富蘭克林資源 (BEN) 2016 Q2 法說會逐字稿

(audio recording) Good morning and welcome to Franklin Resources earnings conference call for the quarter ended March 31, 2016. Statements made in this commentary 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 in the Risk Factors and MD&A sections of Franklin's most recent form 10-K and 10-Q filings. Good morning, my name is Melissa and I will be your call operator today.

(Operator Instructions)

As a reminder this conference is being recorded. At this time I would like to turn the call over to Franklin Resources Chairman and CEO, Mr. Greg Johnson. Mr. Johnson, you may begin.

Good morning and thank you for joining Ken Lewis and me to discuss the Company's second quarter. Although we continue to experience net outflows in the March quarter, the nature of the mid-quarter market rebound marked an encouraging transition for us as many of the weakest performing sectors of 2015 were among the strongest performers in the quarter.

As the quarter progressed, investment performance of many of our key strategies improved, as did redemption trends. Overall, our financial results were solid as we continued to exercise expense discipline. Notwithstanding some notable one-time items that are discussed in more detail in our 10-Q, which was also filed this morning. Now, Ken and I are happy to take your questions.

(Operator Instructions)

Dan Fannon, Jefferies.

Thanks, good morning. Ken, if you could clarify some of the one-time items in the quarter? I know you called out some of the $40 million or so in severance but I believe there were some other things in the G&A line and others?

Sure. We did have an impairment charge in G&A that was about $30 million. That was offset a little bit by contingent liability. So those were the two major large lumpiness in the G&A account.

In the context of last quarter we had 3% to 4% expense decline for the year, now you're saying 3%. What are the variables in terms of that change?

One of them was that impairment charge. We weren't counting on that in the 3% to 4% guidance. Also looking out for the remaining quarters for the year, we might have another nonrecurring charge in the fourth quarter, although that could roll into the first quarter as well. So those are two things that weren't known last quarter that we're factoring in, as well as there's a lot of moving parts to this when we are rationalizing business lines and departments and all that. So we're just refining our estimate.

Great. Then Greg, as my follow-up, if you could talk about the DOL and that the final rules are out and how you guys are thinking about that?

I think a lot obviously has been discussed already. It affects a huge part of the industry. I think for us it's difficult to get an exact number on the amount of assets that it potentially could affect but we did our best and with Omnibus accounts that's a little bit tricky.

But we estimate it affects about $130 billion of our assets. I think we're probably a little bit lower than most because of our heavy concentration in retail assets offshore as well as municipal bond funds. And the fact that the key area around 401(k) tends to be in US growth and that's an area where we don't have huge penetration. So I think overall, a little bit lower, but like everybody in the industry, very concerned about and still trying to understand what a 1,000-page document means to our business.

That's really where we're focused today, is working with our advisors, working with outside legal assistance and really making sense of the proposal. I think the good news is that some of the most unworkable items have been adjusted. Obviously a very difficult rule that will eliminate advice to many people that need it most, and that's the smaller end of the market.

Great, thank you.

Robert Lee, Keefe, Bruyette & Woods.

Thanks and good morning. My first question, you have a couple of new initiatives underway. You mentioned the NextStep strategies in the prepared remarks and I know you've obviously taken some steps in the ETF market. Can you update us on where you are with both of those? And particularly NextStep, fleshing it out, what the opportunity is there. Is that part of the relationship you have globally with the Citi?

Yes, that is. It's addressing that area of the market using technology and trying to penetrate those that may not be large enough to be able to get individual help or advice. It does address a new market for us.

I think our partnership, a lot of that was based on our global reach and the fact that we can help them get the marketing message out in markets like Asia and Latin America where Citi has such a strong reach. I think that will take a while to develop, but it is off and running now.

The other areas around the alternatives and multi-alternatives and we continue to extend our capabilities there with the Longshore Credit and Global Macro Fund that was recently introduced. Our Liberty shares ETF which will be available in June and we expect to continue to build out that line as well. Those are just a few of the newer initiatives.

