富蘭克林資源 (BEN) 2016 Q3 法說會逐字稿

Good morning and welcome to Franklin Resources earnings conference call for the quarter ended June 30, 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 Matt and I will be your call operator today.

(Operator Instructions)

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

Hello and good morning, everyone. We appreciate you joining Ken Lewis, our CFO, and me for this call today. The good news is that our results were pretty straightforward for this quarter. So hopefully, the commentary we made available earlier this morning provided much of what you are looking for.

To quickly recap, although we experienced another quarter of net outflows, we did see encouraging signs, with redemptions continuing to slow and improving investment performance, particularly Franklin Income Fund that, as of July, ranks in the top quartile against peers for the trailing one-year period. Financial results and capital management were solid, as operating income increased 11% and the trailing 12-months payout was $2 billion. Now we'll be happy to take your questions.

Glenn Schorr, Evercore ISI.

Hello. Thank you very much. A question on both sales and redemptions. On the sales side, it's good to see an increase in international sales for the first time in two years. Curious what the biggest drivers of that are? And then on the redemption side, a similar question, it's a really big drop in redemptions, and curious if you think that was a point in time or are we at a different level of redemptions? Because that can make a really big difference.

Glenn, I'm just trying to be clear on the question. You said global sales, is that referring to global buying, Global Equity, or sales outside of the US?

Sorry, sales outside of the US.

I think a couple things. The Global Bond, which is a bigger driver of flows outside of the US, we did see an improvement, significant improvement in redemptions in that, and that led to the major improvement in net flows. I think the last quarter we did have some lumpier redemptions in that number versus this quarter. And I still think that's the one area that continues to be under pressure, where we are seeing improvements in a lot of other areas in terms of flows. But the Global Bond, that's the one that continues to be under pressure.

And I think if you look at the other area that I would call out, just in terms of flows, because I think it's a little bit confusing is the Global Equity net flows that increased and redemptions increased there. And I want to point to there were three lumpy, one-time institutional redemptions within that that totaled $3.5 billion out of Global Equity. So otherwise on the retail side, it's an improving trend there.

Okay. And then you had mentioned the launch of the Liberty Q and the Liberty Shares and you talked about three multi-factor funds, I think. Can you expand a little bit more on what channels you're going to be selling that through and what kind of uptake we should expect, say, over the next year?

I think we have moderate expectations within the next year, as far as flows going into that. I think we have made a major commitment to that segment, as far as resources and exposure and marketing dollars, to get the message and brand out there. But it will take a little bit of time. And right now, they've been up and running, doing well, performing well. And it's a matter of getting on platforms. Now we can do that probably faster than a lot of firms because of the relationships, hopefully, that we have built with our broker-dealers and advisors out there, and hopefully get some demand putting them on. But again it's a start for us in a new segment and it will take a bit of time as these records get out there. And I hope it won't take three years, but we are getting a lot of calls and a lot of interest on them. And I think in the meantime, we'll also look at expanding the lineup beyond just the smart beta.

Excellent. Okay. I appreciate it. Thank you.

William Katz, Citigroup.

Thank you for taking the questions. Good morning, everyone. Just on the P&L, you didn't call too much out on your prerecorded comments, and looks like you had some softness relative to, I think, prior expectations, particularly on the IS&P line. Can you give us a sense maybe this quarter how much was still in severance in the comp line, how you're thinking about that going forward, and then maybe some of the other line items, just given some seasonal and/or [quote-unquote] dynamics?

Sure, Bill. There's about $8 million of severance in this quarter. And then looking forward, and it's dependent upon a one-time item that may or may not hit next quarter, but inclusive of that, we do expect to see increases next quarter in most of the line items. I think comp will be more or less flat, but the G&A will be up. So we're expecting possibly a charge related to the wind up of a UK benefit plan, and that should be in the neighborhood of $25 million. It may hit next quarter. It may hit the quarter after that.

