富蘭克林資源 (BEN) 2014 Q3 法說會逐字稿

Good afternoon, and welcome to Franklin Resources' earnings conference call for the quarter ended June 30, 2014.

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

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 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)

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

Mr. Johnson, you may begin.

Hello, and thank you for joining Ken Lewis and I to discuss third-quarter earnings.

The Company's strength and stability was again evident this quarter, with investment performance and profitability remaining strong and our well-diversified asset base garnering $2.6 billion in net new flows.

We also added some new disclosures to the presentation that accompanies our commentary, which we hope you found useful.

As always, we welcome your feedback, and we'd now like to we've now like to open up the lines to your questions.

(Operator Instructions)

Luke Montgomery, Sanford Bernstein.

I'm sure you anticipated this question, but a well-known investment newsletter took aim at what it believes is a lack of liquidity positions in products managed by Hazenstab's teams.

So I was wondering how you respond to those criticisms, and where you think they might have made some logical leaps in reaching their conclusions.

Well, thank you.

It's certainly not a new question that's been raised.

It's one that's been raised over time, and I think liquidity is always something that fund boards and management focuses on, quite a bit.

And I think it's a very difficult answer, and one that's obviously better to come directly from our portfolio management team and from Michael himself which he did at investor day, but in my mind, there are distinct differences between equity and fixed income, and when looking at liquidity and applying the same metrics to a bond fund, I don't think that's appropriate.

If you look at, in particular, the Global bond funds, with short duration, 40% of the fund maturing in less than a year, over 80% investment-grade securities, these factors give us a lot of comfort that it creates liquidity, as you have turnover in the fund.

And also, these funds, because of the nature of some of these bond investments, do hold higher cash than normal and currently averaging around 15%.

So more volatile periods, they may hold more cash.

So it is something we look at.

I think it's an appropriate question.

But again, I think the conclusions that are drawn using some simple equity type metrics are not really appropriate for this type of fund.

Okay.

Thanks.

That's helpful.

And then, you mentioned at your investor day and in the prepared remarks today that you are optimistic that fundamental US tax reform is inevitable.

Perhaps you said so in the past, but what specifically gives you that optimism, and are you focused on a specific catalyst on the horizon, or it's just inevitable if you wait long enough?

Well, I think the question, reform is obviously inevitable.

What time period, what time frame, I think is the question.

I think certainly, with the move towards inversion for some companies and that's getting headlines, there seems to be a little bit more momentum.

I think the question of repatriation, when will that happen?

That's more difficult to answer, and probably pushed back a little bit further in the current environment.

But there are a lot of moving parts right now, with discussions around how to treat offshore cash, and all of that falls under tax reform.

So it's something that we are watching closely, and overall, probably not something that's going to happen in the next year or two, but possibly.

And it could have an influence on how we think about capital management over that period.

Okay.

Thanks so much for taking my questions.

Michael Carrier, Bank of America Merrill Lynch.

Ken, just on the expense outlook, you gave some color on the pre-recorded call.

Just wanted to make sure we had some of these things right.

I think you mentioned the $12 million on the distribution side.

Just on the IT, you mentioned some of that being accelerated.

So does that change your view in the next quarter?

And then in compensation, I don't know if you had an amount that was the mark to market deferred comp, that might have pushed that a bit higher, but I was curious if you had any of those numbers.

And then when you mentioned the 4% to 5% year-over-year growth, I just wanted to be clear, does that include or exclude this $12 million number in the distribution line this quarter?

Okay.

I'll try to capture all of those questions.

Let's first look at the sales and distribution expense.

If you look at that on a net basis, and I guess, assuming flat markets, and same level of sales as we had this quarter, we expect that line to be more or less -- the net basis to be more or less the same next quarter, but there's so many things that can go in and out of that line, that's probably one of the hardest ones to predict.

But that's our best guess of where we stand today.

On the compensation and benefits, about 40% of the expense this quarter was variable but not all of the variable expense was related to market.

