富蘭克林資源 (BEN) 2011 Q1 法說會逐字稿

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

My name is Christine, and I will be your conference operator for today's conference.

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 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 the 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 & Exchange Commission including in the risk factors and MD&A sections of Franklin's most recent form 10-K filing.

(Operator Instructions) The Company asks that you limit your questions to one initial and one follow-up question.

(Operator Instructions)

Now, I would like to turn the call over to Mr.

Greg Johnson.

Mr.

Johnson, you may begin.

Thank you, and good afternoon, everyone.

Thank you for taking time out to join us on this call.

I am Greg Johnson, CEO, and I am joined by Ken Lewis, our CFO.

Hopefully everyone had a chance to listen to the commentary we made available this morning, but just to quickly recap it was another strong quarter driven by strong equity markets as well as the depth and breadth of our global presence.

AUM reached an all time high of $671 billion (sic - see press release), and we saw the benefits of diversification as flow trends to equity and hybrid products improved while fixed income flows remained strong.

We were able to recapture almost half of the Muni-fund outflows we experienced during the quarter, via exchanges into other Franklin Templeton funds.

Operating income was $659 million (sic - see press release), began the year on a high note, but while part of the increase was due to some nonrecurring items in seasonality, it was largely driven by the growth of assets.

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

Thank you.

(Operator Instructions)The first question comes from Bill Katz from Citigroup.

Please go ahead.

Thank you very much.

First question is around capital management.

You mentioned on your prerecorded call that this quarter might be more indicative relative to last rolling five quarters, if you will, if you look at the payout ratio, and I get that because special dividend divide a year ago.

The strategic question I have is, I know we keep asking on these conference calls, but given your very robust balance sheet and the fact that you are going to continue to build cash, I am trying to understand strategically given where rates are and given where you are with the franchise as diverse as it is and as recurring as it is, why you continue to husband so much capital?

And what your thoughts are here?

Is there something you are worried about strategically in the business?

Or looking at from a seminal transaction, and why not be a little more stepped up, if you will, in terms of either dividend payout or buyback?

Okay, thanks, Bill.

This is Ken.

I will take a stab at that.

I think there is a couple ways to look at this question.

First, if you look at our balance sheet, keep in mind that a significant part of the balance sheet we have to reinvest in the business.

And by reinvesting in the business, we're talking about seeding new products and co-investing, and also keeping money on reserve for restricted purposes.

So, I would say that almost two-thirds of the balance sheet is for reinvesting in the business, and earmarked for those purposes.

And the remainder, as you know, part of it is offshore and part of it is in the United States.

And so that gives you the perspective from how we use the balance sheet regarding the philosophy and the strategy.

I think that remains unchanged if you look at our history.

This quarter's payout ratio is indicative of our long-term history, and I think that's proved to be very beneficial to shareholders.

Over the last four years, I made this comment last quarter, but I will just reiterate it.

Over the last four years, we've generated over $1 billion of cash, kept debt stable, and we reduced the share count significantly by about 12% I think it was over the last four years.

So we're continuing to be cognizant of returning and providing value to shareholders, and the other two comments I'd make is the markets do turn.

So, it is good to have a strong balance sheet.

We saw that through the financial crisis, and not only from a financial point of view, but also from a client point of view.

We found that to be -- the fact that we had a strong balance sheet, to be one of the factors that we were able to retain and attract clients during that period.

Okay.

Second question, follow-up question I have, is around margins, and again relative to your commentary that this particular quarter may have been a bit strong.

If you adjust for the number of one-timers you called out in the prerecorded call and take into consideration your guidance for the upcoming quarter, notwithstanding the day count issue, but your margins are generally running above average for the industry.

To the extent that the volumes would continue to grow, whether it be market or new business, would you let the margin run at this point in time?

Or do you need another step function of investment spending beyond your guidance?

Yes, well, we have said this before, too.

