Good morning and welcome to Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year Ending September 30, 2015. Please note 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 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 filing 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. Now I’d like to turn the call over to Franklin Resources’ Chairman and CEO, Mr. Greg Johnson. Mr. Johnson, you may begin.

Hello. Thank you for joining Ken Lewis, our CFO, and me today to discuss fourth quarter and fiscal year earnings. As we detailed in the recorded commentary earlier today, results were impacted by a number of converging market factors that created headwinds for performance and flows, particularly in our flagship funds. While it’s still early, we are encouraged by the rebound in performance of the Franklin Income Fund and Templeton Global Bond Fund over the past month. Importantly, financial results were solid and we demonstrated strong capital management by accelerating share repurchases during the quarter. We would now like to open it up for your questions.

Good morning. Thank you. So last quarter you offered some commentary on gross sales trends being down. This quarter they weakened further and I think they’re the lowest they’ve been since the financial crisis. I guess a skeptic might wonder whether you stumbled into a sustained dry period for products that are going to get traction with the intermediaries. At the same time I think you are still very well diversified across product offerings. You got good salespeople and I think on the whole performance looks decent. So perhaps you could disabuse me of that skeptical view and tell me where you feel optimistic about products or categories that could pick up the baton and drive sales from here?

Well, I think, first of all, I mean you have to look at the quarter and you had extreme volatility and you had headlines almost on a regular basis with one crisis after another. And for us some of those headlines directly affected our flagship fund. So you had the Ukraine with the global bond fund, you had Puerto Rico with Muni. So, I think it’s hard to separate how much that combined with a very weak quarter for certainly emerging markets versus the developed markets and global markets in general, a lot of volatility. You’d expect to see people kind of wait and see what happens. I think the area that we still see strength as far as a new product would be the K2 fund where we are close -- are now about $2 billion. We have raised about $600 million in net new flows for the quarter, so that would certainly be one. But I think the majority looking at the lineup and I would put mutual series in that category where it’s focused on Europe and the U.S. and those were two of the best performing markets, put the mutual discovery fund in very good position in the global equity category, and we are seeing a lot of interest there. So I don’t think it’s any systemic kind of, or other than your two main funds have underperformed near term. They drive a lot of the flows and they tend to mask everything else. And then just the fear of the Fed raising rates that was there for the quarter and any fixed income fund was under pressure as well. So I think it’s hard to get advisors to jump in when you have the uncertainty of these major events like the Fed raising or not to go into fixed income.

Okay. That’s fair enough. And then on the comp line, maybe I thought you could put some context around how you’re driving that down, particularly as you think about year-to-date and projected fiscal first quarter profitability, how that’s affecting bonus accruals for example. And then more generally, if you could comment on how you can manage comp with respect to market levels. Do you like to smooth it, or is it more pay to the environment?

Sure. Yes. So comp this year was down 1% year-over-year. And a large part of that was based on the financial results of the Company and the revenue decline. That philosophy and our methodology for calculating the overall bonus pool, which is dependent on operating income, among other things, it will continue. So I would expect that to be in line with what we’ve done historically. So as I mentioned, expenses for the year, we are looking to decrease expenses. We are also looking to make some investments. Last quarter I thought it would be flat. I think it will be a little bit better than that compensation is the largest expense that we have, so I would expect that to be down as well. Having said that, there is seasonality in many of these lines. The one thing I’ll mention in comp is we do have merit, the increase is coming. We’ll have about one month of that next quarter. So it should be a little bit higher on a quarter versus quarter basis should be a little bit higher than this quarter.

Thank you.

Overall, I would expect it to be lower.

Thank you. Our next question comes from the line of Michael Kim with Sandler O’Neill. Please proceed with your question.

Good morning. First, maybe just at a high level can you talk about potential exposure to assets managed for sovereign wealth funds in the Middle East? Just trying to get a sense of maybe risk of some attrition, assuming commodities pricing remains under pressure. And then related to that any sense of the relative fee rates versus the overall weighted average revenue yield for the firm?

I’ll take the first one. I think that you’re exactly right. I think the attrition and reduction in some of the big sovereign wealth funds and we actually saw the effect of that this quarter where we had $1.4 billion out of one of the sovereign wealth funds and it was really just due to reallocation based on their exposure to Asia, having now a smaller pool of assets and it wasn’t performance related. So there is some pressure there. I don’t think there is anything I would call out beyond that. I think that was the one area where we had significant assets and it was a partial redemption of that account. But I don’t have a number, nor do we publish a number, of our overall exposure there. But we haven’t seen any other pressure that I’m aware of for redemptions from the downsizing of those funds.

Yes. And we have seen some a little bit of pressure in the effected fee rate. But I think that we don’t expect that to continue in a material way, but we’re still seeing some of that and that should bleed into next year as well. We would see the effective fee rate decrease a little bit next year, I would expect.