Some of it's related to sales volumes and specific channels, et cetera.

So we have started disclosing in MD&A, in our filings, what percentage of compensation is variable, just to give investors some sense of whether that's trending up or down over time.

But do keep in mind that it's not all revenue rather related.

And then on the IT line, what I was referring to is typically, we see an increased seasonal expense pickup in the fourth quarter.

And some of that happened this quarter, so we're looking at more of a flat line item next quarter.

But generally speaking, we have been investing in technology incrementally, and so that line has been trending up over time.

And I think that will continue.

Okay.

Got it.

And then Greg, maybe on the flow side or the sales side, looks like redemptions across the board improved in all the different channels.

You mentioned on the prerecorded call, I think you said three $1 billion plus mandates.

Just some color there?

And then on the sales side, it seems like we've been pretty steady here for the past couple quarters, so when you look at your product set, when you look at the environment, what do you think it's going to take to start to see that pick up?

Is it more the marketing campaign, or is it just mix of clients in the overall environment right now?

I think first of all, the comments around -- we did have three $1 billion plus wins during this quarter, and I think we mentioned that just because we want to make sure that when we see the monthly numbers and flows that people recognize that some of that could be more one-time.

As far as who, where, and how, we don't really disclose that now.

But I think generally speaking in the global bond area, three significant institutional mandates that were won during the quarter.

And again the funding could be this quarter or it could be next quarter.

I think with regard to flows, it's difficult.

I think we saw some good momentum going into equities in the prior quarter, and I think we saw for the industry, that we had our first volatility in the markets, and have a risk off environment.

And that affected some areas where we did have strong momentum.

And I think the other one for us that affected us more than maybe others is that the big driver in the prior quarter was the Biotech Fund and US Opportunities Fund in Europe, which again, I think tend to be a little bit more volatile, in terms of how the flows move, with respect to shorter-term moves in the market.

So that did affect us.

But I think, the hybrid side, we continue to see strong momentum, and performance is excellent in the other flagship Franklin Income Fund, so we think that could continue, and I think interest in general between balanced and hybrid funds continues to be very strong, so we'd like to see that momentum continue into this quarter.

Okay.

Thanks, guys.

Michael Kim, Sandler O'Neill.

So first, with demand picking up for hybrid strategies, and you talked about investors maybe gravitating toward the Income Fund as a first step in the re-risking process if you will.

Just curious if that promise is based on some exchange activity out of your fixed income funds that you're seeing?

And then stepping back, how you may be thinking about the sustainability of that trend, just assuming risk appetites here in the US continue to soften.

I think it's fair.

The trend is not something new this quarter.

I think it's been going on for a few quarters, but we are seeing, not only decent pickup in flows, but a decline in redemptions, and also exchanges.

And I think it's just in sync with what we're hearing from investors, the concern about rates, the not wanting money fund, getting paid nothing, and how do we participate in equities with a little less risk, and get a yield that's much better than what I'd get in a money fund.

Obviously that's more risk, but that seems to be where investors' mindset is right now.

Okay.

And then maybe one for Ken.

Just following up on expenses, I know you reiterated the 4% to 5% annual growth target for this year, but just given that the market volatility, wondering if you're seeing any notable changes in terms of your discussions that you've had with the business units, in terms of projects and/or spending?

And how that might impact expense growth as you look out into 2015?

We're just starting those conversations, so it's a little bit early, but they will definitely have the tone that you described, because of the market volatility and where we are.

So it is definitely too early to tell.

I do know that on the technology side, there's a lot of demand to invest in technology, with the end goal of being even more scalable than we are today.

So we'll be very selective in prioritizing those initiatives.

But I guess more to come on that when we talk to you next quarter, when we've finished with the budget process.

Okay.

Thanks for taking my questions.

Bill Katz, Citigroup.

First of all, just an [attach] one to Ken.

You mentioned that for the fiscal fourth quarter, the spread between the underwriting and distribution expenses will be about flat sequentially.