Okay. And Greg, you'd mentioned, gave some nice detail on how you're positioned on the other side of Brexit. Could you talk a little bit about what you might be seeing in July or maybe before and after Brexit in terms of sales volumes, just to get a sense of what's going on on the platform?

I don't think there's been any effect on our flows. I think the July performance has been very strong and worth mentioning. The market has settled back, and even Global Bond had a very strong July. So hopefully, that will help sales. But I don't think it was much of a disruption anywhere. And munis continue to be very strong for us.

Okay. All right. Thank you.

Ken Worthington, JPMorgan.

Good morning. This is Will Cuddy filling in for Ken. Cash outside the US continues to grow. What are your latest thoughts on utilizing cash outside the US? How realistic are investments or M&A to utilize the cash? And how much hope are you placing in a new administration reforming the tax code?

Yes, thank you. And that last point is a key point in the discussions. There's been, it's a current topic in Washington, it's been a current topic. It continues to move a step forward, then stop, move a step forward, then stop. So we're keeping an eye on that. And we think, while the consensus that we hear is probably sometime in 2017 there might be something that involves corporate tax reform. And I would point out, it's a long time ago, but 2005, when they had that, you can look to see what we did there. So depending on, it all depends on what we think is the best long-term interest of the shareholders, what we do. But in 2005, we did repatriate some money. And so that's not an unreasonable thing to expect, but it depends on what the law is.

The cash continues to grow. And we're just planning to continue our capital management strategy that we've been doing over the last few years. And essentially our payout ratio is more than cash generated or net income. And that means we're using US cash. But US cash is still a healthy number, so we don't expect any material change in our strategy.

And I would just add, I think my sense is in meetings in Washington that you are getting momentum on both sides for tax reform. It's clearly Paul Ryan, and something that he feels very strongly about. So obviously, we're in an election cycle right now. Once we get past that, we'll have a lot more clarity on seeing how the House and Senate and Presidency looks. But we are still hopeful that that's something that's coming. But I think in the meantime, as we've said before, the M& A probability, and certainly with some of the currency shifts in Europe and the sterling make M&A activity that much more attractive is something that we have had on our wish list. So I would say again, the seven prior calls, that that's the most probable area for us.

Great. Thank you. On expenses, expense growth seems to be coming in better than your guidance. Are expenses this past quarter a good rate to use in 4Q and as we move into the next calendar year?

I think as I alluded to in the prior question, I think next quarter we should see a little uptick in probably all the lines, the most notable one would be G&A for that charge that I talked about. Comp, I think could be flat. It could even be down a little bit next quarter. That's what we're looking for, for next quarter.

Thank you for taking our questions.

Michael Carrier, Bank of America Merrill Lynch.

Thank you, guys. Greg, just given that you've had more time to go through the DOL rule and have discussions with the distributors and with industry, just wanted to get your take on how you feel like Franklin's positioned for some of the potential changes, whether it's 12b-1 fees or commissions, how Franklin will try to position for the retail channel going forward?

I think it obviously has been the area of creates focus with our distributors, certainly since the announcement. I would say, trying to make sense of the 1,100 pages is a bit like a Rubik's cube, where we're making progress and then turn it over and realize we've got two other problems. So I think we are getting some clarity around where it's heading. We've talked about a standard class of shares. That's something that within the best interest contract can work. I think we're seeing some broker-dealers committed to doing to the brokerage side and others saying it's not something they're going to do. I think the initial reaction that you're going to have a ton of money moving into the advisory side, I think once we really look at what that means, there's other implications of the rule that may mean monies that are held that paid a front-end sales charge should stay where they are and not move to advisory, because that would actually increase costs.

So I think we are making a lot more sense of the rule. I think the net results are also that there will be less funds on platforms. We're seeing that, again, more of that consultant gatekeeper approach and narrowing the funds that any broker-dealer follows. So I think that puts pressure on smaller funds out there to get distribution and ultimately, less advisors.

