富蘭克林資源 (BEN) 2019 Q3 法說會逐字稿

Good morning and welcome to Franklin Resources Earnings Conference Call for the Quarter Ended June 30, 2019.

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 Kevin, and I'll be your call operator today.

(Operator Instructions) As a reminder, this conference is being recorded.

At this time, I'd like to turn the call over to Franklin Resources Chairman and CEO, Mr. Greg Johnson.

Mr. Johnson, you may begin.

Hello, and welcome to our third quarter conference call.

We're pleased to report overall investment performance sustained recent momentum despite some market volatility during the quarter.

Sales improved again as a result with encouraging trends in both the wirehouse and institutional channels.

We remain very focused on managing our expenses while simultaneously making the necessary investments in the business to deliver strong performance.

This month, we announced several senior-level additions and organizational changes to certain investment teams designed to enhance our portfolio management, research and data analytics capabilities.

With me today is our President and Chief Operating Officer, Jenny Johnson.

And joining us for his first earnings call is Matthew Nicholls, our CFO.

Matthew has been with us for 3 months now and is already very immersed in our business.

We're glad to have him with us.

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

Thank you.

(Operator Instructions) Our first question today is coming from Glenn Schorr from Evercore.

This might be a little complex, but sales were basically 50-50 split between inside and outside the U.S. while the AUM is more like 2/3, 1/3.

I'm just curious if you could talk about what's driving the more balanced mix in sales, what the fee rate implication is going forward?

And maybe you could do that assuming a kind of a flat flow environment.

Yes.

I mean, I would first -- I think the -- there was a lot of institutional movement kind of moving around.

So I'm not sure I would draw conclusion that, that number, percentage of sales is here to stay.

We'd have to kind of take a look at that.

And I think the -- from just a general statement, some of the pressures that you're seeing in the U.S. and certainly from retail side and the move to passive and things.

On the retail channel, you're not really seeing that as much globally.

So I think that, that -- you don't have that pressure like you do.

So I would think that some of those numbers should increase.

And probably just overall, the global side relies more on global bond sales, and that continues to do pretty well, especially over the last few quarters in the retail channel outside of the U.S.

And I'd just add.

We have had some success selling some fixed maturity plans both in Asia and in Europe.

Okay.

Okay.

And that's in the won but not yet funded pipeline, I take it?

No.

That one funded during the quarter.

I think the total was...

$500 million.

500 -- that was the $500 million one during the quarter that funded.

Got it.

And then maybe just one on Benefit Street, just talk about how performance is going.

And then, more broadly, what you're doing to leverage both their capabilities and then distribute more of their products across your broader platform?

Yes.

I mean, I think we're very pleased with how it's going.

As you know, it's a different kind of sales cycle than more like private equity and building it into the retail channel.

We're making great progress.

But to get -- those are going to be new products, whether they're interval funds for the U.S. retail market.

We're working with wealth management platforms to leverage the BDC as well as the public REIT and having success there.

So we're optimistic about that.

And I think in the last 5 months, we had over 375 meetings globally and feel like we're getting very strong reception in both the institutional and retail channel.

Nothing to report, I mean, as far as the very stable business right now in terms of AUM and profitability.

And we're still very optimistic looking at the pipeline going forward on growth.

I'll ask if Matthew or Jenny wants to add anything on BSP.

We funded $125 million CLO in the quarter.

And I just -- I'd say just on to add to Greg's comments on the interest globally, both on the institutional and the retail side, there's strong interest, and it does take a little bit longer on the sale, but we've been very pleased with the response in the market.

And the first -- I think their first -- the next large fund is targeted to close in the second half of 2019 -- senior opportunities fund.

Our next question is coming from Craig Siegenthaler from Credit Suisse.

Of the $5 billion in discretionary cash and investments, what level of this would you feel comfortable deploying into an acquisition before considering any debt raise?

I think the answer to that is that we are flexible in terms of how much cash we'll use for an acquisition.

But I would caution everybody to make the point that we're going to remain conservative in terms of our balance sheet.

The structure in consideration of any transaction will always result in a conservative performer outcome, which means that the probability of us using all of that cash for a single transaction or a series of transactions is quite low.

And for any larger transaction, we're most likely to use a combination of cash and stock.

Thanks, Matt.