Why would it not rebound if you had $12 million of quote-unquote one timers in this particular quarter?

Thanks for raising that.

What we're factoring in there is, if you will, a little bit of a lag, because so much of it is asset-based.

It's based on average assets under management, which have been rising, so you're going to see a little bit of that carry over into the next quarter, and probably offset that $8 million number.

So on the expense side, you're saying?

On the expense side, right.

Just to follow-up on another question, and my question as well, if you look at your gross sales over the last four or five quarters, it's basically been flat lined.

Your long-term performance is good.

Your short-term performance is mixed.

But one of the advantages I think your franchise brings is the core value of the business, but what is this going to take to drive more net flows, or maybe gross flows into the system?

Is it just a healing of global appetite, or is it things that you can maybe control to drive better sequential change than that?

I guess the ultimate question is would you sacrifice some margin at this point in time to generate better unit growth?

Well, I think those are all fair questions.

And if the institutional business drives much of the organic growth, that's going to sacrifice some margin.

It doesn't mean we won't do it, as far as introducing lower-cost products out there, but I think it's a matter of one, the Global Bond Fund is still experiencing some redemptions and putting some headwind in Europe.

I think that's improving, shorter-term relative performance has improved there.

So if we could get that back into inflows, that would be meaningful.

But it's a fairly dramatic turn from the prior quarter, when you look at some of these categories, and even areas like munis that have had headwinds are still experiencing some redemptions.

And I think that could turn, as well.

So there's no -- I don't think there's any easy answer.

I think the advantage is, we are a well-diversified lineup and looking at the top line, it looks fairly stable, but looking at the individual lines, there's a lot of movements going on by asset category underneath that.

And it's just trying to find the next driver for those certainly offshore flows, like the Global Bond or get that back to where it was.

(multiple speakers)

Bill, I do think again, we talked about the institutional pipeline and some of the efforts and build-out that we've done globally, and certainly around Asia, and we really are seeing momentum there with some significant wins in that and that's something that happened during this quarter.

And we still are very optimistic about incremental growth from that side of the business.

Thank you for taking my questions, Greg.

Ken Worthington, JPMorgan.

More of a philosophical question, it's about when do funds get too big?

Global Bond has done really well, and has grown quite large.

Now we've got Income Series doing exceptionally well, gathering a lot of cash, and getting very large again, as well.

So at what point do funds get too large, and has Franklin closed the fund in the past to protect the performance?

Well, the answer is absolutely.

And we've closed many funds in the past, and primarily, around equity and smaller cap funds and emerging markets funds and frontier funds, and we've closed funds this year in both of those categories, European Small Cap, Frontier, those are all things that any time you have newer markets or less liquidity in smaller cap stocks, that clearly affects performance.

We look at the Global Bond world, sovereign debt continues to grow.

Liquidity continues to grow.

The size of the fund and the cash position allows us to do some other things in less liquid situations, that we think adds incremental alpha over time.

And as far as the Income Fund goes, again, this is a go-anywhere fund that if you look at the underlying holdings, high-yield bonds, utilities, very liquid stocks.

But I think the onus is always on us, the boards and the fund managers, and if a fund manager ever says I'm having trouble, my performance is being compromised because of liquidity, then we will close the fund immediately.

I don't know offhand how many funds we've done that with, but I know it's a fair number of funds, at least over 10 funds in the last few years.

All right.

Thank you.

And then cash, you said reform is inevitable.

The cash balances really grew this quarter.

I think the cash outside the US is maybe $4.5 billion at this point.

Given the size and growth in that foreign cash, is there any increased appetite to pursue some of the tactics to leverage that overseas balance sheet to buy back in dividends sooner than would otherwise be the case, particularly in the context of pretty attractive debt markets here at home?

I think that talking about -- the discussions around this topic certainly have become more frequent in the boardroom.

And we're looking at it.

We see all the numbers that you do, too.

We recognize not only the growing cash balance sheet, but also the valuation, multiple, and so -- but it's a very holistic discussion.

