富蘭克林資源 (BEN) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to Franklin Resources earnings conference call for the quarter ended December 31, 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 details in Franklin's recent filings with the Securities and Exchange Commission, including the risk factors and MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

(Operator Instructions).

Thank you.

Mr.

Johnson, you may begin your conference.

Thank you.

Good afternoon, everyone.

This is Greg Johnson, CEO of Franklin Resources.

Joining me, as always, is our CFO, Ken Lewis.

Stating the obvious, it was a difficult quarter to be in the asset management business.

Revenues, earnings, and flows declined on the back of very weak markets in the S&P and Dow, over 21% decline.

If there's any silver lining, we're pleased to see that investment performance continues to make progress, and our cost containment initiatives that we initiated over a year ago are starting to have an effect on the controllable expenses.

And we are very focused still on cost containment at the Company.

Quickly looking at assets, assets declined from $507 billion to $416 billion, and average AUM declined just over 20% quarter-to-quarter.

Looking at the AUM by investment objective the major shift toward fixed income continues and fixed income represented 32% of our assets versus just over 28% in the prior quarter, and that has had an effect on our tax rate which Ken will speak about in a few moments.

Looking at the flows, flows decreased or outflows increased to $18 billion from $8.6 billion.

Sales were down 27%, redemptions were flat quarter-over-quarter.

Our flows did not benefit from the flight to money market funds in the past quarter, and money funds represent 2% of our assets versus 40% for the overall mutual fund industry.

Looking at the net flows by sales region in the US, net new outflows of approximately $12 billion more than doubled from the prior quarter of $5.6 billion.

Sales decreased 10% while redemptions increased 20%.

Tax-free funds, which had been one of the best selling categories over the past year had net outflows of $1.7 billion.

It was a lot of volatility during the quarter in the muni market, specifically with our [Cal] tax-free and our high yield tax-free led outflows in that category.

Our largest fund, the Franklin Income Fund had net outflows of $2.8 billion versus $1.4 billion, representing the largest outflow for any of our funds.

Outside of the US, sales decreased by almost 40%.

Redemptions decreased by 23%.

But it's important to note that this decrease in sales was primarily due to our India Treasury Management Funds which had $5 billion less in sales, and there was a dislocation in that market with a lot of the money fund issues that we're experiencing around the globe.

Given the market environment we initiated an international sales campaign which focused on fixed income which highlighted the Franklin US Government Fund.

It was our best-selling product during the quarter with third party net new flows of approximately $520 million compared to a flat quarter in the fourth quarter.

Looking at the flows by client type, on retail, we had net new outflows of $15 billion, compared to $8.8 billion in the prior quarter, and the net outflows was a shift again on the fixed income products that had been generating positive flows in the prior quarters.

The institutional side, we had net new outflows of $3.1 billion versus $200 million in inflows, a 25% decrease in sales with an 8% increase in redemptions.

Most institutions during this kind of volatility were taking a wait-and-see approach during the quarter, which ended in not having a lot of big wins without any fundings from any of the institutions during the quarter.

We expect to see this turn around this quarter with searches increasing and fundings from prior wins occurring this quarter.

Largest single inflow was a $250 million global equity mandate from an existing Korean client.

High net flows were about break-even for the quarter.

Flows by investment objective.

Net outflows for equity products decreased 12% to $8.5 billion.

Global equity contributed to most of the decreases net new outflows declined to $6.5 billion from $7.5 billion in the prior quarter.

Domestic net new outflows decreased to $2 billion from $2.2 billion.

And on the hybrid side, net new outflows from hybrid products more than doubled to $3.2 billion compared to $1.4 billion in the prior quarter.

Again, the majority of that is our largest fund, the Franklin Income Fund.

Fixed income swung to outflows just as industry flows did overall posting net new outflows of $7 billion versus inflows of $2.2 billion.