Okay. And then my follow-up, curious if you give us an update on the institutional demand you're seeing for the Global Bond and related strategies? I know that's been in place in prior quarters. You've talked about seeing increased interest in activity. If you could update us on that?

We are seeing that and I think that's clear. When our team's out visiting various countries and meeting that there is a strong interest in diversifying their currency exposure. So we continue to see a strong pipeline there. I couldn't give you an estimate or number of when but that would be highest, I think, on our list of opportunities in the institutional space.

Thanks for taking my questions.

Thanks.

Craig Siegenthaler, Credit Suisse.

Good morning. So, just coming back to the $130 billion, does that include all retirement accounts, variable annuity commission-based IRA, 401(k) and is there anything else in there?

No, it doesn't -- I think that did not include annuities which you'd want to include in that number. That's probably another $50 billion in sub-advised annuities which obviously could be affected as well. It's a good point.

Got it. Then a question on M&A. It's my understanding both the UK and Canada fall under the US in terms of how you're domiciled from a tax standpoint. If you guys wanted to acquire a business in the UK, could you restructure the business so you could use your international capital to do that acquisition?

Craig, could you just repeat the question a little bit? You're a little faint.

Sure. So, I believe the UK and Canada are under your US domicile from a tax standpoint. So I'm wondering, you'd recently done Rensburg. But I'm wondering if you did a future acquisition in the UK, could you use your foreign capital to do that acquisition?

The answer is yes, we could.

Okay.

It would not require restructuring.

It wouldn't even require restructuring, We could do it without that.

Did you use foreign capital for Rensburg?

I don't recall, we probably did, yes. We probably did.

Got it. That's it for me.

William Katz, Citigroup.

Thanks so much. I want to come back to the impairment you took on K2. I guess that's been an area of growth for you so I'm a little surprised to see the impairment. Could you talk about what drove the impairment? And then if you step back and you talk about your incremental appetite for alternatives which seems to be a pretty big area of growth still for the industry.

Sure. So, the impairment wasn't related to K2. In total it was related to a specific component of the K2 business which would have been the old business contracts that we put a value on. And so we were just adjusting that value based on there have been a couple of redemptions and there have been sales haven't met the original projections. So that's why we impaired it. It was just that one stream of business, if you will, not the entire enterprise.

And your bigger picture view on appetite for alternative capabilities?

I'll hand that to Greg. I think we still view it, as you said, in a strong area of growth. And we're going to continue to look at expanding the product line in less traditional types of investments. Whether it's M&A or building it organically, that's certainly part of our plan.

Okay. And this is a follow-up. You had mentioned in your pre-recorded call, maybe just happenstance, but you listed deals first within your use of cash flow. Wondering if you step back, how you think about capital management priorities given stock recovery versus growing out to business. And within M&A, what kind of things are you looking at?

I think that it might have been happenstance, that ordering, I don't think was intentional. And I say that because nothing has changed in our strategy, our capital management strategy. We don't say the stock is up or down so now that places more or less emphasis on M&A, they're all independent decisions. We're continuing to focus on M&A, evaluate M&A opportunities. That hasn't changed.

All right, thank you.

Patrick Davitt, autonomous.

Thanks for the time. Going back to the expense guidance quickly, I just wanted to clarify that the 3% decline does include all these one-timers we are talking about?

It does.

Okay, perfect. And the on the DOL, can you speak to Schwab's decision to stop selling loaded funds today from the standpoint of your own exposure to them, if at all? And then more broadly, what that could mean for your sales in particular, if that becomes a trend for the broader distribution world?

I have to say I wouldn't make much of that decision. I doubt they do anything in what you called loaded sales. Everybody looks at the A share sales and assumes somebody's paying commission. For us it's now less than 9% of our sales have a commission on them and we are a traditional, what you call I guess, load-based firm. For Schwab, I would say it's a non-event that they are not doing that because it's probably less than 1% of their sales.