And I guess, my point is that, nothing is off the table.

We recognize the attractiveness of the debt markets, we recognize that we could afford to take on more debt.

But really, it's just balancing the long-term interests of the shareholders, and continuing to manage in a conservative way that we've done for over 65 years.

Thank you.

Dan Fannon, Jefferies.

Just a question on the fee rate and based on the areas you're seeing demand, should we, considering the growth in hybrid and some of the US products, and some of the slowdown in some of the global products, or also, as you said, the institutional build, should we see the fee rate continue to trend lower, or is this, do you think a reasonable level?

We're projecting it to be at around this level, which in my mind, is around 62 basis points.

Not really seeing any significant downward pressure.

It gets back to the point that Greg was making earlier about the diversity.

Diversity works in demand for the products, but also works with our revenue.

So yes, we've seen some increased flows through the income product, but some of the flows through the income product have been in the CCAB product, so it balances out the effective fee rate.

And then we are actually seeing some positive signs of some of the CCAB equity in emerging markets products.

The performance is coming back, and we're starting to see some flows there.

So what we're projecting is basically a flat effective fee rate.

Okay.

And then just to clarify, in the overall expense growth rate for the year, is the 12.1, I think a asked earlier, included in that number, and then the headcount number grew substantially sequentially, and just curious as to where you're adding people in the business units?

The $12 million is in the 4% to 5%, the $12 million number is included in that.

The headcount, we did see growth in this quarter.

I don't think that's indicative of a trend.

I think there was a little bit of pent-up demand, that last couple quarters ago, we took a hard-line on expense management so there's a little bit pent-up demand, but I feel like it was more or less a one-time surge, if you will, in headcount.

It was predominantly it was kind of across the board.

It was support, distribution, a lot of it was in low-cost jurisdictions.

So just across the board.

Great.

Thanks.

Craig Siegenthaler, Credit Suisse.

Just starting on the muni business, understand that your duration here is longer than peers in the main funds, but do you offer products that are less constrained like muni, floating rate, or short duration that you can sell, given the stronger demand here for shorter duration muni bond products?

We do.

We have intermediate muni funds and even money funds short term.

But really, it's very difficult, and those, to offset the pressure on longer duration very large funds, we've seen positive flows going into our intermediate funds, despite the overall muni market, but it really is not enough to offset the pressure on longer duration funds.

So there is an exchange available for those concerned about rates going up.

Got it.

And then in the prepared remarks, you talked about the European equity product and I think the Indian equity product, that are doing well in the CCAB European cross-border channel.

Can you provide us a little more detail on those two products, the names, performance, and which clients are buying them?

Yes.

The one was -- we mentioned a couple of the LAMs that did well, local asset managers, and that was Bissett had a strong quarter of inflows in Canada, as well as our India fixed income team, that has a lower duration product, that sold very well during the quarter.

And the Franklin European Growth, which is sold through our CCAB fund, primarily to European investors again, has had strong performance and a strong quarter.

And that fund was closed to new investors as well, European Growth.

Thanks, Greg.

Glenn Schorr, ISI.

This is Kaimon Chung in for Glenn Schorr.

Can you help me understand what's going on with the merchant markets?

Performance has recovered, yet your flow has lagged a little bit, so that dynamic, and might not be specific to you.

Just curious what you're seeing and hearing in terms of client allocations and some performances in this area?

Well, I think it's an area that's obviously overall done a little bit better this year.

And the emerging markets have snapped back a bit.

For us, it's a little bit of a mixed story, with some performance and some having more waiting and materials that's created a little bit of a lag in performance.

I think the other area for us, that we have our core emerging markets but the real driver of flows over the last five years has been our Asian Growth Fund and our Frontier Markets Funds.

And Asian growth had a tough period as markets sold off, but in the last six months or so, year-to-date, has come back 500 basis points against its benchmark.

And if you look at the redemptions, we had significant redemptions in that fund over the last quarter, and we had a lot of big institutional holders in there.

