BEN
#I think what you're referring to ---+ well, let me ask you what you're referring to when you say distribution dynamics.
I don't want to assume.
Right, it is our best guess to that.
I think the caveat that I would like to make on all expense guidance or whatever guidance I have is that the underlying assumption that I use is that we are not assuming any market appreciation or depreciation.
And of course, in those particular lines, that can have a very big effect.
But having said that, and if you look back over last one, two, three, four, five quarters, the net of the sales distribution revenue and sales distribution expense has been relatively consistent and we don't expect that to change.
I wouldn't say we're not interested.
I said we're still looking at it.
We're still ---+ I think what we ---+ our position is that we don't think cloning existing open-end funds in that structure at this stage makes a lot of sense for us, where limitations on how those funds can be run and just demand from the marketplace.
We are going to continue to monitor that.
I think our feeling is that we have a need for a lower cost smart beta option, even internally versus how well we can sell through the advisor channel.
That would be our first step, whether we acquire that, which is something we are actively looking at the marketplace, and also working down the path of building it organically.
That is something we are doing.
I would just add that I think what's driving our thought processes here is where is the demand for these products, and then where can we add value.
I think that is going to be the focus of our product development in this area.
What areas can we add value, given our investment expertise.
There's issues just around derivatives in the ETF versus the other, and I think it's more that if we feel like the marketplace that there is some limitation or some advantage that's enough to bring that fund, then that is something we are going to consider.
I don't think we are ruling it out one way or another.
We just don't think there's demand, but there is an limitations on an ETF versus an open-end fund and how it's run.
Obviously, it's early.
I think we are encouraged that there is a bipartisan effort for some sort form of reform that's tied to the tax bill with the immediate funding of that, whether it's a one-off or combined to a larger tax change, all of those are in the works right now.
There's plenty of people that would say, well, that can't happen at this time in an election cycle, and some that would say that it's just too easy to fund the highway bill in a significant way over time to have ---+ to tie it to that politically, that it can work.
But you do have serious people on both sides of the aisle now working towards making that happen.
And I think that's a big change from where we were say six months ago.
The first question would have to ---+ we would have to see the details of the proposal.
What would be in the best interest of shareholders, we will have to decide that once we see the details of the proposal.
But assuming that it did make sense, we could probably bring back anywhere from $5 billion to $6 billion.
Okay, thank you everybody for participating on the call.
We look forward to speaking next quarter.
Thank you.
Hello, and thank you for joining us today to discuss the third-quarter results.
I'm <UNK> <UNK>, CEO along with <UNK> <UNK>, our CFO.
The current-market environment, with heightened concerns over volatility, currency exposure, fluctuating energy prices and rising rates, presents a number of challenges to investors.
First, I would like to share a few highlights for the quarter.
Delivering strong, investment performance for our clients remains our top priority and we're pleased to see that relative investment performance of our US retail and cross-border fixed income products remain strong.
With the percentage of assets in the top two quartiles increasing since March overall standard periods.
Out-performance of our global-fixed income funds help these redemption pressure on those funds resulting in lower outflows.
The US and cross-border, Franklin K2 Alterative Strategies funds, which together attracted over $600 million in net flows for the quarter, have been our fastest-growing new, fund launch in the history of the company.
The cross-border fund is now available in 23 countries after launching in 14 new countries since March with nine more in progress.
Despite the current headwinds tempering flows, we continued to deliver solid financial results and distribute excess capital to our shareholders.
Operating income was up for the quarter at $770 million, a 2% increase despite flat revenue.
And on the capital-management front we returned $1.4 billion to shareholders over the trailing 12 months through dividends and repurchases.
We also continue to enhance our product offerings and during the quarter launched a new range of retirement payout funds for defined contribution participants.
While retirement planning has historically focused on asset accumulation, products to optimize the distribution of those assets in retirement require further innovation, so we designed these products to support the transition to this draw-down phase.
Turning to investment performance of our US retail and cross-border funds on slide 6, overall relative performance of our equity, excluding hybrid and fixed-income strategies remain solid with the majority of assets ranked in the top half of their peer groups.
