Jul 24, 2008
Executives
Gregory E. Johnson - President and Chief Executive Officer Kenneth A.
Lewis – Executive Vice President and Chief Financial Officer
Analysts
Hsein Lee – Morgan Stanley Mike Carrier – UBS Michael Kim – Sandler O’Neill & Partners William Katz – Buckingham Research Kenneth Worthington - JP Morgan Prashant Bhatia – Citigroup Craig Siegenthaler – Credit Suisse Cynthia Mayer – Merrill Lynch
Operator
Welcome to Franklin Resources earnings conference call for the quarter ended June 30, 2008. Please note that the financial results to be discussed in this conference call are preliminary.
Statements made in this conference call regarding Franklin Resources Incorporated, 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 the risk factors and MD&A sections of Franklin’s most recent Form 10-K and 10-Q filings. (Operator Instructions) Mr.
Johnson, you may begin your conference.
Gregory E. Johnson
This is Greg Johnson, CEO of Franklin Resources and joining me today is Ken Lewis, our CFO. Looking at assets under management, they declined, as you would expect, from $591.1 billion to $580.2 billion and average assets declined from $610.2 billion to $602.9 billion, which represented over a quarter of 1% decline.
Looking at the assets by investment objective, again as you would expect, equity assets continued to decline from 55.5% of total assets to 54.5%. Fixed income increased from 24.6% to 25.4% and hybrid was up slightly.
Looking at the assets by the various investment groups, Franklin was actually up quarter-to-quarter by 1.5%, 1.9% year-over-year, Templeton down 4.2% for the quarter and 15.4% for the year, and Mutual Series down 4.7%, or 12.8% year-to-year. We did make a change to the flows summary and added a new subtitle which is called net new flows which is consistent with the ICI presentation and broke out by net exchanges separately from sales.
Looking at the overall flows we are pleased to see a return to positive flows in somewhat of a difficult quarter. Sales increased over 3%, redemptions decreased 11%, and we have seen an improvement overall in redemption activity as the level of reallocation activity that we talked about in the last call, specifically in January, declined, which helped the Global Equity flows.
We also had an unusual event in the quarter with a redemption from a one-time tender offer of the Templeton Emerging Markets Income Trust, which represented $1.0 billion and we expect $200 million more as that final tender is completed this quarter, but $1.0 billion did hit the flows for this current quarter. Looking at the net new flows by month, we did have some significant wins in April, which I will talk about, but April had end flows of $3.4 billion, May $900.0 million, and June out flows of $3.1 billion as the market sold off during that month.
Looking at some of the flows by region, U.S. net flows of $1.1 billion versus net out flows of $900.0 million in the prior quarter.
We saw the biggest improvement on the equity and hybrid products, which had a large decline in redemptions. The fixed income campaign continues to do very well as we saw retail share hit a high of 13% in April.
Tax-free funds were our best selling categories this quarter with net flows of $1.7 billion, or a 31% increase from the prior quarter. On the non-U.S.
side, net new flows were slightly positive at $100.0 million, which is a $5.3 billion improvement from last quarter’s out flows. Sales increased 9.4%, redemptions declined over 11% and we did see success raising assets with some Sovereign Wealth Funds that were funded, approximately $2.4 billion during the quarter from Middle East and Asian clients.
The reduction in Global Equity out flows was the driver of the turn around in non-U.S. flows, particularly in Europe, where we saw the bulk of the redemptions in the prior quarter.
Looking at the flows by client type, retail had net out flows overall of $800.0 million, versus a $2.8 billion improvement over the prior quarter. The top selling U.S.
fund was the Templeton Global Fund with net flows of $1.0 billion versus $1.8 billion in the prior quarter. And the top selling non-U.S.
fund was within the SICAVs of Templeton, Global Total Return, with net flows of $550.0 million versus $365.0 million in the prior quarter. Institutional had a very strong quarter with net new flows of $1.9 billion versus out flows of $2.7 billion in the prior quarter, a 36% increase in sales.