And just as a follow-up on M&A here.

I saw the commentary on wealth managers.

So I'm thinking what type of D2C businesses are you targeting for a potential acquisition?

So one is that we think that we have obviously fiduciary trust, and we think that that's a great business and benefits from scale.

So we'd be looking for strategic acquisitions in markets where we don't have a big presence, but that would be one.

We think there's some interesting kind of Fintech type of acquisitions that can enhance the high net worth business.

And when you're dealing with high net worth, you have multigenerations, so the younger generation is often more interested in more self-service and technology.

And so buying some start-ups that have that capability is interesting to us.

And fiduciary trust is a great business, and we have a good foundation to build upon.

I think you'll know that the activity around wealth management across private equity investing, in particular, is very significant, and the amount of different integration and roll-up transactions into wealth managers is very pronounced in the marketplace.

And frankly, that activity is being concentrated in private equity, and there isn't any reason why strategics that own net wealth managers could not be more active in that transaction flow.

Our next question today is coming from Ken Worthington from JPMorgan.

Maybe first on the global equity business.

It's been about 4.5 years since your last quarterly inflows into that asset class.

Since then, you've seen about $100 billion redemption on a business that's just $170 billion in size.

So if you can solve the problem here, it would seem as though there's a lot of upside.

Maybe where do you see the biggest issues in the global equity franchise today sort of leading to or contributing to those outflows?

And then as you think about the next 2 to 3 years, maybe what are the steps you're considering that could stop or slow the asset losses?

And with Matthew joining the team, might there be something more strategic on the M&A side that might help turn the tide here?

No, I think you're absolutely right.

Even if you look at this quarter and just say, all right, look at the overall flows and that -- without that category, you'd probably be in positive flows.

So for us, it's really the deep value style of a Templeton, of a Mutual Series that we've all talked about at just about on every call.

But we have another quarter where you have 200 to 300 basis points in differential in performance between your MSCI value and growth indices, and that trend has continued.

So Templeton has stuck to its knitting and is a deep core value manager.

And until that reverses, it's just -- it's very difficult to get a lot of attention back, and then you have the pressure on the retail channels, which is to active and passive.

I think the more successful managers for this cycle have had the flexibility of core mandates.

That's what our solutions group allows us to do is build that.

We have a very successful global growth manager.

It's one of our fastest-growing funds, but it's $1.3 billion today with inflows and just getting on platforms with long-term -- with its record getting past 5, 10 years now.

So that doesn't make up when you have a franchise as powerful as Templeton on the other side.

But any deep value manager, it's been very difficult.

So I think that, that needs to change.

We continue to make changes within that organization.

And Jenny will speak to some of that in a minute.

But for us, it's really -- when you say the future and how do you -- I think the flexibility of an active manager is important and not to be bound by a strict discipline or at least to have an offering out there, and we can do that.

We have all of those capabilities of very successful global growth managing and very successful value, and we have a solutions capability to build core assets, and that's what we're doing with some of the sleeves within our SMA accounts and things.

But Jenny can speak to maybe just specifically with Templeton some of the changes that we've...

Yes.

So we acquired Edinburgh Partners and brought back Dr. Sandy Nairn, who as you may recall, was John Templeton's Director of Research.

And he has been working, and he is the Chairman over the Global Equity Group, and he's been working with the team there very closely.

And we just announced 2 big hires there.

Alan Bartlett coming in when Norm Boersma retires at the end of the year as the CIO.

Alan's probably a little bit better known in Europe, but Sandy and Alan have had a long relationship and very excited to bring him in.

And then a key hire is Peter Sartori in Asia.

And this is one of those things where, when value underperforms -- and we've obviously been through this cycle a few times, but you look at it, and while there's outflows, the reality is take the Templeton Growth Fund.

It's got average P/E of about 13.5 versus say the S&P at 21.

People who are building a full portfolio want to make sure that they hedge the risk.

And so we still think that this is a great franchise.

And when things shift back to value, people will be rewarded with this.

But in the meantime, we continue to invest in the business and give great focus and make sure we have good talent there.

And I would also add, just when you look at Templeton, we did make some changes with the Emerging Markets Group and successions with Mark Mobius.

And that team -- and more flexibility, I would say, in style where the IT has become a bigger portion of the emerging markets indices, and we felt we needed flexibility there.

