富蘭克林資源 (BEN) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the Franklin Resources earnings conference call for the quarter ended March 31, 2010.

I will be your conference operator today.

Please note that the financial results to be discuss 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 describe in more detail in Franklin's recent filings with the Securities and Exchange Commission including the risk factors in the MDNA sections of Franklin's most recent Form 10-K and 10-Q filing.

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

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

(Operator Instructions) Now, I would like to turn the call over to Mr.

Greg Johnson.

Thank you, and good afternoon everyone.

I'm Greg Johnson, CEO, along with Ken Lewis, our CFO.

As always we thank you for taking the time to join us today.

We hope you have had a chance to listen to our prepared marks, which were available before the Exchange opened this morning.

In short, we are pleased to report another solid quarter, highlighted by continued strong relative investment performance and record net new flows including strong growth in gross sales across our broad range of offerings, particularly in our international products as momentum continues to build in many countries around the globe.

I would like to now open it up to your questions.

Our first question is from Bill Katz with Citigroup.

Thank you and good afternoon.

Just two comments -- two questions, I guess.

First one would be, just from a big picture perspective, Greg, can you talk a little bit about how you see the potential handoff, if at all, between fixed income and equity and how you might be positioned for such a potential flow shift?

Well, I think we feel that that shift will occur, maybe it was starting a little bit over the last few months.

Flows have certainly looked better.

Our goal, just like when things were going gangbusters on the equity side, we were pushing hard on a fixed income campaign.

And for the last three to six months, we have been -- while we're doing extremely well on the fixed income side, we have been out there talking about equities and we have a 20-20 vision campaign, which has been received extremely well and despite headwinds, we're going to continue to talk about equities because we think that retail turn will happen and obviously we want to be well positioned.

And I think we feel that we have a very strong lineup and it's a matter of just, again, getting the attention on that lineup and despite the record close for the quarter, we still are making sure that the distribution is focused on getting that equity story out there.

I'm not sure when it will turn.

I think we have all been frustrated that it's taken a bit longer.

I think investor sentiment here in the United States, for a lot of reasons, continues to be a little bit shaky, and we're not seeing that in other parts of the globe.

We're not seeing that in Europe and Asia and have seen a tremendous rebound in our sales and like the Asian growth fund that had $1.2 billion in net influence for the quarter.

So there are funds that are doing very well on the equity side but like most in the US, we still remain frustrated that the investors are not moving back.

Okay, and second question I have is, as you look at your volumes outside the United States, this was a particularly strong quarter.

I think almost $9 billion of inflow and 25% growth rate on those assets.

Can you talk a little bit about maybe some of the volume and the mix drivers to some of that growth?

and maybe on a temporal basis, what might be happening in to the middle part of April?

Well, I think the -- as I mentioned, I mean, the equity investor is back and whether it's merging markets or more focus, the Asian growth fund, those have been two good sellers for us on a net basis as well Mutual Global Discovery fund.

There hasn't been a whole lot of chunky business moving -- actually, more of the bigger business on a separate account side was negative for the quarter in global equities where we had about a little over $700 billion between two accounts that were redeemed in the global equity side.

So you are seeing a fair amount of strength on the retail side around the globe for global equities and obviously global bonds, which had -- outside of the US, just a little over $5 billion in net inflows.

Our next question is from Jeff Hopson with Stifel Nicolaus.

Okay, thank you.

Could you talk about the -- it looked like you had pretty good flows on the institutional side in global bond.

Could you talk a little bit about that pipeline?

Then also you have other products on the global side -- global income, I think, and some others.

They seem to be picking up some traction.

How optimistic are you about those other products outside the big global bond fund?

I think the -- we have seen continued interest and certainly emerging markets debt is another, global aggregate, global core, and with a lot of big sovereign wealth funds around the globe, there continues to be strong interest in those.

I think during this quarter we had some fundings with Malaysia that we talked about last quarter, specifically in fixed income so situations like that, we continue to benefit from the brand presence in a lot of those markets and as those funds continue to grow again, we're very optimistic that we're in a good position to continue to capture that.

So we think, as we've talked about in prior quarters, that certainly an incremental area for growth and we have been getting the benefit of that in the last few quarters.

I think that's going to continue.

Okay.

And like in February, you had no issues with Greece and I suspect that's still the case.

