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Franklin Resources (NYSE:BEN)
Q1 2019 Earnings Conference Call
Jan. 30, 2019 11:00 a.m. ET

Contents:

Prepared Remarks:

Unknown Speaker

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

Operator

Good morning. My name is Brenda, and I'll be your call operator today. [Operator instructions] And as a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to Franklin Resources Chairman and CEO Mr.  Greg Johnson.

Mr. Johnson, you may begin.

Greg Johnson -- Chairman and Chief Executive Officer

Thank you. Good morning, and thank you for joining the call today to discuss this quarter's results. Ken Lewis, our CFO is here with me as usual to discuss our financials, and we also have Rich Byrne, president of benefit street partners, available to address any questions on the alternative credit markets as we're set to close on the acquisition this Friday.  Market volatility clearly impacted our financial results this quarter. In fact, the net effect of the mark-to-market, which is predominantly unrealized losses and other income was more than $83 million this quarter.  Fortunately, this environment has been more conducive to the success of value-oriented investment strategies, including many of ours.

We're pleased to see our relative performance continue to improve with net sales improving notably in several of our flagship strategies this month.  Lastly, we remained active with our capital management program and returned approximately $460 million to shareholders through repurchases and dividends in the quarter. I would now like to welcome any questions that you have. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Patrick Davitt with Autonomous Research.

Patrick Davitt -- Autonomous Research -- Analyst

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

Ken Lewis -- Chief Financial Officer

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

Patrick Davitt -- Autonomous Research -- Analyst

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

Ken Lewis -- Chief Financial Officer

I do think -- yes, I think that's true and I think we are trending on a lower end of that guide right now. I think I would say to you that as we go through the cost-cutting initiatives there'll probably be execution costs that will be nonrecurring, and will be able to give you a better handle on that as we go through the process next quarter.

Patrick Davitt -- Autonomous Research -- Analyst

Thank you.

Operator

Our next questions are from the line of Daniel Fannon with Jefferies.

Daniel Fannon -- Jefferies & Company Inc. -- Analyst

Hi. Just a follow-up on that. I guess, I thought last quarter the comments for this -- for fiscal '19 was closer to flat in your comments about -- you guided to up but said it could be toward flat. So just want to clarify, is your fiscal 2019 guidance of plus 2% to 3% had changed from what you had before? And...

Ken Lewis -- Chief Financial Officer

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

Look, I'm sure the annual guidance was up 2% to 3% and that's hasn't changed. And that -- and we're tracking to the lower end of that right now.

Daniel Fannon -- Jefferies & Company Inc. -- Analyst

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

Greg Johnson -- Chairman and Chief Executive Officer

Yes. I mean, I think the big driver tends to be inflows is the global bond. And if you look at the performance and just recently the one and three-year moved in to the top quartile and also the fourth quarter, which as we know was a very tough quarter for about every segment where MSCI was down 13 and S&P down 15. We had a positive absolute return for global bond.

So I think, that gives a little bit of near-term momentum that we saw kind of, I think, as there's more uncertainties as I said before, as people get a little more nervous, that tends to be a better selling product and we're certainly seeing that, I would say that one has had the biggest turn around inflows and we're seeing that through this current month as well. The other would be the income fund, which is something we put a press on and that's really U.S. retail product, but we saw a pickup in sales there. We're just getting that message out.

We had a big anniversary kind of sales push on that fund. But those would be the two primary drivers, and we saw a pickup in the muni gross numbers as well over the quarter in the U.S.

Daniel Fannon -- Jefferies & Company Inc. -- Analyst

Great. Thank you.

Operator

Our next questions are from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler -- Credit Suisse -- Analyst

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

Ken Lewis -- Chief Financial Officer

That's approximately 3, $3 billion.

Craig Siegenthaler -- Credit Suisse -- Analyst

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

Ken Lewis -- Chief Financial Officer

Well, $3 to $4 billion. So $3 billion -- $3 billion to $4 billion net.

