富蘭克林資源 (BEN) 2017 Q2 法說會逐字稿

Good morning, and welcome to Franklin Resources' Earnings Conference Call for the quarter ended March 31, 2017.

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 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'll turn the floor over to Franklin Resources Chairman and CEO, Mr. Greg Johnson.

Mr. Johnson, you may begin.

Well, hello, and thank you for joining Ken and me this morning to discuss our second quarter results.

I know it's been a busy week for most of you.

So hopefully, the commentary we provided earlier this morning easily addressed most of your questions.

This quarter, we saw a number of encouraging signs, with retail flow trends improving in some regions and funds returning to net inflows.

While we clearly have more progress to make, investment performance is strengthening, which is a positive sign for future flow trends.

Importantly, the financial condition of our firm remains strong, and we continue to position ourselves to meet the evolving needs of our clients.

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

Our first question comes from the line of Dan Fannon with Jefferies.

I guess, in the commentary, Greg, you were generally positive institutionally in talking about sales in the U.S. hitting levels you haven't seen since '15.

And I guess, just where -- I want to talk about that more broadly in terms of kind of where you still see the headwinds, whether that's on the international front.

And I guess, specifically, what products institutionally in the U.S. are you seeing the most demand?

Yes, I think, first of all, I mean, it was really retail sales where we saw the big improvement in, certainly, in growth.

And even on the international side, probably had net inflows if you take out some of the lumpier institutional redemptions.

I think just, overall, from just looking at the more normalized levels that we're seeing strong improvements in both gross and net on the back of strong performance.

And I think just sometimes the institutional redemptions and certainly the headwinds we've talked about, whether it's the variable annuity side, which we had a smaller quarter in terms of net redemptions of about $1 billion, but we had some other lumpy net -- or institutional account redemptions on the global equity side.

And that's really where, I think, if you look at the flows, where we had 4 or 5 large redemptions, none of them, I think -- one, a Middle Eastern client that -- not a performance-related redemption, just really a cash flow need kind of situation.

And then you had redemptions related to a platform moving to subadvisory that hit a couple of large funds as well, and then just a couple of $0.5 billion type global equity redemptions.

So if we look at the big changes over the quarter, Global Bond, certainly, from a retail side, much improved.

And really, in Europe is where we're seeing the dramatic improvement in redemptions and flows there.

And that's an encouraging sign and one that we know, if we continue to get momentum in that, that, that can turn into significant inflows.

And that's what, hopefully, we expect in the short run.

But overall, I think improvement in just about every area except the global equities, and most of that was just due to the institutional side.

Okay.

Great.

And then just, Ken, a follow-up on your commentary around expenses.

Appreciate the comp and the kind of the tech guidance.

I guess, just generally, those are moving.

One's coming down; one's going up.

I guess, as you think about total expenses for the year, can you update us on your thoughts on an aggregate level?

Yes, I think, on an aggregate, if you compare our forecast for this fiscal year to last year, I think we're looking at about a 3% decrease overall in operating expenses.

And that would be compensation, tech, op and G&A.

It would exclude the sales distribution expense line.

Our next question comes from the line of William Katz with Citigroup.

Just maybe I'll start with capital deployment.

I see that the repurchase did slow a little bit in the quarter.

Just sort of curious what drove that.

Was that just timing, pricing?

And then maybe stepping back a little bit, Greg, you had mentioned that you're a little bit behind the curve on solutions a little bit within the institutional channels.

That was, I think, in your prepared commentary.

Can you maybe dovetail together whether that would be a de novo solution or maybe possibly through acquisition?

Let me start with the capital question.

This is Ken.

So there were a couple of things.

Price was a factor during the quarter.

Also, I think, maybe probably one of the bigger drivers was buyable volume was down.

And it was down 25% to 30% this quarter versus last.

So that had an impact as well.

And then you wanted...

Yes, I'll just add.

On solutions, it's really, I think, the integration of our multi-asset solutions into the rest of our equity teams and the reorganization that we just did reflects that and also reflects the importance of solutions versus alternatives, where we're breaking them out with 2 separate business heads.

We'll continue to add where we can -- where we think we can add value.

AlphaParity, the recent acquisition last quarter, a small one, but it gives us more tools to customize within our solutions group.

