富蘭克林資源 (BEN) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

Welcome to Franklin Resources earnings Conference Call for the quarter ended September 30, 2008.

Please note that the financial results to be discussed in this conference call are preliminary.

Statements made in this conference call regarding Franklin Resources Incorporated, 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 known and unknown 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 the risk factors and MD&A securities of Franklin 's most recent Form 10-K and 10-Q filings.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the call over to CEO, Mr.

Greg Johnson.

Thank you, and good afternoon, everyone.

This is Greg Johnson, CEO of Franklin Resources and joining me as always is Ken Lewis, our CFO.

It's been a challenging quarter for everyone in the asset management industry.

I think as most of you are aware, September was one of the worst months ever for net redemptions in our industry and October with the levels of volatility that we've seen could even be worse.

I think if there's any silver lining for our quarter, the one area that we can control is investment performance and we are very pleased to see a couple of the areas that have been a concern over the past year, particularly Mutual Series and Templeton, had a very significant turnaround in their one year but it also affecting the three and five years.

At Mutual, as far as assets in the top two quartiles over one, three and five, they increased to 85%, 97% and 98% and at Templeton a dramatic increase in the short-term, the one year up to 73% and 72% in the five year area.

This should serve us well when market sentiment shifts and investor flows resume.

As far as the declines in AUM, I think as everyone in the industry, we remain very focused on expense management and implementing strategic cost cutting initiatives which Ken will expand on later.

Taking a look at the assets and flows, obviously a disappointing quarter as far as a decline in assets quarter-over-quarter, of about 12.5% or $73 billion.

As you would expect with our sales mix continuing to favor fixed income and market depreciation our percentage of equities increased -- or decreased from the prior quarter from 55% of assets to 52%.

Looking at the flows, we went from 1.2 in net in- flows in the prior quarter to 8.6 in out-flows this quarter.

Sales were down about 9% overall from $45 to $41 billion and redemptions picked up 12%.

Looking at the flows year-over-year we had out-flows for the year of $8.9 billion versus in-flows of $46.5 billion for the prior year and we had market depreciation, most of that coming in September of $123 billion.

Looking at the flows inside the United States and outside of the United States, net new out flows of $5.6 billion in the US versus in-flows of $1.1billion in the prior quarter.

Fixed income continues to do very well and it's been a real focus of ours and we're pleased to see our market share increasing in the tax free bond funds to a new high of 28%.

Tax free funds were our best selling category in the quarter with net new flows of $1.1 billion versus $1.7 in the prior and our largest on the Franklin income fund that had net out-flows of $1.4 billion compared with $250 million of in-flows last quarter.

Outside of the US we had out-flows of $3 billion versus net in-flows of $100 million.

Largest in-flow this quarter was once again from a Sovereign Wealth fund that put $490 million in a global fixed income account.

On the negative side, the largest out-flow was the C-CAV Asian Growth Fund, which as you'd expect, had a major performance impact with the sell off in the Asian Markets over the quarter.

Looking at the flows by client type and retail, we had out-flows of $8.8 billion and much of the outflows in the hybrid and any of the equity classes where market performance has declined the most, such as emerging markets.

Our top selling US fund continues to be the Templeton Global bond fund with net new flows of $335 million versus $925 million in the prior quarter and C-CAV had out-flows of $3.5 billion and remember that's primarily equities in the C-CAV products, so, again they're going to get hit harder on a net-net basis quarter-to-quarter.

And institutional positive net flows of $200 million versus $1.9 in the prior quarter and again the $490 million fixed income account and other notable fundings included a $350 million global fixed income mandate and a $ 200 million global equity mandate from separate US pension funds.

And the high net worth was about breakeven in terms of flows for the quarter.

Again, some of the specifics around the funds or investment objectives, equity had out-flows of 9.7 versus 2.1.

The two funds with the largest out-flows were the Templeton Growth Fund with 1.4 versus 1.2 and Templeton foreign $730 million out versus $836 million in the prior quarter.

The income fund had out-flows and with its makeup of high yield bonds and utilities and heavier weighting and financials and some of the preferred, it did have some short-term performance issues in the quarter and that really resulted in some heavier out-flows there.

Fixed income, another solid quarter overall with net new flows of 2.2 versus 3.7 and net new flows for tax free and global fixed were 1.2 and 1.1.

Money funds we did have in-flows for the quarter at $300 million versus out-flows of $600 million and we did see increased net exchanges as people moved out of riskier assets.

Again, as far as investment performance goes I think that was really the highlight for the quarter in three different areas.