Looking at the short-term margin, we feel it is not the best approach to running the Business, And in that sense, if the markets took off faster than our planned spending, you would see some expansion in the margin.

Having said that, I have in my prerecorded comments mentioned that we do think the spending will increase, not a function of the margin itself, but a function of our strategic plans.

And I can say that in most of the business units are under budget so far in this fiscal year.

So, that's why I thought it was prudent to put some guidance out there on the spending levels.

So, the quarterly numbers you gave for the first quarter, there could be a step function beyond that as we get into calendar second quarter of '11?

I just think I would say my guidance was for the next few quarters.

Okay, terrific.

Thank you.

The next question comes from Michael Kim from Sandler O'Neill.

Please go ahead.

First, just given the shift away from fixed income products, more broadly these days, can you just talk about some of the reasons why you think flows into the global bond fund will continue to hold up--whether it is the fund's geographic diversification, its performance, rising demand on the institutional side?

Any color there would be helpful.

I think it's probably a little bit of all of the above.

We tend to categorize global bonds and look at them like your typical US fixed income fund, but they are different.

And I put them in the alternatives category, in a sense.

It is a new category.

For retail, we talked about it on prior calls, about it had a very small percentage coming from basically nothing to now being a part of a lot of that retail portfolio.

So, it is a nice way to diversify.

I mean, the records, you look at the last decade, how well they have done and obviously the currencies play a big part in that.

And also I think just around the globe the consensus of people worrying about their own currencies and a nice way to diversify your purchasing power, it really is a new asset class for the retail investor.

With that said, any time rates back up, you are going to have some pressure from rising rates and just the value of the portfolio, but it is just not your typical fixed income fund as far as rates sensitivity.

And our fund has a fairly low duration relative to other ones anyway.

So, it is really more about how well you manage the currencies versus how much interest rates are going to affect that.

And as long as you do that well, I think you will continue to see very strong flows.

Okay.

That's helpful.

Just second, I know you made the investment in Pelagos last quarter, and maybe you're looking at setting up a hedge fund capabilities in Asia.

But, more broadly, how are you thinking about continuing to build out your alternatives capabilities in terms of growing it organically versus acquisitions?

And then what sorts of products or strategies are you more focused on?

Thanks.

I think as we stated before, it is a priority for the Company.

We recognize both on the institutional side as well as retail, a growing appetite.

We think it is a natural extension of what we do.

We're a little bit hesitant about just going out and purchasing large hedge funds or alternative managers just because we think it is hard to have a consistent repeatable process where you can put different players into that like you can with a retail mutual fund process.

I think we're going to continue to be open to look at everything.

Situation like a Pelagos is really more of a start-up type for us to dip our toes into the managed futures, derivatives, hedge fund replication, and then build that into our solutions area.

The solutions area is another area, whether it is outcome oriented or target date type retirement plans, that we will continue to build capabilities and have, as I mentioned before, tactical asset allocation fund, hard asset funds, funds that we think can do well in a rising rate environment, and funds that can utilize investments even outside of our own Group, but the majority of them will be within our own Group.

So, we will continue to build that, but we're going to do it thoughtfully, and we have no goal that says we have to be X size in a certain period.

We just want to make sure that fits within our Organization.

Okay.

That's helpful.

Thanks.

The next question comes from Roger Freeman from Barclays Capital.

Please go ahead.

There was some commentary I think, I can't remember if it was prepared remarks or the press release, about strategic projects and recently approved and increase in spending around that and obviously just talked a little bit about that.

Two things there.

One is looking at your proxy, I think you laid out margin minimum margin requirements to get sort of full payout against those, and they seem fairly low, I think a little over 30%.

Is that, going back to I think Bill's question, is that indicative of where spending could go that those margins could get down to those levels?

And can you talk about what some of those projects are?

Sure.

This is Ken.

I guess I want to start by reemphasizing how we run the business.

I mean, it is very much an assessment of the market environment, assessment of our strengths and where we want to focus on the next three to five years, and, of course, we backed that down into an annual process.