Right.

And the world, as we know, continues to move towards fee-based and with the fiduciary changes, probably more with R6 or shares that don't have 12b-1 fees associated with them. You'll see more and more of that.

And when you say 9%, that means all kinds of commissions, front-load, 12b-1s, et cetera?

That's 9% of US commissionable sales.

Okay, thank you.

Michael Kim, Sandler O'Neill.

Good morning. First, Greg, I know you called out the two global equity institutional redemptions that totaled $1.8 billion, but it sounds like there were some other lumpy institutional redemptions related to allocation changes and/or sovereign wealth fund redemptions. Wondering if you could provide any more color on the size of those losses and/or the strategies impacted, and any sense of the residual AUM that might be at risk for further attrition?

I think there's probably another, there were two accounts that totaled $1.8 billion in global equities, one Middle Eastern sovereign wealth, another in Australia doing a rebalancing of a global equity. And really there was only two other large global equity that were about $300 million apiece in Canada.

It's interesting, I think, looking at quarter to quarter for global equity it was actually, while the net number was very high out, it was mostly due to these institutional redemptions. The retail trend is actually better. And I think the retail trend is important too to call out just in general, that it was a lot better than the prior quarter with redemptions declining as well during a choppy quarter. It was really the institutional quarter-over-quarter change in flows that masked, I think, some of the improved trends within the retail side, especially the hybrid side.

Got it, that's helpful.

Nothing else to really, I think, call out on the large, institutional ones.

Okay. And then to come back to M&A. Any color on what you're seeing across the landscape in terms of pricing and/or competition, particularly in light of the recent rebound in the markets? Been hearing anecdotally that maybe the pipeline is starting to pick up, if you will.

I would just -- Ken can jump in -- I think that's right. I think when you are in market lulls and volatile periods you don't really see a lot. I think that's been true that there hasn't been a ton of M&A activity. And as markets rebound I think that people start thinking about it, so I think that's fair. I don't know if we could say specifically that we've seen that, but that certainly has been the case historically. I'll ask Ken --

I agree. We haven't seen any specific changes in the trends. There are a number of targets out there that always being rumored to sell and whatnot. And perhaps some of those are changing from non-actionable to actionable, but we haven't really seeing a pick-up in opportunities.

Okay, great, thanks for taking my questions.

Ken Worthington, JPMorgan.

Good morning. Gross sales across the board look weak over a multi-quarter period and that's driven by both cyclical and secular issues. Are ETS end-use multi-asset products, do they have big enough potential over, say, the next three to five years to offset the redemptions that Franklin is facing? And if those products don't have the potential, what's your next step in to driving the business back to positive organic growth?

Well, I think it's hard to ever know. I think the multi-asset, it's a huge category that continues, I think, to garner more attention in the distribution channels and I think for a lot, it makes a lot of sense. I would look at the organic growth rate trends are more the flagship areas like the income fund which somewhat has been a multi-asset before people started calling it that.

You've seen a pretty strong rebound in two quarters of performance and that can translate pretty quickly into organic growth if these trends continue that really have been moving the last couple of months. And we have seen that fund move from -- just the fund alone -- $3.5 billion in net outflows in the prior quarter to $1.9 billion this quarter. And that continues to improve. That's always been a big driver of net flows.

I think the Global Bond one is a little bit harder, different category and not -- while it's doing better with some of the emerging currencies, I think the duration and rate's continuing to decline. It needs a back-up in rates. If it rates back up that will see significant organic growth, I think, pretty darn quickly because it will be one of the few funds that will do well in that environment.

So, I think you continue to bring new products out there and hope you catch on in a way that can grow. But certainly the multi-asset category is a huge one. You've seen what's happened in Europe with it, so there's no reason why that can't happen here in the US as well.

Great, thank you very much.

Ken Hill, Barclays.

