Good morning and welcome to Franklin Resources' Earnings Conference Call for the Quarter Ended December 31, 2018. Statements made in this conference call regarding Franklin Resources, Inc., which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

Good morning. My name is Brenda and I'll be your call operator today. At this time, all participants are in a listen-only mode. [Operator Instructions] And as a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to Franklin Resources' Chairman and CEO, Mr. Greg Johnson. Mr. Johnson, you may begin.

Thank you. Good morning, and thank you for joining today to discuss this quarter's results. Ken Lewis, our CFO is here with me, as usual, to discuss our financials, and we also have Rich Byrne, President of Benefit Street Partners, available to address any questions on the alternative credit markets as we're set to close on the acquisition this Friday. Market volatility clearly impacted our financial results this quarter. In fact, the net effect of the mark-to-market, which is predominantly unrealized losses and other income, was more than $83 million this quarter. Fortunately, this environment has been more conducive to the success of value-oriented investment strategies, including many of ours. We are pleased to see our relative performance continue to improve with net sales improving notably in several of our flagship strategies this month. Lastly, we remained active with our capital management program and returned approximately $460 million to shareholders through repurchases and dividends in the quarter. I would now like to welcome any questions that you have.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Patrick Davitt with Autonomous Research.

Hi. Good morning. Thanks for the question. Looks like in the prepared remarks you're guiding to expenses being down in 2020. Could you walk us through the puts and takes of that, versus investment need and how you can get comfort that the expenses can come down after being up in 2019?

Sure, Patrick. This is Ken. So we've been working in the last couple with all the business units to identify areas where we can leverage efficiencies and kind of fund all of those investments you referenced. So the result of that exercise is that, we do think through cost cutting initiatives that we will implement this year that, we'll be able to get the run rate expenses to be at or below the 2018 levels and still make those investments -- the strategic investments that you referenced.

Okay, great. Thanks. And in that vein, I guess, is there a chance that some of that could bleed into 2019 so that the lower end of the 2% to 3% guide could come down again?

Yes, I think that's true and I think we are trending on a lower end of that guide. Right now I think I would say to you that as we go through the cost-cutting initiatives that probably be execution cost that will be non-recurring and will be able to give you better handle on that as we go through the process next quarter.

Thank you.

Our next question is from the line of Daniel Fannon with Jefferies.

Hi. Just a follow-up on that. I guess I thought last quarter the comments for this -- for fiscal 2019 was closer to flat and your comments about -- you guided opposite, it could be towards flat. So, just want to clarify, is your fiscal 2019 guidance a plus 2% to 3%, a change from what you had before?

No, going by memory of the comments last quarter. For sure, the guidance remains the same at 2% to 3%, we gave that guidance. But I think when we talked about this quarter, because of the seasonality, I think, that's where we made reference to flat.

Okay.

Sure, the guidance was up 2% to 3% and that's hasn't changed. And we're tracking to the lower end of that right now.

Got it. And then just on -- you kind of referenced increase gross sales in the quarter. We're seeing it, I guess, more in some of the U. S. products, can you talk about that momentum and kind of maybe a little more specifically where you're seeing it at some of the products and maybe some of the channels that there is actually -- you're seeing some of the traction actually pick up?

Yes, I mean, I think the big driver tends to be in flows is the global bond. And if you look at the performance in just recently the one and three-year moved to the top quartile and also the fourth quarter, which as we know was a very tough quarter for every segment where MSCI was down 13 and S&P down 15. We had a positive absolute return for global bond. So, I think that gives a little bit of near-term momentum that we saw kind of -- I think as there's more uncertainty as I said before as people get a little more nervous, that tends to be a better selling product and we are certainly seeing that. And I would say that one has had the biggest turnaround in flows and we're seeing that through this current month as well. The other would be the income fund, which is something we put our press on and that's really U.S. retail product, but we saw a pickup in sales there. We're just getting that message out. We had a big anniversary kind of sales push on that fund. But those would be the two primary drivers and we saw a pickup in the muni gross numbers as well over the quarter in the U.S.