So much of the revenue is driven by the market that it is just, we think, not the best way to run the business, to focus on short-term margins.

So, we're going with strategic projects.

My comments were directed specifically to technology projects.

I guess the question is you're trying to get an order of magnitude of what spending is on IT and others.

I don't think that it is the order of magnitude that would take the margin down to that 32% level in the short-term, and we're not thinking about that.

It is just enhancing our systems and improving our customer service functions, and expanding globally.

More in line with the spending progress you have seen in 2010, I would say.

Okay.

And I guess my second question would be around just your core domestic equities business.

You have been running this Vision Campaign.

You think you're positioned well to get market share improvements as flows come back into equities.

You have given us some stats in the past about the number of advisors that sold Franklin funds for the first time.

Can you update us on this past quarter, maybe over the past twelve months, what that's been, and what the mix has been?

Is that equities, predominantly?

I think for us, looking at the 2020 Vision Campaign and our focus on US equities, we feel like we continue to make very good progress there.

And two of our funds, the Franklin Rising Dividend Fund and the Franklin Growth Fund, have really taken off as far as sales, and continue to grow in terms of market share in the nonproprietary channel.

We have also been very successful in getting them on DCIO platforms, and that is going to be very important in all markets to keep generating consistent sales.

And that's an area where I would say, historically, we have been under weighted on the US equity side, but we do have some funds that are doing very well and are getting a whole new audience.

I don't have all of the numbers in front of me, but if you look at the Franklin Equity Group as a whole, we talk about top two quartiles.

If you look at the first quartile overall performance, it is 77% in the three-year, 73% in the five-year, and close to 80% in the ten-year of those assets, and about 70% in the one-year in the first quartile.

You really have excellent long-term performance with that group at the right time with the marketing campaign.

And we are seeing significant market share improvements there as well as significant net inflows into those funds.

Thanks.

The next question comes from Michael Carrier from Deutsche Bank.

Please go ahead.

You gave one stat this quarter, just on the muni side in terms of money leaving muni-funds, and you guys being able to capture roughly 50% of that.

If you look over time when you've had these shifts--whether it is in and out of equities maybe international, domestic, vice versa or past cycles with fixed income to equities--do you have any other longer term stats across cycles that you could give?

I think that is one of the concerns and everyone thinks that you guys have the good distribution, particularly in the adviser channels.

So, those types of stats is what the positive expectation could be.

And if you just had any more details it would just be helpful, so we can kind of get our hands around that.

Well, I think it is hard.

I think every market is a little bit different as far as what's working and what's not.

And I think just looking at our diversification we have, by asset class and by geography, I think is really unparalleled in the industry.

And I look at the muni world, and of course we felt like this noise was coming.

We talked a lot about it internally, tried to get people ready, but the muni market is a retail driven market.

It tends to be a lot more volatile because of that.

And when you have the headline risk and some of the, I think, just confusion around the possibility of state bankruptcies and things that you get an oversold market.

But I think the good news about munis, I thinks, is like most fixed-income markets, the yields can get attractive to new buyers, and you do have crossover buyers coming in and when those yields get above treasuries.

And I think some of the better information gets out about the possibility of state bankruptcies, that issue will settle down, and I think the market will come back.

And already in the last week or two you have seen the market settling down a bit, and hopefully that's a trend.

But like everyone we know as these budget fights happen in the political arena, you are going to have a lot of volatility in the year or two ahead.

But as far as how much you can keep and how much is working, it is just too hard to generalize based on past trends.

Okay.

And then just in the equity business, both on domestic side and international, you had flows in both of those buckets.

Any detail or any color on the products that are gaining traction, and then you just mentioned on the recorded call that you had a pickup in some redemptions even though you had record sales, so any color on that as well.

Thanks.

Well, I think the offshore -- the Asia growth fund continues to be very popular.

We had $2.3 billion in net inflows in the quarter versus about $1 billion dollars last quarter.

