Franklin Resources' CEO Discusses Q1 2011 Results - Earnings Call Transcript

Jan.27.11 | About: Franklin Resources (BEN)

Franklin Resources (NYSE:BEN)

Q1 2011 Earnings Call

January 27, 2011 4:30 pm ET

Executives

Kenneth Lewis - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Gregory Johnson - Chief Executive Officer, President and Director

Analysts

Glenn Schorr - UBS

Craig Siegenthaler - Crédit Suisse AG

Michael Kim - Sandler O'Neill & Partners

William Katz - Citigroup Inc

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.

Michael Carrier - Deutsche Bank AG

Kenneth Worthington - JP Morgan Chase & Co

Marc Irizarry - Goldman Sachs Group Inc.

Daniel Fannon - Jefferies & Company, Inc.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Cynthia Mayer - BofA Merrill Lynch

Roger Freeman - Barclays Capital

Operator

Good afternoon, and welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31, 2010. My name is Christine, and I will be your conference operator for today's conference.

Please note that the financial results to be discussed in this conference call 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 the 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 section of Franklin's most recent Form 10-K filing. [Operator Instructions]

Now I would like to turn the call over to Mr. Greg Johnson. Mr. Johnson, you may begin.

Gregory Johnson

Well, thank you, and good afternoon, everyone. Thank you for taking time out to join us on this call. I'm Greg Johnson, CEO; and I'm joined by Ken Lewis, our CFO. Hopefully everyone had a chance to listen to the commentary we made available this morning, but just to quickly recap, it was another strong quarter driven by strong equity markets, as well as the depth and breadth of our global presence.

AUM reached an all-time high of $671 billion, and we saw the benefits of diversification as flow trends to equity and Hybrid products improved, while fixed income flows remained strong. We were able to recapture almost half of the muni [municipal] fund outflows that we experienced during the quarter, via exchanges into other Franklin Templeton funds. Operating income was $659 million, began the year on a high note, but while part of the increase was due to some non-recurring items in seasonality, it was largely driven by the growth of assets.

I'd like to now open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Bill Katz from Citigroup.

William Katz - Citigroup Inc

First question is just around capital management. You mentioned on your pre-recorded call that this quarter might be a bit more indicative relative to the last rolling five quarters, if you will, if you look at the payout ratio and I get that with the special dividend about a year ago. I guess, the strategic question I have is I know we keep asking on these conference calls, but given your very robust balance sheet and the fact that you can continue to sort of build cash, I’m just trying to understand strategically given where rates are and given where you are with the franchise as diverse as it is and as recurring as it is, why you continue to husband so much capital? And just sort of what your thoughts are here. Is there something that you're worried about strategically in the business or looking at maybe from a seminal transaction, maybe wind up dealing more, maybe stepped up, if you will, in terms of either dividend payout or buyback?

Kenneth Lewis

This is Ken. I'll take a stab at that. I think there's a couple of ways to look at this question. First, if you look at our balance sheet, keep in mind that a significant part of the balance sheet we have to reinvest in the business. And by reinvesting in the business, we're talking about seeding new products and co-investing and also keeping money on reserve for restricted purposes. So I would say that almost 2/3 of the balance sheet is for reinvesting in the business and earmarked for those purposes. And the remainder, as you know, part of it is offshore and part of it is in the United States. So that's kind of give you the perspective from how we use the balance sheet. Regarding the philosophy and the strategy, I think that remains unchanged. If you look at our history, this quarter's payout ratio is kind of indicative of our long-term history, and I think that's proved to be very beneficial to shareholders over the last four years. I made this comment last quarter, but I'll just reiterate it. Over the last four years, we’ve generated over $1 billion of cash, kept debt stable, and we've reduced the shareholder accounts significantly by about 12%, I think over the last four years. So we continue to be cognizant of returning and providing value to shareholders. And the other two comments I'd make is the markets do turn, so it's good to have a strong balance sheet. We saw that through the financial crisis and not only from a financial point of view but also from a client point of view. We found that to be -- the fact that we have a strong balance sheet to be one of the factors that we were able to retain and attract clients during that period.