But having someone who's run the Franklin Income Fund at our hybrid group now heading up the solutions group, I think, really makes it a much more robust platform that's really integrated into the rest of the group.

So that's really what we're -- I think, the immediate changes that we're talking about.

Okay.

And just one follow-up for me.

You had mentioned that global retail did a bit better this quarter.

However, looking at the U.S., that continues to struggle, at least from some of the Simfund data that we take a look at.

I guess the big-picture question I have is, you have much better performance.

However, you're also seeing a pretty sizable A, B and C share class, which seems to be out of phase, just generally speaking, at the industry level.

How do you reconcile that?

Do you think performance wins at the end of the day?

Or is it more the structure has to change to leverage the performance?

Well, I think performance wins in the end.

There's no question about that.

And as we've said before, I mean, it's when you have a good quarter or a good year, it may slow redemptions a bit, but it takes a while to build back onto the shelf space.

And we've seen, I think, the number of 4- and 5-star funds for us has quadrupled here in the last quarter.

So those are the things that really drive sales and shelf space.

I think all of us on the -- whether anybody -- and that's most of the industry that has more brokerage assets, it, as we all know, creates challenges in the transition to more of the advisory model.

And you have to look at your lineup.

And that's what we've been doing in kind of pruning funds and changing some things to adapt to that advisory model.

But at the end of the day, if you have performance and you have reasonable fees, you'll get distribution in that model as well.

But I think you're right to say that it's a little bit slower of a turnaround than you'd see in just if it was all traditional brokerage.

Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch.

Greg, maybe just another one on, I guess, sales and flows.

So you mentioned the momentum on the retail side in the quarter.

When I look at the institutional and the VA, in that part of the business, it sounds like you had one client that decided to stick with Franklin and then you guys are focused more on the solutions kind of aspect.

So I just wanted to get a sense on, like how quickly -- or how much work have you guys been doing, whether it's on the solutions side, trying to figure out kind of the institutional variable annuity?

I think last quarter you mentioned some new products on the variable annuity side to maybe offset some of the redemption pressures that you're seeing.

Yes, I think, the -- when we look at the VA part of our business, and the assets today are about $44 billion.

We'd put somewhere around $11 billion into the inactive side of the portion that -- I'd put that at the higher risk for moving to passive insurance companies that have gotten out of the VA business and are transitioning those.

It was public that with one of those insurance companies, that they are holding off on their plans to transition.

That was one of the ones that we had indicated to you was probable in terms of redemption, either last quarter or this quarter or over the next few quarters, and that was about $4.5 billion of the $11 billion in assets.

The others, we continue to work with.

And some of them, we have transitioned, as you said, with our solutions, trying to come up with, whether it's low volatility products.

We have built those.

I mean, this isn't something that's new to us.

But we continue to work on the active piece of the business, and we see a lot of opportunities still.

And hopefully, that's a number that instead of looking at a dwindling base, can be a growing base for us.

So it's not -- and I think that's an important distinction.

If you just had a portion of that VA business that because of the volatility and what happened with prepaid commissions, a lot of insurance companies got into a difficult situation, are looking for a solution to work through that.

And that's really something we've been engaged and have accounts that exist today in those lower volatility funds.

And so hopefully, that's an area that can continue to grow.

Okay.

And as a follow-up, we spent a lot of time over the past year on DOL.

I just wanted to shift to MiFID II and just wanted to get your perspective.

I know there's still a lot of kind of puts and takes until implementation and how things are going to kind of settle out.

But I just wanted to get your view on how Franklin kind of looks at the regulations, particularly for the European side of the business.

Yes, it's something that we continue to be very engaged on and are obviously -- you see, our Luxembourg-based SICAV is sold in, I think, more countries than any other one.

So we are very active on that, on the lobbying front.

And I think the obvious main concern is around how we handle the unbundling on the research and brokerage side.

And we're spending a lot of time doing that.

And we've been asking that question, well, what does it mean?

What kind of dollar number are we looking at?

And I think it's probably too early to say, because it depends just how clients react to this disclosure.

For us, it's not -- just on the face of it, it's only 2 funds that really get affected directly by the MiFID legislation.

And so it wouldn't be a significant dollar hit to us.

