富蘭克林資源 (BEN) 2017 Q3 法說會逐字稿

Good morning, and welcome to Franklin Resources earnings conference call for the quarter ended June 30, 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 Robin, I'll 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.

Well, good morning, and thank you for joining our quarterly conference call. With me is Ken Lewis, our CFO.

We're pleased with this quarter's results as flow trends improved, performance remained strong and operating income increased.

Our international retail business continued to gain traction, as solid performance drove demand for many products globally. We implemented a new commentary format this quarter, and we hope you found it useful. And we welcome any additional feedback you have.

I'd now like to open up the line to your questions.

(Operator Instructions) Our first question is from Patrick Davitt with Autonomous.

In the precommentary, it read, like, the unusual items in G&A made it lower than it should be. If that's right, could you help us better understand the disclosure in the Q in terms of, I guess, what you consider the net amount of your unusual item impact?

Sure. I don't know that it was lower than it should be, but -- and there were some -- I would say, the net of the one-offs were maybe just $2 million, that very small neighborhood. But I think, more importantly, what the question is going forward, what do we see, we do see a little upward pressure on that line item and some of the other line items, offset probably by the comp line item, which that compensation was a little bit high this quarter than run rate.

Okay. That's helpful. Then more broadly, there was some chatter last quarter about Wirehouse trying to force revenue share kind of across the board as they become compliant with DOL. What has your experience been on that front? And do you think it is settling out better or worse than maybe what you were paying before the DOL rule?

Well, we can only pay the limit in the prospectus. So that has created, I think, in some cases, a protracted discussion on how we get to a standard number. But I can't think of any case where we have not been able to work it out. And in my -- again, it's a maximum, by prospectus. So it shouldn't increase with the changes.

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

In terms of international equities, it's still a meaningful source of outflows. If it was just the U.S., the asset class, it's what it seems to be working the best. So can you talk about your global equity business? Possibly give us a little more color on the continued weakness, really, in the gross inflows. Is there sort of region or client type? Or can you help us point -- point us to maybe why that weakness or why we're seeing this weakness compared to, like, prior to 2016, it seemed like that gross sales rate was at a more normal level.

Yes. I mean, I think that, that is an area that we were hoping would turn around a little bit faster based on the performance. I think, just a general statement first, just looking at the overall flows on global equity, and obviously, that was an area where we had over $6 billion in outflows. $3 billion of that was due to 3 accounts on the institutional side, the largest, a sovereign wealth fund, not performance-related, but just reducing for cash needs there. And I still think getting back to the gross levels in any equity category is difficult looking historical, when you still have the pressure of indexing happening and replacing the traditional fund. So we have -- the foreign fund has turned around to positive flows for the last 2 quarters. That's much better than where it was, but that category's not as large as the overall global equity category. And that's the important one that we need to see turn around for the Templeton Growth Fund. So we -- I think that the -- and also part of the still the value growth side and some of the headwinds there, but Templeton, for the first time, is getting a little bit of benefit from currencies, which we haven't had, and that trend continues. And obviously, the bigger positions in Europe and financials have helped quite a bit, too. So if you look back, we just got improvement in our star, the number of stars on those funds. And so it takes a little bit of time and, certainly, in the retail channel to get back to the kind of positioning you had. And that's really what we've been trying to do. And if the performance trends continue, we'll be successful there.

Okay. Any color on some of the non-U.S. parts of global? You got a Korean business. You got some business in India. Like, there's definitely different pockets outside the U.S. Is there any -- anything there that is contributing to kind of what we're seeing as you aggregate the global equity AUM in commentary?

Yes. I think, as I've said before, I mean, certain markets get lost in the numbers. And if you just look at, for example, the India business, the $800 million in net inflows for the quarter, very strong relative in organic growth -- organic growth there. Taiwan, $0.5 billion in inflows there. Germany, very strong as well. Asia as a whole, about $2.2 billion last quarter inflows. So those are probably the standout countries in terms of what -- where we're seeing good retail in institutional flows.