Overall on the one year number, from the prior quarter we saw that we moved from 35% of our assets up to 55% and on the five year from 71% overall to 90% of our assets in the top two Lipper Quartiles.

And one of the other big mover areas in addition to Mutual and Templeton, is our global fixed income fund which is our top selling fund and that moved back into the first quartile and moved our taxable fixed income assets on the one year from 30% in the prior quarter to over 82%.

But as we mentioned with Templeton, the underweighting in financials and materials and energy related stocks really reversed itself during the quarter and even with the strong dollar and their policy of not hedging, it still reversed much of the under performance and again looks much better on a relative basis and Mutual Series with heavier cash positions in the funds, more of their typical defensive value orientation did much better in that quarter as well.

So, with that I'll turn it over to Ken for the financial results.

Okay, thank you, Greg.

Hello, everyone.

September 30 marked the end of our Fiscal Year 2008.

Revenue was $6 billion versus $6.2 billion last year, which was down 2.8% and operating income was $2.1 billion versus $2.07 billion last year, and that was actually up almost 2%.

Net income of $1.6 billion versus $1.8 last year was down 10% and reflecting our share repurchase activity earnings per share was down only 5% to $6.68.

Turning our attention to the quarter, it was a challenging one as we all know, with continued market declines weighing on assets under management and on revenue.

Operating income decreased 21% from last quarter to $419.5 million, net income decreased 24% from last quarter to $305 million and earnings per share decreased 24% for the third quarter(Sic-see press release) to $1.30.

Operating revenues were down 13%, Investment Management fees decreased 11% from the prior quarter due to a decline in average assets under management and a mix shift toward lower fee products like fixed income.

The effective fee rate for the quarter, based on a simple monthly average, assets under management was 58.9 basis points.

There were no performance fees this quarter.

On a normalized basis the decrease in the effective fee rate was about 2 basis points from the prior quarter.

Underwriting and distribution fee revenue decreased almost 16% due to a decrease in gross sales and assets under Management.

Shareholder servicing fees declined almost 5% due to decreased billable shareholder accounts following our annual purge of US closed accounts in July which we talked about in the last call.

Other net revenue declined $13.3 million from the prior quarter.

The majority of this change was due to mark-to-market of our retained interest in securitized assets from the auto loan business activity, and that was about $12 million.

Looking at operating expenses, they decreased almost 9% this quarter.

Compensation and benefit decreased 4.1% quarter-over-quarter primarily from a reduction in variable compensation.

There is about $6 million of non-recurring items that reduced the compensation and benefit line this quarter, that are expected to be non-recurring.

Technology and occupancy expense increased 5.7% quarter-over-quarter due to an increase in other occupancy costs such as maintenance and utilities and an increase in depreciation for technology projects that were completed during the quarter.

While we will be deferring non-business critical technology projects and have been deferring them it will take some time for those efforts to be reflected in our numbers.

Advertising and promotion expense increased slightly but we remain relatively flat increasing just 1.6%.

Amortization of deferred sales commissions decreased 2.9% reflecting lower C-class share sales.

And other expenses increased 12.8% due mostly to increased legal and other professional fees that, as we've seen, can be lumpy from quarter-to-quarter.

In this line item, there is about $4 to $5 million in non-recurring items this quarter that increased expenses for the quarter.

Other income net increased $20 million from the prior quarter.

Sponsored investment product losses increased $26.5 million from the prior quarter and that's consistent with recent market value declines during the quarter.

Investment in other income net increased $43.8 million this quarter.

The delta mainly resulted from an increase in earnings for investments accounted for using the equity method as well as an increase in net foreign exchanged realized and unrealized gains.

Those two items together explains most of the $43 million delta quarter-over-quarter.

Interest expense declined to nominal levels as we paid off our medium term notes last quarter and had low levels of commercial paper outstanding.

There was approximately $13 million of commercial paper outstanding at the end of the year.

The effective tax rate for the quarter was 33.86% compared with 27.2% in the third quarter.

The increase was largely due to a one-time tax change approximately $17 million.

That's a result of a change in our dividend policy in the UK where we began repatriating earnings on a quarterly basis.

So, our operating margin decreased to 31.7% this quarter but on a Fiscal Year basis it increased to 34.9% above last years 33.3% level.

We repurchased 2.4 million shares this quarter and 14.2 million shares for the Fiscal Year.

Our total pay out ratio for the Fiscal Year was 108.6%, the largest it's been since 2003.

Total share of the pay off for the quarter was 89.4% which is more in line with our historical average and our recent guidance.

