富蘭克林資源 (BEN) 2010 Q3 法說會逐字稿

Good afternoon and welcome to Franklin Resources Earnings Conference Call for the quarter ended June 30, 2010.

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

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

Statements made in this conference call regarding Franklin Resources, Inc., which are not historical facts, are forward-looking statements within the meaning of the Private Securites 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 result 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 in the risk factors and MDNA sections of Franklin's most recent 10-K and 10-Q filings.

After the speakers' remarks, we will conduct 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, thanks for taking time today to join us this afternoon, and hopefully, you had a chance to listen to the commentary that we made available this morning.

I'd like to recap a few of the highlights.

This was another very strong quarter, despite challenging global markets, and most importantly investment remains strong with over 80% of our assets ranked in the top half of their peer groups for the three, five, and 10-year periods.

Long-term net in-flows of $18.2 billion, which was a new record for us.

And, through three quarters of our fiscal year, we've had three of our four best quarters ever.

I would now like to open it up for your questions, thank you.

(Operator Instructions) The first question comes from Roger Freeman from Barclays Capital.

Hi.

Good evening.

I guess, first question, with respect to the new financial reform legislation and sort of the bank holding company rules around limiting seed investments for funds managed, what are your thoughts around that given your structure and how you may respond to them?

I think like most, we've been very focused and we are a bank holding company and looking at what impact it may have.

But I think like most it's a little bit early to speculate.

And I think our feeling is that once it works its way through the process, which could take a while, many studies to be done, many new rules to come out, we'll get some clarity around the issue.

But, I think as far as the issue of seeding funds, while that may look like that could be a problem, we don't anticipate that it should be a problem.

But that risk is certainly out there.

And, I think the -- again, with our status of a holding company, it's something that we could change by -- stop offering some non-core services, but there's also risk of being deemed a systemically important non-bank company.

So, that hangs out there as well.

So, we really just need a bit of time to get some clarity around these before we really can determine exactly how it will affect us.

I think we feel confident that issues like seed capital should be worked out.

Okay, thanks.

And then I guess my second question -- I guess around your global bond funds, the returns in the quarter I guess looks like the Templeton global bond was down 2.5% or so.

You just -- looking again at the Barclays Global Ag index, which was about flat.

Can you talk at all about how that -- your global fund is maybe positioned relative to -- to an index like that or regionally or sort of within the yield curve.

I could speak in general terms, but again, I'm not the PM so I'd be careful in having me discuss how we're positioned because that could have changed from where I looked at it the last time.

We had been negative on the euro and positive on Asian currencies.

With the euro rebounding somewhat during that period.

I'm sure that led to some underperformance.

But, as far as short-term performance goes and especially in this kind of actively managed fund, there's going to be periods where you underperform the indices.

And I think that our team is in a better position to address that.

And again, I think the overall performance speaks for itself.

Okay, thanks.

Your next question comes from the line of Bill Katz with Citigroup.

Thank you.

Good afternoon, everyone.

I have two questions.

Number one, it looks like you had almost a 30% organic growth rate outside the United States.

I was wondering if you could talk a little bit about the dynamics behind that and maybe any sort of pipeline to the new quarter would be interesting.

And then I have a follow-on.

Well, I think that kind of growth rate is going to be difficult to sustain.

I mean, I think you had some unusual events and certainly we talked about the euro and how that actually accelerated some of the global bond sales throughout Europe as people diversified from -- away from the euro.

So, we were the net beneficiary, and I don't think that's a long-term sustainable trend.

I think it's important to point out that we have seen very significant flows in other categories in CCAB.

Our Asian growth fund has been one of our top sellers there, as well as the emerging markets fund.

And also even within fixed income, many different types of bond funds.

We had the Asian bond fund, which had over a billion in net sales and has really started to accelerate its growth.

So, as far as organic growth rate, those are hard to forecast.

But I think it has been an unusual period with respect to the growth of global bonds, but I think we are getting the benefit of somewhat of the halo effect.

When you have something as strong as the global bond category that that's really helping our other funds as well as our equity funds.

For next quarter, we've talked about the one large account that should fund.

So, obviously that's going to help when you just look at offshore organic growth rates.

Again, that's a one-time event of $4 billion that should come in this quarter.

To the earlier question, just in terms, I think investors concern on the stock is the concentration of the flows.

And looks like this quarter was down to roughly half the volume versus about 60% last quarter.

