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Edited Transcript of LM earnings conference call or presentation 29-Jan-20 10:00pm GMT

Q3 2020 Legg Mason Inc Earnings Call

BALTIMORE Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Legg Mason Inc earnings conference call or presentation Wednesday, January 29, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan F. Magleby

Legg Mason, Inc. - MD & Head of IR

* Joseph A. Sullivan

Legg Mason, Inc. - Chairman, President & CEO

* Peter Hamilton Nachtwey

Legg Mason, Inc. - CFO & Senior EVP

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Conference Call Participants

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* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Craig William Siegenthaler

Crédit Suisse AG, Research Division - MD

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Jeremy Edward Campbell

Barclays Bank PLC, Research Division - Lead Analyst

* Kenneth S. Lee

RBC Capital Markets, Research Division - VP of Equity Research

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Patrick Davitt

Autonomous Research LLP - Partner, United States Asset Managers

* Robert Andrew Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Operator [1]

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Welcome to the Legg Mason Third Fiscal Quarter 2020 Earnings Call. My name is Ash, and I will be your operator for today's conference call. (Operator Instructions) Please note that this conference call is being recorded. It is now my pleasure to introduce your host, Alan Magleby, Head of Investor Relations.

Thank you, Mr. Magleby. You may begin.

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Alan F. Magleby, Legg Mason, Inc. - MD & Head of IR [2]

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Thank you, Ash. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the fiscal 2020 third quarter ended December 31, 2019.

This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements.

For a discussion of these risks and uncertainties, please see Risk Factors and Management's Discussion and Analysis of financial condition and results of operations in the company's annual report on Form 10-K for the fiscal year ended March 31, 2019, and in the company's subsequent filings with the Securities and Exchange Commission.

During today's call, we may discuss non-GAAP financial information. Reconciliations of non-GAAP financial information to the comparable GAAP financial information can be found in the press release and in the presentation we issued this afternoon, which is available in the Investor Relations section of our website.

The company undertakes no obligation to update the information contained in this presentation to reflect subsequently occurring events or circumstances.

Today's call will include remarks from Mr. Joe Sullivan, Legg Mason's Chairman and CEO; and Mr. Pete Nachtwey, Legg Mason's CFO, who will discuss our financial results. In addition, following the review of the company's quarter, we will then open the call to Q&A.

Now I'd like to turn this call over to Mr. Joe Sullivan. Joe?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [3]

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Good evening, and thank you for your continued interest in Legg Mason. As always, we're -- I'm joined here by our CFO, Pete Nachtwey. And this evening, we'll review our performance for the third fiscal quarter of 2020 ended December 31, 2019. Overall, I'm very pleased with our results as we continue to deliver on our 4 key drivers of value creation. At a high level, we delivered strong operating and financial results, buoyed by positive markets, which helped push AUM above $800 billion for the first time in over a decade.

Results were also driven by the broad diversification of our business by asset class, client type, geography and vehicle. It is this relentless focus on business diversification that expands choice for our clients and, in turn, creates resiliency in our financial performance for stakeholders.

So let's talk about how those 4 value creation drivers are working. And as a refresher, the drivers are leveraging distribution to drive growth; capitalizing on our investments to provide investors with greater choice; more effectively controlling our costs to improve profitability; and thoughtfully managing our balance sheet and capital allocation.

So let's start with how we drive growth by leveraging distribution. We benefit from having a broadly diversified approach to distribution, client access and support. We serve institutional and retail clients in the U.S. and around the world through direct and intermediated connections and with traditional and increasingly digital access portals. At any given time, we're likely experiencing meaningful growth in select channels, while dealing with redemptions and challenges and others. It's just the nature of the business for firms of our size and scale and this quarter was no exception. Business trends in the December quarter were stronger in global retail channels versus institutional. At some point, this mix will flip. Retail will soften and institutional will lead the way.

We generated robust net inflows across alternatives and fixed income, while flow trends remained a bit more challenged inequities, which included a large $2.8 billion sub-advisory redemption that was reported in December. And again, we're relatively certain this asset class mix will shift at some point with equities outpacing alts or fixed income. We continue to see greater client demand for more highly efficient vehicles, including CITs, SMAs and especially ETFs where we see ongoing growth across our lineup. We do see this shift in vehicle preference as more of a secular trend boding well for our investment in Precidian and its patented ActiveShares methodology for semi-transparent active ETFs. More on ActiveShares in a few moments.

Net sales of $8 billion on our retail platform fiscal year-to-date reflects continued strength in that channel and represents our ninth -- our best 9-month start -- sales start to a fiscal year in our history. Contributing to that strength in the quarter were net sales of $1.4 billion through international distribution, which was also our best quarterly performance outside the U.S. in nearly 2 years.