And again, $5 billion of that, of the sales, was due to the lower India Treasury Management Funds, and our global international and tax-free funds which were some of our best-selling products in recent quarters, combined to have outflows of $7.3 billion versus positive flows of $2.3 billion.

Money funds posted net new flows of $500 million which is a two thirds increase from the prior quarter.

Looking at investment performance, not a whole lot of changes.

Overall, we're pleased to see that the one-year performance numbers for the group ticked up from 55% of our assets in the top two quartiles to 60% today.

Of note on the taxable fixed income side, we saw the one-year performance improve to 91% of our assets on the top two quartiles, and that was on the back of the Franklin Strategic Income Fund.

Tax-free saw significant improvement in the one-year numbers increasing from 63% of assets to up over 81% of assets.

Looking at the equity side, the Templeton side slightly -- or decreased, and that was on the back of the growth fund.

And I would say for the year, Templeton has about average performance for the one-year period but the growth fund did slip down to third which represents 50% of our assets.

Mutual series continues to have excellent performance, and in every time period, one, three, five, and ten, at least 88% of its assets are in the top two quartiles.

Franklin Equity.

As we mentioned, the Franklin Income Fund with its focus on financials and high-yield bonds continues to lag its peer group and that represents 51% of our assets, but many of the other Franklin equity funds performance increased, the small mid cap fund, which is 5% of our assets, the Franklin balanced fund, another 5% of our fund, also improved in the quarter.

I'll now turn it to Ken for operating results.

Okay.

Thanks, Greg.

Hello, everyone.

This was a challenging quarter for all asset managers as market conditions drove assets under Management to levels last seen several years ago.

We felt that our response on the cost management side was effective.

Expenses declined over $200 million from last quarter, and more than 33% from the prior year.

Operating income decreased 38% from last quarter to $268 million.

Net income decreased 60% from last quarter to $121 million, reflecting investment losses and increased tax expense.

Included in the results this quarter are over $100 million of unrealized investment write-downs to market.

Earnings per share decreased $0.59 from last quarter to $0.52.

Investment management fees decreased 27% from the prior quarter, primarily due to the decline in daily average assets under Management and a further mix shift toward lower fee generating fixed income products.

As you may recall from previous discussions, most of our funds generate fees based on average daily net asset values and due to the volatility and the timing of the fluctuations in assets under Management in this quarter, the daily average assets under Management was lower than the simple monthly average.

And, that is primarily why you are seeing what looks to be a much lower fee rate compared with the prior quarter.

We estimate that our average fee rate using the daily averages was about 57 basis points versus the 54 basis points you might calculate using the monthly average.

Underwriting and distribution fees decreased over 28% in line with decreased sales and assets under Management.

Shareholder servicing fees declined almost 5% compared with a 3% increase in billable accounts.

And that disconnect is due to an increase in closed accounts that generate lower fees.

Other net was a negative $4.1 million this quarter.

Included in this number is an $18 million write-down of a retained interest in securitization transactions that represents our contractual right to receive interests from the pool of securitized loans that we service.

On the expense side, as we've talked about, operating expenses decreased over $208 million or 23%, as we focus our attention on expense management through a variety of measured and deliberate steps.

Most of this decrease was from cost cutting.

Some of it it was due to seasonality and lower volumes.

A portion of the cost reductions were headcount related this quarter and included an approximate 2% reduction in October that was followed up with an additional 4% reduction last week.

Included in the compensation benefits expense line is an $11.2 million severance charge related to the October reduction offset by non-recurring expense reductions of $3 million to $5 million.

Looking forward, we expect a charge of around $13 million in the next quarter's numbers for last week's reductions as well as a seasonal uptick in compensation expense related to payroll taxes.

Technology and occupancy expense decreased 17.3% quarter-over-quarter, due to a decrease in consulting fees, part of which is seasonal, utilities and building maintenance, and outsource data services.

