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

Glenn Schorr - Evercore Group LLC Craig Siegenthaler - Credit Suisse Securities (USA) LLC Kenneth B. Worthington - JPMorgan Securities LLC Brennan Hawken - UBS Securities LLC Daniel Thomas Fannon - Jefferies LLC Patrick Davitt - Autonomous Research US LP Michael Carrier - Bank of America Merrill Lynch Alexander Blostein - Goldman Sachs & Co.

LLC Brian Bedell - Deutsche Bank Securities, Inc. Robert Lee - Keefe, Bruyette & Woods, Inc. William Katz - Citigroup Global Markets, Inc..

Good morning and welcome to Franklin Resources' Earnings Conference Call for the Quarter Ended March 31, 2018. 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 Matt, and I'll be your call operator today. At this time, all participants are in a listen-only mode. 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..

Good morning, everyone, and thank you for joining. Ken Lewis, our CFO and me to discuss second quarter results.

Although outflows remain a challenge, year-to-date flows improved significantly from last year and we remain optimistic because we continue to make significant investments to enhance our investment management processes, bolster our global distribution capabilities and build out our solutions.

Given recent market dynamics including heightened volatility and a rising interest rate environment as well as cyclical nature of growth versus value, we believe that our investment teams are well positioned for potentially significant outperformance going forward. Capital management also remains an important area of focus for us.

And during the quarter, our board declared a $3 per share special dividend and we accelerated share repurchases, bringing our total payout for the trailing 12 months to over $3 billion. Financial results also remained strong. Now, we welcome any questions you might have..

Great. Thank you. At this time, we'll be conducting a question-and-answer session. Our first question here is from Glenn Schorr from Evercore ISI. Please go ahead..

Hi. Thanks very much. So I kind of agree that you might see this switchover from growth to value. Curious on why you think we might not have – haven't gotten there yet.

And then maybe more importantly, if you look across your whole franchise, why haven't we seen a bigger move towards being style agnostic across the franchise? Anyway, in other words, why it'd be in a position such that you are more exposed to style preference over time?.

Yeah. I think both good questions, and I think the growth/value cycle clearly hasn't played out yet. I mean, the same stocks tend to keep bouncing back and you've had – you have more volatility there.

I just think the macro environment is set for that as rates rise, and you're discounting future earnings with the growth stocks and, historically, value tends to outperform.

And the one thing we are really seeing, I think an interest in right now is, you do have – we talked about it, more gatekeepers looking at funds and positioning portfolios and having more influence than the broad-based advisors.

And we are getting a lot of interest in those traditional funds that actually have been underperforming in this environment, significantly in the three to five numbers that have had very good long-term numbers and much better downside protection. So, we are seeing a renewed interest on the shelf space side to position those funds.

But like anything in the retail side, it's going to take some time to see the rotation really happen before you'll see the flows really happen.

But we just believe right now that based on where the markets value and based on the backdrop of rising rates that that should take place and I think, as I said, it's being supported by many other gatekeepers.

The question of value versus growth and it is interesting too, because I mean it's something we debate quite a bit and we'd have the same kind of, why would you have a fund that specializes in one versus the other.

And looking at our performance and our growth area which is excellent, but it's just not as big as – to the franchise is the rest, so it gets a little bit less.

But you look at the Franklin DynaTech, Franklin Growth Fund, Franklin Technology and the CCAP (00:05:29), all with just outstanding performance and record flows right now, but that doesn't offset the other side when you have the deep-value players like Templeton and Mutual Series.

I think we thought of more core type offerings is something that we think about, but we also think there's solutions group and having more of a tactical allocation between the value and growth is a very simple alternative to just creating a bunch of new funds, where we can offer the allocation between value growth and really have core offerings with our solutions group, so that would be probably where we would address that..

Definitely appreciate that. I'm glad you brought up the gatekeepers getting more involved because I agree. How do they look at – how do they balance the 1 year, 3 year, 5 year with the 10 year? Like your performance is borderline amazing long term and the last handful of years is tougher.

How do they balance that? You said they're looking at some of the better funds right now. I'm just curious on how that changes..

