富蘭克林資源 (BEN) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to Franklin Resources' earnings conference call for the quarter ended March 31, 2013.

My name is John and I'll be your conference operator today.

Statements made in this conference call regarding Franklin Resources Incorporated which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements.

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

(Operator Instructions).

The Company asks that you limit questions to one initial and one follow-up question.

(Operator Instructions).

Now, I'd like to turn the call over to Franklin Resources' CEO, Mr. Greg Johnson.

Mr. Johnson, you may begin.

Thank you.

Good morning, everyone, and thank you for taking time to join us today.

We know it is a busy day for all of you.

With me today is Ken Lewis, our CFO, as well as Chris Molumphy, the Chief Investment Officer of the Franklin Templeton Fixed Income Group.

I asked Chris to join us this morning in case there are any follow-up questions from his comments in the recorded commentary which we made available this morning.

To quickly recap the highlights this quarter, it was another strong quarter, highlighted by strong relative performance, significant improvement in net new flows and new highs for operating income, net income, and earnings per share.

I'd now like to open it up to your questions.

(Operator Instructions).

Craig Siegenthaler, Credit Suisse.

Hi, good morning.

This is Mark Deluzio here for Craig.

You mentioned that K2 had positive inflows of $500 million in the quarter.

Has this momentum continued in April, and is there any visibility on the pipeline of won, but not yet funded, business there?

Well, I think we are careful about talking about the next quarter, but there's plenty of things that they've been working on in the pipeline, so it looks healthy.

So, we continue to be optimistic about that area.

Okay, quick follow-up there.

Has there been any traction with the 1940 Act Fund-To-Fund product, or any other possible retail products from your alternatives business?

Well, yes.

Like many, that's something we're looking at right now.

It is a natural extension of what K2 does.

And there are funds available to put in a fund-to-funds that have liquidity and transparency for '40 Act funds, so that's something that is in the planning stages for us.

Okay, great.

Thanks for taking my questions.

Thank you.

Matt Kelley, Morgan Stanley.

Morning.

I was hoping to touch base with you on your global equity platform, and just --.

You had modestly positive inflows for the quarter, pretty strong performance, so just curious if you can tease that out for us where you seeing the strongest inflow, and maybe a little bit by channel, too?

Who is buying more and who is -- where the stronger redemptions are, as well, for the first quarter?

I think it's -- if you look at the quarter-over-quarter flows, the big switch was Asian Growth Fund, and that's been a big driver.

Much of that's raised in Europe through our CCAV funds, and that had a very strong quarter.

Another is the Frontier Equity, which is, again, just an extension of the Emerging Markets side, which has done very well.

Also, Asia Small Cap has done very well.

The Templetons improve, but continues to be in net redemptions, despite strong performance, and Mutual Discovery at Mutual rebounded to positive flows, which is -- that's been a major driver for us over the last five years or so, so it was good to see that one coming back.

I think just the retail tends to take the longest.

We also had some decent institutional wins that funded in global equity, as well.

But really, the US retail, despite good performance, is just a longer turnaround.

Thanks, Greg.

And then, just to follow up on that point.

What are you seeing from institutional clients in terms of use of the barbell with the alternatives and passes?

Is that something you are seeing increase, or steady-state, or what are you seeing there?

Well, I'm not sure we've seen a big shift.

I think there's plenty of talk about increasing alternatives and looking for, potentially, more alpha and higher returns.

For us, it still relatively limited in the amount of searches that we're going to participate there, so it is not really core.

We are not seeing a big switch on the passive side from international equity from global equity like we are in more of the US equity business, so I think there -- it is still a challenge with passive on global equity side, but not -- we're not nearly as much as on typical, like large cap growth in the US.

Thanks.

Thanks.

Luke Montgomery, Sanford Bernstein.

Hi, guys, thanks for taking my question.

How much of your industry-leading margin will you attribute to the global scale of the Templeton Global Bond product?

And how should we think about the incremental margin in that strategy at that point?

And if we really try to dimension the concentration risks, what would be the impact on the margin if you lost a significant chunk of those assets?

Yes, a couple things.

I wouldn't necessarily attribute the overall profitability to any one product, but the scale, you are definitely right on about the scale.

So we see this scale -- the benefits of scale with our international business to the extent that we're distributing the products using our CCAV umbrella.

And the same thing in the US.

So, I don't think that, if you look back in our history, you can look at the margins.

We put a new slide in there this quarter.

You can see, if you tracked -- and we have two slides in there.

That's new.