And if anything, you may have benefited from the fact that you didn't have exposure there.

Would you say that same type of situation is still there right now?

Yeah.

As far as I know, that's the case and certainly it was the case when the contagion hit originally, that we didn't have any exposure there.

I think the performance should look even better through this period.

Our next question is from Mike Carrier with Deutsche Bank

Thanks, guys.

I think on the recorded call you were mentioning that the institutional -- you hit it like the best month in March in two years.

I was just wondering, one is that overall -- I thought it might have been just US.

Then if it was in the US, where was the strength coming from the products?

Yes, I think it was both -- it was in the US and some of that again, it's not always a clean line between institutional and separate accounts and retail and some of that was some wins on the annuity side where we had some chunkier wins during the quarter there.

And continued just -- I think overall very consistent performance in the US through the consultants, a typical business on the global equity side.

Nothing really big to call out.

I mean, it was just a lot of little wins that are probably a healthier way to go.

Okay.

And then can -- just on the expenses, the one item you didn't mention was just on the IT and just wanted to see any outlook there.

Because you gave pretty good, detailed guidance on all the other line items.

And just on the cash use -- you continue to buyback stock.

Just looking forward given the cash balance any expectations versus historically where your buybacks have been?

Sure.

On the IT line, I think I mentioned on previous calls that there is an expectation that spending will increase there.

But it's slow.

These projects take a long time so I would continue -- I would suggest that trend will continue.

And now on the cash, no real difference on kind of our philosophy on that.

Definitely committed to generating very competitive total return.

To shareholders, share repurchase is a tool that we use for sure on that.

I think we're in the market pretty regularly but we tend to be opportunistic and that will continue.

Our next question is from Cynthia Mayer with Bank of America Merrill Lynch.

Hi, thanks.

Let's see -- I was going to ask you about IT, too, so I'll ask a very quick follow-up on that.

Once you start spending on IT, maybe if you could give a sense of how much how -- how the incremental amount relates to what you already have in that line and also, is that the kind of thing that's like a step function or just a little bit more every quarter for a little while?

Well, I probably should point out there's more in that line than IT.

There's certainly occupancy and facilities costs in that line so that drives the line a little bit.

Regard IT, it's a combination.

There's ongoing maintenance that you can see gradually increase -- we did pull back during the market downturn.

We pulled back on some of the maintenance items so that type of expense I think you will see sequentially quarter over quarter and then the larger projects is more of a step function.

Takes awhile to put on.

Some of them get capitalize and then you start to see it in the depreciation number.

Okay.

And then in terms of the flows, you mentioned greater appetite for equity outside the US.

Is that just Asia?

Or is that are you just finding it's worldwide, it's Europe, too?

It's Europe as well.

Our next question is from Ken Worthington with JPMorgan.

Hi, good afternoon.

So on the Templeton Global Bond, just a couple of questions there.

At what point does capacity start to be a factor?

Two, who are the incremental buyers of the fund?

Three, to what extent does the management team -- do you guys as the management team have concerns about how this fund performs in a rising rate environment?

Thanks.

Well, I think, first of all, capacity in any of our funds is something that we're concerned about and if the portfolio managers feel that it's time to consider closing a fund, we will do that and we've done that in the past.

That's something we're very aware of.

I think the general statement regarding flows and where we had $10 billion of net inflows was into a global government bond fund.

In a government bond fund obviously you have tremendous capacity and growing capacity and then also, currency is the other area so liquidity of derivatives around currency forwards and things that you have to use in a fund like that, again, it's one of the most liquid and large markets.

While we have a large share of a new class of flows, it is dwarfed by the overall size of that market so there's really very little concern.

If you had that much going in emerging markets debt that may be a different discussion on liquidity to consider having to close.

I think the question around buyers is an interesting one.

Because I think part of this growth is the recognition certainly on the retail side of a new asset class that is less correlated in a way to typical fixed income to equities.

It had a very strong overall performance number and obviously active management is the only way to really play that market and try to get currencies right obviously is very challenging as well.

We have had a team that has been successful in doing that and I think looking at the average retail investor, they're more open to putting a portion of their assets in that.

So I think that's part of what you're seeing in that class and it's still a very relatively small number of the typical retailer investor's portfolio.

So, I think that's a good trend that bodes well for continued new investors in that category.

