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spk01: Good morning and welcome to Franklin resources earnings conference call for the quarter ended December 31st 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 MDNA sections of Franklin's most recent form 10 K and 10 Q filings.
spk09: Good morning my name is Brenda and I'll be your call operator today. At this time all participants are in a listen only mode. If you'd like to ask a question at that time please press star one on a telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. And as a reminder this conference is being recorded. At this time I would like to turn the conference over to Franklin resources chairman and CEO Mr. Greg Johnson. Mr. Johnson you may begin.
spk07: Thank you good morning and thank you for joining the conference. I'm pleased to be here all today to discuss this quarter's results. Ken Lewis our CFO is here with me as usual to discuss our financials and we also have Rich Byrne president of Benefit Street Partners available to address any questions on the alternative credit market as we're set to close on the acquisition this Friday. Market volatility clearly impacted our financial results this quarter. In fact the net effect of the mark to market which is predominantly unrealized losses and other income was more than 83 million this quarter. Fortunately this environment has been more conducive to the success of value oriented investment strategies including many of ours. We are pleased to see our relative performance continue to improve with net sales improving notably in several of our flagship strategies this month. Lastly we remained active with our capital management program and returned approximately 460 million to shareholders for purchases and dividends in the quarter. We'd now like to welcome any questions that you have.
spk09: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue and you may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question during the Q&A. One moment while we hold for questions. Our first question comes from the line of Patrick David with Autonomous Research.
spk16: Hey good morning thanks for the question. It looks like in the paired remarks you're guiding to expenses being down in 2020. Could you walk us through the puts and takes of that versus investment need and how you can get comfort that the expenses can come down after being up in 2019?
spk14: Sure Patrick. This is Ken. So we've been working in the last couple of months with all the business units to identify areas where we can leverage efficiencies and fund all those investments you reference. The result of that exercise is that we do think through cost cutting initiatives that we will implement this year that we'll be able to get the run rate expenses to be at or below the 2018 levels and still make those investments, those strategic investments that you referenced.
spk16: Okay great thanks. And in that vein I guess is there a chance that some of that could bleed into 2019 so that you know the lower end of the 2 to 3 percent guide could come down again?
spk14: I do think yeah I think that's true and I think we are trending on the lower end of that guide right now. I think I would say to you that as we go through the cost cutting initiatives there'll probably be execution costs that will be non-recurring and we'll be able to give you a better handle on that as we go through the process next quarter. Thank you.
spk09: Our next questions are from the line of Daniel Fenn with Jeffreys.
spk13: Hi just to follow up on that I guess I thought last quarter the comments for this for fiscal 19 was closer to flat and your comments about you know you guided up but said it could be towards that flat so just want to clarify is your fiscal 2019 guidance a plus 2 to 3 percent a change from what you had before? No
spk14: I'm going by memory of the comments last quarter for sure the guidance remains the same at 2 to 3 percent and we gave that guidance but I think when we talked about this quarter because of the reasonality I think that's where we made the reference to flat but I'm sure the annual guidance was up 2 to 3 percent and it hasn't changed and we're tracking to the lower end of that right now.
spk13: Got it and then just on you know you kind of reference increased growth sales in the quarter you know we're seeing it I guess more in some of the US products can you talk about that momentum and kind of maybe a little more specifically where you're seeing it at some of the products and maybe some of the channels that there is actually you're seeing some of that traction actually pick up?
spk07: Yeah I mean I think the big driver you know tends to be in flows is the global bond and you know if you look at the performance and just recently the one in three year moved into the top quartile and also the fourth quarter which as we know you know was a tough quarter for about every segment where MSCI was down 13 and S&P down 15 we had a positive absolute return for global bonds so I think that gives a little bit of near-term momentum you know that we saw kind of I think as there's more uncertainty as I said before as people get a little more nervous that tends to be you know a better selling product and we're certainly seeing that you know I would say that one you know I've had the biggest turnaround in flows and we're seeing that through you know through this current month as well you know the other would be the income fund which is something we put a press on and that's really US retail product but we saw a pickup in sales there we're just getting that message out we had a big anniversary kind of sales push on that fund but those would be the two primary drivers and we saw a pickup in the muni gross numbers as well over the quarter in the US.