And just one more. A number of competitors cutting fees to hopefully drive better sales. To what extent do you think reducing fees would help you, either in international equities since you've just been talking about that or maybe, more broadly, across different areas of the firm?

Yes. I mean, I think, that's the big question for many firms. It's very hard for everybody to be in the lowest quartile of expenses. It's also very hard to compete with just straight market beta at 2, 3 basis points. So if you can reduce from 50 to 30 and you're losing business to 2 or 3, that's probably not a great decision. I think what we've tried to do is look at every category. We're doing that right now, working with our distribution partners and finding out if any asset classes that we have that are being priced out of the market, that have competitive performance, and the pricing is an issue. I think we've -- most of our funds are on the lower side, so we don't see that. But there are some that we think we probably will reduce. I don't think there's anything from a substantial impact at this stage. But like many, the pricing side of the equation is much more important and you have to be competitive, and that may mean some near-term revenue loss to continue to get share. And that's -- we've been doing really a review that we're in the middle of and are getting closer to probably reducing a few funds.

Our next question is from the line of Michael Carrier of Bank of America.

Ken, just on some of the expense guidance that you gave, you mentioned just in comp, that there was some severance. I don't know if you can size that just so we can kind of get a better run rate.

Yes, there were some nonrecurring items. But also, I think, something important to keep in mind is due to the performance of the company and the increasing average assets under management, et cetera, we took a look at some of the variable comp components and adjusted our estimates of our liability there. In this quarter, and since it's the third quarter of fiscal year, you pretty much have the whole year impact of that adjustment in this current quarter. So that had the effect of inflating the quarterly number a little bit. So that's something to keep in mind. Overall, as I said in the commentary, I think, when you look at the comp line year 2017 versus '16, we're looking that to be down around 2% to 2.5%.

Okay. And then, Greg, just as a follow-up. Just given a lot of the industry changes and trends that we're seeing, you guys have done something to try to, whether it's expand distribution, diversify products with K2 and EPS, anything kind of changing the, I don't know, the outlook in terms of cash use and doing more on the M&A side? I guess, particularly, just on the product side because, I guess, on the distribution, you guys have a lot. But just want to get your thoughts, just given we are seeing a lot of industry changes, if anything, is changing in terms of priority or the cash?

I mean, I don't think anything's changed as far as priorities. I think we're always looking to add strong investment teams that complement the lineup. I think, obviously, in the alternatives space, we've talked about why that's not always easy to do. I think we like the high net worth and fiduciary trust that business to grow, so that's something that would move up the list on priorities for us. But overall, we continue to be very active in looking at everything. And I wouldn't say the list has changed from what we've talked about before.

Our next question is coming from the line of Dan Fannon with Jefferies.

Generally, we've heard from some other of your peers about uptick in expenses and spend. And so Ken, wanted to get just kind of a thought around the kind of a longer-term expense profile as you kind of start looking into next year, how we should think about maybe some initiatives that are going to be coming online, whether they're tech or other investments, and how that might mean to the overall kind of expense outlook?

Sure, sure. So we are just starting our annual budget process. So it is a little early for me to give you any definitive guidance with a lot of confidence. But I can tell you that we're really taking a hard look, leaving no stone unturned, looking for ways that we can harvest expense savings to fund those new strategic initiatives. I could say, overall, from what I know today, and I mean, it is looking like it will be a challenge next year to reduce next year's expense levels from the current levels. But beyond that, it's kind of too early to tell exactly. But I'll definitely have more for you next time we meet.

Okay. And then -- and just a follow-up, Greg, on some of the international comments and success in retail. Obviously, the global bond seems like it's a big driver of that but are there other products underneath that, that are seeing some of the benefits of the improvement in the broader kind of international retail segments?