Great. Thank you.

Our next question is from the line of Craig Siegenthaler with Credit Suisse.

Thanks. Good morning. Just first on excess capital. What is the level of working capital, regulatory capital, and feed within the $7.8 billion just so we can back in sort of true excess here?

That's approximately $3 billion.

$3 billion, so then it would be $4.8 billion net?

Well, $3 billion to $4 billion, so $3 billion, $3 billion to $4 billion net.

Okay. And just as my follow-up, what is the potential for another special dividend here, and I actually think you may have another board meeting coming up in February. So what are your thoughts around that just given all that excess capital?

I think as we've said before to this question that, that decision is the board decision. It's hard to handicap what they think. We feel that -- we feel and we continue to see this, we feel that having a strong balance sheet is strategic and having the dry powder for potential acquisition is always a consideration. All of that will be weighed at the February board meeting.

And I just think it -- you know, I mean, this is an industry that's undergoing quite a bit of change and excess is not a word we use in the balance sheet, it's a word that the market tends to use. But we think that capital can -- if you choose appropriately, can be very strategic and add a lot of shareholder value as things change and opportunities arise and what could be a pretty volatile period for the industry.

Our next question is from the line of Michael Carrier with Bank of America Merrill Lynch.

Thanks, guys. Maybe first one for you, you mentioned in the some of the commentary just some of the traction that you're seeing over a multiple years of initiatives on the fee-based side of the business in U.S. retail. Maybe just can you give us an update on what traction you are seeing in terms of the platforms, number of products? And then maybe an update just how much of your business is on the fee-based side relative to say maybe the brokerage and how that has shifted over the past few years as these initiatives have been in place?

Yeah, I mean, I think as we said before, I think, an area of significant investment for us in the last few years has been really transitioning the U.S. retail distribution to be better equipped to service of fee-based environment not only require adding a lot of different skill sets into the group, but also pricing and changing and adding classes of shares and changing products as well. And also, we created a specialized New York Stock Exchange change, dedicated, and I think those kind of changes take a little bit of time, but we are seeing results, and even the New York Stock Exchange channels, we were up 26% in sales quarter over -- the prior quarter. So I think that -- and those changes can be destructive, but I think, they’re somewhat several now. I think another area that we think is going to be important, we talked about solutions. We put a big investment in solutions, and I think, today we have what we consider one of the best in the industry, which is as far as product development and where we think incremental growth can occur within our multi-asset group in solutions, we now have 11 model funds, which use underlying FTE funds, but also because they can incorporate some lower cost indexing and passive into that it gives us a much more competitive outcome-oriented solution type product, and we have 11 of those that are just rolling out right now, and we’re seeing a lot of interest there. I think the -- I don't have the exact number between the brake, but I think, as far as we look at the world; probably 70% is going into fee-based versus brokerage today. So that's where we need to be. And what we measure is the effect of or how important it is to get products on the shelf on the platforms. And we have very specific metrics trying to do just that. And we've seen a very strong pickup and that goes to ETFs as well, where I'd say one of the big changes in the last year's, because we have been out there, long enough now with some of those ETF firms having those types of consultants in place and product managers that have been able to get approval into the New York Stock Exchange firms and that will help that as well. So, I think, it is a big transition. It's going to continue to happen with some funds that may not fit the fee-based world. Others that we have to continue to modify pricing on and maybe adjust, but I think we have better momentum or good momentum there now and hopefully that's going to continue.

Okay. That's helpful. And then, Ken, just a quick follow-up on capital return. You guys have been active kind of across the different ways that you're going to return capital. Just on the buybacks, given that the pace has been elevated, any update just how we should be thinking about the rest of 2019 just in terms of the pace?