Of course there are many ways to look at performance and an asset way to view our peer performance is just one.
In our 10-Q filing this morning, we disclosed performance by investment objective against the benchmark and against peers.
Looking at that view, equity performance strengthened against passive benchmarks for the one-, three-, and five-year periods while having mixed results against peers which was opposite of what we saw for the US taxable and tax-free, fixed-income strategies.
Under-performance of the Franklin income fund, which represents almost 30% of assets in the equity and hybrid category shown on slide 6, weighed on aggregate performance for the one- and three-year periods due to weakness and interest-rate sensitive utilities, consumer discretionary, and energy-sector holdings.
Although the fund had a good start at the beginning of the quarter with strong absolute relative returns, the market pulled back across several equity sectors later in the quarter which led to a decline in relative performance.
As noted other equity-focused strategies have generally had good relative performance.
The Mutual Global Discovery Fund, for example, outperformed its peer group across all periods as of June.
On top of strong performance we have been working hard to promote this fund with new marketing materials highlighting our truly active management-investment strategy and the consistent low-volatility track record.
In general, I believe that as a Firm we are well positioned from an investment capability and strategy perspective, particularly when interest rates began to normalized.
Such an environment has traditionally correlated with the out-performance of value investing.
Additionally, many of our fixed-income strategies have been defensively positioned in terms of duration for some time now.
Assets under management ended the quarter at $867 billion, a decrease of about 1.5% since March.
However, average assets under management increased slightly during the period.
This divergence was due to the market pullback in June.
The mix of assets under management by investment objective and sales region is consistent with what we reported at the end of March as we generally experience only gradual changes in the mix from quarter to quarter.
Net new outflows increased to $11 billion primarily the result of a 19% decline in long-term sales which was felt across all investment objectives.
Flows drove most of the decrease in ending assets as market depreciation, was only about $2 billion this quarter.
From a retail perspective we faced continued headwinds during the quarter as a result of a confluence of market factors that impacted the short-term performance of several US and SICAV flagship funds.
In the past we've seen that it takes time for a fund's flows to recover following periods of short-term under-performance.
Often we see a period of sharp redemptions followed by a period of slower sales which eventually recover and to start driving improved organic growth.
This quarter redemption stabilized, but we did see a pronounced decline in sales, particularly in some of our largest funds.
In the current-market climate, a number of our flagship funds have been impacted at the same time.
We're confident, however, that this is the part of a natural business cycle and believe the demand for these products will recover as investment strategies of our portfolio teams play out.
In the meantime we continue to keep advisors informed about the current positioning of the portfolios and the perspectives behind the portfolio managers' conviction.
We also continue to look for opportunities to cross sell and to enhance our product offerings.
Also contributing to the overall decrease in sales this quarter was a drop in institutional-business volumes as that segment snapped its streak of quarterly sales growth.
While we did book a large funding for a global-equity mandate a handful of large redemptions resulted in net outflows in excess of $3 billion from global-equity accounts while fixed-income strategies generated positive net sales.
Clearly this was a disappointing quarter from a gross-sales perspective but net flows of our institutional business are always impacted by the timing of individual mandates and redemptions as well as client interest which we think remains very strong.
Looking now at flows by investment objective, global-equity flows declined this quarter due mostly to the institutional redemptions I just mentioned but also because of the increased redemptions from the Templeton Asian Growth Fund.
To the positive we continue to see interest in European equity oriented products managed by our mutual-series Team including the Mutual Global Discovery Fund that had almost $300 million in net flows this quarter.
Additionally, global-fixed income outflows improved a bit this quarter.
The Templeton Global Bond and Total Return Funds continued to deliver strong out-performance versus their peers and benchmark.
However, short-term absolute performance and broad market flows out of fixed income, due to fears of rising rates and market volatility, continue to pressure net flows.
This has remained largely a retail channel phenomenon as institutional investors have not redeemed as heavily and net flows remain positive in that segment.
US equity outflows increased a bit this quarter but we continue to see interest in a number of growth strategies, including the strong performance Small Cap growth in DynaTech Funds.