spk02: Great thank you.
spk09: Our next questions are from the line of Craig Seganseller with Credit Suisse.
spk11: Thanks good morning just first on excess capital what is the level of working capital, regulatory capital and seed within the 7.8 billion just so we can back into sort of true access here?
spk02: That's approximately three, three billion. Three billion so that would be 4.8 billion net.
spk14: Well three to four billion so three billion three to four billion net.
spk11: Okay and just as my follow-up you know what is the potential for another special dividend here and I actually think you may have another board meeting coming up in February so what are your thoughts around that just given all that excess capital?
spk14: You know I think as we've said before to this question you know that that decision is the board decision it's hard to handicap what they what they think you know we feel that we feel we continue to say this we feel that you know having a strong balance sheet is strategic and you know having dry powder for potential acquisitions is always a consideration so all of that will be weighed at the February board meeting.
spk07: And you know I just think it you know I mean this is an industry that's undergoing quite a bit of change and you know excess is not a word we use on the balance sheet it's a word that the market tends to use but we think that capital can you know if you choose appropriately you know can be very strategic and add a lot of shareholder value as things change and opportunities arise and what you know could be a pretty volatile period
spk02: for the industry.
spk09: Our next questions are from Michael Carrier with Bank of America Merrill Lynch.
spk08: Thanks guys maybe first one for you you mentioned you know in some of the commentary just some of the traction that you're seeing you know over multiple years of initiatives on you know the fee-based you know side of the business in US retail maybe can you give us an update on you know what kind of traction you are seeing in terms of you know the platforms number of products and maybe an update just you know how much of your you know businesses on the fee-based side you know relative to say maybe the brokerage and how that has shifted you know over the past few years as these initiatives have been in place.
spk07: Yeah I mean I think the as we said before that I think an area of significant investment for us in the last few years has been really transitioning the US retail distribution to be better equipped to service a fee-based environment and that not only required adding a lot of different skill sets into the group but also pricing and changing and adding classes of shares and changing products as well and also we created a specialized New York Stock Exchange channel you know dedicated and we're you know I think those kind of changes take a little bit of time but we are seeing results and even the you know New York Stock Exchange channels we were up 26% in sales quarter over the prior quarter so you know I think that that and those kind of changes can be disruptive but I think they're somewhat settled now. I think another area that you know we think is going to be important we talked about solutions we put a big investment in solutions and I think today we have a you know what we consider one of the best in the industry which is you know as far as product development and where we think incremental growth can occur within our multi-asset group in solutions we now have 11 model funds you know which use underlying FT funds but but also because they can you know incorporate some lower cost indexing and passive into that it gives us a much more competitive outcome oriented solution type product and we have 11 of those that are just rolling out right now and you know we're seeing a lot of interest there. I think the I don't have the exact number between the break but I think you know I think as far as we look at the world probably 70% you know is going into fee base versus brokerage today so that's where we need to be and and what we measure is the you know the effect of or how important it is to get products on the shelf on the platforms and we have very you know specific metrics you know try to do just that and and we've seen a you know a very strong pickup and that goes to ETFs as well where you know the I'd say one of the big changes in the last year is because we've been out there long enough now you know with some of those ETF funds having those types of consultants in place and product managers that were able to get approval you know into the New York Stock Exchange firms and that'll help that as well. So you know I think it is it is a big transition it's going to continue to happen you know with some funds that may not fit the fee based world others that we have to continue to modify pricing on and and maybe adjust but you know I think we're we're we have better momentum or good momentum there now and you know and hopefully that's going to continue.
spk08: Okay that's helpful and then Ken, just a quick follow-up on the capital return you guys have been active you know kind of across the different you know ways that you can return capital just on the buybacks you know given that the pace has been elevated any update you know just how we should be thinking about you know the the rest of 19 you know just in terms of the pace?
spk14: Yeah it's pretty much the our same policy that we've had and practice that we've had going forward so you know obviously we think the stocks are good buy at this price so we'll be active in the market but you know having said that we're going to be both systematic and opportunistic take of things like you know volume dips and and then you know hold back if we see any kind of opportunities in the M&A world or any other need for capital so kind of more more of the same I you know I don't know that I would think we would you know the volumes would be elevated from this level but you know just we're just going to continue to be opportunistic.
