Oct 23, 2008
Executives
Gregory E. Johnson - President and Chief Executive Officer Kenneth A.
Lewis – Executive Vice President and Chief Financial Officer
Analysts
Mike Carrier – UBS William Katz – Buckingham Research Hsein Lee – Morgan Stanley Kenneth Worthington - JP Morgan Michael Kim – Sandler O’Neill & Partners Jeff Hobson – Stifel Nicolaus Prashant Bhatia – Citigroup Craig Siegenthaler – Credit Suisse Marc Irizarry – Goldman Sachs Cynthia Mayer – Merrill Lynch
Operator
Welcome to the Franklin Resources earnings conference call for the quarter ended September 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 securities of Franklin’s most recent Form 10-K and 10-Q filings. (Operator Instructions) I would now like to turn the call over to CEO Mr.
Greg Johnson.
Gregory E. Johnson
Good afternoon everyone. This is Greg Johnson, CEO of Franklin Resources and joining me as always is Ken Lewis, our CFO.
It has been a challenging quarter for everyone in the asset management industry. I think as most of you are aware September was one of the worst months ever for net redemptions in our industry and in October with the levels of volatility we have seen could even be worse.
I think if there is any silver lining for our quarter the one area we can control is investment performance. We were very pleased to see a couple of the areas that have been a concern over the past year particularly in mutual series and Templeton had a very significant turnaround in their 1-year but also affecting their 3 and 5-years mutual.
As far as assets in top percentiles over 1, 3 and 5 increased to 85%, 97% and 98% and at Templeton a dramatic increase in the short-term the one year up to 73% and 72% in the five year area. This should serve us well when market sentiment shifts and investor flows resume.
As far as the declines in AUM I think as everyone in the industry we remain very focused one expense management and implementing strategic cost-cutting initiatives which Ken will expand on later. Taking a look at the assets and flows, obviously a disappointing quarter as far as the decline in assets quarter-over-quarter.
About 12.5% or $73 billion. As you would expect with our sales mix continuing to favor fixed income and market depreciation our percentage of equities decreased from the prior quarter from 55% of assets to 52%.
Looking at the flows, we went from 1.2 in net inflows in the prior quarter to 8.6 in outflows this quarter. Sales were down about 9% overall from $45 to $41 billion and redemptions picked up 12%.
Looking at the flows year-over-year we had outflows for the year of $8.9 billion versus inflows of $46.5 billion for the prior year. We had market depreciation, most of that coming in September of $123 billion.
Looking at the flows inside the United States and outside of the United States, net new outflows of $5.6 billion in the U.S. versus inflows of $1.1 in the prior quarter.
Fixed income continued to do very well and has been a real focus of ours and we are pleased to see our market share increasing in the tax free bond fund to a new high of 28%. Tax free funds were our best selling category during the quarter with net new flows of $1.1 billion versus $1.7 billion in the prior and our largest fund, the Franklin Fund, had net outflows of $1.4 billion compared to $250 million of inflows last quarter.
Outside the U.S. we had outflows of $3 billion versus net inflows of $100 million.
The largest inflow this quarter was once again from the sovereign wealth fund that put $490 million in a global fixed income account. On the negative side our largest outflow was the SICAV Asian Growth Fund which as you would expect had a major performance impact with the sell off in the Asian markets over the quarter.
Looking at the flows by client type, in retail we had outflows of $8.8 billion. Much of the outflows in the hybrid and any of the equity classes where market performance has declined the most such as emerging markets.
Our top U.S. selling fund continues to be the Templeton Global Bond Fund with net new flows of $335 million versus $925 million in the prior quarter and SICAV had outflows of $3.5 billion.
Remember that is primarily equities in the SICAV products so again they are going to get hit harder on a net basis quarter-to-quarter. Institutional positive net flows of $200 million versus $1.9 in the prior quarter.
Again $490 million fixed income account and other notable fundings included a $350 million global fixed income mandate and a $250 million global equity mandate from separate U.S. pension funds.
High net worth was about break even in terms of flows for the quarter. Again, some of the specifics around the fund or investment objectives, equity had outflows of about $9.7 versus $2.1.
The two funds with the largest outflows were the Templeton Growth Fund with $1.4 versus $1.2 and Templeton Foreign with $730 million out versus $836 million in the prior quarter. The income fund had outflows and with its make up of high yield bonds and utilities and a heavier weighting in the financials and some of the preferred it did have some short-term performance issues in the quarter and that really resulted in some heavier outflows there.