I think you'll see more retirements as this transition will be too much. And just issues, simple things, it sounds, again, having a robo advisor for a small account, but can you have your own ETFs within that robo advice under the rule. These are the kinds of problems that I think are coming up. And obviously, the ERISA lawyers are trying to clarify that and we're working with many in the meantime.

I think the net effect for us is to have some kind of standardized pricing. Obviously, we don't want to have 100 different pricing structures out there and are trying to come to some new standard that works for most broker-dealers and advisors, and that's really where we are.

Okay. That's helpful. Just as a follow-up, to the quarter there were a lot of volatile events and markets were all over the place, but we got some improvement and you mentioned July. When you look at those redemption trends in terms of the improvement, was it pretty consistent throughout and maybe even into July, or are you starting to see more improvement, particularly given some of the performance trends that you mentioned?

I think we're always careful to talk about flows beyond the quarter. I think the big one for us, as I stated before, that tends to snap back the fastest is the Franklin Income Fund, which you look at that category just two quarters ago, we had a hybrid $5.6 billion in net redemptions and last quarter $2.2 million. So I think that that trend, we hope, will continue as people, even in the last quarter, the three-year number, or the five-year number actually improved back to the second quartile. And hopefully in another, the end of this month, hopefully we'll be back in the second quartile for the one-year. And as we stated earlier, we're at the 8th percentile for year-to-date.

So that's a pretty big recovery there. And I think that that's where you'll see the improvement in flows. I think we have some good stories, as well on the equity side with one of our largest funds, the Franklin Rising Dividend Fund, a $17 billion, $18 billion fund doing extremely well right now and getting a lot of attention for its performance, which is first quartile for the one-year, second quartile for three- and five-. Franklin Growth also very strong. So I think those are areas where we could see a turnaround in flows. And I think as long as the market is stable, the other trends should continue, as well.

Okay. Thanks a lot.

Dan Fannon, Jefferies.

Thank you. Good morning. On the prerecorded call, you talked about a platform loss. And I think you've mentioned that at other points in time over the last 12 months, and I think insurance was an area of weakness a few quarters ago. I was just curious if there's a channel, if there's any consistency to some of these platforms in which you're seeing market share losses or being taken off, or is it just performance and fund specific?

I think the main driver when we talked about a platform change was one of our large broker-dealers that we worked with building an in-house sub advise platform and was moving some assets, and it was $1.1 billion out of our Mutual Discovery Fund. So that's a one-off event that's not performance related that drove that.

We did have, I think the other one, just in general, I've talked about the variable annuity business and how that's undergoing change, and certainly with the DOL, we'll have more changes. But we have seen some groups get out of that business so they're really in a wind down, so it kind of changes what they're looking for on their platform. And we, with our Solutions Group, are doing our best to transition those asset. But they're the ones that still, you have a pipeline of redemptions over the next, say, two years, as those groups are transitioning out of that business.

I would guesstimate that you probably have $5 billion-plus in assets over the next two years that will transition. And hopefully, we can capture some of that, but it will go out of the traditional funds into a lower fee-type solution to meet whatever liability they have. Those would be the big changes that have driven the lumpier redemptions, and I think will continue to create some headwinds in the next two years on the VA side.

Great. Thank you.

Brennan Hawken, UBS.

Hello. Good morning. Thank you for taking the question. Just wanted to follow up on DOL. Could you speak to the penetration of your products in advisory accounts within the broker sold channel as a percentage of your total assets in that distribution channel?

I don't have the exact number. I know we have about $100 billion in retirement assets in the traditional brokerage side. I don't know what the number is, maybe -- somebody's putting some numbers in front of me now, so I hope they're right. About $40 billion in advisor class, which would be more of the wrap side, about two to one in the traditional A share to advisor class. $140 million total.