spk02: Okay next slide.
spk09: Our next questions are from the line of Bill Katz with Citi.
spk03: Okay thanks very much Ken staying with the margin discussion for a moment could you sort of maybe drill down in terms of where you think you can get some of those incremental savings versus talk to some of the incremental areas of spend?
spk14: I think you know I think across the board I think every every function is looking at their their operations and trying to identify areas where we could reduce costs you know it's simply you know a lot looking at kind of you know what we do and how we do it the world's changed so you know there's probably a lot of outdated procedures and that we don't need to do it do the same way anymore and so and and obviously we've been building over the years in low-cost jurisdiction so leveraging leveraging that and that crosses every function so it's really an enterprise-wide effort it's hard to say one particular area versus another but I think the key levers are the low-cost jurisdiction and then leveraging technology and then you know we've kind of been very forward with you know with our strategic strategic investments are so we would continue things like solutions and other strategic investments and fund them with these savings.
spk03: Okay and just as a follow-up Greg you mentioned it's a rapidly changing backdrop and from that I'm sort of implying that maybe a little bit more interested in M&A could you talk a little bit about from here what areas seem to make the most strategic appeal to your mind?
spk07: Well I think the again as we've said before I mean you know I think it is a changing landscape for distribution and how we look at the world and I think if that means you know there's opportunities to to tie up with distribution in some cases or own portions of distribution I think that would be different than our traditional way of thinking about a purely independent asset manager and I think you're seeing some of that happen in in places around the globe you know that would be one that we think could be strategic for us you know I've said the you know the high yield business the ETF business all businesses that we want or I meant I said high yield the fiduciary trust would be one that you know we'd want to grow and scale up you know having that direct relationship with the investor I think it would be important as well so those would just be a couple but distribution and building high net worth would be certainly two priorities for capital.
spk03: Just a quick follow-up since you have some on-line I want to get an update from the team of benefits just in terms of what they're seeing in terms of the credit backdrop and allocations given some of the tumble through the fourth quarter.
spk07: Dale, I guess Rich, you there?
spk10: Yeah thanks Greg I'd be happy to take that. The fourth quarter as as you know you know with the drawdown in the S&P we saw outflows out of loan funds and bond funds um uh some of that trans you know that translated into the liquid markets on pricing less so in our private debt business is usually a delayed effect there. Maybe for the purpose of your question note that almost all of our capital is locked up capital so you know if your question relates to you know any redemptions or things like that that's not really a factor for us. For us it's just a function of where is the most opportunistic investment opportunity. I know the market has retraced a lot of the declines in the from the fourth quarter into the first quarter but we're finally starting to see you know some of that lag has finally taken hold pricing and documents starting to reflect a more reasonable risk reward equation and just a word about sort of our philosophy we've generally been fairly defensive in how we how we position most of our portfolios particularly around the private debt product. Mostly everything we've been doing is top of the capital structure most of that's first lien low loan to values and you know fair amount of dry powder so we you know we're looking forward to a more reasonable environment where we can invest. Fundamentals have been still relatively strong I know there's some headwinds we'll see what volatility brings us going forward but for us this is a buying opportunity.
spk09: Thank you. Our next questions are from the line of Robert Lee with KBW.
spk15: Great thanks thanks for taking my questions. Now maybe sticking with Benefit Street a little bit I guess a couple questions there. Number one you know maybe can you give us a sense of you know where you are in maybe your fundraising cycles I mean obviously mostly locked up capital did you just kind of come out of a cycle with a lot of dry powder or you kind of you know have on the drawing board post-closing there's you know fair number of new strategies or existing strategies you're raising for and then maybe Ken I think when you announced the deal last quarter you kind of suggested that beyond kind of gap impacts you know there could be some other things that kind of start impacting the P&L either you know going forward whether it's a contingent payouts or whatnot. Can you any update on how we should be thinking about those non-gap factors going forward or maybe some of them are gap?