Well, I think the other standouts in the last couple of quarters on the fixed income side, I mean, obviously, global bonds, it's a tremendous turnaround from where we were, where we had $2 billion in inflows for that category, where a year ago, we probably had $7 billion, $8 billion in outflows. So we're certainly pleased to see that, that's turned around. The other areas' floating rate has -- was very strong, and it's a little choppier because some of it -- we get some institutional accounts in that. But especially as rates ticked up, that category, we've seen momentum certainly in Asia. One of the big headwinds was Asia growth. That's turned around just as far as actually redemptions, and performance is very strong there. And the other one that has been a drag would be emerging markets, but very strong performance continues despite even growth outperforming value. But that -- those funds have been well positioned through that. So those would be the areas that we're seeing strong interest outside of the U.S.

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

I guess, the question I have is on the distribution front. I mean, as you've expanded the product range, obviously, there's EPS initiative and other products, I mean, there's only so many things you can kind of fit through any pipe, so to speak. And I just don't get a sense if there's a lot of -- you may trim your product line every now and then with small underperforming things, but how do you kind of manage all these new initiatives and getting in through your distribution without kind of...

Cannibalizing.

Yes. Cannibalizing your existing product?

Yes. I mean, I think that's the question we wrestle with quite a bit. And to Ken's earlier points on some of the initiatives and funding that we need to do, take distribution and ETFs. We probably need to continue to build out our ETF specialists and not rely on the existing retail wholesalers. And I think that's something that we've been out telling the story but really feel like that's going to require a separate effort. Now there would be alternatives and supporting that group versus just having a generic institutional sales group. I think the specialization in distribution is becoming more and more important, especially as there's more gatekeepers that expect that expertise and closeness with the portfolio management team. So that would be another area that we think we're going to continue to make an incremental investment in because, I think, you're absolutely right. You cannot rely on one platform to sell all different products and have that same kind of credibility in the market. We think that more specialization is required. That's an investment we've been making on the retail side as well in building out more consultants and even bifurcating our sales teams for different types of advisers in the field, even in the same territory. So I think that, that -- the bar is being raised, and we have to continue to specialize and focus the distribution efforts.

Great. And then maybe just a follow-up on the capital question. I mean, I know every quarter, I believe, in the Qs, you highlight the amount of your cash and investments that you have kind of set aside for regulatory and operational needs. And I don't remember the precise number, say, it's roughly $3 billion or so. I mean, should we think of that as, I mean, kind of the minimum that you kind of think you need on an operational basis? Or is it really kind of somewhat higher than that just because you like to have other cash just in the event of transactions? Just trying to get a sense of what you feel is like your kind of your bottom line, could never go below this type number.

Okay. I'll try to answer that question. I didn't hear all the parts of your question, but I think I got the main idea. So right, so in our filings, we do highlight the minimum amount of cash in the U.S. and outside the U.S. that we feel we need for internal purposes, kind of things that might come up, regulatory issues, amounts to seed new products, et cetera. The U.S. cash is approximately, like, $2.3 billion of that number. I think, we say, we have $800 million that we kind of hold aside for operational regulatory requirements. And international, that's $6.3 billion, and of that, we hold about $2.2 billion. So I think your number, $3 billion, is about right. And that is, I think, your characterization is also correct. That's the amount that we think we would need, kind of bare minimum to have on hand. Keeping in mind also, though, that if we needed more money, we have the ability to borrow more money.

And maybe just one last question. I believe you have some debt that's maturing pretty soon. Should we expect that you pay that off or look to just kind of refinance that?

The debt. Yes, we do have a debt maturing in September. And I think, because of our strong financial position, we have the ability to be opportunistic in what we do. I guess that's...

And I think we'd add, it also depends on the tax repatriation and how that shapes in the next few months based on what we would do there.

And that' definitely, yes, a factor that we're considering.

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

I think, in the prepared remarks, you guys highlighted some institutional wins. I think it was roughly $2 billion on the international side. Can you elaborate a little more, I guess, which products that's coming in from? And then anything else you're aware on the positives and the negative side on the institutional front so far in the quarter?

Yes. I think, first of all, it was very quiet from the standpoint of funding for the quarter. There were no significant onetime separate accounts coming in during the quarter. But we do have -- we had some wins during the quarter that are funding now in this quarter. And that's what we mentioned, was the $2 billion. And I believe most of that is in fixed income, emerging markets, global bonds and in the global bond category, most of that $2 billion.