I mean, I think you will find it's all over. I mean, I've had consultants come in and clearly they would say the 10 year is the most important number. But they also recognize that the patience level and it's a little bit different of a time horizon on the retail side. So we think the 10 year is still very important and it's still measured.

But I would say, the 5 year is probably weighted higher on the retail side. But many look at really – really try to evaluate the cycles and how you do over time.

I mean, it was interesting for us, somebody was pointing out and it was a slide that they used in a retail presentation on the Barron's ranking overall for family and up until ninth (00:07:27), right before the last big reversal in growth value, we were last on the list for three years and then we were first on the list for the next five or six years.

And now we're back to near the bottom of that because of the cycle. And they were just pointing to how important the macro moves affect an overall franchise when your assets are concentrated in one area. So that – I think his point in that slide was that, who do you want to partner with for the next 10 years? Don't look back on the 5 years.

But to your point, I mean it's really – the 1 year is not very important, the 3 year and 5 year are, and the 10 year is right there as well..

Okay. Thanks, Greg..

Our next question is from Craig Siegenthaler from Credit Suisse. Please go ahead..

Thanks. Good morning..

Morning..

First just starting on capital management, and actually I'll just ask two questions here.

What is the level of excess capital that can be withdrawn after you make the $700 million debt repayment and the April 12 special dividend? And then secondly, could we see another special dividend over the next year? Or should we assume the $3 was it?.

Right. So I think we were estimating, and it's in the filing too, that our kind of operational capital needs are about $3.5 billion, and then you could do the math where you could see all our liabilities. Remember that the dividend was paid in April, so that – you'd have to take that out of the cash number.

All the debt, the tax repayment and all that, you'd have to factor all those in. And then regarding the special dividend, I wouldn't assume anything. I think that capital management is a long-term process. Being shareholder-friendly is a priority, we'll continue to – I think we have demonstrated and we'll continue to demonstrate that it's a priority.

And so, over time, the board of directors will assess where we're at in terms of cash requirements and needs, and whether they should do another special dividend..

And, Ken, can you....

Yeah. I would just add that, M&A activity obviously falls into why you have to be flexible in answering that question on what your intention is. And there's always a possibility of another one, but there's also another strong possibility of M&A activity..

Ken, how large is that tax repayment?.

It's $1 billion..

Correct..

Okay. Got it..

$1.1 billion..

Thank you very much, guys..

Thanks..

Our next question is from Ken Worthington from JPMorgan. Please go ahead..

Hi. Thanks for taking my question. Invesco announced like an hour or so ago, a pretty big insurance mandate loss. How big is – I guess maybe first, how is your insurance business doing? That had been an issue for you in years past. What is the latest in terms of AUM here? And what are the recent trends in terms of sales and redemptions? Thanks..

Their insurance business right now is $2.5 billion in the variable annuity. Is – sorry..

No, it's more like $30 billion I think..

No, I don't mean that. I meant like – I'm sorry, I meant the variable..

I would say, it's probably somewhere $30 billion to $40 billion. The redemption activity has slowed down.

Still some of that at risk and we're really – we've been working with the insurance companies to come up with alternatives through our solutions group for more lower volatility type equity exposure in the markets and retain some assets through that.

But right now not in a growth position, although we are seeing I think the viability of variable annuities going forward in the market and some of the repricing of annuities, and continue to have very strong relationships with the insurance companies and hopefully get that back into net inflow.

But for now, I would still say, it's more of a potential net outflow looking at a year or two ahead..

Okay. Great. And then on Ken, shareholder service fee expect to be flat compared with last year. I guess, is there a new level of seasonality in the March quarter. To get your guidance of flat, kind of need that to really pull back in the last half of the year, and I couldn't quite get there based on the description of how they're now calculated.

So, anything there?.

Yeah, that's correct. Yeah, last November we changed the model on how those fees are calculated. It's combination of fixed and variable, and the variable is related to transactions. And because of – in this particular quarter, we have all the tax transactions that have increased the seasonality of that line.

So that should fade out and that's why we're saying overall year-over-year should be flat..

