富蘭克林資源 (BEN) 2011 Q4 法說會逐字稿

Good afternoon and welcome to Franklin Resources' earnings conference call for the quarter ended September 30, 2011.

My name is John and I'll be your operator for 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 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 the actual results to differ materially from the future results expressed or implied by such forward-looking statements.

These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission including in the risk factors and MD&A sections of Franklin's most recent Form 10-Q filing.

(Operator Instructions) Now I'd like to turn the call over to Mr.

Greg Johnson.

Mr.

Johnson, you may begin.

Thank you, good afternoon, everyone and welcome.

Thanks for taking time out to join Ken Lewis and I, today for our call.

I think first of all considering the volatility during the quarter, we are pleased to report positive net flows of just over $3 billion.

We are also pleased to report record operating earnings of $688 million and now we'd like to open it up for your questions.

Thank you.

(Operator Instructions) Cynthia Mayer, Bank of America.

Just maybe a question on the institutional global international flows you guys mentioned in the recorded commentary.

It seems like given how good the one year and three year performance is for Templeton Equity, I'm wondering what's behind the institutional redemptions you mentioned and also I think you mentioned some inflows, so I am wondering what the net is of institutional flows to international global equity overall?

I think that is a good question and, there were I think five different lumpy and each of them was for a different reason within global equities.

There were two kind of long-standing state relationships that -- one in emerging markets and one in global equities.

And, some of that is performance and some of it's moving to passive but it did result in I think about $1.6 billion or $1.7 billion between the two of those.

Then we had another significant account in the variable annuity side, on the mutual series discovery side that moved to an in-house manager within one of the large insurance companies that wasn't as much performance related and sometimes there's just timing differences when these reductions are made, it could have been lagging at that time and then taken a while and more of the recent rebound in performance may have not been considered

Okay, and just as a follow up I think you mentioned Italy was your top-selling area.

Was that sales of global bond and what, if any, impact you think the European agreement on recapitalizing the banks would have on European's appetite for a global bonds fund?

I think it's probably a little early to assess that.

I still think it's viewed as an alternative category and obviously a positive overall for how that fund is positioned and how well it has done and some of the weakness which we felt was more short-term, it certainly turned around here in the last few weeks.

So as far as what happens in terms of flows I think just overall as you would expect, the last week we had negative outflows in the global bond category and that pressure continued early into the new year.

We don't really like to comment a whole lot on where fund flows are going but I think in this case, just due to some of the misinformation that has been out there we'll say that we have been pleased to see how it has been very steady despite that one short period of under performance, net-net year-to-date probably around breakeven overall with an improving trend.

And, US doing better than Europe as far as looking at the flows within the two regions.

Michael Kim, Sandler O'Neill.

Just a follow up with the global bond fund I understand the performance has snapped back pretty sharply in the last month or so, but, just given the performance hiccup, if you will, are you concerned at all that you might be at risk of somewhat of a kind of a reverse halo effect where maybe some of your other global fixed income funds might be susceptible to a slow down in flows either across kind of retail or institutional channels?

Well, I don't think so.

I mean, I think anytime you have that kind of volatility, yes it'll be a speed bump and slow things down and certain people will have a new appreciation for the kind of volatility that you can see in that kind of a fund.

We've always said that this is a fund that is not really benchmark oriented as far as how it's run and how it's performance has been so outstanding over time that you'll have short term periods of under performance.

If we look back on the history of this fund, it's had a couple periods where it's been down 7% or 8% so it's not unusual to have that and it's the kind of style that I think a lot of people are looking for, as far as trying to get that output from active management in there.

So we've already been encouraged by the snap back in flows and positive flows with the US -- certainly on the US side with global bonds.

I think if you look at the absolute numbers and for the year, nobody has lost money in that.

Our relative performance is down a little bit but that has been coming back.

But as far as the -- it has a positive return for the year or close to a positive return today.

So that -- I think that, that's very important in the psychology of money and new money coming in and we're still encouraged by the tremendous overall record that it has and short-term things can move very quickly, especially with currencies.

Okay.

And then, just given kind of the decline in AUM and the slowdown in net flows more recently, are you at the stage where you may be starting to kind of tap the brakes on some projects or reinvestment spending and then just more broadly how much flexibility do you have on the expense side to kind of defend margins looking forward, assuming the markets remain volatile?