Shares outstanding of 232.8 million are at the lowest level in over 10 years.

I'd like to make a comment on cash and cash equivalents.

Cash and cash equivalents totaled $2.5 billion at September 30, down from $3 billion at June 30 and $3.6 billion September 30, '07.

It's worth noting that the time deposits with original maturities greater than three months are not included in cash and cash equivalents, even when the remaining maturities are less than three months.

So, we've laddered this portfolio over the past year, these other current investments are shown on our balance sheet have grown from $300 million last year to $539 million last quarter to $837 million in September 30 of this year.

If you were to include all of our time deposits on an apples-to-apples basis with cash and cash equivalents the comparable balance would show just a modest decrease year-over-year from $3.9 billion at September 30, '07 to $3.6 billion at June 30, '08 to $3.4 billion at September 30, '08.

And finally I'd like to make a few comments on cost management.

As you may remember, we got an early start, and aggressively looked at expenses last February by asking the business units to cut their budgets and develop contingency plans.

I think you can see those results of those efforts as operating expenses decreased 17% for the year so we have a huge head start we think on our competition.

Our approach has been measured and it's been deliberate.

We know that we are nothing without our customers and we will be very careful to maintain our high standards of investment performance and customer service when reducing expenses.

And I think it's good to bear in mind or at least it's interesting to me that about 40% of our decline in AUM for the year occurred in September.

Even before that occurred we were committed to have targeted and strategic position reductions, given the market activity during the last 30 days we'll be increasing our cost reduction efforts.

Our plans haven't solidified and it is the bottom of the process, so, it's tough to give you an idea of the magnitude but over the next year we definitely expect expenses to decrease.

With that I'll hand it back to Greg for some closing business highlights.

Thank you, Ken.

Just a couple of items of note.

Our credit rating was upgraded recently on October 6 by S&P and we currently have the highest rating given to an asset manager.

We also launched the Franklin World Perspectives fund which has been a big push of ours to leverage all of our local Asset Management teams around the globe and introduce international core growth type fund and it uses managers from Canada, Europe, India, Japan, Korea, Latin America, the Middle East and finally the US.

So, with that, we will now open it up for your questions.

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Mike Carrier with UBS.

Thanks, guys.

First, is a question on the expense base and I know you guys have been talking about expenses pretty much at the beginning of the year and said they are down relative to many in the industry.

Just trying to get a sense though, when you look at some of the expenses that you have currently and some of the investments that you have put in place, what areas can we see some reductions over the next 6 to 12 months and maybe as like a percentage of the expense base or even some of the areas of expenses whether it's other or advertising, where do you think you have more flexibility than say something like occupancy?

I'll start and maybe Greg will add a few comments to it.

I think in terms of the line items, every category is on the table, so, whether it's comp or IT our advertising or other, all those items are on the table.

Our approach has been to take a bottoms up analysis of it and we're going to kind of continue with that so it's hard to -- (inaudible) top down process so its hard to give you a percentage of expenses but definitely we are looking at it aggressively.

Okay.

And then you know, just considering the market turmoil, returns over the past 10 years at least in the US among various asset classes aren't that great and yet, near term pressures on the business.

I'm just curious like do you expect to see any major shifts by either retail or institutional investors in terms of products?

Like what they're going to be demanding over the next 12-24 months and then how could you be positioned for that if you're seeing it or maybe it's too early or maybe in these times of crisis we all swing, the pendulum swings way too far in one direction.

But and then I guess the other thing is when there is a crisis in the market like usually opportunities do come up and given your cash balances, is it a time where you just continue to have cash on balance sheet because it's a good thing to have these days?

But still there could be opportunities and would you consider those over the next 6 to 12 months?

Yes, I think as far as the shift, and obviously this has been a very dramatic period as far as how the equity markets -- and I think you're right, the tenure numbers make it very hard to market.

I think the near term shift will be towards fixed income.

I think we haven't really seen that yet because of the volatility and how this all started and some of the liquidity issues in that market but I do think that you will see a meaningful shift.

Muni's are extremely attractive right now and I think that trend will continue and probably people will hold more than she should in money funds too and our job is going to have to be to have to convince them why there's lower risk in this market than there has been in a long time.

I think as far as types of products, you tend to see more guaranteed insurance products.

Now, that's a whole other issue right now too as far as what is the guarantee in some cases, providing minimum numbers, is that going to be credible in the marketplace, so that's a question too.

