富蘭克林資源 (BEN) 2008 Q2 法說會逐字稿

Welcome to the Franklin Resources earnings conference call for the quarter ended March 31, 2008.

Please not that the financial results to be discussed in this conference call are preliminary.

Statements made in this conference call regarding Franklin Resources Inc.

which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of unknown and known risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements.

These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including any risk factors in MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

Good afternoon.

My name is Ashley and I will be your conference operator today.

(OPERATOR INSTRUCTIONS).

Mr.

Johnson, you may begin your conference.

Thank you and good afternoon this is Greg Johnson, CEO of Franklin Resources, and joining me today is Ken Lewis, our CFO.

I think everybody recognizes it was a difficult quarter for most asset management firms, and it was no exception at Franklin Templeton.

Looking at the overall asset levels, they declined by about 8%, from $643 billion to $591 billion.

Our average assets declined 6%, from $651 billion to $610 billion.

As you would expect with this kind of volatility, with outflows and market depreciation, our overall shift shifted from equity to fixed income.

And equity assets at the end of the quarter represented 55.5% of our assets versus 59.3% in the prior quarter, and fixed income increased 24.6% versus 21.4%.

The assets by the various investment groups, Franklin was relatively flat, down 1.5% to $240.5 billion, and Templeton was down 15% to just $210 billion.

Before I talk about the overall flows, I just wanted to mention one change in our presentation of flows.

In an effort to improve our AUM presentation, net exchanges are now included with our sales numbers.

Previously, net exchanges were included in market appreciation.

We have also reclassified two Indian money market funds to the taxable fixed income category.

And after further review, this classification was determined to be more appropriate, given the attributes of the fund.

These funds are still used in short-term cash management, so you may see an increased redemption and sales levels overall.

So in sum, net new flows equals new sales minus redemptions, plus net exchanges.

Moving on to the flows, it was a negative quarter.

We had outflows of $6.1 billion versus inflows of $4.6 billion.

Sales were down about 13%, redemptions up 9%.

I think it's important to note that looking at the flows, most of the outflows did occur in January There were some lumpy outflows I'm going to speak about in a minute, but in January we had close to $5 billion overall in net outflows.

Looking at the flows by region, the U.S.

was relatively flat, just had outflows of $900 million versus $1 billion of inflows in the prior quarter, and non-U.S.

flows were $5.2 billion, making up the bulk of the $6.1 billion in outflows versus $3.6 billion in inflows.

In the U.S., actually the institutional had a fairly strong quarter in the U.S.

and some notable wins with Global Bond Plus at $250 million it funded during the quarter, a Global Multisector of $400 million, and a Templeton Global Equity separate account of $230 million.

We did see a relatively significant $550 million redemption from an insurance company, primarily a result of the guaranteed account value adjustments that happened at the beginning of the year, and we saw some other reallocations of clients that had net redemptions resulting in $750 million from separate accounts.

In the non-U.S., the [CCAV] sales declined approximately 18%.

Redemptions increased 15%.

So overall within CCAV, $1.4 billion in net outflows versus $3 billion in inflows in the prior quarter.

As I mentioned earlier, there was some notable lumpiness in January.

We had $1 billion of a couple banks that reallocated in Europe as they went to lower-risk options, away from international equities.

We had a European global equity management of $720 million that went to passive management, so that hit in January, as well as a $444 million global equity mandate from Canada and a $325 million one in India that went in-house there.

So we had a lot of somewhat large, we hope one-time redemptions in January that did affect the net flow numbers.

Looking at the flows by client type, really equal as far as the net outflows between retail and institutional -- retail, about $3.3 billion in net outflows versus $2 billion in inflows in the prior quarter; institutional, $3 billion in outflows versus $2.6 billion in inflows.

Looking at the U.S., I think the overall stability there had a lot to do with the strength of municipal bonds.

And that's something that we don't have the benefit of when we're looking at the CCAV fund flows.

Municipal bonds had a very strong quarter, with a 56% increase in sales, and resulted in net flows of $1.3 billion, which were six times the $200 million in the prior quarter.

The Five Star Global Bond Fund continues to generate significant flows and had $3.2 billion in net inflows between the CCAV and U.S.

registered fund versus $2.4 billion in the prior quarter.

Institutional, I mentioned some of the notable fundings during the quarter, but I think also very importantly, we had some very significant wins during the quarter that actually funded on April 1.