It shows the top selling funds over a period of time, and then it shows the margins over a period time.

And you can track that to see that it is not necessarily dependent on any one given product.

Okay.

Thanks.

And then, if this so-called great rotation thesis were to play out, and the Global Bond Fund were to get thrown out with the bath water, what are the key equity or other products you point to that you think have strong -- would have a strong interest and good performance that would allow you to internalize a fair amount of those outflows?

And in other words, what is the wholesaler strategy going to be in that environment?

I think it is very important to note that, one, I am not sure what we mean by great rotation, because you've seen in the first quarter, you've had a rotation into equities and fixed income, and most of that has been at the expense of money funds.

And I think it is really -- it's very important to distinguish Global Bonds between typical interest rate duration-type fixed income products.

And I think people position Global Bonds more like they would an alternative, because they are not really correlated, it is more currency driven.

So, if you have a spike up in rates, you have shorter duration on these types of funds, and they really are not as sensitive as typical fixed income.

But we have Chris here to talk just to that.

I think it is a question -- we get quite a bit for the firm in how Global Bonds are positioned versus typical fixed income.

Chris, do you want to --?

Yes.

No, I would agree, Greg, and that's something we touched on a bit in the recorded remarks with respect to Global Bond.

In our particular case, our Global Bond strategy, the core strategy has, in fact, no US Treasury exposure, and virtually negligible US duration exposure.

Overall duration of the fund is 1.5 years, which is some duration, but significantly less than the broader market.

And to Greg's point, it is a bit of a different asset cost.

It's certainly not domestic fixed income, by any means.

And it does sit somewhere between a traditional fixed income and, perhaps, alternatives, as Greg alludes to.

So, it is a bit of a different asset class, and one that's probably got some significant secular upside over the years to come.

Okay, thanks.

I think we can agree that maybe it shouldn't be thrown out with the bath water, but the question is more, what is your strategy -- what is your sales strategy going to be if it does?

Well, I think our strategy, and that's what we've talked about, if you look at -- would we be sitting here talking about Franklin Income Fund right now if -- with the same kind of issue, if it wasn't the Global Bond Fund that had such significant net inflows?

And for us, our goal is to always to have something in the market that can drive organic growth, but also have a breadth of products behind it.

And if you look at the category -- the quarter, where we had positive flows in just about every asset class, we have plenty of funds that we think can do very well.

And look at our Rising Dividend Fund, which has done very well in this market, just crossed $10 billion, frontier markets.

There's a lot of new funds that we have introduced, and a lot of equity funds, like the Franklin Growth Fund, that continues to get shelf space.

And if that's where the world goes, we have long-term funds with a strong track records in position.

Our strategy hasn't changed.

We've been driving home the equity message and how Franklin has had a long history in managing equities.

And that is something that we've done against -- somewhat against the market, but gotten message out there.

And I think we are well-positioned as far as shelf space with 401(k) plans when, and if, it does really turn back.

Okay, thanks.

That was helpful.

Thank you.

Dan Fannon, Jefferies.

Thanks.

I guess, Ken, just on the expense commentary from the prerecorded call, you talked about regulatory expense.

And just curious as to what is different, and if anything changed, or as we think about the build, is there a step function that's coming as a result of some of these changes, or just gradual from current levels?

Yes, I would go with the gradual.

I think we did have some margin expansion this quarter.

It is, for us, a hard quarter to have margin expansion, just because of the seasonality of some of the expense items.

So I think that was a positive.

I think you could see a little bit more expansion going forward.

But on the other hand, you do have some of the smaller line item expenses, like G&A and occupancy, and technology that we are forecasting to be a little higher.

Maybe they won't be a little higher, but that was the essence of my commentary this quarter.

But again, those are the smaller line items.

So I think, generally, margins should be in line and maybe even a little improved if the markets continue to go up.

Okay.

But if I even think about your fee rate and the improvement we saw this quarter, even a modest continuation of positive inflows, it still seems like incremental margins should be higher and you should still see decent leverage in going forward

Yes, but I think a lot of the expenses are also variable with the market, and you see that in the G&A line, too.

So --.

But even if it's just market's flat

Yes, like I said, I think a couple expense line items will increase, and so I wouldn't -- I think it is more of the same, slightly improved, just potential slightly improve on the margin front.

Okay.

Thank you.

Bill Katz, Citi.

Hi, this is Steve Fullerton filling in for Bill.

I just have one quick question.

You talked on the prerecorded call about the strong growth in Italy.

Can you just go into what's driving that, and how you could translate that to other regions?