Craig Siegenthaler -- Credit Suisse -- Analyst

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

Ken Lewis -- Chief Financial Officer

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

Greg Johnson -- Chairman and Chief Executive Officer

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

Operator

Our next questions are from the line of Michael Carrier with Bank of America Merrill Lynch.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Thanks, guys. Greg, maybe, first one for you. You mentioned on some of the commentary just some of the traction that you're seeing over multiple years of initiatives on the fee-based side of the business in U.S. retail.

Maybe just can you give us an update on what kind of traction you are seeing in terms of the platforms, the number of products? And then maybe an update just how much of your business is on the fee-based side relative to, say, maybe the brokerage and how that has shifted over the past few years as these initiatives have been in place?

Greg Johnson -- Chairman and Chief Executive Officer

Yes, I mean, I think the -- as we said before, I think, an area of significant investment for us in the last few years has been really transitioning the U.S. retail distribution to be better equipped to service a fee-based environment not only required adding a lot of different skill sets into the group, but also pricing and changing, and adding classes of shares and changing products as well. And also, we created a specialized New York Stock Exchange channel dedicated and we're -- I think those kind of changes take a little bit of time, but we are seeing results, and even the New York Stock Exchange channels we were up 26% in sales quarter over -- the prior quarter. So I think that that -- and those kind of changes can be disruptive, but I think they're somewhat settled now.

I think another area that we think is going to be important, we talked about solutions. We put a big investment in solutions, and I think, today we have a -- what we consider one of the best in the industry, which is as far as product development and where we think incremental growth can occur within our multi-asset group in solutions. We now have 11 model funds, which use underlying FTE funds, but also because they can incorporate some lower cost indexing and passive into that, it gives us a much more competitive outcome-oriented solution type product, and we have 11 of those that are just rolling out right now and we're seeing a lot of interest there. I think the -- I don't have the exact number between the break, but I think, as far as we look at the world, probably 70% is going into fee-based versus brokerage today.

So that's where we need to be. And what we measure is the effect of or how important it is to get products on the shelf on the platforms. And we have very specific metrics trying to do just that. And we've seen a very strong pickup and that goes to ETFs as well, where the -- I'd say one of the big changes in the last years because we've been out there long enough now with some of those ETF finds, having those types of consultants in place and product managers that would enable to get approval into New York Stock Exchange firms and that will help that as well.

So I think, it is a big transition. It's going to continue to happen with some funds that may not fit the fee-based world. Others that we have to continue to modify pricing on and maybe adjust, but I think, we're -- we have better momentum or good momentum there now, and hopefully, that's going to continue.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

OK, that's helpful. And then Ken, just a quick follow-up on the capital return. You guys have been active kind of across the different ways that you're going to return capital. Just on the buybacks, given that the pace has been elevated, any update just how we should be thinking about the rest of '19 just in terms of the pace?

Ken Lewis -- Chief Financial Officer

Yes. It's pretty much the same policy that we've had and practice that we've had going forward. So obviously, we think stocks are good buy at this price, so we'll be active in the market. But having said that, we're going to be both systematic and opportunistic, take advantage of things like volume dips and then if -- hold back if we see any kind of opportunities in the M&A world or any other need for capital.

So kind of more of the same. I don't know that I would think we would -- the volumes would be elevated from this level, but just -- we're just going to continue to be opportunistic.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

OK. Thanks a lot.

Operator

Our next questions are from the line of Bill Katz with Citi.

Bill Katz -- Citigroup -- Analyst

OK. Ken, just staying with the margins question for the moment, could you sort of maybe drilled down in terms of where you think you can get some of those incremental savings versus talk to some of the incremental areas of spend?

Ken Lewis -- Chief Financial Officer

I think, you know, across the board, I think, every function is looking at their operations and trying to identify areas where we could reduce costs. It's just simply a lot looking at kind of what we do and how we do it. The world's changed. So there's probably a lot of outdated procedures that we don't even need to do it, do the same way anymore.