spk14: Let me start with that and then and then send it over to the Benefit Street guys. Right so in the guidance we talked about for this year we have eight months left the deal closed February 1st that you know for modeling purposes we're looking at investment management fees increasing about three and a half percent and whatever and then you know commensurate increase in expenses not in percentage basis but an absolute dollar basis. So we still think that in this fiscal year the acquisition will be neutral in terms of EPS accretion and then accretive after that.
spk15: Okay I mean there's going to be any we want to think of kind of the cash impact should we assume that's going to be somewhat higher maybe there's some tax benefits or obviously intangible amortization things like that or?
spk14: Well those you know those expense numbers include everything and in terms of cash you know we disclose we disclose the purchase price so and that's that's that's it so it's so it's the upfront payment that we disclosed and then the expense the expense number I gave you
spk15: and that's it. Okay all right maybe the follow-up on some of Bill's question I'm sorry go ahead.
spk14: Do you want the Benefit Street folks to answer your question? Yeah
spk15: that'd be great.
spk10: Okay sure well let me see if I can hit the key parts that you're getting at or follow-up if you like. We you know most of the money as I mentioned and as you mentioned is is locked up capital in drawdown funds. That is our flagship fund in private debt that's our fund four. We have a senior only fund in private debt. We have a special situations fund. We're actively investing those funds when we get to a certain threshold of drawn capital we usually then start to market our successor funds which we intend to have successor funds to each of those so we've been generally on pace on all that and remember we also have leverage against the funds that we could use for you know additional buying power you know if you know if the market opportunity gets better. So you know we remain on pace and that's sort of the the nature of how we approach it. Did that answer your question?
spk15: Well I guess I was just curious I mean say since you're not familiar with your firm you say on pace are you kind of halfway through investing these and they have kind of an average investment period of three years just trying to get a sense of when you could hitting that you know next fundraising cycle.
spk10: Yeah as a general rule we raise our successor fund when we're 75% invested in the current fund and all three of the funds that I referenced and I didn't even mention you know our separate accounts and other capital that we manage that's also locked up but we are more than 50% drawn on all the funds that I mentioned and they all have different drawdown periods and cycles so it's a little more detail but you know we're more than halfway we're more than half drawn and when you get to 75% you should assume we'd be launching some successor funds.
spk15: Okay great fair enough and maybe if I can just one quick question when you think about your own budgeting and modeling you know going forward and given a lot of the investments you've made in whether it's CITs or ETFs or just new products you know and obviously have made some and have talked about some kind of you know fee adjustments how are you modeling changes in your kind of overall fee rate I mean do you kind of assume hey it's going to go down one or two basis points a year or half I mean how do you kind of handle that internally?
spk14: Yeah we've so you know we bottoms up build of all that and we look at the the mix of assets going forward and you know with the with the volatility this quarter we saw a slight you know if you if you would if you adjust for non-recurring items for the two quarters we saw a slight degradation in the effective fee rate and so if you look forward for the for 2019 we think that the fee rate won't change that much and might be slightly lower than last year but we're not getting a lot of external fee pressure on that so we're not budgeting some you know material decreases in the effective fee rate going forward now of course benefit street will change that and for the better but you know I think I give you the math for that but without benefit street you know we don't see significant change in effective fee rate a slight slight degradation in 19 versus 18.
spk02: Great thanks for taking my questions.
spk09: Our next questions are from the line of Brian Bedell with Deutsche Bank.
spk05: Great thanks very much. Greg maybe can you talk a little bit about the the investment advisor reception to the improved performance you know in you know across a lot of different products especially in the one and three year periods and and whether that's that's actually impacting sales here in January and also whether that's slowing redemptions obviously December was heightened redemptions for the industry
spk14: and
spk05: then also on the institutional mandate side any large one or lost mandates in the pipeline and then you see delayed funding given the environment in the institutional space?