Got it. A couple of clean-up questions. I guess, when we look at the fee rate, it feels -- looks like it's slipped down a little bit sequentially. Just wondering, given the fact that the global products, just from a beta, have done obviously better, and the currency probably were maybe a little bit more helpful, just surprised, we didn't see a bit of an improvement there. So maybe just peeling back the layers, kind of what's going on in the outlook for kind of the fee rate given where the business is today?

Could you repeat the question? Especially the first part?

Sorry, just on the fee rate, excluding performance fees, if you just look at the management fee rate. Looks like it's slipped down a little bit sequentially. So I'm just curious whether it's a mix or it's a currency issue or something like that.

Yes, I don't think there's anything noteworthy to call out there. And performance fees weren't that much this quarter, really. And I think it's just a function of mix, really, other than anything structural.

Got it, okay. And then just the last question. As we look out into 2018, with MiFID II, obviously many of your competitors kind of commented on what they think the implication could be on the business, given your obviously large global footprint. Just curious how you guys are thinking about it. And any incremental expenses we need to be thinking about related to MiFID II into 2018?

Yes. And I think the question, obviously, around the unbundling and what does that mean, and I think, like everyone, we're still very much studying it and have a group committed to doing that. I think if it's narrow in terms of how it's implemented, it wouldn't have a very large impact on us. It becomes more of a standard across the rest of the globe. Obviously, it'll have a bigger one. And I wouldn't even want to estimate at this stage what that would look like. I think, overall, the -- as far as regulations and complying with them and having new clean share classes in place, we are ready to do that and in compliance and I don't see any real issues just aside from the unbundling and the uncertainty. And we know some have decided to pay for research directly, and that's something that we have not made a decision on one way or another right now.

The next question is coming from the line of Brian Bedell of Deutsche Bank.

Maybe switching over to DOL, Greg. Just your views on sort of the current tempo there, given that we've been obviously pushed out to the June implementation deadline. And now the -- maybe your views on where you think the best interest contract exemption ends up, and what you're hearing from advisers on their view on allocation between active and passive. And sort of in conjunction with the comments you made earlier on the revenue share, are you seeing sort of pressure on your share classes there? Or do you think development clean shares will fall out of those problems?

That's a lot of questions in one. I think, first of all, with the DOL, we're in a comment period. It's a little bit quiet right now. People drafting responses to both the SEC and the DOL. Our sense is that the 2 now are talking and have been public in trying to work together. So our view is that the January 1 date will be pushed back. That'll be the goal, I think, of most in the industry to try to give time to have a thoughtful overall standard developed with the 2 groups. And that in terms of the BIC and the best interest contract, I think having some level of higher suitability will probably be the outcome but not be as onerous as having a contract in place that creates issues and then not having the private right of action and some of the weaknesses in the current structure, we think that will be addressed in the future as well. And you also have momentum on the legislative front to do away with it completely. So I think that's still a possibility. But I think the more probable is a delay and then the 2 groups working to coming up with a workable standard. And I think everybody needs to go back and start with why are we doing this in the first place and then come up with an appropriate solution to that. On the active-passive, I -- no matter what the DOL, where this all comes out, you have a move towards fee-based, and you have to think about how that affects your business, affects your lineup, puts pressure on expenses, as there's more pressure around what the adviser's charging around that portfolio. So I think that, that pressure continues one way -- will continue regardless of where the DOL rule goes. And we talked about that earlier, just making sure your funds are competitive for these platforms are narrower than the traditional one and may have a third or half of the funds available that were there before. So you have to be competitive on both the expense side and the return side there. Revenue share, I think, the -- that's still probably one that has more uncertainty about where it ends up in the future. Some large advisers are adopting a no-revenue stance. Some are -- have revenue sharing in. Some are going to adopt clean share. So I think that, that'll -- the market forces, where that prevails, I think it's too early to tell. But I think it's going to be a difficult world where one adopts a clean share and another doesn't. So that -- I think that, that's more of a probable outcome over time that you'll move towards that clean share class.