Fixed income another solid quarter overall with net new flows $2.2 versus $3.7 and net new flows for tax free and global fixed were $1.2 and $1.1. Money funds we did have inflows for the quarter at $300 million versus outflows of $600 million and we did see increased net exchanges as people moved out of riskier assets.
Again, as far as investment performance goes I think that was really the highlight for the quarter in three different areas. Overall on the one-year number from the prior quarter we saw we moved from 35% of our assets up to 55% and on the five-year from 71% overall to 90% of our assets in the top two Lipor quartiles.
One of the other big mover areas in addition to mutual and Templeton is our Global Fixed Income Fund which is our top selling fund and that moved back into the first quartile and moved our taxable fixed income assets on the one-year from 30% in the prior quarter to over 82%. As I mentioned with Templeton the under-weighting in financials and materials and energy related stocks really reversed itself during the quarter and even with the strong dollar and their policy of not hedging it still reversed much of the underperformance.
There again it looks much better on a relative basis. The mutual series with heavier cash positions in the fund, more of their typical defensive value orientation did much better in the quarter as well.
With that I’ll turn it over to Ken for the financial results.
Kenneth Lewis
Hello everyone. September 30 marked the end of our fiscal year 2008.
Revenue was $6 billion versus $6.2 billion last year which was down 2.8%. Operating income was $2.1 billion versus $2.07 billion last year and that was actually up almost 2%.
Net income of $1.6 billion versus $1.8 billion last year was down 10% reflecting our share repurchase activity and earnings per share were down only 5% to $6.68. Turning our attention to the quarter it was a challenging one as we all know with continued market declines weighing on assets under management and on revenue.
Operating income decreased 21% from last quarter to $419.5 million. Net income decreased 24% from last quarter to $305 million.
Earnings per share decreased 24% for the quarter to $1.30. Operating revenue was down 13%.
Investment management fees decreased 11% from the prior quarter due to a decline in average assets under management and a mix shift towards lower fee products like fixed income. The effective fee rate for the quarter based on a simple monthly average, assets under management was 58.9 basis points.
There were no performance fees this quarter. On a normalized basis the decrease in the effective fee rate was about 2 basis points from the prior quarter.
Underwriting and distribution fee revenue decreased almost 16% due to a decrease in gross sales and assets under management. Shareholder servicing fees declined almost 5% due to decreased billable shareholder accounts following our annual purge of U.S.
closed accounts in July which we talked about in the last call. Other net revenue declined $13.3 million from the prior quarter.
The majority of this change was due to mark to market of our retained interest in securitized assets from the auto loan business activity. That was about $12 million.
Looking at operating expenses they decreased almost 9% this quarter. Compensation and benefits decreased 4.1% quarter-over-quarter primarily from a reduction in variable compensation.
There is about $6 million of non-recurring items that reduced the compensation and benefit line this quarter. I expect that to be non-recurring.
Technology and occupancy expense increased 5.7% quarter-over-quarter due to an increase in other occupancy costs such as maintenance and utilities and an increase in depreciation for technology projects that were completed during the quarter. We will be deferring non-business critical technology projects and have been deferring them; it will take some time for those efforts to be reflected in our numbers.
Advertising and promotion expense increased slightly but remained relatively flat increasing just 1.6%. Amortization of deferred sales commissions decreased 2.9% reflecting lower C-class share sales.
Other expenses increased 12.8% due mostly to increased legal and other professional fees that as we have seen can be lumpy from quarter to quarter. In this line item there is about $4-5 million in recurring items this quarter that increased expenses for the quarter.
Other income net increased $20 million from the prior quarter. Sponsored investment product losses increased $26.5 million from the prior quarter and that is consistent with recent market value declines during the quarter.
Investment and other income net increased $43.8 million this quarter. The delta mainly resulted from an increase in earnings for investments accounted for using the equity method as well as an increase in net foreign exchange realized and unrealized gains.
Those two items together explain most of the $43 million delta quarter-over-quarter. Interest expense declined to nominal levels as we paid off our medium term notes last quarter and have low levels of commercial paper outstanding.
There was approximately $13 million of commercial paper outstanding at the end of the year. The effective tax rate for the quarter was 33.86% compared with 27.2% in the third quarter.
The increase was largely due to one-time tax change of approximately $17 million as the result of a change in our dividend policy in the U.K. where we began repatriating earnings on a quarterly basis.