Good morning. Just had one on repurchases. You guys have had a few really strong quarters of repurchase but I'm assuming some of that was opportunistic in nature. I'm wondering how to think about that moving forward and what level at your stock price might cause you to purchase more, purchased less, from a US cash perspective? Thanks.

Sure. I think I was anticipating I might get this question. I was looking back at our history over the last eight or nine quarters and I think the message that I want to give is that our strategy for repurchases is consistent. I don't see anything today that would cause us to change what we've done historically. Sure, it's definitely, in terms of activity, ramped up when the price has declined in the opposite. But we continue to believe in the stock and we'll continue to be opportunistic.

Okay. And then for the follow-up I know you guys mentioned in the prior-quarter call expanding into some of the local markets. I think Poland was the one you mentioned. Wondering the strategic rationale for that type of investment in a smaller market versus some of your key geographic centers on the distribution front?

I don't think it's a question of resources being taken away from some of the bigger markets because of our initiatives in a smaller one. I think we have always felt that part of the competitive edge we have is our presence in all these different markets. And for us Poland is also one of our operations and servicing centers for Europe and we have a lot of employees and a strong presence there.

It is a growing middle class in that market and you take markets like a Taiwan that for us years ago somebody would've said why are you bothering with that. But they can become very meaningful if you have an early dominant position. So it's not taking away any resources for us, it's just continuing to build out that retail capability where it makes sense. You add it all up and it can be very meaningful.

Okay, appreciate the color there, thanks.

Michael Carrier, Bank of America.

Thanks a lot. Greg, on the pre-recorded call you mentioned as the market rebounded both performance and redemptions were showing signs of improvement. Wanted to get some color on what you saw. I think sometimes when we look at the one-year and the three-year performance, you've mention when some of the larger funds are maybe just under the 50 percentile. Wanted to get any color on the larger funds if they're approaching that threshold to see if the performance starts to pick up?

I think it is significant. I would look at the first two months of this last quarter as in a risk-off environment where it's was -- the under-performance was getting worse every day. The last six, seven weeks it's been probably the best overall performance. We talked about some of the concentrated exposures that we have overall as a firm.

But I think that to me -- it's almost also a leading indicator to the market where we're saying, hey, it's been ten years of this growth value cycle and all of a sudden value is starting to outperform. You look at even emerging markets that have had a better quarter, value is up 7.5% and growth was up 3.3%.

So you have -- I think the turnaround in what people have been looking for, whether it's currencies doing better abroad, oil obviously rebounding and that affects probably four major groups' performance right now with the energy exposure. And also the high-yield exposure in the income fund.

I think all of that can turn pretty quickly. I don't know exactly which ones are right. I haven't looked at that to say the three-year number who is within 2 percentage points or that. I think the more important number is the market gets the drivers for our bigger funds. I think for a first time in a while we're getting some wind behind us as far as the relative performance goes.

Okay, thanks. And Ken, a quick follow-up on the impairment. I think you mentioned there was maybe an offset. Wanted to try to understand what the net impact was on the G&A line to understand from what the build-off. I think you also mentioned about $20 million in performance fees. I know those are hard to predict but in terms of locks or when you typically realize those, the outlook there.

Sure. Maybe it's better to just give you what we're thinking about in terms of G&A going forward. We do think that line is going to come down a little bit so we're not expecting a lot of upward pressure there. Keeping in mind that there's a lot of market-driven items that go through that line. So, assuming a flat market, we generally expect for the remainder of the year, for that expense to come down from where it's been in the last two quarters.

I'm not avoiding your question, it's just that I don't want to waste all the time with in and out accounting details. But generally speaking, we're thinking for G& A and other to come down a little bit from where it's been the last two quarters, for the rest of the year.

Okay, that's helpful. And on the performance fees?