But you tend to see that kind of product come out to get people back into equities but I do think that when things settle and markets turn, just the kind of feeling that the market has today is so different than what we had a year ago or six months ago and it does change pretty quickly and if you get a little bit of momentum back, I do think people are more educated and will come back into the market pretty quickly.

Around the cash side, we feel pretty good about the balance sheet right now and I think that that does create some unique opportunities and we've talked about that in the past that you never know what can happen in this market and not having leverage as an asset manager and having a strong balance sheet puts us in a different position than where the market was a year or so ago.

So, the chances that we do something I think are higher than they have been, I'm not saying we will do something but I think at these prices, we think there's a lot more attractive opportunities to add value than there has been in a long time.

Okay, and then just one follow-up on the cash.

The change on the tax rate in the quarter, does that just mean that going forward you'll be repatriating each quarter back to the US?

And then out of that $3.4 billion of cash that you mentioned, including over three-month cash equivalent, how much -- what portion of that is in the US?

38% of that total number I gave you is in the US.

Okay.

And could you repeat the first question, sorry?

Just given the change in the tax rate and the adjustment on the repatriation does that mean each quarter you're be repatriating cash back to the US?

Yes, it does, but it's important to point out a couple things.

One, it just relates to a subsidiary in the United Kingdom and it's not all of the offshore cash.

Secondly, this was more of a cumulative effect and so going forward, I wouldn't expect the tax rate to be up where it is now.

This was more of a one-time non-recurring item.

Okay, should we expect it to go back to like the 28% range?

Yes, I think -- you know there's probably more things pushing the rate up.

Okay.

You know, from the 28% closer to -- we give a range of 28.5% to 29.5%.

Okay, alright, thanks guys.

Our next question will come from the line of William Katz with Buckingham Research.

Thank you, good afternoon.

Just actually more of a clarification, to your point about expenses being down in the upcoming Fiscal Year, is that a quarter-on-quarter analysis or a year-on-year analysis?

It's more of a year on year analysis.

You know, the decisions you make today can take 2 or 3 quarters to flush through the results.

Okay.

Is there any concern here given that you've already been cutting pretty aggressively over the last year plus, about cutting too deeply and potentially eating into the revenue creation opportunity for the firm?

I think Ken mentioned that that's really what we will not do and I think it's a real advantage for us historically.

We've advertised through periods like this and think that this is somewhat of the best time to get the brand out there where there's less competition, so, while we may reduce it somewhat, we will not do the easy thing and just cut it out.

A lot of investment managers that have built businesses that are now not breakeven around the globe, tend to come in and retreat from some countries.

That's something we will not do that we still believe in that long term vision of these markets continuing to develop and the Asset Management business continuing to be a big opportunity for us in those markets so we will not do that.

We may slowdown advertising in some of those markets.

You may slowdown hiring, but we are committed to those and as Ken said too, I mean the Investment Management is what we do and we can't do anything that compromises that and the reality today is that you have increased call volume and increased transactions for your service areas with the volatility in the marketplace.

So, the last thing you'd want to do is go in and reduce the service levels that could really hurt the relationships with the advisors, so, I think you do have to be very careful but there are variable expenses there.

I mean the comp line, our year-to-year was still a pretty good year for the firm but at these levels it will not be as good a year and that means you will have an immediate effect on variable compensation.

And as Ken mentioned the IT spend -- there's things like revenue sharing and the promotion and marketing line that's a function of assets, so, with the decline in assets that's going to be an automatic reduction in what we've already budgeted to that line as well.

So, there are a lot of variable expenses in there and then we're going to still take a hard look at the structure and we think there's some efficiencies with some of the changes that we've made.

And it just takes a little bit of time to get there but the important thing is we've got the groups together that are working on those initiatives and we think by year-end you'll see some real changes.

Okay and then just a couple other questions.

In terms of the balance sheet, as you said you're maybe more open to deals now than in awhile maybe given your position as well as the depressed valuations in some cases.

As you think about your franchise either geographic or by product mix, what seems to make sense as an incremental opportunity to you?

Well, as we've said before, I don't think there's anything that we would say we have to have.

We have most covered, so, it really depends on the situation and if you have a direct sold group that immediately you could add value into the adviser channel through relationships or a firm that's only being sold in the US and has strong performance records and we can leverage that through our structure across the rest of the globe, those are things we would look at.

Obviously we've said it before, we have good assets and good capabilities in the growth area but we don't really, we're not known for that and if that's the one area where we have less market penetration, that's one that we would still be open to but we don't really have anything on the wish list.

