Unverified Participant Gregory Eugene Johnson - Franklin Resources, Inc. Kenneth A. Lewis - Franklin Resources, Inc..

Daniel Thomas Fannon - Jefferies LLC William Raymond Katz - Citigroup Global Markets, Inc. Michael Roger Carrier - Bank of America Merrill Lynch Kenneth B. Worthington - JPMorgan Securities LLC Brennan Hawken - UBS Securities LLC Alexander Blostein - Goldman Sachs & Co. Brian Bedell - Deutsche Bank Securities, Inc.

Glenn Schorr - Evercore Group LLC Craig Siegenthaler - Credit Suisse Securities (USA) LLC Patrick Davitt - Autonomous Research US LP Christopher Harris - Wells Fargo Securities Robert Lee - Keefe, Bruyette & Woods, Inc. Michael J. Cyprys - Morgan Stanley & Co. LLC.

Good morning, and welcome to Franklin Resources Earnings Conference Call for the quarter ended March 31, 2017. Statements made in this conference call regarding Franklin Resources, Inc., which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements.

These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and MD&A sections of Franklin's most recent Form 10-K and 10-Q filings..

Good morning. My name is Melissa, and I'll be your call operator today. At this time, all participants are in a listen-only mode. [Operator Instruction] As a reminder, this conference is being recorded. At this time, I'll turn the floor over to Franklin Resources' Chairman and CEO, Mr. Greg Johnson. Mr. Johnson, you may begin..

Well, hello, and thank you for joining Ken and me this morning to discuss our second quarter results. I know it's been a busy week for most of you, so hopefully, the commentary we provided earlier this morning easily address most of your questions.

This quarter we saw a number of encouraging signs with retail flow trends improving in some regions and funds returning to net inflows. While we clearly have more progress to make, investment performance is strengthening, which is a positive sign for future flow trends.

Importantly, the financial condition of our firm remains strong and we continue to position ourselves to meet the evolving needs of our clients. I'd now like to open it up for your questions..

Thank you. Our first question comes from the line of Dan Fannon with Jefferies. Please proceed with your question..

Thanks. Good morning. I guess in the commentary, Greg, you're generally positive institutionally in talking about sales in the U.S. hitting levels we haven't seen since 2015.

And I guess just where – I want to talk about that more broadly in terms of kind of where you still see the headwinds, whether that's on the international front? And I guess, specifically, what products institutionally in the U.S.

are you seeing the most demand?.

Yeah. I think, first of all, I mean it was really retail sales where we saw the big improvement in – certainly in gross and even on the international side, probably had net inflows, if you take out some of the lumpier institutional redemptions.

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

And I think just sometimes the institutional redemptions and certainly the headwinds we've talked about, whether it's the variable annuity side, which we had a smaller quarter in terms of net redemptions of about $1 billion.

But we had some other lumpy net – or institutional account redemptions on the global equity side, and that's really where – I think if you look at the flows where we had four, five large redemptions, none of them – I think, one a Middle Eastern client that not a performance-related redemption, just really a cash flow need kind of situation.

And then, you had redemptions related to a platform moving to sub-advisory that had a couple large funds as well. And then, just a couple of $0.5 billion type global equity redemption.

So, if we look at the big changes over the quarter, Global Bonds, certainly from a retail side, much improved, and really in Europe is where we're seeing the dramatic improvement in redemptions and flows there, and that's an encouraging sign and one that we know, if we continue to get momentum in that, that can turn into significant inflows, and that's what hopefully we expect in the short run.

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

Okay. Great. Thanks. And then just, Ken, a follow-up on your commentary around expenses. Appreciate the comp and the kind of the tech guidance. I guess just generally, those are moving, one's coming down, one's going up.

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

Yeah. I think on an aggregate, if you compare our forecast for this fiscal year to last year, I think we're looking at about a 3% decrease overall in operating expenses, and that would be compensation, tech, op, G&A. It would exclude the sales distribution expense line..

