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spk00: Good morning and welcome to Franklin Resources Earnings Conference Call for the quarter and fiscal year ended September 30, 2019. Please note that the financial results to be presented in this commentary are preliminary. 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 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.
spk06: Good morning. My name is Rob, and I'll be your call operator today. At this time, all participants are in listen-only mode. If you'd like to ask a question at that time, please press star 1 on your 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 0 from your telephone keypad. As a reminder, this conference is being recorded. So that we may address as many questions as possible, we ask that you please limit yourselves to one initial question and one follow-up question. If you have additional questions, you may then re-queue, and time permitting, those questions will be addressed. 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.
spk17: Thank you. Good morning, and thank you for joining us to discuss the fourth quarter and fiscal year results. Joining me today is Matthew Nichols, our CFO, and Jenny Johnson, President and Chief Operating Officer. Our industry remains in the midst of rapid change that we worked diligently to address in fiscal year 2019 by evolving certain parts of our business while remaining steadfast in our core convictions. We were pleased to see improved sales and share in the U.S. retail channel. Our U.S. equity sales also improved again this quarter, reflecting strong performance and recent sales momentum continued in our U.S. fixed income strategies. Overall investment performance improved throughout most of the year, but trended down in the final months following global events it negatively impacted certain strategies. Capital allocation remains a very important focus for our board management team. We continue to actively evaluate the industry landscape for opportunities to grow and enhance our business through acquisitions, and we rewarded our investors through dividends and repurchases this fiscal year that amounted to 107% of net income. I'd now like to open the line to your questions.
spk06: Thank you. Our first question comes from one of Craig Siegenthaler with Credit Suisse.
spk04: Thanks. Good morning, everyone. I just wanted to start with Benefit Street first. Can you provide us an update on fundraising and AUM growth since the deal has closed? And also, do you have an AUM target for the Senior Opportunities Fund to help?
spk17: As we said on the last call, I mean, we're very pleased with the progress with Benefit Street. And I think, you know, the last year has really been getting our distribution platform up to speed and training. And we had, you know, over 350 global meetings and, you know, introducing the new funds that they're offering. And I think we're excited about what that means for this year in terms of flows. And as you know, on the institutional side, you know, you have – not a steady flow, but when you close funds, you have obviously a large one-time flow, and we're expecting to see two or three of those events in the next year, and hopefully we'll target somewhere over $3 billion, $4 billion range of flows if everything works and markets stay steady. We've also registered funds in the process of getting retail products out there, whether it's a BDC with some of our major distributors as well as the potential of introducing interval funds for more of the retail and wealth management platforms. So very pleased with the progress to date there. And I would say in the last quarter we had one CLO close that you asked about, flows for $233 million or so. But that was the only really fundraise in the last, you know, four to six months.
spk04: Thanks, Greg. And then just one follow-up on the 55.8 basis point fee rate. When you exclude market appreciation in any kind of divergent beta, what are your thoughts on the overall fee rate going forward, given organic mix shift, and also any potential pricing adjustments that you could do to enhance growth?
spk12: Hey, it's Matthew. I would say that it's a very tough question to predict fee rates. Our mix of products is evolving somewhat. The past quarter, for example, the fee rate came down slightly based on the fact that our international global products came down a little bit through increased redemption activity that we talked about. But I think further guidance on the average fee rate is difficult to predict.
spk07: Thank you.
spk06: Our next question comes from the line of Patrick Babbitt with Autonomous Research. Please receive your questions.
spk10: Hey, good morning. Thank you. My first question, there's been a few high-profile Morningstar downgrades of some of Haddonstad's funds. Historically, there's been a high correlation between flows and these ratings. I'd be curious to get your thoughts on if you think that correlation is still as strong given all the changes in the distribution ecosystem. And through that lens, are you expecting accelerated outflows as a result?