All right. Okay, great. And then just a big-picture question on the M&A environment. Just for the industry, I guess, as you think about active performance generally has improved this year so far. Do you see that fostering consolidation? Because the sort of conditions have improved from the sort of a large manager consolidation perspective? Or do you think that actually creates a dynamic where there's less pressure on major players to consolidate? And how do you guys view yourself as potentially merging with another big asset manager versus looking for more sort of small tuck-in acquisitions?

Yes. I mean, I don't think that the -- there's been any kind of shift between active-passive and how a large firm thinks of their business in terms of probability of consolidating. It's very hard to just say, "Well, to put 2 big firms together and not hurt each of your businesses as you combine the 2." So I think the other, the real story is on the small to medium and how, in this environment, a traditional, say your niche active equity manager, the investment you need to make to be competitive and to stay on platforms, and as I mentioned, the narrowing of funds availability, and some of that's based on the size in the system, I mean, because there are costs to have diligence and follow x number of funds. It's just harder and harder for the smaller player where they may have had relationships out in the field, specific offices or branches or whatever. It's just going to be hard for them to get the shelf space when it's channeled through one central gatekeeper. So I think there's going to be more opportunities for those type of firms that have seen assets decrease, don't have the balance of fixed income and other categories that will need to sell or consolidate or become part of a bigger platform. But I think the larger firms being forced is more of a bear market deal than it is in active-passive question.

Our next question comes from the line of Bill Katz with Citi.

And I have a laundry list of questions for you. So first question, just going into the question you had the expense dynamic a little bit. Sort of wondering where you think you can still harvest some savings from as you think about next year? Because many of your peers are showing some pretty substantial year-on-year growth of expenses, even though they're very efficient themselves. And I say that as I look at your gross sales, which are relatively flattish, and by both region as well as, I think, by most asset classes. So how do you sort of jump-start growth here? And do you need to sort of deepen the spend to get there?

Well, I'll handle the expense side of that. As I said, I guess, my comment was no stone unturned. I think you are exactly right. It is getting more challenging to find expense savings because we are efficient. Our competitors are efficient as well. We do have, I think, a competitive advantage there with our presence in the low-cost jurisdictions, where we can do more investments in technology and things like that at a lower cost. So I think that is something that differentiates us. But in terms of specific areas that we're looking at, it could be just things that procedures and processes that we set up a long time ago for a specific business model. The business model's changed. So we're just questioning ourselves, do we need to do that process? Or do we need -- has business changed where we can perhaps approach the problem differently? So things like that. And those -- I can't give you a specific quick hit list of things, which implies that changes will take a little bit of time to identify and then to execute on them. But I still think there are opportunities in the organization to do that.

Your question was what on growth and jumpstarting what?

Right. I mean, to me, it looks like just expanding my thought. It looks like your net sales, your gross redemptions were the driver to sort of the reduction for the most part sequentially in terms of the net outflows. And when I look at your gross sales, the good news is they've stabilized from where you were maybe 2, 3 quarters ago, but sort of flattish at the margin. And so, I guess, I see some mix performance trends, good positioning outside the United States. Talk about pricing a little bit, which I want to come back to. So how do we think about really jumpstarting the growth on the gross sales side?