And again, the largest contributor, we did mention that in the prior quarter call, was a Middle Eastern mandate of $1.4 billion that funded in April, it actually ended up at $1.8 billion. We continue to have meaningful wins from both U.S.
and non-U.S. clients in Global Equity.
In Global Fixed Income mandates, with $300.0 million, the Illinois State Board, Shinko in Japan at $250.0 million, emerging markets debt, among other wins in the quarter. High net worth continues to be very steady in a difficult environment with net flows of $100.0 million.
Looking at the flows by investment objective, again, the biggest turn around was around the equity products where net equity out flows were only $2.1 billion compared to $12.0 billion in the prior quarter. We continue to see out flows in the Templeton Growth, albeit at a smaller pace, of $1.2 billion versus $1.3 billion in the prior quarter, and Templeton out flows of $830 million in the Foreign Fund versus $1.1 billion in the prior quarter.
The hybrids category went back into net in flows for the quarter. It had net flows of $200.0 million, which is an increase of $800.0 million from the prior quarter, the primary driver being the Franklin Income Fund, which returned positive flows of $255.0 million versus an $800.00 million out flow in the prior quarter.
As I mentioned, Fixed Income had a very solid quarter with flows of $3.7 billion but they were down from $5.3 billion in the prior quarter, with Tax Free gaining the largest share at $1.7 billion versus $1.3 billion. Money funds had out flows of $600 million versus in flows of $1.1 billion.
Turning to investment performance, not really a whole lot of changes there as far as how the market has been responding. 56% of our overall assets were ranked in the top two quartiles for three-year periods, 71% for the five-year, and 92% for the ten year.
And the majority of our equity assets being de-valued, or having a value discipline, have continued to be weighted in areas that have underperformed the market and the underweighting specifically to materials, commodities, or oil services continues to weigh down on the short-term results. We are encouraged by the strength of the growth areas and that has been an emphasis for us as the market as growth has outperformed value.
But more importantly, we‘ve seen some excellent performance out of the Franklin Growth Funds and the Franklin Flex Cap Growth continues to have very strong performance for the one, three, five, and ten-year periods and our Growth Opportunities is the top quintile for all time periods. Our Global Growth Strategy, on the institutional side was recently upgraded by a major consultant and we’re starting to see interest as that track record is closing in on five years there.
The Fixed Income continues to be very strong on the back of municipal bond performance. And now I would like to turn it to Ken for the operating results.
Kenneth A. Lewis
We’re pleased to report another solid quarter amid continued, and I would say extraordinary market volatility. Once again our results show that we are able to effectively manage our costs and not only did we maintain a healthy operating margin, but we actually increased it to 35%.
Operating income increased 2.5% from last quarter to $532.0 million. Net income increased 10.2% from last quarter to $403.0 million and earnings per share increased 11% from the second quarter to $1.71.
Year-to-date earnings per share was $5.38 versus $5.26 for the same period last year. Looking at revenue for the quarter, investment management fees increased 1% despite the decline of simple mostly average assets under management.
I think this bears a little bit of explanation. Most of our funds generate fees based on average daily net asset values.
Due to the market volatility this quarter, the daily average assets under management was actually higher than the simple monthly average. So that’s why you’re seeing what looks like a higher effective fee rate this quarter, but on a normalized basis our effective fee rate for the quarter was comparable to the prior quarter.
Underwriting and distribution fees increased slightly due to increased sales and average assets under management as did the underwriting distribution expenses. The underwriting distribution margin decreased to 2.63% from 2.79% last quarter as we saw a small increase in the percentage of retail sales from outside the United States.
Shareholder servicing fees declined slightly due to an increase in lower fee-earning accounts, for example closed accounts. During the quarter we completed the purge of 237,000 Canadian closed accounts and our U.S.
purge that took place in July will be reflected in our fourth quarter numbers, and that is 1.7 million accounts. Other net revenue increased $5.7 million this quarter.
That was related primarily to a $485 million securitization of our auto loan portfolio, that resulted in a small gain. On the expense side, expenses were once again held in check as we continued with our strategic cost management initiatives during the quarter.