So they funded -- although we won the business in this quarter, it funded in the current quarter, and that resulted, with one client, a $1.4 billion inflow at the start of the quarter of April 1.

High-net-worth side, we had net inflows of $200 million, so again it speaks to how resilient that distribution channel is when you have market volatility.

Looking at the flows by investment objective, as you would expect, equity had the majority of the outflows at $11.9 billion versus $500 million in inflows in the prior quarter.

Hybrid had slight outflows of $600 million versus $900 million of inflows.

And fixed income had inflows of $5.3 billion versus $3.4 billion.

Looking at some of the changes or some of the flows by fund, and some of the larger funds, I think on the domestic equity side, of note, mutual shares had net outflows of $541 million versus slight inflows in the prior quarter.

Templeton BRIC, which is a new offering, continued to have net inflows, had inflows of $236 million in the quarter.

And on the outflow side, Templeton Growth, $1.3 billion versus $1.1 billion.

And Templeton Foreign actually improved on the back of the improving performance there, from $1.4 billion to $1.1 billion in outflows.

One of the big drivers of the CCAV fund has been the Asian Growth Fund, and that had net outflows of $880 million in the quarter versus $1.1 billion in inflows in the prior quarter.

The Income Fund had outflows of $767 million versus $480 million of inflows, and a portion of that net outflow was attributed to the Founding Funds, which -- it's one of the three funds within the Founding Funds.

On the taxable side, I mentioned the Global Bond Fund, which continued to be very strong.

High Yield continued to have net outflows, but didn't accelerate, relatively small at $290 million in outflows.

And tax-free income, again, as I mentioned, was $1.3 billion.

Investment performance, really no significant changes there.

I think overall, some of the areas of concern, or underperformance, extended into the five-year numbers.

But really, if you look at the underlying numbers between Mutual and Templeton, it's not going to take much to move those back up into the second for those periods.

And even to date, we're seeing those numbers swing around on almost a weekly basis.

And that really goes the same for the Income Fund as well, which, because of its always having 40% or so in high-yield bonds, it really depends how high-yield bonds do relative to the more quality corporates or treasuries on how well that will do in the short run.

And we've seen those numbers improve here recently.

So overall, fixed income continues to be very strong, actually has improved, gotten stronger overall, and really not a lot of change within the Templeton, and Mutual Series starting to lag a little bit, but again, not much below second quartile, and a lot of that due to their weighting in European stocks, as well as financials and how they're measured against the S&P 500.

So with that, I will turn it to Ken for operating results.

Thanks, Greg.

Hello, Everyone.

As Greg mentioned, this quarter's market volatility definitely created a challenging operating environment for us.

Our results show that we were able to effectively manage costs and maintain a healthy operating margin of 34.5%, which was above the fiscal year '07 margin of 33%.

Our successful cost management was tempered by a reduction in nonoperating income this quarter, caused by some unrealized mark-to-market losses, less realized gains on investments and our products, and lower earnings on invested cash, all of which I will discuss in more detail.

So net income for the quarter decreased 29.4% to $366.1 million or $1.54 per diluted share.

A couple of highlights on the line items, the individual line items -- investment management fees declined approximately 10%, due to the decline in average assets under management; a change in mix towards fixed income that Greg mentioned; one day less in the quarter; and approximately $10 million less of performance fees.

Our underwriting and distribution fee revenue decreased just under 13%.

That was consistent with the decline in sales and assets under management.

The underwriting distribution margin was just under 3%.

The decrease was due to some nonrecurring items in those line items, and if you exclude those, the margin would have approximated the prior quarter.

Other net revenue declined $4.4 million, primarily due to a mark-to-market on an interest rate swap related to our auto loan operations.

On the expense side, we were able to hold expenses in check without jeopardizing some of our strategic initiatives.

Most of the line items increased less than 2% quarter over quarter.

Compensation and benefits was virtually flat from last quarter, as the increase in payroll taxes and a full quarter of merit increases were offset by a decrease in variable compensation.

Technology and occupancy expenses were also flat quarter over quarter, but we will continue to invest in automation projects to increase the scalability of our operations.

Advertising and promotion increased less than 2% quarter over quarter as we increased TV and print media advertising.

Please keep in mind that the first quarter usually sees lower advertising spend.

In the U.S., we launched two new commercials, and in Germany we initiated a new marketing campaign focused on retirement savings.

The increased spend was partially offset by decreased variable marketing support costs.