Right.

This is Ken, I'll take that one.

As you probably expect in the answer we are definitely closely monitoring the expenses.

I'd say in the short-term our objective is to keep expenses relatively flat for the next quarter.

Some lines will be more successful than others for that.

But certainly, that's the message for the troops that we're watching expenses.

We haven't decided to take any formal programs of cost reductions or any of that but certainly we're delaying in deferring projects.

So I think there is a fair amount of flexibility but it takes a little bit of time and so, just as we were back in the global financial crisis of 2008, 2007, 2008, we're pretty thoughtful about it.

Seeing if the markets come back, if it's a protracted decline or what have you and then we kind of make decisions real-time.

Bill Katz, Citi.

Just one more yet again on the global bond fund.

Just from a bigger picture perspective given the diversification of the platform any thoughts around capacity and potentially closing that fund to avoid some of the -- maybe some of the redemption stresses and you get some market dislocations?

Just sort of curious, your thoughts on that?

I don't think anything has changed.

I think we have seen a pickup in the total return fund that has corporates in there as well, in addition to sovereign debt so I think that's taking some of the pressure off the growth in the global bond side, certainly if there is any silver lining to the last quarter is one could argue you have more capacity on the sell off and some redemptions but the reality is, sovereign debt it's a huge and liquid pool and we don't see any constraints at this time.

And maybe one a little bit off the beaten path, but congratulations on the new heavy ICI board.

Just sort of curious I know you haven't really been in it for very long in fact, but money market reform, I think you're on tape for saying everything is on the drawing board if you will so maybe your initial thoughts on where you see the money market reform.

There seems to be a lot of uncertainty.

So curious to your thoughts?

I don't think there's much news there from what's been published in the press and it's a high priority in Washington and they are looking at ways to deal with the perception of the systemic risks involved with maintaining the dollar NAV.

I think it's important to note that the changes have been made to date that do improve the credit and liquidity in money funds but there's an urgency to do more than that.

And that's really when I say everything is on the table, everything is on the table as far as looking at alternatives from capital requirements and different ways just to deal with first losses in funds and things like that.

So it's going to continue and you are going to hear things but I don't really have anything new to report from what's been already out there.

Jeff Hopson, Stifel Nicolaus.

Okay, two questions.

First, the compensation expense in the quarter was there any, I guess, accrual adjustment?

And then, Greg, as you kind of look across Europe, a lot of upset there with I guess distribution and potentially asset managers of banks being sold off.

Does this present any new opportunity potentially for you there?

I'll take the comp question first.

There were some accrual adjustments, there was also -- there's some expense line items that are correlated to market value so the valuation of mutual fund performance awards and all that so you saw some credits in there reducing the expense.

So, in general, I would say that for this level of revenue the expense line item's a little bit below what you would normally expect to see going forward.

Okay.

And I don't see any real changes on some of the recent actions in Europe as far as the banks and the banks are critical to distribution but I think the overall trend of open architecture and be more receptive to outside managers is something that still continues today.

And I don't really have anything to add on anything else on that.

Okay.

And in terms of global bond funds, the weakness in Europe -- any particular market where there's been kind of newer money that's come out -- right back out I guess because they didn't understand the product or anything you can add to kind of the flavor of what's happened there?

No.

I think there's been -- there hasn't been one market that you point to as having a higher redemption rate.

I think the comment I made earlier about just overall higher redemptions in Europe than what we saw in the US as far as what had been sold on a retail basis but nothing that caused any concern or looked abnormal as far as a percentage basis.

Mike Carrier, Deutsche Bank.

Again, just maybe one more on the expenses.

Seasonally, typically like occupancy some of the IT things tend to be a little bit elevated.

I guess just when you think about next quarter, anything unusual in there in terms of a step down and then grow from there?

Sure.

One of the line items that have some seasonality in it is the general, administrative and other.

With the reclassification that we did last year, I mean that still has advertising in it and seasonally, that does decrease in the first quarter.

So I would expect to see that.

And as well, as we talked about watching the expenses, that's usually the quickest item that we can control and react to.

So reduced travel and that kind of thing.

On the technology side I think this is a pretty good run rate.

It might be -- there might be a little bit of seasonal uptick in that line but I wouldn't call it significant.