Yes. I mean, I think it -- if you look at just international that a year ago was $6.5 billion in gross, and its run rate now was $12.5 billion for the last quarter so, you can see that there has been a jump-start there. And again, many, many very strong stories in a lot of regions and countries around the globe. Yes, I think the U.S., it's just been a much more difficult environment, and where you would be seeing, in a normal environment, a pickup in those numbers. But because of what's happening in some of the transitions in the industry that we are all too familiar with, it's been harder to get the kind of rebound. And it also, as I mentioned before, I think the key areas for us in jump-starting. I mean, obviously, the global bonds, you get a little move in rates up, and you saw how quickly that can change perception being one of the few in that category. It actually can show that it's done very well in a rising rate environment. And I still think that, that probability is real despite the consensus view that rates have to stay low and down. We think it's one of the few real flagships that's well positioned for that. The income fund has had a huge rebound in performance. I'd say that's the one that hybrid category, in a normal environment, would be doing much better than it is and kind of treading water right now. And part of that, again, is just due to the some of the changes in the industry. I think that the outside of that, we've had a history of innovation and doing new things. And I think when you say jump-start, we think we have a lot of exciting things that, as Ken mentioned, that may require a little bit more investment. But that we think can jump-start organic growth as well. And part of that is around the ETF side, the alternatives with K2 and KMAP initiative, having a platform for distribution. Those are the kind of things that could jump-start growth in the near term. And then, I think, there's been a lot of discussion around data and how we look at that. And that's another area like many in our industry, and we think we are uniquely positioned with the Silicon Valley presence and relationships that our teams have here, with technology companies and our India presence to do some exciting things there. So I think there's always going to be opportunities for new ideas and growth, and we've got many that we think are very exciting. But in the near term, it's really making sure that we're well positioned with these changes in the U.S. retail and getting as much shelf space as possible and retaining assets as they transition from brokerage to advisory. And that the next question will be, what does that mean? What's the number? And I don't think any of us know that, but we want to capture as much as we can in that transition. And that's really why the retail side, you just haven't seen the more normal rebound for the industry inflows.

And just one quick follow-up. You mentioned that you're reviewing some of your pricing. Could you quantify the amount or dollar size of AUM that are at risk for the change? Risk may not be the right word. And then where you are relative to peers in that repricing?

I mean, first of all, as I stated before, I mean, we've always been on the lower side of expenses. And I think, having gone through every fund in the last few months, I'm encouraged by where many of them do stand. There's a few outliers that we're looking at right now, and it's really weighing, like anyone, what the revenue impact and how distribution feels that what -- how does this contribute to redemptions and how does it contribute to sales and modeling that out and understanding what we need to do in the near term versus the long term. And those are hard decisions. But most of our -- again, I would say, all of our large categories are in pretty good shape as far as the expense ratios versus peers.

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

Why do you guys think that institutional sales outside the U.S. aren't doing a little bit better? I know you've got a mandate that are getting ready to fund, but it just seems to me that it's pretty wide disparity between the recovery we're seeing on the retail side of the business and institutional. It's just not clear why that's the case.

Yes. I think the institutional is hard. The -- you get -- it's a little bit chunky and hard to kind of just look at and get any sense to what the trend is based on quarterly numbers. And I think it was an unusual quarter, and that you didn't have any significant fundings for that. But as we've said, I mean, $2 billion coming in, and that's, I think, all was offshore institutional relationships that we feel like the interest is very strong in local currency, global bonds, emerging markets bonds. And we hope that, that trend continues. But it is, you get $1 billion here. You get -- it's just large, chunky. And hopefully, this quarter will be a lot better than last quarter there.

Okay. And just bigger picture. What are your general expectations for your ETF initiative?

As we stated before, I mean, it's a new line. It's not -- you're not coming out and just coming with a low-cost passive. You're coming with smart beta and factors. And that's an education process that requires time, and we're committed to the business. We built a very strong team, and we continue to thoughtfully build that out. We just kicked off our Canadian ETFs. We're looking at Europe next. We know it's going to be an important part of our business over time, but like many initiatives, we don't come out and state how big it has to be within a certain period to be successful. We're operating them -- we want to make sure that we know what we're doing first. And I think we feel pretty confident that we have the right team and resources, and we're going to continue to build out the distribution side. But like any new product, it takes time to get on the platforms. And we've certainly been pleased over last year's we've been out in the market for over a year that, that we're now getting on the major platforms. So hopefully, that'll give some momentum on the retail side.

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

Just a follow-up on the institutional side. You noted that you have a new head of U.S. Institutional. I wonder if you can just share, just at the highest level, what they'll be charged with doing? Does it include a broader fixed income build? Just curious, from the top down, why the move and what they're charged with.