Amortization of deferred sales commissions decreased slightly, reflecting U.S.

sales, and other expenses increased 3.5%.

Both the first and second quarters have separate and distinct nonrecurring items that depressed this run rate by about $5 million.

So that's a long way of saying that both of those numbers are a little bit on the low side.

Looking at other income and expenses, net, sponsored investment product losses increased more than $25 million from the last quarter.

Just to remind everyone, this represents the underlying investments of products that we consolidate due to our ownership.

They are marked to market and reflected as investments trading on our balance sheet.

And really, the decline was in line with the broad-based equity indexes decline that we saw in the quarter.

So the decrease was about 9% of the average investment balance.

Investment and other income, net, decreased $48 million due to several items.

After harvesting gains on our investments in prior quarters, we saw very little this quarter.

So that reduction, coupled with lower earnings on cash, made up most of the delta in this line item.

And due to the volatility in this financial line item, we are going to be expanding our disclosures of investments in our 10-Q that's due out shortly.

The effective tax rate for the quarter was 29.5% compared to just under 27% last quarter.

For the six months, the tax rate was 28%, which is similar to last year's tax rate.

A shift in revenue mix to fixed income products that are managed in the U.S.

may put upward pressure on this rate going forward.

But despite a volatile quarter, we were able to maintain healthy operating margins that I mentioned of 34.5% for the quarter and 36.2% year to date.

And then lastly, a couple points on capital management.

We repurchased 3.6 million shares this quarter, and our total shareholder payout, including dividends and stock repurchases, was 140% of year-to-date earnings.

That concludes my remarks.

I'll hand it back to Greg.

Thank, Ken.

Just quickly, some of the business highlights -- in the United States, we were pleased to see we were ranked third among fund families in the U.S., with 12 Lipper Awards for the three-, five- and 10-year periods.

We are pleased to see that our -- we've talked about our fixed income campaign and how the results there have increased market share in many different categories.

But even more importantly, we've seen 14,500 new financial advisors that hadn't written a ticket with us in fixed income do that through this campaign period.

On the international side, we announced during the quarter a 49% stake in Vietcombank in Vietnam, a Vietnamese investment management company.

In Malaysia, we recently were approved to establish a foreign fund management company there.

We're currently one of five companies that has been approved in that market.

On the institution side, along with strong demand for the excellent fixed income results that we have as an organization, we also see continued demand for global equities, as well as non-U.S.

equity strategies and private equity real estate, with several opportunities today in the pipeline.

With that, we would like to now open it up for your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Michael Kim, Sandler O'Neill.

I apologize if you mentioned this already, but the $1.4 billion institutional account that funded, I guess, on April 1, what type of mandate was that?

It was a global fixed and global equity.

Okay, great.

And then just in terms of the slowdown in retail volumes, looking across geographies, it seems like redemptions have accelerated quicker overseas versus perhaps here in the U.S.

Do you think this is kind of just a function of international equity markets underperforming, or do you think that overseas retail flows are just generally more volatile on a quarter-to-quarter basis?

I think it's true, and I think the hard part in really answering that question, you have a lot -- you have many larger accounts, platform-type sales, fund-of-funds sales that use CCAV.

So in periods, you will have, whether it's a consultant or whoever's running those accounts, move large moneys around.

So that can skew what we would view normally as a retail number.

But I think in general, when comparing to the U.S., it really comes back to the mix of assets, and CCAV, our CCAV, tends to have more in global equities, more in -- whether it's a regional fund like the Asian Growth Fund, so with the kind of market you've had last quarter, you would expect to see more redemptions, and you're in a lot of newer markets that this may be the first time you've had a selloff for the investors.

So I think we're kind of testing that as well.

But when I really looked at the numbers, I think the first thing you expect in that kind of market is sales really slow down.

And that's really what's happened.

And then redemptions pick up.

But if you look at the overall numbers, they really didn't -- it wasn't a huge pick-up in redemptions.

I think some of those funds had a decrease in sales, when looking at the equity side.

Okay.

And then I know it's still kind of early days as it relates to the integration of the retail and institutional businesses at Templeton, but have you started to see any narrowing in terms of the performance distribution across -- or the performance dispersion, I should say -- across the two platforms, and do you think the improvements in the Foreign Fund are linked to that process?

Well, I'd certainly like to say they are.

And I think, again, it's hard to answer that directly, because some of those holdings were done before the changes.

But I think, more importantly, the group is working extremely well together, and the result will be much more consistent results between the institutional and the retail side.