Yes, it's pretty much the same policy that we've had and practice that we've had going forward. So obviously, we think stocks are good buy at this price, so we'll be active in the market. But having said that, we're going to be both systematic and opportunistic to take advantage of things like volume dips and then holdback, if we see any kind of opportunities in the M&A world there are any other need for capital. So kind of more the same. I don't know that I would think we would -- the volumes would be elevated from this level, but just we're just going to continue to be opportunistic.

Okay. Thanks a lot.

Our next question is from the line of Bill Katz with Citi.

Okay. Thanks very much. Ken, staying with the margin discussion for a moment. Could you sort of maybe drill down in terms of where you think you can get some of those incremental savings versus talk to some of the incremental areas of spent?

I think across the board, I think, every function is looking at their operations and trying to identify areas where we could reduce costs. It just simply looking at kind of what we do and how we do it. The worlds changed. So there's probably a lot of outdated procedures that we don't need to it, do the same way anymore. And obviously, we have been building over the years in low-cost jurisdictions, so leveraging that and that crosses every function. So, it's really an enterprise wide effort. It's hard to say one particular area versus another. But I think the key levers are the low-cost jurisdictions and then leveraging technology. And then we've kind of been very forward with what strategic investment are. So we would continue things like solutions and other strategic investments and fund them with these savings.

Okay, and just as a follow-up. Greg, you mentioned, it's a rapidly changing backdrop and from that I'm sort of implying that maybe a little bit more interest in M&A. Could you talk a little bit about from here, what areas seem to make the more strategic appeal to your mind?

Well, I think, again, as we've said before, I think, it is a changing landscape for distribution and how we look at the world. And I think if that means there's opportunities to tie up with distribution in some cases or own portions of distribution, I think, that would be different than our traditional way of thinking about it purely independent asset manager. And I think you're seeing some of that happen in places around the globe that would be one that we think could be strategic for us. I've said, the high-yield business, the ETF business all businesses that we want. I meant – I said high-yield, the Fiduciary Trust would be one that, we would want to grow and scale up having that direct relationship with the investor. I think it would be important as well. So those just be a couple of the distribution and building high net worth would be certainly two priorities for capital.

Understood. And just a quick follow-up, since you have him online, I was wondering, if you can get update from the team of Benefits, just in terms of what they are seeing in terms of credit backdrop and allocations given some of the – somewhat through the fourth quarter?

Sure.

Rich, are you there?

Yeah. Thanks. Greg. I'd be happy to take that. Fourth quarter, as you know, with the drawdown in the S&P. We saw outflows out of loan funds and bond funds. Some of that trends – that translated into the liquid markets on pricing less so in our private debt business is usually a delayed effect there. Maybe for the purpose of your question, note that almost all of our capital is locked up capital. So if your question relates to any redemption's or things like that, that's not really a factor for us. For us, it's just a function of where is the most opportunistic investment opportunity. I know, the market has retraced a lot of the declines in – from the fourth quarter into the first quarter. But we're finally starting to see – some of that lag has finally taken hold. Pricing and documents starting to reflect the more reasonable risk reward equation and just a word about sort of our philosophy. We've generally been fairly defensive in how we position most of our portfolios, particularly around the private debt product. Mostly everything, we've been doing is top of the capital structure, most of that's first lien, low loan to values. And a fair amount of dry powder. So we're looking forward to a more reasonable environment, where we can invest. Fundamentals have been still relatively strong. I know there is been some headwinds, we'll see what volatility brings us going forward, but for us, this is a buying opportunity.

Thank you.

Our next question is from the line of Robert Lee with KBW.

Thanks. Thanks for taking my questions. Maybe sticking with Benefit Street, a little bit, I guess, a couple of questions there. Number one, maybe could you give us a sense of where you are and maybe your fundraising cycles, I mean obviously, mostly lots of capital that you just kind of come out of the cycle with a lot of dry powder? Are you kind of have on the drawing board post-closing there's a fair number of new strategies or existing strategies your raising for? And then maybe, can I think when you announced the deal last quarter, you kind of suggested that beyond kind of the GAAP impacts, there could be some other things that kind of start impacting the P& L, either going forward whether it's a contingent payouts or whatnot, give any update how should we be thinking about those non-GAAP factors going forward or maybe some non-GAAP?