Okay, thanks.

And then, Greg, just you mentioned some of the new products that you guys have been working on, the asset allocation, the world prospectus funds I think those were hitting the three years, I guess what are you seeing from a traction standpoint?

Where is the interest?

And then in terms of these products, do they fund into a variety of your products?

Or are they just specific products in and of themselves?

I think it's still early to -- they've only been out there a few months as far as the tactical asset allocation they do feed into multiple funds.

Probably over 10.

So our expectations there are that, that will take a little bit of time to get going.

I think the world prospectus fund just give us another arrow on the global equity side where we have leveraged the local asset managers and really built a very strong record that in hitting the three year number we highlight that because that's always a hurdle for getting on platforms and making sure you've been out there for three years.

So, that hasn't gotten a lot of attention in the system, but now that it has a strong performance and been out there for a while and has unique story.

It's one that we'll be talking about in the next year.

But really, as far as flows, I think we're pleased to see that muni's have come back and continue to come back and hopefully will be in a positive net mode this quarter.

It's a long way from where we were a few quarters ago.

I think the Franklin Income Fund hybrid had an unusually tough quarter and most of that, again, was due to a variable annuity account that affected the flow number there and I expect the income fund to come back as well as far -- so those would be the areas that I think are going to continue to do well.

Jonathan Casteleyn, Susquehanna.

One of your competitors recently talked about more indexing initiatives in fixed-income because of low current yields.

Have you heard of any conversations within some of your product speaks about lowering some of your abnormally higher fixed-income fees, say in some of your other products?

Well, I think the good news is that we're on the lower end of that as far as expenses and have always been that way.

If you look at the muni's and governments, I think the global bond's in a category of its own.

Not your typical fixed income that would be under the normal kind of pressure.

But I think that's fair anybody on the higher to mid end in fixed income and a lower yield environment is going to put pressure not only on the yield you can pay, but also where you fall on your Lipper categories and expenses become very important in how you're ranked in total return.

So we haven't felt that pressure in many of our funds.

Okay.

And then, can you talk about the contribution from balanced equity management in investment management fees for the quarter?

Just trying to strip that out to understand what the normalized result was?

It's very small.

Very small and the basis points on the effective fee rate is like 0.1 or 0.2 or something like that.

Marc Irizarry, Goldman Sachs.

Greg, maybe you could address your strategy outside the US particularly in parts of Asia where maybe the growth outlook is a bit stronger.

How are you thinking about acquisitions, you've got also a decent amount of cash I guess overseas and is that sort of an advantage for you to go out and maybe start to accelerate your growth in some of those faster growing regions particularly if some of the competition is looking there as well?

Well, I think we've addressed that question on many different calls and for us, the answer is we're always out there looking for what we think makes sense and I think the one problem you have is if you are in these markets and you are a local manager you're not going to pay a strategic premium to buy another manager in that market and there's many US managers, European managers that are doing the same thing that want to get into those markets and if you look at India and some of the prices that were paid to get in that market, that wouldn't make sense for us, if we're already in it.

So I think that's a barrier today that's still very much in place.

But we're certainly looking at anything that we think fills a gap or can make us stronger and we can combine and get cost savings that way but a lot of these faster growing markets are going to be a much higher premium and a higher multiple to buy into and we are already in it.

Okay, then can you just talk about capital priorities?

Obviously you guys have been busy buying back some stock but could you maybe just run through how you're thinking about your capital priorities?

I think, no news -- no new news on that front in terms of returning dollars to shareholders, preference to buybacks, focusing on the dividend growth rate, that should continue and as you saw we were opportunistic and when we see an opportunity like that we will do that again.

Ken Worthington, JPMorgan.

To follow up on Cynthia's question, in terms of the sales in Templeton Equity, is there any merit to the thought that the success in the bond fund has monopolized the sales effort or maybe diverted sales from the equity side of Templeton?

And could it be that the choppiness in global bond or total return may be becoming a catalyst to better sales on the equity side of Templeton?

Because again to Cynthia's point it seems like the performance is there, the asset class has been in favor but maybe the bond fund has been so successful it was just the easy thing to sell?

So any merit to that?

I think one and I probably should have done this earlier is point to, if you look at where we had most of our add-ons and wins on the institutional side they were in global equity and global bonds during this quarter.