William Katz - Citigroup Inc

Just around margins and, again, relative to your commentary that this particular quarter may have been a bit strong. If you adjust for the number of one timers you called out in the pre-recorded call and take into consideration your guidance for this upcoming quarter, notwithstanding some of the day count issue, but your margins are generally running above average for the industry. To the extent that the volumes would continue to grow, whether it be market or new business, would you let the margin run at this point in time? Or do you need another step function of investment spending beyond your guidance?

Kenneth Lewis

Well, we've said this before too. Looking at the short-term margin, we feel it's not the best approach to running the business. And so I guess, in that sense, if the markets took off faster than our planned spending, you would see some expansion in the margin. Having said that, I have in my pre-recorded comments mentioned that we do think the spending will increase, not a function of the margin itself, but a function of our strategic plans. And I can say that most of the business units are under budget, so far in this fiscal year, so that's why I thought it was prudent to put some guidance out there on the spending levels.

William Katz - Citigroup Inc

So the quarterly number you gave for the first quarter there could be a step function beyond that as we get into the calendar second quarter of '11?

Kenneth Lewis

I just think -- I would say my guidance was for the next few quarters.

Operator

Your next question comes from Michael Kim from Sandler O'Neill.

Michael Kim - Sandler O'Neill & Partners

First, kind of just given the shift away from fixed income products more broadly these days. Can you just talk about maybe some of the reasons why you think flows into the Global Bond Fund will continue to hold up whether it’s kind of the Fund’s geographic diversification, its performance, maybe rising demand on the institutional side? Any color there would be helpful.

Gregory Johnson

Well, I think it's probably a little bit of all the above. I mean, we tend to categorize global bonds and look at them like your typical U.S. fixed income fund, but they are different. And I kind of put them in the alternatives category in a sense. I mean, it's a new category for retail. We talked about it on prior calls about -- it has very small percentage coming from basically nothing to now being a part of a lot of retail portfolio. So it's a nice way to diversify. I mean, the records and you look at the last decade, how well they've done. And obviously, the currencies play a big part in that. And also I think just around the globe, the consensus of people worrying about their own currencies and a nice way to diversify your purchasing power. It really is a new asset class for the retail investor. Now with that said, I mean any time rates back up, you're going to have some pressure from rising rates and just the value of the portfolio, but it's just not your typical fixed income fund as far as rate sensitivity, and our fund has a fairly low duration relative to other ones anyway. So it's really more about how well you manage the currencies versus how much interest rates are going to affect that. And as long as you do that well, I think you'll continue to see very strong flows.

Michael Kim - Sandler O'Neill & Partners

And then just second, I know you made the investment in Pelagos last quarter. And I guess, maybe you're looking at setting up hedge fund capabilities in Asia. But more broadly, how are you thinking about continuing to build out alternatives, capabilities in terms of growing it organically versus acquisitions? And then what sorts of products or strategies are you more focused on?

Gregory Johnson

Well, I think as we've stated before, I mean it is a priority for the company. We recognize both on the institutional side, as well as retail, a growing appetite. We think it's a natural extension of what we do. We're a little bit hesitant about just going out and purchasing large hedge funds or alternative managers just because we think it's hard to have a consistent repeatable process where you can put different players into that like you can with a retail mutual fund process. So I think we're going to continue to be open to look at everything. A situation like a Pelagos is really more of a startup type for us to dip our toes into the managed future derivatives, hedge fund replication and then build that into our solutions area. The solutions area is another area whether it's outcome-oriented or targeted-type retirement plans that we will continue to build capabilities and have, as I've mentioned before, tactical asset allocation fund, hard asset funds, funds that we think can do well in a rising rate environment and funds that can utilize investments even outside of our own group, but the majority of them will be within our own group. So we'll continue to build that, but we're going to do it thoughtfully. And we've got no goal that says we have to be X size in a certain period. We just want to make sure that it fits within our organization.

Operator

Your next question comes from Roger Freeman from Barclays Capital.

Roger Freeman - Barclays Capital

I guess, could you -- there was some commentary, I think, it came over the prepared remarks or the press release about strategic projects recently approved, increasing spending around that and obviously, you just talked a little bit about it. I guess, two things there. One is, we're also looking at your proxy. I think you laid out some minimum margin requirements to get sort of full payout against those and they seem fairly low. I think it was a little over 30%. Is that kind of going back to -- I think Bill's question. Is that indicative of where spending could go that those margins could get down to those levels? And can you talk about what some of those projects are?