Our second value creation driver is capitalizing on our investments to provide investors with greater choice as was evident this quarter with Precidian, Clarion, Quantifeed. We crossed $1.6 billion of AUM in ETFs, which we have grown from 0 just a few years ago. And we remain excited about the potential with ActiveShares, the SEC approved semi-transparent ETF structure and the reception of it in the market. 14 firms have now licensed the technology through Precidian, which collectively represent more than 25% of U.S. equity mutual fund AUM. We notified Precidian last week of our intent to exercise our option to acquire a majority stake in the company and we will be working very closely with them to continue to build out this important capability for our industry. We're also in the market now with Clarion and their real estate income fund, CP REIF, which is now available on 3 large platforms with more to come. To support this important launch, we've added a number of alternative investment consultants across the U.S. to support our field sales teams and adviser clients on fund-specific issues and needs.

Quantifeed, in which we have an investment and with whom we work closely as partners, continues to garner interest with several of our global clients and, in fact, was recently recognized as FinTech Company of the Year and Outstanding B2B Robo-advice Platform in Hong Kong. Congratulations to our Quantifeed partners.

In sum, our portfolio of affiliates and unique investments is strong and diverse, which helps us to continue expanding choice for clients, while diversifying and building a more resilient business for our financial stakeholders.

Now moving to our third value creation driver. We remain focused on effectively controlling costs to improve profitability. And very simply, on this one, we are ahead of schedule in realizing our annual run rate savings target of $100 million or more by the end of March 2021, and we are pleased to have achieved over 80% of our run rate savings at the end of December. Pete will review more of our strategic restructuring progress in his section.

Our final value creation lever focuses on balance sheet and capital management. How we manage the balance sheet and allocate shareholder capital is critically important to short and long-term performance and our competitive positioning in the industry. As always, we take a measured and thoughtful approach in working with our Board to evaluate and determine the appropriate mix of investment spending, debt reduction, seed capital needs, dividends and share repurchase. Having used cash to both reduce our debt last summer and absorb costs related to our strategic restructuring, we will be generating more free cash. So it is the appropriate time to engage actively with our Board on these capital allocation decisions. And I look forward to updating you on those plans in the not-too-distant future.

And one item of note to which I'd like to call your attention. Related to the debt paydown from last summer, which I just referenced, I'm pleased to share that our leverage ratio, as measured by The Street, has now dropped below 2x. And while we may fluctuate slightly above that level on a short-term basis due to seasonal factors, it is our intent to continue to work that ratio consistently lower over time. So let's take a bit of a closer look at our results for the quarter, which reflect the impact of the value drivers that I've been discussing. While net flows were modestly negative for the quarter, AUM was up 2.5% or just over $20 billion to over $800 billion in total, primarily reflecting healthy markets. As I previously noted, business in the retail channel continues to be especially robust as we are winning in strategies, vehicles and channels that are currently in demand.

Gross sales in retail were down just slightly quarter-over-quarter, but up meaningfully year-over-year and the combination of record sales levels and historically low redemption rates make this an especially good time for net flows on our retail platform. This is where our strategy of diversification and choice is working. As data clearly shows that having more strategies with clients increases the persistency of the entire book of business.

Lead indicators across our affiliates remain broadly favorable, including investment performance track records that were generally flat to slightly improved during the quarter. And in particular, more than 90% of our AUM in fixed income and alternative strategies is beating their respective benchmarks across all time periods. And while unfunded wins and committed, but uncalled capital softened with fundings not having been completely replenished, almost all of our affiliates report activity levels and pipelines that remain elevated and well diversified.

Turning to the P&L. Net income and adjusted net income were both up quarter-over-quarter and year-over-year. Our operating revenue yield remained steady in the quarter. Affiliate performance fees were up. And as I mentioned, progress against our strategic restructuring remains on or ahead of plan. The resiliency we've built into our business over the last 5 years is working well and the outcomes that I've just mentioned here have contributed to a nice improvement in our earnings and operating margin.

Now before I hand it over to Pete, I'd like to share a bit of a read on our expected flows for January. As was reported, and I think you know, we were notified by a client late last month of a $2 billion outflow from a sub-advisory equity mandate that has now redeemed as expected. In addition, a $1 billion performance fee only sovereign fixed-income mandate likewise redeemed. Now just to put these 2 recent outflows in context. Over the past few years, the combination of these 2 mandates yielded a bit less than $1.5 million in pretax profit annually. Notwithstanding these 2 large redemptions and with strong inflows elsewhere across the enterprise and with wins that we anticipate will fund in the next couple of days, we should be roughly flat for the month of January. Obviously, the month hasn't closed yet and surprises can always happen, but that's our best Intel right now.

And in closing, I'd just like to reiterate that going forward, we remain committed to managing our business in a highly efficient fashion, expanding choice through the diversification of our business to meet evolving client demand across investment strategies, vehicles and access, which has the benefit of enhancing resiliency for our shareholders at the same time.

And with that, Pete, I'll turn it over to you.

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Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO & Senior EVP [4]

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Thanks, Joe. I'll start off with some highlights on Slide 2. Legg Mason reported GAAP net income of $75 million and adjusted net income of $93 million or $1.03 per share. We also made meaningful progress in our strategic restructuring efforts where we ended the quarter at 81% of our targeted run rate savings and we continue to project $100 million or more of annualized savings by the end of fiscal 2021. At quarter end, AUM stood at $804 billion. Overall, we reported net outflows of $1.6 billion for the quarter. And as Joe just mentioned, a $2.8 billion sub-advisory redemption contributed heavily to our equity outflows. However, we are very pleased that both our fixed income and alternative businesses generated net inflows.