$140 million total. And all that is within the retirement accounts, rather than in -- okay, got it. Are those general proportions, though, different for taxable versus non taxable? I would assume proportionally probably similar.

I would think so, yes, I think they would be similar.

Okay, okay. Great. And then the expense front, just a clarification, is the potential for the UK charge next quarter and the somewhat uncertain timing, which you highlighted, the reason why you just don't want to update that previous 3% expense reduction commentary that you've given in the past?

No, it's not relevant. We've known this was coming. We're unsure of the timing. So we've incorporated it into any guidance that we've given in the past. So I think inclusive of that, we should be within the range that we've told you before on the change of expenses year-over-year.

Okay. Okay. Great. And then last one for me, we saw an uptick in buybacks here this quarter. Was that opportunistic just given some of the volatility, or a potential indication that your capital allocation policies may be shifting, ex-, of course, any momentum on reform and in the tax code, as you laid out before?

That's purely opportunistic. I take advantage of price dislocations as they occur. And it doesn't represent any change in strategy.

Okay. Thank you for taking my questions.

Chris Harris, Wells Fargo.

Thank you. Hello, guys. So in your prepared commentary, you did talk a little bit about Franklin's history, being able to adapt to changes in the industry, and that's certainly well-documented. But when we think about the situation we're in now, this period certainly feels a lot different, just because appears you have a lot of investors out there that just don't want to own active funds, or at least in certain areas, anyway. So what we're wondering here is what's your long-term strategy to manage around that or manage that type of an environment? And we know you guys have K2 and the ETF initiative going on, but that just doesn't quite seem like enough. So any commentary you can give in that regard would be helpful.

Well, I think, again, as we've stated in prior calls and continuing to look at alternatives, continuing to look at solutions where we can add value outside of just market traditional data. Again, as we stated before, to come into the market and offer passive today doesn't make a whole lot of sense for us. We've seen the race to the bottom and fees have continued to drive down close to two basis points. So that doesn't seem like an attractive alternative.

I think we also believe that active, that there are forces at work over the last five, ten years that have contributed to the passive strategies, and once active outperforms and that tends to be in more of a rising rate environment historically, I think that conventional wisdom could shift pretty quickly. And that's something we firmly believe. But in the meantime, we have built out our solutions, we're looking at our multi-asset capabilities, we're getting a lot of interest in that, and that's just another area how we can add value to investors by combining different asset classes over time. So that's going to be an important growth area, whether it's real estate alternatives, long/short, hedge funds, those are all private equity things that we plan on continuing to expand outside of your traditional US large-cap stocks.

Great. Thank you.

Brian Bedell, Deutsche Bank.

Great. Thank you for taking my question. I think, Greg, you've mentioned, if I heard this right, $3.5 billion of lumpy institutional redemptions in the global international equity category, is that correct?

Right, right.

Okay. And maybe just adding on to your commentary on the VA side of that $5 million potential retention pipeline over a couple of years, is there anything else that you foresee on the institutional side, both positive and negative, over the next quarter or so?

Well, we do, if we know something is being redeemed, we try to call it out and have done that on past calls. We do have a large institutional low fee account that was redeemed, I think this month, about $1.2 billion, $1.3 billion in the Global Equity area. I don't have anything to call out. I think the institutional pipeline, again, we feel like it looks good, as far as the opportunities that we have identified and RFPs that we're responding to. And I know one area that would be a new growth area for us, but one that we've had excellent numbers, it would be on the Franklin Global Growth side and hopefully, we'll see some nice wins there over the next year.

Okay. That's helpful. And Ken, I think you mentioned on the recorded call some adjustments to CDSC amortization and the impact on sales and distribution expense. What was the level of that in the quarter?

I think it was about $6 million.

Okay. And you view that as one-time or something that's potentially ongoing?

No, I think that's one-time. There's a little bit left of it that we might get next quarter, but essentially one-time.