Okay. Thanks..

Thank you. Our next question comes from the line of William Katz with Citigroup. Please proceed with your question..

Okay. Thank you very much and certainly appreciate the streamlined process, it really is helpful on a day like today. Just maybe starting with capital deployment.

I see that the repurchase did slow a little bit in the quarter, just sort of curious what drove that? Was that just timing, pricing? And then maybe stepping back a little bit, Greg, you had mentioned that you're a little bit behind the curve on Solutions, a little bit within the institutional channel, at least that was I think in your prepared commentary.

Can you maybe dovetail together, whether that'd be a de novo solution or maybe possibly through acquisition?.

Let me start with the capital question. This is Ken. So, there were a couple of things, price was a factor during the quarter. Also I think, maybe and probably one of the bigger drivers was buyable volume was down, and it was down 25% to 30% this quarter versus last. So, that had an impact as well. And then, you wanted....

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

We'll continue to add where we think we can add value. AlphaParity, the recent acquisition last quarter, a small one, but it gives us more tools to customize within our Solutions group.

But having someone who's run the Franklin Income Fund and our Hybrid group now heading up the Solutions group, I think really makes it a much more robust platform that's really integrated into the rest of the group. So, that's really what we're – I think the immediate changes that we're talking about..

Okay. And just one follow-up for me, and thanks for taking both questions today. You mentioned that global retail did a bit better this quarter. (07:24) in the U.S., that continues to struggle, at least from some of the Sim fund (07:26) data that we take a look at.

I guess the big picture question I have is, you have much better performance, however, you're also seeing a pretty sizeable A, B and C share class, which seems to be out of phase just generally speaking at the industry level.

How do you reconcile that? Do you think performance wins at the end of the day or is it more the structure has to change to leverage the performance?.

Well, I think performance wins in the end. There's no question about that. And as we've said before, I mean it's – when you have a good quarter, a good year, it may slow redemptions a bit, but it takes a while to build back under the shelf space.

And we've seen – I think the number of four and five star funds for us has quadrupled here in the last quarter. So, those are the things that really drive sales and shelf space.

I think, all of us, on the – whether anybody – and that's most of the industry that has more brokerage assets, it, as we all know, creates challenges in the transition to more of the advisory model. And you have to look at your lineup and that's what we've been doing and kind of pruning funds and changing some things to adapt to that advisory model.

But at the end of the day, if you have performance and you have reasonable fees, you'll get distribution in that model as well. But I think you're right to say that it's a little bit slower, the turnaround, than you'd seen just if it was all traditional brokerage..

Okay. Thank you, guys..

Thank you. Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question..

Thanks, guys. Greg, maybe just another one on, I guess, sales inflow. So, you mentioned the momentum on the retail side in the quarter. When I look at the institutional and the VA, that part of the business, it sounds like you had one client that decided to stick with Franklin. And then, you guys are focused more on the Solutions kind of aspect.

So, just wanted to get a sense on like how quickly – or how much work have you guys been doing, whether it's on the Solutions side, trying to figure out kind of the institutional variable annuity? I think last quarter you mentioned some new products on the variable annuity side to maybe offset some of the redemption pressures that you're seeing?.

Yeah. I think when we look at the VA part of our business, and the assets today are about $44 billion, we'd put somewhere around $11 billion into the inactive side of the portion that – I'd put that at the higher risk for moving to passive, insurance companies that have gotten out of the VA business and are transitioning those.

It was public that with one of those insurance companies that they are holding off on their plans to transition. That was one of the ones that we had indicated to you was probable in terms of redemption, redemption either last quarter or this quarter or over the next few quarters. And that was about $4.5 billion of the $11 billion in assets.

The others we continue to work with, and some of them we have transitioned, as you said, with our Solutions, trying to come up with – whether it's low volatility products, we have built those. I mean, this isn't something that's new to us, but we continue to work on the active piece of the business and we see a lot of opportunity still.