And then finally, on rates, I think you're a little bit less sensitive to rates and we do -- I mean, obviously it's fixed income.

Currencies are going to be a big driver but we also look at duration and are very focused then because it's not as much of an income-oriented fund.

We can go a little bit shorter on duration than our typical longer-term maturity fixed-income fund so that helps a little bit.

But bottom line is that it's very challenging to manage in this space and there are going to be times when you're going to be out of favor and wrong and to us we're trying to build that into the selling process that that should be part of your expectation.

You're never going to call every move in currencies.

But I think we feel like we have got one of the best teams out there.

Our next question is from Robert Lee with KBW.

Thanks, afternoon.

Just with -- I have a question on the regulatory front or legal front with -- who knows what happens if the [Dodd] build, included in that is obviously the [Voca] rules and unfortunately for you guys, if I remember correctly, you are regulated as a bank holding company.

So I know nothing has been set in stone, but what flexibility -- do you have the flexibility if that came to pass to change your holding company structure -- I assume you do so you wouldn't be subject to any of the rules as it relates to private equity or other holdings.

Yes, I think the -- as you said, it's hard because things are moving so quickly and the bottom line is we don't have to be a bank holding company.

It's a complementary part of a few of our businesses that even today we're looking at the overall structure and trying to rationalize the right future but we can't really do that until we know what the regulatory landscape is going to look like.

So you're right.

Today we fall under that, under the Voca rule.

You probably -- I'm not even sure we could seed fund.

I'm not sure how any of this would work in practice and I think we've got a long ways to go before we get too worried about what impact it may or may not have.

But I think the bottom line is we feel even in the worst-case scenario that we could restructure the business and not have a big impact to get from a different structure away from the Fed structure but even that there's been discussion that, well, we're not going to allow people to switch so I'm not sure what that means, either.

I think things are moving.

They're very fluid right now.

We're participating in Washington where we can but I don't feel there's anything there today that would present a huge challenge for us.

Okay.

And maybe shifting to the institutional business -- just curious -- I mean, couple of competitors here or there have talked about being impacted in the quarter by client rebalancing and taking advantage of the rebounds in the market this past year and using that as an opportunity to rebalance.p Generally, it seems like away from long only equity strategies to some extent.

It doesn't seem like that's impacting your business much in the quarter.

Could you comment a little bit -- did you see some of that and maybe what pockets it was in if you did see it?

Or are you thinking maybe that didn't affect you guys as much in the quarter?

I think we did see it.

We've seen it the last two or three quarters and the rebalancing and any time you have a sector do well like global equities or emerging markets, they tend to be a little bit of trimming to those certain accounts so we have seen that.

They're just not I think on a relative basis, they're not the big numbers.

They're relatively small.

Our next question is from Michael Kim with Sandler O'Neill.

Hey, guys.

Just first in terms of the equity marketing strategy, what are some of the areas or products that you've been focusing on and then have you started to see any follow-through from that in terms of maybe a step up in sales in the last couple of months?

Well, we have seen a pickup and we have seen a pickup in one of the ways we measure these campaigns internally is the number of new advisors selling equity funds.

That's an important metric for us and we have been hitting a new audience, really, every month.

So that has been a nice positive.

We have seen positive flows going into our equity funds like the Franklin Growth Fund and the rising dividends.

So the focus has been there.

It's just on a relative basis compared to everything else.

It's dwarfed but the numbers are positive and they are growing.

I think just overall from the retail -- in terms of general statements, mutual series in the US has had outflows so that's put a little bit of drag on just looking at the US equity numbers and a lot of that is somewhat expected for us when you had the higher cash positions and their deep value style tends to underperform the kind of market that we've had over the last year.

So I think it's -- we feel like we are getting the attention there.

It's difficult.

But I just don't think the overall landscape is going to change a whole lot in the next quarter or two as far as flows go.

Okay.

And then maybe a question for Ken -- now that your asset basis is relatively close to where it was back in 2007 and just given maybe a measured step up in spending, is it fair to say that the main driver or two to higher margins going forward is really a function of mix, so basically just getting the equity and maybe the non-US contributions back up to where they were in prior cycles?

I wouldn't agree with that.

I would clarify that I think it's more on an investment objective and less so in a jurisdictional basis.

Generally speaking, I think the increase in sales internationally won't impact overall profitability that much.