Hybrid flows turned negative this quarter due to outflows of about $1.6 billion from US and cross-border versions of the Franklin Income Fund due to the performance issues I discussed earlier.
As I mentioned previously, our Franklin K2 Alternative Strategies Funds generated over $600 million in net inflows and the cross-border version was among the best-selling funds firm-wide this quarter.
Taxable US fixed income slipped into outflows this quarter due to a large drop-off in institutional sales as well as outflows from some high-yield and government-bond funds.
Tax-free fixed income funds also experienced outflows this quarter, though we did see continued interest in intermediate-term strategies.
I would now like to turn it over to <UNK> to discuss operating results.
Thanks, <UNK>.
Overall, the quarter's financial results were strong.
Stable revenues and disciplined-expense management drove the growth in operating income which increased to $770 million.
However, the impact of non-operating items decreased net income to $504 million and diluted earnings per share to $0.82.
Looking at revenues, investment-management fees remained essentially unchanged at about $1.3 billion this quarter, lower performance fees and a slightly lower, daily-average fee rate were essentially offset by the additional day in the quarter.
Sales and distribution revenue was $567 million this quarter.
Lower average non-US assets and a decline in sales drove the decrease, but this was partially offset by a higher US assets and the impact of a longer quarter.
Shareholder-servicing fees were about $67 million and were relatively unchanged over the prior quarter and other revenue was about $27 million due to the increase interest income from some consolidated products.
Looking now at expenses on slide 18, sales and distribution expense was $694 million this quarter and the majority of this decrease was due to the changes in assets under management that also impacted sales and distribution revenue.
Compensation and benefits expense decreased this quarter to $364 million which was lower than I originally anticipated back in April due mostly to lower variable compensation as well as a foreign-exchange benefit of about $5 million.
Based on where we are now, I continue to anticipate that the full-year compensation expense will only increase by about 1% over 2014.
Information systems and technology expense increased to $58 million this quarter.
Although it is hard to predict the exact timing of these expenses as I mentioned before, this expense tends to be higher in the fourth quarter due to the fact that some of the larger projects, like software renewal and infrastructure development are typically finalized in the second half of our fiscal year.
Investments in our security and communications infrastructure and desktop server and storage updates have driven these costs higher this year.
And we continue to have a healthy pipeline for strategic projects that will enhance our fund administration, performance, risk, and human resource management platforms.
Due to these items I now expect the full-year expense to be in the range of 2.5% to 3% higher than FY14.
Occupancy expense decreased to $31 million this quarter in general, administrative and other expense increased a bit to $85 million.
Looking now at profitability, the operating margin increased to 38% for the FY-to-date period and we remain focused on expense control in the current environment.
The quarterly tax rate increased to 28.9% due to some prior quarter benefits that did not recur which brings the FY-to-date rate to 29.2%.
We continue to expect the FY rate to be within the range of 29% to 30%.
Other income net of non-controlling interest negatively impacted earnings this quarter by $28 million.
By far, the biggest attractor was the impact of a stronger US dollar.
Which resulted in realized and unrealized foreign exchange losses of $30 million.
Interest expense increased to $13.7 million this quarter while the rate of our tenure notes issued in March was actually lower than that of the five-year notes that matured in May.
It was a net increase in debt outstanding and we obviously only realized a partial-quarter benefit from the maturity.
Moving on to equity-capital management.
We repurchased 4.3 million shares during the quarter at a total cost of about $218 million which represents an increase over the prior few quarters and was one the highest quarterly levels in the past several years.
In fact, open market repurchases increased 20% versus the prior quarter despite an 11% decrease in10b-18 buyable trading volumes.
As you can see our slide 23, over the course of the past year we returned over $1.4 billion to shareholders via repurchase in dividends, pushing the nominal payout ratio well above the 50% level which approximates our US cash-flow generation.
Finally, we are pleased to see signs of increased bipartisan support for international corporate-tax reform on the horizon which may include favorable repatriation provisions.
With that, I'd like to conclude our comments, thank you for listening.