Okay. But next March and the March after and the March quarter after that, we should see the pickup in the first quarter typically..

I'm sorry, I didn't hear that..

So in terms of seasonality, the March quarter is going forward will be elevated and the rest of the year will be sort of depressed. Is that how we should think about it....

Correct..

...in years forward?.

Correct..

Okay. Thank you. That was it..

Year next question is from Brennan Hawken from UBS. Please go ahead..

Good morning. Thanks for taking the question. Just wanted to follow up. You guys put in some good clarity on updating your expense guide, and saw how Edinburgh is going to provide an uplift to some of those line items.

Could you help us think about how we should be modeling the revenue pickup from the Edinburgh AUM coming on, what kind of fee rate, et cetera?.

I think that, overall we talked about the Edinburgh acquisition as being not material to earnings and that's still true. I think what I've been doing with the expense guidance is, previously we've talked about some of the initiatives that we've invested in and that's why I've given the – I think the 5% guidance.

And what I'm trying to do now is just to factor in all of the expenses. I wouldn't say Edinburgh Partners is a big part of it, but we had the severance in Korea this quarter and all that. So when you factor all of that in, that's why I'm giving the 6.5%, 7%, 7.5% guidance..

Okay. So, effectively Edinburgh being just one contributor there and not really a driver, and therefore the offset from revenue isn't going to be material either.

Is that what you say?.

Correct. That's correct..

Okay. Thanks for clarifying..

Our next question is from Dan Fannon from Jefferies. Please go ahead..

Thanks. In the prepared comments, you talked about the pickup in retail redemptions outside the U.S.

I guess, is there anything specific that happened like platform related or how should we think about the trends there may be going forward?.

No, I don't think there was anything trend wise. I mean, I was looking underneath trying to answer that question as well. I think you did see a pickup in some redemptions in Global Total Return, but you had clearly steady flows into the Emerging Markets Bond.

And some of that pickup, just quarter-over-quarter, could have been a platform moving or a major reallocation in a platform because you do get that more in Europe than you do here certainly in the States. But no real underlying trends to report there.

I think the performance is lagging a little in the short run, but picking up here in the last – this month, as rates are climbing up. And we also think still the defensive nature, this is a fund that kind of shines.

And down markets, as it's not correlated with anything else, so hopefully we can get some absolute return in a tougher market environment and get flows back. But it just seems like right now the Emerging Market Bond Fund continues to get momentum versus the other two..

Okay. And then just to follow up on another comment from the release. You talked about an outreach program for at-risk assets.

I guess, can you put some color around that, maybe how you size those at-risk assets and, I guess, how that outreach is going?.

Well, I think that there is no – I think, again, the institutional is just looking at areas where you have had deep value and long-term relationships, and making sure that we are being proactive in meeting with those.

And I don't think there's any one category, I think like at-risk, we – certainly on the VA side and that's where Ken's number came at-risk.

We'd say $2.5 billion was the number that he came up with off the top of his head and that was the at-risk assets for this year that we just know based on the relationship that they may be shifting that to something else.

And I think it's just recognizing everything's at risk every day, but certainly the deep value assets that have underperformed, we've got to get out there and make sure people understand how that performance should turnaround based on the macro environment. That's really the effort that we're doing with the institutional side.

I think you have to recognize that a lot of – when you have big assets and styles out of favor a lot of your efforts are defensive versus going out and trying to get new business. You have to make sure you maintain the relationships with the existing business, because you're under pressure as well..

Got it. Thank you..

Thanks..

Our next question is from Patrick Davitt from Autonomous Research. Please go ahead..

Hey, good morning, guys. Thank you. As a follow-up to Craig's question, it sounds like you're still optimistic on the M&A opportunity.

Have you noticed any changes, I guess, in the willingness of sellers to sell through the recent volatility? And within that, should we think of the repurchase authorization as separate from the pool you're keeping to do M&A, or is it kind of a placeholder for capital return until something gets done?.

It's the latter. It's a placeholder. It's not a separate part, no. (00:18:13).

Right..