spk17: Yeah, I think clearly there's a correlation. And obviously, you know, the more recent underperformance puts pressure on some of the Morningstar ratings. But, you know, I think this fund is really in a category of its own, and there's no real one clear correlation. peer group, you know, for this kind of unconstrained global bond that, you know, tends to have no correlation with, you know, beta or duration. So I think it always has a place in a portfolio regardless, and people are, you know, that have used the fund in the past understand, you know, what it brings to a typical 60-40 or, you know, typical portfolio to lower risk, and that hasn't changed. But, no, we don't expect – I think the relative performance is the key in the short run more than the ratings. And obviously, you know, the fourth quarter, September with Argentina, you know, you had some what was up until that point very strong relative performance, you know, a downturn in that. But, you know, that turns fairly quickly in that market because every fund looks so different. So, you know, we – aren't as optimistic on flows right now based on that September. But, you know, as I said before, that can turn very quickly as the markets move. Right.
spk10: Okay. And my follow-up, Matthew, now that you've been in the position a bit longer now, any updated thoughts on the potential to get even more lean on the expense side heading into next year?
spk12: Yeah, I think that we've just been through a very disciplined budget process for 2020. When we last commented on this, I think we had referenced guidance again for 2020 to be at just about 2019 flat. I think we can say now that we believe we can come in a little bit below that target. And I also believe that we have a little bit more flexibility than I first thought before we started the budget process. But, you know, I'd still continue to point to the guidance that we provided beforehand on just a little bit below 2019 for expense 2020. Thank you.
spk06: The next question comes from the line of Mike Carrier with Bank of America. Please proceed with your questions.
spk15: Good morning. Thanks for taking the questions. I guess just one more on expenses. You guys did a lot over the past year or so, you know, just in terms of driving efficiencies but also investing in the business. And you mentioned like the 20, you know, outlook, you know, in terms of down a bit. I guess just like kind of bigger picture, how are you thinking about, you know, the investments in the business? And if, you know, we do get into an environment where, you know, whether it's flows or markets are weaker – You know, are there other, you know, whether it's outsourcing or kind of chunkier, you know, big things that, you know, could drive the expense base lower over a longer period of time?
spk12: Yeah, I think, you know, we have been working hard on that. As you pointed to, we've announced the outsourcing of our fund administration business, which we're ahead on that, which is why our IS&T expenses went up a little bit more than planned for the quarter. I'd say as well that we spent a lot of time reviewing other parts of our IS&T business, and we think there is some opportunity there to decrease our expenses a little bit more if we had to. But generally speaking, as we've already referred to, where we've saved, we've tended to try and reinvest that in other very important parts of our business, in particular on the investment side.
spk13: Yeah, I mean, one of the things, you know, on the technology is just investment in data science around for our investment teams with a centralized data lake and data scientists embedded in the teams. And so that's been an area of growth in our expenses on the IS&T side. So we're trying to figure out where we can save so that we can reinvest it.
spk15: Okay, thanks. And then just on the follow-up, So on the strategic growth initiatives, you also have been active, whether it's solutions, ETFs, you know, a lot of different areas. And it sounds like on the M&A front, you're still spending a good amount of time, you know, looking at potential opportunities. I guess if we don't see something, you know, say over the next, you know, year, is it mostly about price, especially if you're going after growth areas? Or are there other factors that you think are challenging in this environment to pursue some of those strategic initiatives?
spk12: Yeah, I mean, I would characterize our progress in terms of M&A and acquisition targets as quite good progress in all the areas that we are focused on and referred to in the previous call. And we feel cautiously cautiously optimistic about our options in that regard. I'd also add a nuance to our commentary from last quarter which is to say that while we value our cash and conservative balance sheet we are ready and willing to utilize a meaningful portion of our cash to help meet these strategic objectives. As mentioned last quarter any performance scenario would continue with low leverage and strong financial flexibility but this should not be confused with our unwillingness use our cash.