But again, when you have that transparency and the questioning, we don't know how far it extends.

And I wouldn't want to try to extrapolate because we don't know what that would mean.

I think you're right in saying there's still quite a bit of uncertainty on it.

Our next question comes from the line of Ken Worthington with JPMorgan.

Morningstar downgraded the parent company rating for your funds at the end of March citing investment lineup and firm leadership.

I guess, are there any indications that institutional consultants share these concerns?

And are there parts of the Morningstar comments that you think may have even some remote merit?

And are you making any changes to address the Morningstar comments?

I think it's a subjective analysis that's probably based on flows with something that they -- led them to do that.

I don't -- there's not much you can do.

It's not -- we haven't gotten, certainly, any feedback from clients that it's a concern in any area.

I mean, they have the relationships.

They do their due diligence.

They know us.

They know our funds probably better than that analyst.

So I don't really -- I think a couple of the comments they had were probably relevant that we are looking at.

But it's not something that we got any feedback from the distribution side that this was an issue.

It's not something that's really that focused on.

Okay.

And it seems like there's been some movements in leadership and you've done some things around some -- the acquisition of AlphaParity and some other reorgs.

Maybe what sort of changes seem -- there seem to be changes being made behind the scenes.

Is anything -- maybe you can talk about what's happening behind the scenes in terms of leadership changes.

Well, we just had the reorg that we announced.

And there were some major changes just on, again, aligning people with where the priorities are for the firm and having a new role within solutions, new role within alternatives, new role within equities as a whole.

The president consolidating many of the functions or reporting lines of the existing co-presidents model.

So I mean, I think that's a big change.

And the other big change is I've taken on the performance analytics.

Basically, your risk group reports directly to me, separate from the investment teams.

And I think that, that just speaks to the heightened awareness and importance of risk management for the firm, having that kind of check built in and that I get that information directly.

I think that's a fairly significant change as well.

Our next question comes from the line of Brennan Hawken with UBS.

Just a quick one on the international gross sales.

Really solid improvement, I think, which you highlighted in your prepared remarks, pointing to flagship products driving the sales momentum.

Was there anything specific as far as the products go?

And was there any other components that contributed there that are worthy to note beyond just a general improved optimism or a reaction around the performance track record that's turned around?

Yes, I think it's really Global Bond is the driver there.

A major turnaround and kind of the proven case that we've been talking about that if rates rise, this is a fund that can position your portfolio very nicely for that.

And I think that, that proved itself in this last cycle.

You look at the return numbers, and first quartile for every time period.

I mean, that certainly helps when you're having a fund that was in net redemptions.

The other -- there are other areas that had inflows.

And certainly, our emerging markets bond fund had major inflows and continues to do very well.

Our floating rate fund, specifically in Korea, crossed $1 billion very quickly.

So those are new areas of distribution for us.

And if we look across the globe, many markets that had been in redemptions have turned to positive.

You look at Hong Kong, Korea, India, Taiwan, Germany, all back in positive.

So I think that, that's a very strong and good trend for us going forward.

Terrific.

And then is there any color -- it was -- while the gross sales picked up nicely, which is very encouraging.

Obviously, stronger in international, but also picked up in the U.S. What is it that can get those redemptions to slow?

Are there any particular trends that you're noticing that would give you encouragement that we might not be far away from that beginning to slow down?

Is there any additional color you can give on the redemption side?

Yes, I mean, I think they are slowing.

And if you -- they -- you look at the numbers, and of course, we'd like to see them slow faster.

But again, I think it's just a matter of performance sinking in and people recognizing the strong performance across the lineup right now.

You do -- as we said earlier on the call, I mean, the transition from brokerage to advisory creates a little bit more of a lag effect or just more of a headwind in some of those redemptions in those A class shares.

But I think, when we look at the trend right now, and of course, knock on wood, and we don't like to lead anything, but certainly better right now what we're seeing and seeing some positive overall days for the firm, which we haven't seen in a while.

So hopefully that continues.

Terrific.

Last question for me.

Do you guys have any plans as far as maybe an offering in the -- amongst these clean share sleeves that we've heard about?

And what's your view on this type of a product and structure?

Yes, I mean, I think, like everyone, it's something we are looking at and trying to figure out how we would offer that and how it would affect our distribution channel.