And I wouldn't say the volatilities changed the opportunities here; certainly not in the traditional space. But we are seeing more, I think, opportunities in the alternative side..

Okay, great. And as a follow-up, the management fee rate I think was probably a lot higher than people were expecting and you mentioned periodic revenue sources as one driver.

Is that really just the performance fee, or is there something else there? And how much of that was really just driven by the average equity component?.

Yeah. So performance fees, it was – it was our Romanian operation fund dual that was part of it and then regular performance fees. I mean, I think that the daily average assets under management kind of clouded the calculation a little bit. But the takeaway is that we're not really seeing a big dramatic shift in the effective fee rate at this time..

Thank you..

Your next question is from Michael Carrier from Franklin (sic) [Bank of America Merrill Lynch] (00:19:23). Please go ahead..

Thanks guys. Just one on capital management. Just given the pace that you have in buybacks and in the authorization that was announced, just trying to get a sense of what we should be expecting as maybe like a run rate basis versus where you can be opportunistic. And then still wanting to have a strong balance sheet in kind of firepower for M&A.

So any color on what might be a good run rate, given the elevated level we saw this quarter..

Right, and it's a tough one to say. A lot's depending on so many different factors. So I don't think I feel comfortable actually saying that this is a run rate. I just say that it's a priority, it's a high – it's a continued priority to return capital to shareholders. This quarter there was a lot of reasons for the elevated repurchases.

We might have better – we'd have – might have – next quarter might present more opportunities or less opportunities. So it's tough to say..

Okay. Got it. And then, Greg, I think you mentioned in some of the commentary, some of the things you guys have been doing given the industry changes. So whether it's investments in the business, some of the M&A stuff.

And so I just kind of want to get a sense, like when you look at what you're doing, say in 2017, 2018, heading into 2019, what are some of the – kind of the big maybe investments that you think can kind of start to shift some of the flow trends? Obviously, there is the performance aspect.

But maybe take that away and whether it's on like the product side, the distribution side.

Where we might be able to start to see some traction as we head into 2019?.

Yeah. I mean, I think the investments that we have made and continue to make, recognizing the changing distribution landscape, and we certainly have added to the number of people calling on the home offices and gatekeepers.

And we have seen I think results from that already, where we target the number of funds on platforms, and we've exceeded the targets for the year on making sure that funds are either maintained on the new lists for advisor platform. So I think that's been a very important area of investment.

The ETFs is another very important area for us that we continue to build out. We added seven new funds in the last quarter. And have to have a separate distribution approach to that, so that's an incremental investment for the firm.

The solutions team, we've added very senior people there over the last year and think that that's just going to be increasingly important. And now, in a position to really offer a better suite of multi-assets and target-date funds and customized solutions.

And in the last quarter, we got a $300 million mandate in the multi-asset category, which is something we would not have been competitive in last year. I think the other areas around just data would be a longer term, but we have made – we bought Random Forest and really that's more of a fixed income effort now in the non-bank lending section.

But just having the data scientists here and then building it out with each of our investment teams with the hub and spoke in India is going to be important in how we consider – or how we look at and build our capabilities in looking at data. So those would be a few of the areas.

And then private equity would be another that we have – as we think about technology changes and disruption and fintech and we've approached it kind of the piecemeal and one-off.

Well, now we have a much more organized way of looking at it, where we have a specific strategic pool of money, we have the dedicated teams that are actually raising private equity funds now, and we have partnership with a firm looking at data and AI investments, where we've already made a significant amount of those.

And all of those help us, as we think about tools for our investment teams and better information and better data..

Okay. Thanks a lot..

Thanks..

Our next question is from Alex Blostein from Goldman Sachs. Please go ahead..

Hey, good morning, guys. Just a couple of questions around just investment and spending trends.

I guess – can you, I guess, help us bridge the – and I know there's a couple questions in that, but what I'm trying to get to is, relative to the 5% in expense grow that you outlined last time, going up to the current range, how much of the initiatives kind of – so the Edinburgh acquisition, Random and the JV with Korea, how much did that add? And should we assume the rest is basically incremental growth spend? That's part one.