We managed through that change, and the performance is excellent for that group.

And also the quality with -- as far as process and we think is a real opportunity on the institutional side for the first time with many changes in that group.

So I think that it's -- we're examining it, but I think with Templeton's large institutional base, it's very hard just to suddenly say you're going to be more flexible in how we become more growth-y or GARP-y.

But I think the flexibility to figure out new ways to figure out how to be more efficient in the value space is something we're very committed to.

I think again, with respect to your question on M&A, notwithstanding all the great internal organic work we have going on as referenced by Jenny and Greg, we have a very proactive approach, I would say, to M&A in both asset management and wealth management.

We're specifically not shy of larger-scale transactions to create growth and promote diversification of our business.

But frankly, only a small handful of those really make much sense.

Unlike some other things, we're very focused on certain international locations where we're subscale and we think we can grow.

It make sense because of the demographics of those countries.

We think expanding and globalizing our alternative asset business and building upon our acquisition of Benefit Street makes tremendous sense.

We believe accelerating scale in certain investment objectives makes sense.

Institutional is very important to us.

A big focus is strategic activity and, then as we mentioned a second ago, expanding our wealth business on the fiduciary trust.

And maybe just following up on insurance.

You had outflows this quarter in the VA business.

Any -- does this foreshadow anything over the next 12 months?

I remember last time we had outflows for a number of quarters.

And then just to play good cop as well, you highlighted the opportunity on the asset allocation side for the insurance channel.

Could you flesh out your comments there a little bit more?

Yes.

I mean I think any of the traditional assets that are still in the mutual fund you put under a watch list.

I don't think there's anything from a significant flow standpoint occurring next quarter.

But all of those assets continue to be under pressure.

And whether it's transitioning to passive or lower volatility or asset allocation models, we continue to do that.

I think we've had plenty of interest on these new models and new allocation within insurance companies, and we continue to see that growth.

There is nothing to report as far as new wins this quarter.

But hopefully, as we said before, that we can replace a lot of those older mandates and be competitive in the new low vol and asset allocation area, and that's what we built teams to do.

And I would just say, generally, that from a pipeline and flow -- and this is always a hard one for us to kind of forecast for you is what we think next quarter.

I think we've seen some significant wins, but we also know that we have a few big mandates, and they're all in the very lower fee ones, moving out one -- a couple big ones in Canada that were Canadian equity and Canadian fixed specifically but relatively low fee, but we had a big win on the K2 side.

So we kind of look at it and say that we have $4 billion in and $4 billion out between just those wins and losses.

And some of that will come out next quarter.

Some of it will come in next quarter.

But it's kind of as best we can look at the pipeline, it's somewhat of a wash right now.

And I think we can't give much color beyond that because we don't know specifically when the funding dates are for some of those mandates.

Our next question is coming from Patrick Davitt from Autonomous Research.

Matt, I'll start with you.

Now that you've been in the position for 3 months, could you maybe frame a bit more what you see as the key priorities and opportunities over the next year or 2 for you?

And within that theme, any potential changes and how you think about parameters around looking at the evaluation of potential M&A targets?

So my priorities have been to get up to speed as quickly as possible on the finance group, first of all.

That's a big group here doing lots of different things across 35 countries.

So the first thing I've done is that.

Second thing is to form a more centralized corporate development function and focus more on corporate strategy on a centralized level across all the different groups that we have in the firm.

I've been working on that.

Third is to really select where we want to focus our time on strategy.

There's lots of things we can do across wealth and asset management and in different geographies, different asset classes, as I've referenced.

So focusing on a few of those where we think it's going to make the biggest difference to our firm expeditiously without panic has been very important to me and what I've been focused on with both the management team and the executive committee here.

So that's been my primary focus.

And then obviously, I focused on the capital structure, making sure we retain the financial flexibility that we have today.

We talk a fair amount in our prepared remarks about -- that's not going to change, I referenced at the beginning, but our ability or willingness, if you will, to deploy some of that cash is certainly the top of our mind strategically.

So that's -- be my main priorities to begin with.

Okay.

And then the expense guidance, including BSP, year-over-year on 2019, is that on the full 2019 number, including all one-timers?