So it is very much something that's certainly on the plate today.

And I don't have -- we don't have any plans to announce any offering right now, but it is something that we think is very viable and something that I would put in the probable category at some stage.

But probably too early to be discussing with distribution partners or anything like that.

Is that fair?

Right, right.

I think we work together with the distribution partners to figure out what they need.

And with the uncertainty of the rule still pending, I think it's early to decide what those share classes are going to look.

Whether you need the T, whether you need a clean share class, all of that, I think, is still very much up in the air based on what happens with the fiduciary rule.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

A question for you guys around the management fee, management fee rates.

So some of your products tend to be, and especially some of the larger ones, on the higher end of things.

And as I think about the growth in the advisory channel and your guys kind of market share within that part of the market, do you find your fees competitive enough to gain a larger share of the pie there, especially relative to some of the larger peers?

And I guess, ultimately, would you consider some of the fee reductions to accelerate growth in that channel?

Yes, I mean, I think that's just part, again, of what I said earlier.

That with this transition to advisory, we're looking at the entire lineup.

And to me, you obviously have to be competitive on the fee side.

I think we are.

I think the areas where -- I'm not sure what you're referring to where we're higher, because in most cases, we are lower than the average.

And I think you have to look at the specific category and who you're competing with, but that's certainly something that if we feel like it's not competitive in the channel, that's something that -- a short-term hit we would take if we had to.

I don't -- those are discussions we're having.

We're looking at all of that.

But most of the funds are on the lower end of fees.

So I think continue to be well positioned.

And I think the battle on fees, it's easy to sit there and think, "Well, I can just reduce and suddenly I'm competitive." But the reality is, when you're competing against passive, you better beat passive or make your value proposition clear.

Reducing your fees by 20 basis points doesn't change if that adviser is moving a key amount of their assets to passive.

Reducing your fees only hurts your margin.

And if you beat passive over the long run, a 20-basis-point difference doesn't really matter.

So I think that, that's the bigger question is whether you believe active will beat passive, because trying to compete with passive on a fee basis is not the right answer.

Yes, that all makes sense.

And then secondly, I was hoping you could touch on the institutional channel.

Understanding a couple of lumpy outflows for you guys this quarter, good news on the VA stuff sticking around.

But just bigger picture, any comments around the pipeline and the composition of the institutional pipeline for you guys?

Yes, I mean, I would say that the area that we've been talking about and continue to see more interest based on the last market cycle with rates coming up is just the institutions interested in local asset management, currencies, currency funds with global bonds.

We're seeing a lot of interest there.

And those can be larger accounts.

We're seeing pretty good interest as well in the emerging market side.

We're growing in the U.K. side as well, with some of the fixed income funds there, on excellent performance.

So those would be some of the areas that -- and global agg, we've had a couple of big wins, and had a big win last quarter that will fund close to $1 billion this quarter.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

Maybe, Greg, if you could just comment a little bit about what you're seeing on the Department of Labor trends in terms of what your sales force is seeing with the advisers and your work with distribution partners.

And to what extent are advisers moving or you think they'll be moving product, shifting around more before June 9?

Or is it more of a play of, let's, gee, let's see what happens?

And then just maybe your AUM that's -- that it has 12b-1 fees and just some distributors switching out of 12b-1.

Yes, I mean, I think it's still, like the future of the rule, very much up in the air with how distribution is reacting.

I think that it doesn't matter if you have a rule or not.

The trend towards the advisory platforms is there and happening.

It's just a question of how quickly it accelerates.

And that's something that many of the major broker-dealers favor.

So to sit back and say, "Well, I'm not going to react to that because of the uncertainty of the rule," I think it really doesn't matter.

That trend is in place.

I think, as we said earlier, around what it means in terms of share classes in the future, I mean, there are things that need to change with that rule.

And I'd start with, what are we trying to solve?

And hopefully, it's something that the SEC, it gets pushed back to the SEC at some point to provide a workable rule that affects all distribution.

I think if we feel like we need a rule, then that's the right place to have a rule.

And this rule was highly political from the start.

And things like private right of action, I think, need to be taken out of the rule and having a more reasonable and workable best interest contract, I think are the 2 things that we think need to change if we indeed believe we have to have a rule.