Well, I think it's -- they're charged with raising institutional assets. That's pretty straightforward. But this person comes with a very strong background with consultants, and so that's going to be very important. It's also very important to work with our teams in making sure that the process and how we articulate the process to the institutions is right. And I think that, that partnership is something that we would hope this person would continue to build on. And I think that's going to help us on the retail side as well as the gatekeepers, all of that, I think, becomes very intertwined and how we talk about what we do with investment management teams. So that person will take some time and looking at what we are doing and how we're doing it and probably have some input on some changes there as well. But it's just bringing in more experience to a team. And I think the overall business will benefit from that kind of talent.

I know I bugged you a little bit in the past about it, but with such a great retail fixed income platform, would their responsibilities potentially include if this client feedback is there, the consultant feedback is there, a broader institutional platform on the fixed income side, specifically?

Yes. I mean, I think, we are open, again, as you know, to anything. And I think that person having that experience there and looking at what we do, and we'd certainly listen to that, if that was something that we feel we need to do.

Okay. Switching gears. I saw that Cryer versus Franklin got class act -- class status this week. I mean I personally have strong opinions that the case won't hold water, and you can't be judged versus a passive fee on every product you put in the funds, but actually, that's not the question. The question I have on that is, does a case like this making class status have the ability to influence behavior in the retirement channel in general and make people risk-averse and just toss in the towel and go passive as much as that might be a terrible move?

I don't think so. I mean, I think this is an example of, to me, why the DOL rule is weak in its current state, that just extrapolate all these suits, times every retirement plan. It's a trial lawyer's dream to have that. And our belief is that this case has no merit. Every -- just about every firm's been sued that has their own funds and their own offerings. So we're going to fight it, and like you said, I think we believe that we're on the right side and did all the right things.

Yes. Well, I'm with you there. Last one is a tiny one on buyback. Heard all your comments on cash. Does a broader buyback get held up on waiting on tax reform and repatriation specifically? Because use of funds kind of matters of whether or not you get to return the cash or not. There's a lot of people that would like to see a bigger buyback.

No. I think, certainly, not in the short term. If there is some tax reform that might have some impact, we'd have to wait and see the details of what that tax reform is. But in the short term, I don't expect us to change our thinking on share repurchases.

Okay. So more in line with the current levels?

Yes, from the current levels. I'm sorry I didn't hear that last part.

He said more in line with the current levels.

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

I just wanted to come back to the M&A point. Just curious, how you're thinking about prioritizing waiting for clarity on repatriation and potential tax reform? What sort of impact does that have in terms of on your thinking for doing a deal? And then just, I know in the past, you had greater preference it sounded like for institutional and non-U.S. potential properties. Just how are you thinking about M&A today to improve your longer-term positioning to drive growth? What type of property could make sense as you're thinking about it now?

I'd say that it doesn't really impact the thinking now. I think the -- earlier, well, you have offshore cash. And I think the probability is you'll have a territorial system in some form. You will be taxed on your earnings that -- not your cash, but your earnings in the past. So it doesn't matter if we use the cash for offshore acquisitions versus waiting to bring it back. You're going to pay a tax based on what you earned in those offshore to free up the existing cash. So that creates kind of a level playing field as you look at the world. And I don't think it precludes us at this stage from favoring U.S. or saying, "Well, we'd have to finance a U.S. today versus not." I think if it makes sense, we would do it in the U.S. to equally versus the rest of the world. I don't know if that helps, but that's based on where we are with the taxes.

Okay. And just any thoughts on potential properties on the M&A front, how you're thinking about that broadly?

Yes. I think, I mentioned it earlier, that there's no high priority. We look at where we can complement the lineup. So maybe, if anything, continuing to build out the high net worth business with fiduciary would move up that list today versus anything else. But we have, like always, many active. We're in many -- doing diligence at any given time on different firms. (inaudible) dedicated to doing that.

Okay, great. And just lastly on (inaudible) , you acquired a team from AlphaParity earlier this year. Just curious if you could update us on how that's progressing and how you're thinking about the opportunity set there and how this could potentially fit into building out an expanded institutional business.