spk13: I'm just going to add, you know, is it mostly about price? I mean, obviously price matters, but our approach in thinking around M&A is absolutely around a growth story. So, you know, it has to hit a category where we're filling product gaps that we don't have, where we're getting distribution capability that we may not be as strong in or a geography. And that's first and foremost important. cost-cutting then gets to be, you know, a secondary benefit of that. And then, of course, it has to be at the right price.
spk17: You know, and I think just to add on price, it's not like going out and deciding when you're going to buy specific security. I mean, it's when the right needs are available, and sometimes you end up paying a little bit more, but it's got to be, you know, we look at it as something that You know, we're going to build over many market cycles and have that time to grow in an asset class that will be around for a long time. So, you know, I think sometimes it's easy to look at the world and say, well, gee, I'll buy this when you have X sell-off. But that's not, you know, realistic. Sometimes the sellers aren't selling in that, you know, in that bottom part of the cycle.
spk12: Yeah, and the current valuations of certain asset classes, frankly, reflect that. the valuations of companies that contain certain asset classes reflect the reality of where the market is, I would say, in several of the cases that we've been in.
spk07: Okay. Thanks for the call, Eric. Thanks. Sure.
spk06: Your next question comes from the line of Brian Bedell with Deutsche Bank. Please receive the question.
spk11: Great. Thanks. Good morning, folks. Let me just move back on to the global macro, global bond complex. You know, I understand that the shift in the recent few weeks and months has moved more to a cautious stance. And, you know, my goal at House & Stock is kind of, I believe, almost something like half in cash and at least some of the big funds, too. Just in terms of maybe that macro view and how it's being read by the sales force and the advisors, and do you expect that repositioning, if that's sort of a more of a, sort of a, I guess, more of a, permanent's the wrong word, but more of a strategic shift, do you think that will significantly impact the sales engine for that complex?
spk17: I mean, it's hard to say. I think it is clearly a more conservative stance and de-risking of a lot of the EM currencies that, again, this goes back to my point about how markets move and how relative performance can swing so quickly. So I don't think there's a lot of funds that have a similar defensive position today. You know, which sometimes I think you bring up correctly that, you know, what does that mean for a sales environment? And I think, you know, we've always stood behind the PM's convictions and doing what's right, again, for the long term. And having the cash in that kind of fund, it has never really been a problem. It would be in more of an equity fund, obviously, but because of the liquidity constraints sometimes that having that higher cash is important. And if you get in a disruptive situation, environment which, you know, that team feels like there's a serious potential for, that cash can be very efficient in not having to sell securities but going in and buying during the dislocation. So, you know, I think some of the best track records over time are built when you have that ammunition to buy instead of sell, and that's really what that fund's positioned for. But I think, you know, it's hard to say what impact will that have on You know, the sales, but as I said in my earlier comments, this is a little bit different of a product. People are used to the higher cash in this fund, and some get comfort from having that when, you know, when issues come up with certain holdings on liquidity, and that's part of the combination here.
spk11: Right. And has that hedge to higher rates been reversed largely in the fund as well?
spk17: Not reversed, just on the shorter to medium term and still negative duration on the longer, but definitely focused on the longer end of the curve and no longer on the more medium, shorter end.
spk11: Got it. And then just my follow-up is on the outsourcing of the fund administration. Can you just review, again, like what parts of the fund administration are outsourced and what you still have in-house? I believe you're still doing outsourcing. from my collection, fund accounting in-house, but I think the custody is outsourced. Maybe just to clear that up. And between middle office and is it across most of your mutual fund complex or just portions of it? Trying to get a sense of what could be further outsourced in the future and how much you have now.
spk13: I mean, you're correct in that we historically had outsourced the custody, of course, and had kept the fund administration in-house. And part of that was because with our global footprint, it was difficult to find somebody who could, you know, cover all the areas that we tend to cover. And now the providers have stepped up, and so we're looking to outsource all the fund administration. And many of the work that's done in custody you have to do in fund administration, so we found some amount of duplication. But because we were early into lower-cost environments, it was hard to find providers that could be competitive pricing-wise. And now, as others have done that, we found that both the coverage of what we do as far as geography as well as the cost is now much more competitive.