So the future of how asset classes look, how brokerage accounts look, I think, is still very much in the air in terms of what we have to price.

And that will all be probably worked out in the year ahead.

But it's also somewhat challenging to get a common voice from the industry on what we need.

So that's -- I think that's one of the issues as well that people have different views and different needs on what that rule should indeed look like.

The question around 12b-1, I mean, we have already share classes that exist without a 12b-1.

So that's -- and some would obviously in advisory models use those.

So that's already there today.

We have that in our (inaudible) advisory class.

Are you seeing active substitution into the non-12b-1 shares within your complex?

Yes, I mean, I think the more of the advisory platforms, that's something they would use.

So yes, I mean, as that continues, I think you'd see that.

Great.

And then just on expenses, Ken, the 3% drop in expenses, I have a couple of questions around that.

I guess, what are your assumptions on performance fees?

Because I think you said you still expect comp to be down 3% to 4%.

It was a little elevated.

I assume performance fees helped that this quarter.

So just maybe comment around your view of performance fees for the back half of the fiscal year in conjunction with the op expenses.

And just the base of that op expenses, is that the $2.042 billion base?

I just want to make sure I have the right number there.

Okay.

Let's start with performance fees.

So I think the performance fees this quarter and a little bit last quarter were for similar products a year ago, so that was like the first time we had performance fees on those.

I would not expect those particular performance fees to recur in the second half.

But we do have performance fees typically in the second half of the year.

What they'll be, I'm not sure, but I would just go back and look at what we've had in previous third and fourth quarters, and the performance is picking up.

And then the expense base, just the 3% drop, the fiscal year?

I just want to make sure I'm doing it off of the right base of expenses ex sales distribution, of course?

Right, yes, yes, 2 point -- last year was about $2 billion, right.

Yes, I just want to make sure I have all the onetimers out of there.

So is it $2.04 billion?

Or is there...

Yes, if memory serves, that's correct, yes.

And you can also -- for kind of the more granular questions and answers here, you can also -- feel free to call our IR Department.

Brian Sevilla will help you out with that.

Our next question comes from the line of Glenn Schorr with Evercore ISI.

Two clarifications first.

One, on the whole large insurer not replacing dozens of actively managed funds.

Just specific, is it related to the lawsuit?

And where I'm getting at is, should we think of this as a temporary stay and these funds could be at risk at some point?

Or is -- there was a decision of, this is where we're going to be, and we can consider the 4.6 base as we proceed?

I don't have the answer.

I mean, I think the reaction is they're going to stay put for now and assess it, and maybe take a different tack.

I mean, I'd still think you always put it at the at-risk.

It's just that we don't know today.

And their decision is to hold off for now on moving that to passive.

Okay.

Fair enough.

And then your other point on the key distributor transitioning from advisory to a subadvisory program.

Is that just them subadvising out?

Is that part of passive, too?

I was most curious because some of the assets were in funds that the performance has gotten a lot better.

I'm just curious on what's behind the move.

Yes, they don't -- I think they would say that it's not related to performance.

It's really just the concentration of assets that they've had in those funds, and they built their own subadvisory platform and moved a lot of assets from a lot of top-performing funds into that -- into those other funds.

So it was never an issue of performance.

It was just they built a fund family and had a fair concentration in a lot of different funds.

And this was one way to handle that.

Got you.

So it's not actually something that we should look for as a trend, hopefully?

No, it better -- no, I don't think so.

I think for now, I hope it's -- I hope that's it.

I'm with you.

Last one, always tough to get too much out of you on this.

But just curious, going on $10 billion of cash and equivalents, is there any different sense of urgency on -- I'll leave it really open and say do something with that?

Or are we like, we're so close to tax reform now, now we wait?

No, I think the -- it's still -- I think the way we would look at tax reform is if we find something before repatriation that we can save 15% on buying offshore, that's still going to be very attractive.

So I think you could argue that it certainly makes it more interesting with the cash in the meantime before you repatriate to look at things offshore, and we continue to do that.

I mean, like I've said in past ones, every moment, we're looking at something.

Our next question comes from the line of Craig Siegenthaler with Crédit Suisse.

I missed the response on this one, but how much 12b-1 fee AUMs do you have remaining?