And so -- and obviously, we've been building over the years in low-cost jurisdictions, so leveraging that and that crosses every function. So it's really in enterprisewide effort. It's hard to say one particular area versus another. But I think the key levers are the low-cost jurisdiction and then leveraging technology.

And then we've kind of been very forward with what our strategic investments are. So we would continue things like solutions and other strategic investments and fund them with these savings.

Bill Katz -- Citigroup -- Analyst

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

Greg Johnson -- Chairman and Chief Executive Officer

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

So those would just be a couple, but distribution and building high net worth would be certainly two priorities for capital.

Bill Katz -- Citigroup -- Analyst

Understood. And just a quick follow-up, since you have them online, I was wondering if we get an update from the team at Benefit, just in terms of what they're seeing in terms of the credit backdrop and allocations given some of the tumult to the fourth quarter?

Greg Johnson -- Chairman and Chief Executive Officer

Sure. Rich, are you there?

Rich Byrne -- President of Benefit Street Partners

Yes. Thanks, Greg. I'd be happy to take that. Fourth quarter, as you know, you know, with the drawdown in the S&P, we saw outflows out of loan funds and bond funds.

Some of that trend that translated into the liquid markets and pricing less so in our private debt business. There's usually a delayed effect there. Maybe for the purpose of your question, note that almost all of our capital is locked-up capital. So if your question relates to any redemptions or things like that that's not really a factor for us.

For us, it's just a function of where is the most opportunistic investment opportunity. I know the market has retraced a lot of the declines in -- from the fourth quarter into the first quarter, but we're finally starting to see -- some of that lag has finally taken hold. Pricing and documents starting to reflect a more reasonable risk reward equation. And just a word about sort of our philosophy, we've generally been fairly defensive in how we position most of our portfolios, particularly around the private debt product.

Mostly everything we've been doing is top of the capital structure, most of that's first lien, low loan to values, and fair amount of dry powder. So we're looking forward to a more reasonable environment where we can invest. Fundamentals have been still relatively strong. I know there's been some headwinds, we'll see what volatility brings us going forward, but for us, this is a buying opportunity.

Bill Katz -- Citigroup -- Analyst

Thank you.

Operator

Our next questions are from the line of Robert Lee with KBW.

Robert Lee -- KBW-Equity Research -- Analyst

Great. Thanks. Thanks for taking my questions. Maybe sticking with Benefit Street a little bit.

I guess, a couple of questions there: No. 1, maybe could you give us a sense of where you are in maybe your fundraising cycles? I mean, obviously, mostly locked-up capital, did you just kind of come out of the cycle with a lot of dry powder? Are you kind of have on the drawing board post-closing there's a fair number of new strategies or existing strategies you're raising for? And then maybe, Ken, I think when you announced the deal last quarter, you kind of suggested that beyond kind of the GAAP impacts, there could be some other things were kind of start impacting the P&L, either going forward, whether it's contingent payouts or whatnot. Can you -- any update on how we should be thinking about those non-GAAP factors going forward, or maybe some of them are GAAP?

Ken Lewis -- Chief Financial Officer

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

Robert Lee -- KBW-Equity Research -- Analyst

OK. I mean, are there going to be any kind of the cash impact. Should we assume that's going to be somewhat higher? Maybe there's some tax benefits or, obviously, intangible amortization, things like that, or?

Ken Lewis -- Chief Financial Officer

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

Robert Lee -- KBW-Equity Research -- Analyst

OK. All right. And maybe just a follow-up on some of those questions -- I'm sorry, go ahead.

Ken Lewis -- Chief Financial Officer

Do you want the Benefit Street folks to answer?

Robert Lee -- KBW-Equity Research -- Analyst

Yes. Yes, that'd be great.

Ken Lewis -- Chief Financial Officer

OK.

