BEN
#Well, I think it is unique.
I think it speaks to the strength of our global footprint and working with some of the large financial institutions.
This really is a new category.
It's not an existing relationship with an advisor.
It's really how does the bank address the smaller balances that are out there, but still significant, that wouldn't make sense for maybe a one-on-one advisor to service, but a way they can effectively offer products to help those people.
To me ---+ and I wouldn't say the expectation is going to hugely move the needle for us in the next three years with what's raised here, but I think it's a point of the changing distribution landscape and how that the digital world is not just the traditional direct channel doing it or robo advisors or whatever you want to call it.
It's also firms like Franklin Templeton that can go out and use the depth of our resources in building solutions and then going out and leveraging the relationships throughout the world.
We're going to do this in Asia and Europe and the US and in a cost efficient way, in a low-cost way, hit a new market.
And I think this is, to me, an exciting first step in opening up the distribution landscape to do more of these types of things with ---+ whether it's with brokered dealers, partnerships, or who knows in the future where you do things direct to small accounts.
It's just a first step.
And I think an exciting one where we developed a new type of product that really has alternatives in it and has all the different categories within it, including we have lower passive cost funds in it, as well.
It's not all Franklin Templeton in it.
That, I think, gives it more credibility and hopefully can lead to a new market and significant sales over the long term.
I think you have to be consistent.
We try to not ---+ I think it's a huge mistake to just go to where least resistance is in a sale.
And we try to go out there and be consistent about our story and talk about where the obviously, if the client has X amount of assets in a given category, we better spend our time talking about that.
If we didn't do that, and I think our sales force has been around long enough to know that you are going to lose that relationship and credibility pretty quick if you are not talking about the areas where you are having underperformance.
So, yes, I mean, a big part of it is focusing on retention and really also painting a picture of why these things should turn around.
And I think that's what you have to spend your time on.
But also always have something that is in the channel that's exciting that they can talk about.
That's also adding value and always having something new, whether it's K2, whether it's a Flexible Alpha Bond Fund, or a Franklin Growth Fund.
Those are things you want to talk about.
So I think it's always a balance of the two, and we're very careful about ---+ and watch very closely on all presentations that are made in the field to make sure that they are focusing on where the assets are first.
Yes.
Think, first of all, take each category and go back a year or six months ago.
You'd have top decile for every period.
If you have top decile for every period, you are taking more risk generally than many that would manage closer to the index.
And we have always said this is a very unconstrained approach.
And any time an act ---+ a real active manager will underperform and grossly underperform in certain markets.
You're never top one, three, and five every period if you are a true active manager and really don't worry about being that different from the benchmark.
Take the Franklin income fund for example.
It's the highest yielding fund in its category.
We know it underperformed generally when rates go up because we will always have more duration in that fund and everything held equal in the short run, that will happen.
He can do some tweaking around that.
But people buy it for the stability of that higher income and it truly is a hybrid, not a pure equity fund.
So the peer group even gets a little bit confusing.
I don't think the energy ---+ and it's not the first person to buy a fixed income in that category and one that we feel like there hasn't been a lot of differentiation within the group and that there are still are many companies at the prices today are going to do fine.
You know, you're paying debt first.
That's the main thing.
And many of these can service a debt.
Now, there has been some that have obviously not done as well through this period.
But it's an active bet.
And active bets in the short run can make you look kind of silly.
And that's the nature of the being a true active manager.
So I don't think anything has changed.
I think you just have two that have headwinds at the same time.
Again, the long-term performance still looks good, clearly, in the global bond case.
I mean, this can turn around in a couple of weeks as far as the short-term numbers.
I don't think we are being.
I think there's other ones that are private companies and others that have significant assets and probably the two, three biggest firms in this category, two out of the three are private.
So you don't hear about them.
But everybody is equally being affected by them getting out of that business.
Yes.
Sure.
I think that ---+ yes, that's a great observation.
Obviously, that can't go on forever.
But we do have flexibility.
So we have short-term flexibility where we have inter-company borrowings that we can do.
We have the ability for debt.
If we feel the need to do it, as we've shown in the past, we will increase the leverage of the Company.