Is there anything you're doing at the wholesale level to try and modify behavior?

Maybe it's payouts, incentives, I'm not sure exactly what, that would look to further diversify the platform?

Well, I think that that's something that we are focused on.

And again, the incentives for all of our salespeople have specific metrics around diversifying the book and diversifying it by advisor.

And that's something that we recognize is a risk.

But, if you looked at our marketing efforts today, certainly on the retail side with our 20/20 vision campaign, that's very much focused on trying to get investors to look at equities.

Because we think especially on the retail side that probably too much money is moving into fixed income at these lower yields.

We want to make sure that people recognize the risks there and are looking to equities.

And I think the timing has been good with that campaign because we've seen our Franklin Equity Group continue to perform very well.

I think 75% of its assets are in the top quartile for the last year.

So, I think you combine those two and hopefully we'll get a little bit of momentum when things turn there.

Okay.

Thank you.

Your next question comes from the line of Dan Fannon with Jefferies.

Good afternoon.

You guys have talked previously about the kind of the gatekeepers, the consultants looking at the global bond as a new category.

Wondering if you would kind of update on this in terms of some of the institutional potential channels opening up or more opportunities there?

Well, I think that's certainly been the case.

I mean, when you look at the category 10 years ago, it was very small.

So, even though it's grown quite a bit, it -- represents a relatively small position on the retail and as well as the institutional side.

And we have especially here in the States a very dominant share of the growing asset class.

And I think the other -- the good news is that it's a very large asset class when you're looking at sovereign debt.

The liquidity and the scale and the amount, you can -- how big a fund can be in that category.

So, I think all of those are positive, and obviously the -- the trend toward fixed income and we're seeing that on the institutional side, as well, in more of the global Ag mandates and emerging market mandate.

But that pipeline still looks very healthy.

Okay.

And then, Ken, on the numbers side, just heading into your kind of fiscal year end for the next quarter, should there be any seasonality to the comp or the comp ratio as we think about a catch-up given the strength in sales and your guys' pretty strong growth rates?

Yes, sure.

The -- if you -- there was that non-recurring item this quarter of $12.5 million, and I guess that implies from my point of view a run rate that's probably a little bit on the low side.

I think -- but of course it's dependent on revenue, and with the markets dipping in May, you might see a little bit of a drop in revenue.

So -- but all that said, I think we'll see a little bit of an upward pressure on the comp line.

Not too much, just a little.

Great.

Thank you.

Your next question comes from the line of Michael Kim with Sandler O'Neill.

Hi, guys.

Good afternoon.

Greg, can you just maybe give us your thoughts on retail investor sentiment more broadly.

It seems like we're in somewhat of a holding period where retail investors just aren't really coming back into equities for the time being.

Do you get the sense that this could be kind of a multi-year process or what do you think we need to see in order to maybe speed that process up?

Well, I think you probably know the answer.

I mean, it's really what happens in the market.

And I think that investor was coming back, and flows were improving.

But after the flash crash and then some of the debt problems over the quarter, retail investor tends to retreat.

And it's not so much redemptions as it is they just stop putting new moneys into the net numbers, tend to look a lot worse than -- than you would think.

So for us, we're going to keep talking about equity, we're going to keep pushing our 20/20 vision campaign.

I think they will come back.

But, It's a function of what the economy does, what confidence levels are out there.

And, right now it's just not very high.

I think there is still good flows going into more packaged products, variable annuities, 401K are still relatively positive.

But, it's just the discretionary equity additions to portfolios that I think are under the most stress.

Okay.

And then maybe can you just give us an update on activity levels on the institutional side more broadly and then just the mandate that's set to fund this quarter.

What type of strategy is that?

Well, I think first of all with regards to just the pipeline and -- I don't think there's been any real shift.

I mean, it's still global fixed income, global Ag, emerging markets, debt, and global equities for us and occasionally some other classes.

But that would represent the bulk.

We're still seeing very strong activity there.

The [fondual fund] was a multi-year effort for us that had to go through some government approvals to move the moneys over to an outside manager.

That has taken place.

So we hope to have that $4 billion account in.

And as far as fees go, I would just say that, one, we don't disclose specific fees, but it's something where you would expect an institutional global mandate.

And this -- when you say what does it look like, it doesn't look like anything because it's a closed end fund, Romanian securities.

And that is a new category for us, certainly.

Okay.

Thanks for taking my questions.