Let me start with that, and then hand it over to Benefit Street guys. Right, so in the guidance, we talked about for this year, we have eight months left. The deal closed February 1st, that for modeling purposes, we're looking at investment management fees increasing about 3.5% and then commensurate increase in expenses, not on percentage base, but in absolute dollar basis. So we still think that in this fiscal year, the acquisition would be neutral in terms of EPS accretion and then accretive after that.

Okay. I mean there going to be any – so we want to think of kind of the cash impact, so we assume that’s going to be somewhat higher, maybe there’s some tax benefits or obviously intangible amortization things like that or?

Well, those expense numbers include everything. And in terms of cost, we disclosed the purchase price, so that's it. So it's pretty upfront payment that we disclosed and then the expense number I gave you, and that's okay.

Okay. Right. And maybe the follow up on some of those questions. I'm sorry, go ahead.

Do you want the Benefit Street folks to answer you?

Yes, that'd great.

Okay.

Sure. Well, let me see if I can hit the key parts that you're getting at or follow-up, if you like. We were -- most of the money as I mentioned or as you mentioned is locked up capital in drawdown funds that is our flagship funds in private debt. That's our Fund 4. We have a senior-only fund in private debt. We have a special situation fund. We're actively investing those funds. When we get to a certain threshold of drawn capital we usually then start to market our successor funds, which we intend to have successor funds in each of those. So we have been generally on pace, on all of that. And remember we also have leverage against the funds that we could use for additional buying power, if the market opportunity gets better. So we remain on pace and that sort of the nature of how we approach it. Did that answer your question?

Well, I was just curious I mean to say, since not familiar with your firm, you say on pace. So you kind of halfway through in investing these and to have kind of average investment period of 3 years, just trying to get a sense of when you could be hitting that next fundraising cycle?

Yes. As a general rule, we raise our successor fund when we are 75% invested in the current fund. And all 3 of the funds that I referenced, and I didn't even mention you our separate accounts and other capital that we manage, that's also locked up. But we're more than 50% drawn on all the funds that I mentioned. And they all have different drawdown periods and cycle. So it's a little more detail, but we are more than halfway. We are more than half drawn and when you get to 75% you should assume we'd be launching some successor funds.

Okay. Great. Fair enough. And maybe if I can, just four quick question, when you think about your own budgeting and modeling going forward and given a lot of the investments you've made in, whether it's CIPs or ETFs or just new products. And obviously, you have made some and have talked about some kind of fee adjustments, how are you modeling changes in your kind of overall fee rate? I mean, do you kind of assume that it's going to go down 1 or 2 basis points a year or half? I mean, how do you kind of handle that internally?

Yes. We've -- so we do the bottoms up, build of all that and then we look at the mix of assets going forward. And with the volatility this quarter, we saw a slight degradation effective fee rate. And so if you look forward for the 2019, we think that the fee rate won't change that much, it might be slightly lower than last year, but we're not getting a lot of external fee pressure on that. So we're not budgeting some material decreases in the effective fee rate going forward. Now, of course, Benefit Street will change that for the better. But if I could give you the math for that, but without Benefit Street, we don't see significant change in effective fee rate a slight degradation in 2019 versus 2018.

Great. Thanks for taking my questions.

Our next question is from the line of Brian Bedell with Deutsche Bank.

Great. Thanks very much. Greg, maybe can you talk a little bit about the investment adviser reception to the improved performance in across a lot of different products, especially in the one-year and three-year periods? And whether that's actually impacting sales here in January and also whether that's slowing redemptions? Obviously, December was heightened redemption through the industry. And then also on the institutional mandate side, any large one or lost mandates in the pipeline? And then do you see delayed fundings given the environment in the institutional space?