So our operating margin decreased to 31.7% this quarter but on a fiscal year basis it increased to 34.9% above last year’s 33.3% level. We repurchased 2.4 million shares this quarter and 14.2 million shares for the fiscal year.
Our total payout ratio for the fiscal year was 108.6%, the largest it has been since 2003. Total share payout for the quarter was 89.4% which is more in line with our historical average and our recent guidance.
Shares outstanding of 232.8 million are at the lowest level in over ten years. I’d like to make a comment on cash and cash equivalents.
Cash and cash equivalents totaled $2.5 billion at September 30 down from $3 billion at June 30 and $3.6 billion on September 30, 2007. It is worth noting that the time deposit with original maturities greater than three months are not included in cash and cash equivalents even when the remaining maturities are less than three months.
So have [lattered] this portfolio in the past year. These other current investments as show on our balance sheet have grown from $300 million last year to $539 million last quarter to $837 million as of September 30 of this year.
If you were to include our over time deposits on an apples-to-apples basis with cash and cash equivalents the comparable balance would show just a modest decreased year-over-year from $3.9 billion at September 30, 2007 to $3.6 billion at June 30, 2008 to $3.4 billion at September 30, 2008. Finally, I would like to make a few comments on cost management.
As you may remember we got an early start and aggressively looked at expenses last February by asking the business units to cut their budgets and develop contingency plans. I think you can see those results of those efforts as operating expenses decreased 17% for the year.
We have a huge head start we think on our competition. Our approach has been measured and it has been deliberate.
We know we are nothing without our customers and we will be very careful to maintain our very high standards of investment performance and customer service when reducing expenses. I think it is good to bear in mind, or at least interesting to me, that about 40% of our decline in AUM for the year occurred in September.
Even before that occurred we were committed to have targeted and strategic position reductions. Given the market activity during the last 30 days we will be increasing our cost reduction efforts.
Our plans haven’t solidified and it is the bottom of the crust so it is tough to give you an idea of the magnitude but over the next year we definitely expect expenses to decrease. With that I will hand it back to Greg for some closing business highlights.
Gregory Johnson
Just a couple of items of note. Our credit rating was upgraded recently on October 6 by S&P and we currently have the highest rating given to an asset manager.
We also launched the Franklin World Perspectives Fund which has been a big push of ours to leverage all of our local asset management teams around the globe and introduce an international core growth type fund and it uses managers from Canada, Europe, India, Japan, Korea, Latin America, the Middle East and finally the U.S. So with that we will now open it up for your questions.
Operator
(Operator Instructions) The first question comes from Mike Carrier – UBS.
Mike Carrier – UBS
First a question on the expense base. I know you guys have been talking about expenses pretty much since the beginning of the year.
They are down relative to the industry but I’m just trying to get a sense…when you look at some of the expense you have currently and some of the investments you have put in place what areas can we see some reductions over the next 6-12 months and maybe as a percentage of the expense base and maybe some of the areas of expense in other or advertising, where do you think you have more flexibility than say something like [inaudible].
Kenneth Lewis
I think in terms of the line items every category is on the table. So whether it is comp or IT or advertising or other all of those items are on the table.
Our approach has been to take a bottoms-up analysis of it and we are going to kind of continue with that. So it wasn’t a top down process so it is hard to give you a percentage of expenses but definitely we are looking at it aggressively.
Mike Carrier – UBS
Considering the market turmoil, returns over the past ten years at least in the U.S among various asset classes aren’t that great and you have near-term pressures on the business. I’m just curious, do you expect to see any major shifts by either retail or institutional investors in terms of products or what they are going to be demanding over the next 12-24 months?
How can you be positioned for that if you are seeing it? Maybe it is too early or maybe in these times of crisis the pendulum swings way too far in one direction.
When there is a crisis in the market there are usually opportunities that do come along. Given your cash balances is it a time where you just continue to have cash on the balance sheet because it is a good thing to have these days but still there could be opportunities and would you consider those over the next 6-12 months?
Kenneth Lewis
I think as far as the shift, obviously this has been a very dramatic period as far as how the equity markets and I think you are right the ten-year numbers make it very hard to market. I think the near-term shift will be towards fixed income.
I think we haven’t really seen that yet because of the volatility and how this all started and some of the liquidity issues in that market but I do think you will see a meaningful shift. Munies are extremely attractive right now and I think that trend will continue.