And I think the difference today with some of the valuations is you may be able to -- at some level acquire and merge funds and get some real cost savings and benefits quickly that way and that's something we haven't seen I think in this industry in awhile.

I would just reiterate Greg's point the strategy hasn't changed.

The universe of opportunities has grown.

That's what's different.

Okay, makes sense and then just last question, as it relates to compensation, your relative performance is now improving.

Could we be in a situation where your margins could get compressed just because you need to pay for the relative performance improvement while at the same time the absolute returns are going the wrong way?

Well that is -- well, just to reiterate, the compensation philosophy, it's a combination of company performance, relative performance and of course market external market factors, so anything is possible.

I think generally, we're going to try to -- we're going to look at all of the expense line items including compensation.

Okay and just one last one, thank for taking all of my questions.

There seems to be a significant amount of consolidation going on among distribution in the US and probably over the -- across the world over the next several quarters if not sooner.

Just sort of curious, how your thinking about your positioning in the retail area relative to the potential for margin compression and any potential shifts in strategy to overcome that?

Well I'd start with just the generic kind of statement that consolidation is generally not good for an independent asset manager that relies on advisors.

I mean, I think that's somewhat of a general statement.

But the less distributors you have obviously the more influence they can have on who they're distributing.

But I don't think -- I think with this kind of dislocation and there will be a little bit unrest and the independence I think are going to continue to grow as a percentage of the industry and really -- so, we don't see the traditional model changing except that one of our big initiatives is really with our website and trying to deliver to those independents in a way that's much more cost effective than the traditional [wholesaling] model so I think that -- we've been working at that for awhile.

I think these changes will just accelerate some of the growth in the independent channel.

Okay.

Thanks very much.

Our next question will come from the line of Hojoon Lee with Morgan Stanley.

Good afternoon.

Just a question on the stronger dollar this quarter.

Could you give us a sense of how this affected both revenues and expenses, maybe versus a quarter when FX moves weren't as significant?

Sure.

It's a -- well a couple of things.

You know, I guess it's important to point out that most of the operating income for the company is denominated in US dollars, so, it didn't really have that much of an impact this quarter on revenue or expenses.

Like over 90% of the operating profit of the company is dollar denominated.

Great.

Thanks.

And just as a follow-up, could you speak to the behavior or trends your seeing among your distribution partners in Europe and Asia?

For instance are they selling more deposit or other types of products now?

And maybe if you could kind of bracket how this differs from your distribution arrangements in the US?

Well, we're not really seeing that sort of a trend.

Okay.

Thank you.

Our next question will come from the line of Ken Worthington with JPMorgan.

Just to follow-up on that question, can you walk us through how you're thinking about the currency hedges with the dollar up significantly?

And I know said -- I know your funds collect fees in US dollars but even those funds that collect fees in the US dollars are still -- have assets, underlying assets that are tied to foreign currencies.

So, it seems like there is a currency issue there, so how are you hedging and given the magnitude of the change in the dollar, does your hedging strategy change going forward?

I'll give you a couple of data points.

During the quarter, about 21% -- 20% to 21% of the depreciation or assets under management was due to currency, so it wasn't a major factor.

And keep in mind that even with that, as Greg pointed out, that the performance improved.

When you look at our assets under management almost 0.6 of them are dollar based, so, that's why you get such a small percentage and again, in revenue terms, almost 90% -- and revenue (inaudible) thought was 90% it's dollar based.

So, hedging is just not an issue?

Well some of the -- obviously the Templeton funds do not hedge except for the global bond fund that does employ hedges and the Mutual Series fund from time to time hedges, so, it's kind of hard to generalize.

And I'm sorry, I was meaning at the corporate level as opposed to at the fund level.

Oh,there's -- yes, I guess the point is there's no need to hedge.

Okay.

Okay, fair enough.

And then on the repatriation of -- I think it's earnings in the UK, maybe you said dividends in the UK, --

Same thing.

Same thing okay, so what was the intention?

Why decide to dividend now?

Is there a chance that you might expand this to other regions and then I think you have a pretty big off balance sheet liability because I think you've said -- or you have declared over years that you didn't want to repatriate any of the earnings.

Does that change that liability, does that bring like this liability like on balance sheet?

Is there anything there?

No.

And that's a great question.

This was specific to one asset advisor in the UK where we had kind of changed the asset management contracts and over the years there's been acceleration of cash accumulation there, so -- and a relatively narrow income tax differential between UK and US dollars.

So, that's what was the catalyst for changing our policy, but at the time there's no plans to expand that any further.

Okay.