Okay. Great. And just lastly, Greg, maybe your view, you talked a little bit about M&A and that looking a little better, given the build up of non-US cash. Maybe if you can talk more broadly about you've been in the industry a long time, your view of to what extent we'll potentially see more consolidation in the industry, if active continues to underperform and product needs to get specialized? And then from your angle, do you see yourself as more of a participant in acquiring firms or potentially even combining with another large firm?

As I've stated before, I think any industry that is maturing and gets larger, you hit a point where consolidation makes sense. I'm not sure we're there yet, but certainly you have some outside forces at work that we haven't seen before. So I think that that could contribute. I think the other that point I stated when asked about this is that it's not the easiest industry to do large mergers and consolidations with funds. You have separate contracts and Boards, and it's very time-consuming and difficult to do mergers.

I think for us, we again are open to anything that we think enhances the lineup and creates shareholder value over time. We try to build as many relationships across our industry to be able to act on things that make sense. And that's where we are today, and I wouldn't state one way or another. I think we're always out looking on behalf of shareholders and trying to create value. And if that's a merger, if that's an acquisition, we're open to any and all.

Great, Greg. That's great perspective. Thank you.

Craig Siegenthaler, Credit Suisse.

Thank you. Good morning. I just had a question on capital. Can you quantify how much excess cash you have in the US operating sub today above any working capital or regulatory needs?

Sure. I think that roughly, and I would even include some of our voluntary restrictions on it, we have about $2.5 billion in US cash. Roughly about $800,000 of that is called restricted. I'm sorry, $2.5 billion, and $800 million restricted.

Got it. If we look at your net income this quarter, $446 million after tax, do you have the mix that was generated in the US? And I also think your Canadian-UK entities sit under the US sub. And what was the level that was generated outside the US?

In terms of the earnings mix?

Yes.

I'm not sure I have that handy. I don't have that handy. But it's a tough thing to judge. It's a tough thing to estimate. And so we see developments quarter over quarter that earnings are shifting one way or the other, we just project that out. And so we just saw a shift this quarter.

Ken, on a trailing 12-month basis, or a run rate basis, is there a rough range that we should think about? Is it like 50/50, 60/40?

I think we're talking about two different things. Overall, GAAP income, we could say 50/50 is not bad, but on a taxable basis is a completely different ballgame there. Taxable income and booking are completely different.

All right. Great. Thank you for taking my questions.

Alex Blostein, Goldman Sachs.

Thank you. Good morning, guys. Just a follow-up around expenses. This year, there's a lot of moving pieces, a bunch of one timers, severance obviously was a big part of that, and it sounds like there's another charge with the $25 million. So all in all, can you guys help us understand as we look for 2016 as a whole, how much some of these one-time items been weighing you on expenses. And more importantly, as we look out into next year, presumably these will not repeat. How should we start to think about next year's expense run rate?

Maybe that's a better approach, instead of listing all the one-offs and trying to estimate what one-offs will be next year, I think we could take a higher view of it. We've been talking on this call about all the changes in the industry. And because of all that, we're continually examining all of our strategies. So if we look forward to next year, we're looking at -- and I mentioned this in a previous call, as well -- we're looking at every facet of our business model to determine if we have the business models and service capabilities that we need for the future. And that may include structural expense increases or decreases over the next few years.

So that's a long way to answer your question that we are currently looking at our cost structure, but it's a little too early to give definitive guidance, because some of these initiatives are multi-year. But I can tell you that based on what I know now, if I look towards 2017, it looks like expenses will be flat to slightly down compared with the current year or the estimate of the current year expense.

Got you. I'm assuming the 25 shows up in the fourth quarter, the $25 million.

Assuming the $25 million shows up in the fourth quarter, correct.

Got it. That's helpful. Wanted to go back to the DOL discussion for a second. As you guys discuss the change among the distributors and more decision making process taking place more in a of gatekeeper way, more consolidated type of decision making, and I guess more centralized, what so you think will be the criteria for active fund placement in that environment, and more importantly, how do you think you are positioned in that backdrop?