Focusing on our global distribution platform, gross sales remained strong at $21.6 billion, with positive net sales of $1.6 billion despite the sub-advisory redemption. And looking at prospects for future flows, investment performance remained strong with 79% and 83% of strategy AUM being benchmarked for the 3- and 5-year periods while 65% and 76% of AUM are beating respective Lipper category averages for the same periods.

Now let's look at our affiliates on Slide 3. 4 of our 9 affiliates generated positive long-term net flows for the quarter, with inflows coming from a mix of fixed income, alternative and equity managers. Unfunded wins and committed uncalled capital were down from the prior quarter, primarily reflecting significant fundings at Western and ClearBridge as well as some seasonality. Looking ahead, our pipeline of new opportunities remains healthy across asset classes and strategies.

Turning to Slide 4. The asset class mix of our unfunded wins and committed uncalled capital remains diverse, with 46% coming from alternatives, 36% from fixed income and 18% from equities. While the unfunded balance is down, the underlying mix of wins and uncalled capital within each asset class remains well diversified across products and strategies.

Slide 5 highlights our global distribution platform. While slightly lower on a sequential basis, gross sales were up 23% from the same quarter last year. And with our redemption rate at 22% compared with 29% a year ago, net sales remained solidly positive at $1.6 billion and represent a sharp improvement from $6.5 billion of net redemptions in the same quarter last year. Through the first 3 quarters of fiscal 2020, global distribution generated record gross sales, while net sales of $8.2 billion compared favorably to $7.8 billion of net redemptions during the same period last year.

Moving to Slide 6. Since I already highlighted our bottom line earnings, I will move on to operating revenues which increased by $11 million or 1% quarter-over-quarter. This was driven by an increase in non-pass-through performance fees as well as higher average AUM. This quarter, we realized $29 million of non-pass-through performance fees, which were well above our forecast as a result of strong December quarter performance and strategies with annual locks of both EnTrust and Western.

Our performance fee eligible portfolio remains well diversified across hedge funds, real estate, private equity and a number of our fixed income and equity managers. It is important to keep in mind that we only record fees when they are locked and not subject to clawback, so there is no risk of reversal due to market action. For next quarter, we estimate non-pass-through performance fees at approximately $5 million to $10 million and pass-through performance fees at approximately $6 million.

Finally, our GAAP tax rate came in at 27%, which includes the impact of certain discrete tax items, while our cash tax rate was only 6% for the quarter. And for adjusted earnings models, we expect next quarter's tax rate to be in the range of 26% to 28%.

On Slide 7, you can see that AUM increased for the quarter driven by market appreciation and positive FX, partially offset by long-term outflows and realizations, while our operating revenue yield of 36 basis points remained consistent with the prior quarter's level.

As shown on Slide 8, operating expenses increased by $6 million on a sequential basis, driven by a $2 million increase in comp and benefits, primarily resulting from incentive increases related to higher net revenues. We also saw a $4 million increase in other expenses, mostly as a function of technology, conference and T&E costs.

Turning to Slide 9. Our comp ratio for the quarter was 54%, down from the prior quarter and in line with our forecast. Salary, incentives and benefits increased due to higher net revenues, partially offset by increased savings from the strategic restructuring. Next quarter, we expect our comp ratio to come in at a similar range for this quarter's 53% to 55% despite some seasonal factors.

As shown on Slide 10, our adjusted operating margin expanded by 150 basis points quarter-over-quarter driven by higher net revenues and strategic restructuring saves. Next quarter, we expect our adjusted operating margin to be down slightly due to lower forecasted performance fees and higher seasonal comp, partially offset by an increase in advisory fee revenues given our higher ending AUM and increased savings from the strategic restructuring.

Slide 11 is a roll forward from Q2's -- fiscal Q2's adjusted EPS of $0.95 to this quarter's $1.03 per share. Key drivers include $0.06 from higher net revenues and $0.04 in additional restructuring savings, partially offset by $0.04 in higher BAU expenses.

On Slide 12, we've updated the schedule depicting savings and associated costs related to our strategic restructuring program. As you can see on the far right, in the fiscal 2021 column, our savings target remains at $100 million or more, while our cost to achieve these savings remain in the range of $125 million to $135 million. In fiscal Q3, we reported $20 million of savings with cumulative savings realized now at $49 million. We expect to realize an additional $22 million of savings in our fiscal fourth quarter, bringing our cumulative savings to approximately $71 million by the end of fiscal 2020.

We have now achieved run rate savings of over 80% of our target and project to capture over 90% by the end of this fiscal year. In terms of costs to achieve these savings, we reported $18 million this quarter and we expect an additional $14 million to hit in fiscal Q4. For the full fiscal year, we anticipate cost of $80 million to $85 million with an additional $35 million to $40 million to come in fiscal 2021.

With that, let me turn it back over to Joe for his closing comments.