But remember, the retail side, the portfolio manager will always have a bit more discretion than institutional mandates, which are a lot -- run with more common portfolios.

And that's something that we encourage, but we also don't want to have -- it has to be within a reasonable band.

And I think that's what we've certainly moved towards.

And the Nassau group seems to be working very effectively with the overall Global Equity Group.

Okay, that's helpful.

Thanks.

Mike Carrier, UBS.

Just one question on the investment and other income lines, given that it was volatile this quarter.

Can you give us any color on the breakdown within that bucket in terms of what flows through there?

And then you were talking about some of your investments in some of your funds that are consolidated and are marked to market there.

Just any balances for that component of the line?

Sure.

I'll start with the line that we call sponsored investment products gains.

So that's the mark, and you can get a pretty good feel for that if you look at our balance sheet in what we call investment securities trading.

So those would be the products where we consolidate due to control.

And they're classified as trading, and they're marked.

So I guess one way to look at that is whatever you think the market assumption is for the period, you apply that against the average balance of those investments, and you can get a little bit of a feel for what to expect there.

On the investment and other income, we have realized gains, and we have, essentially, realized gains and earnings on cash.

And that's rolling through there.

And the biggest delta was the fact that we really didn't sell too much of our investment.

We didn't have too much in realized gains this quarter versus prior quarters.

And in addition, certainly interest rates are lower than they were last quarter, and our cash balances were a bit lower as well.

I should add, the other thing that was in there, and it wasn't very significant, maybe in the neighborhood of about $10 million, were some asset impairments or valuation allowances that we made.

Okay.

And then just on performance, if you go through some of the different equity buckets, the one-year, it's been under some pressure, but then when you go to the three-year, five-year, in some of the buckets you're seeing some pressure there, too.

Just wondering, is there anything more strategically that you guys are thinking about in terms of any changes, or it just going through this process and just different things happening in some of the international markets?

I think the emphasis with the organization is always on investment performance in everything we can do to make sure that we have the right people and resources to support consistent performance.

I think if you go back to my earlier remarks about the three- and five-year, yes, some of the numbers are creeping in.

But if you take, for example, Mutual Series or Beacon or shares, they're probably in the 51, 53 percentile, which puts a big bucket of assets in below-average that, in a one day's, two days', a week's performance, can move back up into the second one.

So I don't think there's really -- that number doesn't really tell the whole story.

And the performance there, when you look at the mix that they've had and how they have had European exposure and things, they've done relatively well with that exposure against their current benchmarks.

So I think you will always be concerned about underperforming, and that's what we do as a company, and that's why we exist.

So whether it's three, five, 10 or one, again, we're going to do what we can to make sure we do the best job possible.

William Katz, Buckingham Research.

Two questions.

Just sort of curious -- given all the issues going on with the credit-sensitive part of the financial system, banks and brokers and others, can you revisit the strategy of having the bank?

The second question I have is, given what seems to be a building bias toward growth-led flows, just give me an update on where you stand in terms of potentially leveraging a more decisive rotation away from value.

I'll take the one on the bank.

No, really, there's no change in our strategy there.

We think it is a strategic component of a high-net-worth business, and I don't think it's been terribly affected by the credit markets.

Our business is pretty vanilla there.

And a word on, I guess, the auto loan operations as well -- what we've done there is, you probably are aware that the securitization markets all but dried up for a source of financing.

But fortunately, we can ride out that storm.

And what we've done is we've increased pricing, so that that business is kind of at the current sustainable level.

And I'll just add, on the growth side, it is something that we continue to be very focused on.

And I mentioned some of the performance numbers, and the recent strength around some of the Franklin numbers have been certainly a highlight for the quarter.

But in addition to that, fiduciary has a very strong large-cap-growth U.S.

fund that we're positioning for the retail market to sell through our wholesaler force.

And we're also, in addition to that, registering a global growth fund to be run by that group, as well as a global growth fund to be run by our local asset managers.

And all of that is a priority and something that you'll hear more from in the next quarter or so.

Okay.

And then just maybe one follow-up; I apologize.

Just when I'm looking at your margin year on year and it's down a tad -- not a lot, down a tad -- just sort of curious, as you sort of think about the delta and all the different line items, are you getting to a point now where, if the revenue environment were to continue to be problematic, that you're running out of flexibility on expenses, or is there still some variability left from here?

I think there is some variability left on it.