Kenneth Lewis

Sure. This is Ken. Yes, I guess, I want to start by re-emphasizing how we run the business. I mean, it's very much an assessment of the market environment, assessment of our strengths and where we want to focus on the next three to five years. Of course, we've backed that down into an annual process. And so much of the revenue is driven by the market that it's just, we think, not the best way to run the business to focus on short-term margins. And so regarding the strategic projects, my comments were directed specifically to technology projects. And I guess, the question is, you're trying to get an order of magnitude of what spending is on IT and others. I don't think that it's the order of magnitude that would take the margin down to that 32% level in the short term. We're not thinking about that. It's just enhancing our systems, improving our customer service functions and expanding globally, more in line with the spending progress you've seen in 2010, I'd say.

Roger Freeman - Barclays Capital

Your core Domestic Equities business, you've been running this vision campaign. You think you're positioned well to get market share improvements as flows come back into equities. You've given us some stats in the past about the number of advisors that sold Franklin funds for the first time. Can you kind of update us on maybe this past quarter, maybe over the past 12 months, what that spending and what the mix has been? I mean, is that equities predominantly?

Gregory Johnson

Yes, I think for us -- looking at the 20-20 vision campaign and our focus on U.S. equities, we feel like we continue to make very good progress there. And two of our funds, the Franklin Rising Dividend Fund and the Franklin Growth Fund, have really taken off as far as sales and continue to grow in terms of market share in non-proprietary channel. We've also been very successful in getting them on DCIO platforms, and that is going to be very important in all markets to kind of keep generating consistent sales. And that's an area where I would say, historically we've been under weighted on the U.S. equity side, but we do have some funds that are doing very well and are getting a whole new audience. I don't have all of the numbers in front of me, but if you look at the Franklin Equity Group as a whole, we talk about top two quartiles. But if you look at the first quartile overall performance, it's 77% in the three year, 73% in the five year and close to 80% in the 10 year of those assets and about 70% in the one year in the first quartile. So you really have excellent long-term performance with that group at the right time with the marketing campaign, and we are seeing significant market share improvements there, as well as significant net inflows into those funds.

Operator

The next question comes from Michael Carrier from Deutsche Bank.

Michael Carrier - Deutsche Bank AG

You gave one stat this quarter just on the muni side in terms of money leaving muni funds and you guys being able to capture roughly 50% of that. I guess, if you look over time, when you've had these shifts, whether it's in and out of equities, maybe international or domestic or vice versa or past cycles with fixed income in equities. Do you have any other I guess like longer-term stats across cycles that you could give? Because I think that's one of the concerns and everyone thinks that you guys have the good distribution, particularly in the advisory channels. So those types of stats I think is what the positive expectation could be, and if you just had any more details, it would be helpful so we can kind of get our hands around that.

Gregory Johnson

Well, I think it's hard. I mean, I think every market's a little bit different as far as what's working and what's not. And I think just looking at the diversification we have by asset class and by geography, I think is really unparalleled in the industry. I look at the muni world and, of course, we felt like this noise was coming. I mean we talked a lot about it internally, tried to get people ready, but the muni market is a retail-driven market. It tends to be a lot more volatile because of that. And when you have the headline risk and some of the -- I think just confusion around the possibility of state bankruptcies and things, that you get an oversold market. But I think the good news about munis is, I think they -- like most fixed income markets, the yields can get attractive to new buyers and you do have crossover buyers coming in and when those yields get above treasuries, and I think some of the better information gets out about the possibility of state bankruptcies that, that issue will settle down and I think the market will come back. And already, in the last week or two, you've seen the market settling down a bit and hopefully that's a trend. But like everyone, we know these budget fights happen in the political arena, you're going to have a lot of volatility in the year or two ahead. But as far as how much you can keep and how much is working, I mean, it’s just, I think, too hard to generalize based on past trends.