Compensation and benefits increased slightly during the quarter due primarily to variable compensation that was based on increased operating income. Expenses such as technology and occupancies and other expenses decreased during the quarter as a result of our cost cutting efforts around discretionary spending such as travel and entertainment and other office expenses.
Advertising and promotion decreased by $2.6 million this quarter due to a combination of cost cutting efforts, as well as reduced strategic opportunities. And amortization of deferred sales commission decreased 3.2% reflecting lower fee to client shares.
Moving below operating income, other income net increased $21.3 million from last quarter. Our sponsored investment product losses decreased by approximately $7.0 billion last quarter.
Just to remind everyone, this represents the underlying investment in products that we consolidate due to our ownership that are marked-to-market and reflected as investments trading in our balance sheets. And if you recall last quarter we had substantial unrealized losses in that line item.
Investment and other income increased 4.9% quarter-over-quarter. The last two quarters included about $5.0 million to $10 million of expenses that are considered to be non-recurring.
This quarter there was about $10.0 million of losses from investments accounted for using the equity method. Interest expense declined as we paid off our medium-term notes in April.
The effective tax rate for the quarter was 27.2% compared to 29.5% in the second quarter and that was primarily due to a change in projected earnings mix. So we ended the quarter with a healthy operating margin of 35%, which was a 0.5% increase over the prior quarter and generated a year-to-date operating margin of 35.8%.
Despite all the market volatility, I am pleased to say that we have been able to maintain a strong operating margin. I think this shows the strength of our management structure and our ability to respond quickly to a challenging operating environment.
A couple of points on capital management, as I mentioned, we paid off our medium-term debt, we securitized auto loans, we enhanced the parent company’s liquidity with some opportunistic commercial paper issuance. Our total shareholder payout, including dividends and stock repurchases was 113% of year-to-date earnings and that excludes the debt payment.
Looking forward we would expect our buyback activity to support a payout ratio that’s more consistent with the payout ratio of prior years. So now I will turn the mic over to Greg for some discussion of business highlights.
Gregory E. Johnson
In the United States, or actually the globe, we had an important organizational restructuring at the senior management level and named Vijay C. Advani Executive Vice President of Global Distribution, with oversight of both retail and institutional distribution to further leverage our global platform and really address the blurring lines between institutional and retail that we’re seeing around the globe.
And hopefully from that we can get some operational efficiencies out of that. We’ve also named Bill Yun to be the Executive Vice President of Alternative Strategies, a new role dedicated to overseeing the company’s specialized and alternative investment businesses, including our local asset management business around the globe as well.
We were pleased to see that Morningstar ranked us as the Top Municipal Bond Fund Family, and on the international side in Malaysia we were granted one of five asset management licenses and awarded a mandate in that market. In India we began distributing some private equity strategies to high-net-worth individuals and opened a new call center to service Indian investors.
And in Canada we were pleased to see that Edward Jones added Franklin Templeton Investments as a partner in that market. We would now like to open it up for your questions.
Operator
(Operator Instructions) Your first question comes from Hsein Lee - Morgan Stanley.
Hsein Lee – Morgan Stanley
You noted in your release that you recently launched a new SICAV fund, Franklin MENA. Could you give us an update on AUM in your SICAV products and also in this environment, as well as longer term, how you think these products will grow versus U.S.
products.
Gregory E. Johnson
I don’t have the actual AUM at this point for the fund. It’s relatively small.
We introduced it in the SICAV as well as to the Korean market and it’s really just an example with our local asset managers and that’s a minority ownership through Algebra Capital, that we’re seeing increased demand for more regional funds, more specialized focused alpha, and at this point it’s really early as far as assets. I’m sure it’s under $100 million.
Hsein Lee – Morgan Stanley
I would be interested if you could give some color on any differences you’re seeing in retail client engagement, by geography. Is demand in Europe and Asia currently weaker for you than the U.S.
and also, once market conditions normalize, could you maybe help us bracket where you expect to see stronger investor demand and why?