But I think what drives it is us being opportunistic when we feel like there's opportunities to buy the stock at a good price.
And then from there all the other decisions flow.
So I don't think anything's restricted really.
Well, I would say that ---+ I mean, we've talked about some of the areas would be in the alternative space of something made sense there in the high net worth space if something made sense there.
We talked about that in the past.
I think whether there was a large-scale manager outside of the US that was complementary and could get some synergies out of that would be interesting for us as well.
And I think something on the institutional lower cost side that we could leverage through the retirement channel here would be interesting as well.
So those would be a few.
But I think we, as always, we try to look at pretty much everything, try to get a better sense of value and what's out there.
So I wouldn't preclude anything.
But as far as a wish list, those would be the ones that we would ---+ you could have an international manager without a US distribution, which could be complementary.
Those are the kind of things we would look for.
I think ---+ and, obviously, like anybody looking at this space, you want something that has a strong repeatable process with consistent results over time and the right kind of culture that can fit in and the right kind of incentives by doing it.
And that's where I think, as we've said in the past, just going out and buying hedge funds or alternative managers can be somewhat challenging as it's hard to align the right incentives after somebody who is solely responsible for the results is selling most of their up side in that deal.
So that's why we haven't really done many of these types of acquisitions.
I hope not.
[ Laughter ] You know, I am absolutely long term and I think that this ---+ the fire burns probably too much every day for me.
But this was in no way ---+ I think this was recognition of two people that have been here for a long time and we think make ---+ we really think ---+ makes us a stronger organization.
Just the demands on travel time and this helps me, I think, organize in a way where we can better use our strengths in the Company and Vijay and Jenny bring a fresh energy and perspective.
I think also the realignment of our executive committee, now having three of our senior investment people, is something that I think is very important for the Firm going forward and really bridges the gap between the management guys and the investment guys and puts us all together as one team.
So in no way should it indicate ---+ and I hope that's good news, me having any change.
But we are excited about these changes, and I really do think it's going to put us in a much stronger position to address the areas that need to be addressed.
Thank you again for everyone participating on our call and we hope we have some better news next quarter.
Thank you.
Hello, and thank you for listening to our commentary on fourth-quarter and fiscal-year results.
I'm <UNK> <UNK>, CEO, and I'm joined by <UNK> <UNK>, our CFO.
FY15 was challenging in many respects.
Risk aversion spiked alongside volatility, resulting in underperformance of economically sensitive stocks, the continued decline in emerging markets' equities and currencies, and one of the longest commodity routs on record.
This, in turn, weighed on short-term investment performance for many of our funds, and gross and net flows for some of our flagship strategies.
The Company has successfully navigated through periods like this before when the sometimes contrarian and value-oriented approach of our investment strategies have been out of favor.
We're confident that we have the talent, discipline and foresight to continue driving our long-term success and to identify new investment opportunities.
As we work through these challenges, our shareholders can expect the Company to continue to demonstrate prudent expense management, which <UNK> will address, and also a disciplined, long-term focus on capital management.
Focusing more on the quarter, our Company continues to benefit from a diversified product range, and we're seeing areas of strong performance and positive flow trends.
However, these strengths were overshadowed by our larger flagship funds and some one-off redemptions.
Financial results remained solid this fiscal year, with operating income of over $3 billion and a strong margin of 38%.
This quarter, we accelerated share repurchases to $500 million, and repurchased a total of 11.9 million shares.
This brought the total fiscal-year payout to $1.7 billion, including the special dividend declared in December.
We recently announced the reorganization of our senior management team.
Our emphasis was on expanding the responsibilities of key Company leaders, while also further engaging our investment management teams in running the Organization.
Effective October 1, Vijay Advani and Jennifer <UNK> assumed the expanded roles of Co-Presidents.
As Co-Presidents, they will now jointly oversee the majority of investment management and all related investment management support services, including trading, performance analysis, and risk management, in addition to the other areas of responsibility.
The addition of these responsibilities is designed to draw upon their unique perspectives and insights in running our Business while further broadening their business knowledge and leadership abilities.
In conjunction with these changes, we also announced the formation of an Executive Committee.