I think the -- Italy, it is been really on the back of the Global Bond Fund.

And we are actually kicking off a big equity road show throughout Italy right now.

Our goal -- you tend to start with one popular fund, and then once you get the shelf space, you can try to diversify that mix, and we try to put incentives in place for that.

We also have a -- kind of a Tactical Asset Allocation Fund that was introduced over a year ago that's done very well in Italy.

But it is really through the traditional banks that we've established long-term relationships with, and a way for them to diversify away from home currency risk.

And that's been a big reason why the Global Bond Fund has done so well there.

Okay, great.

Thanks a lot.

Michael Kim, Sandler O'Neill.

Good morning, this is actually James Howley filling in for Michael.

I appreciate the color that you guys gave earlier about the on-the-ground capabilities in Europe and the US version of the emerging bond fund coming online.

But what are some of the other more interesting strategies or vehicles that you're contemplating these days as it relates to product development?

I think one of the areas that we touched on earlier in the call was around K2 and introducing some retail-type products there in the fund-to-fund space.

We've spent a lot of time building out our solutions or your Tactical Asset Allocation Real Asset Return funds, funds that are positioned to have commodity exposure, should rates go up.

And that was probably a -- I should have answered part of that, to the question earlier about if you do have a rotation, we want to have funds in there that have commodity exposure and can protect capital in a rising-rate environment.

I think the breadth -- and that's really the area, the solutions and building out our asset allocation capabilities with -- because we really have just about every category covered from a mandate or fund perspective, so I don't think it is anything that we need to develop that's new.

But really try to take what we have and package that in a different way that can be more solution-oriented.

Great.

And then, just turning to capital management.

Some peers have seemingly gotten even more focused on returning some excess capital, and I appreciate that you guys have been very consistent on the dividend and share repurchase front over time.

And I appreciate the 12 months is within the range, but how are you guys thinking about getting more aggressive on returning capital, particularly as the balance sheet continues to strengthen over time?

Yes.

It clearly has been a focus.

It will continue to be a focus.

As we've talked about, our goal is absolutely to return a high percentage of the US cash flow to investors every year.

And yes, the focus has been on dividends in the past.

Share repurchases have been lower.

The stock price has risen materially this quarter.

The other factor is that viable training volume has declined materially.

So those are factors that have driven this quarter's results.

It hasn't changed our strategy of being very conscious of returning earnings to the shareholders.

Okay, great.

Thanks for taking my questions.

Jeff Hopson, Stifel.

Okay, thanks a lot.

Can you give us the amount of institutional global fixed flows in the quarter?

And then, we have talked about this before, but just want an update.

Vanguard has increased, or actually, established a global fixed ratio or percentage within their target date funds which would seem to be, in my opinion, kind of a industry indicator, perhaps.

So just curious about any update on how you are doing in penetrating 401(k) with that asset class?

And typically, obviously, it takes a while to build traction with the a new fund, but with the emerging market in the US, given the track record globally and his reputation, can we assume that you will get traction in that category, or that product, sooner?

I don't have the first part of your question on the institutional.

I'm looking at some of the larger fundings over the quarter.

And the really -- the largest international fixed was $121 million.

So that would -- I think, as far as looking at flows, the majority was retail.

There wasn't any big chunks, big separate accounts in global fixed.

And I will take the other one, I think on target dates, in general.

I'd put that in the challenge category for us, because the captive platforms for 401(k), they are really the ones that are in the position to benefit more from target date funds.

And that makes it harder to sell individual funds, as buyers move into the target date and that's how they get their exposure into equities.

The good news is they get their exposure in equities at a young age.

And I think that's been -- we've seen that statistic.

But, for more of the independent asset manager that's not on the platform, it makes it a little bit more challenging to get flows into your traditional equity funds that are even doing well, if the world moves to target date.

Now we have target date, but it is hard to differentiate it enough to really get the lion's share of any one given platform.

It's going to go more to their own target date than they are an outside one And in emerging markets, I hope -- we have had a long history.

We've obviously been the early mover, have a strong portfolio management team.

And Frontier has done extremely well for us, which is kind of the emerging story.

And we hope we can continue to get flows in the core emerging markets.

Okay, great.

Thank you.

Ken Worthington, JPMorgan.

Hi, good morning.

Wanted to just dig into the appetite for global equity.

I'm good to try this in a couple different pieces.

So on the retail side, I'd love to hear about the momentum of interest in global equity products.

And on the institutional side, can you talk about the pipeline of activity?

How RPs are trending, and if you're seeing more money moving around within the global -- for global mandates?