spk07: You know I think it it December January is always a little bit tricky to get to draw too many conclusions because of the tax selling and in December and and then the strength that the historical strength of January after that with you know some retirement fundings other money going back in the market after tax selling you know I think like most in the industry we we sometimes maybe get overly encouraged by January because it it you know it looks so good compared to December and I think that's that's true again for us and I think part of that you know hopefully is is certainly sustainable with with better performance over time and if I you know I was just looking at a chart you know for us our top 25 funds a year ago 6% were in above average and this year 78% are above the peer average so you know that's a significant shift in in performance that you know I think you know we we know that we have to get that message out and have it you know flow through the three and five year numbers but you know I think we we are encouraged by what's happening you know in the market we said sometimes you know being a predominantly you know as far as our mix having value side that it takes a little bit of a disruption in the market you know to get people thinking back again about value and I think the decoupling from the fangs is another you know important shift that's happened over the last few months you know that should help these so we are seeing as I said before I mean I think the global bond is a very strong story in this kind of marketplace and as people you know become more concerned about equity valuations and things and looking for alternatives it's just a nice fit so we're seeing and that one tends to move a little bit faster than say your you know your traditional retail value funds which may take a little bit more time but clearly I think you know the relative numbers give our sales force something to certainly talk about and and hopefully we'll see see that boat as I've said the beginning January you know looks a lot better than December
spk05: and on the institutional side
spk07: yeah the institutional I haven't heard anything as far as you know that I think you know we we that may have been the case where you saw delays but I haven't really heard that and you know if you think of if you think the retracement in the market that we've had to date would probably eliminate anybody from a timing standpoint but you know I just I haven't that's just something I'm not aware of you know having a delay there
spk05: thank you thank you and then just on the capital management Ken I think you said just I just wanted to clarify was it three to four billion of what you view as net excess capital or cash and then maybe Greg just to expand on your M&A comments about you talked about distribution I guess if you can get a little deeper in in that I think you mentioned high net worth but if that's if there anything else where that you wanted to sort of own the distribution and I guess how that fits in with you know this general trend towards open architecture that's been going on for decades
spk14: yeah so in our prepared remarks for your question on the excess I'll give let Greg get the moment it's uh 3.3 we said 3.3 billion of liquid assets reserved to satisfy operational and regulatory requirements and capital investments in our products
spk05: right this is the excess capital then is you said but we don't use
spk14: that no that's we don't use that term and that's what we need so the difference is available is opportunistic you know and available got it
spk07: got it got it got it yep so and I just to expand I mean I you know I think it it uh the the world you know if you look and this is not a statement really for you know the U.S. when I look when I mentioned distribution it's probably more outside of the U.S. and markets that have guided architecture type platforms and and may have ownership of you know four or five investment managers for those platforms and it could be you know new technology platforms for you know fee-based advisors in countries where we may not have a significant share could be a good way you know to enter that market so those are the kind I think it's just a change in how we would say we are you know strictly think of ourselves as an independent pure asset manager in an open architecture world you know we do see more more guided architecture in certain markets and the strength of banks in certain markets and a bank you know may for regulatory reasons spinning out their distribution things like that that that you know I would say we are open to looking at that where in the past we may have said hey we're a a pure at independent asset manager that's not something we want to do and you know fiduciary trust is a very successful -net-worth manager that we think could be bigger and and more meaningful to to our bottom line it's something that you know we want to grow and something that we've talked about we just believe in the value of advice and that that would be another area that would be on that list but just like you know alternatives real estate all those other things are on that list too
spk02: right
spk05: right
spk02: no okay that's that's clear thank you
spk09: our next question is from the line of alex blusty with goldman sax
spk17: hey guys just a couple of clarifications at this point um so when I when I look at your expense guidance again for 2000 fiscal 2019 does that include any sort of kind of severance restructuring charges that are going to be associated with the cost savings plan and any help to kind of help us break out the actual dollar amount of kind of run rate expenses that you expect to take out and the kind of restructuring costs that will be associated with that
spk14: yeah so the guidance does not include any severance or execution costs related to to cost reduction simply because we don't know what that is right now so that's you know when we talk to you next quarter we'll be able to give you a better idea for that even you know by line item for the rest of the year what that's going to be we do expect all of that to be incurred in this fiscal year not bleed into 2020 and so it'll probably start out slowly next quarter gradually build with the bulk of it probably being in the fourth quarter and then in terms of the the number I think you know we're of savings we're looking to get it like we said at or below 2018 levels without regard to to benefit stream