spk11: And just the timing of the outsourcing of this, is this going to be converted in the next couple of quarters, or is it longer term?
spk12: No, this will be over 2020 is the conversion, and we'll start realizing benefits in 2021.
spk11: Got it. Okay, and that's in your guidance already for the expenses. Yes, that's correct. Yes, perfect.
spk07: Thank you. Thank you.
spk06: Our next question is from the line of Ken Worthington with J.P. Morgan. Please proceed with your question.
spk02: Hi, good morning. You mentioned a number of large block withdrawals in the coming quarter, I guess the current quarter. $800 million global fixed income, $1.6 billion for mutual shares, and there were some larger block redemptions this past quarter. Now, we expect the institutional business to be lumpy. Your lumpiness is really more on the redemption side. So any common themes to the bigger block outflows? Are you hearing, you know, is it performance issues, distribution issues, active to passive pricing? So any common themes? in these sort of different asset classes and what you're seeing. And ultimately, Franklin's been in redemption for, I don't know, six or so plus years. What is the path back to inflows for Franklin? You know, what, if any, are milestones that are you holding out for yourself with that regard? Thanks.
spk17: Yeah. First of all, it's probably all the above on some of the lumpy redemptions, but in particular, the large one coming this quarter with mutual shares in particular was really a large broker-dealer distributor that's moving assets to their in-house funds and not really performance-related, but more about funds just moving in-house. You know, Templeton continues to be under pressure, and this relates to what, you know, you talked about inflows in six or seven years, and obviously for us, you know, having a lower base of U.S. assets, our U.S. funds are doing extremely well, growing market share, very strong inflows, accelerating, but, you know, that pales compared to the large Templeton deep value, mutual series deep value, you know, assets that we have. So that's really the catalyst is going to be the rotation of you know, of value and growth. And then also, we talked earlier about many of the new initiatives that we've funded, whether it's around the solution side, the SMA side. A lot of resources have been put into that. We've been very successful, I would say, in the last year or two, getting on platforms. Our multi-asset solutions group just recently gone on two major platforms. And I think those are going to drive flows over time. Now, they'll drive flows at a little bit lower of a margin maybe than your traditional 40-act funds, but ones that we think can be very positive. And only a few players are going to be competitive in that space that have the scale to do that. And ETFs as well continue to be an area of growth for us and just crossing $5 billion. And again, getting to the size where we have more distribution opportunities opening up and having been on platforms now or been in existence for three years minimum in some cases, you know, getting on platforms. And that's really, I would say, is where the most progress has been made on the U.S. side is these new multi-asset solutions, ETFs, and getting onto traditional platforms as well as hopefully getting onto new technology platforms that emerge.
spk13: And I just add, you know, on the – You know, the institutional side, you know, there were some big headwinds this year in that, you know, obviously with Argentina, Greg talked about it. We also had a new CIO introduced on the Teflon Global Equity Group. You know, when you're playing defense in those meetings, you know, they had a, you know, saw 20 clients representing $40 billion in assets hitting 13 cities in five days. That's what your conversation ends up being. Having said that, We've got $4 billion in unfunded international institutional business. Our pipeline in the U.S. institutional has doubled in size. We actually converted nine new prospects. And so there are green shoots underneath. It's just you're mixing it in a time with just some big headwinds. And I think we have some good green shoots, as Greg mentioned, on the retail side with some big placements of our model business and some good growth there.
spk17: And I would give another example. I mean, our Emerging Markets Group has new leadership and excellent performance and institutional quality process, and really we think an opportunity for institutional assets for the first time, and we're excited about that. That team now is getting on platforms for institutional searches, and we haven't had that opportunity in the past.
spk02: Great. Thank you. And then to follow up, there was a delay in the two institutional fundings. I think it was $2 billion. Is there any risk that they don't fund, or is funding just a certainty, and it's just the timing that is unknown?