Michael Carrier - Deutsche Bank AG

And then just in the Equity business, both on the domestic side and international. You had flows in both those buckets. I guess, any detour or any color on the products that are gaining traction. And then you just mentioned on the recorded call that you had a pickup in some redemptions, even though you had record sales, so do you have any color on that as well?

Gregory Johnson

Well, I think the offshore, the Asia Growth Fund continues to be very popular. We had $2.3 billion in net inflows in the quarter versus about $1 billion last quarter. Our China Fund as well, offshore was a top seller, and Global Discovery had good inflows. Our Eastern European hot fund had good inflows. So yes, I think the strength outside of the U.S. obviously is more in the global funds and more of the global sector funds. And in the U.S., the two funds that I mentioned, the big sellers were the Rising Dividend and the Growth Fund for U.S. funds.

Operator

The next question comes from Jeff Hopson from Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.

Back on the muni exchanges, is that something you're doing proactively to try to retain those, or is that just a natural consequence of having better brand awareness with the financial advisors? And then secondarily, I know that the U.K. had been something that you wanted to fill over time. As we think strategically around the globe going forward, where could be potential areas that you feel like you need to be in either where you're not in or you need to be bigger in those particular markets?

Gregory Johnson

I'll start with the second part. The U.K. is just a, for us, a nice kind of fit where we get a group with long-term record and we can immediately try to leverage that through our sales relationships. And even we're optimistic that we can take that group and introduce them to some large distributors that we have global relationships with fairly quickly. Now I think the other market that we mentioned would be Australia, which is one that we've looked at some opportunities there and will probably continue to do so, just with the superannuation and the importance of having local Australian equity management there. Outside that, I don't think there's any major markets. I mean you could look at Japan as one, but probably not high in our list. We do have a domestic equity capability there now. The question around munis, and are we proactive? The answer is, no. As far as going out and trying to retain, that's probably a normal number for most fixed income funds where they would move somewhere else if somebody had a short-term concern on the market. And I think it goes to the strength of broker-dealers’ sold funds and where they pay a commission and go into the fund family. And if you have a well-diversified fund family, you will retain a lot of those assets because those people are in it to buy munis. That's what they want. But there may be a period where they want to shift out for a time frame and having a strong fund family allows you to do that, and also having paid a commission, they're not going to just jump out and move into something else because that wouldn't be appropriate. So I think the broker-dealer side, you do end up retaining more than you would on the direct side.

Operator

The next question comes from Dan Fannon from Jefferies & Company.

Daniel Fannon - Jefferies & Company, Inc.

One more question on the Muni segment, if you could just discuss what the funds that the investors actually are rotating into? And maybe the fee differentials, if there is any amongst those funds?

Gregory Johnson

Well, I think it's really any of the shorter duration bond funds. We saw a pickup in the floating rate fund, which if somebody thought rates are going to go up, obviously that's a good place to go in the short term, and money funds as well.

Daniel Fannon - Jefferies & Company, Inc.

And then on the Global Bond Fund, it has predominantly I think been a retail product to date. And can you give us a sense of the current breakdown there of the mix within that fund generally, and what the appetite is on the institutional side for that product today, maybe with regards to RFP or kind of sales cycle, where it fits?

Gregory Johnson

It is predominantly retail. I don't have the exact percentage, but it's the dominant 90% plus of the assets. And again, as I stated, I think the institutional side is more a global lag. It's not a specific sovereign debt category for the institutional marketplace, and that's an area where in the last year, two, three, we continue to build good momentum and still have a very good pipeline. I'd put that right up there with our top-selling category and much of that continues to be because of the strength overall of that team and the success on the Global Bond Fund that we're able to leverage into global lag, as well as emerging markets debt.

Operator

The next question comes from Ken Worthington from JPMorgan.

Kenneth Worthington - JP Morgan Chase & Co

In terms of the new disclosure, you've collapsed some line items and made things a little bit more opaque. Any chance we can get disclosure on what the underwriting and distribution expense would be under the old reporting structure? Or any chance that will be available in the Qs?

Kenneth Lewis

The answer is yes to both. So before we put the earnings release out we issued the 8-K showing the changes historically. Hopefully that could help update all the models. And certainly, in the Q, we're going to break out the expense line item to show which component of the expense is more or less sales-based, which component is more related to assets under management, and then we'll show the amortization of the first commissions. And the Q should be out very soon.