And hopefully, that's a number that instead of looking at a dwindling base, can be a growing base for us. So, it's not – and I think that's an important distinction.

You just had a portion of that VA business that, because of the volatility and what happened with prepaid commissions, a lot of insurance companies got into a difficult situation, are looking for a solution to work through that. And that's really something we've been engaged and have accounts that exist today in those lower volatility funds.

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

Okay. Thanks. And then as a follow-up, we spent a lot of time over the past year on DOL. Just wanted to shift to MiFID II, and just wanted to get your perspective. I know there's still a lot of kind of puts and takes until implementation and how things are going to kind of settle out.

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

Yeah. It's something that we continue to be very engaged on and – obviously, our Luxembourg-based CCAB is sold in, I think, more countries than any other one. So, we are very active on the lobbying front. And I think, the obvious main concern is around how we handle the unbundling on the research and brokerage side.

And we're spending a lot of time doing that and we've been asking that question, well, what does it mean, what kind of dollar number are we looking at. And I think it's probably too early to say, because it depends just how clients react to this disclosure.

For us, it's not just on the face of it, it's only two funds that really get affected directly by the MiFID legislation. And so, it wouldn't be a significant dollar hit to us.

But again, when you have that transparency and the questioning, we don't know how far it extends and I wouldn't want to try to extrapolate, because we don't know that would mean. I think you're right in saying, there's still quite a bit of uncertainty on it..

Okay. Thanks a lot..

Thank you. Our next question comes from the line of Ken Worthington with JPMorgan. Please proceed with your question..

Hi. Good morning and thanks for taking my questions. Morningstar downgraded the parent company rating for your funds at the end of March, citing investment lineup and firm leadership.

I guess, are there any indications that institutional consultants share these concerns? And are there parts of the Morningstar comments that you think may have even some remote merit, and are you making any changes to address the Morningstar comments?.

I think it's a subjective analysis that probably based on flows with something that they led them to do that. I don't – there's not much you can do. It's not – we haven't gotten certainly any feedback from clients that it's a concern in any area. I mean, they have the relationships. They do their due diligence.

They know us, they know our funds probably better than that analyst. So, I don't really – I think a couple of the comments they had were probably relevant that we are looking at. But it's not something that we got any feedback from the distribution side that this was an issue. It's not something that's really that focused on..

Okay. And it seems like there has been some movements in leadership and you've done some things around some – the acquisition of AlphaParity and some other reorgs. Maybe what sort of changes seem – there seem to be changes being made behind the scenes.

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

Well, we just had the reorg that we announced, and there was some major changes just on, again, aligning people with where the priorities are for the firm and having a new role within Solutions, new role within Alternatives, new role within equities as a whole.

The president consolidating many of the functions or reporting lines of the existing co-presidents model. So I mean, I think, that's a big change. And the other big change is, I've taken on the performance analytics; basically, your risk group reports directly to me, separate from the investment teams.

And I think that that just speaks to the heightened awareness and importance of risk management for the firm. Having that kind of check built-in and I get that information directly, I think that's a fairly significant change as well..

Okay. Great. Thank you very much..

Thanks..

Thank you. Our next question comes from the line of Brennan Hawken with UBS. Please proceed with your question..

Good morning. Thanks for taking the question. Just quick on the international gross sales. Really a solid improvement, I think which you highlighted in your prepared remarks pointing to flagship products driving the sales momentum.

Was there anything specific as far as the products go? And was there any other components that contributed there that are worthy to note beyond just a general improved optimism or a reaction around the performance track record that's turned around?.

Yeah. I think it's really Global Bond is the driver there, a major turnaround, and kind of the proven case that we've been talking about that if rates rise, this is the fund that can position your portfolio very nicely for that, and I think that, that proved itself in this last cycle.

You look at the return numbers and first quartile for every time period, I mean, that certainly helps when you're having a fund that was in that redemptions. There are other areas that had inflows and certainly our Emerging Markets Fund had major inflows and continues to do very well.