spk13: You know, right? If the money's not in hand, there's always a risk. But there's nothing that indicates that there's any kind of risk that, you know, we believe they will be funded. Okay. Okay. Thank you.
spk06: The next question is from the line of Dan Fanon with Jefferies. Please proceed with your questions.
spk08: Thanks. Just on the $4 billion of the international kind of backlog or unfunded wins, I guess in context of I don't think we've gotten a number like that from you before, you know, versus a year ago or, you know, other points in time, like how do we think about, you know, that relative to previous periods just so we can have, as I said, some context? Sure.
spk17: Yeah, I mean, good question. And that's probably why we haven't talked about that number in the past, because I think the hard part is the timing for you to figure out when those assets come in. And sometimes they take longer than you think and could be a year out, could be next month. So, you know, we've always been kind of hesitant to even talk about that. And that number is really just what's in the offshore international institutional flows. There's a few more domestically, but I'm not sure what you do with that number, actually, so good point.
spk08: All right. And just a follow-up on kind of the global bond. You know, a lot's been written about the performance earlier. You talked about the Morningstar changes. I guess, can you talk about what you're doing internally with your sales force and your distributor to basically play more defense here, I assume, to kind of keep assets in? I don't I think it's so much as a gross sales issue as also redemption given the kind of level of underperformance and, as I said, the headlines that's created. So is there some campaign or something that you guys are doing internally to get in front of this and be more proactive?
spk17: Well, we are, and we're trying to do as much as we can, and we have a new piece going out that talks about the repositioning and some of the recent moves with the fund. But, again, I mean, I still point to the long-term performance that's really unparalleled in this. And we've had plenty of periods where, you know, you've had things not work out in the short run. And, you know, you just point to that long-term record and how it lowers your risk in a portfolio and focus on those things. And, you know, it's a risky world out there with highly valued assets going. on every metric and the story here is going forward what's going to defend your portfolio and I think that's an important message and one that our sales force is working on.
spk13: And we just came out in October with a piece called The Four Pillars to Face a World of Uncertainty which is we're positioning it as you want this in your portfolio because it's a hedge to many of the other positions that people have taken and You know, trying to lay it out very clearly. And it's been well received, although very, very recent.
spk07: Okay. Thank you.
spk06: Our next question is from the line of Jeremy Campbell with Barclays. Please proceed with your question.
spk01: Hey, thank you. First, sorry if I missed this in your answer to Craig's question earlier, but what was the revenue and AUM contribution from Benefit Street during the quarter?
spk12: We don't break it out like that, Jeremy.
spk07: Okay, no rough sense?
spk12: Well, we had revenue was stable with the last quarter, which was about $51 million.
spk01: Okay, great. Thanks. And then just kind of more broadly speaking, just kind of wondering what your thoughts are around what's happening over at UBS right now with the elimination of FMA fees to asset managers. You know, do you think this is kind of like a new front on the industry-wide fee pressure? And does it dampen your outlook at all about growing Franklin's S&A footprint or kind of your desire for both management and M&A target like you guys called out in the prepared remarks?
spk13: So, you know, I mean, interestingly, with our fiduciary trust high net worth business, we've never charged a fee on top of our own proprietary products, right? It was always kind of a conflict around that. So, you know, they've reversed that a bit by making the product free and charging the fee at the top of the house. It is just one of those things. It just feels like a conflict when you do that. But our experience has been that clients absolutely want open architecture and they, you know, they desire to have outside products in. So I think that, you know, not everything in SMAs is going free. Having said that, you know, there's fee pressure all over the business and we're all going to have to prove out our value on our fees. no different than you've had to do on the institutional side and the retail side, and I think this is just an extension of that.