I would say it is very steady.

You look at global equities, overall, have had positive inflows over the last year on a retail basis.

Clearly, more people are allocating to global equities.

We have a campaign, "Global is the New Core." And taking the typical investor in the US, instead of having 50%, 60% in US equities, try to think about 30%, 40% in global equities.

So that -- just the percentage of the pie has changed.

That's put pressure on US equity flows, as well.

We continue to see that.

I think for us, if I put any area that's been a little disappointing is that we haven't participated in that the way we should have.

And part of that was some of the challenges around the Templeton's value style, which the good news, that performance has turned around.

But it takes time to get back into those -- the mindset of advisors and the retail investor.

And that is something that has been a big priority for us to do.

So I think the story is just very strong, because people are much more comfortable with globalization in investing across borders.

The home country bias is not a strong, so that's very much in place.

We participate in a lot of areas.

Mutual discovery has been a big driver on the Mutual series side for us.

And then traditionally with Templeton, as well.

It is interesting, our largest mandate we won last quarter was a global growth fund, which you think of Franklin Templeton for global growth.

But we have excellent performance in global growth in the New York-based head there, and that was a $0.5 billion win.

So that's a category that's institutional quality for us that drives outside of the traditional Templeton value.

And again -- that we can participate in just about every type of mandate on the global equity site.

So I think institutional, it's still very strong.

The pipeline, when we look at our wins every quarter, there continues to be, and whether it is Asia-specific or global-based, we are getting in a lot of searches there.

I don't think it has been an increase, but I think it is pretty much steady straight -- steady-state and still the best opportunity for us, along with global fixed on the institutional side.

I guess my issue is, you've got a very big franchise, the performance seems to be very good.

When you flow, you flow really tiny, and when you outflow, I guess maybe you're tiny, as well.

But if you are seeing growth, it just seems to be very modest.

And you talk about gaining mind share, are there leading indicators that would show that that momentum is improving, or do you think this kind of blah growth run rate persists for the year?

Or what gets it out of this range-bound, really tepid growth, or maybe tepid shrinkage range?

It seems like you should be doing much better.

I think it is Templeton Retail that is the key, because we are doing very well.

If you are looking at the organic growth rates in Europe, or, as I mentioned earlier, Asian Growth, Asian Growth, Small Cap, Frontier Funds, tremendous growth rates there.

All of that get somewhat lost in the net negative numbers coming out of the retail US.

So it just takes time to turn around the mindset.

The advisor moves on.

You get the benefits, sometimes, of them still selling after you under performed for a while.

But once you are removed, it takes a while to get back.

And that has been 100% focus of our distribution groups, to make sure that that story and performance is heard.

And we feel like we are making good progress there, but again, to me it is very simple.

It is getting that back on track, and then you will see the right levels of organic growth in global equities.

Robert Lee, KBW.

Great, and thanks for taking my questions.

Let's see, I guess, the first one may be, Greg, for you.

I'd just be interested in getting an update.

I know you've spoken about in the past, with the acquisition of K2 and looking around the globe, you actually have a pretty fair number of alternative-type strategies.

But the distribution of them maybe has been somewhat haphazard, or not particularly well organized, and I know you've been making efforts to streamline that and centralize it.

Can you first update us on where that stands, and if that is something you will think will start taking effect more this year, and maybe as we get to the end of this year, next year, could start to see move the needle a little bit?

I think it is gradual, like most things we do.

And we have dedicated senior resources to the alternative side, people that have been here at the firm a long time.

And really 100% of their job now is to try to make sure that we are leveraging those stories wherever we can across relationships in the firm.

I think that's been a big step forward.

I think we still debate at the actual sales-client interaction level what the right mix is.

And in some cases, I think we are concluding, we need more dedicated people out there.

I think that's something that we will continue to add, and we've got the infrastructure and senior management team in place to build that out now, where we didn't before.

I don't think there will be a big change, but it is just gradually, we will keep adding people on there.

Okay.

Great.

And then, I apologize if you had addressed this in the remarks at the start, because I got on the call late, but with the capital management, the ever-present questions, I guess.

But can you update us, if we look this quarter and out for this year, what your current expectations are for the mix of cash that will be generated, or you expect to be generated and available in the US versus outside the US?

And also, if there's anything you are seeing or hearing in the recent budget negotiations and proposals that give you some, although it is always hard to hope for good outcomes, but hope -- gives you some optimism about seeing some changes that could free up some of that non-US cash to be brought back home?

Right.