This group, which includes the Co-Presidents; <UNK> <UNK>, our Chief Financial Officer; and Craig Tyle, our General Counsel, as well as the three heads of our investment management business, will shape the Company's overall strategy and make operational decisions.
We believe these organizational changes will further strengthen our Company by expanding the responsibilities of key talented individuals, while also adding additional investment management perspective to our senior leadership group to help guide resource allocation, product development, and our continued growth in the years ahead.
Looking at US retail and cross-border funds relative performance on slide 6, long-term fixed income performance remained strong, with the majority of assets ranked in the top half of their peer group.
Shorter-term absolute and relative underperformance of our global bond and total return funds, which comprise about half of our ranked fixed-income assets, is weighing on the one-year numbers.
Equity and hybrid relative performance continues to be pressured by the Franklin Income Fund, as its underperformance over the past year is now weighing on the five-year performance rankings, in addition to the one-year and three-year where it represents roughly 30% of ranked assets.
I encouraged BEN investors that are curious about the positioning of these funds to take a look at recent video commentaries from the portfolio managers, which can be easily accessed from the investor relations section of our website.
Long-term relative performance, or other equity and hybrid funds, remained solid, with the majority of assets still ranking in the top half of their respective peer groups.
Assets under management ended the quarter at $771 billion.
Average assets also decreased, and were down 7% at $825 billion.
The mix in assets by investment objective and sales region remained well balanced this quarter, but as a result of the drop in assets, we saw a slight shift towards fixed income, as equity assets depreciated more substantially.
Total market depreciation of over 7.5% or $66 billion was the primary driver of the overall change in assets under management since June.
Long-term net outflows increased to $28.5 billion due to a combination of slower sales and increased redemptions, as a confluence of market factors continued to weigh on short-term performance and, in turn, flows of a number of our flagship funds again this quarter.
We remain confident that what we are experiencing is part of a natural business cycle, and demand for our flagship products will recover as the investment theses of our portfolio teams play out.
Along those lines, we have been through these periods before, and thought it might be beneficial to put our flows into some historical context, as we show here on slide 11.
The chart illustrates historical organic growth rates against the relative strength of the S&P 500 Value Index versus the S&P 500 Growth Index, which shows how our flows have trended when growth or value outperforms.
Of course, this is just one of the factors that can influence flows given our mix of assets that has changed over the past 20 years.
In the late 1990s, as growth began to significantly outperform value, our flows slowed and turned negative in what was a very difficult time for our Company.
That trend reversed in early- to mid-2000s until the global financial crisis when growth again began to outperform value.
After the GFC, the correlation between overall flows and gross outperformance lessened, but that also coincides with the growth of our global bond franchise.
During this period, however, global equity flows have struggled.
As Sir John Templeton said ---+ this time is different, is the most costly four words in market history ---+ which is why we feel that this is simply a time when some of our contrarian investment strategies are out of favor.
We are confident that our investment professionals have their products well positioned.
Turning to slide 12, you can get a better sense of the high-level flow trends within the retail and institutional channels where we have seen a number of large redemptions this quarter across different areas of the Business.
US retail experienced a spike in redemptions to almost $29 billion, which accounted for the bulk of the increase in Firm-wide redemptions this quarter.
While this was largely due to redemptions from Franklin Income Fund and global fixed-income strategies, we also saw an increase in municipal bond fund redemptions and two large redemptions on our variable annuity business.
Franklin Templeton's legacy variable annuity business was built on well-branded, long-only strategies.
Through 2007 and going into 2008, we were the number one selling asset manager in the variable annuities space.
But the global financial crisis created misalignments between long-only portfolios like ours and the lifetime income guarantees that insurance companies are contracted to provide policy holders.
As a result, some carriers elected to leave the business altogether, while remaining players have attempted to de-risk their portfolios.
This trend has resulted in over $3 billion in net outflows this quarter from various subadvised accounts, in addition to those realized in prior periods.
Institutional net flows were also impacted by a few lumpy redemptions totaling $2.7 billion from a large client that redeemed from global equity and fixed income mandates.
We anticipate additional redemptions from companies attempting to de-risk over the next couple of quarters.