Well, I think it's just -- it's again, just bringing in talent with outside expertise and views and a different way of thinking about the market and a different way of customizing portfolios. And we didn't talk a lot about the solutions side and building that out as a separate team now from the alternative side as far as having a head and a new dedicated person to do that. So this is just another tool in the box that allows us to do things that we couldn't do before. And it's really about bringing people in that can bring a broader array of customized solutions. And we're already, I think, starting to see some wins in place as we haven't had before and one, more recently, on the variable annuities side, on a new asset class, and a lot of that was just having that solutions build-out and depth. And that's really what these people bring.

The next question is from the line of Brennan Hawken with UBS.

Just wanted to circle back from an earlier question here on revenue share. So just to clarify your comments there on being limited by the prospectus. I'm guessing that, that's based on, like, 12b-1 and payments that would be included in the expense ratio. But how about revenue share payments that would be made that are funded by the Franklin's P&L and not within the fund?

Yes, you still have to disclose that in the prospectus, and we have caps on fixed income and equity by fund in the prospectus. And I think, today, there's probably only one relationship that would be affected by our caps where we can't meet the revenue share number, and that means we're not going to be able to wholesale in that one channel. And it's not a significant one for us, one I'm not going to mention, but if you haven't read about it, it means it's probably not that big. And I think all of the rest we've been able to meet so that's the point that it is out of our P&L, but it's also disclosed. It also has a cap on it for us.

And then, I think you mentioned a factor that drove the increase in the comp expectations for this year, improved investment performance. So I know the 1-year performance has improved a lot, but some of the longer terms not so much. Which time frames tend to drive pay for performance by your guys' calculations? And can you help us understand that a little bit better?

I mean, it's a 1, 3 and 5. And we feel like that's an important way to kind of look at it in the right perspective. But again, sometimes, the numbers are the 5-year number, for example, $90 billion of that is Franklin Income Fund that's in the 52nd percentile and probably moved into the 48th in the last month because it's outperformed over the last month. So immediately, that number shifts from a 48 or something to a 70 with one fund in a few weeks. So I think, overall, if you look at the investment teams, the big shifts are Templeton. That's a fairly significant pool for us. The global bond group is excellent over mutual series. So a lot -- there's been a pretty strong rebound. And I think the number was, if you take our top 10 flagship funds, 9 out of 10 in those 3 periods, we're talking about were in the top 2 quartiles. So that shows you a real consistency across the lineup, and they are revenue-generated pools based on performance. So you will have upward pressure from that.

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

As a follow-up to Glenn's question, you've added a lot on the distribution side and high-profile, both non-U.S. and U.S. Can you give us an idea of a time line to expect more -- some tangible sales traction with those changes?

Yes. I wouldn't have a time line. I think it wouldn't be appropriate. And I think the driver is still going to be relative performance more than just putting new distribution people in place. And certainly, with the U.K. hire, that will take time and assess that market, and how we build out there. It's a market we historically have not put a huge effort in on the distribution side just because for us, historically, they've had a lot of global equity managers and that's been our lead product. So it hasn't been something that we've made a big effort, but that may change with this person. And so I don't have a time frame for what that means. I think first, that person gets in, looks at the market and then comes up with a plan. And we may be better suited in 3 months or 6 months to talk about that.

Okay. And then just quickly on the $2 billion institutional guide. That run rate, historically, is very consistently kind of in the 2 to 3 range per quarter. So should we take the fact that you're actually giving a specific number to mean that you feel like this is unusually high for where we are in the quarter?

No, I just think it was a certainty that we had, and it's already funding. So I think they felt like they'd mention it. And probably the importance of not seeing anything this quarter to say, "Hey, there (inaudible) wins this quarter, they just funded next quarter." To get to more of a normalized so you don't put it in at 0.

There are no additional questions at this time.

Well, thank you, everybody, for attending the quarterly call. We look forward to speaking next quarter. Thank you.

Today's conference has concluded. Thank you for your participation.