And I guess part two is, as you look out at the next couple years, I guess where are we in the investment cycle? You guys are clearly implementing a bunch of new things.

But just thinking beyond this year, what should be the expense growth for the foreseeable future?.

Well, I think the – yeah, on the expense growth, the main part is like I said earlier, it's just kind of – given all of the activities that we've done – but I'm trying to just give you an estimate of where expenses will be in this fiscal year. Part of it is the seasonality also of the comp line.

So, that's why I gave the specific guidance on the compensation, but that's just kind of in the short term.

I think going forward, next year – and I made the comment in the remarks that it's a year for us to assess the investments and call those that aren't working and look for ways that we can kind of temper that expense growth to something more in the inflation range.

So that's going to be looking forward for next year, and there'll be more to come on that the next time we get together..

Okay. Thanks..

Our next question is from Brian Bedell from Deutsche Bank. Please go ahead..

All right. Great. Thanks. Good morning, folks. Maybe just on that thing on the – just the last comment you... [Technical Difficulty] (00:25:55).

Can you repeat the question?.

Yes.

Can you hear me?.

Yes. Now, it's working. Yeah..

Okay, great. Just Ken, relative to the comment you made in the prepared remarks about assessing the investments. Just your view again of outsourcing the custody fund accounting and back in middle office. Obviously, custodian banks are talking about an increased trend of outsourcing from asset managers.

I know you guys have always wanted to keep that in-house, because you can scale that.

But is that something that is part of that assessment, or would you rather just keep that? And I guess also, how do you think about the market environment to the extent that if we do go into a bear market, obviously better to have a variable cost structure with that..

Sure. And I think we have a nice – I do think we have a nice mix of fixed and variable comp. And I think also, as we mentioned before that our presence in these low-cost jurisdictions really does make a compelling argument for not outsourcing.

But having said that, it's not something we do on an annual basis that assessment, but it's certainly something we do cyclically. And so, maybe three years ago we did that analysis and decided, oh, that we should make some investments for the internal systems. But going forward, we're going to continue to look at those things as well..

Okay. Okay. And then question for you, Greg, on the U.S. retail redemptions this quarter – this first quarter or the March quarter.

If you could maybe – maybe hard to do, but if you could parse that out between what you think is more due to the market conditions with the corrections we've had versus the platform, product line of changes at the warehouses and the other broker dealers. Just maybe your view of where we are on that platform consolidation for the industry broadly.

I know we've done a lot of it, since – obviously since DOL.

But is that – are we most of the way through that or do you see a lot more to happen?.

Yeah. I mean, good question. I don't think there is any real quarter – or shifts in retail flows.

I mean, I think you have the drag of the significant value assets and our larger funds, and then you had volatility in the first quarter for the first time where you had a big risk-off kind of moment there, and then a fairly – a decline in the market at the end of the quarter. So you did see a spike up in retail redemptions.

I didn't see anything by asset class or product line really to call out other than you just – again, first time we've had some real volatility in the market.

And I think we did a little better redemption rate wise through that period; and certainly, performance wise for that short period of volatility like we would expect with some of the value funds. And the other part of the question was....

Was on the warehousing and... (00:29:16).

Oh, right. Right, right, right. I think that's a good question and I was actually talking to some of our sales heads about that. And I think it's interesting this – the new, call it, the higher standard of conduct or new best interest standard that is under common period with increasing the suitability requirements and disclosure.

I think what's important in the proposal is that, certainly brokerage, as it exists today, can survive and doesn't have to be modified to a level where you can't have differentiated commissions. So I think that's important. I think the other, obviously not being enforced by plaintiff attorneys is a good thing for that proposed legislation.

And so, I think it would slow down the acceleration of movement from brokerage to advisory accounts. The urgency to do that would not be there, and I think that's a good thing certainly for our mix of assets that has high exposure on the brokerage side. So, I think the – we're not done, I don't know what inning we're in in this shift.

It seems like – I was looking at one of our major distributors and partners and they probably had a ratio of 65/35 still a brokerage to fee base. But the other side of that is the new assets coming in are probably 70/30 fees. So I think regardless, you have to get your model positioned more for the fee side.