spk17: Yeah, I think there's been a little bit of market confusion over that change, you know, that it was really an entity, you know, that's not getting the fee, but there's still a fee being charged around the RAP account, and the underlying managers are still being paid a fee, is my understanding. So, you know, we all know SMA, you know, is a way to accelerate shrinking margins versus your traditional SMA, 40-act fund because the pricing is controlled by the distributor. And that's not a great trend, but it's a trend you can't ignore and one that we believe it's a business we're going to be aggressively in versus trying to defend against it. So I think that's part of our solutions, thinking it's a change of mindset. We have and we think an important growth area for us, and I think you're correct that it will result in a lower margin, but it will result in larger assets, and hopefully that will offset it.
spk07: Great. Thanks a lot.
spk06: The next question comes in the line of Bill Katz with Citi. Please proceed with your question.
spk05: Okay. Thanks very much for taking it this morning. So, Matt, let's come back to the expense discussion for a moment. I guess you've been On the month-to-month with the AUM and sort of discussing the flow dynamics, I've been sort of dancing around with different adjectives and so forth. And so I'm just trying to understand your sort of phraseology here in terms of doing a little bit better on the cost side. So I guess, is there a way to think about that? Are we talking down 0% to 5%, more than that? And then what is the revenue and or flow assumption that you're counterbalancing that expense outlook against?
spk12: Look, I'd say, Bill, that It's too early to go much further than what we've said. But, you know, if forced to go into more detail, we'd say probably, you know, zero to 2.5% down from 2019 in expenses.
spk05: Okay.
spk12: And this is revenue back up. And revenue is largely consistent. And I'll also just – I don't think we addressed the question – which also related to this earlier on about the average fee rate. I think we confused that with what we thought of something different. But if the question was where do we think the average fee rate is heading for our overall mix of business, we forecast that to be roughly flat, and that's based on a whole series of assumptions around the mix of our business internationally, domestically, the growth of alternative assets offsetting some of our business that is more under pressure from a fee perspective.
spk05: Okay. This is my follow-up to stay with you, Matt. So you sort of mentioned the nuance of potentially more sizable deals. I guess that's the way I interpret it. What's changing your thinking? And then when you look at the landscape of other sizable deals that have gone on over the last several years, what gives you confidence that the market would be receptive to those types of things?
spk12: I think, as Jenny mentioned, we think when we look at some of the opportunities that exist in the marketplace, it's certainly not easy, and I think we discussed that last quarter. But we see areas that we can fill at Frankfurt. We have a tremendous chassis and a core business with leading products on a global level across many countries. But we think we can grow that further by filling some of the gaps that we have, whether it's becoming larger institutionally in the U.S., whether it's having a bit more alternative assets. I mean, there's some other, frankly, products, if you will, that we already have, but we're quite small in, that if we were larger, we think we'd be more successful. So I wouldn't guide you towards thinking we're going to do, you know, some mega-transaction. But the short list of ideas that we thought about, we think, create growth opportunities for us, given our current business, without having to drive down expenses as sort of the number one bullet point. However, we should state that there are obviously some cost aspects to all of this consolidation in the business that we would be able to capitalize on.
spk07: Thank you. Thanks Bill.
spk06: The next question is from the line of Brendan Hocken with UBS. Please proceed with your questions.
spk14: Good morning. Thanks for taking my questions. I think earlier, Matthew, you flagged that outsourcing the cost to shift to greater amount of outsourcing is included in your expense guide for 2020. Are there any other unusual or what you would expect to be non-recurring items that would be included in that guidance?
spk12: Not at the moment.
spk14: Okay. And then when we think about the – it looks like of the $201 million or so of non-recurring and acquisition-related expenses, you know, there's some portion that's recurring, so – whatever, let's call it $150 or so million that's non-recurring, that would suggest like a 5% core growth rate in expenses in your guide. You flag that you're doing some investing and everything like that, but number one, is that right, a fair way to think about it? And number two, can you talk about what kind of returns or what kind of ROI that you guys have? What's the hurdle for making some of these investments just given the really challenging backdrop that we have here for the industry. Thanks.