Operator

The next question comes from Cynthia Mayer from Bank of America.

Cynthia Mayer - BofA Merrill Lynch

Looking at the international flows, it looks like long-term redemptions ticked up this quarter. And you may have gone over this, but can you talk a little about what drove that? And also, I think you said the overseas assets are a little more equity-focused. So could you also give the mix in terms of the net flows overseas, equity versus fixed?

Kenneth Lewis

I don't have the breakdown available in front of me between those two. And I would have the same question as far as the pickup in redemption activity. I think it was somewhat unusual to have that, along with a strong equity market during that period. So Cynthia, I don't have a good answer on that.

Cynthia Mayer - BofA Merrill Lynch

And then just, I guess, in terms of Pelagos, can you talk a little about the timetable for introducing products from there?

Gregory Johnson

Well, I think we're working on it. We want to make sure that, that's part of the reason we came in with a 20% stake and want to understand exactly how derivatives fit into a 40-act [ph] type retail product. And so we'll take our time there and try to figure out where it fits. So I would imagine something in the next 12 months, we would expect but there really is no direct timetable to introduce those capabilities in our funds right now.

Cynthia Mayer - BofA Merrill Lynch

Headcount rose a bit in the quarter, how do you see that over the next year?

Gregory Johnson

I think you’ll continue to see some modest increase in headcounts going forward. Like I said, most of the business units are under budget, so I'd expect the hiring to pick up. Maybe a little background on the change in headcount this quarter. I think there were 60 to 65 with the net change. Most of that was in portfolio and portfolio support functions, sales and technology, and about a third of that were in low-cost jurisdictions. So I would expect the capacity headcount to be in those areas and in that geography. So I would expect a little bit of increase in headcount going forward.

Operator

The next question comes from Craig Siegenthaler from Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG

Actually, just on muni flows, how have the recent trends been over the last few weeks there?

Gregory Johnson

Well, I think, overall, when you look at the industry, the last few weeks have been a little bit better, and the first few weeks were a little bit worse.

Craig Siegenthaler - Crédit Suisse AG

And you continue to expect the 50% shift to other Franklin Templeton products to continue, is that kind of a rough range? Or is there anything unusual there last quarter?

Gregory Johnson

No, I don't think there's anything unusual because it's made up of a lot of smaller investors, so hopefully that's a trend that we can hold.

Operator

The next question comes from Glenn Schorr from Nomura.

Glenn Schorr - UBS

Appreciate the comment on predominantly the muni franchise retail driven. Just curious on the U.S. part of the taxable side, if it's upwards in that range.

Kenneth Lewis

I'm not clear on the question...

Glenn Schorr - UBS

Well, you said munis is 90% retail. You said munis assets are 90-plus percent generated from the retail footprint, and just curious what that is on the taxable fixed income side?

Kenneth Lewis

Yes, I think it will vary. I mean, for us, it's probably similar to that. But we do have institutions that use the U.S. government fund, for example. So I think in a fund like that, it would be higher, but I just don't have a breakdown in front of me.

Glenn Schorr - UBS

Given that predominately dominant U.S. retail franchise, curious on what your thoughts are or aspirations are for making a bigger push. I know some people are concerned that higher rates bring changes in allocations. I actually think higher rates, there’s a lot of institutions around the world that would love to invest at a higher yield. So just curious on your thoughts on growing the institutional fixed income footprint in the U.S. over time.

Gregory Johnson

Well, that's been a big push of ours, and I think we continue to build out the capabilities there and we have a very strong team and I would agree. And I think that fixed income tends to rebound a lot faster in bear markets than equities do because of that current yield. And you're right, you do attract new buyers that come in and all of a sudden say, hey I can get X percent on a muni or on a government and that will attract a new buyer. And once rates settle down, that's true, you will come back a little bit faster.

Glenn Schorr - UBS

And what does it take -- in other words, it feels like a lot of the infrastructure is there. Clearly you have great management skills. Can you do side-by-side? Can the same managers manage the funds? And is it more of the marketing effort to get into the consultants and that just is a longer sales process?