Rich Byrne -- President of Benefit Street Partners

Sure. Well, let me see if I can hit the key parts that you're getting at, or follow-up, if you like. We were -- most of the money, as I mentioned and as you mentioned, is locked-up capital in drawdown funds, that is our flagship funds in private debt. That's our fund four.

We have a senior-only fund in private debt. We have a special situations fund. We're actively investing those funds. When we get to a certain threshold of drawn capital, we usually then start to market our successor funds, which we intend to have successor funds to each of those.

So we've been generally on pace on all that. And remember, we also have leverage against the funds that we could use for additional buying power if the market opportunity gets better. So we remain on pace and that's sort of the nature of how we approach it. Did that answer your question?

Robert Lee -- KBW-Equity Research -- Analyst

Well, I guess, I was just curious. I mean to say since I'm not familiar with your firm, you say you're on pace. Are you kind of halfway through investing these, and they have kind of an average investment period of three years? Just trying to get a sense of when you could be hitting that next fundraising cycle?

Rich Byrne -- President of Benefit Street Partners

Yes. As a general rule, we raise our successor fund when we're 75% invested in the current fund. And all three of the funds that I referenced, and I didn't even mention our separate accounts and other capital that the manage that's also locked up, but we are more than 50% drawn on all the funds that I mentioned. And they all have different drawdown periods and cycle.

So it's a little more detail, but we're more than halfway. We're more than half drawn and when you get to 75%, you should assume we'd be launching some successor funds.

Robert Lee -- KBW-Equity Research -- Analyst

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

Ken Lewis -- Chief Financial Officer

Yes. We've -- so we do a bottoms up of all that. Then we look at the mix of assets going forward. And with the volatility this quarter, we saw a slight -- if you adjust for nonrecurring items for the two quarters, we saw a slight degradation in the effective fee rate.

And so if you look forward for the -- for 2019, we think that the fee rate won't change that much and it might be slightly lower than last year, but we're not getting a lot of external fee pressure on that. So we're not budgeting some material decreases in the effective fee rate going forward. Now of course, Benefit Street will change that and for the better. But I think I give you the math for that, but without Benefit Street, we don't see significant changes in the effective fee rate a slight, slight degradation in '19 versus '18.

Robert Lee -- KBW-Equity Research -- Analyst

Great. Thanks for taking my questions.

Operator

Our next questions are from the line of Brian Bedell with Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

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

Greg Johnson -- Chairman and Chief Executive Officer

You know, I think it -- December, January is always a little bit tricky to get to draw too many conclusions because of the tax selling in December and then the strength -- the historical strength in January. After that, with some retirement fundings, other money going back in the market after tax selling.I think like most in the industry, we sometimes maybe get overly encouraged by January because it looks so good compared to December. And I think that's true again for us, and I think part of that hopefully is certainly sustainable with better performance over time and if I -- I was just looking at a chart. For us, our top 25 funds a year ago, 6% were in above average.

And this year, 78% are above other peer average. So that's a significant shift in performance that I think -- we know that. We have to get that message out and have it flow through the three and five year numbers, but I think, we are encouraged by what's happening in the market. We've said sometimes, being a predominantly -- as far as our mix have in value side that it takes a little bit of a disruption in the market to get people thinking back, again, about value and I think the decoupling from the FANGs, is another important shift that's happened over the last few months that should help these.

So we are seeing, as I said before, I mean, I think, the global bond has a very strong story in this kind of marketplace. And as people become more concerned about equity valuations and things and looking for alternatives, it's just a nice fit. So we're seeing and that one tends to move a little bit faster than say, your traditional retail value funds, which may take a little bit more time. But clearly, I think the relative numbers give our sales force something to certainly talk about and hopefully we'll see that both.

As I've said, beginning January looks a lot better than December.

Brian Bedell -- Deutsche Bank -- Analyst

Right. And on the institutional side?