Gregory E. Johnson
Well, I think it really follows investment performance and assets wherever you tend to be strong. If that sector is having trouble that will be difficult for flows.
And I think if you look at the volatility for us of non-U.S. flows versus U.S.
flows, certainly on the retail side, you do not have the benefit of municipal bond funds and the government funds and the funds that really add balance in these times. So you have more volatility, deeper redemptions on a net basis number for non-U.S.
than you do for U.S. But on the institutional side, the offset of that is that we still see big opportunities with global fixed, and the emerging markets debt, still in Sovereign Wealth funds and that could offset that.
But that is about as general of a statement as I could make and I just think in this environment I would expect to see the U.S. flows more stable than the non-U.S.
flows.
Hsein Lee – Morgan Stanley
Could you provide some additional color on what’s been driving the decline in performance this quarter at Franklin Templeton’s equity funds? Other than investment style, whether it’s sector or geographic exposures that have been driving down those numbers?
Gregory E. Johnson
I think specifically I mentioned Templeton and not having any oils, metals, commodities, obviously that will hurt relative performance and that really relates to the large global and foreign funds. The emerging markets funds do have exposure there.
Mutual series has historically had a heavier weighting in global securities and they’re measured against the S&P 500, so having a higher amount in the UK and having that market sell off more than the U.S. market to date, that has had a negative impact on its peer group, on its relative performance.
But again, it’s consistent with cycles in the past and we don’t see any reason to try to change anything.
Operator
Your next question comes from Mike Carrier - UBS.
Mike Carrier – UBS
You’ve given the average AM levels, just giving the sell off in June in the markets and what we were seeing in July. Just curious, when you look at the end of period and how averaging levels are trending thus far in Q3, you have done a good job on managing expenses.
Just curious, going into the back half of the year, are there any areas on the expense side and on the expense line, that you think you have a little bit more flexibility?
Kenneth A. Lewis
Yes. That is a pretty tough question to answer.
It’s hard for me to give you a sense of trends and the reason I say that is because on the one hand we are identifying other areas where we can defer costs, or even cut costs, but on the other hand we are continuing to invest strategically. So how that shakes out on individual line items in the short term is a little bit tricky.
But I think there are areas that we are looking at to see if they are adding value do we need to make further cuts or just defer planned initiatives that we have in our budget.
Mike Carrier – UBS
You have mentioned in the past that sometimes you’re looking for opportunities in the international markets; at one point the UK. You have done a lot with the cash on the buyback side in paying down the debt.
Given the environment, particularly in the U.S. with other financial firms and some of the banks needing to raise capital and potentially selling off asset management arms, are there any holes that you think you would be willing to take a look at, a portfolio if it comes up at a good price or is it not really something that you’re looking at in the near term?
Gregory E. Johnson
I think we’re always looking at opportunities and you’re exactly right the valuations have come down both in the U.S. and outside the U.S.
It’s a tricky business to grow by acquisitions. Every firm is a snowflake and we might have a specific need and the properties might meet one need but bring other problems.
We will continue to look at it, so if your question is, is there interest in pursuing those opportunities, there is.
Kenneth A. Lewis
I think the answer is we don’t feel like there’s any strong need to fill in product gap and we think we have addressed the areas where we have less penetration, global growth, large cap growth, and have very viable strong teams and records now that we think we can grow that.
Operator
Your next question comes from Michael Kim - Sandler O’Neill & Partners.
Michael Kim – Sandler O’Neill & Partners
Could you just give us some additional color on investment performance trends, more generally? Specifically looking at the equity platform, were there any sizeable products that may have been just below the 50th percentile that might be skewing your overall Lipper rankings in either direction?
Gregory E. Johnson
Yes, and I probably should have mentioned that when I talked about performance. I think it is important.
Some of the large categories, mutual series is right on the bubble at 50, 52 with the latest numbers. The Franklin Income Fund right at 50.
And those are huge asset levels that can really swing that number quickly. So there’s no real big lags, I think, in those numbers and most of them are in that 50-60 category, which can easily move the needle very significantly as far as looking at the percentage of funds in the top two quartiles.