But it moved from significant outflows to about flat this quarter, so that was another area of major improvement for us.

So I think mixed on the near-term performance in our core emerging markets funds, but Asian Growth has snapped back nicely and hopefully we can start to see some momentum there and Frontier continues to have strong demand.

Okay.

Thank you.

Brian Bedell, Deutsche Bank.

Greg, if you want to comment a little bit on the performance, the one and three-year assets, percentage of assets that are outperforming right around 10% or so, the 5% numbers are a little better.

If you could talk about the driver on the one and three-year side, whether you think that will flip around, given timing of those performance periods?

And then if you think there's any impact on the sales process, or do you really sell more towards the five-year numbers?

I don't get too concerned about the one-year, and especially if it relates to areas like municipals that have longer duration, less driven on total return and more on stability and income, and even any style differences in the short run, you're going to have.

So we're right around over half.

And that's in the short term, that's fine, and even something like the Global Bond that week to week can move now from second or third quartile depending on a week's movement, and that can shift everything up and change the picture.

So I think the good news is for a Global Bond that started with a lag, has closed that gap a bit.

And in a one-year, is right around 50%, but maybe slightly below, so that's going to push your numbers down.

But overall, I think performance I'm more focused with I think we as a group with the 5 and 10 and certainly the 3 is important as well.

But there's nothing -- I think the equity overall continues to be strong.

I look at Templeton, very strong across all time periods.

So we still feel like investment performance continues to be pretty solid.

Okay.

Great.

That's helpful.

And then just on the institutional mandates, you mentioned on the prerecorded call that three $1 billion of mandates funding in this quarter or next, and I guess the bigger picture question there is, as we see the dynamic of pension plans increasingly barbelling to more alpha-type strategies and into fixed income, and you mentioned these were Global Bond mandates, are you benefiting from that on the Global Bond side and at the same time, do you think that's a negative for the active equity, as it pertains to Franklin?

I don't think it's a negative for the active.

I think well certainly, the overall trend is a negative, as far as passive replacement with defined benefit plans or institutional mandates against active.

And that continues to pressure any active managers, and we've seen that even in this last quarter.

We had a significant -- I haven't mentioned, I think we may have mentioned in the materials, but we had three redemptions on the Global Equities side of about $1.5 billion.

Without that, we would have positive flows going into global equity.

So that pressure is still there to move against passive.

But I think the Global Bond side is still relatively new to a lot of institutions.

And if you sit with consultants and endowments and foundations, like everyone, our are concerned about when will rates rise, and how can we do something that protects the portfolio?

A short duration Global Bond alternative looks very attractive, so I think it could come from both sides but probably more from your duration-type assets that have interest rate risk, where you're moving some of that risk into a different category that is not correlated to what the markets are doing.

So I think there still is a big opportunity, and if anything, those plans are under-weighted towards Global Bonds.

So we think it's a good story.

Great.

Thanks very much.

Robert Lee, KBW.

This is following up to the earlier question with Ken's earlier question.

Ken, you had mentioned that maybe there are more discussions taking place around potentially adding some debt to the balance sheet to take advantage of lower rates, and all the cash you have offshore.

But as you think about that, are there any specific limiting factors?

Is it maintaining a AA-minus credit rating or A-plus or are there certain kind of constraints that you feel that if you were to do it, you wouldn't want to break those constraints?

I think the overriding constraint, if you will, is this concept of conservatively managing the balance sheet.

I think that belief, that philosophy probably will not change.

So I think to your point about lowering the debt rating, it's certainly not a constraint in and of itself, but there'd be a lot of discussion about that for example.

And there is -- we do use a lot of the cash.

We use it for seeding.

That's possibly a constraint.

And overriding though, it's just the philosophy of being conservative.

Okay.

Thanks.

Maybe a follow-up, you talked about it at the investor day, and in the past.

The importance of growing your range of alternative products, and you have a pretty broad range, including the K2 acquisition.