But I think the deal well being vacated and some of the difficulties in complying with that rule, certainly will slow down that trend and brokerage can run off in a more reasonable way instead of having to convert..

All right, and that gives us great color. And indeed, from the actual number of products on the platforms, do you see that continuing to come down significantly or do you think we've gone through sort of a house cleaning... [Technical Difficulty] (00:31:23).

Yeah. I think we've gone through it, but I think the – clearly, there is less on there and that means that you have to rationalize your product lineup which is something that we've spent a lot of time in the last year, really looking at deciding what is going to be viable to continue to promote in the future.

And that's really where the initial investments we've made and more relationship specialists and consultants have been important to make sure that those funds get that shelf space.

But I think the – you have a narrowed funnel and the question is, how quickly the brokerage assets move to that narrow funnel and you'll have – that's where you're really getting some of the accelerated or higher redemption rates for your traditional base..

Right. okay..

So it's a narrower funnel, it hopefully will not get much more narrowed. I don't think there's any reason for that. But really it's the speed of the movement, that's a question..

And that's still coming, is what you're saying....

Yeah..

...in terms of the actual flow, yeah. Yeah, okay..

Yes..

Thank you..

Our next question is from Robert Lee from KBW. Please go ahead..

Great. Thanks. Good morning, everyone..

Good morning..

Good morning..

I guess a question on kind of, I guess, retail distribution. I mean, some of your competitors have talked about other success they're seeing in retail distribution because of their SMA presence.

Others have talked about how they've invested in building out that capability, because it kind of recognizes a need if they want to be in that distribution channel. And I mean, I don't have a sense that that's been a product lineup where you've traditionally had as much focus.

So could you – do you think that's – maybe as you get the centralization on a lot of platforms of decision making and a lot more advisors shift to kind of SMA-type wrap products that – I mean, is that – do you feel that your position is you should be there? Is that one of the places you're focused on making – rolling out new products and making new investments? Just trying to get a feel for that..

I would say, yes. I mean, I think as we've said before, we do view ourselves as the content in (00:33:45) active investment management and the vehicle we're not agnostic to, whether it's commingled trusts, SMAs, ETFs. We're going to do all of that.

And I think, now with technology improvements and efficiencies, we can do SMAs much more easily than we could say 5 or 10 years ago. So that is an area that I think we will continue to expand and offer more products. And certainly, the commingled trusts and flexibility with that is something we've been doing here in the last year..

Okay. Great, and then maybe one last question, not to beat the capital management horse too much. And understanding you had the $3 special and the increased dividend 15%, I guess it was back a couple quarters ago. As I think of your kind of, let's call it, regular dividend payout ratio, it's still kind of hovering around or just around 30%.

And if I think of your – many of your peers are kind of in that 40% to 50% range. And you now have access to worldwide cash.

So I mean, can you maybe talk about just kind of your regular dividend? Is the goal just to kind of start low and just keep your track record of increases? Or is there a possibility that you kind of raise that normal payout ratio up towards kind of more of a peer average?.

Well, when we talked about this at the February meeting, we talked about all the aspects of the dividend, the payout ratio, the yield and all that and the special dividend, shareholder preferences. We went out and talked to our major shareholders. And I think the answer to your question is, time will tell.

The regular dividend will probably be a topic at future board meetings. And so I wouldn't rule out a larger increase, but I wouldn't count on it either. It's definitely a board decision..

Okay, that was it. Thanks for taking my questions..

Thanks..

Our next question is from Bill Katz from Citi. Please go ahead..

Okay. Thanks for taking the question. Lots have been asked already. Just in terms of coming back from a bigger picture perspective, Greg, seems like your verbiage is that you're still open to transactions, but you're – as a firm have been more tactical in approach, either in terms of what you've acquired or what you're building out.

Where are you from a bigger picture perspective of a bolder move that might be needed to jump start growth? I hear you on the long-term performance, but you have great performance, but you're not leveraging that in any way across the platform, whether it'd be equity or fixed income. And I hear what you're working on a little bit.