spk17: got it okay and then just a clarification again another one on the cash and kind of the the requirements that you guys have between working capital regulatory etc do you include the upcoming payment to benefits trade which I think was 683 million dollars within that or that would be on top so I know you guys don't like talking about the kind of the excess cash but would that be effectively reduction to that number
spk14: no that's in there
spk17: that's in there got it okay thanks
spk09: our next questions are from the line of brennan hawken with ubs uh
spk04: good morning guys thanks for taking my questions just a couple left here at this point um can you uh I know you spoke to the sort of core trends that you expect to be right but could you please quantify performance fees this quarter just so we can try to calibrate at least where we're starting off from a core fee rate basis and then post bsp deal it seems as though performance fees are going to be substantially larger is that going to lead you to actually break those um that out as a line item so that we can have greater clarity and maybe avoid some of the noise that might flow into the numbers
spk14: sure um so your quarter over quarter delta for performance fees was about four million um and so last last quarter they were about four million higher than quarter um and I think if I remember last quarter they were about six million this quarter about two um and then going forward yeah you're right um we do expect performance fees to be higher um we haven't made a decision um how we will present that but for sure um we will call it out um we'll call it out in the prepared remarks in terms of the geography of the income statement we haven't what to do there um kind of waiting to see what the magnitude is but uh for sure we'll call all of that out
spk07: but you know that's a good point something we're going to look at just like we're going to look at the other income line and look at the mark to market effect of the you know investments we hold and because that can be a little bit noisy quarter to quarter too
spk04: sure that's fair thanks and then um just curious about um on the accretion uh expectations I know you said you don't think that there's going to be much change and also fully appreciating that um the comments about the BSP uh funds not really being marked as uh as we see with some of these other alternatives certainly attention being drawn to uh leveraged lending and other similar types of lending activities which even though explicit leverage lending is just part of what lending activities are very very similar um in structure etc so you know for example the fed's SNCC review leveraged lending was like three quarters of non-accrual lending um and you know almost 90 percent of substandard commitments and there's been a lot of significant risk flagged in these in these loans I know you see the recent volatility as an opportunity but is there still an assumption of um credit losses remaining at zero in your accretion when you think about if that turns out to be too optimistic and credit losses go up in these products how much does that impact fundraising and how much could that impact the outlook for for accretion from this deal thanks uh
spk14: well we are assuming I'm going to let the the benefit street guys talk about uh the risks and the portfolios but we are assuming very low consistent with historic historic results very low um default rates in our accretion analysis
spk07: you know and I would say I mean those are all fair concerns and comments and ones we had well before the fourth quarter you know and as we looked at this business and we're late late in the economic cycle we're not going to be able to get to the end of the cycle and and credit spreads were narrow and I you know I think uh you know we we think again we would just say that this is an asset class that's here to stay I think that having the dry capital puts you on the right side of the trade you know when when when other vehicles are forced to sell and have to continue to mark down you know those are the kind of things we got comfortable with I think from fundraising it's very hard to give you any kind of sense of that means I mean yes it's going to be harder in an environment where where uh you know spreads are rising and there's defaults out there and credit issues that that's clear but I think that our commitment is to the asset class long term that and the fact that uh benefit street has come into that with size wide open as far as you know being on the first lean side and and more senior secured and we and and we know the arguments on that that there's less junior and uh recovery rates are going to be lower but you know that's all that's I think we feel like we're in the right place in a growing market and I'll let Rich take it from there.
spk10: Thanks Greg. I think I think you and Ken hit most of the key points. I guess I would just add a few things. One, I think as the question unfolded it talked a little about uh marks just just to be clear we mark all of and I assume we're mostly talking about private debt here. We mark our private debt assets quarterly. You know there's a real mark so this is not you know there's there may be a lag effect sometimes but on a quarterly basis you feel very comfortable that the book is marked you know appropriately by third-party valuation firms. Greg mentioned you know we're generally at the top of the capital structure you know the the correction in the markets and the drawdown in the S&P and the outflows you know it's really a technical correction. They're really you know we haven't seen any material I mean energy you know there were some issues of course with oil prices but uh we haven't seen a material change in or diminution in in credit quality across the book. There's always going to be defaults. We've been we've been very fortunate to be running at a very low default rate historically. Of course uh we're going to always model something greater than zero in in books but nothing that's happened in the you know in the fourth quarter has led us to you know materially change our assumptions around defaults or recovery rates and we think all of our books are marked you know appropriately.