Advertising and promotion expenses decreased $21.3 million, or 46.8% quarter-over-quarter, due to a combination of lower marketing support fees, cost-cutting, and about $5 million to 6 million of seasonally low advertising spend.

We continue to believe that it is important to support our brands with advertising and are doing so albeit at reduced levels than we've done in the past.

Amortization and deferred sales commissions decreased 24% due to a decrease in Class A and Class C deferred assets, and the accelerated amortization of $8 million that was included in the previous quarter.

Also, this quarter included about $3 million of accelerated amortization.

And lastly, on the expense side, operating expenses -- other expenses -- decreased 27.3% as a result of lower legal and professional fees, travel, entertainment, and other discretionary expenses.

Moving to non-operating income, other income net swung to a loss of $83 million this quarter due to several factors.

First, sponsored investment product losses increased slightly over the previous quarter to $36.5 million, and this line represents the mark-to-market of our [C] capital investments in our own funds that we consolidate.

And, investment and other income net posted a loss of $45 million, which was a $123 million decrease from the prior quarter.

The decrease mainly resulted from the switch from net gains to losses in equity income from affiliates and increased other than temporary impairment on available for sale investments.

That was about $34 million.

In increased realized losses on investment, about $17 million.

Unrealized mark-to-market losses on retained securities from our 2008 auto loan securitization, $12 million.

Decreased interest income on yields and cash and cash equivalents have declined materially.

That's about $9 million.

And, decreased realized and unrealized foreign exchange gains is about $8 million.

Now, those are a laundry list of unusual items that occurred in the quarter.

It might be easier just to look at what was expected in this line item during the quarter, and during the quarter we had earnings on cash and investments of about $25 million.

So, that's an item we would expect to recur at probably lower rates as the yield on cash decreases in the future.

The effective tax rate for the quarter was 34.9%, due primarily to the changed mix of assets under Management and related revenue.

The estimated percentage of taxable income earned in the United States increased 26% in the quarter.

And that probably is not too surprising when you consider the 26% decrease in the Templeton assets under Management Templeton funds are mostly managed offshore.

The operating margin slipped to 27.7% this quarter, which in this environment we feel is a pretty healthy margin.

Despite the difficult market conditions, we continue our capital management activities.

We increased the dividend by 5% in December and repurchased 700,000 shares during the quarter.

Our total payout ratio for the quarter and current fiscal year was just under 78%, and that's slightly below the 80% to 90% target we previously indicated.

Cash and cash equivalents plus other current investments -- that's time deposits -- were $3.1 billion at December 31st compared with $3.4 billion at September 30th.

That concludes my remarks.

Back to Greg for some business highlights.

Thanks, Ken.

Moving on to business highlights, which seems like an oxymoron looking over the past quarter, but I will mention a few highlights for the quarter.

We did launch our retire metrics sales and marketing campaign which is focused on developing retirement solutions to meet the changing needs of advisers and their clients.

We initiated the international sales campaign to focus on fixed income.

We opened a local asset management office in Malaysia, and we expect more mandates to fund this quarter, somewhere around $500 million.

And in the UK, we are pleased to see that the Templeton emerging markets trust received the Trust of the Year Award for 2008 in the Emerging Markets category.

We also are pleased to see the continued excellent performance with our global fixed income group, and in Canada, the Templeton Global Bond Fund was awarded for the Best Global Fixed Income Fund at the Canadian Investment Awards.

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

Thank you.

(Operator Instructions).

Our first question will come from the line of Michael Carrier with UBS.

Thanks, guys.

First, a question on just the cost.

When we're looking at the different buckets, I know there's going to be some noise that you gave related to comp next quarter.

But primarily the other buckets, when we're looking at IT, advertising, other.

Ex the seasonality that you mentioned, are we at a pretty good run rate going forward given the current environment?

And if just if things were to worsen, you have some more flexibility there.

I think the answer is those specific line items probably a pretty good run rate, if you adjust for seasonality there in the IT line, in the advertising line.