We have to add people, and we just opened up the office in Bucharest here in the last couple of weeks.

Okay.

Great, thanks.

Your next question comes from the line of Ken Worthington with JPMorgan.

Hi, good afternoon.

First, performance fees this quarter.

Was that mostly Darby?

And if so, what are the assets that are generating those performance fees?

They -- I think they're only $2.3 billion in your K.

How big are they today?

They were split between Darby and some of our emerging markets products.

Still the performance fees as a percentage of assets are very small.

And I don't -- these things are hard to predict.

The -- I guess the concentration of the investments might have been more skewed toward Latin America.

I don't think -- I don't think performance fees have been a material part of our revenue story, and I don't expect they will be in the near future.

Okay.

And what's the asset base?

Well, like I say, it was both Darby and emerging markets, and I think it's about like less than 1%, 1% or 2% of AUM.

Okay.

And then secondly on Canada, Canada's been in redemption, I think each and every month this year.

And it seems like in the Canadian market the dynamic funds and fidelity are taking huge share.

So, what's going on with the Franklin business in Canada, and what is it going to take to kind of turn that business around?

I think you're right.

It has been a very challenging market, and especially for any firm that has global equity funds in that category, the Canadian market's been very strong as you'd expect with the strength in commodities.

That really drives that market.

So, most of the moneys are going to go into domestic mandates.

For us, we've diversified away from the flagship Templeton Growth Fund in that market and have been very successful with a -- more of an allocation story up there.

And that continues to do very well.

And the other issue is the concentration of distribution.

There's more distribution happening through banks and captive sales forces, and I think that's something that any outside manager needs to look at in the future.

But it's just been harder and harder for the independent manager.

And I think that goes against the trend we see in the rest of the world.

Okay.

Thank you.

Your next question comes from the line of Robert Lee with KBW.

Thank you.

Good afternoon.

I just have -- my first question is heading in -- I mean, if I look back -- if I think back a couple of quarters, markets were better all around.

And, I think the general sense is that you guys had started to kind of loosen the reins a little bit on investment spend.

Not dramatically, but, kind of starting to spend a little bit more money on new initiatives than maybe you had in the year or so prior.

Given where we were in the -- what the markets did the last quarter and where we are right now how do you -- what's kind of your current view from, an expense perspective, is there kind of a backlog of projects you need to get to?

And with your pretty strong volumes, is that kind of keeping the pressure on, having to spend on infrastructure?

Robert, this is Ken.

So, we are going through the budget process right now.

And I wouldn't characterize it as a tremendous backlog of requests for spend.

So, we're clearly want to leverage the success that we have and the opportunities that we're seeing from those successes.

And we're committed to do that.

I think a lot of the -- the bulk of the expense requests are to invest in operations outside the US, in portfolio and distribution.

And when we get those requests, they usually come with at least some objectives of generating revenue.

So, if your question is about margin compression or expansion, I think we try to take a balanced approach and we just prioritize the investments based on what we think the potential payback is.

Okay.

And maybe -- this is kind of -- in part a follow up to an earlier question.

If you look through your -- your various managers, I'm thinking mainly of Darby and I guess it's Franklin Real Estate Advisors, I guess they're predominantly where you would have different alternative strategies in a classic definition.

As you look at the institutional world, I mean, there's certainly more dollars kind of being targeted toward alternative strategies broadly, I think, around the world.

I mean, how do you -- do you think that those are the right -- that those are big enough platforms to really grow meaningfully, or do you think that just broadly within alternatives, is that an area where you want to try to increase focus whether it's through acquisitions, team lift-out, kind of what are your thoughts there?

Well, I think we are watching the certainly institutional market and where RFP's are going and the increased allocation towards alternatives continue as the expected returns on traditional long only equities and fixed income with continual decline and you have to meet that liability there.

So, we are very aware of that.

And as we've stated before, we have to fit in an alternatives manager that makes sense within our given structure, and also with the right kind of economic incentives to maintain a transition whether it's an acquisition or partial ownership and something that we are doing today that's a little bit different than what we've done in the past is to take minority stakes.

That hasn't been so much the case now, but something we're open to doing with emerging managers in the alternative space rather than just going in and acquiring it outright but taking minority stake, working with them and increasing that stake from there.

So, I think that's just a recognition of it.

It's a different -- little bit different business for us, and doesn't necessarily fit in the more traditional acquisition of a mutual fund company.

Great.

Thank you very much.

Activity there.