Greg Johnson -- Chairman and Chief Executive Officer

Yes, the institutional, I haven't heard anything as far as -- I think we -- that may have been the case where you saw delays, but I haven't really heard that. And if you think of -- if you think the retracement in the market that we'd had to date, it would probably eliminate anybody from a timing standpoint. But I haven't -- that's just something I'm not aware of having a delay there.

Brian Bedell -- Deutsche Bank -- Analyst

And then -- thank you. And then just on the capital management. Ken, I think you said, just -- I just wanted to clarify, was it $3 billion to $4 billion of what you view as net excess capital or cash? And then maybe, Greg, just to expand on your M&A comments about you talked about distribution. I guess, if you can get a little deeper in that I think you mentioned high net worth, but if that's -- if there was anything else where you said you wanted to sort of own the distribution? And, I guess, how that fits in with this general trend toward open architecture that's been going on for decades?

Ken Lewis -- Chief Financial Officer

Yes. So in our prepared remarks for your question on the excess, I'll let Greg get in a moment, you said $3.3 billion of liquid assets reserve to satisfy operational and regulatory requirements and capital investments in our products.

Brian Bedell -- Deutsche Bank -- Analyst

Right. So the excess capital then is -- you said...

Ken Lewis -- Chief Financial Officer

No, we don't use that. No, that's -- we don't use that term, and that's what we need. So the difference is available is opportunistic when available.

Brian Bedell -- Deutsche Bank -- Analyst

Got it. Got it, got it. OK.

Greg Johnson -- Chairman and Chief Executive Officer

Brian, and just to expand, I mean, I think it -- the world, if you look at -- and this is not a statement really for the U.S. when I look -- when I mentioned distribution, it's probably more outside of the U.S. and markets that have guided architecture-type platforms and may have ownership of four or five investment managers for those platforms, and it could be new technology platforms for fee-based advisors and countries where we may not have a significant share, could be a good way to enter that market. So those are the kind.

I think it's just a change in how we would say we are strictly think of ourselves as an independent pure asset manager in an open architecture world. We do see more guided architecture in certain markets and the strength of banks in certain markets and a bank may for regulatory reasons, spinning out their distribution things like that that I would say we are open to looking at that. Where in the past, we may have said, "Hey, we're a pure independent asset manager," and that's not something we want to do. And fiduciary trust is a very successful high net worth manager that we think could be bigger and more meaningful to our bottom line.

It's something that we want to grow and something that we've talked about. We disbelieve in the value of advice and that would be another area that would be on that list.  But just like alternatives, real estate, all those other things are on that list, too.

Brian Bedell -- Deutsche Bank -- Analyst

Right. Right. OK, that's clear. Thank you.

Operator

Our next questions are from the line of Alex Blostein with Goldman Sachs.

Alex Blostein -- Goldman Sachs -- Analyst

Hey, guys. Just a couple of clarifications at this point. So when I look at your expense guidance again for fiscal 2019, does that include any sort of kind of severance restructuring charges that are going to be associated with the cost savings plan? And any help to kind of help us break out the actual dollar amount of kind of run rate expenses that you expect to take out and the kind of restructuring costs that will be associated with that?

Ken Lewis -- Chief Financial Officer

Yes. So the guidance does not include any severance or execution cost related to cost reductions, simply because we don't know what that is right now. So that's when we talk to you next quarter, we'll be able to give you a better idea for that even by line item for the rest of the year what that's going to be. We do expect all of that to be incurred in this fiscal year and not bleed into 2020.

And so it'll probably start out slowly next quarter, gradually builds  with the bulk of it probably being in the fourth quarter. And then in terms of the number, I think, we're -- savings, we're looking to get it, like we said, at or below 2018 levels without regard to Benefit Street.

Alex Blostein -- Goldman Sachs -- Analyst

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

Ken Lewis -- Chief Financial Officer

No, that's in there.