With regards to the second question, there is some flexibility in those line items, particularly the IT line item, if things were to get worse.

Okay.

And then, part of the biggest shift in terms of flows that we saw was in the international fixed income bucket.

And just wondering, granted, there were outflows pretty much across all the sectors, buckets during the quarter for the industry.

But just wondering, when you look throughout the products in that bucket, were there certain things in certain customers that you were really exiting?

Because on the institutional side when you look at the total flows, doesn't seem like it was all fixed income.

I guess just any granularity on that, and if you expect it to moderate to more normal levels?

Well, it's hard to say.

I think I do expect it to moderate, because I think if you look at the flow activity, it really correlates with what's happening in the -- especially the financial services sector capital markets.

When you get the headlines, it's almost immediate on the retail side.

If you look at the industry flows in the quarter, any kind of bond fund that was long-term, global bond funds, high yield, munis, there was a very rough period there, and there was a flight to quality.

If you have another period and people run to treasuries, then you would see another blip in that.

But, I think that was more of a one-term, and I think the trend is improving.

It's not something that people are abandoning.

What I think is the most attractive sector that existed.

Okay, and then just two final questions.

Just on the tax rate, as long as the fixed income assets remain where they are relative to the equities, should we still expect roughly that 35% tax rate?

Or is there anything that you can do to try to bring it down?

And then the second one would just be, when we look at the non-operating income, and this is across all the asset managers this quarter, a lot of volatility and not a lot of disclosure in terms of trying to really figure out what's in there and trying to model it.

If I look at the different buckets in terms of the seed investments versus that other income bucket, when we look at the 10-Q or the disclosure that you give on the securities, we can break it out in terms of available-for-sale versus trading.

But is there anything that we should be looking at other than that in terms of, like if you can give us an updated level of what the investments are currently?

And then going forward, maybe we can try to mark them from those levels?

If there's any color there?

First, on the tax rate, there were a couple items in the tax rate, discrete items this quarter that pushed it up.

And if you assume that the mix will not change, I think that maybe it's a little bit high this quarter, so maybe take a little bit off that, but it won't be 35%.

But, it's in the ballpark going forward, assuming the same mix that we have assumed in the first quarter.

On the other income, not much has changed in the composition of the investments.

You can look at the investments available for sale and the trading securities.

The trading securities -- the investments I'd say are maybe weighted more towards global equity, but they're basically they should model after our product offerings because most of it is seed money.

So should be pretty consistent with our AUM in terms of mix of the securities.

But there's been no fundamental shift in the strategy for this quarter or for a long time.

Okay.

Thanks, guys.

Thank you.

Our next question will come from the line of Robert Lee with KBW.

Thanks.

Good afternoon.

Hello.

I'd like to go to the comp line for a second.

How should we be thinking about, going through some of -- just went through somewhat larger headcount reduction, taking another charge.

How should we be thinking about what kind of the targeted -- what that implies for cost saves in terms of compensation or otherwise going forward?

Right.

I tried to give you a little bit of guidance there on the ins and outs.

The short term, you'll have this severance charge that I mentioned, and you'll have an uptick in the taxes.

And the other thing to keep in mind in the first quarter is there are some components of the compensation expense that are tied to the Company's stock price as well as to some of our funds.

So, some of the long-term awards are granted our funds, and they get marked.

So that is why you had a little bit of reduced expenses last quarter.

So going forward, I think the ins and outs offset each over.

And the other big driver is always the bonus pool, which is variable.

We set that as we go, but obviously there's flexibility there, either way, with what the markets do.

But if I look at the 6% headcount reduction between the last one and this one, is the idea that you are taking $30 million a year out of the comp base, everything else being equal.

Or $40 million?

How should we be thinking of that?

Our estimate, in terms of that coming out of the comp base, is it's probably going to be a few quarters before you see it stabilize.

It's in the $20 million to $25 million range.