Our Floating Rate Fund, specifically in Korea, crossed $1 billion very quickly. So, those are new areas of distribution for us. And if we look across the globe, many markets that had been in redemptions have turned to positive. When you look at Hong Kong, Korea, India, Taiwan, Germany, all back in positive.

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

Terrific. And then, is there any color, it was – while the gross sales picked up nicely, which is very encouraging. Obviously, stronger in international, but also picked up in the U.S.

What is it that can get those redemptions to slow? Are there any particular trends that you're noticing that would give you encouragement that we might not be far away from that beginning to slow down? Is there any additional color you can give on the redemption side? Thanks..

Yeah. I mean, I think they are slowing and if you look at the numbers and – of course, we'd like to see them slow faster, but again, I think it's just a matter of performance sinking in and people recognizing this strong performance across the lineup right now.

As we said earlier on the call, I mean, the transition from brokerage to advisory creates a little bit more of the lag effect and – or just more of a headwind in some of those redemptions in those A Class shares.

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

Terrific. Last question for me.

Do you guys have any plans as far as maybe an offering in the – amongst these clean share sleeves that we've heard about, and what's your view on this type of a product and structure?.

Yes. I mean, I think like everyone, it's something we are looking at and trying to figure out how we would buffer that and how it would affect our distribution channel. So, it is very much something that's certainly on the plate today.

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

But probably too early to be discussing with distribution partners or anything like that, is that fair?.

Right. I think we work together with the distribution partners to figure out what they need and the uncertainty of the rule is still pending. I think it's early to decide what those share classes are going to look, whether you need the T, whether you need a clean share class.

All of that, I think, is still very much up in the air based on what happens with the fiduciary rule..

Fair enough. Thanks for the color..

Thanks..

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question..

Hey. Good morning, everybody. A question for you guys around the management fee rates.

So, some of your products tend to be, and especially some of the larger ones on the higher end of things, and as I think about the growth in the advisory channel and your guys kind of market share within that part of the market, do you find your fees competitive enough to gain a larger share of the pie there, especially relative to some of the larger peers? And I guess ultimately, would you consider some of the fee reductions to accelerate growth in that channel?.

Yeah. I mean, I think that's just part, again, of what I've said earlier that with this transition to advisory, we're looking at the entire lineup. And to me, you obviously have to be competitive on the fee side. I think we are.

I think the areas where – I'm not sure what you're referring to where we're higher, because in most cases, we are lower than the average. And I think you have to look at the specific category and who you're competing with.

But that's certainly something that if we feel like it's not competitive in the channel, that's something that a short-term hit we would take, if we had to. I don't – those are discussions we're having, we're looking at all of that, but more of the funds are on the lower end of fees. So, I think it'll continue to be well positioned.

And I think the battle on fees, it's easy to sit there and think, well, I can just reduce and suddenly I'm competitive.

But the reality is, when you're competing against passive, you better beat passive or make your value proposition clear, reducing your fees by 20 basis points doesn't change, if that advisor is moving a key amount of their assets to passive, reducing your fees only hurts your margin.

And if you beat passive over the long run a 20-basis-point difference doesn't really matter. So, I think that that's the bigger question, is whether you believe active will beat passive, because trying to compete with passive on a fee basis is not the right answer..

Yeah. That all make sense. And then secondly, I was hoping you could touch on the institutional channel, understanding a couple of lumpy apples for you guys this quarter, good news on the VA stuff sticking around.

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

Yeah. I mean, I would say that the area that we've been talking about and continue to see more interest based on the last market cycle with rates coming up is just the institutions interested in local asset management currencies – currency funds with Global Bonds, we're seeing a lot of interest there and those can be larger accounts.

We're seeing pretty good interest as well in the emerging market side. We're growing in the UK side as well, with some of the fixed income funds there on excellent performance. So, those would be some of the areas that – and global ag, we've had a couple of big wins and had a big win last quarter that will fund close to $1 billion this quarter..