Sorry. The performance fees, they are hard to predict and they, in fact, were $20 million. If I think about it in terms of seasonality, typically we might have a little bump up next quarter. So it wouldn't be unusual for us to see some performance fees next quarter. And then the fourth quarter typically we don't have too much.

Okay, thanks a lot.

Chris Harris, Wells Fargo.

Thank you. A larger question, big picture question, on the flows. If you look at this quarter relative to last, things got a little worse but we've talked about some of the drivers, the institutional impact and so on. But also, I guess there's another impact and that's the market selling off as much as it did in the first part of the quarter.

And so I'm wondering, I know this is probably really hard to gauge or frame up, but how much impact do you guys think that had on the flows? I guess what I'm getting at is if we didn't have this mini blow-up in the market, might the flow picture have looked even better than actually what occurred?

I think it would. I don't think there's any question when the markets sell off to a 10% down through the first couple of months in generally what is a very strong month is January, so it's always very hard to say what would it mean, what would the number look like. But certainly, it definitely had an impact. Especially, as I said for us, the positions that we had and with the dollar, oil and energy, value growth, everything moving the wrong way for the first couple months, that didn't help in the key areas where we have the largest assets. And we've seen the impact and redemptions were actually a little bit lower for the quarter which is counterintuitive a little bit. But gross sales dropped quite a bit but and that's what generally happens when you get in that really volatile period.

Got it, okay. And a follow-up question on the taxable US fixed income business. Still out-flowing there. Can you speak to that? Is that primarily a performance issue? And if so, what's the driver?

The US taxable?

Correct.

I think part of it was the high-yield exposure and for us having a fair amount of assets in the high-yield area and the over-exposure to energy there. That led to some of the outflows.

Okay, thank you.

Brian Bedell, Deutsche Bank.

Good morning, thanks for taking my questions. Greg, go back to the $130 billion of assets that you thought were at risk from the Departments of Labor perspective. If you could stratify the 401(k) part of that? I think we were estimating less than $20 billion of that would be 401(k). And then if the rest of that is IRA-related, are you looking at the accounts that are with brokers in that regard? Or would IRA assets be higher than that overall?

And then is there, to any extent you think, pricing dynamics might change in a post-DOL world? Would that influence some longer-term decisions on changing pricing structures in your funds, including 12b-1s?

As I've said, I wish we had an exact number because it's a little bit hard to collect. And we did our best to collect from various sources. I think the 401(k)-specific number, which mostly is investment only business, is about $31 billion, $30 billion somewhere in that range. And IRAs are probably in the $70 billion to $100 billion range, is our best guesstimate there.

I wouldn't say it's at risk, I think there's clearly -- it means there's going to be some changes in how they are serviced and how we service and how we deliver through the advisor community. Still a lot of work to be done there. We have the share classes already in place that are being used today. Some of that could move to those types of classes. We think the net result will be there will be more motion of money. We want to make sure first and foremost that we're doing everything with our advisors to make sure the burden -- we can help them manage this huge change.

That's helpful color. And I think, Greg, on the last quarter particularly, you mentioned there were some larger variable annuity accounts that still were doing allocation changes in it. I thought you said there was one that looked like it was susceptible to coming in that -- I don't that came in the -- correct me if I'm wrong but did that come in this quarter or is that something that still remains a potential redemption?

That got moved back for a while, I think probably six to nine months from hitting this quarter. We'll keep you posted when we get better color but it's still, I think, still hanging out there.

Okay, great, thank you.

Alex Blostein, Goldman Sachs.

Thanks, guys. So one more on the DOL, if I may. Thinking through, obviously the rule is still fresh and I'm assuming we're all collecting information from various distribution channels on how things will continue. But when you take a step back, the $100 billion-plus I'm assuming it's grandfathered in, obviously because the sale's already occurred.

But taking a step back, do you guys think performance will be a much bigger point of influence on the way financial advisors decide how to allocate assets from here? The reason I'm asking is if the fund under-performs for a brief period of time, is there a greater risk for redemptions, other than new contract versus what we've experienced in the past?