Gregory Johnson

Well, I think the answer is yes to both. You can do side-by-side. That's what we do, and we have been building very good relationships with the consultants and continue to see very significant separate accounts come in, in the last quarter or two of our largest separate accounts for global lag, so it's working.

Operator

The next question comes from Bill Katz from Citigroup.

William Katz - Citigroup Inc

Greg, you mentioned toward the end of the pre-recorded call that you would expect to shift back to equities, but flows may be a little bit more drawn out and may be less than prior cycles. Maybe you could expand on that a little bit. It seems to be a little bit more conservative than what some of your peers have been saying over the last couple of days. So is that your view? Is that your view on top of your relationship with the distributors in getting feedback that way? Maybe just a little more qualitative discussion around that will be helpful.

Gregory Johnson

Well, I think it's my view that I think you have to take into account the demographics of an aging population and how that shifts. And I think the -- probably the severe equity sell-off probably accelerated that shift a little bit. I think the other part of it is, if you look at the marketplace today and we look at our – where we're successful in the U.S. equity side and funds like the Rising Dividend Fund or a Hybrid Franklin Income Fund or a Franklin Growth Fund, that tend to be a little bit viewed more conservatively managed, less volatile versus your traditional growth momentum fund. I think part of it is the advisor gravitating towards that instead of what used to be a momentum or even a large-cap growth. So I just think there's some shifts there that it's just very powerful when people are getting older and they're not going to want to take the risk that they were taking before and that's not true in every country, but I think that's the case I would make in the States. And you also had an incredible run-up of equities during that period. And I just think it's going to take time and you're probably not going to get back to those kind of flows.

Operator

The next question comes from Marc Irizarry from Goldman Sachs.

Marc Irizarry - Goldman Sachs Group Inc.

Greg, when I look at the net flow trends and equity just on their face and obviously U.S. equity fund flows picking up and then looks like some deceleration in global. Is there anything from a tactical perspective that you're seeing from the retail channel across the globe that suggests that maybe there's a little bit of more demand for U.S. over global at this point in time from at least a tactical perspective?

Gregory Johnson

No, I mean I don't think we're seeing that. I think for us, our performance has been better on some of the U.S. funds in the near term. And if you look at our big global funds, they have a value bias value. Value has underperformed growth here for the last couple of years. And Mutual Series is more defensive in nature and has higher cash levels, and Templeton has been under weighted material through the last few years. So I think that’s hurt the shorter-term performance for some of our core global funds. And as you would expect, we're not doing as well there as we would like to be.

Marc Irizarry - Goldman Sachs Group Inc.

And then just on the muni fund flows for a second, you mentioned that you were able to keep $2 billion, almost half of the $2 billion, in the Franklin Templeton fund family. And you mentioned before your retention rate of the assets, do you have any metrics on how much of the muni fund that you were able to retain, the brokers were able to retain within tax rate during this period?

Gregory Johnson

I'm not clear on the question. Could you rephrase that or...

Marc Irizarry - Goldman Sachs Group Inc.

So your gross retention rate and tax free fixed income? What would that be?

Gregory Johnson

Now we’re probably just a little under half of the money that's going out, we're retaining. It's exchanging and not just going out of the fund family. So if we had over $2 billion in outflows for the quarter, we retained about $1 billion through exchanges. So 50% I mean, whether that's the question before. Is that a number you would -- we've never really spent a lot of time looking at that. It's just because of this unique period here we went back and looked at that number, so I don't know if that's high or low. It's something we're going to look at. But as I stated before, I wouldn't want to just assume that's a number to model out at 50% prior...

Kenneth Lewis

Marc, this is Kenneth. Something about the Muni business, the tax reflects $70 billion so. I don't know if that's what you're...

Marc Irizarry - Goldman Sachs Group Inc.

Yes, I'm kind of curious how much of it's staying within, how much stayed within munis versus within other parts of the...

Kenneth Lewis

Yes, I don't know.

Gregory Johnson

Some of that was -- stayed in the muni family just different durations and...

Kenneth Lewis

We have some intermediate funds and they had positive flows, so I'm sure that was where you thought a percentage of the exchanges went into the intermediate muni fund, as well as we have some money market muni funds that they could have gone into as well.

Operator

The next question comes from Roger Freeman from Barclays Capital.