And then on the Balance Sheet liability thing, is that just a non-event or is there something there?

No, that's a non-event.

Okay, thank you very much.

Our next question will come from the line of Michael Kim with Sandler O'Neill.

Hey, guys, good afternoon.

Not to beat a dead horse but just in terms of expenses, if you look at your AUM, they're down about 20% year-over-year when your headcount is actually crept up a bit and I understand a lot of that has kind of been in lower cost centers but do you feel like your headcount's where it needs to be today, just given that the reset in the AUM levels?

Well obviously, the fact that the asset managements are down, you know, a lot of that as I pointed out, 40% of that occurred in September, so, we felt -- but even before that, we felt that there was an opportunity to do some targeted headcount reductions and that's what I was referring to so now since that event we're definitely going to escalate our efforts there.

Okay, and then maybe a question for Greg.

Just kind of focusing on the retail business here in the US.

What are the areas where you think you could feel like you can still generate meaningful in flows in this type of environment whether it's Mutual Series, global, fixed income or Munis or what have you?

Just some additional color there would be helpful.

Yes, I think it's all of the above.

I think number one, I'd probably put Munis -- just because I think they're -- there is such a value there right now and part of that was some of the liquidity issues affected that market as well, so, I just think that's a good story and solid for a lot of people today.

I think the equity one is a little bit harder, but I think with -- again with mutual, with the history and being more defensive and doing well in these kind of markets and hopefully with the better short-term performance we should get a little bit of momentum back there but I think any of this until the -- any of the equity sales are going to be very difficult until we get a much, the volatility in the market settles down quite a bit and I think fixed income should be what emerges as far as meaningful flows, I think, in the next quarter or so.

Okay, and then just finally I know you touched on this earlier but in terms of free cash flow usage, any kind of change in thinking in terms of dividends and share repurchases, just given the ongoing market volatility?

No real change -- share repurchase, we'll continue to be opportunistic.

We have about $5 billion left on the authorization there and no real change in the dividend policy.

Okay.

That's helpful.

Thanks.

Our next question will come from the line of Jeff Hapson with Stifel Nicolaus.

Okay, thanks.

Greg, what are you hearing from the institutional side as far as potential changes and what they're looking for, any changes of behavior?

And then do you think that traditional asset classes potentially in the institutional channel could see some rebound given the dislocations in some of the alternatives area?

Yes, I think there will be some changes there and obviously, the pension liabilities being underfunded now and that should mean search activity will increase.

It's been very quiet right now and I think a lot of people are hesitant to put anything new to work, especially on the equity side, in the kind of market that we're in right now.

But you would think that with some of the problems in the alternatives area and I think the amount of money that's gone into the absolute return (inaudible) to funds, that to me, there will be a lot more question marks around that value proposition and I -- you know I think that's just going to be a lower portion of searches going further so and I also think that at these valuations and historically where we are, the long only strategy, should be a lot more attractive than it has been in awhile.

So, to -- the answer your question, which you kind of directed me to answer on was I do expect to see more searches in the traditional area but again, I don't think it's going to be meaningful until things settle down a bit in the equity markets.

Okay and global fixed income in the institutional channel, any slowdown in interest in that product?

No.

I think that's the one that we continue to see strong interest in and the managers have really done a tremendous job in positioning the fund and historically, it had benefited from the dollar depreciating and then they made the right move at the right time with the fund to reposition it on the other way.

So, it really is a great story right now, and adding a lot of value for active management and certainly with the Sovereign Wealth Funds, where we see a lot of interest, we expect to see new searches and continued searches there.

Our next question comes from the line of Eric Veil with (inaudible).

Thanks, my question has been answered.

Thank you, sir.

Our next question will come from the line of Prashant Bhatia with Citigroup.

Just on -- you talked about the cost cutting.

Are there any areas where you're going to actually invest or spend money to grow organically over the next 12 months and if you could highlight some of those areas?

Sure.

I think there are areas.

You know, internationally, we've been expanding and we'll continue to go there.

Local Asset Management is an area where we will continue to invest.

We launched on the fourteenth, Worldwides perspective, C-CAV product that really is a group effort with our local asset managers contributing ideas to that product and I think that's an area where we're going to continue to expand.

Okay, so international and that entails headcount and so on?

Yes.

Of course.

Okay.

Also, on the share repurchase, you said you'd be opportunistic.

I guess just looking back over the past couple of years, you've spent over $1 billion in repurchases at prices that were double what they are today.

So, when we look forward over the next 12 months is it reasonable to look at north of $1 billion allocated to buyback?