I think it's early to speculate on those types of thoughts. Obviously it would be nice to have clear rules, and here we don't in a lot of cases, on the suitability and standard and how it's enforced and risks and how advice is delivered. I think a lot of that has to be vetted and figured out and a lot of legal fees to get there. Then you're still going to have some exposure in doing it.

So even the question of figuring out performance and what time period is the right one, and at the end of the day anybody can question an under-performing fund versus an index during any given period. And I think those are the questions that we have to somehow address.

I think at the end of the day a lot of it is always performance-driven and more than ever today you have more consultants involved in the selection of the platform. So I think that has been in place for a while. Regardless of a fiduciary rule, I think that was the trend where a lot of the 401(k) plans having strong consultants helping pick the options, I think that performance will always be critical.

Thanks. And Ken, one follow-up on expenses. You guys have done a good job maintaining margins at the current levels and keeping expenses well-managed despite the severance and a few other one-timers running through the numbers. Curious, if you were to strip all that out and say, okay, the baseline is a little bit over $2 billion for the year, how much more room do you guys have to drive the non-distribution expenses lower into the next 12 months or so, assuming markets are flat?

I think we're at the point -- I think there's room. I think there is room to drive the expenses down more in a number of different areas. What's left, though, is a little bit more complicated to sift through and come up with a definitive plan. So it's going to take a little bit longer to execute those cost savings than the ones we've done so far. But that doesn't mean that there's not more room to trim expenses. It's just going to be harder to see that impact in the P&L in the short term. It's going to take longer.

I see. Great, thank you.

Michael Cyprys, Morgan Stanley.

Good morning, thanks for taking the question. Wondering if you could elaborate a little bit more on your last point, on some of those additional expense savings that could come through that could take a little bit longer, what some of them might be? I think in the past you referred to potentially greater outsourcing. Any update on that and generally how you're thinking about additional actions that you could take on the expense side.

I think it's more looking at the way we do things in challenging our business processes that may have been set up when the business environment was different and seeing if there is ways we could leverage technology to do things smarter and better and more efficiently and gain more scale. When you start -- that's the point I'm trying to make -- when you start to take that approach, it gets a bit more challenging and time-consuming to go through and vet. Those are the type of things. Specific lines of business perhaps, specific functions, is our processes best in class right now or can they be improved? That's what we're looking at.

Got it, okay. And as a follow-up, trying to get M&A, curious how active the dialogue has been on the M&A side. And to what extent have you gotten close on a deal? And if that's the case, what's been the hang-up? If you could talk more broadly as to your M&A strategy, what sort of AUM or deal value magnitude you think makes the most sense and characteristics that you're looking for right now.

There's different ways of looking at M&A. We never start with we need and AUM target, so let's look at targets that have that assets under management and consolidate. It's more of a strategic-driven approach. But that you have to marry with what the supply is and what the targets bring to the table. So everyone, every single deal that we look for the strategic rationale tends to be the spoke and adjusted for that target. Very difficult to generalize in terms of AUM targets or specifics.

Okay. On the activity of the dialogue? Have you gotten close on anything and what's been the hang-up if you have?

We have dedicated people that are out their looking at the industry. I wouldn't say anything has been close and we probably wouldn't mention that anyway. We're going to continue to look and as we said on the last call, it continues to be a priority with the offshore cash, to utilize that in a way that enhances shareholder value. And that's really what we're trying to do.

Okay, thanks.

I think looking back, if there were one common theme for why deals weren't done tended to be cultural fit.

Okay, thanks.

Eric Berg, RBC.

Thanks very much and good morning. On the area of expenses, or in the area of expenses, would you say that if the equity market weren't as volatile as it has been and if equity prices were higher -- not off the way they are compared with a year ago -- would you still say that the state of the business, what's going on in your industry, that there would still be a need to lower expenses?