We are working to counter this trend, as many insurance carriers have introduced new investment-only variable annuities with no guarantees tied to the securities markets, which allows us to reintroduce our long-only strategies, as well as our new managed volatility fund.
We were also pleased to announce we are working with Citi to develop a suite of funds that will cater for the needs of their emerging affluent segment, a key target segment with significant potential and over 2 million existing clients globally.
We are expecting a phased rollout starting mid- to late-2016 to all core markets, given our strong global footprint across Asia, Europe, Latin America, and the United States, which aligns with that of Citi.
We are excited about this new initiative which represents a significant opportunity to strengthen our global brand alongside one of the premier global financial institutions, and believe this initiative could drive meaningful sales over the next few years.
Our institutional pipeline remains strong, and we continue to win new mandates across a variety of strategies.
In fact, October has already seen a large $5 billion funding to a global fixed income strategy from an Asian pension client.
Outflows from global equity strategies remained elevated this quarter, as a decrease in redemptions was offset by a similar decrease in sales.
Emerging market strategies, including Templeton Asia growth, which have underperformed on a relative basis, were the primary contributor to global equity outflows again this quarter.
Also impacting flows was an institutional redemption of $1.3 billion from a client that I mentioned earlier.
On the positive side, our local asset management team has attracted about $500 million of inflows to retail and institutional clients.
Global fixed income strategies came under increased pressure during the quarter, as we experienced a decrease in sales and a spike in redemptions, which led to outflows of $12 billion.
The majority of the outflows were attributed to strategies managed by our Templeton Global Macro Group, including the flagship Templeton Global Bond and Total Return Funds.
Also contributing to redemptions was about a $1.4 billion redemption from a large institutional client.
Outflows from US equity strategies increased to $3.5 billion, as they also experienced slower sales and increased redemptions.
The primary detractors from flows were almost $2 billion of outflows from several subadvised accounts, including $1.5 billion in terminated accounts, as well as about $600 million of redemptions from our variable insurance product funds.
Hybrid strategies also experienced a quarter-over-quarter decrease in sales, and an increase in redemptions that led to increased net outflows.
Most of the increase in outflows was attributable to the US registered and cross-border versions of the Franklin Income Fund.
Combined, the funds experienced outflows of about $3.8 billion due to short-term underperformance that I touched upon.
On the other hand, K2's liquid alternative offerings continue to generate solid inflows, and we recently launched the Franklin K2 Long Short Credit Fund to capitalize on that momentum.
Turning to slide 19, both tax-free and taxable US fixed-income strategies posted net new outflows this quarter.
Tax-free outflows increased primarily due to a $1 billion platform-driven redemption at a large distributor that primarily reallocated into some new proprietary funds.
On the taxable side, we continued to see interest in floating rate strategies, as well as our cross-border US government fund.
However, high-yield and strategic income strategies were net outflows.
Now, I will turn it over to <UNK> for financial results.
Thanks, <UNK>.
Although assets declined significantly in the third and fourth quarters, overall we had a pretty solid year for financial results.
Operating income was down 6% this fiscal year, but 2015 was still the second-highest year for operating income in the Company's history.
Due to the impact that declining markets had on investments and other income, net income and diluted earnings per share declined 15% and 13%, respectively.
Focusing on the fourth quarter on slide 18, operating income was $718 million, a decrease of just under 7% from the prior quarter.
Net income was $358 million this quarter, which is quite a substantial decrease, but it is mostly due to a number of items impacting investment and other income, as well as the quarterly tax provision, which I will discuss in a moment.
Similarly, diluted earnings per share also declined and was $0.59 this quarter.
Turning now to revenues, investment management fees were $1.3 billion, and declined at 6%, in line with the decline in assets under management.
Sales and distribution revenue decreased 10% this quarter, which was consistent with the decrease in assets and sales that <UNK> discussed.
Shareholder servicing fees decreased to $64 million due to the annual purge of US closed accounts in July, which were approximately 600,000 accounts.
And other revenue was $42 million because of unusually high revenue from certain products that we consolidate, which was offset in investment and other income, and net income attributable to non-controlling interests.
Slide 29 shows the impact that consolidated sponsored investment products and variable interest entities had on specific P&L line items.