Our China Fund as well, offshore, was a top seller, and Global Discovery had good inflows.

Our Eastern European Fund had good inflows.

So, I think the strength in, outside of the US obviously, is more in the global funds and more of the global sector funds, and in the US the two funds that I mentioned, the big sellers were the Rising Dividend and the Growth Fund for US funds.

Thanks.

The next question comes from Jeff Hopson with Stifel Nicolaus.

Please go ahead.

Okay, thanks a lot.

Back on the muni exchanges, is that something you're doing proactively to try to retain those?

Or is that just a natural consequence of having better brand awareness with the financial advisors?

And then secondarily, I know that the UK had been something that you wanted to fill over time.

As we think strategically around the globe going forward, where could be potential areas that you feel like you need to be in, either where you're not in or you need to be bigger in those particular markets?

Okay.

I will start with the first or the second part.

The UK is just, for us, a nice kind of fit where we get a Group with long-term record, and we can immediately try to leverage that through our sales relationships.

And even we're optimistic that we can take that Group and introduce them to some large distributors that we have global relationships with fairly quickly.

Now, I think the other market that we mentioned would be Australia, which is one that we have looked at some opportunities there and we'll probably continue to do so just with the superannuation and the importance of having local Australian equity management there.

Outside of that I don't think there is any major markets.

You could look at Japan as one, but probably not high on our list.

We do have a domestic equity capability there now.

The question around munis, and are we proactive?

The answer is no as far as going out and trying to retain.

That's probably a normal number for most fixed income funds where they would move somewhere else if somebody had a short-term concern on the market.

And I think it goes to the strength of broker-dealers sold funds and where they pay a commission and go into the fund family.

And if you have a well-diversified fund family, you will retain a lot of those assets because those people are in it to buy munis.

That's what they want, but there may be a period where they want to shift out for a timeframe, and having a strong fund family allows you to do that and also having paid a commission.

They're not going to just jump out and move into something else because that wouldn't be appropriate.

So, I think the broker-dealer side you do end up retaining more than you would on the direct side.

Thank you.

Your next question comes from Dan Fannon from Jefferies & Co.

Please go ahead.

Good afternoon.

One more question on the muni segment, if you could just discuss what the funds that the investors are rotating into, and maybe the fee differential if there is any amongst those funds?

I think it is really any of the shorter duration bond funds.

We saw pickup in the floating rate fund, which if somebody thought rates were going to go up, obviously that's a good place to go in the short-term, and money funds as well.

Okay.

And then on the global bond fund it has predominantly been a retail product to date.

Can you give us a sense of the current breakdown of the mix within that fund generally, and what the appetite is on the institutional side for that product today with regards to RFP or sales cycle?

Where it sits?

It is predominantly retail.

I don't have the exact percentage, but it is the dominant 90% plus of the assets, and again, as I stated, I think on the institutional side it is more Global Ag.

It is not a specific sovereign debt category for the institutional marketplace, and that's an area where in the last year or two, three, we continue to build good momentum and still have a very good pipeline.

I would put that right up there with the our top selling category in much of that continues to be because of the strength overall of that team and the success on the global bond side that we're able to leverage into Global Ag as well as emerging markets debt.

Great.

Thank you.

Our next question comes from Jason Weyeneth from Sterne, Agee.

Please go ahead.

My questions have been asked and answered already.

Thank you.

The next question comes from Ken Worthington from JP Morgan.

Please go ahead.

Good afternoon.

Just one left for me as well.

In terms of the new disclosure, you have collapsed some line items and made things a little more opaque.

Any chance we can get disclosure on what the underwriting and distribution expense would be under the old reporting structure, or any chance that will be available in the Q's?

The answer is yes to both.

So, before we it put the earnings release out we issued the 8-K showing the changes historically, and hopefully that could help update all the models.

And then certainly in the Q we're going to break out the expense line item to show which component of the expense is more or less sales based, which component is more related to assets under management, and then we'll show the amortization of deferred commissions, and the Q should be out very, very soon.