Alex Blostein -- Goldman Sachs -- Analyst

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

Operator

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

Brennan Hawken -- UBS Investment Bank -- Analyst

Hi, good morning, guys. Thanks for taking my questions. Just a couple left here at this point. Can you -- I know you spoke to the sort of core trends of your expected fee rate, but could you please quantify performance fees this quarter just so we can try to calibrate at least where we're starting off from a core fee rate basis? And then post BSP deal, it seems as though performance fees are going to be substantially larger.

Is that going to lead you to actually break those -- that out as a line item so that we can have greater clarity and maybe avoid some of the noise that might flow in with the numbers?

Ken Lewis -- Chief Financial Officer

Sure. So your quarter-over-quarter delta or performance fees was about $4 million. And so last quarter they were about $4 million higher than this quarter. And I think if I remember last quarter, they were about $6 million, this quarter they're about $2 million.

And then going forward, yes, you're right. We do expect performance fees to be higher. We haven't made a decision on how we will present that, but for sure, we will call it out. We will call it out in the prepared remarks.

In terms of the geography, the income statement we haven't decided what to do there. Kind of waiting to see what the magnitude is. But for sure, we'll call all of that out.

Greg Johnson -- Chairman and Chief Executive Officer

You know, I think at this point, something we're going to look at, just like we're going to look at the other income line and look at the mark-to-market effect of the investments we hold and because that can be a little bit noisy quarter to quarter, too.

Brennan Hawken -- UBS Investment Bank -- Analyst

Sure. That's fair. Thanks. And then just curious about on the accretion expectations.

I know you said you don't think that there's going to be much change and also, fully appreciating that the comments about the BSP funds not really being marked as we see with some of these other alternatives, certainly attention being drawn to leverage lending and other similar types of lending activities, which even though explicit leverage lending is just part of what BSP does a lot of the other lending activities are very, very similar in structure, etc. So for example, the Fed's SNC review leverage lending was like three quarters of nonaccrual lending, and almost 90% of substandard commitments. And there's been a lot of significant risk flagged in these loans. I know you see the recent volatility as an opportunity.

But is there still an assumption of credit losses remaining at zero in your accretion when you think about if that turns out to be too optimistic and credit losses go up in these products, how much does that impact fundraising and how much could that impact the outlook for accretion from this deal? Thanks.

Ken Lewis -- Chief Financial Officer

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

Greg Johnson -- Chairman and Chief Executive Officer

Yes. And I would say, I mean, those are all fair concerns and comments, and ones we had well before the fourth quarter. And as we looked at this business and we're late in the economic cycle and credit spreads were narrow, and I think -- we think -- again, we would just say that this is an asset class that it's here to stay. I think that having the dry capital puts you on the right side of the trade when other vehicles are forced to sell and have to continue to markdown.

Those are the kind of things we got comfortable with. I think from fundraising, it's very hard to give you any kind of sense of what that means. I mean, yes, it's going to be harder in an environment where spreads are rising and there's defaults out there and credit issues, that's clear, but I think, our commitment is to the asset class long term, and the fact that Benefit Street has come into that with its eyes wide open as far as being on a first lien side and more senior secured. And we know the arguments on that that there's less junior and recovery rates are going to be lower.

But that's all -- that's I think we feel like we're in the right place in a growing market and I'll let Rich take it from there.

Rich Byrne -- President of Benefit Street Partners

Thank -- thanks, Greg. I think you and Ken hit most of the key points. I guess, I would just add a few things. One, I think as the question unfolded, you talked a little bit about marks.

Just to be clear, we mark all of -- and I assume we're mostly talking about private debt here. We mark our private debt assets quarterly. Those are real marks, this is not -- there maybe a lag effect sometimes, but on a quarterly basis, we feel very comfortable that the book is marked appropriately by third-party evaluation firms. Greg mentioned, we're generally at the top of the capital structure.

The correction in the markets and the drawdown in the S&P and the outflows was really a technical correction. It really -- we haven't seen any material, I mean, energy there were some issues, of course, with oil prices. But we haven't seen a material change in or diminution in credit quality across the book. There's always going to be the faults.