I think December, January is always a little bit tricky to get to draw too many conclusions because of the tax selling in December and then the strength that -- the historical strength in January. After that, with some retirement fundings, other money going back in the market after tax selling, I think like most in the industry, we sometimes maybe get overly encouraged by January because it looks so good compared to December. And I think that's true again for us, and I think part of that hopefully is certainly sustainable with better performance over time and I was just looking at the chart, for us, our top 25 funds a year ago, 6% wherein above average. And this year, 78% are above other peer average. So that's a significant shift in performance that I think, we know that. We have to get that message out and then have it flow through the three-year and five-year numbers, but I think, we are encouraged by what's happening in the market. We said sometimes, being a predominantly as far as our mix having value side that it takes a little bit of a disruption in the market to get people thinking back, again, about value And I think the decoupling from the things is another important shift that's happened over last few months. That should help these. So we are seeing, as I said before, I mean, I think, the Global Bond has a very strong story in this kind of marketplace. And as people become more concerned about equity valuations and things and looking for alternatives, it's just a nice fit. So we're seeing and that one tends to move a little bit faster, and say, your traditional retail value funds, which may take a little bit more time. But clearly, I think the relative numbers give our sales force something to certainly talk about, and hopefully, we'll see that bode as I’ve said, beginning January looks a lot better than December.

Right. And on the institutional side?

Yes, institutional, I haven't heard anything as far as -- I think we -- that may have been the case where you saw delays, but I haven't really heard that. And if you think of -- if you think the retracement in the market that we've had to-date, it would probably eliminate anybody from a timing standpoint. But I haven't -- that's just something I'm not aware of having a little delay there. Q – Brian Bedell: Thank you. And then just on the capital management, Ken, I think you said, just -- I just wanted to clarify, was it $3 billion to $4 billion of what you view as net excess capital or cash? And then maybe, Greg, just to expand on your M&A comments about you talked about distribution. I guess, if you can get a little deeper in that I think you mentioned the high net worth, but is there anything else where you said you wanted to own distribution? And, I guess, how that fits in with this general trend towards open architecture that's been going on for decades? A – Ken Lewis: Yes. So in our prepared remarks, for your question on the excess, let Greg get the moment, its $3.3 billion of liquid assets reserve to satisfy operational and regulatory requirements and capital investments in our products. Q – Brian Bedell: Right. And so the excess capital then is you said use that word? A – Ken Lewis: No, that's what we need. So the difference is available is opportunistic and available to us. Q – Brian Bedell: Got it, got it, got it. Okay. A – Greg Johnson: Just to expand, I mean, I think it -- the world, if you look at -- and this is not a statement really for the…

Our next question comes from the line of Alex Blostein with Goldman Sachs. Q – Alex Blostein: Hey guys, just a couple of clarifications at this point. So when I look at our expense guidance again for fiscal 2019, does that include any sort of kind of severance restructuring charges that are going to be associated with the cost savings plan? And any help that kind of help us break out the actual dollar amount of kind of a run rate expenses that you expect to take out and kind of restructuring cost that will be associated with that? A – Ken Lewis: Yes, so the guidance does not include any severance or execution cost related to cost reductions, simply because we don't know about that is right now. So that's when we talk to you next quarter, we will be able to give you a better idea for that even by line item for the rest of the year. But that's going to be. We do expect all of that to be incurred in this fiscal year and not bleed in to 2020. And so, it will probably start out slowly next quarter, gradually build with the bulk of it, probably being in the fourth quarter. And then, in terms of the number, I think, of savings we're looking to get it, like we said, at or below 2018 levels without regard to Benefit Street.

Got it, okay. And then just a clarification, again, another one on cash and kind of the requirements that you guys have between working capital, regulatory, et cetera. Do you include the upcoming payment to Benefit Street, which I think was $683 million within that or that would be on top? So I know you guys don't like talking about the excess cash, but would that be effectively a reduction to that number?

No, that's in there.

That's in there. Got it. Okay. Thanks.

Our next questions are from the line of Brennan Hawken with UBS.