I think we're positioned well, because he first driver is going to be assets that are on their books with their clients, so you're not going to eliminate those. And the other performance and risk-adjusted returns and relationship, the size of the company, I think those are all factors. I think each firm will have their own. Clearly, we will not have every one of our funds on those lists. And it may mean consolidation of funds within our own lineup, as we rationalize. And that's been an emphasis of our firm is to streamline the lineup and number of products that we're servicing. And I think in this environment, that's going to probably accelerate that process of closing some smaller funds that wouldn't get the shelf space.

Got you. And then maybe just squeeze one more in, around the fee rate dynamic. It seems like, at least more recently, there's been a little bit more of a widening divergence between domestic product versus international product, and especially given your comments about slowing redemptions and the hybrid side of the business. Is there a meaningful enough of a difference between the hybrid product, domestic equity product versus in Global Bond and international equity product that could, given these slow trends, result in actual shift in the mix that's big enough that we can see it in the fee rate, or not very meaningful?

No. I think that if you look at the fees across those different categories, they're actually fairly aligned, probably the hybrid one's a little bit lower, obviously, than international equity. But I don't think it would have a meaningful shift in your effective fee rate at all.

Got you. Great. Thank you very much.

Robert Lee, KBW.

Thank you. Good morning and thank you for your patience in taking all the questions. Curious about in the alternatives business. Obviously, you have K2 and you've launched some liquid strategies which had some early success. Could you maybe first update us on progress with some of your liquid alts alternatives, and then maybe also your thoughts about building out a broader alternatives capability where you would be particularly interested, and maybe update us on your current capabilities are, maybe outside of K2?

I think K2 is working well, as planned, in bringing liquid alts to the retail channel. In the last year, we expanded the line-up and added a long/short credit fund and a global macro fund. And we think those can be nice complements to diversifying a portfolio.

Outside of that, we have a lot of areas, whether it's a real estate and private equity, and it's really trying to build more scale within those. So I think we are looking at, considering acquisitions on that side and continuing to build out our capabilities and just think it's a natural extension of what we do. I think we are open. I think as I've stated in the past, it is difficult to go out and buy a hedge fund or buy companies that have done well in the alternative space, because they are so driven by the specific person. But we are looking actively in that area and whether, again, it's real estate, private equity or traditional hedge funds, those are all on the table.

And maybe just a follow-up on the Global Bond global fixed income. You had talked in the past seeing the institutional channel as a big opportunity for those strategies broadly, and can you maybe update us on that? Given some of the performance challenges of the past year, that's slowed down. Where do you think that opportunity exists currently on the global bond side institutionally?

I think the institutional market, especially, I think they are less sensitive and because this fund, to just benchmark it against global bonds, I think really is more of a global macro type fund and it doesn't fit really well into any one given category. I think the standpoint of diversifying from local currency and local sovereign debt, there is still a big appetite for that. I don't think that's changed. And I think also, when people, sophisticated investors look at the portfolio and look at how it's positioned, it is very different and does offer something very different in that it will be one of the few games in town, if rates actually do go up at some point. And I think the risk, certainly from the perspective of an individual country's currency depreciating in some cases, is still very much there. So we are getting institutional interest and that really hasn't changed. So hopefully, we'll get some significant wins in there.

And one last question, if I can, on the retail distribution. You've talked at length, as have peers, about changes there, maybe approved lists shrinking and number of products you may have on any platform moving around. At the same time, you've had a lot of new product initiatives, Liberty Shares, K2, your whole broad lineup of traditional products. So within that mix, are you thinking or have you thought that there's some kind of change you need to make in terms of your own distribution capabilities? Is it shrinking it or is it changing the type of personnel, given the changing product mix? I'm just curious how you feel about strategic changes in your capabilities?