Awesome.

Thank you so much.

Your next question comes from Cynthia Mayer from Bank of America.

Please go ahead.

Hi.

Thank you.

Let's see.

Looking at the international flows, it looks like long-term redemption picked up this quarter, and you may have gone over this.

Can you talk a little about what drove that?

And also, I think you said the overseas assets are a little more equity focused, so could you also give the mix in terms of the net flows overseas equity versus fixed?

Thanks.

Yes.

I don't have the breakdown available in front of me between those two, and I would have the same question as far as the pickup in redemption activity.

I think it was somewhat unusual to have that along with a strong equity market during that period.

So, I don't have a good answer on that.

Okay.

Great.

And then just in terms of Pelagos, can you talk about the timetable for introducing products from there?

I think we're working on it.

We want to make sure -- that's part of the reason we came in with a 20% stake and want to understand exactly how derivatives fit into a '40 act type retail product, and so we'll take our time there, and try to figure out where it fits.

I would imagine something in the next twelve months we would expect, but there really is no direct timetable to introduce those capabilities in our funds right now.

Okay.

And maybe lastly just head count rose a bit in the quarter.

How do you see that over the next year?

I think you'll continue to see some modest increase in headcounts going forward.

Like I said, most of the business units are under budget, so I would expect the hiring to pick up.

Just a little background on the change in head count this quarter.

I think there were 60 to 65 was the net change.

Most of that was in portfolio and portfolio support function, sales and technology and about a third of that were in low cost jurisdictions.

So, I would expect the head count to be in those areas and in that geography.

So, I would expect a little bit of increase many in headcount going forward.

Great, thank you.

The next question comes from Craig Siegenthaler from Credit Suisse.

Please go ahead.

Thanks.

All my questions have been answered, but actually just in the muni flows, how have the recent trends been over the last few weeks here?

Well, I think overall, you look at the industry, the last few weeks have been a little better, and the first few weeks were a little bit worse.

Do you continue to expect the 50% shift to other Franklin Templeton products to continue?

Is that kind of a rough range, or was there anything unusual there last quarter?

No.

I don't think there is anything unusual because it is made up of a lot of smaller investors, so hopefully that's a trend that we can hold.

Got it.

Great.

Thanks for taking my questions.

The next question comes from Glenn Schorr from Nomura.

Please go ahead.

Hi.

Thanks.

Appreciate the comment on predominantly the muni franchise, retail driven.

Just curious on the US part of the taxable side, if it is upwards in that range and definitely have to follow-up on that.

I am not clear on the question.

You said munis is 90% retail?

Glenn?

Yes.

I apologize.

You said munis' assets are 90-plus% generated from the retail footprint?

Just curious what that is on the taxable fixed income side.

Yes.

I think it is going to -- it will vary.

For us it is probably similar to that, but we do have institutions that use the US Government Fund, for example.

So, I think in a fund like that it would be higher, but I just don't have a breakdown in front of me.

Okay.

And given that predominantly dominant US retail franchise, curious on what your thoughts are or aspirations are for making a bigger push.

And I know some people are concerned that higher rates bring changes in allocations.

I actually think higher rates is a lot of institutions around the world would love to invest at a higher yield.

So, just curious on your thoughts on growing the institutional fixed income footprint in the US over time.

That's been a big push of ours, and I think we continue to build out the capabilities there, and we have a very strong team.

And I would agree, and I think that fixed income tends to rebound a lot faster in bear markets than equities do because of that current yield.

And you're right, you do attract new buyers that come in and all of a sudden say -- hey, I can get x% on a muni or on a government, and that will attract a new buyer, and once rates settle down, that's true.

You will come back a little bit faster.

And what does it take, in other words, it feels like a lot of the infrastructure is there.

Clearly, you have great management skills.

Can you do side by side?

Can the same managers manage the funds, and is it more of the marketing effort to get into the consultants, and that just is a longer sales process?