And so if I can just make a couple of general points, we are taking the cost management discussion very seriously.

We are in constant dialogue with the business units.

But having said that, I think it's a little short-sighted for us to make some deep cut-to-the-bone expense reductions.

In fact, even cutting to the muscle might be a little bit short-sighted.

But there is still room.

Obviously, the component of compensation that's variable, if revenues go down, that will go down.

And I think some of the decisions we make today, from a cost management perspective, will take a few quarters before they're reflected fully in the P&L.

Ken Worthington, JPMorgan.

Two questions not covered yet.

One is you mentioned the campaign in fixed income.

Can you just give us some more flavor on what you've been doing there, how much you've been spending, and a little more on the impact the campaign has had in terms of, I don't know, beyond just the broker account selling, but any more information you can give us?

I can give you a little bit.

I mean, I don't have the numbers on what we're spending on it, and it has been going on for probably nine months, and it's something that we recently extended.

And it really started, just -- we felt that Franklin had a long history in fixed income.

We've had tremendous records there, and we were actually losing market share in fixed income.

And part of that was because we're out there talking about other areas, like equities and Templeton and Mutual Series and other products in the Company.

I think we just lost sight of some of the strengths on the fixed income side.

So we wanted to make sure it was a priority to get that message out there, and we put in very specific quantitative measures for our salesforce to cross-sell and really measure it by various groups to, not just on the dollar sale, but to see that we have new advisors selling.

And if you look at what's happened, the timing really couldn't have been better.

And that's not because we made a market call of any kind; just the markets moved our way there.

And also on the muni side, our muni share had a tremendous pickup here in the last quarter, and much of that was due to many of the credit problems that some of the leveraged muni bond funds have had.

And we've always stuck with pure vanilla and relatively simple on the muni side, and that was out of favor for a while.

And we were losing share with that story of low-cost, pure-vanilla.

Well, today, that's very much back in vogue.

So we want to make sure we're still telling that story.

But we also had a lot of mortgage funds, strategic mortgage, a lot of funds that -- strategic income fund -- that had great Morningstar ratings and very small assets, and it was really just a question of getting the shelf space.

So that's what we have focused on.

And we're not just out there talking about that; we're still very much talking about the other ones.

But we just felt that it was getting lost with all of the other products, and we needed to focus on it.

And then I don't know if I'm front-running the Q, but what was the cash position at the end of the quarter?

It had fallen from 3 to 2.5 or so over the last two quarters.

And then if I look at the cash, what's actually at the parent company and able to be returned to shareholders, obviously at your discretion?

Because I assume it's not the full 2.5.

Probably, we started this about a year ago, disclosing the percentage of cash, U.S./non-U.S.

So I would refer you, basically, to the Q that's coming out, because I don't have that number handy.

And the cash, also I would refer you to the Q, I guess, which will come out in a couple weeks.

And for the cash at the U.S., is all that eligible to be used for returning to shareholders?

More or less.

Of course, there's some regulatory capital requirements, so give it an appropriate haircut, but most of it is available.

Prashant Bhatia, Citi.

In the prior quarters, you were spending a lot more on repurchases, and the stock was 20%, 30% higher.

I guess why the relative slowdown this quarter?

I think there's probably a couple of reasons.

Market volatility might be one of them.

Also, we really haven't changed our strategy of being opportunistic.

It's tough to see what was going on in January.

But the other factor to consider is that we had a debt repayment in April, so we were kind of being a little bit cautious there.

Okay.

And then just in terms of the equity outflows, the $9.2 billion in global and international equity, can you just give a little bit more detail of where the clients were that pulled the money out?

Was it predominantly U.S.

based, or was it more overseas-domiciled clients?

Well, it was more overseas, and I mentioned just some of the lumpy January redemptions that took place for various reasons, one performance related, and most of them not, or they just reallocated, in the case of Europe and some of the fund-of-funds, where they just reallocated to a lower-risk portion in those portfolios, and we lost out on those.

So most of it was outside of the U.S.

And in the U.S., if you look at the quarter-to-quarter numbers, for our big funds, they're relatively stable as far as the net outflow numbers, and actually, as I mentioned, improved on the foreign fund.

Okay.

And also, on the performance, I know you said it can bounce around amongst the categories, but it does seem like every equity -- all your equities now are in the bottom two quartiles.

Have you looked across the managers, and is there some kind of consistent theme that's driving that underperformance?