I think the US, non-US cash generations in the -- maybe -- it is not 50%/50%, might be 60% international.

And going forward, and I did mention, as one of the questions earlier, that it has been slow.

Some of that's been due to the viable trading volumes, as well as the run the stock has been on this quarter.

We are going to stay focused on it.

We're going to be pretty opportunistic going forward.

And so there's no real change strategically into our policy there.

But we are definitely aware that the volume was lower this quarter.

And we haven't heard anything new coming out of government.

We still remain somewhat moderately optimistic that something might happen, but it won't happen for a while.

I don't know if anyone else has heard anything on that front, but --.

So we'll just wait to see on that.

The follow-up to that, if you look outside the US, there are some jurisdictions which did have modest capital needs, or regulatory needs.

Do see anything outside the US that, regardless of what happens here tax-wise, means you'll just have to keep more capital or cash in certain jurisdictions than you currently do?

Anything like that on the horizon?

Nothing material.

The trend is, with a lot of the regulatory -- as we expand globally, we get into different markets.

There's different -- so there is demand to increase capital requirements in certain jurisdictions, but, relative to the size of our balance sheet, it doesn't really move the needle.

Maybe one last capital question on seed capital.

You guys dedicate a large chunk of capital to seeding new strategies and products, and clearly recycle it.

But is there any -- as you continue to expand your capabilities with K2, and looking at products there, some of which can be capital-intensive in the sense that they require higher levels of seed capital, but anything that makes you think that the amount you dedicate to that could actually start to creep upwards, going forward?

I think that is a trend.

You are right on in spotting that.

The products get more complex.

We do things like introduce products with different sleeves that portfolio managers have to manage.

The requirements go up.

Fortunately, for the capital management discussion, those needs tend to be outside the US, so they are not impacting the US cash, to an extent.

We are keeping that pretty tight.

And most of our product development is not in US product.

It is mostly in international products that we are developing products.

So it is true, it's requiring more capital, but it tends to be outside the US.

Great.

Thanks for taking my questions.

Michael Carrier, Bank of America.

Thanks, guys.

First question on margins and scale.

If I look at year over year, for the first six months, it looks like your average assets are up 13%, and you have some operating leverage.

But I'm trying to understand, obviously, there's distribution costs that are going to go up with markets and assets, and some comp.

But if the market levels continue or they drift higher, should we assume that you can still be generating 100, 200 basis points on an annual basis in leverage, given the strength of the markets that you've benefited from?

Yes, those are pretty big numbers, and, of course, hypothetical.

I think one thing not to lose sight of in this quarter is that strange anomaly with the distribution expense where we are accruing the asset base component of that on a monthly basis, but the revenue was short, because it was based on the number of days.

So, that normalizes.

Just something like could -- you could see some margin expansion in the short term.

But over the long term, I think the variable costs will go up if the revenue goes up.

And our variable compensation will, of course, go up.

Performance is good, so there's pressure there.

So I think all of these things lead me to believe that it's more of an offsetting slightly better margin, but not in the range you were talking about.

Okay.

Those nuances are helpful.

And then, when I think about products versus geographies, obviously, from is scale standpoint, there are certain products that you have on the scale in.

Greg, you mentioned Italy in terms of gaining scale in that market.

Are there any other -- when you look at the international markets, are there are others where you are getting to --.

I don't know, it's probably different for each market, but whether it is $5 billion, or $10 billion, or whatever that level is where you feel like the operating leverage, or the scale in the business, starts to improve, versus when you're running at a level where it still, relative to the overall margin, it is under, because you are still building up or building out?

I think I would say today that most markets we are in are at scale, where we are profitable.

I cannot -- there's very few today that would be net negative and then, still on that phase, Italy is now our largest country outside of the US as of this quarter.

So it is certainly at scale $36 billion.

Is just a matter of the risk, and diversifying, and making sure you're -- while the sun is out you are doing everything to get the message on the other funds, just to help your business to be more diversified.

But today, we probably have, I think we have 19 countries, or regions, that we define that have assets over $3 billion in each of them.

So you can see it is very broad diversification.

Every one of those would be profitable.

Different levels of margins, but certainly profitable.

Okay.

That's helpful.

Then, last one on the equity flows, you mentioned, in terms of seeing that improvement, the focus on Templeton Retail, and predominately in the US.

When you look at your history, Franklin, and you go through periods where there is a product, whether it was Templeton or Income Series, that did lag the industry, and you saw some outflows or weak relative to the industry.