And through that lens, any updated thoughts on moving to non-GAAP reporting and when you could make that kind of change and what you think the size of the potential adjustments could be if you do make that change?

Yes.

So fiscal 2019, including BSP and nonrecurring items, net of [S&D] is about plus 11% to 12% from fiscal 2018 and no adjustments to 2018 on that.

So that's correct.

What's your second question?

Thoughts about moving to a non-GAAP reporting where a lot of these onetimers would be adjusted out of your reported earnings number.

And to the extent you do make such an adjustment, what you think the scale of the change would be to a 2020-type number?

Yes.

I think at the moment, the way we see it is the GAAP reporting is the cleanest way to report our financials.

We do obviously have adjustments that we try and highlight in our prepared remarks.

But until we take one step further in complexity, we intend to keep it as it is and just make sure we have as helpful prepared remarks as possible.

And we have our Chief Accounting Officer, Gwen, with us also at the table, who is staring at me.

It's from the one on the right, right one, non-GAAP.

So yes, we're going to -- we're sticking with GAAP for now until we do something more complex.

Our next question in coming from Dan Fannon from Jefferies.

I guess just a follow-up on that question on just to clarify here for the fiscal 2020 expenses, inclusive of BSP.

That's on a fully loaded '19 number or it's going to be flat?

Correct.

Yes.

Okay.

And then just a follow-up on kind of the commentary at the beginning in the prepared remarks around kind of some of the changes you've made.

Obviously, you talked a bit about the global equity, but there also were changes on the fixed income side.

So curious if you anticipate any changes or I should say any pushback from consultants or intermediaries around some of these changes or just kind of flesh out a little more detail kind of what you guys have done?

So -- because I'm sure internally, it's probably a much bigger deal, but externally, it's a little hard to see what you guys actually are doing in terms of some of these changes.

I mean I'd say, one thing is as a firm that has long tenured investment people, people do come to the end of their career and choose to retire.

And I think none of these have been a surprise around that.

Having said that, bringing in Sandy Nairn on the Templeton Global Equity Group and having Sonal Desai as the new CIO, they're going to put their own stamp on the investment process.

And so the feedback it always takes it awhile, and people put you on kind of a wait-and-see as they process the changes.

We had good feedback in that we're very proactive in reaching out to, I think, over 200 institutional clients on the Templeton team to explain the changes.

On the fixed income, the -- creating this quantitative insights group, actually we've had it somewhat internally, but what Dr. Sonal decided when she came in is recognizing that there was opportunity to leverage the group more broadly across the various fixed income teams.

In addition to that, while we had acquired Random Forest and were incorporating data science in some of our fixed income groups, there's obviously opportunity to continue to do that.

And so by having Roger Bayston just focused on data science and really kind of new Fintech investment opportunities as well as the quantitative strategies, it really highlights and makes sure that, as a firm, we have the focus on that.

So we really view it as strong evolution in the investment process.

I don't think anybody could sit out there and think that they are going to not evolve with the way information is now available in technology and data, evolve their investment process to incorporate this.

And so we really see it as a natural evolution but in a time where things are evolving quickly.

So far, it's been well received, but it always takes a little time for these things to settle.

And I think it's -- your question reminds me of that old Mark Twain line of I'm all for progress.

It's change I don't like.

And I think we recognize that these are -- some take it in a very positive way.

Some are a little more cautious.

And at the end of the day, it could cost you short term some business.

But we think it's the right -- these are the right moves to put us on the strongest footing going forward, and that's I think the way we have to look at the business.

Our next question is coming from Bill Katz from Citi.

Most of my questions have been asked already.

Just staying on flows for a moment.

Appreciate the ins and outs on the institutional side.

Just sort of wondering if you could speak to what you've seen in the month for retail, maybe by asset class or by geography.

So on the retail side, on the -- from an asset class, I mean the areas that we're seeing positive flows are the tax-free fixed income, the global and international fixed income, the positive on sort of the Franklin equity side.

We've made some big investments in personnel on the U.S. retail side to have a focus on -- we talked about the New York Stock Exchange channel.

And last quarter, I think, we had a 26% uptick in sales there, and we're continuing to see progress there.

We're seeing progress and traction on the SMA business.

We've had some good wins on the collective investment trusts in the -- with our partnership with Wilmington Trust.

So areas that we have focused on with some hires and new personnel, we're seeing some really good traction.

