain the assets and their turnover rate is under 5% with clients per year.

Obviously that's a very good number in the financial services industry.

So, you know, that's not a big issue for us, you know, having to replace "X" number of assets every year.

Thank-you for some encouraging comments.

Thank-you.

And your next question comes from Glen Schorr with Deutsche Banc.

Please go ahead.

Hi, thanks.

Just one remaining question.

One of your competitors mentioned today a comment about ongoing pressure on distribution costs and they have a little bit of a different distribution mix than you, but outside the asset class preference issue; there any anecdotal commentary you can provide on incremental pressure on many of the channels, especially maybe the brokerage channels trying to push their own products these days?

I think you've always had the issue of pushing their own product.

Certainly we have seen a balance approach and an open architecture is more of the acceptable format in terms that historically put a lot of pressure on our sales force to hit some number from management in terms of inside funds has not been a successful strategy.

Now they've been much more accommodating in providing outside help with the outside fund groups and part of that is helping pay for that.

That's where you see pressures for distribution and clearly the overall industry, you look at the -- the -- what one would argue as the oversupply of investment management and distribution does have more power than they would if they were fragmented smaller.

So, clearly that's a give and take that's been going on for years.

I wouldn't say it's increased.

I think it's always there.

It seems to be settling into a level, but it is one that -- there's always going to be give and take and back and forth and pressure on margins.

We have to make smart decisions on which relationships and how far we're going go with it.

It is nothing accelerating at this stage, even with the difficult times some of them are going through.

And also, Glen, you know, probably, you know, for us, you know, having a very deep, broad product lineup and being very established in the channels we're in puts us in a couple of the firms in the strong enviable position.

It is the smaller firms and those firms with narrower classes of products that are probably finding themselves in a much more difficult situation, you know, as the years go on?

I completely agree.

Maybe just a follow-on on that, it won't necessary -- even if it were there or increasing it wouldn't necessarily increase -- show up in the underlying distribution margin, correct?

I mean some of those costs make their way into the advertising promotionally?

Yeah, but it's not limited to that.

You would see it in the underlying distribution, also.

It could be almost anywhere, actually.

I appreciate the color.

And our final question is a follow-up question from Mark Constant with Lehman Brothers.

Please go ahead.

Thanks.

Just actually wanted to follow-up on the tax rate for a second.

Just intuitively I know a lot of things go on in that number, but generally non-U.S. is a lower effective tax rate than U.S. and with the mix kind of shifted the other way and I would have thought if we saw a variation show up in the annual accrual it would have gone the other direction, was there something unusual there?

No there, wasn't.

If anything, bad timing and a change in the world from where we thought we would be 12 months of now, you know, in light of the tax rate.

But that is correct.

The relationship holds in that direction typically?

Yes it does.

Okay.

Thank-you.

We have no additional questions at this time, sir.

Please continue.

We thank everybody very much for joining us and look forward to talking to you next quarter.

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