spk12: Yeah, I think there's lots of questions in that. I'd say that we should follow up separately to go through that in more detail. I think the assumption about an increase in expenses built into our modeling, I think that is not accurate. And I would say The reason why we outlined the non-recurring items, you're correct that there is an element of this associated with our Benefit Street acquisition that does include around $79 million for the next three years, which is recurring, but then that drops off. So we wanted to try and make that clear. Otherwise, you'll be looking at our Benefit Street acquisition assuming that it's a zero margin business, which is very misleading. So that's the reason why we wanted to put that into the table. But in terms of our future costs and how we look at investments. I wouldn't say we apply a classic ROI to it. It has to work for our business in terms of scaling or creating more opportunities for our investment teams, our distribution efforts, and we certainly don't look at things on a three-month or six-month or one-year basis. It has to make sense over a multi-year perspective.
spk07: Okay. Thanks for that, Colin.
spk06: The next question is from the line of Chris Harris with Wells Fargo. Please proceed with your questions.
spk03: Thanks. Can you guys talk a little bit about your international distribution capabilities today and what you might be trying to do to improve them, which you cite as a focus area for the firm going forward?
spk17: Yeah, I would say not a lot has changed. I mean, and for the International capability, it doesn't have the benefit of some of the momentum we're seeing in the U.S. in terms of municipal bond sales and muni funds. The flows there rely more on global bonds. Templeton, we are seeing strong flows in the Franklin U.S. growth products, K2. would be more of a focus there as well. So, you know, I think for us it is a huge value of the company and franchise and one where, you know, in the year ahead it's part of it's getting Benefit Street, getting some products up in the Luxembourg-based CCAB fund, which we're in the process of doing, leveraging Benefit Street on the institutional side as well would be one. And just, I think, relating to the acquisition side is we feel like there's some underutilized capacity for more product under that distribution network. But, again, if you look at pockets for us where, you know, it's a different story where you have India had a very strong year of growth and inflows, Taiwan very strong year. So there are pockets that are doing, you know, very well throughout the globe that, you know, have a different product mix than maybe our traditional one. But I think just generally speaking, we feel like we can take on more, and that's part of our acquisition thinking on that.
spk07: Okay. Thank you.
spk06: The next question is coming from the line of Michael Cypress with Morgan Stanley. Please proceed with your questions.
spk16: Hey, good morning. Thanks for taking the question. Just wanted to circle back on expenses, hoping you could help with some of the moving pieces here. So we hear the guidance that to be – slightly down next year. So that's a combination of the investment spend and expense cuts. But I guess if you could just help quantify how much you're cutting, where specifically? I know you mentioned fund admin. What else? How meaningful is that? And then conversely, you're also making investments, I think, on the tech side with the data lake. How much are you guys investing, if you could help quantify that? And if you could provide any sort of color around these investments?
spk12: Yeah, I think what we'd say is that we think that on information systems and technology, we have some room to move on that. As I mentioned a moment ago, perhaps up to several percentage points more efficient to be there. I think beyond that, it's very early to give guidance on any specific line item, and I would just keep referring back to the fact that we're confident, all else remaining equal, that we will be able to – be down slightly on our 2019 expenses as a whole.
spk17: And I just would add, I mean, I think we look at this, we recognize where, you know, the pressure that the industry is under, and it is very top of mind with all senior management to look at span of control and every kind of saving that we can generate to continue to invest in the parts that we think are going to be incremental to getting inflows in in a few years. So, you know, I think we're all very focused on that but just very hard to come out with, well, what does that number look like in two or three years, other than we're kind of attacking every angle.