I think there would be perhaps more of a desire or a want than a need but we would still focus on that. And I think that's a lesson that we've learned through the last two downturns is that it's human nature when times are good to relax the purse strings and do things, do the nice-to-haves. I think as a firm we've grown-up and realized that we need to be disciplined so that we don't get into those situations where we have to have massive layoffs or something in that downturn and disrupt the business.

I would also add -- your question, beyond what are the obvious issues, the active manager faces in today's marketplace and changes in the distribution model and regulatory environment. Even in a robust environment you'd probably, yes, looking for more efficiencies. But I would also say you don't cut your way to prosperity. And we have always felt like there are times when we have to continue to invest, to be strategic, to do M&A, to bring out new products. I think it's a changing world and just trying to cut your way to maintaining margins, you'll be out of business at some point.

And if I could just have a little discussion with you, following up on the matter of share classes and the DOL. I find it almost a full-time job keeping track of share classes A, B, C, R, L, I, Advisor Class, Investor Class, Admiral Class, it goes on and on. The lexicon differs by Company. I'm wondering whether one if you could maybe make it a little bit easier for us by offering any general comments you think hold true as to what is going to happen here?

In other words, can we say as a general statement, that irrespective of what the share class is called, A, B, C, R, L, I, whatever, that lower expense ratio share classes will be doing better as a result of DOL? That is what I'm looking for, some general guidance on how to think about this.

I think that's right. I think there's more pressure, especially for newer business to utilize what we call an R-6 class. Again, I think there's still a lot of work to be done before we can draw any conclusions on how fast that will move. And certainly you can conclude that the lower end of the market will be more passive Robo and less people-intensive or advice-driven. Those conclusions you can draw. How quickly the pace moves to specific classes, I think as you said, there's a lot of work to be done in the meantime before you can say X% is going to be there by this date.

Thank you.

John Dunn, Evercore ISI.

Hi, sitting in for Glenn Schorr. Can you guys give us a little more color on the composition of the sales and distribution fee line? What's the recurring piece versus a 12b-1, et cetera?

Hi, Ken. I think it was -- let me just get your reference there. I think that we included a slide, maybe it was 27-ish or something -- it's in the back -- that breaks down. So there is a component of those two lines, distribution revenue and expense, that is sales-based and we talked a lot about what percentage of the assets are sales-based is very small, and then the percentage that's asset-based.

So part of the reason that the net line has been going down is because of the assets under management have been going down. So if you look forward a couple of quarters, I would expect that the net number would be a little bit less than it has been. I think it's been, I'm going to guess like 115, something like that probably we're thinking now flat markets, it might go down to like 105 net per quarter.

Got you, thank you.

(Operator Instructions)

Patrick Davitt, Autonomous.

Thanks for the follow-up. With the understanding that DOL's really focused on the relationship between the broker and the client, do you guys think there is any risk of increased expense load at the manufacturer level, at your level as a result?

I think there's an increase in -- I don't know if I'd call it specifically on your share class. But certainly the potential for an increase in how we did business versus how we're going to do business in terms of compliance costs and how we assist the advisor and all of that. Still we have a close partnership with many of them in delivering this. A lot of that has to be done. But there's no question that there's a major cost burden of compliance to -- between all the disclosures and sign offs that has to be done, that will increase costs.

Is any of that in your expectations right now?

No I think it's too early to try to budget that or figure out how that's going to be worked. But I think we would anticipate that, based on everything we've seen.

And one last one. It looks like, for some of the larger funds that have been under-performing, that short-term performance is starting to bleed into the three- and five-year numbers. Are there any large platforms or consultants that may be more focused on those longer-term numbers that you could be worried about right now?

I think you always worry about that. But as I said earlier, I think what people -- if you can understand that performance in relation to the market, whether it's value growth or different exposures in portfolios, and then look more near-term. I don't think I've seen a better six-week period of relative performance for our flagship holdings. So that's going to bleed in pretty quickly too.