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [5]

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Thanks, Pete. As we look forward to the final quarter of our fiscal year, we are heading in the right direction and continue to make progress against our strategic goals. AUM, year-to-date sales, inflow numbers, earnings and margins have all improved, and we're aggressively managing our costs, moving toward our target of $100 million or more of saves as part of our strategic restructuring, all while remaining committed to delivering on our mission of investing to improve the lives of our clients and performing for our various financial and other stakeholders.

Like many of our peers, we face challenging macro factors impacting our industry. But through the diversification of our business and a disciplined mindset on costs, we remain confident in the resiliency of our growth and results.

And finally, as the strategic restructuring, which we began just over a year ago continues, I want to acknowledge the great work by the employees who have left as a result of this restructuring and, in particular, members of our executive committee who departed at the end of 2019. Fran Cashman, Tom Hoops, and John Kenney, all made valuable contributions to Legg Mason over many years and helped guide us to where we stand today. I want to personally thank them and all my Legg Mason and affiliate colleagues for their dedication to our clients and shareholders.

And with that, Ash, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Bill Katz with Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [2]

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So I guess, first one, Joe. Maybe just starting -- or Pete, starting on the expense initiative that you have underway right now, you continue to sort of include in your discussion the $100 million-plus of savings. I guess you're another quarter in, you're running slightly ahead on the time line to your base level. Could you sort of talk a little bit about where you might see some incremental opportunity for additional savings and when you might be able to sort of frame that out?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [3]

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Yes. Thanks, Bill. We're actually a bit bullish on that front in terms of expecting the -- to be able to realize some more, and in part because the organization is really taking this up in a very disciplined way. And I think most of it, on a go-forward basis, will come out of things like occupancy. We'll also look at potential ways to outsource and get more efficient from a technology perspective. But at this stage, we think $100 million is a good number to stick with, and we're cautiously optimistic around being able to report better.

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William R. Katz, Citigroup Inc, Research Division - MD [4]

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Okay. And then just as a follow-up, just on capital, Joe, I appreciate the fact that more to follow. But can you maybe help frame out just how you're thinking about priorities from here between deleveraging in an absolute sense versus just growing EBITDA versus buyback where the stock is trading today versus other forms of deployment, whether it be dividend or through acquisition capital?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [5]

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Yes, Bill, thanks. I mean we'll be a little bit tiresome maybe on this answer because our position with respect to capital allocation and our priorities for our excess cash really haven't changed. As we've said before, we think about our excess cash is discretionary. We focused on -- once we have taken care of our CapEx, our tax obligations, our dividends, our debt service and ongoing needs for seed, and I would say that's one thing that has been increasing. All of our affiliates are active in product development, and so there are increasing, I would say, needs for seed capital. But look, we've been focused on paying down debt, which we did last summer, that -- with that paydown, our next maturity is about 4.5 years away. So we feel good about that. And I think now is the time as we've -- we're getting almost through this $100 million strategic restructuring initiative, cash will start building at an increased level in a more robust level, and we need to talk to our Board, and we'll be talking to our Board about how we deploy that. And some of it will maybe building cash on the balance sheet to continue to delever. We really want to stay focused as best we can on keeping under 2x, and we're committed to remaining focused on that. But then we're also going to look at dividend, and we're going to look at share repurchase, and we'll have that conversation over the next quarter or so with our Board, and then we'll report out to you as soon as we can be more definitive on that.

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Operator [6]

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Our next question is from Kenneth Lee from RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [7]

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Just one on the Precidian ETFs. What's the latest update and thoughts on potential Precidian product launches this year?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [8]

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Thanks, Ken. Look, it's been a big week really for the ETF industry generally and for Precidian with the Inside ETF Conference going on down in Florida. It's kind of their seminal event of the year. Lots of discussion down there. And I've seen -- I'm sure you've seen all the articles around semitransparent active ETFs, and in particular, a lot of conversation about ActiveShares, which is exciting. There's really significant momentum that's continuing to build, as I mentioned in my prepared remarks. 14 signed licensees, really a blue-chip list of asset managers that are licensees, representing more than 25% of active U.S. equity mutual fund access -- assets. There's something on the order of 50 or more contracts outstanding. That's up from 35, 38 from last quarter. You probably recently saw that Goldman filed for exemptive relief mid-month here. And now, as you know, certain applicants can use the short-form application to expedite the SEC's exemptive relief process. So right now we've been working all-in. Our partners at Precidian have been kind of all-in, and we've been working with them and working really hard with the trading community, which will ultimately be the support for ActiveShares in testing the legal and operational ecosystem. And we think that's been going really well, and we're hopeful that the first ETFs using ActiveShares will launch soon. We expect that to be with American Century, quickly followed by Legg Mason/ClearBridge. So -- and then just as an update, I think I mentioned in my prepared remarks, we did notify Precidian last week of our intent to exercise our option to acquire a majority of the stake in the company. So we're excited about that.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [9]