Probably people will hold more than they should in money funds too and our job is going to have to be to convince them why there is a lower risk in this market than there has been in a long time. I think as far as types of products you’ll tend to see more guaranteed insurance products.
That is a whole other issue right now too as far as what is the guarantee in some cases providing minimum numbers. Is that going to be credible in the market place?
So that is a question too. But you tend to see that kind of product come out to get people back into equities.
I do think when things settle and markets turn the feeling the market has today is so different than what we had a year ago or six months ago and it does change pretty quickly and if you get a little bit of momentum back I do think people are more educated and will come back into the market pretty quickly. Around the cash side we feel pretty good about the balance sheet right now and I think that does create some unique opportunities.
We talked about that in the past. You never know what could happen in this market and not having leverage as an asset manager and having a strong balance sheet puts us in a different position than where the market was a year or so ago.
So the chances that we do something I think are higher than they have been. I’m not saying we will do something but I think at these prices we think there is a lot more attractive opportunities to add value than there has been in a long time.
Mike Carrier – UBS
On the cash, the change on the tax rate in the quarter does that just mean going forward you will be repatriating each quarter back to the U.S. and then out of that $3.4 billion of cash you mentioned including the over three month cash equivalent, what portion of that is U.S.?
Kenneth Lewis
38% of that total number I gave you is in the U.S. It is important to point out a few things.
One, it just relates to a subsidiary in the United Kingdom and it is not all the offshore cash. Secondly, this was more of a cumulative effect and so going forward I wouldn’t expect the tax rate to be up where it is now.
This is more of a one-time, non-recurring item.
Mike Carrier – UBS
Should we expect to go back to the 28% range?
Kenneth Lewis
There are probably more things pushing the rate up from the 28% closer to a range between 28.5-29.5%.
Operator
The next question comes from William Katz – Buckingham Research.
William Katz – Buckingham Research
Just a clarification to your point about expenses being down in the upcoming fiscal year. Is that a quarter on quarter analysis or a year on year analysis?
Kenneth Lewis
It was more of a year on year analysis. The decisions you make today could take three quarters to push through results.
William Katz – Buckingham Research
Is there any concern here given you have already been cutting pretty aggressively over the last year plus about cutting too deeply and potentially eating into the revenue creation opportunity of the firm?
Gregory Johnson
I think Ken mentioned that is really what we will not do. I think it is a real advantage historically we have advertised through periods like this and think this is somewhat of the best time to get the brand out there where there is less competition.
So while we may reduce it somewhat we will not do the easy thing and just cut it out. A lot of investment managers who have built businesses that are now not break even or below tend to come in and retreat from countries.
That is something we will not do. We still believe in that long-term vision of these markets continuing to develop and the asset management business continuing to be a big opportunity for us in those markets.
We will not do that. We may slow down advertising in some of those markets.
You may slow down hiring but we are committed to those and as Ken said too the investment management is what we do and we can’t do anything that compromises that and the reality today is that you have increased call volume and increased transactions for your service area with the volatility in the market place. The last thing we want to do is go in and reduce the service levels that could really hurt relationships with the advisors.
I think you do have to be very careful but there are variable expenses there. The comp line, our year-over-year was still a pretty good year for the firm but at these levels it will not be as good a year and that means you will have an immediate effect on variable compensation.
As Ken mentioned the IT spend, it seems like revenue sharing and the promotion and marketing line is a function of assets. So as we define an asset that is going to be an automatic reduction in what we have already budgeted to that line as well.
So there are a lot of variable expenses in there and we are going to still take a hard look at the structure and we think there are some efficiencies in some of the changes we have made. It just takes a little bit of time to get there but the important thing is we have the groups together working on those initiatives and we think by year-end you will see some real changes.
William Katz – Buckingham Research
In terms of the balance sheet you said you are maybe more open to deals now than in awhile. Maybe given your position as well as the depressed valuations in some cases.
As you think about your franchise geographically or by product mix, what seems to make sense as an [inaudible] opportunity to you?
Gregory Johnson
As we said before I don’t think there is anything we have to have. We have most covered so it really depends on the situation.
If you have a direct sold group that immediately you could add value into the advisor channel through relationships or a firm that is only being sold in the U.S. and has strong performance records and we can leverage that through our structure across the rest of the globe, those are things we would look at.
Obviously we have said it before…we have good assets and good capabilities in the growth area but we are really not known for that and if that is the one area where we have less market penetration that is one we would still be open to but we don’t really have anything on the wish list. I think the difference today with some of the valuations is you may be able to at some level acquire and merge funds and get some real cost savings and benefits quickly that way.