Well, I think obviously you'll get an answer from any of the managers.

And I think, for us, it's really, are we consistent with what we would expect from that style in this type of market?

And the answer is yes.

And as I said with Mutual, they've historically had a weighting outside of the U.S., and historically in Europe, historically in financials.

Well, those have been two areas that, over the last year, are going to put some pressure on relative performance.

Templeton is going to have a hard time buying materials, commodities, oil-related stocks, and they've been a very important part of relative performance for that segment.

So I think that's what we try to look at and see if we're sticking to our knitting.

And we've been through plenty of periods like this over time, and we feel very confident with the team and process that's there today.

Okay.

And then on the portfolio, you talked a little bit about the income coming out of there, but can you talk about what the underlying assets are?

You mentioned you had some permanent impairments there?

Let me clarify that.

So on the sponsored investment product line, that's what I was specifically referring to, which was in investment trading securities and marked to market.

The securities there, a couple of the big ones were UK and European equities, and most of them are just the plain -- I would characterize them as plain-vanilla long equity funds.

Okay.

And then in the investment and other income, anything specific there?

Yes, we had a couple of impairments.

One was an investment that was part of the Darby operations; that's our private equity [bit].

But in total, the impairments were less than $10 million.

Okay.

Is that based on what that portfolio looks like?

Should we expect that to be closer to a run rate going forward, or is that too early to say?

No, the reason I'm pointing that $10 million out is that should be nonrecurring.

Okay.

And then just, you had mentioned 14,500 advisors were new to selling the fixed income product.

Do you have an equivalent number for your equity products?

No.

I don't have any measurement.

We've done campaigns in various time periods with the same kind of goals in place, but I wouldn't know what those numbers would be offhand.

Craig Siegenthaler, Credit Suisse.

Thanks for taking my call.

Just following up on the last question on the investment income line item, so it looks like you reported a little bit over $30 million.

You said $10 million of it was more unusual due to realized investment losses, and then I guess the Darby [P] portfolio.

You add that back, you get to a little bit -- I guess a little, right around $40 million.

Is that a good run rate for your interest on the bond part of that cash portfolio, and then anything above that would be realized gains?

I can't find too many faults with that analysis.

Okay.

Second question, really on the acquisition front -- where are you guys looking globally to expand?

I know Templeton is very rich in global offices, but is there any areas you're underweight internationally that you'd like to move a little bit deeper into?

Well, I think it's consistent with what we've talked about in the past.

We try to look at anything where we think we can add value with our distribution.

And the UK is a market for us that, as far as market share, we are underrepresented in on a relatively mature market.

And that's probably the only obvious one for us.

We're still looking at, whether it's a place like Malaysia or a market like a Brazil, where you could come in and where these local managers are emerging, we like to be first in those markets, too.

And those are longer-term bets, and that's really the Vietnam-type investment that we made, and the one in the Middle East as well, that we like to be first in these newer markets as they're coming out.

And I would expect to see more deals like that done.

Jeff Hopson, Stifel.

You may have addressed this, but compensation expense did not adjust, I guess, relative to revenues.

So what are your thoughts there, and how that might be affected going forward?

I think that it actually did adjust, and it was offset by increases that were due to the full quarter of merit increase, as well as your seasonal uptick in payroll taxes.

So that's why it's flat quarter over quarter.

Okay, so there's some seasonal.

And then otherwise, going forward, it will naturally adjust to both profits and revenue?

Is that fair?

Yes, I think so.

All things being equal, if we replicated the quarter, I think the comp to net revenue ratio is probably reasonable going forward.

Mark Irizarry, Goldman Sachs.

Maybe if you could just clarify that last point, are you saying that the second-quarter run rate comp ratio is reasonable, or that it should sort of get back to the previous quarter's ranges, in the mid-20s?

Thanks for asking the clarifying question.

It's absolutely dependent on the revenue and the profits to the Company.

That's clearly a component of the variable.

In addition to the performance, relative performance, the variable compensation is a function of the overall profitability of the Company.

Does that clarify things?

Yes, so just to be clear, so that second quarter is or is not a good run rate?

I think the compensation to net revenue ratio is reasonable.

Got you.

And then, Greg, can you talk about the monthly progression of sales?

I know you alluded to $5 billion in outflows in January alone.

But can you talk about what happened in February, March, particularly in global and international, and then what are you seeing so far in April?

Well, I think I have to be careful about what I'm seeing in April.