Do you have any sense how long, once -- because the performance is back, so once the performance is back, how long that traction tends to take in order to have those flows shift?

Obviously, it is going to depend on the environment for overall equity flows, but just trying to gauge, based on the experience in the past, how long that tends to take?

I don't have an -- I can just tell you that equity takes longer than fixed income.

Fixed income tends to move back a lot faster because of the attraction of that current dividend rate there, and equity is a little fuzzier, so it just takes a little bit longer to get back.

The other piece that I should have mentioned -- we were talking about international flows.

I'm just looking at some of the numbers, too, and there tends to be some headwind just from reallocation.

You get into a strong market, and pension plans will rebalance based on the -- so I'm looking -- I see a lot of topping off in some large accounts that can happen over -- when you have the kind of moves that you've had, and that adds up, too.

And then, a couple of redemptions, too, this quarter in global equity, the largest redemption was in global equity.

So those are going to, again, mask a lot of the good that is occurring on the retail side, and improvements in the retail side.

And those are more one-off than the underlying flow trend.

And I am looking at some numbers that the majority of the larger accounts that went out this quarter were in global equity.

Okay, that's helpful.

Thanks, guys.

Gregory Warren, MorningStar.

Good morning, guys.

How are you?

Just trying to figure out, I know we touched on this a little bit, and I don't want to really beat a dead horse here, but I'm trying to figure out what the issue really is on the global international equity side.

Because if you look at the industry AUM flows through the first quarter, actively managed pulled in well over $35 billion.

And as we roll into April here, international seems to be about the only area where there's still interest.

And you guys touched on there being an issue on the US retail side, and that outside of US, your flows were better.

But I'm trying to get a feel for, is this a matter, of on the retail side, advisors are putting investors more into, say, [tactful] bond and those sort of portfolios, because they are a little bit more equity-like?

And less so on these funds, because there's been some performance issues, or --?

What's your take on what's going on here?

I just think we are not, for the advisor in US, they are selling other global equity funds than are -- selling some of ours, but not --.

The only area that I think of in any significant way where we lost some share was on the retail side in global equities over, say, the last five years.

So that's part that's lagging for us, that performance lagged and now it is strong.

It just doesn't turn that fast.

And then, again, if you have some significant outflows, you are looking for global equity accounts, some topping off.

Then there was one that -- a large Canadian one in the quarter that went out, that is going to -- you are going to draw a lot of conclusions by looking at the big number that is a one-off number versus retail flows.

So retail flows did improve for us, like most for that quarter.

It is just that we had probably a little bit more in one-off top, whether it is reallocations or terminations, in that category.

It simple.

We do well with just about everything else.

And Templeton has lagged here in the US, and that's also a big asset base, that when it lags in gross sales, even a normal redemption rate creates fairly heavy net quarterly redemptions.

So we've got to get the gross sales number back up, and that's what we are trying to do.

Okay, yes.

That makes sense somewhat.

Basically, I'm looking at the January flows as being a one-off, too.

You've got the normal reallocation that goes on there.

You had a lot of money flowing out of stocks -- stock fund sales and special dividends in the fourth quarter that got reallocated in the first part.

But when I'm looking at your taxable bond flows here, they seem to be a lot stronger than we've seen a long time.

And I'm just wondering, do you feel that what we saw during the March quarter is going to continue at this level, or a tapering down as we get through the rest of the year, because this is more on par with the run rate we were seeing prior to the performance pick-ups?

You know, I don't see any reason why that shouldn't continue.

I think we are still, like most in the industry, fixed income continues to be strong, so we think that trend should continue.

I couldn't call anything out unusual there.

And also, Craig, you alluded to the fact this great rotation, but with money funds and in short rates at zero, which --

Yes.

-- you believe they may well be for some time.

That seems as though that continues to provide a base for taxable fixed income.

Yes.

We are seeing fairly broadly in terms of our product line, both in terms of some low duration products, some multi-sector product, and then the continued search for yield.

There is still a necessity for yield out there, so I don't -- I'm not a sales professional, but it seems as though a lot of those trends are here, at least for the foreseeable future, one would guess.

And I think, when we talk about the great rotation again, and fixed income, and what does it mean, I think you also have to consider just the demographic shift and risk tolerance of your average investor, certainly in the States, that's getting older, closer to retirement, and that baby boomer bubble there that it's working its way through, has less of an appetite for equities.

And that has an effect, as well, when they are looking and getting closer to retirement.

Yes, I'm right with you on there.

This whole notion that would be a huge bubble popping in the fixed income.

I don't think it is going to be as big as people think.