That is something we haven’t seen I think in this industry in awhile.
Kenneth Lewis
The strategy hasn’t changed. The universe of opportunities has grown.
That is what is different.
William Katz – Buckingham Research
Lastly, as it relates to compensation your relative performance is now improving. Can we be in a situation where your margins could be compressed just because you need to pay for the relative performance improvement while at the same time the absolute returns are going the wrong way?
Gregory Johnson
That is, just to reiterate our compensation philosophy, it is a combination of company performance, relative performance and of course external market factors. So anything is possible.
I think generally we are going to look at all the expense line items including compensation.
William Katz – Buckingham Research
There seems to be a significant amount of consolidation going on among the distribution in the U.S. and probably across the world over the next several quarters if not sooner.
I’m just sort of curious how you are thinking about your position in the retail area relative to the potential for margin compression and any potential shifts in strategy to overcome that.
Gregory Johnson
I would start with just the generic statement that consolidation is generally not good for an independent asset manager that relies on advisors. I think that is somewhat of a channel statement but the less distributors you have obviously the more influence they can have on who they are distributing.
I think with this kind of dislocation and there will be a little bit of unrest. The independents I think are going to continue to grow as a percentage of the industry and so we don’t see the traditional model changing other than one of our big initiatives is really with our website and trying to deliver to those independents in a way that is much more cost effective than the traditional wholesaling model.
So I think we have been working at that awhile. I think these changes will just accelerate some of the growth in the independent channel.
Operator
The next question comes from Hsein Lee – Morgan Stanley.
Hsein Lee – Morgan Stanley
Just a question on the stronger dollar this quarter. Could you give us a sense of how this affected gross revenues and expenses?
Maybe versus a quarter when FX moves weren’t up significantly?
Kenneth Lewis
A couple of things. I guess it is important to point out most of the operating income for the company is denominated in U.S.
dollars so it didn’t really have that much of an impact this quarter in revenue or expenses. Over 90% of the operating profit of the company is dollar denominated.
Hsein Lee – Morgan Stanley
As a follow-up could you speak to the behavior or trends you are seeing among your distribution partners in Europe and Asia? For instance are they selling more deposits or other types of products now and maybe if you could kind of bracket how this differs from your distribution arrangements in the U.S.?
Gregory Johnson
We are really not seeing that sort of a trend.
Operator
The next question comes from Kenneth Worthington - JP Morgan.
Kenneth Worthington - JP Morgan
Just a follow-up on that question. Can you walk us through how you are thinking about the currency hedges with the dollar up significantly?
I know your funds collect fees in U.S. dollars but even those funds that collect fees in U.S.
dollars still have underlying assets that are tied to foreign currencies so it seems there is a currency issue there. How are you hedging and given the magnitude of the change in the dollar does your hedging strategy change going forward?
Kenneth Lewis
I’ll give you a couple of data points. During the quarter about 21% of the depreciation of our assets under management was due to currency.
So it wasn’t a major factor. Keep in mind even with that the performance improved.
When you look at our assets under management almost 2/3 of them are dollar based. That is why you get such a small percentage.
Again in revenue and expense terms almost 90% of that is dollar based.
Kenneth Worthington - JP Morgan
So hedging is just not an issue?
Kenneth Lewis
Well obviously the Templeton Funds do not hedge except for the global bond fund that does employ hedges and the mutual series from time to time hedges. So it is kind of hard to generalize.
Kenneth Worthington - JP Morgan
I was meaning at the corporate level as opposed to the active fund level.
Kenneth Lewis
I guess the point is there is no need to hedge.
Kenneth Worthington - JP Morgan
On the repatriation of I think it is earnings in the U.K., maybe you said dividends in the U.K., what was the intention here? Why decide to dividend now?
Is there a chance you might expand this to other regions? I think you have a pretty big off balance sheet liability because I think you had declared over years you didn’t want to repatriate any of the earnings.
Does that change that liability? Does that bring a balance or this liability on balance sheet?
Is there anything there?
Kenneth Lewis
That’s a great question. This was specific to one asset or advisor in the U.K.
where we had changed the asset management contract and over the years there has been an acceleration of cash accumulation there. Relatively narrow income tax differential between U.K.
and U.S. dollars so that is what was the catalyst for changing our policy.
At this time there is no plans to expand that program.