I think that's already been happening. It's been really an effort probably the last three, five years for us transitioning your traditional retail sales force into a more institutional quality level, especially at that gatekeeper level, the people calling on the home office, those are really more of your traditional consultants with that kind of background there to talk about metrics that are very different from how we viewed funds, I think, in the traditional way. So that's already happening. I think as far as even our sales force, and we've made changes there over the last year, focusing specifically more on having a targeted group for the advisory side that's a little bit different, again, than your traditional.

So we and evolving as the market has been changing and we will continue to do that. And hopefully, at some level, you'll get some efficiencies out of that as we get better at providing useful information on a real-time basis through the digital side, which has been a big emphasis in trying to reach more advisors in a more efficient way. And I think that, again, as the model changes, the use of the technology and information getting to advisors can create a lot of efficiencies from the traditional way that we've done it. So I think that's happening, as well.

Great. That's all I had. Thank you for taking my questions.

Eric Berg, RBC Capital Markets.

Thanks much and good morning. The improvement in the redemptions took place, it seems, pretty much everywhere across the complex, except, of course, for global equity. And I understand that there has been improvements, a very significant improvement in your flagship hybrid product. But it was also an extraordinary quarter in so many respects, what with the Brexit vote and terrorism and interest rates declining and extreme volatilities in currency. It's a long list of factors that made it a remarkable three-month period. To what do you attribute this company-wide decline, not just in certain categories, but company-wide decline in redemptions? That's my first question.

Well, I think the effect for us, and again, we've stated, we had more exposure to energy rolled up through probably four different entities and we don't do any top-down risk management, each individual firm, we look at separately. And so you had an over exposure to energy, had an over exposure to Europe. Those were trending nicely until Brexit. And even if you look at the trend in equities to quality away from more of your traditional momentum, to strong balance sheets, rising dividends, quality earnings, those were all trends that fit nicely into our, generally into our philosophy with many of our equity funds. So you did see an improvement and rotation happening, a rotation into value, as well.

And if you look at the quarter, Brexit hit right at the end of the quarter. So if it was at the beginning, maybe it would be a little bit of a different story. But what we had captured a lot of good relative performance during the quarter, which unfortunately in the last couple weeks, when you had more of a risk off environment, you lost some of that, which has been gained back in July.

So I think it's really just looking at the flagship products for us and also munis, that's a strength area for us. And munis are very attractive in this environment and should continue to be. So I think that that's counter to what is happening, and a result of a lot of the, I think, uncertainty in equity markets, money moving into munis right now. So that's another factor, as well.

The second and final question I had relates to fixed income in general, and you just touched on it a little bit, but maybe you could expand in responding to the following question. I have been struck by not only the fact that your company is having very stable, not growing, but very stable fixed income growth sales, and so are many of your competitors. It's surprising to me, given that there is no yield and the duration risk is very substantial, should interest rates rise over the next couple years. My question, given all that, the absence of yield, the duration, the loss of principal risk, why do you think fixed income across industry is doing as well as it is, in terms of gross inflows?

That's a great, great question. But I do think fixed income always has a place in a diversified portfolio and does reduce risk. I think you are correct that where we sit in this cycle, I think many would argue that there's greater risk from rates going up. That's certainly the position within our Global Bond fund. But at the end of the day, it's very hard to take a portfolio and just ignore fixed income. You'd put a lot more risk into that given portfolio if you go 100% equities. But at the end of the day, you look at something like munis, it still has an attractive yield relative to the Treasury market, certainly on an after-tax basis. And the general consensus right now, right or wrong, is that rates are not going up. So I think there's a sense of security that even with these small yields, they're going to be fine for X number of years.

Thank you.

Thank you.

Patrick Davitt, Autonomous.

Thank you. Good morning. (Indiscernible) Shares recently announced that they had hired Dennis Roth, who was your head of consultant relations. Was that separation your decision? And what are the plans for replacing him and has it caused any dislocation in that part of your group?