Roger Freeman - Barclays Capital

Just in terms of the Global Bond Fund and sort of a macro comment around sort of relative yields globally. Do you think that Global Bond Fund is less susceptible to outflows from capital seeking better returns, say, in equities, than say, domestic just given that global rates are higher than U.S. rates? Is that a fair assessment?

Gregory Johnson

Well, I think it just depends on people's individual view. And again, when you're building a portfolio and building risk into a portfolio, I mean you get a little less obviously equity risk by having that, as well as just straight interest rate risk, by having that category. So I think that's up to the individual where they think equities are going or where they think rates are going to make that kind of call. So I wouldn't want again...

Roger Freeman - Barclays Capital

Just looking on the returns in that fund. First, I think in October, it pretty significantly underperformed the Barclays Global Ag Index, but then it dramatically outperformed in November and December. I'm just curious if there was any sort of shift in currency exposure mix within fixed income asset classes broadly, geographies, anything?

Gregory Johnson

Well, I think there's always shifts. I don't think there was a dramatic shift. And I think we talk about short-term underperformance because we expect it in that fund in any given time when how quickly the euro can move on some headlines and that's going to affect. Hopefully, we get the longer-term trends right, and that's what we've done. But there's always going to be periods where we have short-term underperformance with that kind of fund.

Roger Freeman - Barclays Capital

And then in the muni funds, I think in your presentation you showed the one-year Lipper rankings, which had fallen off considerably and obviously everybody’s faced the pressures of muni fund investing. Is yours just a function of a higher California muni exposure?

Gregory Johnson

No, actually -- I mean, the California funds are doing -- I think it was second quartile for the one year through the end of the year. It's really duration. I mean our muni funds are run for current income, as well as total return. And so at any time when interest rates are backing up, we will underperform in the short run. I mean it's as simple as that. We think people buy munis for the higher yield, along with the stability of principal, that's how we manage the funds. So again, depending on what rates are doing, we generally will underperform and that's been the key driver, not the quality of the portfolio. It's been really the duration.

Roger Freeman - Barclays Capital

Any change, any updated thoughts around how Dodd-Frank might impact you structurally or strategically around the bank holding company status or your Securitization business?

Gregory Johnson

No, no change really, we're still wait and see attitude on there.

Operator

Today's final question comes from Jonathan Casteleyn from Susquehanna.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Just wondering your view on the potential for and repatriation of capital holiday as proposed in Congress. Would that be the final straw or the only thing you're looking at as far as pulling some of the capital out of your foreign subsidiaries? Or is there something specific to Franklin that would allow you to maintain the status quo of sort of over capitalized foreign subs?

Gregory Johnson

I think if there is a tax holiday, we certainly would take a good hard look at it and see what's in the best interest for the business. But I don't think there's anything special to Franklin in that regard.

Kenneth Lewis

And I think it would be our intention to -- like we did last time, we were able to bring back those dollars where they're more flexible here as far as buying X stock and paying dividends. It will be our intention to bring most of it back.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

And then just so I understand the diversification you speak of in the Global Bond Fund, is that because you don't hedge your geographic investments? So would that imply that a stronger dollar’s worse for the fund and a weaker dollar’s better for the fund, is that sort of a sound thought?

Kenneth Lewis

Yes, I think generally that's probably true.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

Can you just remind me of your M&A discipline as far as time line for accretion? And then just the overall general strategy, I mean are you trying to increase the diversification of the Franklin conglomerate or are you just trying to provide distribution to your sort of smaller acquired targets?

Gregory Johnson

I think the M&A is more about manufacturing capabilities in areas where there might be product depth, that's what you saw in the acquisitions that we've made.

Kenneth Lewis

Obviously, we'd like it to be accretive as soon as it can be.

Jonathan Casteleyn - Susquehanna Financial Group, LLLP

But you don't have a stated duration, so to speak?

Gregory Johnson

No.

Kenneth Lewis

No.

Operator

That was the last question for today. Please go ahead with any final remarks.

Gregory Johnson

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

Operator

Thank you for participating in Franklin Resources Earnings Conference Call for the quarter ended December 31, 2010. This concludes the conference for today. You may all disconnect at this time.

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