And do you include low-grade As in this bucket, too?

Yes, we'd have to get that for you.

I don't have that here, but it would still be the majority of the assets.

And then can you provide some commentary behind if Global Bond and Franklin Income were removed from recommended list and platforms generally last year after their underperformance and if you've seen them getting added back this year?

And any kind of tangible data points would be helpful, too.

Yes, I think, that's part of the challenge is that when you have a strong rebound and somebody made that decision to take them off, that they're going to be a little hesitant to put it right back on.

So you need a little bit of time.

But again, I look at the sales trends, and certainly, Income Fund now as a fund, and last quarter, was actually in positive sales despite hybrid being somewhat negative.

But that's a huge turnaround from where it was.

And Global Bond had its lowest redemptions in over 10 quarters.

So behavior is changing despite whether or not you're on a recommended list.

And that performance does trickle down to the adviser level regardless of whether you're on a focus list or not.

Our next question comes from the line of Patrick Davitt with Autonomous Research.

Just to clarify something you said earlier.

I think you said you've had some positive days, which hasn't happened in a long time.

Is that in April or was that already happening in the first quarter?

It's in April.

And again, we don't like -- I think I'm just mentioning it because I think it certainly feels better for everyone at the company to see that trend.

And whether or not that continues, I think, is always what the market does in the near term.

But that's clearly a positive sign for us, a green shoot.

For sure.

And then there's $1 billion mandate you know of coming in, in global agg?

Yes, it's a $900 million, $900 million.

I exaggerated slightly.

And the last one's on the repurchase.

I think you said something about buyable volume, but your volume was actually up in the first quarter.

So could you give us more color around the lower repurchase rate?

Right.

So let me get this -- when I say buyable volume, I am talking about something called 10b-18 volume, which is the -- our metric on what we can buy.

And again, if you want to know more about that, feel free to call IR after the call.

Our next question comes from the line of Chris Harris with Wells Fargo.

Just a follow-up question on potential M&A opportunities.

When you guys think about what's out there and what your needs are internally at Franklin, do you guys feel like you need to do things mainly in line with your core competency, so active management?

Or would you be willing to step out from that, say, either in passive management or something maybe even adjacent to asset management?

Just trying to get an understanding if there's sort of a governing philosophy to how you're thinking about deals here.

Yes, I think it's always the philosophy is trying to figure out what the needs are of clients and how we can strengthen our offerings.

And obviously, the big change now that everybody's talking about is how you look at data and whether it's kind of the big data analytics, artificial intelligence.

There's a lot of new companies, a lot of new interesting things happening there.

So that's certainly an area that we are spending time on understanding and figuring out how -- whether it's a direct investment, a JV or building your own, how we can use information today to help our active teams or build a separate one that could be completely different from our traditional.

So I think as any large asset manager, that's certainly an area today, with the supercomputing capabilities and the amount of data real-time, documenting behavior real-time, is something that every asset manager, I think, needs to be at least aware and looking at.

So that would be an area.

We don't have -- if a large passive manager came up, and I just don't think that's going to happen anytime soon, but it would certainly be something we would look at as well.

I don't think we have any hard rules on, philosophically, that we have to be this or that.

I think it's, hey, if our clients -- we know passive's here to stay.

We know that it works very well with active.

It works very well with alternatives and other capabilities that we have.

And the more we can package all that together through our solutions is something our -- that's really our long-term vision is trying to build out all of those capabilities.

So I don't think that the philosophy of saying you're an active manager precludes you from doing anything.

And there's all forms of active using passive through solutions, and that's really where we think the market's going.

Our next question comes from the line of Robert Lee with KBW.

We've talked a lot about different share, fund share classes and the advisory business, but you haven't really talked too much about the SMA business, which is clearly, in a lot of your U.S. distribution outlets, a sizable and growing business.

So -- and maybe some of your strategies like Global Bond and Franklin Income don't translate as well.

But can you talk a little bit about your presence in the SMA business?

And do you feel that it's -- you have the right product suite there?

Or is that a place you're putting more emphasis on incremental growth?

Just trying to get a better feel for your positioning there.

I mean, it's a business that we have been, I think, servicing and building and going after.

So nothing's new there.

It's still a relatively smaller proportion of our business.