No, it hasn't. And we really don't, we will not comment on what the surrounding circumstances a departure. But it has not been disruptive and it's been replaced.

Okay. And more broadly, I know you're probably tired of talking about capital. But if we're in a situation where there is no tax holiday, either because of the continued impasse in DC, and you can't find an M&A target, is it just the status quo and you'll continue to build the cash, or are there other options that you consider if we get in that kind of situation next year?

There's always other options. I guess I would respond to that, it's a pretty big hypothetical there with three or four possibilities. It's hard to predict what will happen. Maybe we have like an 18-month time view when we look at these things, and I think it's going to be status quo. We don't plan on changing anything soon.

We don't want to feel like we have a timetable to do a big deal that you have to do something by X. And I am a firm believer that once we get past this cycle, that some form of repatriation will come through. But that doesn't mean in the meantime that we're not looking at opportunities, especially with some of the currency devaluation in Europe right now.

I guess on that point, you touched on this a few questions ago, but your tone on M&A has ebbed and flow over the last two years. What is the primary reason that you haven't found something? Is it just a lack of businesses that really fit or is it more price? What do you think the overarching kind of reason for that is?

I think it's probably those two items and more. We're pretty active every year in looking at properties. And some of us come to us, some of us we're proactive on. And for the ones that we haven't done, it tends to be, they don't really meet our criteria. So quality, repeatable investment process, culture, price, yes, price could be an issue, it has been in some cases. As Greg mentioned earlier, it's not the easiest industry to integrate. We think about that. And also, a lot of, we come across situations where there's ownership, structural challenges, as well. So it runs the gamut of why a deal doesn't go through, but those are some of the things that we found.

I think like anything in life, the best ones are not for sale right now. And we're going to continue to build relationships, and I think if both firms see the benefits, then you can have a successful merger acquisition, and that's what we're hopeful. At the end of the day, we don't feel like that necessary to be successful, either. And I think that's an important point, too.

Okay. Makes sense. Thank you.

Michael Cyprys, Morgan Stanley.

Hello. Good morning. Thank you for your patience and taking the question. I just wanted to follow up on the M&A point. I hear you're not necessarily the easiest industry for M&A, but at the same time realize it sounds you're open to anything right about now. Just curious how you think about the value and benefit that could potentially be derived from large-scale M&A or potential consolidation?

We've done in the past and it's added a lot of value to this firm. I think we have experience, we recognize some of the pros and cons in large-scale deals, just from a branding standpoint and product and disruption are difficult and are making a big bet. But they're also the ones that are going to move the needle the most. So I think for us, it's really looking at what areas we could strengthen our lineup. And there are certain firms that do that out there. But we also don't want to get to the point where we have so much brand and product that it becomes confusing in the marketplace, too. So I think those are all issues that it's challenging to get two big firms to view what's right for the future, I think, in a consistent way. But we're going to keep trying to do that.

Okay. Just as a follow-up, if we could just dive in a little bit on the digital front, just curious how you're thinking about your digital strategy? I know some of your competitors have acquired certain capabilities in that area. Maybe you could elaborate on how you're thinking about that. And I think you mentioned a little earlier in terms of platforms looking for more of that?

I think that we are looking, and even with the DOL having some capability and whether that's built internally or we go out and rent the capability or buy the capability, those are all things we are exploring. I think the traditional model of saying we'll go out and buy a robo advisor for us, again, unless you have a large-scale ETF business, we're not sure that makes a whole lot of sense, but we do need some form of allocation for existing clients within that would be helpful for smaller accounts within the fiduciary rule, as well. So it is something that we're looking at and seeing how those capabilities and looking out on the long horizon make sense one way and other for us, as well. And there's a lot of different ways we can do it, and that's really the stage we are in right now is meeting with as many of them and deciding whether to buy or build.

Great. Thank you.

Thank you.

I would now like to turn the floor back over to Mr. Johnson for any closing remarks.

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

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