Okay. Fair enough. That’s helpful. And then just given sort of the elevated fund outflows more recently, just any plans to maybe step up or adjust your marketing or sort of educational initiatives as it relates specifically to the global bond fund, just given the negative duration and relative returns of that portfolio, just to differentiate it, assuming rates, do start to trend higher at some point?

Yes. I mean I think we have been very active in just that, getting the message out that this fund is positioned for higher rates. And it’s difficult to get to every shareholder, but especially when you have large gatekeepers in places in Europe that control the big percentage of those accounts. So we have been very active in just that. The messaging that this is a very different category. But at the end of the day you probably do have a lot of people that bought it at a time when you had very high returns and in a lower return environment and also the competition from just equities doing better in Europe. As I said before, you will see monies move over. But you’re still right. There is a perception of any fixed income fund that it will not do well in a rising rate environment, and our marketing message has been very clear about trying to differentiate that. And part of the reason we took that global macro group out of our fixed income group was better to differentiate what that group is doing versus a traditional fixed income fund.

Okay. And then just final question. Just trying to think about capital management. Clearly, you stepped up the share repurchases activity this quarter and you’re now, I think, paying out more than 100% of the U.S. cash flow. But just trying to think about those dynamics within the context of a potential special dividend like you have done in the past?

Right. You know, when we had the special dividend last year, I talked a little bit about it after the fact. And I mentioned that there is usually a very robust discussion of capital management by the Board during the Board December meeting. So I really can’t say what they will decide in December. But I guess I remind you of last year. One of the factors they considered was the percentage of current year’s or the previous year’s net income that they return to shareholders. That number at the time was below 50% and this year it’s almost 90%. So I think that would be a significant factor in the decision. I don’t know what they’ll decide, but I’ll let you make your own assumptions about that.

Thank you. Our next question comes from the line of Michael Carrier with Bank of America. Please proceed with your question.

Thanks. Ken, just on the capital management, one follow-up there. When you look at -- obviously the pace was very active this quarter. But even when you look going forward, the valuation is still -- you had this level when the Board kind of considers what those options are. Is that one of the driving factors? Are there a lot of other factors that go into that decision-making?

Yes. I think I would -- I think that the factors that they consider are the regular dividend and the special dividend and the volume, the historical volume of share repurchases and the anticipated volume going forward based on stock price. So as we’ve shown, we are opportunistic and we do tend to purchase more shares when the stock price is lower. But it is also systematic. And it is one of the things they would consider.

Okay. And, Greg, just on the -- some of the flow dynamics. And not really focused on this quarter, because there is some crazy things going on, but when you think about maybe on like the structural side and you hinted at in like the VA space some shifts that are going on there. And then when I look at -- on the flip side some of the new products that you launch, whether it’s K2 or some of the allocations in the international fixed income, maybe not this year but over the longer term, it seems like there is some structural drivers that are going in your direction despite some of these headwinds. So just wanted to get an update on where you see that demand? Maybe it’s longer term that’s driving some of the interests in these products versus -- you highlighted on that, like page 11 on the slides where from a cyclical standpoint you can see some pressure in shorter periods of time. So just basically how you’re positioned for maybe the longer-term growth trends that you’ve seen in the industry?

I think our history has always been to try to be innovative, whether it’s with pricing or new funds and do things that stand the test of time. So I think you’re right. The VA, there is some lumpy activity that’s hard to get a handle on what more of your operating flows -- to try to forecast and see where things are going because the VA business has been an important part of our U.S. retail. In the last quarter you had $3 billion of redemptions in -- for inactive firms that no longer support that business and it’s in a runoff mode. And that’s probably about a quarter of the firms that are in that business. So you’ll still have some headwinds in that category continuing. They will probably be more one year event, but certainly challenging. I think as far as where the world is going and things that hopefully we’re thinking long term about, as we’ve said in probably the last two years’ worth of calls, how we have continued to build and develop our solutions capabilities and building tactical asset allocation funds and multi-asset funds that are starting to get good records and good traction. And to us that capability enabled us to do something creative with Citi and our global footprint put us into a different position versus competitors to come out with a suite of funds for a new market for them, where they will go after it in more of a digital way for relatively smaller accounts. But I think having that product capability of doing more of the tactical and more funds that are more oriented towards a specific group that bring in all of the asset classes, I think that’s very different than your traditional fund of just one class. And that’s still going to be very important as advisors, to continue to build their own. But I think having the capability to do more tactical allocation will be increasingly important. I think that’s the area that for us I think offers a lot of growth. I think the expansion in the alternatives, we’ve seen the success and I think the early traction of our long/short of our -- the fund that’s out there right now and then having a credit capability in there is another sleeve and we’ll continue to build on that. So that’s another area of growth. And then we have a new offering with a Flexible Alpha Bond Fund, which is another area of having more of a pure unconstrained bond fund like some of our competitors have that hopefully in a rising rate environment could do well.