Kenneth Worthington - JP Morgan
The balance sheet liability thing is that just a non-event or is there something there?
Kenneth Lewis
That is a non-event.
Operator
The next question comes from Michael Kim – Sandler O’Neill & Partners.
Michael Kim – Sandler O’Neill & Partners
Not to beat a dead horse but just in terms of expenses if you look at your AUM they are down about 20% year-over-year when your headcount has actually crept up a bit and I understand a lot of that has kind of been in lower cost centers but do you feel like your headcount is where it needs to be today just given the reset in the AUM levels?
Kenneth Lewis
Obviously the fact that the asset management centers are down a lot of that, as I pointed out 40% of that, occurred in September. So even before that we felt there was an opportunity to do some targeted headcount reduction and that is what I was referring to.
So now since that event we are definitely going to escalate our efforts there.
Michael Kim – Sandler O’Neill & Partners
Just kind of focusing on the retail business here in the U.S. what are the areas you feel like you can still generate meaningful inflows in this type of environment whether it is mutual series, global, fixed income, munies, etc.
Just some additional color there would be helpful.
Gregory Johnson
I think it is all of the above. I think number one I would pick munies just because there is such a value there right now and part of that was some liquidity issues affected that market as well so I think that is a good story and solid for a lot of people today.
I think the equity one is a little harder but I think once again with mutuals and the history and being more defensive and doing well in these kinds of markets and hopefully with the better short-term performance we should be able to get a little bit of momentum back there. I think any of the equity sales are going to be very difficult until we get the volatility in the market settles down quite a bit and I think fixed income should be what emerges as far as what is meaningful flows I think in the next quarter or so.
Michael Kim – Sandler O’Neill & Partners
Finally, in terms of free cash flow usage, any kind of change in thinking in terms of dividends and share repurchases just given the ongoing volatility?
Gregory Johnson
No real change. Share repurchase we will continue to be opportunistic.
We have about $5 billion left on the authorization there. No real change to the dividend policy.
Operator
The next question comes from Jeff Hobson – Stifel Nicolaus.
Jeff Hobson – Stifel Nicolaus
What are you hearing from the institutional side as far as potential changes and what they are looking for or changes of behavior? Then do you think that traditional asset classes potentially in the institutional channel could see some rebound given the dislocations in some of the alternative areas?
Gregory Johnson
I think there will be some changes there. Obviously the pension liabilities being under funded now should mean search activity will increase.
It has been very quiet right now. I think a lot of people are hesitant to put anything new to work especially on the equity side in the kind of market we are in right now but you would think that with some of the problems in the alternatives area I think the amount of money that is going to the absolute return fund-to-funds to me there will be a lot more question mark around that value proposition and I think that is just going to be a lower portion of searches going forward and I also think that at these valuations and historically where we are the long only strategy should be a lot more attractive than it has been in a while.
So in answer to your question which you kind of directed at me I do expect to see more searches in the traditional area but again I don’t think it is going to be meaningful until things settle down a bit in the equity market.
Jeff Hobson – Stifel Nicolaus
Global fixed income in the institutional channel…any slow down in interest in that product?
Gregory Johnson
No, I think that is the one that we continue to see strong interest in and the managers have really done a tremendous job in positioning the fund and historically it has benefited from the dollar depreciating and then they made the move at the right time with the fund to reposition it the other way. It really is a great story right now and adding a lot of value for active management and certainly with the sovereign wealth funds where we see a lot of interest we expect to see new searches and continued searches there.
Operator
The next question comes from Prashant Bhatia – Citigroup.
Prashant Bhatia – Citigroup
You talked about the cost cutting. Are there any areas where you are actually going to invest or spend money to grow organically over the next 12 months?
If you could highlight some of those areas.
Gregory Johnson
I think there are those areas. Internationally we have been expanding there.
We continue to grow there. Local asset management is an area where we will continue to invest.
We launched on the 14th Worldwide Perspective a SICAV product that really is a group effort with our local asset managers contributing ideas to that product. I think that is an area where we are going to continue to expand.
Prashant Bhatia – Citigroup
International and that entails headcount and so on?
Gregory Johnson
Yes. Of course.
Prashant Bhatia – Citigroup
Also on the share repurchase you said you would be opportunistic. I guess just looking back over the past couple of years you spent over $1 billion in repurchases at prices that were double what they are today.
When we look forward over the next twelve months is it reasonable to look at north of $1 billion allocated to buy back?