Great. Thanks very much..

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question..

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

To what extent are advisors moving or you think they'll be moving product, shifting around more before June 9? Or is it more of a play of gee, let's see what happens? And then, just maybe your AUM that has 12b-1 fees, I know some distributors switching out of 12b-1?.

Yeah. I mean, I think it's still like the future of the rule very much up in the air with how distribution's reacting. I think that it doesn't matter if you have a rule or not. The trend towards the advisory platforms is there and happening.

And it's just a question of how quickly it accelerates and that's something that many of the major broker dealers favor. So, to sit back and say, well, I'm not going to react to that because of the uncertainty of the rule, I think it really doesn't matter. That trend is in place.

I think, as we said earlier, around what it means in terms of share classes and the future, I mean, there are things that need to change with that rule. And I start with what are we trying to solve. And hopefully, it's something that the SEC – it gets pushed back to the SEC at some point to provide a workable rule that affects all distribution.

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

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

So, the future of how asset classes look, how brokerage accounts look, I think is still very much in the air in terms of what we have to price and that will all be probably worked out in the year ahead. But it's also somewhat challenging to get a common voice from the industry on what we need.

So that's – I think that's one of the issues as well that people have different views and different needs on what that rule should indeed look like. The question around 12b-1, I mean, we have already share classes that exist without a 12b-1. So, that's – and some would obviously in advisory models use those. So, that's already there today.

Isn't actually called (26:37) advisory class..

Are you seeing active substitution into the non-12b-1 shares within your account play (26:44)?.

Yeah. I mean, I think the more – more of the advisory platforms, that's something they would use. So, yes. I mean, as that continues I think you'd see that..

Great. And then just on expenses, Ken, the 3% drop in expenses, a couple of questions around that. I guess what are your assumptions on performance fees is I think you said you still expect comp to be down 3% to 4% and it was a little elevated, I assume performance fees helped that this quarter.

So, just maybe comment around your view of performance fees for the back half of the fiscal year in conjunction with the op expenses and just the base of that op expenses, is that the $2.042 billion base? I just want to make sure I have the right number there..

Okay. Let's start with performance fees. Well, I think, the performance fees this quarter and a little bit last quarter were for similar products a year ago. So, that was like the first time we had performance fees on those. I would not expect those particular performance fees to recur in the second half.

But we do have performance fees typically in the second half of the year. What they'll be I'm not sure, but I would just go back and look at what we've had in previous third and fourth quarters and – because performance is picking up..

And in the expense base, just the 3% drop, the fiscal year, just want to make sure I'm doing it off of the right base of expense. Ex-sales distribution, of course....

Right. Yeah. Yes.

Two point, sorry, last year was about $2 billion, right?.

Yeah. I just want to make sure I have all the one-timers that are there. So, is it $2.04 billion or is there....

Yes. If memory serves, that's correct. Yeah. And you could also – for kind of the more granular questions and answers here you could also feel free to call our IR department, Brian, should be able to help you out with that..

Yes. Great. Thank you..

Thank you. Our next question comes from the line of Glenn Schorr with Evercore ISI. Please proceed with your question..

Hi. Thank you. Two clarifications. First, one on the whole large insurer not replacing dozens of actively managed funds.

Just specific, is it related to the lawsuit and what I'm getting at is, is should we think of this as a temporary stay and these funds could be at risk at some point or there was a decision of this is where we're going to be and we can consider the 4.6 base?.

Yeah. I don't have the answer. I mean I think the reaction is, they're going to stay put for now and assess it, may take a different tack. I mean I'd still think you always put it at the at risk. It's just we don't know today and their decision is to hold off for now on moving that to passive..

Okay. Fair enough. And then your other point, on the key distributor transitioning from advisory to a sub-advisory program. Is that just them sub-advising out? Has that part (30:14) was most curious because some of the assets were in funds that performance has gotten a lot better.