spk02: Thanks for the call.
spk09: Our next questions are from the line of Chris Harris with Wells Fargo.
spk06: Okay thanks. The earlier commentary about M&A and and you know possibly investing in distribution. How do you guys think about the conflicts that might arise as a result of a deal like that?
spk07: Well I think that's that's why I said that you know I don't envision this in the U.S. certainly where you'd have a a conflict but I think the world has changed considerably where you know it doesn't in the old days you know the thought of of having anything drifted away from direct to a consumer you know you could never do if your business was sold through advisors and today in a fee based world where you're competing with Vanguard and traditional direct marketers it's really just you've got to make sure you've got best of class funds with with with very strong track records and that's going to get you your distribution. So I don't think the conflict is as big although you know I would say I don't envision us doing anything in the states that would would own distribution. I think it's more you know we look at markets that have become more closed and guided and you look at a Canada that has you know very you know has has a closed kind of market as far as distribution goes or more closed than most and in Europe which is trending that way too you know where you're seeing countries like Italy and others that you know where distribution you know has co-owners that that could be fund sponsors so that you know those are just the things we're looking at and I think it's just a change in how we would view our traditional you know mission and mandate of being independent you know one that in certain markets it may make sense to tie up in places like Latin America where banks dominate the markets and India you know India there's just a lot you know I think of places that around the world outside of the U.S. where it may make sense you know long term to do that I think that's just a different thinking you know as far as how we would approach M&A in the past.
spk06: Yeah okay that makes that makes perfect sense and then just the one follow-up question I had was on your investment performance you know obviously good thing to see things trending in the right direction there. I know it might be a little difficult to generalize but when you look at across your asset classes the numbers in you know tax-free fixed income and U.S. fixed income probably a little bit still below where you guys would like to see them. What is driving that at this point is that kind of like a duration thing perhaps? Yeah. Is that what it is? Okay.
spk07: I think it's a few things I think the you know we tend that's the one area where we don't worry as much about your total return ranking. I mean we want to be in the middle because we you know we run those funds we want to make sure we're providing some of the highest tax-free income out there and have a you know a stable net asset value is kind of how we think about it and that's you know important and how we we sell those. I think as far as the makeup over the last few years and some of the things that we've underperformed would be we were on the higher end of credit quality and the lower credit in munis tended to do a bit better although we saw that reverse in the fourth quarter where many of our funds had very strong performance you know with stronger credit compared to others and duration we don't really switch and we were on the lower end of duration because of pre-refunded bonds and again how we think about running these is more for stability and high income than trying to make duration bets and have a dividend that goes up and down from those duration bets. You know we think that's what people really want so I don't we don't worry as much if we're you know below or above average in that category as we do certainly in equities we want to make sure that you know the funds are stable in all types of markets and provide that current income. Great thank you.
spk09: Thanks. Our next questions are from the line of Michael Cypress with Morgan Stanley.
spk12: Hey good morning thanks for taking the question. I just wanted to circle back right to your comment earlier on fees and pricing you mentioned modifying pricing on some products. Can you just talk about your approach to that in terms of modifying pricing your expectations there where have you modified how that's played out relative to expectations and is this more about gross sales or looking to stem redemption how you're approaching that and thinking about it. Thank you.