Michael Kim – Sandler O’Neill & Partners
I understand that end-of-quarter or end-of-month percentages can move around quite a bit, but from a flow perspective do you find that there is a lag effect associated with these shifts in overall Lipper rankings?
Gregory E. Johnson
That’s probably correct and I think part of it, even though you may not be in the top two quartiles, a lot of these still have three or four star funds because of their consistent records and their strength in the three and five and longer term. And that will be a bigger driver on the fund flows than whether you’re in the quartile year-to-date one way or another.
I think it’s just a good indicator to talk about because it ultimately leads performance.
Operator
Your next question comes from William Katz - Buckingham Research.
William Katz – Buckingham Research
Could you talk a little bit more about the institutional pipeline, maybe quantitatively or qualitatively size it where we stand today versus maybe coming into the quarter. And related to that, if you talk a little bit about where you’re seeing demand, whether it is alternatives in global or other areas as well?
Gregory E. Johnson
I think the opportunity, and I don’t really have any way to quantify the pipeline versus the prior quarter. Like most, it’s going to be with the Sovereign Wealth funds right now and with the global fix and even the existing accounts as that money continues to build they are continuing to add to existing to existing positions.
So I think that’s the obvious near-term opportunity for us as well as in Global Equity. I don’t have any way to quantify whether that’s better or more or less than the prior quarter.
William Katz – Buckingham Research
Has it been any change in terms of, one of the things seemingly coming out of all the earnings so far has just been to continue risk aversion, both in retail and institutional. Are you seeing that as well in your conversation with consultants and clients in general?
Gregory E. Johnson
I think that’s right. This has been a major shock to the system and certainly what’s happened in July and the new volatility, a lot of people are going to move to the sidelines and wait until things settle down a bit.
So I think that definitely has changed the selling environment for the time being.
William Katz – Buckingham Research
In terms of the new senior executive structure, you alluded in your comments to some other efficiencies. Are those product and/or expense efficiencies and can you help flesh what some of those might be?
Gregory E. Johnson
I think it’s both. I think it’s probably, we looked at those two areas and we saw the groups getting closer and closer as gate keepers control more and more of the retail channels and a lot of the servicing that we’re doing in distribution in some cases was somewhat redundant and it was very hard to attack that with two different entities.
And having it as one group, we think we’re in a better position to make smarter decisions around the redundancies that we can more effectively reorganize and manage. And I think there are real cost savings there but you may not see that for a quarter or two but we’re in a better position to deal with it.
I don’t think there’s as much on the product side because really, we always look at the products holistically from institutional and from retail.
William Katz – Buckingham Research
You said that you would expect buybacks to return to their more historical level relative or maybe pay out relative to prior income. Could you just restate what that goal is?
Gregory E. Johnson
I will refer you back to the historical levels, which is about 70% to 80% of [current] earnings and that feels like a comfortable target for us. That was dividends and share repurchases.
Operator
Your next question comes from Ken Worthington - JP Morgan.
Kenneth Worthington - JP Morgan
What were performance fees for the quarter?
Kenneth A. Lewis
There were some performance fees. They were about $4.0 million in this quarter versus about $2.0 million last quarter.
Kenneth Worthington - JP Morgan
You said in the release you have $3.0 billion of cash and cash equivalents. How much of that cash is unrestricted and available for buyback and dividends?
Kenneth A. Lewis
Well, the first thing, there are some regulatory requirements, I wouldn’t put them as a major factor. I think the bigger factor is the mix of cash on-shore and off-shore, which of course is available, but at a haircut.
And at June 30 approximately 63% of our cash was held offshore.
Kenneth Worthington - JP Morgan
I think you said the Global Bond Fund had $1.0 billion of sales. Was that, I think that included the institutional or was that just the retail?
I think you said that your Templeton Global Bond Fund was your biggest asset gatherer. It did $1.0 billion of sales this quarter versus $1.8 billion last quarter.
Is that both the retail and the institutional side or is that just retail that you were referring to?
Gregory E. Johnson
Just retail.