It's still early in that process, but we're seeing good traction there.

And then, of course, our DynaTech Fund, which I think is in the top decile, 1-, 3-, 5- and 10-year, is having -- it had its greatest quarter yet as far as net flows.

Was that the question, Bill?

I mean, were you talking about this flows July, or I couldn't quite...?

I appreciate the strategic answer, but I was hoping to get a little more of a tactical update about how July was looking maybe on a net basis.

Yes.

I mean I don't -- I think it's -- the markets have been relatively stable through that.

So the trends that you're seeing are continuing certainly on the retail side with tax REIT I think is the one that's emerging and has gone from a $2 billion in outflows a few quarters ago to close to $1 billion in inflows this quarter.

So that's a pretty big reversal.

And then U.S. equities continue to be strong as well as multiasset balance.

But nothing -- I wouldn't call out anything.

I think Global Bond has had a little bit of short-term underperformance, so that may affect things in the short run as a perception of rates and the Fed cutting rates versus our position generally, which has been more a position for rising rate environment.

But with that said, I think that fund has done very well with its other big bets.

So it's not a big drag on the fund.

But nothing -- I think I wouldn't really call it any big changes in terms of just the retail fund flows.

Okay.

That's helpful.

And thanks for the combined answer.

And then just as a follow-up.

Just coming back to fiscal '20 expenses for a moment.

I guess, as I look at the last couple of conference calls and just sort of reread some of the transcript and the dialogue about Q&A, it does seem to be a little bit of a difference of how you sort of think about fiscal '20 today versus maybe where we were 3 months ago.

So is it really now a sort of flat to slightly lower is how to try and ring fence that?

And within that the annualized savings that you highlight in your prepared remarks earlier, is that -- what's the time line to sort of getting to those savings?

Bill, it's Matthew.

So I think a couple things there.

First of all, our guidance has changed a little bit in the sense we're bringing it down a fraction.

I don't want to overstate that it really is a fraction.

So I think beforehand, we were talking about it being marginally higher.

Now we're marginally lower.

So that's the first point.

That includes by the way -- and this triangulates back to some of the questions on capital management.

It does include some meaningful investments that we continue to make organically around the multiasset business, data science technology and so on that Jenny referred to.

So while we are very disciplined around our expenses, we're also making sure that doesn't compromise the growth strategy that we have internally around our capital.

So that's the 2020 answer.

Did you have another question on 2020?

No.

That's helpful.

Just want to run through the tax guidance you gave for the fourth quarter.

Is that a fair look forward into fiscal '20?

Or is there an opportunity to bring that down even more?

Yes.

I think actually there was -- I read all of the initial preliminary reports this morning.

And I think there was a bit of confusion around the tax rate.

So I'll just clarify what we meant and what's in the prepared remarks.

So inclusive of the revision that we talked about in this quarter, we estimate that our fourth quarter tax rate will be between 22% to 22.5%.

That means the full year 2019 tax rate would be between 26.5% and 27%.

The 21% to 22% that we refer to is referencing 2020 onwards.

Our next question is coming from Mike Carrier from Bank of America.

Firstly, just on the expenses.

Matt, you mentioned on the guidance for '20.

I guess, just maybe longer term and bigger picture, how are you thinking about margins in the business over time, just given the focus on efficiencies.

You had some of the investments that you're making and some of the flow trends that you guys are facing currently.

Look, we're obviously as a business focused on wanting our margin to go back up.

I'm not going to give any guidance on that.

I mean, we have reported that, if you exclude the nonrecurring items that our margin is closer to 29% or just above 29%.

We don't see like for it to be higher than that.

But we can't let that impact what our long-term strategy as a company and the investments that we need to make to achieve some of the things that Jenny and Greg have talked about.

We're very focused on investing for the future while being incredibly disciplined around expenses.

We already have a new budget process that we're putting in place right now.

We're working through that.

And that is all about making sure that we stay on top of our expenses but at the same time making sure we have enough investment dollars to recirculate into the business as I described a moment ago.

And that's why we're fairly comfortable with the guidance we're giving on 2020, although I should say it is early days.

Okay.

That's helpful.

And then just on the flow side, I think you guys flagged a few known institutional platform redemptions in July.