In total, the impact on earnings per share was immaterial.
Looking at expenses on slide 20, sales, distribution and marketing expense decreased 10% to $626 million this quarter, which is consistent with the change in sales and distribution revenue.
Slide 28 shows sales and distribution net was $116 million in the quarter.
Based on current sales levels, we think that this is a reasonable run rate for the short term.
Compensation and benefits expense decreased 7%, due mostly to reductions we made in the quarter to variable compensation, and also due to a decline in market value of certain long-term incentive awards, as well as a seasonal decrease in certain benefits.
For the year, compensation declined 1%, but headcount increased 2% as we continued to leverage our low-cost jurisdictions.
Of the 200 net headcount additions this year, 235 were in low-cost service centers, and we reduced headcounts by a net 35 in all of our other locations.
Information and technology expense was a little higher than anticipated at $65 million, due to a number of technology initiatives that I mentioned in past quarters.
Increases in information and technology expense are not unusual for the fourth quarter.
Occupancy expensed increased slightly this quarter and was $36 million.
And lastly, general, administrative and other expense was $92 million due to higher advertising costs and an increase in the mark-to-market value of certain liabilities, as well as an impairment associated with a prior acquisition.
During the fourth quarter, we developed our budget for the next fiscal year.
And during this process, we decided upon a number of immediate and longer-term cost-cutting measures, as well as focus areas of investment.
So a few comments about expense levels for 2016: While we're still putting the finishing touches on our plans, our direction is clear.
Excluding distribution expense, we are forecasting a 3% to 4% decrease in the remaining expense categories, which will be offset somewhat by strategic investments.
Last quarter, we were thinking that 2016 expenses would be flat year over year.
Our best guess today is that we should see slight reductions in expense levels year over year.
The caveat to that is execution risk.
Planned expense reductions, as well as incremental investments, can be delayed for a number of reasons, and currency fluctuations can also impact expense levels.
In addition, we are developing contingency plans to reduce expenses further, should markets significantly decline in the future.
Looking now at profitability on slide 21, our expense discipline this year has yielded a modest expansion of the operating margin to 38.1% for the fiscal year, despite a decrease in revenue.
To put the revenue story in perspective, we have weathered a number of volatile periods in the past 20 years.
And historically, periods of revenue compression have lasted one to two years.
In fact, in the last 20 years, we experienced only four fiscal years of negative management fee growth.
Moving on, the tax rate for the quarter was 36%, which was higher than expected due primarily to a reduction of earnings related to investment losses outside the US, and a shift in the mix of earnings.
Looking ahead, we currently expect the FY16 tax rate to be in the 30.5% to 31.5% range.
As I mentioned earlier, other income decreased significantly this quarter, which reflects the volatility we have seen in global markets recently.
Fourth quarter, investment and other losses was $116 million, net of non-controlling interests.
By far the biggest contributor was losses from equity method investments of about $73 million.
This includes a $60 million unrealized loss on a longstanding investment in a lower tax jurisdiction, which was a significant driver of the change in earnings mix impacting taxes this quarter, as there was no associated tax benefit.
As a reminder, our equity method investments tend to move directionally with the MSCI World Index, so such losses should not be a surprise.
Additionally, the mark-to-market losses on trading investments and consolidated sponsored investment products impacted investment losses this quarter.
Moving on to equity capital management, we repurchased 11.9 million shares during the quarter as the stock pulled back, and 10b-18 qualified volume increased, allowing us to accelerate share repurchases materially.
Repurchases totaled $500 million, nearly triple the average quarterly pace of the prior five years.
For the fiscal year, repurchases totaled 22.5 million shares, driving our end-of-period share count down by 3% on a net basis.
Earlier this week, the Board approved an additional 30 million shares to the current repurchase authorization to allow us to continue our share repurchase strategies, which have both systematically more than offset annual issuance and opportunistically accelerated repurchases when warranted.
Over the course of the fiscal year, the Company returned over $1.7 billion to shareholders via repurchases and dividends, which pushed the nominal pay-out ratio to 86%, substantially exceeding US cash flow generation.
That concludes our prepared remarks.
We look forward to the live call today.