There will definitely be some out draft, but we will have to see.

I still think we are caught in this risk-aversion cycle here.

And 2013 is looking an awful like 2011, and all we really need is a hiccup here, and people start running from the doors on the equity side.

Let's hope not, though.

Yes.

(laughter)

Okay.

Thanks for taking my questions, guys.

Roger Freeman, Barclays.

Hi, good morning.

I just wanted to come back to Global Bond Fund.

As you talk about it, it doesn't fit neatly into one category.

And wondered if you could talk about the segmentation, the investor base, both on the institutional and retail side?

Are there buckets you feel like, based on whatever feedback you can get through the channels, that you can put investors in, in terms of what they are invested in it for?

Yes, again, I don't have that information and it is just guessing.

As far as -- I think is generally going to be a little bit more sophisticated, a little bit, maybe, a little larger averaged ticket size, just because it is something a little bit different.

You're coming from zero penetration in a traditional retail buyer today where it is still very small, and even for the institutional buyer, the category is still under 5%.

You've got a huge way to go.

And I think -- you think about the investor, they're concerned about rates going up.

They are concerned that -- gee, equity markets, I can't -- we had a tough decade, and we've got all these macro headwinds that are still out there, and they are just concerned about risk.

This is not a risk-free investment, by any means, but it is not correlated to a lot of the macro.

You could make a lot of money with many of these macro changes that can happen with countries.

So it is a different story, and it lowers the risk of a portfolio.

I think you'd still have a ways to go as far as market penetration, and it is probably starting with the more sophisticated one moving down, and I think it is the same story with pensions.

It is going to take a while to position it properly and get different fiduciaries and boards comfortable with the concept.

But I do think it is an alternative that's liquid, it is transparent, it's easy to value, and it lowers the risk of a portfolio.

That's a lot of checks.

Absolutely.

Okay, thanks.

And then, the second question, in terms of your equity marketing strategy, the global equities, new core, with that being your push, does that come at all at the expense of domestically focused equity funds?

Or is the opportunity to push the improved performance story in Templeton just that much better?

I think it is both.

Really, we've started, and continue to push, the equity story out there.

The global one is newer this year.

Again, I think we always talk about our distrib-- our wholesalers sales team can probably give three good ideas in any one meeting, and that's about the max.

So we are careful about what those three are.

And it is really talking about equities, and whether it is global or US, that story is going to fit for both.

I hope it doesn't diminish the importance of getting our domestic equity story there, but we're really talking about just equities, in general.

That's really the start.

Okay.

Thanks.

Marc Irizarry, Goldman Sachs.

Great, thanks.

Greg, can you talk a little bit about your business outside the US?

Are you seeing some competitors in some places, maybe where they're subscale, maybe some global competitors retrenching, and is that helping you guys?

And then also maybe you can comment on, I know it matters by region, but is the local competition -- are you starting to see the architecture open up a little bit and help you guys?

I think it is hard to generalize, because I think every market is a little bit different with respect to some opening, some getting more difficult.

I think the open architecture, generally speaking, is there in most places.

I think once the bank -- the banks control so much of what's distributed, especially as you get into the smaller countries.

That's where the money is, and once the big banks went to open architecture and you have global relationships and local servicing, you can do very well there.

I don't think that's changed much one way or another, but it is there.

As far as competition, you have got some disruption with the banks' own funds.

So I think that's probably good for the independent, and help the open architecture trend.

But we're not -- I don't think we are seeing a big shift on --.

We see a lot of managers talking about moving into different areas and building local businesses, but I think once they look at some of the challenges and numbers and investment it takes, it is not quite that simple.

Then we see the typical names that we compete with in places like Asia and Europe, but I don't think the landscape has shifted a whole lot.

Okay, and then you mentioned that Italy has grown significantly, second-biggest market now, I think you mentioned.

Any update or view on the financial transaction tax and what that might mean to some of the European countries in your retail business out there?

I don't have an update.

I hope that it doesn't happen, for obvious reasons.

I think those things, once people get educated on who really pays for those, that hopefully that shifts the thinking.

But unfortunately, it does have momentum and again, I don't think it is something that we can control, except from somewhat of a lobbying.

We can try to get their message in there.

But the transaction taxes have come up a lot of times before, and I think, hopefully, level heads will push back on it.

Okay, great.

Thanks.

Thanks.

Chris Harris, Wells Fargo.

Thanks, hey, guys.

Another follow-up here on Templeton.

The performance is really strong.

We've talked about it, and at this point, it is a sales issue.