But as far as the quarter, you could see that obviously there was a big improvement in February and March if we had that kind out outflows in January.

So you had slight outflows, I think, and it probably tracked to what the market was doing.

February was a good rebound, and a little bit better, and March relatively flat.

So a better picture, and I think that is important to note, the lumpiness and the trend.

And we really haven't broken that out probably in the past, but I think it is irrelevant, because we really haven't seen that kind of move within a quarter like we did this quarter.

But as you would expect, the markets are performing better.

There's a feeling that things may have bottomed.

And with that, investor sentiment is better than it was.

So overall for the industry, flows should be better than what we've seen in the last quarter.

And then just in terms of the way you're growing the business though potential acquisitions, it seems like you're acquiring local-level talent, probably on a broader geographic basis.

But obviously, it seems that what happened this quarter was more about depth of product.

What's your feeling on any kind of deal to broaden your overseas product versus putting new flags on the map, if you will?

Well, I think you want to do both.

And I think we are open to both.

And I'm not sure it was depth of product.

I think the equity side, if you had heavy equity assets, it was a pretty tough quarter.

There's exceptions, of course, to that, but as a rule most firms had outflows.

Value actually did better than growth year to date.

So that shift is not really affecting much as far as the product mix goes.

And I think for us, it's some near-term performance issues that are putting some pressure on the flows, and then just this is the first big hit for the emerging and developing markets and our first, really, sell-off, and they held in there very well and then had a bit of a hit.

And I think that probably shocked some investors and created some redemptions during the quarter.

And then just in terms of the buyback, how should we be thinking about that going forward?

I think really no change.

It's tough to give you guidance.

Who knows what's going to happen in a given quarter?

We're going to continue to be opportunistic.

We like the business outlook.

We like the Company.

And a reminder that in January, we got an upping of our Board authorization.

Cynthia Mayer, Merrill Lynch.

I guess just a follow-up on your previous comment on the developing market selloff.

I'm wondering, can you describe the equity/fixed asset mix for U.S.

versus non-U.S.

and versus developing markets?

Because I kind of remember a slide from an old presentation in which you guys said that one of the interesting trends is that, as markets develop, investors tend to move from fixed income to equities.

And I'm wondering, among your developing markets investors, what is their weight of equities versus fixed?

And for overseas investors in general, are they more weighted to equities than fixed than in the U.S.?

I unfortunately do not have all that information, and I can speak in general terms and say that it really does vary, not so much by whether it's an emerging or developing market, but more by the region and the country.

And where Latin America has been more fixed income, U.S.

government sales -- Global Bond does very well there for us as investors move out of the traditional high-yielding bank instruments.

But in Asia, where there's been local appetites for local equities -- take a market like Korea, where they have a history of investing in Korean equities and fixed income, and their first diversification was into China and India funds.

And they feel like that's diversifying.

So it really does vary by marketplace.

And just in general terms in Asia, a newer investor will be much more comfortable moving into what I would consider to be riskier sector, country or regional funds than they would be in places like Latin America.

So overall, you do have a heavier weighting in.

And for us, just look at the last quarter.

I said the Asian Growth Fund had had a swing of probably $2.5 billion of flows between one quarter and the next.

So you can see how dramatic that one fund was on our overall net flows.

Okay.

And then a question on Templeton.

If the dollar starts to strengthen here, would Templeton be flexible in terms of hedging, or is that a bedrock part of their philosophy?

It has been a bedrock part of its philosophy, but we have registered funds in other currencies, local currencies, to deal with some of those issues.

And I would just add -- I presume you're talking about Templeton Equity, but Templeton Global Bond Group, they are in fact looking to be strategic about future dollar to eurodollar to other currencies and take advantage of that.

Okay.

And I guess just one more use-of-cash question.

It's been a few years since you did a special dividend, and I'm just wondering, as you look out ahead to potential shift in tax rates, whether you find that an attractive option at some point?

As you would imagine, we talk about things like that all the time.

At the current, where we stand today, there's really no plans to change anything.

But of course, that's a decision the Board will make.

They meet pretty regularly.

Robert Lee, KBW.

Hard to believe there's still more questions left, but a couple.

First thing is, I'm just curious -- do you anticipate any potential fallout from the potential Supreme Court ruling in the muni business, in that Kentucky case?

I think it's certainly a risk, but at the end of the day, investors are still going to want munis, whether they have the state exemption or not.

And it's still very uncertain which way it goes on what the states will do, whether they can decide to allow double exemption or not to protect that.