I think the answer is yes to both.

You can do side by side.

That's what we do, and we have been building very good relationships with the consultants, and continue to see very significant separate accounts come in.

In the last quarter, two of our largest separate accounts were Global Ag.

So, it is working.

Great.

I appreciate it.

Thanks.

The next question comes from Bill Katz from Citigroup.

Please go ahead.

Just a follow-up, Greg.

You mentioned towards the end of the prerecorded call that you would expect to shift back to equities, but maybe a little more drawn out and maybe less than prior cycles.

Maybe you could expand on that a little bit.

It seems to be a little bit more conservative than what some of your peers have been saying over the last couple days.

Is that your view?

Is that your view on top of your relationship with distributors and getting feedback that way?

Just a little more qualitative discussion around that would be helpful.

Well, it is my view that I think you have to take into account the demographics of an aging population, and how that shifts.

And, I think, probably the severe equity sell off accelerated that shift a little bit.

I think the other part of it is, if you look at the marketplace today, and we look at where we're successful in US equity side and funds--like the Rising Dividend Fund or a hybrid Franklin income fund or a Franklin Growth fund that tend to be a little bit viewed more conservatively, managed less volatile versus your traditional growth momentum fund--I think part of it is the adviser gravitating towards that instead of what used to be a momentum, or a even a large cap growth.

So, I think there are some shifts there that it is just very powerful when people are getting older and they're not going to want to take the risk they're taking before.

And that's not true in every country, but I think that's the case I would make in the States.

And you also had an incredible run-up of equities during that period.

And I just think it is going to take time and you're probably not going to get back to those kind of flows.

Okay.

I appreciate the perspective.

Thank you.

The next question comes from Marc Irizarry from Goldman Sachs.

Please go ahead.

Thanks.

Greg, when I look at the net-flow trends and equity just on the face, obviously US equity fund flows, picking up, and then looks like some deceleration in global.

Is there anything from a tactical perspective that you're seeing from the retail channel across the globe that suggests that maybe there is a little bit of a more demand for US over global at this point in time, from at least a tactical perspective?

No.

I mean, I don't think we're seeing that.

I think for us our performance has been better on some of the US funds in the near term.

And if you look at our big global funds, they have a value bias.

Value has underperformed growth here for the last couple of years, and mutual series is more defensive in nature, and has higher cash levels.

And Templeton has been underweighted materials through the last few years.

So, I think that's hurt the shorter-term performance for some of our core global funds, and as you would expect, we're not doing as well there as we would like to be.

Okay.

Just on the muni-fund flows for a second, you mentioned that you were able to keep $2 billion, almost half of the $2 billion, in the Franklin Templeton fund family.

And you mentioned before your retention rate of the assets.

Do you have any metrics on how much of the muni fund AUM you were able to retain, the brokers were able to retain, within tax free during this period?

I am not clear on the question.

Can you rephrase that?

So, your gross retention rate in tax free fixed income?

What would that be?

Now, we're just a little under half of the money that's going out, we're retaining.

It's exchanging and not just going out of the fund family.

If we had over a $2 billion in outflows for the quarter, we retained about $1 billion through exchanges.

So 50%, I mean, but whether that's the question before is that a number you would -- we have never really spent a lot of time looking at that.

It is because of this unique period here, we went back and looked at that number.

So, I don't know if that's high or low or -- It's something we're going to look at, but as I stated before, I wouldn't want to just assume that's a number to model out at 50%.

Right.

This is Ken.

About the muni business, the tax-free is like $70 billion.

So, I don't know if that's what you're --

Yes, I am curious how much of it is staying within, how much staying within munis versus within other parts of the --

I see.

I don't know.

Some of that stayed in the muni family, just different durations, and --

We have some intermediate funds, and they had positive flows.

So, I am sure that was where you saw a percentage of the exchanges went into the intermediate muni funds as well as we have some money market muni funds they could have gone into as well.

Okay.

Great.