Thank you.

Your next question comes from the line of Michael Carrier with Deutsche Bank.

Thanks, guys.

Just in the international fixed income bucket, just wanted to try to get a little bit more clarity or granularity.

We all focus on the global bond fund.

Just what other product are in that mix that are benefiting as well.

And then, from a flow perspective, any granularity on where it's coming from, so whether it's retail institutional, US, non-US, and then knowing investors, if that product or that asset class is -- starts to lose its luster, like, where will they head?

And like, are you positioned to take advantage of that?

I think that's a good question.

That's -- some of the point I made earlier about looking at flows in other categories for us within fixed income.

In the global total return, which is the CCAB fund had $2.7 billion.

It's a Global Ag, it's a traditional sovereign-plus corporate.

And that had $2.7 billion of net in-flows versus $2.2 billion in the prior quarter within our CCAB lineup.

Emerging market bond fund had $1 billion in net sales versus $700 million in the prior quarter, and the Asian bond fund on a $1 billion base had over $1 billion in net sales for the net quarter to end up at a $2.2 billion base.

So those are some other funds that are doing extremely well.

And as far as the retail institutional the US is going to be primarily retail using the fund, almost all retail.

And the US is going to be -- or outside of the US is going to be a little bit of both with a lot of those dollars coming from Europe.

And places like Switzerland in particular.

Okay, thanks.

And then just one question on the cash.

You raised the debt so now you have even more cash.

And you did the buy-backs and I think historically you guys always point out whether it's with the special dividends and buy-backs, current dividends, there's a big payout.

When you look at the portion that's in the US versus outside the US, just an update on that.

But then more importantly, what -- how do you gauge that decision on bringing more cash into the US paying taxes, wait for a tax holiday, just what goes through your mind in terms of when you make that decision?

I think that -- we'll file the Q shortly and give the exact figure for all short cash, but I think after the debt raise we're close back to that 50/50.

So, in terms of our repatriation policy and all that, obviously -- the international area is our area of growth.

And so, the base advice is to leave the money there and invest it in the foreign operations because that's where we're seeing a lot of growth.

And then the overall -- I guess the overall overriding concept is the return to shareholders.

And we've kind of been fairly consistent in the percentages of our payout ratio being what -- what percentage of net income we returned to shareholders with dividends and share repurchases.

So, that's really what we're looking at.

And I think we have plenty of financial flexibility to continue to -- continuing that history of being shareholder friendly, and when that gets to the point where it's jeopardized, I think we'll have to revisit our situation.

Okay.

Thanks a lot, guys.

Your next question comes from the line of Cynthia Mayer with Bank of America.

Hi, good afternoon.

Let's see, maybe -- I'm wondering if you could give us a little color on which strategies won the net $500 million in mandates from insurance companies in May?

And also, some others in the industry have been saying that insurance companies are moving away from active managers because they find it hard to hedge.

Did you find that dynamic at play at all in discussions with the Company?

Yes, I read that article, as well, and I didn't see or hear about any redemptions that were made for that reason.

But certainly I -- I think that's something to be aware of.

The big win for us was the $790 million small cap fund that came in over the quarter.

And no real outside of that, it's mutual series, it's Templeton.

It -- it really is fairly well diversified within the annuity channel.

Okay.

And then maybe just one very specific question.

Why -- why is the US purge so much higher this year?

It's like 3 million accounts versus 2 million last year?

So, that's our closed accounts that we keep per year.

And then purge them once a year.

So, the closed accounts probably for increased redemptions last year.

Oh, I see, because it sort of trails.

It's a year lag.

Got it.

Got it.

Okay, thanks.

Your next question comes from the line of Mark Irizarry with Goldman Sachs.

Great.

Thanks.

Greg, the non-US sales continue to be very impressive, and I'm sure you're continuing to gain momentum in a lot of different regions out there.

Can you talk about the regions where you're seeing the most momentum?

And then also how does the strategy of local -- of M&A of local managers sort of fit into where you ultimately can see your market share overseas?

Well, I think the -- it really hasn't changed.

I mean, we think that having a local manager if you're going to develop a -- a strong presence in a given retail market and they have a demand for local management, we want to be there in that market.

I mean, I don't think that's changed.

I just think you have an unusual period right now and with southern Europe, Italy, Spain, with the euro that have accelerated fixed income sales.

But I think -- and I think, generally, you can make the statement that that's probably going to be less sticky than traditional type money because the nature of what people are doing.