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

Yeah. They don't – I think they would say that it's not related to performance. It's really just the concentration of assets that they've had in those funds and they built their own sub-advisory platform and moved a lot of assets from a lot of top performing funds into those other funds. So, it was never an issue of performance.

It was just a build the fund family and had a fair concentration in a lot of different funds. And this was one way to handle that..

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

No, it better – no, I don't think so. I think for now I hope it's – I hope that's it..

I'm with you. Last one, always tough to get too much out of you on this. But just curious going on $10 billion of cash and equivalents, is there any different sense of urgency on, I'll leave it really open in saying do something with that or are we like we're so close to tax reform now, and now we wait..

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

So, I think it – you could argue that it certainly makes it more interesting with the cash in the meantime before you repatriate to look at things offshore, and we continue to do that. I mean it – like I've said in past ones, every moment we're looking at something..

All right. Thanks for all that, Greg..

Thank you. Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question..

Thanks.

I missed the response on this one, but how much 12b-1 fee AUM do you have remaining? And do you include load (32:22) in this bucket too?.

Yeah. We'd have to get that for you. I don't have that here, but it would still be the majority of the assets..

Got it. And then, can you provide some commentary behind if Global Bond and Franklin Income were removed from recommended list and platforms generally last year after their underperformance and if you've seen them getting added back this year and any kind of tangible data points would be helpful too..

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

But, again, I look at the sales trends and certainly income fund now as a fund, and last quarter it was actually in positive sales despite Hybrid being somewhat negative. But that's a huge turnaround from where it was. And Global Bond had its lowest redemptions in over 10 quarters.

So, behavior is changing despite whether or not you're on a recommended list and that performance does trickle down to the advisor level regardless of whether you are on a focus list or not..

Thanks, Greg..

Thanks..

Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question..

Hey, guys. Thank you for taking my questions. Just to clarify something you said earlier.

I think you said you've had some positive days which hasn't happened in a long time, is that in April or was that already happening in the first quarter?.

It's in April. And, again, we don't like to – think I'm just mentioning it because I think it certainly feels better for everyone, the company to see that trend and whether or not that continues, I think is always what the market does in the near term. But, that's clearly a positive sign for us, a green shoot..

Sure.

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

Yeah. It's the $900 million, $900 million..

Yeah. Okay..

Exaggerated slightly..

All right. And last one's on the repurchase. I think you said something about buyable volume, but your volume was actually up in the first quarter.

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

Right. So, you have to – when I say buyable volume, I am talking about something called 10b-18 volume, which is the – our metric and what we can buy..

Okay. Thank you..

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

Thank you..

That's a little technical issue there..

Thank you. Our next question comes from the line of Chris Harris with Wells Fargo. Please proceed with your question..

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

When you guys think about what's out there, and what your needs are internally at Franklin, do you guys feel like you need to do things mainly in line with your core competency, so active management? Or would you be willing to step out from that say, either in passive management or something maybe even adjacent to asset management? Just trying to get an understanding if there's sort of a governing philosophy to how you're thinking about deals here..

Yeah. I think, it's always – the philosophy is trying to figure out what the needs are of clients and how we can strengthen our offerings. And, obviously, the big change now and that everybody is talking about is, how you look at data and whether it's kind of the big data analytics, artificial intelligence.

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

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

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

We don't have, if a large passive manager came up, and I just don't think that's going to happen anytime soon, but it would certainly be something we would look at as well. I don't think we have any hard rules on, philosophically that we have to be this or that. I think, it's hey, if our clients – we know passive's here to stay.

We know that it works very well with active. It works very well with alternatives and other capabilities that we have. And the more we can package all that together through our solutions is something – that's really our long-term vision is trying to build out all of those capabilities.

So I don't think that the philosophy of saying you're an active manager precludes you from doing anything and there's all forms of active using passive through solutions and that's really where we think that the market is going..

Got you. Thank you..

Thank you. Our next question comes from the line of Robert Lee with KBW. Please proceed with your question..