We're not quite certain when the timing is going to turn around.

But I guess what I'm curious about is, presumably you guys are paying your people pretty well for the improved performance in that product class, and so if there is a situation where we do start to see a really big pick-up in sales.

All of a sudden, advisors start selling the product more, is there a high degree of operating leverage that would really help you guys out there?

Or would you use that opportunity to pay your people a little bit more, given the better flows?

If you can help us frame up that dynamic with how flows could potentially impact your operating leverage?

I will take that, it is Ken.

Yes, clearly on a -- if it is a material shift to that global equity class, you're going to see the effect of B-rate pick-up.

And in that case, you should experience a fair amount of operating leverage.

And the question -- I have to agree, we do pay our people well.

We will continue to do that.

We've talked about this a little bit in the past.

It is more of an art than science.

And two things drive it, it's the overall Company profitability.

It's also the individual groups' performance, and so we balance those two things, and will continue to do that.

Having said all of that, you go back and you look at our compensation ratio to investment advisory fees, it does vary, but over the long term, it has been within a pretty tight range, I would say

Yes, I mean, I would agree.

I was trying to make the point that if you guys are compensating folks, because the performance has been really good, as you highlighted, it just seems like there would be a really good opportunity for the margin, if we all of a sudden started getting significant amount of sales into that product.

I would agree, and the other dynamic is, if it is the Templeton global equity products and the emerging markets products, just keep in mind that that also gets managed in low tax jurisdictions.

Okay, perfect.

Make sense.

And then, real quick follow-up, I know there's been a lot of questions about the balance sheet.

Just curious, to get your thoughts on how you guys are thinking about M&A opportunities here, and whether you think that might be a good use of the cash that's held overseas?

I know a lot of it is going to be a function of if it becomes available, but love your updates there.

Thanks.

Yes, it's proactive in some markets, reactive in others as things come up and we evaluate the product set.

I think we will continue looking at some of the smaller markets.

We did that small acquisition in Mexico because we thought that's a good opportunity.

But we are clearly open.

We are very disciplined in the approach, which I think some of the better deals are the ones we didn't do.

We will continue that approach.

But we feel that that is a competitive strength, our balance sheet, and that we can be able to take advantage of any opportunity when it arises.

Jeff Hopson, Stifel.

Okay, thanks a lot.

Just a couple final questions, I guess.

The distribution margin, to what extent is that affected by higher sales in non-US markets?

And then, is there any overall, or net effect to the bottom line?

I know you guys have a lot of product in US dollars, but you also have some not.

So I'm curious about that.

And then, you might have commented on this, the tax rate lower.

What was that reason, and any projection for tax rate going forward?

This is Ken.

I'm just writing down your three-part question there so I don't forget it.

The underwriting distribution margin, the first place I would suggest to look at is in the MD&A and 10-Q.

We break out the revenue component into a sales base and asset base, and we break out the expense component into sales base and asset base.

So you can see, if you match those two up, you can see relationships.

But you are exactly right, that a high degree of international sales will have a tendency to depress that margin in the short term.

And the other dynamic to consider is, in the US, the revenue streams are kind of split between investment management, distribution, shareholder servicing.

That's not necessarily the case outside the US, where the investment management fee tends to be higher, but it is also tends to -- the reason it's higher is it covers the distribution expense.

So we have that little revenue expense mismatch, but we try to help you understand that more with our disclosures in the queue.

On the FX side, there's a couple of areas that FX affects the business.

I'm glad you asked the question.

It is probably a good opportunity to talk about that.

The first is assets under management.

The majority of our assets under management aren't funds and accounts that are priced in US dollars.

The other is in cash and cash equivalents, so about 10% of the cash and cash equivalents are held by US dollars -- held in US dollars by entities with a different functional currency.

Those changes go to unrealized foreign -- they go to the other income line.

I don't want to get too technical, but just for simplicity, the translation of the US dollar, cash and investments into the foreign entities functional currency is done at the month end, at the spot rate.

And that goes to other income, and then the translation of those holdings back to US dollars at the corporate level, essentially, it is an offsetting transaction that goes through OCI.

And then overall, because we're so global, the operations, they do tend to act as a natural hedge.

And we've been tracking it for years, and it has never been material.

And then, the last part was for taxes.

The tax rate went down, but we did have a fair amount of discrete items in the quarter that drove the tax rate down.

And I think that was in the neighborhood of $12 million.

Okay, thank you.

We have no further questions at this time.

Thank you, everyone, for participating on today's call and we look forward to speaking next quarter.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.