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Great, very helpful. And just one quick follow-up, if I may. Just a follow-up on the prepared remarks in terms of the unfunded pipeline. Wondering if you could just broadly comment on what you're seeing in terms of institutional client either sentiments or positioning, and how that's potentially impacting the unfunded pipeline?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [10]

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Yes, good question. I guess let me, maybe, take it at a little bit of a higher level. And I think I said this on the last call. Unfunded wins are important, but they're really just 1 data point. When we think about and try to project our business, they're an important data point, but they're just 1. And so when we think about it, there really are multiple factors that go into what we would project or look for in terms of the growth of our business. And those would include things like the demand for particular strategies or the investment performance that we have in those types of strategies. And so the good news is, for us, we've got solid investment performance, broadly speaking, across the platform. We've got a very strong activity pipeline, that's what we hear from virtually all of our affiliates in high investor demand categories such as fixed income, non-U. S. equity alternative strategies. And so I look at it and say, many of the pieces are in place for our unfunded wins to start building again. But I think the perspective that I'd like to offer is that our business is so much more and so much bigger than just our unfunded wins or committed, but uncalled capital book. We report that because those are contractual commitments that clients make to us so we think it's important to share those with you. But the reality is, what we know and, frankly, what our counterparts in other parts of the industry have the same experience. We experience a significant amount of sales and redemptions on a daily basis that, quite frankly, we just cannot project with precision.

And just to kind of put that in context, our unfunded wins in the aggregate typically account for somewhere between just 10% to 15% of our -- of the total quarterly sales that we experience. So we've said in the past, for every dollar, we have in an unfunded win, we expect about $0.50 of that, about half of that to fund in the next quarter. And so that amount that funds in that quarter typically represents 10%. It can be a little less, it can be a little more, but we cuff it at 10% to 15% of the total quarterly sales. So we've got a tremendous amount of flow in and out of the platform. And so we have some visibility, which we share in terms of unfunded wins and committed but uncalled capital to try to give you a sense for where flows are going and where the appetite is, but it's far from complete visibility around our future flows. So look, we've been pleased with the daily sales activity that is occurring across our affiliates and across our platform and in different client channels, supplemented by the fundings of our unfunded wins and committed but uncalled capital book. But I'll just go back to the bottom line is that the activity level with our institutional clients and the pipeline remains very, very high.

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Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO & Senior EVP [11]

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Yes. Maybe, Joe, I might add, to your point, kind of, what are they specifically looking for? I think we're seeing really strong demand for fixed income, particularly, or call next-generation types of fixed income going beyond Core, Core Plus. They're looking for alternatives. They're looking for solutions. So that -- I think those trends have been out there for a while, and they continue.

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Operator [12]

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Our next question is from Craig Siegenthaler from Crédit Suisse.

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Craig William Siegenthaler, Crédit Suisse AG, Research Division - MD [13]

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I just wanted to dive deeper on the first question on capital. Can you remind us how your seed capital has been growing? And will that continue? Or can you recycle out of some of the older funds as they mature to meet future needs on product innovation?

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Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO & Senior EVP [14]

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Yes, sure, Craig. It's Pete. Actually, our balance sheet investment in seed capital has actually been coming down, and it's been in part because of our managing aggressively from a recycling standpoint, but it's also because of us putting in place kind of a novel approach from a TRS standpoint or total return swaps. So we've been funding a lot of the, what we call, kind of launch or accelerant capital for new products where distribution partners are looking to get them on their platforms right away without a track record, but typically they want to see a larger amount of seed going to the tune of $25 million, $50 million versus a typical just long term R&D, as we call it type C investment, it is typically in the $2 million to $5 million range. So we've been able to help the affiliates and global distribution launch more products, but actually with less money on the balance sheet. But as Joe said, we're seeing there's a tremendous amount of interest in terms of new products and the capabilities that our affiliates have and we definitely don't want to short shrift them on the seed capital.

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [15]

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And I think, Pete, we have done a really good job at recycling it, but the requests are more and the requests are typically kind of larger when you...

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Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO & Senior EVP [16]

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Right, yes. Yes.

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Operator [17]

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Our next question is from Dan Fannon from Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [18]

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My question is on the sub-advised business that you -- from ClearBridge, both in December and January, curious if it's from the same strategy. And also just generally, kind of how much sub-advised business is -- should we think about within the kind of the ClearBridge construct of the roughly $154 billion that they have.

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [19]

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I would say the outer, the sub-advised redemption in December was ClearBridge, but the larger sub-advised redemption in January was at Brandywine and so they were different. And then, obviously, the performance fee fixed-income mandate was actually at Western, so it wasn't -- it's not concentrated on any one strategy. The size of the SMA book is roughly -- I'm going to have to look -- about 70 -- roughly $70 billion or so at ClearBridge. That's -- well, that's -- no, no, that's wrong. That's -- I'm sorry, I'm giving you a wrong number because that's retail SMA, right? So I don't have that number down. I'll have to get you the exact total. It's not a huge portion of their book, but I'll get it for you. I'll get the number for you.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [20]