Kenneth Worthington - JP Morgan
Could you give some performance on that fund as your biggest [instigator], the near-term performance [thus far], has that had any impact on the decline in sales we saw from one quarter? The long term track record is very good, [as long-term falls off] does that matter for fixed income funds?
Gregory E. Johnson
Yes. It may have but I think the bigger issue is just interest rates and inflation and the fear, right now, that it’s affecting the debt market so that’s certainly had an impact.
It’s hard to measure. I can’t think the short-term performance is going to have that much, but I’m sure it has some impact, but I think the bigger issue is just around the volatility in the world markets.
Operator
Your next question comes from Prashant Bhatia - Citigroup.
Prashant Bhatia – Citigroup
You gave us the Lipper performance for the U.S. registered product, of about $300 billion.
Can you give some color on the remaining $250 billion to $300 billion that is outside of the U.S. in terms of how much is above benchmark, maybe on a one, three, five-year type view?
Gregory E. Johnson
I don’t have that and I’m not sure we break that out.
Prashant Bhatia – Citigroup
Or even just roughly, I’m just trying to get a feel for that other large pool of AUM and how the performance is. Any color you can give.
Gregory E. Johnson
I really couldn’t, I think there are some other big pools in there like the Asian Growth Fund, that’s done very well, but I just don’t have that broken out for non-U.S.
Prashant Bhatia – Citigroup
On the buyback side it sounds like you are managing to a ratio, combination of dividend and buyback. Are you basically not really price sensitive when you’re buying back stock?
Is it just more a formula?
Gregory E. Johnson
No, I think the strategy, as we stated before, hasn’t changed, that we’re opportunistic. I just think that, trying to give you a little flavor for trends, that expecting historical averages.
So it’s not a formulaic approach but an the end of the day we should be close to that average at least maybe at midpoint.
Prashant Bhatia – Citigroup
On the acquisition strategy, it sounds like you’re more focused on getting some new capabilities so is it fair to say asset purchase is just pure scaled asset purchases really aren’t what you’re looking for?
Gregory E. Johnson
I think a pure asset purchase at the right price, we would be very interested in. I think it really comes down to, in that situation, the efficiencies from combining the two and the price you pay.
So I think everything is relative to how much you’re willing to pay and what you can do with it and ultimately add shareholder value. And whether that’s going out and buying a different capability and making it grow or buying existing assets that you can combine with the existing funds, we’re certainly open to that.
There just hasn’t been that opportunity at the right price to make that happen, to date.
Prashant Bhatia – Citigroup
Would you in some of those cases consider very large-scale purchases or is it more bite-size type purchases.
Gregory E. Johnson
Again, in the right situation we would consider a larger one.
Prashant Bhatia – Citigroup
And then just on the haircut that you said for the 63% that’s offshore cash is that about a 50% haircut?
Gregory E. Johnson
Right now our policy is to reinvest that cash for foreign operations, so I was referring to the U.S. tax rate.
Prashant Bhatia – Citigroup
No, I’m saying to bring that across, if you wanted to bring it across, what haircut would you take on the tax side? Is it the corporate tax rate or is it more punitive 50%?
Gregory E. Johnson
No, corporate tax rate. The statutory rate in the U.S.
Operator
Your next question comes from Craig Siegenthaler - Credit Suisse.
Craig Siegenthaler – Credit Suisse
First question, on the $2.4 billion of flows in the Sovereign Wealth Fund, I’m just trying to get a read for how normal this is, if this is a strong result. And also just looking at activity in late June, maybe early July, can we expect a duplication of this in the September quarter or is this unusually high?
Gregory E. Johnson
The answer is that on the Sovereign Wealth Funds and any large institutional account, we call them out because they are unusual and we want people to understand that you do have periods, like we did in the prior quarter where reallocation was unusual, too, and we called that out and that led to higher redemptions. This quarter probably helped flows with a higher than normal funding of those institutional accounts.
So there is really no normal number. I think we talked about the pipeline still looks good, we still expect to get new wins but you could nothing this quarter and twice as much as much next quarter, and that’s really again why we call them out when we do make these calls.