Thank you. Our next question comes from the line of Daniel Fannon with Jefferies. Please proceed with your question.

Thanks. I was hoping to get a little bit more color on the insurance dynamic you mentioned on the prerecorded call. It seemed like some of it was associated with some de-risking from previous periods, but you also mentioned ongoing. So just trying to get a sense of what is your exposure to that channel and thinking about also more looking forward, is the DOL and some of the changes around disclosures and that, is that having any factor in some of these changes now, or is it more, as you highlight, de-risking?

I think it’s de-risking and just the guaranteed benefits and the liability and how they have thought about that as a business and some just have -- the insurance companies have gotten out of that and the companies like Hartford and Sun Life and Jackson National, big major firms are no longer doing that. So when they go inactive, some of them will lock in the liability. Some of them will go indexing or just do different things. So I think for us the total is about -- and I probably shouldn’t even quote this off the top of my head but 17 billion remaining in that category. What percentage is at risk is probably -- I am not sure either there, but probably a third of that still, I would imagine, just based on looking at the numbers.

Great. And then the puts and takes around that institutional dynamic. You highlighted the win of 5 billion or so I guess.

Right.

And then these ongoing redemptions. As you think about where else on the positive or negative side, you kind of see the kind of short to intermediate term kind of shaping up?

Well, I think the win -- and that was in Japan with the pension client that funded in the first week of October at close to $5 billion and probably good news that it was relatively good timing to date on that category. And it’s a very influential account that we think could -- we could see real momentum in that marketplace and even in the last year, some of the successes for the Company, and Japan would certainly be right up there with 3 billion in net inflows for the year and India with over 2 billion in net inflows for the year. So it really is a story around how these – the hybrid category with the income fund and the global bond category has been overshadowing a lot of activity underneath. And I think that’s the key to flows getting the relative performance turned in those and the big drivers there are going to be energy, oil, and the emerging markets’ currencies, are going to be the real game changers in near-term flows.

Thank you. [Operator Instructions]. Our next question comes from the line of Ken Worthington with JP Morgan. Please proceed with your question.

Hi. Thank you. In terms of the kind of expense outlook for next year on the prepared remarks you talked about kind of 3% to 4% expense reduction. AUM has fallen much, much more from the peak. It’s still kind of a challenging market and there is definitely performance issues. I guess why is 3% to 4% the right amount? What’s kind of the pathway to get there? And I believe also in the prepared remarks you talked about that being offset by investment. I guess talk about the priorities from the investment front? Thanks.

Sure. Well, we know that in this industry there is typically a lag in the revenue from the -- when maybe three, six, eight months from after asset general management declined. So the time we were doing our budgets, that was -- that seemed like 3% to 4% seemed like a reasonable target. And that, just to be clear, excludes selling and distribution expenses. So the reduction including selling and distribution expenses would be much higher than that. But a lot of that are things that we don’t control. So I just wanted to exclude sales and distribution from the number when I gave it to you. Having said that, we are constantly looking at expenses, and we have -- we just have ongoing discussions about actions that we could take, actions that we might take, should revenues decline further. So it’s not -- it’s not 3% and forget it. So we’re constantly looking. And then there are things that we could do in the next fiscal year to reduce expenses further should we need to. But we want to be mindful and very thoughtful about where we cut expenses so that we don’t – so that we don’t hurt the business and impact our strategies in ways that we don’t want. So that’s the thinking there.

And the …

And what are -- are there any specifics you can share like how do you get to 3% to 4%, is it are you cutting comp or is there certain projects that can be delayed? Can you flesh out a little more how you get the 3 to 4?

I think a lot of is it comp. I think it’s a combination of everything that you said. And then -- and I think the 3% to 4% represented things that we could do and be confident that we could do in the short-term. We are looking at old initiatives, old business lines, and rationalizing them. Are the things still working? Do we still need the level of investment that we had? Can we repurpose those investments? But those are longer term and it would be premature for me to estimate what they might be in the future. So that’s why I really didn’t talk about them. But those are the things that we are looking at. And then, Ken, the second part of your question was initiatives. Things like smart beta we might want to invest in. There might be a systems improvement that we might want to do. And the caveat that I gave in my prepared remarks was they are there and we built in cushion to do that. But things get worse, we probably -- we might not do that. We will do smart beta for sure.

And I think about the challenge is always the timing. I think the fact that you lost $100 billion in assets in one month, the budgeting process started long before that and it’s hard to adjust real time to managing these groups. I think the point is that we recognize that there are headwinds out there. The market has been challenging. And we’ve set our first goals out there quickly and we are going to review all aspects of the business to see if we can make more meaningful cuts than that percentage. But even 3% to 4% is meaningful when you take it in the context of you have merit increases, you have occupancy, all these things going up. It’s actually more than 3% or 4% to really get your controllable down by that number.