I think that in each of the time periods we were pretty -- we were pretty -- we're bullish on the company given the market environment in the climate that we are in and that's the case today.

The volatility adds a new dimension to it but -- so, I think, you probably won't see those levels but you'll see us be active.

Okay, and does the acquisition opportunities -- does that make you pause on the buyback as well or is that another element in the mix because you may have acquisition opportunities that you didn't have before?

I think that is a factor that -- yes, we would consider going forward.

Okay.

And then on the money fund side, roughly $7 billion in AUM, that's not really a scaled platform, is there -- do you think an opportunity here to grow that meaningful or do you think you need to?

Or the other way, do you maybe potentially exit that business being that it's relatively small and we've seen some of the risk in that business can be relatively large?

You know, I think the answer is that we have never tried to aggressively go after money fund business in any way.

We treat it as a convenience for shareholders and it's becoming less and less important as advisors are linked into their own money funds.

So, it -- at $7 billion, it's not a money loser for us but it's certainly not much of a money maker if it is.

We've been very conservative in how we manage those funds that we felt like if you want to compete money in funds, we absolutely agree with you that the risk reward is not there for us as far as what we'd like to focus on.

So, it's something that we don't have any ambitions to scale but we do think at $7 billion, having them here for our shareholders and capturing in markets like this where you may be able to keep some of it in the complex, still works and we do have some people that just deal with them directly as well, just because they haven't gone somewhere else.

So, it's a business we're going to keep and on that the way that we think we manage it, has little risk to the company and having gone through what hopefully is one of the most difficult periods that we'll see from money funds -- again we had very few issues if any.

Okay, and then on the Sovereign Wealth opportunity, how do you size that for your company?

How many people are dedicated to trying to bring in assets there?

How big do you think that can get in terms of total assets being managed by Sovereign Wealth type money and if you could just size what that pool is right now for you?

And if you can tell me where oil prices are going I'll try to answer that question because that's really where it has obviously a direct impact.

For us, we have been servicing that group through our various country heads and regional heads and we changed our model this year to have a dedicated Head of Sovereign Wealth out of London who is working with all of those different local country heads that may be in those specific markets.

So, we probably have five or so people dedicated now to that effort but they're really part of our overall institutional group and I have no idea how big the opportunity.

It's -- obviously for us already very significant but I don't know what to expect and how big it can grow.

Can you give us rough numbers what the AUM is today, for you?

I just don't have it broken out.

You know I know one relationship is $10 billion, so, it's meaningful.

Okay, thank you very much.

Our next question will come from the line of Craig Siegenthaler with Credit Suisse.

Thanks.

Just thinking about the other distribution channel which includes both institutional and international retail.

I'm wondering if you're seeing a divergence between the two channels?

And what I'm really trying to get at is, are international terminations or redemptions really -- or excuse me, are institutional redemptions and terminations really holding in there and is it retail which is driving out flows?

Or is it kind of a mix of both?

I'm sorry, I missed, is this for overall the globe or US or non-US or retail institutions?

According to your roll forward on 7 -- on page 7 -- you're AUM roll forward.

You break out assets within the other channel which includes both institutional and also international retail is also in there and I'm wondering what's really driving the sequential decline in flows?

Is it retail assets outside the US or is it more of an institutional issue and I assume it's probably more of a retail issue because that's what you're seeing in the US.

Yes, that's right.

It's clearly more of a retail issue and we actually had, as I mentioned earlier, net in-flows for the quarter in the institutional side.

Got it.

And my second question really is on the investment and other income line, I know you gave kind of a quick explanation that was a little bit lumpy, a little bit strong.

I was wondering what again was the reason for that strength and how can we think about kind of a core run rate in that investment and other income line?

And what's also the asset base that supports it, I'm wondering roughly?

Okay, so there's always two things to talk about when we talk about other income.

There's a sponsor in investment product gains and losses that's the mark-to-market on our trading securities.

That line item -- so, that's been down about 10% and that's roughly in line with the major indices.

There's about -- the trading security is probably around $300/$350 million, and then in the investment and other income what's driving the delta there is some gains we took on predominantly our investments in our private equity products.

The DARBY products that were made many many years ago that we had some positive marks on, so, that was part of it and the other part of it was an FX gain.

And part of the FX gain related to the repatriation of the UK -- the UK earnings.

So, those two items represents almost all of the $43 million delta.

So, when we think about that line item and we think about your cash level and we look at 1% of cash, it roughly gets you to a number in the mid 30s is that a good run rate?