But could you maybe help us frame and size how you think about that business today?

How big you think that is, and within that, obviously, you've talked about some of the K2 initiatives, but within that, where you're seeing some momentum or expect growth can potentially accelerate?

Well, I think again, like many, the appetite for alternatives is clearly there, and one that we want to have as many different products as possible.

And I think that's where we've done the most product development, the most resources incremental to distribution.

And portfolio management have been in that area.

The K2 retail fund for us has crossed $450 million.

So it's starting to get decent traction.

And we still even are just in the stage where we're getting onto some of the bigger platforms, so I think that's going well.

The other areas that we've invested in are more of the tactical asset allocation, the hard assets type funds that we've talked about in the past.

They've been a little bit out of favor since the introduction.

But again, in a rising rate environment, we think those will continue to be very attractive.

We continue to build out our real estate side as well.

That's another area that clearly, there continues to be appetite both on an institutional and retail side, and we'll continue to look at even the individual hedge funds, and how they fit into our complex.

And that's something that we're open to as well.

Maybe one last question, that combines the first two.

It seems like over -- for many years, can't really talk about capital management with you about without talking about M&A and acquisitions, and clearly you acquired K2 and some others here or there, but at this stage of the game, with the breadth of your platform, is there anything, is there any role you think at this point for some M&A, particularly in the alternative space, now that you have K2 in house?

Do you think that's another use of cash, particularly outside the US, or how are you thinking about that at this stage of the game?

Well, I would say that as always, we look at everything that comes across.

And we are doing it right now.

The appetite is there.

I think if we find that it complements our existing line-up and strengthens one of our key strategic initiatives, we are very open to doing that, at the right price.

And doing it offshore obviously makes more sense than buying it onshore.

So everything held equal, we'd rather do something offshore to utilize cash.

So I don't think there's any reluctance or resistance to do that.

And we continue to look at just a matter of finding that right fit.

That was all I had.

Thanks for taking my questions.

Douglas Sipkin, Susquehanna.

I appreciate the comments on the prerecorded call about the history of markets, and how long we've gone without really a bear market or a pullback.

And I guess that sparked a question in my mind.

And I hate to beat a dead horse, but is the growth of the non-US business and the earnings there a bigger factor in the decline of your payout, or is it just because the markets have just gone straight up?

I got the sense that maybe you would consider doing more if the markets offered better opportunities, so I'm trying to figure out, is that a bigger factor as to why the payouts slowed, versus the non-US growth, given the strength of the markets for five years?

I think that's a fair characterization, so I would agree with you.

I think the other thing, if you go back and look how the payout ratio on a trailing basis, remember we had that special in the numbers in past quarters and that -- a lot of that was driven by tax changes too, so that's another factor.

So the market -- the rally of the market is definitely a predominant factor.

So it's fair to say that if we did get anything outside of 2% or 3% decline like a real correction, we may see at least a buyback payout ratio take up?

When we say we're opportunistic, that's what we mean, yes.

So it's reasonable to expect that.

Okay.

That's all I've got.

Thanks.

Betsy Graseck, Morgan Stanley.

This is Tom Whitehead filling in for Betsy.

A lot of ours were answered but just one, I don't think you mentioned performance fees this quarter.

I know prior June quarters have been around $10 million, so was just curious as to how much of that was in investment management fees and then if you could, maybe give us some color on how much of that was some K2, and the outlook for that going forward?

Thanks.

Sure.

This is Ken, for the transcription service.

Sometimes they get that backwards.

The performance fees in this quarter were about $2 million.

And I would say that none of it was related to K2.

And the K2 performance fees are expected to be next quarter.

So overall, next quarter, we're expecting performance fees in the neighborhood of $7 million to $8 million.

Okay.

That's helpful.

That's actually all I had.

So thank you.

Gregory Warren, Morningstar.

Just real quick, we touched on this a little bit during the course of the call, we're looking at the equity side of the business.