Gregory Johnson
I think in each of the prior periods we were bullish on the company given the market environment and the climate we were in and that continues today. The volatility has a new dimension to it so I think you probably won’t see those levels but you will see us be active.
Prashant Bhatia – Citigroup
Does the acquisition opportunities, do they make you pause on the buyback as well or is that another element in the mix because you may have acquisition opportunities you didn’t have before?
Gregory Johnson
I think that is a factor we will consider going forward.
Prashant Bhatia – Citigroup
On the money fund side, roughly $7 billion in AUM that is not really a scaled platform. Is there, do you think, an opportunity for you to grow that meaningfully or do you think you need to?
The other way do you maybe potentially exit that business being a relatively small and receive some of the risks of that business relatively large?
Kenneth Lewis
I think the answer is that we have never tried to aggressively go after money fund business in any way. We have treated it as a convenience for shareholders and it is becoming less and less important as advisors are becoming linked into their own money funds.
So it is $7 billion. It is not a money loser for us but it is certainly not much of a money maker if it is.
We have been very conservative in how we manage those funds. We felt like if we want to compete, we absolutely agree with you the risk/reward is not there for us as far as what we would like to focus on, so it is something we don’t have any ambition to scale but we do think at $7 billion having them here for our shareholders and capture in markets like this where you may be able to keep some of it in the complex still works and we do have some people that just deal with them directly as well just because they haven’t gone somewhere else.
It is a business we are going to keep and one we think we manage it as low risk to the company and having gone through what hopefully is one of the most difficult periods that we will see for money funds. Again, we had very few issues if any.
Prashant Bhatia – Citigroup
On the sovereign wealth opportunity how do you size that for your company? How many people are dedicated to trying to bring in assets there?
How big do you think that could get in terms of total assets being managed by sovereign wealth type money? If you could just size what that pool is right now.
Gregory Lewis
If you can tell me where oil prices are going I’ll try to answer that question. That is really where it has obviously a direct impact.
For us, we have been servicing that group through our various country heads and regional heads and we changed our model this year to have a dedicated head of sovereign wealth out of London who is working with all those different local country heads that may be in those specific markets. We probably have five or six people dedicated now to that effort but they are really part of our overall institution and I have no idea how big the opportunity is.
It is obviously for us already very significant but I don’t know what to expect and how big it can grow.
Prashant Bhatia – Citigroup
Could you give us rough numbers of what the AUM is today for you?
Kenneth Lewis
I just don’t have it broken out. I know one relationship is $10 billion.
So it is meaningful.
Operator
The next question comes from Craig Siegenthaler – Credit Suisse.
Craig Siegenthaler – Credit Suisse
Just thinking about the other distribution channel which includes both institutional and international retail I’m wondering if you are seeing a divergence between the two channels? What I’m really trying to get at is are institutional redemptions and terminations really holding in there and is it retail with struggling outflows or is it a mix of both?
Gregory Johnson
Is this for overall the globe, U.S. or non-U.S.?
Craig Siegenthaler – Credit Suisse
On Page Seven your AUM you break out assets within the other channel which includes both institutional and also international retail is also in there. I’m wondering what is really driving the sequential decline in flows.
Is it retail? The assets outside the U.S.?
Or is it more of an institutional issue? I assume it is probably more of a retail issue because that is what we’re seeing here in the U.S.
Kenneth Lewis
That is right. It is clearly more of a retail issue.
We actually had as I mentioned earlier net inflows for the quarter on the institutional side.
Craig Siegenthaler – Credit Suisse
On the investment other income line I know you gave kind of a quick explanation that was a little bit lumpy. I was wondering what again was the reason for that strength?
And how can we think about kind of a quarter run rate in that investment and other income line and what is also in the asset support roughly?
Kenneth Lewis
There is always two things to talk about when you talk about other income. There is the sponsored investment product gains and losses.
That is the mark to market on our trading securities. That line item has been down about 10%.
That is roughly in line with the major indices. That is about, the trading securities, about $300-350 million.
Then in the investment and other income what is driving the delta there is some gains we took predominately on our investment center private equity products, the [Darby] products that were made many, many years ago that we had some positive marks on. So that was part of it.
The other part of it was an FX gain. Part of the FX gain related to the repatriation of the U.K.
earnings. So those two items represent almost all of the $43 million delta.