Good morning, guys. Thanks for taking my questions. Just a couple left here at this point. Can you -- I know you spoke to the core trends that you expect in fee rate, but could you please quantify performance fees this quarter just so we can try to calibrate at least where we're starting off from our core fee rate basis? And then post ESP deal, it seems as though performance fees are going to be substantially larger. Is that going to lead you to actually break that out as a line item, so that we can have greater clarity and maybe avoid some of the noise that might flow into the numbers?

Sure. So you're quarter-over-quarter delta for performance fees is about $4 million. And so last quarter, they were about $4 million higher than this quarter. And I think if I remember, last quarter they're about $6 million, this quarter they're about $2 million. And then going forward, yes, you're right. We do expect performance fees to be higher. We haven't made a decision on how we will present that, but for sure, we will call it out. We will call it out in the prepared remarks. In terms of the geography, the income statement, we haven't decided what to do there. Kind of waiting to see what the magnitude is, but for sure we'll call all of that out.

Okay.

That’s good point, some thing we're going to look at, just like we're going to look at the other income line and look at the mark-to-market effect of the investments we hold, and because that can be a little bit noisy quarter-to-quarter, too.

Sure, that's fair. Thanks. And then, just curious about -- on the accretion expectations. I know you said you don't think that there's going to be much change, and also fully appreciating that the comments about the BSP funds not really being marked as we see with some of these other alternatives. Certainly, attention being drawn to leverage lending and other similar types of lending activities, which even though explicit leverage on, it is just part of what BSP does, a lot of the other lending activities are very, very similar in structure, et cetera. So for example, the Fed SNC review, leverage lending was like three-quarters of non-accrual lending, and almost 90% of substandard commitments. And there's been a lot of significant risk flagged in these loans. I know you see the recent volatility as an opportunity. But is there still an assumption of credit losses remaining at zero in your accretion, when you think about if that turns out to be too optimistic and credit losses go up in these products, how much does that impact fundraising and how much could that impact outlook for accretion from this deal? Thanks.

Well, we are assuming -- I mean, let the Benefit Street guys talk about the risks in the portfolios, but we are assuming very low -- consistent with historic results, very low default rates in our accretion analysis.

And I would say, I mean, those are all fair concerns and comments and once we had well before the fourth quarter. And as we look at this business and we’re late in the economic cycle and credit spreads were narrow. And I think -- we think -- again, we would say this is an asset class that's here to stay. I think that having the dry capital puts you on the right side of the trade, when other vehicles are forced to sell and have to continue to markdown. Those are the kind of things we got comfortable with. I think from fundraising, it's very hard to give you any kind of sense of what that means. I mean, yes, it's going to be harder in an environment where spreads are rising and there's defaults out there and credit issues, that's clear. But I think that our commitment is to the asset class long-term. And the fact that Benefit Street has come into that with sites wide open as far as being one of the first lien side and more senior-secured. And we know the arguments on that, that there's less junior and recovery rates going to be lower. But that's all – that’s I think we feel like we are in the right place in a growing market and I'll let Rich take it from there.

Thanks, Greg. I think you and Ken hit most of the key points. I guess, I would just add a few things. One, I think as the question unfolded, you talked a little bit about marks. Just to be clear, we mark all of -- and I assume, we're mostly talking about private debt here. We mark our private debt assets quarterly. Those are real marks, this is not -- there maybe a lag affect sometimes, but on a quarterly basis, we feel very comfortable that the book is marked appropriately by third-party evaluation firms. Greg mentioned, we're generally at the top of the capital structure. The correction in the markets and the drawdown in the S&P and outflows was really a technical correction, it really -- we haven't seen any material energy. There were some issues, of course with oil prices. But we haven't seen a material change in or termination in credit quality across the book. There’s always going to be defaults. We have been very fortunate to be running at very low default rate historically. Of course, we are going to always model something greater than 0 in our books. But nothing that's happened in the fourth quarter has led us to materially change our assumptions around defaults or recovery rates. And we think all of our books are marked appropriately.

Thanks for the color.