Okay. Thank you. For the follow-up, Greg, you mentioned a number of times some of the more recent investors and the Michael Hasenstab fund complex may be more susceptible to redeeming given the performance issues that the fund is working through, is it possible to kind of frame what the dollars you think are more susceptible? Like again, even if it’s really vague, like that would be helpful. Is it $25 billion from here? Is it $50 billion, is it $100 billion? Like how much is, in your opinion, in that susceptible or at-risk bucket?

Yes. I mean, I have no idea. I mean, you could take a wild guess there. But again it’s going to be -- it’s all relative to what’s happening in the marketplace and the fact is that that category, even on the three-year returns and five-year is much lower than where it was. So that makes just -- the point is you need absolute and relative performance to get momentum. And right now, it’s competing with equity markets that have been much stronger over those longer periods and that’s put pressure on them, and then also competing with the fear of rates going up. So my opinion, the markets change quickly; you can get a tailwind pretty quickly by what’s happening in other sectors in the market and even a rise in interest rates. These funds will stand out clearly against a huge pool of capital that we could capture back in quickly. So, it’s hard to guesstimate based on the current numbers. You had a very disruptive quarter there where the risk on trade -- risk off trade and movement back into treasuries and the euro versus emerging market currencies was exactly counter to how that fund was positioned for that period. You are going to have periods like that. And I wouldn’t extrapolate that for the year going out, as far as what it to expect on redemptions. But I think it’s something we try to factor in.

Thank you. Our next question comes from the line of Bill Katz with Citigroup. Plead proceed with your question.

Thanks. Good morning. Appreciate you taking the questions. So Greg, using some of your slides from your presentation at page 11, you talk about the dynamic of growth versus value and being able to overcome that after a good crises. Strategically, how are you thinking about capital deployment? I appreciate the repurchase and when you were trading on enterprise value with the VA in particular, but just big picture? It sounds like there are pros and cons around the tactical flow dynamic. You’re doing a nice job on expenses. But is there strategic urgency to broaden out the platform so we don’t have to worry about whether the Dow is going up or not and put that in contrast? When it comes to BlackRock, trades at a substantial premium, I think the market says they can earn through and grow through almost any cycle, right? And for you it seems like you need a good value market to really drive flows looking at your own chart. So how do you think about maybe diversifying the franchise through acquisition to balance out some of that perception?

I mean I think, Bill, you’re right. Anything that we can do that creates a stronger platform for our distribution group, an all weather type platform for what’s happening in the markets would be attractive. We are certainly open it to that. I think you’re right. Any time you are facing headwinds in a lot of areas, that probability becomes greater. I would put that all in the category of us continuing like we always do, looking at every available company and meeting with as many as possible and trying to strengthen the line-up when it makes sense. So, yes, I would agree with that.

Okay. And then, Ken, you gave some nice color here on the expenses. Could you range it a little bit? If we were to be in a more bullish backdrop relative to expectations do the expenses come back quickly, or is there sort of appreciate the lag and the averaging AUM? How much flex do you have here to protect the margins if actually markets start to go up the other way? Is there sort of release some of the savings here and overspend if you will? I am trying to get a sense of the sensitivity.

Yes. I think over the past maybe six or seven years we have gotten a way of increasing expenses wildly when the markets go up and then decreasing them. We have gotten a little more stable. Having said that, there is flex, and we do flex. I guess one way to think of it is in terms of new initiatives, there are things that we feel, okay, we must have that so we’ll invest in that in any market. And then there are things that are nice to have, and those things, when times are a little tougher, we put them to the side and then when times get better we invest in them. But I think we’ve been pretty good with keeping it somewhat range bound, the expense growth rate from year to year regardless of the market conditions. And then cutting them when we need to, obviously.

Thank you. Our next question comes from the line of Brennan Hawken with UBS. Please proceed with your question.

My first question is on quarter to date. You provided some color in beta helping out, which was helpful and gave us some color on some of the mandates you have won. Is there any way you can give us a look quarter to date at where you are as an organization as a whole as far as flows go?

No. I mean, we really stay away from that. I think we have tried to just highlight any -- if we know something that’s large and unusual, sometimes we will bring that up just so when the monthly numbers come out you have a better guesstimate on what’s happening. But we really stay out of trying to forecast anything.

I recognize that. I was hoping given some of the remarkable unusual levels of volatility in the results maybe we could make an exception. Worth a shot. Next question is on performance stats that you give. And with the equity in hybrid numbers, if we stripped out the Franklin income fund from those figures where would the one-year, three-year, and five-year percentages stand on that slide 6 for you?