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Okay. And then just as a follow-up, Peltz -- Nelson Peltz has been on your Board for a couple of quarters now, and we've yet to hear much in terms of what he would like to see from you guys and any change that may occur. And, obviously, I assume that comes with next quarter or next update with regards to the capital return but, I guess, any kind of update around his thoughts around what you guys could be doing more or would like to do on a go-forward basis?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [21]

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Again, Dan, I think I've said this before, and I just have to repeat it. I think I'm not going to speak for Nelson or Ed Garden or for Trian, but what I think, what I see, and what they see, I think, is very similar. The need and the opportunity to continue to operate more efficiently. And Pete talked about the fact that while we're not announcing any greater saves beyond $100 million, we do think there's some potential. It's not going to be quantums, but we do think there's a mindset right now towards constantly looking for more opportunities to save and we're going to be focused on that. And I think that's something that, that Trian feels. And then it's effective. How can we operate more effectively and how can we do growth, and we are very much aligned with them in both of those focus -- the focus on both efficiency and effectiveness.

Dan, by the way, I don't know if you've jumped off, but in total, for across -- I just got the number -- across the platform, we have about $45 billion in sub-advisory mandates. So that would include not just ClearBridge, but Western and Brandywine and others. So a total of $45 billion sub-advisory mandates.

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Operator [22]

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Our next question is from Chris Harris from Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [23]

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So it was a very strong quarter for flows outside the U.S. on the retail side. Can you guys maybe talk a little bit about what's resonating internationally? And maybe what affiliates or products are doing particularly well?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [24]

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Sure. And I think, Chris, it's really a testament, again, I know we keep hammering the diversification theme, but it's really working for us. So as you know, and you've been following us for a long time, we've had historically, just very strong flows out of Japan, those have softened a bit this year. But the good news is, Australia has been just really strong. We've had, I think, net inflows in Australia, I think, for 14 straight quarters. We've seen the business -- our business in Asia is about as strong as it's been in memory. Europe, which started the year a little bit softer, has come back on. And so what we're seeing is diversification between the U.S. and international, with the international side picking up a little bit more on a relative basis, but also diversification within the international side. In terms of products, one of the areas with Western that you see, for example, a very strong product offering for Western's macro opportunities, which has got just terrific performance and is very attractive as sort of an unconstrained fixed income offering. We're seeing very strong interest in Core and Core Plus, but also for -- on the equity side with Martin Currie Emerging Markets, GEMs -- the GEMs strategy. We're seeing good interest in our Australian equity offerings. So it's fairly diversified across, really, I would say, Martin Currie, in particular. There's Royce, has had success with one of their international small-cap offerings, global offerings. So it's been fairly broad, but I would say, global emerging markets, and I would say macro ops have been 2 really biggies for us.

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Operator [25]

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Our next question is from Jeremy Campbell from Barclays.

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Jeremy Edward Campbell, Barclays Bank PLC, Research Division - Lead Analyst [26]

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Just a quick follow-up on Precidian. I mean now that you guys have given your notice to step up your stake in there, can you just help us think about how to size that increased buy-in from a capital deployment perspective? And if that would be kind of cash on hand or some other financing?

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Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO & Senior EVP [27]

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Yes, I think, we'll -- this is Pete, Jeremy. We'll do cash off the balance sheet and it's -- as it's been disclosed, it's $25 million in terms of the option exercise.

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Operator [28]

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Our next question is from Robert Lee from KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst [29]

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First one is, I apologize, I had some phone problems. So I may have missed this but, Pete, could you just go over what -- how we should think of comp to net revenue going forward? I know you gave that guidance, but I missed it this time.

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Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO & Senior EVP [30]

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With this comp ratio?

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst [31]

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Yes, yes.

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Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO & Senior EVP [32]

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Yes. So we're looking at 53% to 55%. Again, normally, which we're actually quite pleased with because, typically, March and June quarters are higher because of seasonal factors as social taxes kickback in and 401(k) contributions, et cetera. So again, that's just another sign -- tangible sign that the cost savings are real in terms of what we've been driving.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD & Analyst [33]

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Okay. Great. And then maybe just a philosophical question, Joe, in a way, but if I think about the loss in sub-advisory mandates that are kind of flowing out, and as you point to that, pretty kind of marginal contributors to your earnings and low fees, funds trust performance fees. So is there any -- how do you guys think about new mandates? I mean, is it kind of -- is there any thought that maybe those kinds of things they may be profitable, but is it really kind of worth it? Is that more of an affiliate decision? Just trying to get at, does it really pay for all these large mandates that don't earn much at the end of the day, but kind of create a lot of unfortunate noise from quarter-to-quarter and year-to-year.

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [34]

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Yes, I wouldn't -- look, I think broadly, I mean, there's fee pressure all over the place. And we're -- it impacts us no differently than anyone else. I wouldn't extrapolate the -- we talked about the relatively low impact of the outflows in January. I wouldn't describe the same profitability to, frankly, the outflow in December. So we called out the relative contribution of the $3 billion worth of -- on a collective basis, the $3 billion because it is unusual that those $3 billion are on the lower side. The sub-advisory business is a very good business for us. It's competitive like any other business, and these are under pressure everywhere and everything else, but it's a very attractive and profitable business for us. So I wouldn't extrapolate what we called out for those 2 particular outflows to the rest of the sub-advisory book. It's a good business. And our affiliates, we work very closely and partner with them on all aspects of it, winning the business, pricing the business, servicing the business, but it's a good business for us. There's no doubt about it. And it's -- they tend to be oftentimes stickier assets as well, just given the nature of the relationship.