Craig Siegenthaler – Credit Suisse
Actually, I noticed that you also had a $1.0 billion redemption from the Franklin Income Trust. Is that part of the giant $60.0 billion retail fund?
Gregory E. Johnson
No, that’s the Emerging Markets Income Trust in the UK that is a Mark Mobius for Emerging Markets Fund that had a tender. It’s a closed-end fund.
Craig Siegenthaler – Credit Suisse
One of your competitors this morning, on their call, and they also have a bipolar business in that half the business gets a higher fee rate from the equities and the other part gets a lower fee rate from the fixed income side, like you in the business mix. But based on where June 30 where you finished and based on where the average rate was for the quarter ending in June, it looks like [inaudible] is down significantly which is also going to have an impact on the fee rate.
Are you looking for like a one basis point decline in fee rates sequentially or any expectation there?
Gregory E. Johnson
It’s anyone’s guess what will happen as far as the mix and the overall markets but if the equity markets decline and the mix shifts to fixed income you would see a little bit of a downward trend in the effective fee rate. But I think you have to sometimes look beyond within equities because through June emerging markets really hadn’t had that big of a setback compared to the rest of the world, and they have as of July, so that will have a bit more of an impact on us on that fee.
Kenneth A. Lewis I don’t know that I would characterize it as bipolar because it is more of a graduated spectrum of fee rates across the different investment objectives.
Gregory E. Johnson
I think, again, I would stress that with the global fix we have a higher fee rate for normal fixed income assets that you would get because of that specialty. Same with emerging markets debt.
So you don’t have that huge difference that I think a lot of firms have between the average fee on equity and fixed.
Craig Siegenthaler – Credit Suisse
And because a lot of it’s retail, too and it makes it a little higher.
Gregory E. Johnson
Right, but nothing really in short-term duration in institutional which is the real low.
Craig Siegenthaler – Credit Suisse
But could the performance fee, I know it’s very seasonal and it can be volatile, how does the third quarter look? Is that going to put additional pressure on the fee rate?
Kenneth A. Lewis
On the performance fees?
Craig Siegenthaler – Credit Suisse
Yes.
Kenneth A. Lewis
The performance fees really aren’t a big part of the equation. The last quarter they have been a $2 million to $4.0 million.
I think in years past we had a subsidiary that we were consolidating that had bigger performance fees and that has been de-consolidated last year so we’re not seeing that run through revenue. And then we have a couple of performance fees on the emerging markets funds and it’s anyone’s guess how they’ll come in.
They are seasonal.
Operator
Your final question will come from Cynthia Mayer - Merrill Lynch.
Cynthia Mayer – Merrill Lynch
It seems like the distribution margin continues to shrink and can you remind us, once again, is that a function of greater sales overseas and should we expect that to continue to slip a little bit.
Gregory E. Johnson
That is exactly right and if that trend continues that margin will decrease further.
Cynthia Mayer – Merrill Lynch
Circling back to the subject of acquisitions, you mentioned alternatives and I’m wondering if alternatives would be an area you would be interested in acquiring?
Gregory E. Johnson
I think it is something that we have spent a lot of time looking at different situations and the right one we feel has not, the right opportunity has not come up. But now I think with Bill in this position and having a dedicated person there to look at that, and also somewhat of a re-evaluation of how the Street’s valuing performance fees and things like that, again, it creates a higher probability of us doing something.
So we’re open to it, we’re building it, we think it’s important, and we think there is going to be more opportunity certainly than there has been in the last year or so.
Cynthia Mayer – Merrill Lynch
On the Sovereign Wealth funds, do these tend to be done for a straight fee or a fee plus performance fee and should we think of them as in general lower fee because they are so huge?
Gregory E. Johnson
I think there are some performance fees but the majority are straight fees so it won’t be a big impact and as you would expect, lower fees than the traditional retail.
Operator
And at this time I would like to turn the call back over to Mr. Johnson.
Gregory E. Johnson
Thank you everyone for taking time to be with us today and we look forward to speaking next quarter. Thanks.