Is there something larger to do that could either accelerate earnings growth or accelerate the flows, rather than just sort of trying to see if some of these more skunk-work things actually get hold? And how do you think about the risks of something like that today?.

Yeah. I think the risks are great to think about a large-scale merger and what you're left with. So I think that's again, as we've said, less probable. But you look at something like a K2 now that is generating $0.5 billion a quarter in net inflows. That's fairly significant to us in balancing some of the rest of it.

So I think that those kind of incremental adds are still going to be very important to us. And the priority is to find more non-correlated alternatives that we can offer, specifically through retail and institutional. But we're open, as we always say, to look at everything that we think can jump start or be incremental.

But I think the thought of combining two large firms that have multiple styles underneath them, gets a little bit daunting and risky for the shareholders and trying to understand who they are and what they do. So we, as always, have – are looking at many different situations and are finding firms in that medium size.

We have done a series of smaller ones and sometimes they take as much work as the bigger ones. And so, we want something that's going to move the needle and we are seeing things more in that mid-size versus tiny or extremely large; and that's really what we'd like to do..

Okay. That's helpful. And then just one quick one for Ken.

Is there anything in your numbers here in terms of revenue recognition restatement some of your peers have had to sort of adjust certain fee waivers and/or distribution payments that may have affected the optics of reported numbers this quarter or comparably from prior quarters?.

No. No. That's effective for us next year..

Okay. All right. Thank you very much..

Thanks..

Our next question is from Patrick Davitt from Autonomous Research. Please go ahead..

Thanks for the follow-up. It looks like global bond is top decile again year-to-date. The last time we saw improvement like that – I think post-election we saw a pretty quick kind of uptick in sales there.

Curious if you're seeing that again, and if there's any reason to think that this period would be different than that period in terms of the improvement?.

I don't think it was – that's fairly short term and that was news to me, so I doubt the market knows it yet. I know we certainly had a big move in relative numbers in the last few weeks which I've seen. But I think it will take a little time. But again, I think the more volatility you have in the market and then people start looking for alternatives.

And this is a fund that really – it was pretty obscure and small and so it had a 10-year record. During the last decade of equities, it was up 10% a year. So you really do have an alternative that can add some balance to a tougher market environment, and that's what people are looking for.

And it's been competing with a ripping market for the last decade in places like Europe where it was an alternative to the euro. Euro stabilized, has been strong. So it's had a lot of headwinds just from local debt in its local markets, and that tends to be when it really does well in Europe.

But in the U.S., clearly, we think it's an alternative category that if the markets get choppy and if rates go up, there is not going to be many places to hide and I think you can do very well in that environment..

Our next question comes from Brian Bedell from Deutsche Bank. Please go ahead..

Great. Thanks for taking my follow-up. Just I want to clarify, one thing you said, Ken, I think about the – prior question about the revenue contribution from the recent deals. I think you said the expense obviously is going up from those deals. And then part of that was severance I think.

And then, I guess, you said it was – if I heard it correctly, it's not material.

So, is that a match of revenues and expenses or do we see a profitability profile for that next year after you get through the severance?.

Yeah. I don't think it's material on revenue or expenses. I think that – I was just trying to – try to clarify maybe added more confusion, but I was just trying to clarify the effect of what's been done this year and how it will play out in future quarters..

Okay, okay. So just not that big, okay. And then just on the cash, the $10.4 billion, if we look at that pro forma for the dividend payment, the tax payment and your bond pay down, we would be a little bit north of $7 billion, not including any other factors.

Is that sort to make sure you I have that right?.

And then, our kind of the money we put aside for operational regulatory needs, that takes it down significantly from that number..

Yeah, the $3.5 billion, right. The $3.5 billion that you keep for....

Right, right..

Yeah. Yeah. You see your excess will go to $3.5 billion basically..

That is the reasonable conclusion..

Okay..

We don't use that word..

Okay. Thanks very much..

Thank you. This does conclude the question-and-answer session. I'd like to turn the floor back over to management for any closing comments..

Well, thank you everyone for participating on our quarterly call and we look forward to speaking next quarter. Thank you..

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