Yes. It would look, obviously, very different. It would be -- if you take it out, it would -- it would look about 50/50 between those in the first, second, and third and fourth, but much stronger on the three-year, five-year, and ten-year. Actually, when you look at the large Franklin -- the Franklin growth fund, the Franklin U.S. opportunities, our core focus are all doing extremely well for all time periods and actually had positive flows. Those again get a little lost in the shuffle, but very good performance with the Franklin equity funds. I would call that as one of the few highlights for this quarter.

Thank you. Our next question comes from the line of Chris Harris with Wells Fargo. Please proceed with your question.

Thanks. I appreciate the outlook on slide 11 giving us a little bit of history as to what may happen going forward. And I guess that leads into my question. In your experience in the business, inflows and performance are trending this negatively, how long does it usually take for things to kind of normalize or come back? If we look at slide 11, the history would seem to suggest a couple of years. And I know it’s driven by a variety of factors. Obviously performance and so on. But is that generally, you think, a reasonable base case? Are there other factors that could swing it wildly one way or the other?

I think I mentioned the two that would swing it much faster. And I don’t think there is a norm for when things turn. It’s all what’s happening in the marketplace and how are you positioned against where people think the market is going. And I think the two big drivers that roll up for us, if you look across our groups, would be energy. You know, where a lot of the value players did -- they didn’t have heavy weightings going in, but they may be putting heavier weightings ins at the price is falling. And Templeton is one of those that has bought more energy. The high yield market with 20% of the index and the income fund having a heavier exposure. Anything that happens in the near term to oil is going to have a dramatic affect on that short-term performance, which then could, in turn, switch flows around fairly quickly. And it just -- it depends on what’s happening in the rest of the markets, too. How quickly you’ll accelerate that versus what the domestic market is doing, what the global markets are doing. Those are all factors. And it’s just been -- for anybody in the global space, anybody in the value space, it’s been a very tough run here for the last eight or nine years.

And then my follow-up question on smart beta. Sounds like you are, obviously, very interested in doing something there. Curious to get your thoughts whether this could be something that you would be building organically? Would you potentially acquire something? And then how would you distinguish a Franklin offering in what is a pretty crowded space already?

We recognize all of that. I think I can’t give many details on the -- what we intend to do there because we filed an exemptive order and haven’t filed a registration statement. As we said before, we are looking at our own rules-based type ETFs but we can’t go anything else. For us, it is a crowded marketplace, but having some low-cost beta with a little bit of -- hopefully a little alpha on top of that fits nicely into our own -- I talked about earlier the suite of solutions and having -- whether it’s through our high net worth channel or through our own target date funds and things having our suite, it has a place just there today in existing products, and then how we expand into areas that we haven’t had exposure to complement our traditional area where we see people, that would be attractive too. And then again, as we’ve said earlier, we look at everybody out there and if something gets us there faster or is complementary, we are open to doing an acquisition as well.

Thank you. Our next question comes from the line of Kenneth Hill with Barclays. Please proceed with your question.

You’ve seen some nice traction on the K2 products. I was wondering how you think about the investment there. Do you think that’s mostly done on the platform and what the pipeline might look like going forward? And I also -- would you consider any other sort of small acquisitions potentially like an alternative manager to help that out?

Yes so I mean I think the -- most of it is platform driven. It took a while. It took a few years to get a long enough record to get as we said, I think we mentioned that on prior calls that we’re getting into the major broker dealers and on their platforms and getting approved. And that took three years and that’s really why this year we’ve really seen acceleration there along with the strong performance even in the protection of the downturn. It’s done exactly what it should be doing. So it’s been very attractive there. I think the other side is we have had much better kind of line of sight on what’s happening in that space with K2 having relationships with so many different types of managers, and that may be something that we expand or take different stakes and different types of managers over time. And we’ve had many introductions and discussions along there as well. So I think there is always a challenge to translate things to a pure liquid alts fund and that doesn’t suit every type of alternative manager. And even these funds, it’s a little bit different to meet that daily liquidity requirement. So I think there are some constraints versus everything that’s out there.

Okay. And then as a follow-up. The 60 million of unrealized losses you guys called out on investment on the prerecorded call; can you remind us again what types of investments you may hold there and then how we should think about that line here this quarter given some of the rebound on the market?

Yes. I think the oversimplified easiest explanation is that the majority of the lines that -- the majority of the investments that are causing the volatility track pretty closely to the MSCI world index. If you kind of use that as a basis going forward, you would get closer than if you didn’t do that I suppose would be a way to say that.

It’s where most of the volatility will be just in the seed capital in funds that have global equity exposure and emerging markets exposure. And then we have some investments in hedge funds that specialize in that as well.

Okay. Fair to assume some rebound based on what we have seen quarter-to-date thus far?

Yes.