So I think at the end of the day, you'd have somewhat of a pricing adjustment in the marketplace.

You'd probably have a lot of funds combined.

But the demand for munis would still be very consistent.

And I don't really have a sense for what the odds are of where that Supreme Court decision is going to go.

Okay.

And another balance sheet question, I think you mentioned you had the debt that matured, which -- I assume we'll see this in the Q, but I'll ask anyway.

I assume you used -- did you refund that or use cash?

And I guess related to that, if you just kind of paid it off, what's your feeling about having at least a little slice of debt on the balance sheet?

It's a combination of cash and CP.

We issues about $300 million of commercial paper.

We did that in advance of the debt maturing.

But I think you're right.

I think that it is good to have a little bit of debt financing on the balance sheet.

Certainly at the rates today, I think it's something that we will consider.

Okay.

And Greg, another question for you.

Recently, you've had active ETFs that have gotten some approvals.

And how do you think of the ETF business or the active ETF business as kind of a competitive threat for the traditional fund business?

Well, I think it's something that we need to be looking at closely.

And just like you could argue the same risk, whether it's straight index funds or quant funds, too, fall into that same category, and those are things that we spend a lot of time making sure we know exactly what's going on there.

I think there's still a little bit of confusion on what is an actively managed ETF, and to me it's still more of a quant-tilt type of an index product.

But we are looking at them, and if we feel that a quant-type approach makes sense within our group, I'm sure an actively managed ETF is a natural extension of that.

But I don't think it's a direct threat to your traditional daily actively managed fund, because it's really impossible to replicate that.

Christopher Spahr, Deutsche Bank.

I was just wondering if -- maybe I missed this, but if you can give me the amount of AUM that's held by non-U.S.

clients this quarter and what it was last quarter?

Well, I can tell you what it was last quarter.

It was 28%.

I'm sorry?

It was 28% last quarter, and 26% -- and it's 26% this quarter.

Did you get that?

Yes, thank you.

So that reflects both just the net outflows as well as the market depreciation?

Yes.

That's total assets under management.

And regarding the expenses that was earlier, do you expect that the service expenses might actually go up if suddenly you have to service these clients a little bit harder overseas, educating them more about the products, sticking with them, maybe reaching out to the salesforce overseas, so forth?

I think that that's something that we've been doing for a really long time.

So I don't really see any net new incremental spend in that area.

Michael Hecht, Banc of America.

I just wanted to follow up on a couple things.

First, I guess on the cash and cash equivalents question, you guys -- you give that in the release now, right?

It was $3.7 billion at the end of the quarter, up from $2.9 billion last quarter?

Right.

So a decent amount of build there.

And I'm just wondering if you can help us, because I didn't get a good sense of appetite for repurchase, but how you are prioritizing use of free cash flow at this point between CapEx or spending on new seed investments or new product launches versus capital -- share repurchases and whatever.

Okay.

There's a lot in there.

So it was $3.7 billion at March versus $3.6 billion at September.

I have $2.9 billion at December.

So there's really no change.

The way that we look, for example, on the CapEx is everything's kind of -- we look at the benefits of investing now versus the returns in the future.

There's no change there.

And really, there's no change to our strategy right now in terms of stock repurchases.

And we talked a little bit about the debt.

So same story, really.

What's the amount that's still authorized on the repurchase?

You did 3.6 million this quarter, right?

The authorization was for 10 million, or a little bit under that, probably about 9.5 million or something like that, 9.4 million.

And then just last question on consolidation.

What areas would be most attractive?

And has the pricing environment become any more conducive to doing deals?

And then what about larger diversified players that might be looking to monetize certain businesses, like asset management, in the current environment, where a lot of funds like those are raising capital?

Is there any more of an opportunity to look at deals like those in this environment?

I think that's probably an accurate statement, that there is a capital shortage for many large financial institutions.

So the easy way to shore up your balance sheet is to sell independent asset managers that they may have acquired through the last cycle.

So clearly, I do think you will see a few more deals done.

And I think the good news for us is that you have less competitors right now because of the situation with the debt markets and private equity, as well as the financial institutions being under pressure, puts it more on a more normalized, I think, more normal situation to go out and acquire one of those firms.

And there are no further questions.

I will now turn the call back over to Mr.

Greg Johnson for closing remarks.

Well, thank you, everyone, for joining us today for the call, and we look forward to speaking to you next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.