Our next questions are from the line of Chris Harris with Wells Fargo.

Okay. Thanks. The earlier commentary about M&A and possibly investing in distribution, how do you guys think about the conflicts that might arise as a result of a deal like that?

Well, I think that's why I said that, I don't envision this in the U.S. certainly where you'd have a conflict. But I think, the world has changed considerably where it doesn't -- in the old days, the thought of having anything direct to our consumer, you could never do if your business was sold through advisors. And today in the fee-based world where you're competing with Vanguard and conditional direct marketers, it's really just you've go to make sure, you got best of class funds with very strong track record and that's going to get you your distribution. So I don't think the conflict is big, although I would say I don't envision us doing anything in the states that would own distribution. I think it's more, we look at markets that have become more closed and guided and you look at the Canada that has a very -- has closed market as far as distribution goes, or more closed than most and Europe, which is trending that way too. We are seeing countries like Italy and others where distribution has co-owners that could be fun sponsors. So those are just the things we’re looking at. And I think it's just a change in how we would view our traditional mission and mandate of being independent, one that in certain markets it may makes sense to tie up in places like Latin America where banks dominate the markets…

And India.

India, there’s just a lot I think of places around the world, outside the U.S. where it may make sense long-term to do that. I think that's just a different thinking as far as how we would approach M&A in the past.

Okay, that makes perfect sense. And then just one follow-up question I had was on your investment performance. Obviously, good thing to see things trending in the right direction there. I know it might be difficult to generalize, but when you look at across your asset classes, the numbers in tax free fixed income and U.S. fixed income probably a little bit still below where guys would like to see them. What is driving that at this point? Is that kind of like a duration thing perhaps?

Yeah. I think it -- so few things. I think we tend -- that's the one area where we don't worry as much about your total return ranking. I mean, we want to be in the middle because we run those funds. We want to make sure we’re providing some of the highest tax fee income out there, and have a stable net asset value. It's kind of how we think about it. And that's important in how we sell those. I think as far as the makeup over the last few years and why we've underperformed would be we were on the higher end of credit quality and the lower credit in munis tended to do a bit better. Although, we saw that reverse in the fourth quarter where many of our funds had very strong performance with stronger credit compared to others and duration, we don't really switch. And we were on the lower end of duration because of predefined bonds. And again, how we think about running this as more for stability and high income and trying to make duration bets, and have a dividend that goes up and down from those duration bets. We think that's what people really want. So I don't -- we don't worry as much below or above average in that categories, we do certainly in equities. We want to make sure that the funds are stable in all types of markets and provide that high occurring income.

Great. Thank you.

Thanks.

And next questions are from the line of Michael Cyprys with Morgan Stanley.

Hi, good morning. Thanks for taking the question. I just wanted to circle back, Greg, to your comment earlier on fees and pricing. You mentioned modifying pricing on some products. Can you just talk about your approach to that in terms of modifying pricing, your expectations there? Where have you modified? How that's played now to the expectations? And is this more about grow sales or looking to stem redemptions, how are you approaching that -- thinking about? Thank you.

Yes, I mean I think it's just recognizing that being on a high-end of a fee if you're fourth quartile and fees and have top performance, you're not going to get shelf space in a -- in the new fee-based world. So, I think you have to look at how are we positioned against the universe and we have to be at least competitive on the fee side. So, we've made a series of modifications in a lot of different products. I mean they are not dramatic shifts, but we've lowered fees on our international equity funds, we have lowered fees on limited duration fixed income funds. We've changed payouts to be more competitive on -- for those that are still using the brokerage side, reallowance and things. I just think all of that affects your margin, but that's reality of where we need to be. And then I mentioned that we -- I think -- we're excited about these 11 new models that -- the outcome-oriented growth income that combine a lot of our traditional funds with some lower fee mixes and then gets you to a more competitive overall fee. And that -- we think that is very attractive in this market as well. So, I think it's just the recognition that it's not just a world where certainly the buyer or the consultant or the gatekeeper is looking just at your total return. They're looking at where you're positioned in fees. So, we have to -- and I think the good news is that we are always on the lower end of that equation. So, don't feel like we have a huge amount of changes ahead, but we continue to -- I sit there and I sit with our group and will look at every fund on a regular basis and go down and see where it's positioned. And we obviously do that with the Boards as well. But it just reflects the nature of the forces that all of us are dealing with in industry, but as Ken said, I think at the end of the day, it doesn’t really have a material effect on our overall effective fee rate and what's going to affect that next year if emerging markets or international equities or equities are up, that's going to have a much greater effect on our effective fee rate than any tinkering by individual funds.