So you just had some big, large ones that overshadowed those numbers, come out but we had a lot of $200 million, $300 million wins.

So that tells you it's not really a performance issue and we had some add-ons that were significant to existing accounts as well.

There's always reasons a certain fund on the institutional side and it may be that, that one underperformed the overall composite.

There's things that can happen that way.

That could be the case in one of those.

I think the distribution effort has been very much focused, one of our priorities for the year was to make sure that Templeton was getting the right exposure in the system and we actually saw that the Templeton foreign fund improved its sales quite a bit, market share within the nonproprietary channel here.

We're going to continue that.

The campaign that we're running now is global as the new core very much highlights Templeton.

So our goal is to make sure that we are always balanced in what we are talking about despite sometimes that the sales flows may not reflect that.

Okay, thank you.

I know this is a teeny one.

But you had announced last quarter about the carry earned at Darby.

Does that mean -- was there a big distribution made?

And I guess, does that mean -- are they out raising a new fund right now?

And if so, how is that going?

This particular transaction related to one of the oldest Darby funds and doesn't -- so they are still kind of actively managing their current portfolios.

They might have some plans for new funds but none that are going to occur in the near-term.

So this transaction was just the crystallization of gains in an old Darby fund.

Roger Freeman, Barclays Capital.

Hi, it's Steven Truong here for Roger.

Can you update us on your seed portfolio?

I recall earlier this year there were some realized gains and going forward, how should we think about that?

Thank you.

Sure.

So there was a lot of noise in the non-operating line this quarter related to the market volatility and it was unrealized.

And the whole book when you look at it, it's still in a net gain position and so, we kind of keep in mind that a lot of it is seed capital so we're keeping that contained and if you will, repurposing old investments that have either been successful or didn't work out into new investments.

But that does leave you exposed to equity markets and the like.

So but that's our approach.

It's kind of -- we have pools of investments that we use for product development purposes that are in a sense fixed, notionally fixed if you will and the business units know that, that's a limited resource.

And but you still get this exposure.

And I would add, obviously as markets pickup it would be a reasonable assumption to see a lot more green bars on that slide 17 replacing the red ones this quarter.

Douglas Sipkin, Ticonderoga.

Most of my questions have been asked and answered.

I guess just a general one.

I know it is sort of early in this market move but are you guys picking up at all any increased interest on the retail side to get back into equities?

Given -- usually people go to fixed income first but given where rates have been I was just wondering maybe if you are seeing a little bit more light in the tunnel for retail equities given the move in the markets in October?

I'd definitely say there's more light, but that probably means that redemptions have slowed down versus sales picking up and it's just going to take I think a little bit more time to convince the equity buyer that it's time to jump back in.

There's just been a lot of volatility in the marketplace and I think that, that just works against the long-term investor right now.

Bill Katz, Citi.

Just a follow-up I know you gave a partial answer before but just a little more clarity.

In terms of the world allocation funds where the three year performance is moving to the [favor] anniversary.

What -- where might you see the greatest lift with that given some of the volatility around it?

Do you think it is the US?

Do you think it is outside of the United States, Asia?

I'm just sort of curious of where you might see the best short term opportunity?

I don't -- I think it could be either one.

It just depends which group -- I think the good news with Europe is that you can get on platforms and that can mean faster growth of assets more like an institutional account versus the US where it may take you more time as the distribution system has to work with the advisors to get them comfortable with it.

So, probably on the immediate term, you could argue that Europe would be a quicker, immediate opportunity but I think it remains to be seen and I wouldn't bet either way.

And, then just one more in terms of I think you mentioned in your prepared remarks earlier today that some funds into Romania, you sort of layered out a whole new set of funds and then also some CCAV shifting into actually some conversion to OICs with the new platforms.

What kind of ramp would you think from here in terms of net new business?

I mean, I don't think that the -- Romania would be something that's going to move the needle very much for us in the near-term.

I think the -- Rensburg is just getting that positioned properly and if the European market continues to move, that's something that would again be a new offering for us and one that we're going to try to build and that's been a priority in the UK market but again these are not big initiatives that we expect are going to take time to build.

We have no further questions at this time.

Okay, we'll thank you everyone for participating today and we look forward to speaking next quarter.

Thank you.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may now disconnect.