It's more of a question of the asset mix shifting to the equity assets.

(Operator Instructions) Our next question is from Douglas Sipkin with Ticonderoga.

Thank you and good afternoon.

I just wanted to drill down a little bit more on the global fixed income.

I don't know if you guys have provided it, but can you possibly just give us some ranges as to how much of that AUM -- $97 billion, I believe -- is institutional based and correspondingly how much of the flows generally come from institutions versus retails.

Then just for the follow-up on that, you did a really good job discussing retail -- highlighting that as a new asset class and therefore the potential is probably better than people think.

How about on the institutional side?

Are institutional investors seeing it that way as well?

Thanks.

Well, I think -- first of all, I don't have all of the data in front of me to tell you exactly how it breaks down -- I can tell you that majority $10 billion of the net flows going in to the global bond fund split between the US and international sales.

Obviously make up the majority of the overall flows.

We did have some separate account wins and I don't have the aggregate number.

There were some at $300 million, $200 million, and maybe we can help you further with investor relations group.

I don't have it broken out in front of me other than to give you the sense that within that category, clearly is retail that is driving probably 80%, 90% of those flows and that's a guesstimate.

That's probably close.

And then just in terms of -- I guess then it's fair to assume that the institutional demand hasn't really changed all that much or is the outlook for sort of global emerging, et cetera , increasing, or flattening or sort of decreasing from sort of a RFP

I think it's steady.

This is a little bit different than the retail because it's not strictly the global bond or the global government bond fund.

It's more geared towards emerging market debt in some cases or global ag, global core.

It's a little bit different.

We are still are seeing a very steady RFP flow in those categories.

Our final question is from Roger Freeman with Barclays Capital.

Oh, hi, good afternoon.

Just coming back to the US flows, so with -- I guess the mutual series is distorting, I guess if we look at the aggregate US flows bit.

Where -- how do you look at where those are positioned as -- is it either cash balances today or when do you sort of annualize or get past some of the headwinds from a return perspective at that --

I think it -- There will always be short-term challenges when you have investment styles that go to cash in some markets and you're never go again.

You're never going to sign that in the short term.

That's why we spend a lot of time talking about building three and five and ten year track records.

Right.

I think people somewhat -- they expect that but there always is a short-term orientation on results.

I think with the mutual shares funds or mutual series funds, the cash levels are down.

They're down in the teens and low teens in most cases so you won't have the kind of drag that you had before.

Hopefully for us, it's just -- it is just how historically that group has run money and in some cases you're going to have these periods where they under perform but again if you look at the longer-term numbers and how strong they are, I think that's really more important than the one-year number.

You look at something like the Franklin Income Fund, for example, we had short-term challenges -- they've had traditionally higher weightings and financial services during the period when financial services banks were in a lot of trouble -- that fund underperformed but quickly, it's really more a blip now in the numbers and it's back to being a top performer for the one-year period and that kind of smooths out over the three and five.

We have seen the quick rebound in flows there.

That was probably one of the most important funds for us as far as flows and continues to be very important to us going forward but it shows you how quickly things can turn around on the short term basis and not really hurt your long-term numbers when you have those little blips.

Okay, that's helpful.

And then, I guess my second question would be just around the strategic outlook particularly around (indiscernible), what are the -- can you characterize the types of properties that are for sale at this point?

Last year obviously there were the institutions, asset management firms coming out of financial institutions looking to raise capital, presumably less of that, although maybe some of the smaller institutions.

Are we sort of back to the historical landscape in terms of diversification of ownership generational issues, those types of things?

Yes, I think that's probably fair.

I think the more distressed sales probably passed.

The one of manufacturing and distribution separating is probably somewhat passed and then you'll always have generational transfers and just people that feel like -- their company will be better positioned within a larger institution.

And I think some of that in this world, having gone through this cycle and risk management and how that becomes more important to the investor to be part of a larger organization I think does create more -- smaller situations and we've had a lot of conversations where that's been an important focus to them, the distribution side and just the importance of being within a larger organization that has all the resources to make sure you're looking at risk and compliance and everything and more importantly from their client size.

So I think you will see a lot of opportunities as always in this industry.

There's always opportunity out there and we're continuing to look at everything.

Okay, well, thanks, everyone, for your time.

We'll talk to you next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.