If euro goes the other way, that could move.

So I think you have to be sensitive to that.

But I think our strategy of continuing to develop local asset managers hasn't changed at all.

There's only a couple of markets that you would say have addressable retail markets that we're not in right now.

Those are ones that -- that we're certainly looking at.

Okay.

And then just can you talk a bit about the taxable fixed income -- obviously, the gross sales accelerated, but so did the redemption rate.

Can you speak a little bit about the dynamic there just in taxable fixed income?

Obviously, on the sale side it seemed like maybe the euro was accelerating, some non-US sales.

What happened in terms of redemption to the quarter?

Well, I don't think they -- they moved up a little bit, but on the fixed income side -- but nothing -- I don't think it was a dramatic change.

And it is interesting when gross sales increase that redemptions tend to increase.

I've never understood that looking at retail sales for a long time.

That you would expect them to stay stable when things are increasing.

But they tend to move up on just whatever reason for the activity.

So, I don't have a good answer on why taxable fixed would have increased the redemption activity over the period.

But I can say it wasn't really much.

Okay, great, thanks.

Your next question comes from the line of Chris Farr with CLSA.

Good afternoon.

My question is related to how your teams are structured, particularly in the global fixed income side.

I get questions from my clients on like say key person risk in particular funds.

I just want to know how your teams are structured and if the global bond fund, and the global total return fund are the same management team?

They are not for those two examples, but the global fixed is headed up specifically by Dr.

Hasenstab who obviously is a very high-profile throughout really the world on both institutional and retail, and a team that we continue to build underneath him.

So, I think our feeling is that we -- stars get developed in this industry, it's a risk, we know.

We want to make sure we have a deep bench and a consistent process that we can repeat.

But that's certainly always a risk but we're well aware of that risk.

And then, within the other -- all of the taxable fixed is a separate team, as well.

And the munis are a separate team.

It's all headed up by one person who runs fixed income, but we have four or five different CIO's within fixed income for the different strategies.

And Michael Hasenstab is one of those with the global bonds.

Okay, and then one quick follow up.

Just on -- I think you touched on this earlier.

Just getting traction on the local funds, particularly on the equity side.

Can you just give a sense like when some of the strategies you guys can employ like, say, whether it's in India or other Asia markets or even European markets?

Well, I think each market you can look at -- I mean, the local managers have done very well this year, but we're not talking about it because I think it just as a percentage of the total numbers, it looks fairly small.

And India's been an example for us where we've increased market share considerably.

And that's been a real success story here.

Where we had lost some share over the last few years.

And that's on the back of very strong performance in that local market.

But, those markets are going to take time.

You're just not going to get the kind of momentum you can get from developed markets where all of the sudden your mix is in favor of where the market's going.

And certainly our mix has been in the right spot for a lot of the more developed markets.

That doesn't change our thinking on the other Asia, India, the other markets that are just going to take a longer time to develop.

Thank you.

Your next question comes from the line of Douglas Sipkin with Ticonderoga.

Yes, thank you and good afternoon.

Just wanted to expand a little bit on marketing expense.

I know you guys provided a little bit of detail on the pre-recorded call.

But some of your competitors talked about spending more now.

I mean, you guys feeling more pressure that you're going to need to go above and beyond what you've been doing?

I know you've been sort of leading the pack on spending, on the marketing side.

Or do you feel pretty comfortable with where you're trending in even though it sounds like comps are moving up, you don't feel like you need to change all that much?

Yes, I don't think we need to make any dramatic change to our strategy.

I -- I've been saying for a couple of quarters that we had planned and continued to increase advertising spend and I think that trend will continue.

It was offset a little bit this quarter by reduced promotion.

But certainly the advertising spend was up this quarter.

And I expect that to increase next quarter, too, not a lot but a little bit.

And like I said, no real change in our strategies.

Just we made commitments and we will probably see them come through in future quarters.

Great.

Then just a follow up.

I know you addressed it also on the prerecorded about some of the changes the SEC is proposing.

Can you maybe talk a little bit about how you guys see your business evolving through that and any potential spots that you're looking closer at in terms of some of the reforms around 12-B-1 fees or retail brokers negotiating their own commissions, things like that?

Again, I think it's a little bit early.

It's just in the comment period.

But I think it's very consistent with what the industry felt was going to be proposed by the SEC.

I think there's a lot of positives to be taken from that.