Got it, okay. And just as a follow-up question maybe more broadly on credit cycle and liquidity, some concerns around there around buildup and leverage by corporates with a larger portion going to daily liquidity funds, high yield bond funds, loan funds, et cetera. Can you just talk about what actions you're taking to mitigate any such risks in your daily redeemable funds?

Yes, I mean, I think it is a concern and certain -- obviously, many academic papers, many journalists have covered this that liquidity in certain markets -- senior-secured debt market and floating rate and things like that, you do need to be careful about. So, I think, like most, we look at liquidity and make sure that we feel comfortable and we stress test these things and don't want to be in a position where you're force-selling into a market that doesn't have a lot of buyers. But, again, that's not an area where we have a lot of assets. So, -- and why we think benefit Street structure that is more like a private equity structure can be I think a very effective way to benefit from that dislocation in liquidity with funds on -- that are daily liquid funds. So I just don't think it's a category for us that there's a lot of assets where we would say that's a concern, I mean, we have some funds in those areas, but not – they are just not significant as far as size.

Great. Thank you.

Our next question is from the line of Brian Bedell with Deutsche Bank.

Great. Thanks for taking my follow-up. Just one more on M&A, maybe a longer-term view, I know, Ken, you mentioned you do want to preserve dry powder for potential future opportunities, especially if the markets get tough. So if – we are late cycle and if we do move into a bear market and recession period for a prolonged period over the next even two to three years, I mean, Greg, how do you think about large scale M&A where there would be a lot of product rationalization involved and the lost of cost-cutting. And it typically those deals are hard to execute well, and that's my manager's kind of shy away from them. But if we do have even a much tougher environment both from a market level perspective and industry-wide organic growth perspective, do you see those deals starting to form and would you be interested in engaging in something like that?

Well, I think we never say never, and if we think it can add shareholder value by efficiencies and synergies and costs that's certainly something we're going to look at. But I think you hit it on the head. The execution it is very challenging. It's very disruptive and very time-consuming for management to do that. And it's also a question of the brand and how much you can throw on distribution and get those synergies. So I think it's more of the smaller media managers that will be bought versus the bigger managers that are going to combine that's where the difficulties lie and if you're not on it, smaller group that relies on a narrow distribution platform and that goes to fee-based and all of sudden you're not on that platform. Those are the ones that you will probably see moving with larger firms and you're able to benefit by getting different styles and management teams in there. I think the larger ones are very difficult, they look good on paper, but the execution side is just challenging as you said.

And then maybe just going back to your alternatives comment with BSP, I guess, thinking about that, down the road as well as is there a shift into your alternatives assets in a more meaningful way, something desirable for you or rather just continue to be opportunistic around the edge of it?

No, I think it is. We stated it's a priority for us to grow that business. And I think the strength and depth of the BSP senior team and access that we think really accelerates that by having somebody like Tom Gahan his senior team involved and looking at the landscape of alternatives, along with our K2 Group that – I believe will be very helpful in is looking at other opportunities in that area and none of these are vulnerable to the passive shifts in pricing wars that we're seeing on the traditional model.

Okay. Great. Thanks very much.

Thanks.

Thank you. We reach the end of our question-and-answer session. I'd like to turn the floor back over for any closing comments.

Well, thank you, everyone, for participating on the call, and we look forward to speaking next quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.