spk12: Yeah, and I think we also demonstrated in the fourth quarter that the discipline we have around our most important expense, which is variable compensation and compensation for the firm, I think we demonstrated that we get the balance right and do what's right for the company, but also do what's right for shareholders. And then when it comes to the other components of our expenditure, I think we have very clear reasons why there were moves in each item. So IS&T, we actually expected that to be down, but it was up just because we wanted to do the right thing and continue to make more progress than we expected. That's what we did. And that does not mean that that increase is likely to continue. Actually, that's going to come down. Our G&A and other included some intangible impairments, both this quarter and last quarter. We don't – well, we would hope that wouldn't. repeat. We don't expect it to. And when we analyze and drill down into G&A, we think there's some room there also. On occupancy expense, we've talked a fair amount about this. The reason why that spiked so much in the last quarter, as guided the previous quarter, it's because we've completed our campus in San Mateo. We also have new real estate in Poland. But that's going to be all offset by an increase in revenue attributed to our efficiency drives across our real estate ownership, including some very attractive lease streams that frankly pay for both the building of our headquarters here in San Mateo and the running of them. So I think with each one of our items, whether it's comfort benefits, IS&T, occupancy expense, G&A, and others, we have plans under each one of these. We think we have flexibility under each one as needed. We've described the fact that some of that's offset by the investment that we are adamant we want to continue to make, which is why we don't refer to a forecasted margin. But it doesn't mean that we won't take that action as we demonstrated in the fourth quarter where we took action across all the key items.
spk16: Okay, thanks for the color on that. And then just maybe on China, given the regulatory change and marketing up, market opening up in China, can you just give us an update on where your business stands today in China, how you're thinking about the opportunities out there over the next couple of years, and what sort of actions are you taking to capitalize on this?
spk17: Well, we are, I think like most businesses, looking at taking control of our joint venture. We were one of the early ones with Sealand and are in the process of taking a majority stake in that. And we have other options and other licenses that we can take different tacks. And I think China, size-wise, I'm looking at Jenny, because we don't include it in our assets. I think it's $5 billion. It's profitable. It's not obviously a major contributor to our earnings, but it's a profitable number and growing and has had good performance. But I think, like many, we look at China as a very tricky market. We think it's a tremendous opportunity for growth. But the thought of continuing with a partnership, you know, versus going alone in that market, I think is one that you have to think very carefully on. And I'll ask Jenny if she's got any additional questions.
spk13: No, I think that's right. I mean, I think it's, for us, it's been about, you know, we'd like to own 100% if that can make sense. But whether or not we can, we end up doing there, we always have also our woofy option, as Greg said, you know, so it keeps our options open. A big area of focus has been integrating some of the investment capabilities with our emerging market team so that they can collaborate on A-share research, which we think is important, and that has been going very well, as well as it gives us optionality when we get institutional interest and mandates to either talk to our WUFI team or our JV team.
spk07: Great. Thank you.
spk06: Thank you. Your last question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your questions.
spk10: Hey, thank you for the follow-up. You mentioned the potential for $3 to $4 billion from Benefit Street, but chunky. Should we expect placement fees on the expense side with that? And if so, is that in the expense guidance?
spk13: It would have some placement fees, although we're really trying to have our own institutional team do the big push there. So I think we've kept it where we have divided that up a bit, but we are hoping that it comes through our institutional team.
spk05: Okay, perfect.
spk17: We'd have to look into that. I mean, I'm assuming that's built into their model for the year, but we don't have that at the top of our head there.
spk10: And then on the $4 billion pipeline, one last one, Could you just give us a little bit more color maybe on the fee mix of that, even if it's just better or worse than the average? And maybe broadly, if there are any kind of signals you think might start unlocking that, or is there just no color at all on the second part there?
spk12: I think that would just be embedded in the guidance I gave earlier on about the fee rate for the year. Benefits free across the board is, has a much higher fee rate, as you know, given the business versus the rest of our franchise. So that actually helps us across the year be confident that we, in our statement, that we think our fee rate will remain stable.
spk07: Thank you.
spk06: Thank you. Thank you. At this time, I'll turn the call back to Mr. Greg Johnson for closing remarks.
spk17: Well, thank you, everyone, for participating on our call, and we look forward to speaking next quarter. Thank you.
spk06: Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
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