Okay.

And if I could maybe ask a question on the auto business?

I mean, obviously, had a couple of expenses, charges, or whatever you want to call them, related to the last couple quarters.

I know it's a relatively small thing in the scope of the business, but it's a little bit of a drag right now.

Can you maybe give us some update on what the intentions are of that at this point, or are you still writing auto loans?

Have you stopped?

Is there anything going on there that we should be aware of or think about going forward?

On the auto loans, we definitely slowed down the volume there.

We're riding on a monthly basis -- on an annual basis, the estimate of what we're going to write on an annual basis is probably half the monthly volume that we've been doing over the last five years.

So it's kind of slowed down to a trickle.

We have about $120 million of loans on the balance sheet.

So things have slowed down dramatically.

We are keeping it contained, if you will.

Okay.

Great.

Thank you.

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

Okay.

Thank you.

Just to follow up on that last question, just the bigger picture question is at this point, given everything that the banking industry is going through and may still go through, why are you bothering with a bank?

Just curious if you could talk strategically about that asset, in general?

The bank itself is part of the high net worth strategy, and the auto loan business has been there for a very long time.

And we've kind of been through this on previous calls on how it's evolved.

As part of the cost-cutting initiatives, we're looking at every single business line, and the auto subsidiary is no exception.

I'm sure you would agree that if you did want to exit that business it would be the worst time to do that.

But -- so we're looking at everything.

More to come on that, I suppose.

We are going to go through the portfolio of all our business lines.

The answer is we have to be in the banking business.

That's part of the high net worth services that we offer.

And these write-downs are mark-to-market.

Like many banks we feel like there's more value in that security than where we're marking it today, but the market is the market.

And our underwriting -- we still feel very good about.

And one would argue in this kind of dislocation, in this market and the spreads that we're getting today it's probably a good incremental use of funds.

Sure.

Just to clarify your remarks, the residual cost saves associated with these last two reductions of force, that's more of a six month window until you start to see them, or will they just be masked by the severance charge and some seasonality in this upcoming quarter?

You will see, probably I'd say, maybe not six months but between three and six months you will see the full impact of the cuts.

The first one we had -- you probably have two thirds of the first cut in the first quarter.

And then, this one, you will probably have two months again in this quarter, and then going forward, it should normalize.

In Quarter Three.

As you step back, Greg, I'm sort of curious, as you mentioned you thought things might be moderating a little bit.

Can you give us a little update on what you are seeing at [OB], I know it's early in the year -- in terms of retail volumes?

And I was wondering if you could separate your thoughts between US and non-US?

It is early, but January tends to be a relatively strong month for the industry.

I don't think equity flows overall have come back to typical January, but certainly much better than the fourth quarter overall.

And we would be tracking that, and I would say that it would be similar as far as what we're seeing outside of the US versus what we're seeing here in the US.

Okay, thank you very much.

Thanks.

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

Maybe just to start off with a broader question, once the markets do stabilize, and we start to see retail investors take on more risk -- I'd just be curious to get your thoughts on how you see allocations to international equities playing out?

Do you think investors will continue to put more of their portfolios in funds investing overseas?

Or, do you see more of a reversion to the main in terms of historical allocations?

I think it's hard when you say what is the main, and what is historical.

The fact is, we operate in a global economy, and I think people, the acceptance to investing outside of the US is much higher.

The comfort level to that risk is much greater than where it was five or ten years ago.

So, I don't think that has changed.

I think once you see the returns come back, and to me it's always a function of what it does against your local market.

If global equities do better, and if that's a function of the dollar as part of that one way or another, you'll get that share back pretty quickly.

The question today for all investors, when you have had a 40% or so decline in equity values, and I think that's very different than anything we've seen before.

So how quickly they come back, and do they come back more into munis or higher quality fixed income securities?

That remains to be seen.