From the Director perspective, it's very positive to do away with what has been somewhat of a difficult process there.

We also think it's going to take a few years.

The SEC's got a very full plate, so it could be years before any of this is resolved.

And I think the real questions aren't so much around the economics.

I think those look reasonable from certainly our viewpoint.

It's really some of the operational challenges that we have to work through around conversions and setting up new share classes with 25 basis point fees.

The question around retirement shares -- there's some open issues, but ones that we think we can work effectively with and hopefully through this comment period and come to a reasonable solution.

But I think at the end of the day, the transparency for the investor, settling this at 25, I think all of this is a positive for the future of the industry.

Great, thanks.

Your next question comes from the line of Alan Strauss with Omega.

Yes, just a followup on the 12-B-1 issue.

Do you think -- you have a lot of money that's being passed through your income statement.

Where do you think a lot of that money is going to be made up or is the brokerage just going to end up making a little bit less money?

Yes, I think the net-net effect of this is that the C share will convert to an A share at a specific time.

So, that just means the advisor at that point moves from a higher ongoing fee to a 25 basis point fee so that could shift how A shares are sold against C.

There's also the maximum charge and a lot of that remains to be seen how that's going to work versus the more traditional pay-as-you-go.

But, again, the net effect is around having conversion periods.

If you had a 30 basis point clash share that gets added to the front end sales charge against the maximum charge so at year 18 or whatever the break-even point is that would have to convert to a 25 basis point new class.

So, that's where it gets, I think, a little bit confusing for a very small percentage of investors.

And where the industry needs to think about and quantify the impact versus the benefit.

But, I think overall from an economic standpoint, these are all pass-through numbers for us.

It's not really an income statement impact.

It would lower the 12-B number, but it would also lower the expense side, as well.

So, the net-net wouldn't change.

You think for the industry's selling an A share with a high front-end load could just hurt the growth of the overall industry and you included?

Well, I think you'll still have the C share.

It's not going change the A share.

It's just one of the proposals, the broker-dealer can set a schedule, but it's my understanding that we have to approve that schedule, where we'd offer just a straight NAV-class share or a 25 basis points fee share class and they would set their own schedule.

So, there's just a lot of work to be done on that.

But, certainly, I don't think the effect's going to be higher -- a higher front end charge.

That -- I think the push would be more on the lower side.

Okay.

Thank you.

Your next question comes from the line of Roger Smith with Macquarie

Thanks.

I just want to go back to the cash balances on the balance sheet right now and the debt that was taken out during the quarter -- so I guess, you took out $900 million of debt.

And my guess is that the cash -- I know you said the Q is coming out soon, i going to be close to $3.5 billion and then if it's 50/50, you have about $1.8 billion in each, the US and international.

What do you guys think is the right level of cash in order to run those businesses?

And then that doesn't even contemplate the investments that you have here.

I'm just trying to understand what was the true need for the debt that was taken out, and how the capital really works for these businesses.

Yes, I guess in a couple words, simple answer would be financial flexibility.

And, it's something that has served us well in the past.

And, in fact, allowed us to take advantage of a pretty good interest rate environment.

So, if you remember back, 2008, we had debt mature, we decided not to refinance that debt.

Interest rates -- we didn't like the interest rates at the time.

We had a strong balance sheet, we were able to do that.

In this environment, we saw an opportunity, and -- to give us some more financial flexibility, and we took that.

And, we did some of the proceeds, we used to pay down -- to term out our commercial paper.

And in addition to that, we had a back-stop facility that was up for renewal in June, and we just felt like the terms of that was uneconomical.

So, basically financial flexibility has allowed us to make these decisions without a gun to our head.

Okay.

Thanks very much.

Your next question comes from the line of Roger Freeman with Barclays Capital.

Hi, just a couple follow-ups here.

Just to come back to Darby for a second.

Realizing a small percentage of AUM -- I just want to sort of understand within that given that this thing obviously does carry when you realize investment gains.

I mean, if this is a call it $2 billion AUM business, which from the K it looks like it's probably something in that range, can you think about this over time that you generate at 2 times multiple in invested capital, which would actually be low for private equity.

And if you've got a -- is 20% carry the right way to think about that?

That could generate $400 million in revenue over time.

Well, it's a classic private equity.

It's specialty is mezzanine debt.

It's emerging markets.

And I think that we'll see more carried interest from Darby because some of those funds are maturing, and some of the investments are maturing.