Thanks.

The next question comes from Roger Freeman from Barclays Capital.

Please go ahead.

Thanks.

Just had a couple follow-ups.

Just in terms of the global bond fund, and macro comments around relative yields globally, do you think that global bond fund is less susceptible to outflows from capital seeking better returns equities than say domestic, just given that global rates are higher than US rates?

Is that a fair assessment?

I think it just depends on people's individual view.

And again, when you are building a portfolio and building risk into a portfolio, you get a little less, obviously, equity risk by having that as well as just straight interest rate risk by having that category.

So, I think that's up to the individual to where they think equities are going and where they think rates are going to make that kind of call.

And so, I wouldn't want again --

Okay.

Just looking at the returns and that fund.

First, I think in October it pretty significantly underperformed the Barclays Ag Index -- Global Ag Index, but then it dramatically outperformed in November and December.

Just curious if there was any sort of shift in currency exposure mix within the fixed income asset classes broadly, geographies, anything?

I think there are always shifts.

I don't think there was a dramatic shift, and I think we always talk about short-term underperformance because we expect it in that fund in any given time when how quickly the Euro can move on some headlines, and that's going to effect.

Hopefully, we get the longer term trends right and that's what we've done, but there is always going to be periods where we have short-term underperformance with that kind of fund.

Okay.

And then in the muni funds, I think in your presentation, you showed the one year Lipper rankings, which fallen off considerably and obviously everybody is faced the pressures of muni-fund investing.

Is yours just a function of higher California muni exposure relative -- ?

No.

Actually the California fund is doing -- I think it was second quartile for the one year through the end of the year, and it is really duration.

I mean, our muni funds are run for current income as well as total return.

And so, any time when interest rates are backing up, we will underperform in the short run, and it is as simple as that.

And we think people buy munis for the higher yield along with the stability of principle, and that's how we manage the funds.

So, again depending on what rates are doing, we generally will underperform, and that's been the key driver, not the quality of the portfolio.

It's been really the duration.

And then just lastly.

Any change, any updated thoughts around how Dodd-Frank might impact you structurally or strategically around the bank holding company side or your securitization business?

No change really.

We're still wait and see on that.

Okay.

Thanks.

Today's final question comes from Jonathan Casteleyn from Susquehanna.

Please go ahead.

Thanks.

Just wondering -- your view on the potential for and repatriation of capital holiday as proposed in Congress?

Would that be the final straw or the only thing you're looking at as far as pulling some of the capital out of your foreign subsidiaries?

Or is there something specific to Franklin that would allow you to maintain the status quo of over-capitalized foreign subs?

I don't think -- well, I think if there is a tax holiday, we certainly need to get a good hard look at it, and see what's in the best interests for the business.

But I don't think there is anything special to Franklin in that regard.

And I think it would be our intention to, like we did last time.

If we were able to bring back those dollars where they're more flexible here as far as buying back stock and paying dividends.

It would be our intention to bring most of it back.

Great.

That's helpful.

Just so I understand the diversification you speak of in the global bond fund, is that because you don't hedge your geographic investments?

So, would that imply that a stronger dollar is worse to the fund and a weaker dollar is better for the fund?

Is that a sound thought?

I think generally that's probably true.

Okay .

And then lastly, can you remind me of your M&A discipline as far as timeline for accretion, and then just the overall general strategy?

Are you trying to increase the diversification of the Franklin conglomerate or are you just trying to provide distribution to your sort of smaller

I think the M&A is more about manufacturing capabilities in areas where there might be a product gap.

That's what you saw in the acquisitions that we made.

Obviously, we would like it to be accretive as soon as it can be.

But you don't have a stated duration, so to speak.

No.

Got it.

Thanks for your time.

That was the last question for today.

Please go ahead with any final remarks.

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

Thank you.

Thank you for participating in Franklin Resources earnings conference call for the quarter ended December 31, 2010.

This concludes the conference for today.

You may all disconnect at this time.