Greg, I think you mentioned like maybe in that $4 billion range.

And then on the growth side, you guys mentioned the $2 billion pipeline and then some traction on the solutions.

Maybe just provide an update on some additional color on where you're seeing like increased demand given whether it's the performance that you're seeing in some of the products seeing improvement or some of the investments that you have made over the past few years and where you're starting to see more progress or traction there?

I mean, I think Jenny mentioned we made a pretty significant investment just to restructure some of the U.S. retail and New York Stock Exchange focused channelization and more specialization, and we saw a pretty good pickup year-to-date there, up about 24% I think or something in sales.

And I think if you look at just market share despite flow numbers, I think in the last quarter, it was something like 4 out of 6 or 4 out of 5 of our major categories we picked up market share.

And I think that's a result of a lot of different things that we've been doing that we've been talking about I think over the last year that we've seen some additional investment there.

I think where scale comes to play for a business our size is really the business then of being in the solutions business in a real way and then taking all these capabilities into separately managed accounts or asset allocation.

And that's a big push right now that we think there's only a few people that can do that.

And we think that's going to continue to be a very strong growth area for the business outside of the traditional fund side.

But I'll ask Jenny if she wants to add anything.

Yes -- no, I think that's right.

And I think the model portfolios -- we've had some wins on model portfolios.

And one of our advantages is that we allow open architecture models.

So we have some internally and sleeves that are internal with some portion external.

And so having that real solutions business both with the breadth of capability that we have as a firm as well as a due diligence team that can evaluate outside managers, I think, has been -- given us an advantage in that area.

And I think that the SMA business is an opportunity for us.

It was just in the last probably 4 months that we got approval from our Boards to do some kind of completion type funds that we think can take a strategy like the income fund strategy and be able to sell it through the SMA channel.

And so we think that, that will pick up there.

Our next question is coming from Alex Blostein from Goldman Sachs.

Just another one around M&A for you guys.

Just your comments around targeting either kind of distribution channels or continue to expand in the alternative space have been pretty consistent for the last couple quarters.

Curious to get your thoughts on your appetite for deals for most of the traditional products where you might still have some product gaps, whether it's on the core equity growth side or some of the fixed-income core plus type of products or money market funds so some of the gaps in some of the traditional products and your appetites there.

Yes.

I'd just say all the above of your list.

You hit it pretty accurately.

Yes, exactly.

I was going to say I think one of the points we made earlier on was accelerating scale in certain investment objectives.

We have practically everything.

But there are some areas and you just referenced a couple of them right there that we should be much larger in.

So yes, we're very focused on those.

Cool.

Great.

And then just a question around capital returns.

I think in the release you talked about targeting 100% payout going forward.

Is that on a GAAP net income basis because your nonoperating could be pretty lumpy?

So I'm just kind of curious how that plays into kind of the more tactical capital returns given some of the volatility on the nonoperating income side?

Yes.

GAAP net income and target 100%.

Our next question is coming from Brian Bedell from Deutsche Bank.

Most of my questions have been asked also but maybe just one more on M&A.

Some other areas that may be of potential interest just to get your thoughts.

Any view on either quantitative strategies or smart beta -- gathering up your organic smart beta with an acquisition.

And then also, you mentioned some distribution in Europe whether there were certain geographies where you could do small acquisitions that you think you could scale into your organization and also get a lot of traction?

So wrapping that together with the timing of M&A and the cash that you have, you've always been patient obviously with M&A, but is there a little bit more of a -- urgency is the wrong word but sort of a pickup in appetite to deploy that cash sooner rather than later?

Yes.

I mean look, we use the word action quite deliberately.

I mean we're just being very active in assessing the various options that exist, but we're also focusing those down to a handful instead of getting confused across too many places and too many investment objectives.

And so we're focused on it.

In terms of timing, we're really -- we can't put a time on it.

We can't even put a label on what we're going to do immediately next.

I think that would be a mistake to do that.

These are complicated transactions, whether they are small, medium or large, candidly.

But our observation is -- and we said this in our prepared remarks -- is that there is a lot of strategic activity that's being discussed in the asset and wealth space.

And we're very well positioned to capitalize on that when we find something that fits well with us.

So when that exactly is, I don't think it's the right thing to comment on.

But if we find something sooner rather than later, we will act upon it.