When you have 500, 800 basis points of out-performance in a six-week period, that's going to help pretty quickly. I think that's the momentum certainly with Templeton Energy dollar, more recently some financials, all of that moves the numbers pretty quickly. So I would be more encouraged about the six-week trend than I would worrying about bleeding into the three and five because that's going to be a more important -- and as I said, that will bleed in too pretty quickly.

Great, thanks a lot.

Thanks.

Brian Bedell, Deutsche Bank.

Hi, thanks for taking a couple follow-ups. I think you mentioned, either Ken or Greg, on the pre-recorded call about the fee rate being different on a simple monthly average versus an average daily average. I think you said a basis point differential. Wanted to get color on the go-forward fee rate given the mix. Is that, then, therefore, fairly stable with the fourth quarter or do you see that lower?

I just pointed that out. It was my feeling that we're not seeing it, a big change in the effective fee rate for the mix. In general over the last longer-term, it's been coming down a bit but it comes down very gradually. It's been coming to very gradually and it's effectively a very stable percentage. So that's why I wanted to point out the anomaly this quarter.

It looks exacerbated by the average in calculation, is what you're saying. I missed your response to the question on the performance fee outlook in the next quarter or two. If you want to repeat that?

I think the caller before said it correctly, it's very difficult to say because obviously it depends on the market. If the global equity has a good quarter, I would expect to see some performance fees in June, maybe July, that were similar to perhaps last year, but it's very difficult to say.

Okay, that's fair. Thank you.

William Katz, Citigroup.

Thanks so much. I joined a couple minutes late so I apologize if you did cover this. How did your stratify your platform that you came up with $130 billion of assets that might be at risk? And then when you thought about that, what kind of risk do you anticipate?

It's a great question. I couldn't tell you how much in terms of quantifying risk. I think we did our best, for us, in a world where we have Omnibus and assets we don't see to come up with a fair guesstimate around how much is in 401(k) and how much is in IRAs. And we didn't include VAs; that number's probably $180 billion of exposed assets, breaking out between about $50 billion in VAs and $28 billion in 401(k) investment only and the rest in IRAs. I don't think there's a big -- certainly there's more risk than an average account because of the changes that are being imposed on the industry. But I don't know how I could possibly quantify that right now, though.

Just a matter of segments, what you chose? Whether it's an IRA. I just want to understand, if it's an IRA or a 401(k), that's basically the selection criteria you used to get to $130 billion?

Right. And then VA on top of that.

And then just one last follow-up. Ken, you mentioned that there may be another impairment coming down either fiscal fourth-quarter or early next year, fiscal next year. You probably don't want to be specific on the call but could you generally talk about where that might be\? And is it an AUM level? Is it exit of business strategy? I'm just trying to understand what that might be?

I was referring to, we are winding down a defined benefit plan in the UK. I'm not really sure the timing of that, but that is what I was referring to. Could be fourth quarter, could be first quarter next year.

Thanks so much.

Michael Cyprys, Morgan Stanley.

Thanks for the follow-up. Curious if you could provide any color on April flows and performance trends so far, given some of the positive commentary that you provided around the end of March?

As you know, we're careful about any looking forward past prior quarter. I would just say that the trends that were in place continue even today, with oil continuing to move and energy moving in the right way, the dollar weakening, helping our assets and relative performance for some of our areas. All of that helps and certainly helps with the pressure on retail redemptions that you have a nice little rebound there. So I'll leave it at that.

Okay. And then anything that we should be keeping our mind on in terms of potential lumpy institutional inflows or outflows?

No I think there is still pressure on the VA business, some have closed out so there will be some lumpy timing items over the next year, but nothing to really call out the next quarter.

Got it, thanks.

Thanks.

Thank you. There are no further questions at this time. Mr. Johnson I will turn the floor back to you for any final mark.

Thank you again, everyone, for participating on the quarterly call and we look forward to speaking next quarter. Thanks.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.