Especially on the global international side, we've seen net outflows in two consecutive quarters here.

I'm just wondering the performance is looking better, the appetite seems to be there, although there is some risk aversion in some parts of the market, but what do you really see as the catalyst that's going to get you to a period of sustained flows for this business?

Because when you look at the aggregate numbers overall, the global international side of the business on the active side, is the only one that's really generating any positive flows.

The rest was all passive.

So I'm just kind of curious if you have identified any catalyst or any benchmark that would allow you to finally tap into that growth?

Well, I think it's been frustrating.

Certainly, when I look at some of the Templeton numbers, and Templeton growth in foreign and solid performance and how we're still in just slight net redemptions for those two.

And this quarter as I mentioned, we had three large institutional accounts that moved passive, and that created the negative number in an environment where most were positive.

So we would have been positive without those.

But I think it's just getting more exposure on the Templeton side and more focus from our sales force on the core equities.

We've been talking a lot about balanced funds because it fits in with the marketing campaigns right now.

But I think the flagship core funds that are still significant funds, Templeton Growth is an $18 billion, $19 billion fund.

That's the story we just have to get out a little bit better and get on more retirement platforms, and we've been trying but it's just taken a while.

So I think we'll just keep being consistent, but it's hard -- I can't think of what catalyst is going to turn that around quickly.

Okay.

Do you feel like maybe -- past periods where the Global International Bond portfolio might have been pulling away from the equity side, and now you're seeing very strong close on the hybrid side, the balanced funds.

Do you think that maybe that's just more indicative of the environment we're in, that people want some exposure to equities, but they're feeling more comfortable with balanced funds or potentially with fixed dividend paying funds, things like that?

I think they are.

Again, I just think we sometimes focus too much on net numbers quarter-to-quarter, instead of gross to look at behavior and it's not really -- you had a large drop in redemptions, which created a net number, but the overall gross number was fairly consistent.

So there has always been demand for the hybrid.

It's just again, I think this kind of environment, it looks even more attractive to people, because anything that has a decent yield and some equity exposure with a little bit of downside protection is a story that fits people's fear of where the market is.

Fair enough on that.

Overall, fairly good quarter.

Thanks.

Eric Berg, RBC Capital Markets.

My question is, perhaps taking a different take on the prior question, as we look at the ICI data, the Investment Company Institute flow data year-to-date, it looks to us like as if interest in equities between domestic and International equities has been declining all year, with the greatest pressure on, as a previous speaker indicated, on domestic equities, driving the number down.

My question is really twofold, related.

Would you agree with that assessment, that in general investor demand for equities all year has been declining?

And whether you agree or disagree, if you agree with that assessment, what do you think is driving that?

Especially given the strength in the stock market, one would think that perhaps retail interest in common stock investing would be growing.

I don't know.

I'm not sure I would buy that.

I think there was some weakness in the past quarter.

Remember, it was a few months ago where we were all talking about the great rotation.

And we thought that theme was a little bit overplayed as far as people just leaving bonds, and again, it's just how people look at net numbers versus gross.

I think there's been still some movement, global equities have been stronger than US equities, and some may look at a world that was cheaper outside of US, and reallocated some there.

So again, that creates movements on the net side and clearly passive has been a force that's removed flows as well, away from active managers.

So it could be an over allocation that the US investors had, and just doing more in global equities, because that's continued to have overall positive flows.

But I'm not sure I would draw any conclusion at this stage saying less or more as far as appetites.

I think the appetite, again, on a gross basis, and looking at what people are putting their money to, and even what their average weighting is today, it's still very high to US equities.

So I think the average investor is very invested in that.

But again, the net and how allocations move and whether it's moving some into alternative categories, that's happened as well, and that can take away from the core holding.

Thank you.

Brennan Hawken, UBS.

Sorry to come back to capital here, but just a question on the cash slide that you put into the deck here, you have got it listed on a net basis.

And so are you philosophically trying to send any message that, that's how you look at cash, and it needs to stay positive in the US on a net basis?