And I would just add, too.

I mean timing when you're making larger bets on asset classes, the performance and net flows will be secondary to what the markets do over the next cycle.

So that's important.

That's a hard thing to do, to anticipate, but I think you just don't want to -- and that's back to Matthew's point of not blowing out -- blowing the balance sheet up or to your capital reserves by making a big bet on a market segment when we're in year 10 of the expansion.

I think those are just factors that you have to weigh in to be prudent about where we make our strategic bets.

And I think if you see a smaller one, less correlated, you can move probably quicker or one where you use a little bit more equity in there to get new categories and get some scale out of it, that would work as well.

And I'd be remiss if I didn't take this opportunity to plug the smart beta team that we have because it's got stellar performance, and it's been our fastest growth area in our ETF space as well as some of our separate accounts.

So from that, I think that we would probably not be a buyer.

We would continue to grow what we have.

That's great color.

Yes.

Maybe just one other unrelated follow-up would be on, Matthew, your view of potentially outsourcing some of the administrative and back-office fund functions as opposed to running them.

I know you've used the scale internally over a long time period to maximize that, but is there any kind of change of view potentially in doing that going forward?

So we already announced the outsourcing of our fund administration, as you know.

And in fact, that brings me back to answer the second part of Bill Katz' question, which I didn't answer, which was about the cost savings that we announced between -- I think we said between $80 million and $85 million.

And I just want to be clear.

I think Bill's question was how much of that are we going to achieve in 2020?

I think the answer to that is about $70 million to $75 million fully in 2020 -- fiscal 2020, that is.

The reason why there is $10 million missing from that is the other $10 million is associated with the fund administration outsourcing, which we expect to save around that amount from 2021 because obviously that takes some time to implement.

In terms of going further than that, we don't intend to outsource anything else at this time.

But of course, we continue to review our options around technology to be as efficient as we can.

But right now, we are...

And I would just say that our philosophy hasn't been necessarily that it has to be in-house or outsourced.

It has been, in many ways, you do it as efficiently and cost-effectively as you can.

It was historically difficult to find outsource providers that have the global footprint that we do.

And because we were aggressive in leveraging low-cost locations to support our business, it was -- it didn't make sense economically to do it.

That is changing over time.

And as that evolves, we always look at what makes the most sense for this business.

So it is something we evaluate, and that's where we concluded with the fund administration, although we had looked at that many times before and concluded it wasn't cost-effective at that point.

But now things have changed.

Yes.

And also there wasn't a provider that existed that could serve what we needed to be served in fund administration.

So that changed, so we took the action that we did.

So same thing happens with transfer agency in the future, maybe that changes our view of that.

And is fund accounting grouped in with fund administration?

Yes.

Yes.

Our next question is coming from Brennan Hawken from UBS.

Thanks for taking my questions.

Just one here.

So you guys have spoken a bit about the elevated quarter-to-date redemptions in some of these strategies.

Did your strategies happen to overlap with any of the organizational changes and staffing adjustments that you flagged to PM teams?

Did the redemptions have -- is your question did the -- were the redemptions specifically the result of the organizational changes?

If that's your question, no.

The redemption...

Or did they just overlap with PM teams that were impacted by those adjustments?

They did overlap, but, for example, one of the large redemptions was the result of a firm that had been acquired and the decision for them to bring the asset management business in-house.

So while it was, I believe, a global equity mandate, it wasn't correlated to anything to do with the PM changes.

It was really because they had made a strategic decision to bring the assets in-house.

And most of these changes were announced just recently.

So it wouldn't be reflected in this quarter anyway on the PM changes.

Yes.

I was referring to...

Oh you were saying was it a result of the redemptions you're making these changes.

Is that...?

No.

I was referring to the July color, but -- and thinking that maybe it might be something that we should prep for.

I mean, I think we expect some.

But I think at the end of the day, this category -- the deep value category is just under tremendous pressure of underperforming core and growth over the cycle.

So I think the people that are left believe that this is a safe way to protect the portfolio that you really have.

You've read the articles.

You've never seen more common holdings across active managers today than ever, where 50 top stocks are held by just about every fund.

That's not the case with these.

And I think there are investors who like the fact that you own a portfolio of 12, 13x earnings and much more defensive.