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Thanks. Good morning folks. Greg, maybe if you could just -- I know it’s tough to look at October in the near term here. But I guess over the next say one to two quarters as you think about the macro backdrop versus some of the performance track records and how to contrast that in terms of conversations that your sales force is having with financial advisors and also some of the conversations you are having with your institutional clients about -- and what’s more important for flows near term? Is it -- do you feel it’s closer tied to macro backdrop, whether we have rebound, of course, in emerging market and energy or do you think it’s a little bit more about the relative performance in the funds versus peers?

Well, I mean, again I don’t know how I would answer that in any -- I think that it’s a function of absolute both that the sales force has to paint a macro picture on why it makes sense. And that also helps retention. They need to do that. So I am not -- I think the story to me that’s compelling on what turns it around is you have had such a run of the developed markets versus the emerging markets and the valuations are still -- are much more attractive, I think, in a lot of these other markets. And I think the currency kicker there -- to me, when I again take a step back and look at headwinds and look at what will turn things and the consensus that China will have a hard landing and that, that will affect the region at a time when you have already had currencies selling off at a level like the Asian financial crisis to me, that’s the story for a global equities that the currencies are already at such a level that you should get appreciation there. The low level of currency should help those countries as far as their economies and while certain ones do have more of a direct hit from whatever happens in China, all of them don’t and all of them have been affected. And to me, that’s the story that our sales force, I think, is out there talking about, that you can buy stocks at a cheaper value with better growth rates than what’s available and developed, and also have I think the good potential for a currency. This has been pretty much an unprecedented run of the two against each other.

Okay. That’s good color. Thank you. And then just a follow-up on Greg, you talked a little bit about potential acquisitions down the road or just to fill out the product line. I guess does that require repatriation legislation, or do you think that’s something you can still do without that?

No. I think it’s clearly something we can do without it. I think assuming you have no repatriation, or do you, it becomes more attractive to do something outside of the United States than inside for obvious reasons. We have a very strong balance sheet in the U.S. and have the capability, obviously, to do debt if we needed to do that. So it wouldn’t keep us from doing anything anywhere I think at this stage.

Okay Great. And then just a clarification on the 3% to 4% decline on expenses, Ken, is that net of investments or would investments dilute that? In other words, you get less --

Yes, net -- the investments would reduce that number. So the reduction would be less than 3% to 4%.

Thank you. Our next question comes from the line of Gregory Warren with Morningstar. Please proceed with your question.

Yes, good morning, guys. Actually, I was a little pleased to see sort of the sales numbers on the equity side. They weren’t as bad as what I had been projecting. So that looked pretty good from that perspective. I just want to touch base on something we’ve talked about in the past and it’s a positioning of your global international equity funds and the trouble you have had generating consistently positive flows for that business, but when you look at the performance relative to the index, the MSCI index, it’s the not bad. I mean, over all time frames you are actually doing better than the index. It’s just that when you are running up against the world stock category, Morningstar’s category, you are actually trailing a bit. I am wondering, if you have taken a look at what’s really differentiating you guys? Why is it that there is a spread between where you’re performing and where the rest of the group is performing and whether or not that’s something that can be addressed?

Yes. I think that that is partly due to the history of not hedging with Templeton. And that’s going to have some impact on how we do. And if you look at the risk you manage in a fund, some would say currency is close to half of that risk and we have chosen not to manage that risk. So that would be something I think we have spent a lot of time evaluating and plan to do some of that on some of our smaller funds to at least be able to compete, I think, more effectively and not have the dollar dictate what you’re going to do relative to your peer group in the short run.

Okay. And that’s something you are working more closely with Michael Hasenstab platform on, correct?

Correct.

And then just a separate side note here. I mean, I don’t think anybody’s brought it up this period. We are getting closer and closer to that DOL ruling from the SEC. Do you do a lot of business in the advisory channel? I mean, I know from a commission based perspective a lot more money -- new money is flowing into no load funds, lower sort of fee structures, no commission based funds. But I am just curious on 12b-1 fees. What is your sense? What are you hearing as far as whether or not this is going to put a dagger in 12b-1 fees going forward?

I think -- I don’t think it’s going to put a dagger 12b-1. I think the question of how within the DOL proposal, how will any fees in the future for servicing and also the question of which products are approved. I think the point, we have less exposure than most in that sector. There has been heavy push back, I think, from some of the portions of the proposal and I think most of our comment letters around trying to create a class of approved shares, which would indicate, obviously, more indexing versus active. And hopefully that has been taken off the table. But like everyone in the industry, we’re still very concerned with what the net effect of this will be. And if you take out any ability to pay for advice in the equation, the net effect is you are going to have less people getting help and that’s certainly been the case in the U.K. and I think that’s the case we raise with regulators here. But they are pretty determined and they have gotten a lot of good feedback from the industry and a lot of good feedback, hopefully, from the Hill. We will see where it ends up.

But I haven’t heard outside of that, on 12b-1 that would indicate that there is any future question of 12b-1 surviving or not.