I think the message there is what we've been doing, just to illustrate in past periods, and that is essentially distributing US generated cash flow.

But that's not to imply that's all the flexibility we have.

Obviously in the US, we do have $1 billion of cash.

We have the debt capacity.

So I think the message was simply what we've been doing, historical.

Okay.

Because it just seems like, and I know we've hit on this before, but in talking with many of your shareholders, they continue to hit on the idea that there's no need to even wait for tax reform, right?

When you listen to the S&P earnings call, just this past week, they talked about synthetic repatriation of cash, vis-a-vis domestic debt.

And so if you've got one of the rating agencies on their own earnings call talking about that driving their business, it would seem clear that you could have a conversation with that entity in a way that it probably wouldn't negatively affect your rating.

I don't disagree.

Okay.

Terrific.

Thanks.

Chris Harris, Wells Fargo.

Just a few follow-ups on the fee rate.

Pretty big decline, and you did mention that it was mix related, but wondering if you could flesh that out a little bit more.

What was it about the mix that really led to such a decline in the fees?

And then just to clarify, this is a mix issue and nothing to do with competitive pricing?

Yes.

That is correct.

It's a mix issue.

And I wouldn't say it has nothing to do with competitive pricing, although we operate in a competitive world, but we're not seeing any major impacts on the effect of fee rate as a result of that.

So just to really get granular on the effective fee rate, ex-performance fees, we're showing it at 61.8 basis points.

Last quarter, it was 62.8 basis points and last quarter, we didn't talk about it, but there was about $8 million of nonrecurring items in it.

And so if you adjust it last quarter, 62.5, so we saw that slight range, and that's why we're thinking it's around -- in the 62 range going forward.

Okay.

That's helpful.

And then the 62 range you're talking about, I assume that's not considering any performance fees?

Correct.

Okay.

Can you remind us again what quarters you tend to have the performance fees hit?

Yes.

Last quarter's guidance, we were thinking it was going to be either this quarter or next and it's turning out to be next, in terms of the K2.

So typically, K2's not the only group that has performance fees, so typically we see performance fees in December, and then we see a little bit in March, and then we see a little bit in June and July.

Thanks, Ken.

Marc Irizarry, Goldman Sachs.

Greg, you touched on this a little bit, but just your institutional equity business.

When you look at the performance of some products and the pipeline in terms of how it's building, what do you think it will take to build that in the institutional equity business some more?

And is there a way to augment what you're offering already, with maybe things that you're seeding or maybe capabilities that you can think about acquiring over time, or track records that you can acquire?

Well, for us, it's been more of a build-out in resources, and getting the right kind of people in place.

And that's been the case in Asia, and we do have a very strong brand in that market, so I think it gives us a competitive advantage there in the institutional marketplace.

And that's where we've seen probably the largest wins here, over the past few years.

I think we want to continue to build out Europe as well, and feel like we have a good opportunity there as the next phase of growing that business and we've had a presence there.

I think again it's a question of getting the right people in place and we've been doing that over the last year.

So I think that's the next big opportunity.

I don't think there's any all of a sudden an asset class that we would go out, and if we thought that was the case, we'd go do it, but I think like we feel like there's plenty of opportunities for what we have in our line-up today, and at some times for us, the challenge is paring back what we offer because it gets too confusing versus adding more.

So I think we feel like we've got the right pricing, the right products, we've built a lot around having alternatives in pricing with commingled trusts and funds, and customization is something that we continue to work on with our systems, and that's something that people really want.

And we've seen it even in this last quarter where we've got a dedicated Thai-only equity account and some other specific mandates.

So I think that's another area of growth, when somebody earlier said the barbell and looking for the passive beta, and then how do we add alpha around the edges, so it's really offering not just big core products but more specialized customized alternatives, or long-only strategies that are specific to countries.

We're seeing a pretty good demand for that.

Great.

Thanks.

We have no further questions at this time.

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

Thanks.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.