Great, thanks. And thanks for your patience, taking all the questions. We've talked a lot about different fund share classes and advisory business, but we haven't really talked too much about the SMA business, which is clearly in a lot of your U.S. distribution outlets a sizeable and growing business.

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

But can you talk a little bit about your presence in the SMA business, and do you feel that you have the right product suite there? Is that a place you're putting more emphasis on incremental growth? Just trying to get a better feel for your positioning there..

I mean, it's a business that we have been servicing and building and going after, so nothing's new there. It's still a relatively smaller proportion of our business. And I think with advisory, with the move towards advisory becomes less significant in many ways.

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

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

And, I mean, just within your franchise, I mean is that a $20 billion asset business, $30 billion, $10 billion? I'm just trying to get a sense of how meaningful it is a contributor to kind of your sales and flows..

Yeah. We'll get back to you on that one because I don't have the exact number..

It's pretty small though..

It's pretty small..

Okay. And....

(40:07) maybe less..

Yeah. $10 billion maybe..

Maybe less..

Okay. Thanks. And maybe just as a follow-up. I'm just curious for your perspective, I mean one of your peers or competitors has filed for kind of, I won't call it a new pricing scheme, fulcrum fees has been around. But, clearly, have taken a view that something has to change with mutual fund pricing dynamics.

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

Yeah. I mean I think the more options you have on pricing, the better. I think if you believe that actives can outperform, the client probably will end up paying more for performance fee.

But, certainly, something that we have been open to more on the institutional side where we've done some pricing with performance fees with lower expense rate or lower management fees on them. That's something we've been doing. We're looking at it in the retail space as well.

And, I think, that clearly with such focus and pressure on fees today, paying out of your alpha probably makes more and more sense. So, that is something that we are open to and looking at. And if clients prefer that, then that's something that we have to adapt our model to. So, I think we are open and we think we will see more of that..

All right. Great. I appreciate the color. Thank you..

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question..

Hi. Good morning. Thanks for taking the question. Just as industry assets continue moving into the fee-based advisory channel, just curious how you think about your vehicle delivery today for active management, certainly you have lot of legacy A, B, C mutual fund share classes out there.

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

Well, again, I mean, we look at – our core competency is the management of those assets, so the vehicle is dictated more by the channels and how technology evolves and how we can weather it, an ETF with – using an active bucket in that. I mean, those are things like everyone in the industry again we're looking at.

And if that is a vehicle that's lower cost and something the clients want, then we're certainly open to doing that. And it's just a matter of working with our clients, our advisors and understanding what they need in their channel and moving towards that.

So, I don't – again, we don't have any preference whether it's an SMA vehicle or an ETF or a 40 Act mutual fund. It's whatever the clients prefer and meets their needs..

And just on the SMA, do you feel like you have enough of the capabilities yourself today or is that something you feel like you need to built out more to be a little bit larger within that sort of vehicle delivery?.

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

That's been the big focus for us over the last five years, so that suits the SMA account as well. But as I said before, it's just not a large part of the business today, but one that we certainly are servicing..

Great. Thank you..

Thank you. Our next question is a follow-up from the line of Brian Bedell with Deutsche Bank. Please proceed with your question..

Great. Thanks. Just wanted to clarify something. We did do just a quick run on Morningstar and we got a little over $300 billion of mutual fund AUM with 12b-1 fees.

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

That sounds right..

Okay. Great. And then just on the fee rate picked up this quarter on ex-performance fees, so just was wondering, obviously, there's a mix shift between the asset classes but even within some of the asset classes we've seen some improvement in fees.

I wonder – just wondering if there's – if that's all due to mix or were there any sort of one-time-ish elements that (44:53)..

It was predominantly due to mix..

Just of mix. Okay. Okay. Great. Thank you..

Thank you. Mr. Johnson, there are no further questions. I'll turn the floor back to you for any final remarks..

Well, thank you, everybody for participating on the call. We look forward to speaking next quarter, and have a nice weekend. Thanks..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..