spk07: Yeah I mean I think it's just recognizing that that being on a high end of a fee if you're fourth quartile in fees and have top performance you're not going to get shelf space in a in the position against the universe and we have to be at least competitive on the fee side so you know we've made a series of modifications and a lot of different products I mean they're not dramatic shifts but we've lowered fees on our international equity funds we've lowered fees on limited duration fixed income funds we've changed payouts to be more competitive you know on for those that are still using the brokerage side on re-allowance and things and you know I just think all of that you know affects your margin but that's the reality of where we need to be and then I mentioned you know that we I think a we're excited about these 11 new models that you know the outcome oriented growth growth income you know that combine a lot of our traditional funds with some some lower fee mixes and then get you to a more competitive overall fee and that you is very attractive in this market as well so I think it's just a recognition that that it's not just a world where we're certainly the buyer or the consultant or the gatekeeper is looking just at your total return they're looking at where you are positioned in fees so we have to and I think the good news is that we're always you know on the lower end of that equation so don't feel like we have a huge you know amount of changes ahead but we continue to I sit there and I sit with our group and we look at every fund on a regular basis and go down and see where it's positioned and we obviously do that with the boards as well but you know it it it it it it it just reflects the nature of the you know forces that all of us are dealing with in this industry but as Ken said I think at the end of the day it doesn't really have a material effect on our overall effective rate and what's going to affect that in the next year is if if emerging markets or international equities or equities are up you know that's going to have a much greater effect on our effective free rate than any tinkering you know by individual funds
spk12: got it okay and then just as a follow-up question maybe more broadly on credit cycle and liquidity some concerns there around build up in and and leveraged by corporates with a larger portion going to daily liquidity funds how you'll bond funds loan funds etc can you just talk about what actions you're taking to mitigate any such risks in your daily redeemable funds
spk07: yeah I mean I think it is a concern and in certain you know obviously many you know academic papers many journalists have covered this that that uh liquidity in certain markets a senior you know secured debt market and floating rate and things like that that you know you do need to be careful about so I think like most you know we are you look at liquidity and make sure that we feel comfortable and we stress test these things and you know don't want to be in a position where you're force selling into a market that doesn't have a lot of buyers but I again I don't we that's not an area where we have a lot of assets so so and why we think a benefit street structure that you know is more like a private equity structure you know can be it can be you know I think a very effective way to benefit from that dislocation and liquidity with with shorter with funds on that that are daily liquid funds so I just don't think it's a category for us that that there's a lot of assets where you know we would say you know that's a concern I mean we have some funds in those areas but not they're just not significant you know as far
spk02: as size great thank you
spk09: our next questions are from the line o'brien bedell with doisha bank
spk05: great thanks for taking my follow-up just one more on mna maybe a longer term view um and I know ken you mentioned you you do want to preserve dry powder for potential future opportunities especially if the markets get tough so it's you know if we we are late cycle and and we do move into a bear market recession period for a prolonged period over the next even a couple you know two to three years I mean greg how do you think about um large scale mna where there would be a lot of product rationalization involved in a lot of cost cutting and typically those those deals are hard to execute well and that's why managers kind of shy away from them but um if we do have even a much tougher environment both from a market level perspective and an industry-wide organic growth perspective do you see do you see those deals um starting to um you know to form and would you be interested in engaging in something like that
spk07: well you know I think we never say never and if it if we think it can add shareholder value by by efficiencies and synergies and costs that's certainly something we're going to look at but I think you hit it on the head that you know the it is very challenging it's it's very disruptive and very time consuming for management to you know do that and it's also you know a question of the brand and and how much you can throw on distribution and and and get those synergies so I think it's more of the smaller media managers that will be bought versus the bigger managers that are going to combine you know that that's the difficulties lie and if you're not on a you know a smaller group that relies on a narrow distribution platform and and that goes to fee base and all of a sudden you're not on that platform you know those are the those are the ones that you will probably see you know move in with larger firms and and you're able to benefit by getting different styles and management teams in there I think the larger ones are very difficult they look good on on paper but you know the execution side is just challenging as you said
spk05: and then maybe just going back to your alternative comment with bst and I guess thinking about that you know down the road as well as is a shift into alternative assets in a more meaningful way something desirable for you or you'd rather just continue to be opportunistic on the edge no I
spk07: think I think it is we stated it's a priority for us to grow that business and I think the the strength and depth of the bsp senior team and access that that you know we think really accelerates that by having somebody like you know Tom Gann and his senior team you know involved in looking at the landscape of alternatives you know along with our k2 group that you know I believe will be very helpful in us looking at other opportunities in that area and none of these you know are vulnerable to the passive shifts and pricing wars that we're seeing you know in the traditional model
spk05: okay great thanks very much
spk09: thanks thank you we've reached the end of our question and answer session I'd like to turn the floor back over for any closing comments
spk07: well thank you everyone for participating on the call and we look forward to speaking next quarter thank you
spk09: this concludes today's teleconference you may disconnect your lines at this time and thank you for your participation
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