But I think on the 401K side, we haven't seen a big change, and I haven't heard of a big change in the industry as far as people sticking to their knitting and still adding to their 401K despite having a big [sell-off].

So, I don't think you're going to go back to some number of 5% or 6% or 8% or whatever the historic number is depending on what audience you are looking at.

I still think the trend will be people are more -- they accept global investing more than ever, and they will continue to increase that portion as a percent of their portfolio.

Okay.

And then just finally, I know you touched on this earlier, but it seems like visibility on the non-operating side continues to decline.

Is there any part of that portfolio that you could potentially hedge to reduce the volatility that we're seeing on that on a quarter-to-quarter basis?

From time to time, we have unique investments.

We have hedged them, but when you look at my comment earlier was that it's pretty much representation of our product line, and to try to hedge that wouldn't be very cost-effective.

And, it's something that, Michael, that we have look at over the years.

We have some experience with our joint venture, the finances -- the B shares -- that have attempted to hedge the risk of the B shares.

It's not -- it's effective, but when you expand that to the global scale of our seed investments, it really wouldn't be cost-effective, and it would add to a lot more volatility.

(Inaudible -- background noise)

Okay, that's helpful, thanks.

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

Good afternoon.

Can you provide us with an update for your capital management strategy in terms of how you weight the option of buyback versus acquisitions, and also how do you feel about the current acquisition pipeline in the US versus some of the attractive markets overseas?

I'll talk about the capital management.

Really, no change to the capital management strategy of being opportunistic.

I mean, we're a little lighter this quarter given the market volatility.

But, there is really no change as the markets stabilize, I expect us to get back to levels that we've seen in the past.

And then weighing it against M&A acquisitions, it's -- this is a subjective decision.

It's a factor, but we have a lot of cash and a lot of financial resources available to us in an M&A transaction so I wouldn't give it as much weight as perhaps others would.

And I think just overall, M&A activity -- it's very hard.

I mean, one, I think there will be more deals done in the next year, but in this kind of environment, certainly in the last quarter when you're in the middle of the storm, and you have the kind of volatility that you have with assets and trying to model out companies and look at what the right level is to purchase at.

It becomes hard for the buyer and hard for the seller to agree to what is reasonable.

So, I think you need the markets to stabilize a little bit.

You'll always have the forced seller that has -- that may have debt or issues there that like the banks have to do something quickly.

But I think in our business, there's not too many of those situations, and I do think that when the dust settles, you will see the activity level pick up.

But, it is very hard to do those kind of deals when stocks are moving up and down 10% in any given day.

Great.

Thanks.

Then real quickly, on the global bond funds, outflows really picked up there.

I think you mentioned there was a lower treasury Indian mandate, but I missed that?

I just wanted to know what was that mandate termination?

Also, what were flows ex that termination positive?

Right.

It was really a India cash management accounts that we have.

That corporations use similar to a money fund, but it does have a floating net asset value.

So, it's included in short-term bond funds.

And, they had some dislocation in that marketplace.

And, there were a lot of withdrawals, and that resulted in a decreased sales number.

I think the net outflows for the quarter in the India accounts, even though sales were down $5 billion, the net outflows were about $500 million.

And, we have about $500 million left in those funds today.

The Global Bond side is a little bit different.

And that number would have gone into that Global Bond net gross number that you were looking at.

But Global Bonds itself, like the munis, had a tough period there when everybody was running to Treasuries.

Although our Global Bond Fund had a positive return for the year and continues to be among the best performers for every period that you look at.

So, it's nothing performance-related in either case.

It was really just the flight to quality.

So that Indian mandate, was that in the global bond index, or that was, but it was only about -- ?

It's a separate fund run by our Indian local asset manager for Indian corporations investing in Indian short-term corporates.

But, it sounded like it was pretty small relative to the level of redemptions?

Is that correct?

Yes, it was $600 million out of the total, which was $7 billion for that category, including munis.

Great, thanks for the color.