Craig Siegenthaler – Credit Suisse
So when we think about the line item and when you think about your cash flow and we look at 1% of cash of roughly an [eschewed] number in the mid 30’s is that kind of a good run rate? Then I have a second question on repatriation.
Kenneth Lewis
That is as good as any number really because those items I just highlighted were really unusual in the quarter.
Craig Siegenthaler – Credit Suisse
Just one more question on the repatriation. How large was that and when we think about that is there a better return of capital right now in the U.S.?
Meaning in your view is share buyback or acquisition in the U.S. more attractive than keeping those earnings overseas?
Kenneth Lewis
I think the answer is that we are good on the U.S. with the share buyback in terms of a cash position and we think that is a good use of the foreign cash to invest in foreign operations.
Craig Siegenthaler – Credit Suisse
No color on the size?
Kenneth Lewis
Repeat the question on the size.
Craig Siegenthaler – Credit Suisse
What was the actual level of earnings or cash that was repatriated back to the U.S.?
Kenneth Lewis
$200 million.
Operator
The next question comes from Marc Irizarry – Goldman Sachs.
Marc Irizarry – Goldman Sachs
Can you just shed a little color on the fixed income? Obviously there is some stall or a bit of hobble I guess in fixed income institutionally.
We’re probably going to see a lot of changes going forward. Do you think some of the changes we have seen is going to actually benefit active fixed income or are we going to see potentially some changes there which will ward against some of the positive trends we have actually seen recently in the business?
Gregory Johnson
I don’t really have a strong opinion on what it will do with regard to the current players based on volatility. I’m not exactly clear on the question that you are asking.
I have our head of fixed income right here so I can pull him up here and he can give you a better answer than I can give you anyway.
Marc Irizarry – Goldman Sachs
Do you expect to see any change in your fixed income RFP activity just because of…do you think what we have seen in terms of fixed income performance recently is going to get institutions to sort of rethink their allocations to fixed income in a way that is either going to benefit your business or that is going to hurt the business?
Gregory Johnson
I think we have talked about it before. I don’t think there has been a lot of changes.
There have been pretty large players in that space and one of them has had a bit of challenges in the last year so a lot of business has gone to the other two and we have benefited from that somewhat but I don’t see anything in the recent market that would shift the landscape between those two big ones. But for us, as I said before, I think it is a new group that having combined the Franklin Group and Fiduciary and they continue to do extremely well and continue to grow our share on the institutional side so we still see it as a good opportunity right now.
Operator
The final question comes from Cynthia Mayer – Merrill Lynch.
Cynthia Mayer – Merrill Lynch
On the income fund outflows I’m wondering how permanent you view those. Were you taking off platforms there in a way that might perpetuate the outflows even if the performance bounces back or do you think if the performance bounces that will recover pretty fast?
Gregory Johnson
I think that is the case. I think even if we didn’t have some of the names we wish we didn’t have as far as some of the financials, that fund is categorized in a conservative balance, fixed income category.
It will always hold high yield. It will always under perform when you have periods like that and outperform when the spreads are going the other way.
In utilities they got hit very hard during the sell off. They have essentially been more of a backstop for that mix.
So then some of the dividend paying stocks and preferreds that ran into problems in the financial side. So I think it under-performed.
It was accelerated a bit by some of the financials but we think right now how that fund is positioned and still being able to go in and buy some of these quality financial names today really positions the fund in great shape going forward. I think once the high yield bond market settles down and it appears that is maybe starting to happen that this fund is not going to go away.
It has been around a long time and it performs, again, like it should and we don’t go from investment grade to high yield. It is an income fund.
The good thing about income funds is when they get hit the dividend gets higher if there is a good thing. That attracts new people and that has a very high dividend and a dividend that may go up soon.
That tends to support sales when that happens.
Cynthia Mayer – Merrill Lynch
The mark to market you took on the auto loans during the quarter is that an annual measurement you take or is that the kind of thing if the markets deteriorate again this quarter you would be taking another one?
Kenneth Lewis
It is a constant mark monthly actually. But it is unrealized of course so when markets rebound we will have a mark up.
Cynthia Mayer – Merrill Lynch
What was the size of that? I’m sorry, did you say it was 12?
Kenneth Lewis
It was 12.
Operator
We have no further questions at this time. I would like to turn the call back over to CEO, Mr.
Johnson.
Gregory Johnson
Thank you everyone for participating on the call and we look forward to speaking next quarter.
Operator
Ladies and gentlemen that does conclude today’s teleconference. You may all disconnect.