Yes. It just feels like there is a lot more unanswered questions right now than there are positive things we can latch onto. Thanks for your color. Appreciate it. Thank you.

Thank you. Our next question comes from the line of Robert Lee with Keefe, Bruyette & Woods. Please proceed with your question.

Thanks and good morning, I appreciate the patience. I apologize. You may have talked about this earlier in the call that I got on a little bit late. But, I’m curious. You mentioned in the prerecorded comments and I think earlier in some of the Q&A, you talked about this new product rolling out globally with Citi. Can you maybe -- because you called it out, it seems you probably have pretty big expectations for it. Can you maybe explain a little bit -- in a little bit more detail what that is and why it’s somewhat unique for you in strategy or structure?

Well, I think it is unique. I think it speaks to the strength of our global footprint and working with some of the large financial institutions. This really is a new category. It’s not an existing relationship with an advisor. It’s really how does the bank address the smaller balances that are out there, but still significant, that wouldn’t make sense for maybe a one-on-one advisor to service, but a way they can effectively offer products to help those people. To me -- and I wouldn’t say the expectation is going to hugely move the needle for us in the next three years with what’s raised here, but I think it’s a point of the changing distribution landscape and how that the digital world is not just the traditional direct channel doing it or robo advisors or whatever you want to call it. It’s also firms like Franklin Templeton that can go out and use the depth of our resources in building solutions and then going out and leveraging the relationships throughout the world. We’re going to do this in Asia and Europe and the U.S. and in a cost efficient way, in a low-cost way, hit a new market. And I think this is, to me, an exciting first step in opening up the distribution landscape to do more of these types of things with -- whether it’s with brokered dealers, partnerships, or who knows in the future where you do things direct to small accounts. It’s just a first step. And I think an exciting one where we developed a new type of product that really has alternatives in it and has all the different categories within it, including we have lower passive cost funds in it, as well. It’s not all Franklin Templeton in it. That, I think, gives it more credibility and hopefully can lead to a new market and significant sales over the long term.

Great. That was helpful. And maybe thinking more broadly about the distribution force, how should we -- or how are you thinking about -- I mean, you have a lot of strategies around the world. Some selling well. Some not so well. I mean, how are you trying to focus the sales force versus, there is defending franchises, such as equity income and global bond and maybe some of the others. And there is the new initiatives, whether it’s K2 and the Citi initiative. But there is only a limited -- the pipe is only so big to put all this stuff through. So how are you trying to orient your sales force to -- what are they most focused on right now? Is it defending the franchise or this new stuff? How do you play one off against the other?

I think you have to be consistent. We try to not -- I think it’s a huge mistake to just go to where least resistance is in a sale. And we try to go out there and be consistent about our story and talk about where the obviously, if the client has X amount of assets in a given category, we better spend our time talking about that. If we didn’t do that, and I think our sales force has been around long enough to know that you are going to lose that relationship and credibility pretty quick if you are not talking about the areas where you are having underperformance. So, yes, I mean, a big part of it is focusing on retention and really also painting a picture of why these things should turn around. And I think that’s what you have to spend your time on. But also always have something that is in the channel that’s exciting that they can talk about. That’s also adding value and always having something new, whether it’s K2, whether it’s a Flexible Alpha Bond Fund, or a Franklin Growth Fund. Those are things you want to talk about. So I think it’s always a balance of the two, and we’re very careful about -- and watch very closely on all presentations that are made in the field to make sure that they are focusing on where the assets are first.

Thank you. Our next question comes from the line of Eric Berg with RBC Capital Markets. Please proceed with your question.

Thanks very much. As you think about -- well, first, let me say I appreciate the heads up at the beginning of your comments encouraging us to take a look at the videos on your Investor Relations site. I will do that because it will help me understand further the answer I am looking for. Here is my question. As you think about the nuances of the investment style and approach of the folks running the Franklin income fund and Michael Hasenstab’s group, other than currency, which you just mentioned a moment ago, are there other dimensions to their investment, let’s call it personality, that has caused their underperformance? Because after all everyone -- they have got a lot, large group of peers. Everyone is looking at the same oil price, the same collapse in commodity prices, broadly the same depreciation in emerging market currencies. So what is it about his style or her style that is causing them to be where they are right now?