And, actually have a second question on the repatriation.

Yes, I mean that's as good as any number really because those items I just highlighted were really unusual in the quarter.

Got it.

And just one more question on the repatriation.

Was that -- how large was that and can we -- when we think about that, is there a better return of capital right now in the US?

Meaning do you view, I guess, share buyback or an acquisition in the US more attractive than keeping those earnings overseas?

Well those earnings -- I think the answer is, that we're good on the US for the share buybacks in terms of the cash position and we think that it is a good use of the foreign cash to invest in the foreign Operations.

Great.

And no color on the size?

Repeat the question on the size?

I was just wondering about what was the actual level of earnings or cash as repatriated back to the US?

Oh.

$200 million.

Great.

Thank you for taking all my questions.

Thanks.

Our next question will come from the line of Marc Irizarry with Goldman Sachs.

Oh, great thanks.

Greg, can you just shed a little color on the fixed income business?

Obviously, there's some (inaudible) who have been a bit (inaudible) and I guess fixed income institutionally, we're probably going to see a lot of changes go forward.

Do you think some of the volatility we see is going to actually benefit active fixed income or are we going to see potentially some changes there which will work against some of the positive trends that you've actually seen recently in the business?

I mean, I don't really have a strong opinion on what it will do with regard to the current players based on the volatility.

I'm not exactly clear on the question, maybe that you're asking, so, help me, I have our head of fixed income right here, so, I can pull them up here and probably have a better answer than I can anyway.

I mean do you expect to see any changes in your fixed income RFP activity just because of the -- do you think what we've seen in terms of fixed income performance recently is going to get institutions to sort of rethink their allocations to fixed income in a way that's either going to benefit your business or that's going to hurt the business?

Well I think we talked about it before.

I don't think there's been a lot of changes since there's been three large players in that space and one of them has had a bit of challenges in the last year, so, a lot of business has gone to the other two and we benefited from that somewhat.

But I don't see anything in the more recent -- in the recent market that would really shift the landscape between those two big ones.

But for us, as we said before, I think it's a new group that having combined the Franklin group and fiduciary and they continue to do extremely well and we continue to grow our share the institutional side, so, we still see it as a good opportunity right now.

Great and maybe can you just give a little bit of color or a break out if you could of employees between sort of investment professionals and distribution folks?

Is there another question or is that okay?

That's great.

Thanks.

Okay, thanks, thank you.

Our final question will come from the line of Cynthia Mayer with Merrill Lynch.

Hi, thanks a lot.

Just two quick questions.

Just on the income fund out-flows, I'm wondering, you know, how permanent you view those?

Were you taking off any platforms there in a way that might perpetuate the out flows even if the performance bounces back or do you think if the performance bounces that will recover pretty fast?

Yes, I think that's the case.

I think even if we didn't have some of the names that we wish you didn't have as far as in the financials and the fact is that fund is categorized in a conservative, balanced , fixed income category.

It will always hold high yield.

It will always under perform when you have periods like that and out perform when the spreads are going the other way.

We own utilities, they got hit very hard during the sell off.

They've traditionally been more of a back stop for that mix so it -- and then some of the dividend paying stocks that -- and preferreds that ran into problems in the financial side, so, I think it performed, it underperformed.

It was accelerated a bit by some of the financials but we feel like right now how that funds positioned and still being able to go in and buy some of these quality financial names today really positioned the fund in great shape going forward.

And I think once the high yield bond market settles down -- and it appears that maybe that's starting to happen, that this fund is not going to go away.

It's been around a long time.

It performed again like it should and we don't try to go from investment grade to high yield.

It's an income fund and the income, the good thing about income funds is when they get hit the dividend gets higher if there is a good thing.

And that attracts new people and that has a very high dividend and a dividend that may go up soon, so that tends to support sales when

Okay, and then just one very quick one which is the mark-to-market that you took on the auto loans in the quarter.

Is that a annual measurement you take or is that the kind of thing where you know, if the markets deteriorated again this quarter you'd be taking another one?

It's a constant mark monthly actually.

But it's unrealized though of course, so when markets rebound we'll have a mark up.

And what was the size of that, I'm sorry, you said it was 12?

It was 12, yes.

12, okay, thanks.

Okay, well, operator?

We have no further questions at this time, sir.

I'd like to turn the call back over to CEO, Mr.

Johnson.

Well, thank you, everyone for participating on the call and we look forward to speaking next quarter.

Thank you.

And ladies and Gentlemen, this does conclude today's teleconference.

You may all disconnect.