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

Good afternoon.

First, I may have just misunderstood your comment.

I think, if I heard you correctly, you said that the buybacks slowed down because of market volatility.

How does that play into your decision?

The stock was at $100 last quarter.

It's $50 to $60 this quarter.

Why wouldn't you increase the buyback?

I guess what I'm saying is the first two months of this quarter there was unprecedented stock market volatility, and you just didn't know which way it was going so that was a factor.

It's usually not a factor in our decision, but I think given the exceptional circumstances this quarter, we were a little hesitant and slower on the buybacks than you have seen in the past.

Okay.

Thank you.

And then in terms of compensation, other firms with a December fiscal year-end use the fourth quarter to true up given the market weakness.

You are September fiscal year-end.

How do you think about December comp?

Is it a true-up to the calendar year?

Does it become a run rate for the '09 year?

And, I know you talked about severance and other things, but excluding that, how do you think about in the quarter?

The variable component we have to estimate what we think it is going to be on our fiscal year basis, right, for September 30th.

So, we're sitting here at the beginning of the year, looking at nine months forward and trying to take a best guess at that.

It's a function of profitability.

It's a function of the revenue assumptions that you make in the business and our budgets and all that.

So that's how we did it.

So, it's really the December quarter -- you think about it as the first year.

So there's no real opportunity to true up the calendar year because it's a different fiscal year?

No, it's the same fiscal year.

We pay bonuses in October, based on the September 30th fiscal year.

Okay, great.

Thank you.

Then lastly, on the strategic side, you've got a great balance sheet.

You have got a lot of cash.

There are some distressed names out there.

Is it good time to go on the offensive?

Is it a good time to be exceptionally conservative given market conditions?

Or, is generally in terms of strategic initiatives, is it kind of business as usual?

You're hearing bankers.

You are looking at deals, but it's -- it's business as usual.

Well, I mean, it almost comes back to buying back stock in a volatile market.

It's somewhat similar where you're making a bet at some point, and I think size matters a lot.

You can be more strategic and aggressive with a smaller firm in a very volatile market because your downsides are more limited to the upside over the long-term.

I think a bigger deal in a very choppy market, I think it's more difficult to do, as I mentioned before.

But, I do think the opportunity is better than it's been in a long time, and just the fact that -- look at the valuations, look at the market caps, look where we are in the market.

And then you have to weigh that against long-term outlook for the industry, which we still are very positive about.

So, I think it is a more probable time for those with strong balance sheets to really add long-term value to the Company.

Great.

Thank you.

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

Okay, thank you.

In terms of the institutional clientele, any thoughts on how they will address their challenges in terms of fixed income versus equity versus alternative products?

And then in terms of the wire house consolidation, I guess your Company is probably at the center of the storm in some respects because of your involvement with all those.

How do you see that playing out for you?

I think the -- I will start with the second one.

Easier than the first one, which is, as I said before, any time that you have consolidation of your distributors, it's probably not a good thing as an independent asset manager that the more that's combined, the more powerful, the more reliant you become on that single relationship.

Also, I think the net effect and part of the reason that we've been reducing some of the distribution is that you will see less advisers out there.

And that's a natural outcome of the market we've had, so you have to downsize your retail wholesaling force and support group for that, and that could be 20%, 25%.

Who knows what the number is?

But in this kind of market, I wouldn't be surprised.

So, that's something worth thinking about.

There's not much on the consolidation side that affects our business, how we look at it.

I just think net-net, it's never a positive in any business to have more of your assets with less people, but with that said, we have very good relationships with those people.

So, I don't think it's a big deal one way or another.

I think the question around institutional clients and returns, and what is the outside?

I think that's a very good question and a very difficult question.

And one that, at the end of the day, I think everybody probably has to reduce the expectations on returns, and certainly the growth of many asset classes that were based on an unusual period.

Whether it's private equity or alternatives, and get a more realistic expectation of that going forward.