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Operator [35]

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Our next question is from Patrick Davitt from Autonomous Research.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [36]

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I have another question on sub-advisory mandates. Thanks for the $45 billion. We're seeing kind of a drip of these large mandates redeem kind of across the board, not just at Legg. Can you speak to what extent you are concerned this is a book of business that is broadly becoming a bit of a permanent melting ice cube for the industry? Or is there something idiosyncratic that's been happening over the last year or so that's caused redemptions to increase across the street? Any thoughts around that would be helpful.

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [37]

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Look, I don't -- honestly, I don't think I've seen anything at a high level that would suggest that sub-advisory mandates are a melting ice cube or anything like that. I think if anything, what it may be actually, Patrick, is what we're seeing in other aspects of the business, whether it be on the platforms or even in other institutional type relationships where people are consolidating relationships. And so you might be seeing some consolidation away from smaller or other managers to fewer managers. We are seeing that. And we're, in some respects, a beneficiary of that, I think. We're not -- we think that even these clients, these sub-advisory clients of ours want to benefit from dealing with scaled, diverse multi-asset class managers and managers, who not only have the individual managers but can also bring them together as we can with QS. And so I don't see that business really declining. I do see it potentially consolidating a little bit, which is what we're seeing elsewhere.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [38]

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Okay. And then to follow-up on the January flow mix. Through the lens of the guidance you gave on those big redemptions only having $1.5 million of pretax profit hit, is it fair to assume then that the offsetting inflows are much higher fee and that the net-net of the flat flow could actually be net positive to operating income?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [39]

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Yes, I think that's a reasonable expectation. I have to tell you that the January from the retail perspective, globally, has been just an extremely strong month. And so that tends to have higher fee rates, as you know. And there's been no -- really, I don't think any really big lumpy wins in there. There's been some good top-ups from some of our platforms and things like that, but there's been no huge low fee mandates that have come into that. There's been a lot of fixed income continuing with Core and Core Plus and then good diversification with some alts and things like that. But I would -- I think your premise is right that even with $3 billion out, even if we're flat from a flow perspective, we should be accretive from a revenue perspective. And this, like I said, the retail business right now is just very, very strong.

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Operator [40]

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Our next question is from Michael Cyprys from Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [41]

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Just wanted to circle back on your strategy around expanding choice for clients. I guess just as you think about that and you think about the platform that you have today, are there any sort of gaps or areas that you're looking or think about improving? And how that tie into any sort of appetite around bolt-ons, team lift-outs or even acquisitions?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [42]

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Yes. I think, Michael, you've kind of hit it. Where we've been focused, we did a few larger transactions about 3, 4 years ago. And since that time, we have continued to make smaller investments alongside our affiliates where we can to help them strengthen their platforms and diversify their platform. So as you know, we worked with Clarion Partners to bring in and acquire small U.K. firm Gramercy partners to kind of expand their reach and expand their capability. And that's the kind of thing that we will continue to do, where we can make smaller investments to support our affiliates. That's what we've been working on more over the last few years, as we've kind of looked to digest some of the bigger deals we've done and then get them in and commercialized in the market. We've also made some investments in -- again, in Precidian, obviously, which is more of a vehicle capability and then in things like Quantifeed and Embark, which are more access capabilities. So again, it's about diversifying choice of strategies or capabilities, vehicles and access. So we've been making smaller investments in those and I think we'll continue to do that.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [43]

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Great. And just maybe a follow-up, similar, but more on the organic side. I guess just how does that kind of tie into how you guys are thinking about launching new products and strategies there? Just curious how you're thinking about that, approaching that in terms of prioritization? And what strategies can make sense to bring to market over the next year or 2?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [44]

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I think, increasingly, the way I think about it Michael is, look, our affiliates across the board are always working on new creative strategies that they can -- that as we talked about, we seed and those things take time to germinate and to season to see if there're actually strategies that are salable and work and things like that. I think our bigger opportunity, quite frankly, is in taking existing strategies and making sure that we can get them in all the vehicles that, so that there's greater vehicle choice, so there's -- and we've recently been bringing more of our affiliates onto our retail SMA platform in the U.S. That's a positive. Royce is coming on that platform. We've brought Martin Currie on that platform. I believe we're bringing RARE onto that platform. So taking existing strategies that where you can expand your market opportunity by moving existing strategies beyond just the mutual fund vehicle or the cross-border vehicle into other vehicles, I think that's incredibly important. And then working to get those strategies on to different distribution or access platforms, and that's what we've been doing with Embark and Quantifeed and things like that. So I think it's, yes, we will continue with product development because that's the creative R&D that we like to do and our affiliates like to do. But in the meantime, we need to find ways to continually commercialize that, which we already have and get it in the marketplace.