And I would say Templeton today, if anything in the last quarter, maybe gotten more defensive in their positioning where markets are.

So I think at the end of the day, they will stand out when you have a downturn or interest rates rise and growth's under pressure.

Yes.

And those of us that cover financials can commiserate.

Yes.

Our next question is coming from Robert Lee from KBW.

Matt, welcome and good luck.

Just a real quick question.

Most of mine have been asked.

But going back to the recurring M&A and strategic and organic growth, I'm just curious, as you think about it, is there any change in terms of your willingness I think of in the different ownership structures?

I mean, historically, like with Benefit Street pretty much have been 100% acquirers.

Some competitors are more willing to do majority ownership transactions.

So as you think of the landscape, maybe particularly in the alternative space, is there also a shift taking place in your willingness to think of different structures than you've done historically?

Well, I'll say that there's -- we have some situations of joint ventures.

I mean, actually internationally, there will be markets where we make decisions around -- it's better to partner than it is to own 100% because maybe it's a difficult market for a foreign manager.

So we have an openness to that.

Having said that, one of the things that has made us successful with acquisitions is that we keep the independence of the investment team and we take advantage and leverage all the support capabilities, and that's where you get real scale out of it.

And so when you leave it independent, and you see it with managers out there, you don't get that benefit.

And you get confusion around distribution and you get a lack of commitment and the conversation doesn't get as focused on the investment team.

But obviously in the alternative business, you have to structure compensation appropriately, even when you have 100% ownership.

So we're cognizant of that.

And if it made sense, we would do it.

So like I said, we're not completely against it.

But there -- it is complicated to try to manage a JV much more so than it is when you have 100% ownership.

Yes, and I think that's probably a great summary.

Certainly on the distribution side somebody brought up are you open.

We talked about that.

And certainly, minority stake in a captive market with captive distribution for a platform makes a lot of sense to own.

But as Jenny said, I think creating a corporate culture and integrating and getting really all the leverage from what we offer as a global platform from a distribution and servicing side is very difficult when you own 60% or 70%.

It just gets very complicated.

You spend a lot of energy on things that really are not that productive.

Yes.

I mean, subscale transactions along those lines really don't make any sense to us at all.

And I think anything around M&A, from a financial perspective, this is sort of needless to say anyway, but we would expect the margin to be accretive to us.

So we're absolutely driven around M&A by growth and diversification versus cost-cutting, but obviously, some of the larger transactions do come with very significant margin improvement opportunities.

Our next question today is coming from Michael Cyprys from Morgan Stanley.

So you've made some senior-level additions and organizational changes.

I guess, as you look forward from here, what additional hiring are you making and other potential changes that could make sense next as you're focused on optimizing the cost structure but also investing for growth?

And related to that, as you're thinking about the pace of expense growth beyond 2020, would you envision that being more in line with inflation?

How should we be thinking about that?

I would start with -- I mean I think we've made a significant number of hires.

I don't think there is anything on horizon right now that we say there is a big gap here or there that -- and I think we spent a lot of time working on succession, and that's the norm for any CIO transitions.

So I don't think we have any big plans of adding senior people in the area.

And I'll -- second part of the question, I'll flip to Matthew.

Yes.

And I think our cost structure will be guided based on how we're doing in the business overall, where we need to invest and how we're growing or not.

Great.

And just as a follow-up, I was just hoping you could talk a little bit about your approach in China to sourcing growth there, how that approach is evolving just given some of the recent regulatory changes?

I understand you have a JV in China.

Is the focus more with the JV partner or any appetite for building outside of the JV and any sort of color you could share around AUM, flows, staffing, any progress that you can share.

So we do have a JV, and we're excited about the opportunity to be able to acquire 100%.

And so that -- they've accelerated the pace of that.

So we're certainly looking at that.

We also have a WFOE there where we have some investment personnel that are out of there as well as some kind of support distribution side.

The JV has a great investment performance, and so they've seen some good flows there.

It's a difficult market, and it's always more complicated when you're in a JV structure.

So we think that there is just great opportunity to own 100% and continue to try to grow in China.

And it's about $4 billion to $5 billion, so it's not included in our AUM, and it is profitable, the JV today but not of the size where we'd like it to be.

We've reached end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

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

Thank you.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time, and have a wonderful day.

We thank you for your participation today.