I think the net-net to us is that the separate account, the long-only strategy now becomes more attractive in this marketplace than it has been in the past.

And, I think with the decrease in that, the asset values there, that you should see increases in reallocations going back into those in the next quarter or so.

Okay.

And just to follow up on the distribution issue, if we conclude that that's kind of a net negative, does the outside of the US business strategically become that much more important?

Or, attractive to you?

I don't think so.

I think, again, you have a mature marketplace here.

One could argue many of the markets outside of the US are more concentrated than the US as far as distribution, the big banks controlling the majority of any mutual fund flows.

So, I don't think it would affect our thinking one way or another.

If it makes one channel or one area more expensive than the other, then that's something we're going to build into our long-term plan and how we allocate resources.

But for today, it's just too early.

Okay.

Thank you.

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

Hi, good afternoon.

Quick question on the hybrid on the income fund.

The data I'm looking at makes it look like the net flows, outflows, climaxed in October, and I'm just wondering, what your outlook is for flows on that fund?

And, if you have seen similar periods of underperformance in the past?

And in those cases, where the flows -- what kind of lag there's been?

Sorry for the cold.

I actually used to run that fund many years ago, and I can tell you there has been periods of underperformance, and it's because of its unique nature and its mix.

It will always have high-yield bonds.

We don't make spread calls or credit calls and move into treasuries because the yield is a big part of that fund.

So the good news, when you have a fund that has a high yield like the income fund, people can gravitate toward that fund based on the yield and its long-term record.

It's not like an equity fund that has to be in the top quartile every period.

We always own utilities.

Utilities, over the year, had a tough year along with corporates and things that used to not correlate as much.

Everything kind of correlated last year.

So it made it difficult.

The other side is that the big funds in that category, most of them had exposure to the financials because that was a place where you get yield, whether it was through preferreds or through common stocks.

So it's major competitors have all had similar numbers.

So, I think that helps us get back.

It's really, again, when the markets turn, when financials stabilize, and I think that fund will come around.

But because of its high yield, it tends to attract assets in just about any market.

Okay.

Also, you mentioned you didn't really benefit from the surge in money market flows, and I'm just wondering, is that -- do you think -- any special reason people coming out of bond funds didn't go into money market funds?

Or, is that just a function of your not being in the institutional money market business as much?

Right.

I think if you look at our mix -- and, we did benefit, but it's a small portion of our assets.

Our sales were up 60% to 70% quarter-over-quarter for money fund flows.

But, if you look at our mutual funds, most of the advisors that sell our funds have sweep accounts for their clients to move right into the money funds with their broker-dealer.

So, we're not going to get the money that moves to the sideline.

We'll get a little bit of it, and that's why we have funds.

And, they're really there as a convenience.

They are very conservatively run.

We haven't had any of the credit or liquidity issues that some other funds have had because we've never used them to compete on a yield basis.

I just feel like it's a tough, competitive business where there is enough players in it, and it's not something we need to be in.

Got it.

Thank you.

Our final question will come from the line of Matt Snowling with FBR Capital Markets.

Yes, hi.

I just wanted to circle back to the question on the auto portfolio.

Can you provide some details in terms of the composition?

FICO?

Auto type?

And, maybe where you ended the quarter on the residual balances?

Yes.

It's 40% -- I think it's like 49% prime, 49% non-prime, then the balance below that.

And then on the balance itself, we have about $130 million on balance sheet, and we -- and I think we're servicing about $700 million or $800 million in past (inaudible).

What was the carrying value of the residuals?

Oh, I'm sorry.

Of the residuals?

Yes.

The investment-only strip is down to I think, about $16 million.

$60 million?

One-six.

Thank you.

We have no further questions at this time.

I would now like to turn the call back to Mr.

Johnson.

Well, thank you everyone for attending the call, and we hope the next call we'll have some better news and a more stable environment.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may all disconnect.