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Operator [45]

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And our last question comes from Brian Bedell from Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [46]

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Maybe, Joe, just to add on to an earlier question on ActiveShares launch, I think you said American Century and ClearBridge are, likely, the first 2 to come in. I think you've said soon. I was trying to get a little bit more granularity around that. Is that more like the second quarter or still are we kind of pushing into the second half? And then, this -- may be some categorization of you mentioned, obviously, you're working with market structure participants on this. Is that sort of the main hurdle holding it up? Or are there other things that are keeping the ActiveShares from being launched in the real near term?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [47]

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No. First of all, I would be disappointed. I want to be careful because I don't -- I'm not trying to put any pressure on the regulators here, but I think we feel like we're moving in the direction where we've got a shot for it to be this quarter. We're hopeful that it's this quarter, but it could spillover. It just depends. There's nothing really, Brian, holding it up in terms of big bumps. It's just about putting the pieces together of the ecosystem. And it's really the trading functions, the APs and the AP reps that need to kind of get put together and make sure that plumbing is all working and both the legal and operational side. It's nothing that's extraordinary. It's just getting it all lined up so that it works properly. And we're not going to go until we're very, very confident that it's ready to go. And -- but I don't see there being any -- we don't see there being any regulatory or any operational big hurdles. It's just a matter of kind of getting this ecosystem, this community, trading community, that's going to support it together to make sure we've got all the pieces ready to go and when it launches, it works, and we're confident that it will be.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [48]

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Yes, okay. No, that makes sort of sense. And then maybe just a follow-up on, obviously, ESG is becoming an increasingly hot topic recently. What are you hearing from clients in terms of the demand for your products? How do you guys feel that you're positioned if the flow organic growth situation turns in favor of ESG in the near to intermediate term?

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [49]

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Yes, Brian, I don't think we -- well, first of all, 2 things: One, we think -- when we think about ESG, at least I think of it, and I think we think of it in 2 aspects. One is how do we incorporate ESG into what we do as a business and also how do we think about ESG in terms of how we run the company. So there are 2 kind of separate components. When you think about how we operate as a business. I think you know this, but we've -- because we've said it before, but all 9 of our affiliates are PRI signatories. We've got already just under $300 billion of long-term assets that are in investment strategies that do utilize ESG factors. And that's -- and that data is a little bit stale, so it's probably a higher number at this point, but that's about 43% of our long-term AUM or thereabouts. I would tell you that I think all of our affiliates use it differently. It's not nice to have. It's not a let's kind of a check the box thing anymore. The ESG factors and incorporating that in the investment process is really, I think, table stakes these days. The good news is, we've got, all of our affiliates as I said are PRI signatories. And I think about, in particular, ClearBridge in the U.S. and Martin Currie internationally, who really are leaders in this regard. And so -- and who are known in the industry for that. So it's an exciting time. It's an important time as it relates to the investment side and how we run our business. And then, at the Legg Mason level, we also think about ESG in terms of how we run the company. And there are a number of dimensions that we think about when we think about ESG. We think about, are we governing with responsible corporate practices? What kind of employee experience are we providing? What is our commitment to sustainability and to the environment as a company? What is our community engagement? And then, one of the most important priorities, not -- clearly a strategic priority for us is our commitment to diversity and inclusion. And we are very active in that front. We have actually been recognized in some regards. We have a wonderful Chief Diversity Officer, who has made a real difference with us over the last year-plus that she's joined us. So we -- ESG is just part of both our business and the way we run our company now.

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Operator [50]

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Thank you. That concludes our question-and-answer session. I would like to turn the floor back over to Mr. Sullivan.

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Joseph A. Sullivan, Legg Mason, Inc. - Chairman, President & CEO [51]

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Thank you, Ash, and thanks to all of you for taking time to be with us this evening. We very much appreciate your continued interest in Legg Mason. And as always, I want to recognize and thank my affiliate and Legg Mason colleagues for all they do for our clients and for our stakeholders. And the strong results that we delivered this evening are due to their collective efforts. So I appreciate it, and I want to thank you.

And now before I sign off, I do want to thank and congratulate one individual in particular. Everybody in the room here is looking at me because they didn't see this in my script. But that person is Camille Meade and she's with our U.S. product team in New York. And Camille today celebrates her 30th anniversary with the company, which in today's world, I think, is really extraordinary. And I gave her a call a little bit earlier, and I asked her, I said, how is it that you have stayed with 1 company for so long. And I think I bring it up because I think her response conveyed really wonderful wisdom. She said, "Joe, the company has kept changing over these past 30 years, so my role, my job and my work have kept changing all the time, and that's kept things really interesting and exciting." And I think -- and from my standpoint, I think that's just a wonderful perspective. So on behalf of Legg Mason and all of our stakeholders, I want to thank Camille for 30 years and here's to the next 30. And for the rest of you on the call, we look forward to updating you on our progress again next quarter.

And with that, Ash, we're going to sign off. So thank you all, and have a nice evening.

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Operator [52]

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This concludes today's conference call. Thank you for your participation. You may now disconnect your lines at this time.