But, I really don't expect it to be recurring in the short term.

So if your -- in your time horizon if you're talking about five years, yes, maybe.

In the next year or two, I don't expect it to be significant or material part of revenue.

I guess maybe the only sort of question to tie around that is, I mean, how seasoned are the portfolios there?

Like what's the average life of an investment right now so we can kind of think about that realization cycle that may be coming down the road.

I'd say it's about in the 7 to 10-year horizon from its inception, and some of those funds did start, one or two of them started in the late '90s.

And we're seeing some of the benefits from that.

A lot of them also were launched in the last four, five years.

Okay.

That's helpful.

And just looking at the -- again, the sort of structure, the payout on that.

If you look at the comp and that other expense which sounds like it's tied to comp, it kind of looks like there's about a 60% payout on the -- on the carry.

It seems kind of high for even private equity.

Is that a fair calculation?

Yes.

It wasn't all private equity.

As I mentioned, part of it was emerging markets.

Some of our products in emerging markets.

I thought it was more like 50%.

Okay, all right.

And then just the performance fees and other stuff, is that relative -- are those other funds on a relative basis on benchmark or is it absolute returns?

Sorry?

The performance fees on your other funds, so aside from Darby, do those tend to be relative to some benchmarks, the returns, or absolute?

It's interesting because it was a higher amount of performance fees this quarter than last, given that markets were down.

Yes, that's true.

But, some of the investments, I think, were concentrated in Latin America, and they performed a little bit better.

I think that's where that's coming.

Okay.

Got it.

And just two other quick ones.

Impairment.

The impairment of deferred sales commissions.

Can you just talk about the process for approaching that.

Do you do that every quarter, or is it over some period of time so you sort of capture a timeframe in there?

Yes, we do it every quarter.

And the thing that was driving that this quarter was just a change in our assumptions.

Particularly related to redemption rates, which coming through the last -- the global financial crisis, we were using some pretty high financial -- pretty high redemption rates.

So, we lowered them to a more normal level.

Oh, okay, got it.

All right.

Lastly, just thoughts around the tax-free funds.

The net flows there have slowed.

And they have for the industry, as well.

I mean, is your view that that's primarily just a function of concerns around muni finances?

And does that have to abate before you sort of see more broad-based flows in the munis?

I think that's true.

I think it's -- there's -- obviously, there's been a lot of articles, a lot of noise around state budgets, and I think that's going to continue to be a headwind for munis and also yields have gotten down there pretty low, as well.

So, I think, those are all contributing to the net flow number dropping.

But, I still think it's healthy, and it's positive.

And despite some of these headwinds, we are seeing positive net sales.

So, I think that's good.

But you're right, they have slowed.

Okay.

All right, thanks.

And your final question will come from the line of Bill Katz with Citigroup.

Thanks, just a couple of followups.

Just going back to the leverage of the non-US business.

How important is it having on the ground presence in terms of gaining market share relative to some of the competition that might be based outside the region trying to tap into the market to gain some share?

Well, I think it is important.

I mean I think -- it doesn't mean you can't be successful without having a presence.

But, we're in a relationship business, certainly even with gatekeepers and having a presence and people there to service those gatekeepers, whether it's Europe and Asia, is very important.

Then, if you build further out from that and have a local asset manager, or retail presence, I think that just helps even more cement some of those relationships and people will view the firm differently.

But that doesn't mean you can't be successful.

And many firms have been very successful with a very limited presence or coming in and out.

But, we believe that the reason we've suddenly seen this spike up is a lot of the work that we did over the last decade and having a local presence and really working and building those relationships.

Just one other follow up.

Sort of scratching my head about the discussion here on the capital structure of the Company.

Can you sort of help us understand the -- how you think about buyback versus carrying a little leverage here.

Just don't understand why the need at all for the debt given both your existing level of liquidity and your sizeable free cash flow versus buy-back?

Yes, well, I think you saw, we did increase the buyback this quarter.

And, buybacks are always attractive to us.

I think we'll continue to do that.

You can see that.

We took advantage of a market dip, and so, again, it's just basically financial flexibility to take advantage of those situations.

Okay.

Thanks.

At this time, I would like to turn the conference back to Mr.

Greg Johnson.

Well, thank you, everyone, for attending the call.

And, we look forward to speaking next quarter.

Thank you.

Thank you, ladies and gentlemen.

This will conclude today's conference call.

You may now disconnect.