And I think with advisory, with the move towards advisory, it becomes less significant in many ways.

I think the challenge is how do we compress the pricing within those models and how that reconciles with your other funds is always somewhat of a challenge in how you enter that business when you're competing with firms that may not have other retail funds priced differently than what they're doing in the SMA world.

So it's an area that's going to be still significant and important, but I don't think there's anything new that I'm aware of in that channel that changes our thinking.

And I mean, just within your franchise, I mean, is that a $20 billion asset business, $30 billion, $10 billion?

I'm just trying to get a sense of how meaningful it is a contributor to kind of your sales and flows.

Yes, we'll get back to you on that one, because I don't have the exact number.

It's pretty small, though.

It's pretty small.

(inaudible) maybe less.

Yes, $10 billion maybe.

Maybe less.

Okay.

And maybe just as a follow-up.

I'm just curious of your perspective.

I mean, one of your peers or competitors has filed for kind of -- I won't call it a new pricing scheme.

Fulcrum fees have been around, but clearly have taken a view that something has to change with mutual fund pricing dynamics.

So just kind of interested in your, just in general, your thoughts around some of those initiatives you've seen a competitor take and if you think there's much merit to it or just kind of your perspective?

Yes, I mean, I think the more options you have on pricing, the better.

I think if you believe that actives can outperform, the client probably will end up paying more performance fee.

But certainly, it's something that we have been open to more on the institutional side, where we've done some pricing with performance fees with lower expense rate or lower management fees on them.

That's something we've been doing.

We're looking at it in the retail space as well.

And I think that clearly, with such focus and pressure on fees today, paying out of your alpha probably makes more and more sense.

So that is something that we are open to and looking at.

And if clients prefer that, then that's something that we have to adapt our model to.

So I think we are open, and we think we will see more of that.

Our next question comes from the line of Michael Cyprys with Morgan Stanley.

Just as industry assets continue moving into the fee-based advisory channel, I'm just curious how you think about your vehicle delivery today for active management.

Certainly, you have a lot of legacy A, B, C mutual fund share classes out there.

Can you just talk about how you're evolving your vehicle delivery so the mutual fund vehicle itself is not a barrier for investors to buy active management?

How you're thinking about going beyond the mutual fund vehicle?

Well, again, I mean, we look at our core competency is the management of those assets.

So the vehicle is dictated more by the channels and how technology evolves and how we can -- whether it's an ETF with -- using an active bucket in that.

I mean, those are things like everyone in the industry, again, we're looking at.

And if that is a vehicle that's lower cost and something that clients want, then we're certainly open to doing that.

And it's just a matter of working with our clients, our advisers and understanding what they need in their channel and moving towards that.

So I don't -- again, we don't have any preference, whether it's an SMA vehicle or an ETF or a 40 Act mutual fund.

It's whatever the clients prefer and meets their needs.

But just on the SMA, do you feel like you have enough of the capabilities yourself today?

Or is that something you feel like you need to build out more to be a little bit larger within that sort of vehicle delivery?

Well, I think we've certainly -- and there's a lot of overlap on -- we built out our internal consulting group within our sales and marketing teams and a lot of that overlaps with what happens on the SMA side, too, and really creating a more institutional process and service model.

That's been the big focus for us over the last 5 years.

So that suits the SMA account as well.

But as I said before, it's just not a large part of the business today, but one that we certainly are servicing.

Our next question is a follow-up from the line of Brian Bedell with Deutsche Bank.

Just wanted to try to clarify something.

We did do just a quick run on Morningstar, and we got a little over $300 billion of mutual fund AUM with 12b-1 fees.

I just wanted to see if that was in the ballpark of -- for capturing all of that properly.

That sounds right.

Okay.

Great.

And then just on the fee rate picked up this quarter on ex performance fees.

So I just was wondering, obviously, there's mix shift between the asset classes.

But even within some of the asset classes, we've seen some improvement in fees.

I wonder -- I was just wondering if there's -- if that's all due to mix or were there any sort of onetime-ish elements that affected it?

It was predominantly due to mix.

Mr. Johnson, there are no further questions.

I'll turn the floor back to you for any final remarks.

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

And have a nice weekend.

Thanks.

Thank you.

This concludes today's teleconference.

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Thank you for your participation.