Yes, I mean I think, first of all, you take each category and go back a year or six months ago, you’d have top decile for every period. If you have top decile for every period, you are taking more risk generally than many that would manage closer to the index. And we’ve always said this is a very unconstrained approach. And any time an act -- a real active manager will underperform and grossly underperform in certain markets. You don’t -- you’re never top one, three, and five every period if you are a true active manager and really don’t worry about being that different from the benchmark. Take the Franklin Income Fund for example. It’s the highest yielding fund in its category. We know it underperformed generally when rates go up because we will always have more duration in that fund and everything held equal in the short run, that will happen. He can do some tweaking around that but people buy it for the stability of that higher income and it truly is a hybrid, not a pure equity fund. So the peer group even gets a little bit confusing. I don’t think the energy -- and it’s not the first person to buy a fixed income in that category and one that we feel like there hasn’t been a lot of differentiation within the group and that there are still are many companies at the prices today are going to do fine. You’re paying debt first that’s the main thing and many of these can service a debt. Now, there has been some that have obviously not done as well through this period. But it’s an active bet and active bets in the short run can make you look kind of silly. And that’s the nature of being a true active manager. So I don’t think anything has changed. I think you just have two that have headwinds at the same time. And again, the long-term performance still looks good. Clearly in the global bond case, I mean this can turn around in a couple of weeks as far as the short-term numbers.

Thank you. And my second and final question relates to variable annuities. It’s sort of a similar question to my first one. Is there any reason why Franklin Templeton should be affected more than others by this pull back from variable annuities by some life insurance companies?

I don’t think we are being, I think there’s other ones that are private companies and others that have significant assets and that probably the two, three biggest firms in this category, two out of the three are private. So you are not -- you don’t hear about them. But everybody is equally being affected by them getting out of that business.

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Great. Thanks. Good morning, everyone. Last one I guess on capital measurement again. Can you talk a little bit more on I guess your ability to continue paying out over 100% of free cash flows generated in the U.S., and I guess more importantly the willingness to lever up to buy back more stock to maintain the total payout at current levels? Thanks.

Yes. Sure. I think that -- yes, that’s a great observation obviously that can’t go on forever. But we do have flexibility. So we have short-term flexibility where we have inter-company borrowings that we can do. We have the ability for debt. And if we feel the need to do it, as we’ve shown in the past, we will increase the leverage of the Company. But I think what drives it is us being opportunistic when we feel like there’s opportunities to buy the stock at a good price. And then from there, all the other decisions flow. So I don’t think anything’s restricted really.

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Hi. Good morning. Thanks for taking the question. Just a follow-up on some of your earlier commentary on M&A. Just curious in terms of how you are thinking about prioritizing what products could make the most sense to add in terms of rounding out the products there? And then just more broadly, what are some of the criteria you have when it comes to M&A?

Well, I would say that -- I mean, we’ve talked about some of the areas would be in the alternative space of something made sense there in the high net worth space if something made sense there. We talked about that in the past. I think whether there was a large scale manager outside of the U.S. that was complementary and could get some synergies out of that would be interesting for us as well. And I think something on the institutional lower cost side that we could leverage through the retirement channel here would be interesting as well. So those would be a few. But I think we, as always, we try to look at pretty much everything, try to get a better sense of value and what’s out there. So I wouldn’t preclude anything. But as far as a wish list, those would be the ones that we would -- you could have an international manager without a U.S. distribution, which could be complementary. Those are the kind of things we would look for. I think -- and obviously, like anybody looking at this space, you want something that has a strong repeatable process with consistent results over time and the right kind of culture that can fit in and the right kind of incentives by doing it. And that’s where I think, as we’ve said in the past, just going out and buying hedge funds or alternative managers can be somewhat challenging as it’s hard to align the right incentives after somebody who is solely responsible for the results is selling most of their upside in that deal. So that’s why we haven’t really done many of these types of acquisitions.

Thank you. Ladies and gentlemen, our final question for today comes from the line of Bruce Bohannon with IBM. Please proceed with your question.

Thank you, gentlemen. I pushed the button too early. But thanks for letting me in. You announced earlier that there were some management transitions that recently occurred. I just wanted level set and understand Mr. Johnson, Greg, are you short-term, intermediate term, are you still on fire for this Company? I think it’s an incredible Company. I saw a rumor that you may have been retired on October 1st, which is obviously not true because you’re here. Please and thank you.

I hope not. You know, I am absolutely long term and I think that this -- the fire burns probably too much every day for me. But this was in no way I think this was recognition of two people that have been here for a long time and we think make -- we really think makes us a stronger organization. Just the demands on travel time and this helps me, I think, organize in a way where we can better use our strengths in the Company and Vijay and Jenny bring a fresh energy and perspective. I think also the realignment of our executive committee, now having three of our senior investment people, is something that I think is very important for the Firm going forward and really bridges the gap between the management guys and the investment guys and puts us all together as one team. So in no way should it indicate and I hope that’s good news, me having any change. But we are excited about these changes, and I really do think it’s going to put us in a much stronger position to address the areas that need to be addressed.

Thank you. Gentlemen, we do have one final question coming from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question. Mr. Siegenthaler, your line is live. I am sorry, that seems to be our final question. I will turn the call back to Mr. Johnson for any final remarks.

Thank you again for everyone participating on our call and we hope we have some better news next quarter. Thank you.

Thank you. This concludes today’s teleconference. You may disconnect line at this time thank you for your participation.