We've been very fortunate to be running at a very low default rate historically. Of course, we're going to always model something greater than zero in our books. But nothing that's happened in the fourth quarter has led us to materially change our assumptions around defaults or recovery rates. And we think all of our books are marked appropriately.

Ken Lewis -- Chief Financial Officer

Thanks for the color.

Operator

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

Chris Harris -- Wells Fargo -- Analyst

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

Greg Johnson -- Chairman and Chief Executive Officer

Well, I think that's why I said that I don't envision this in the U.S. certainly where you'd have a conflict. But I think, the world has changed considerably where it doesn't -- in the old days, the thought of having anything direct to a consumer you could never do if your business was sold through advisors. And today in the fee-based world where you're competing with vanguard and traditional direct marketers, it's really just you've got to make sure you've got best of class funds with very strong track record and that's going to get you your distribution.

So I don't think the conflict is big, although I would say I don't vision us doing anything in the States that would own distribution. I think it's more we look at markets that have become more closed and guided and you look at Canada that has a very -- has a closed kind of market as far as distribution goes or more closed than most than in Europe, which is trending that way, too. We're seeing countries like Italy and others that where distribution has co-owners could be fund sponsors. So those are just the things we're looking at.

And I think it's just a change in how we would view our traditional mission and mandate of being independent, one that in certain markets it may makes sense to tie up in places like Latin America where banks dominate the markets.

Ken Lewis -- Chief Financial Officer

And India.

Greg Johnson -- Chairman and Chief Executive Officer

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

Chris Harris -- Wells Fargo -- Analyst

Yes. OK. That makes perfect sense. And then just the one follow-up question I had was on your investment performance.

Obviously, good thing to see things trending in the right direction there. I know it might be a little difficult to generalize, but when you look at across your asset classes, the numbers in a tax-free fixed income and U.S. fixed income probably a little bit still below where guys would like to see them. What is driving that at this point? Is that kind of like a duration thing perhaps? Is that what...

Greg Johnson -- Chairman and Chief Executive Officer

Yes. I think it -- so a few things. So I think the -- we tend -- that's the one area where we don't worry as much about your total return ranking. I mean, we want to be in the middle because we run those funds.

We want to make sure we're providing some of the highest tax-free income out there, and have a stable net asset value. It's kind of how we think about it. And that's important in how we sell those. I think as far as the makeup over the last few years and some of why we've underperformed would be we were on the higher end of credit quality and the lower credit in munis tended to do a bit better.

Although we saw that reverse in the fourth quarter where many of our funds had very strong performance with stronger credit compared to others and duration, we don't really switch. And we were on the lower end of duration because of pre-refunded bonds. And again, how we think about running these as more for stability and high income than trying to make duration bets and have the dividend that goes up and down from those duration bets. We think that's what people really want.

So I don't -- we don't worry as much for below or above average in that categories, we do certainly in equities. We want to make sure that the funds are stable in all types of markets and provide that high current income.

Chris Harris -- Wells Fargo -- Analyst

Great. Thank you.

Operator

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

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good morning. Thanks for taking the question. I just wanted to circle back, Greg, to your comment earlier on fees and pricing. You mentioned modifying pricing on some products.

Can you just talk about your approach to that in terms of modifying pricing, your expectations there? Where have you modified? How that's played out relative to expectations? And is this more about grow sales or looking to  redemptions, how you're approaching that thinking about it? Thank you.

Greg Johnson -- Chairman and Chief Executive Officer

Yes. I mean, I think it's just recognizing that being on a high end of a fee of your fourth quartile in fees and have top performance, you're not going to get shelf space in a -- in the new fee-based world. So I think, you have to look at how are we positioned against the universe and we have to be at least competitive on the fee side. So we've made a series of modifications in a lot of different products.

I mean, they're not dramatic shifts, but we've lowered fees in our international equity funds. We've lowered fees on limited duration fixed income funds. We've changed payouts to be more competitive on for those that are still using the brokerage side on reallowance and things. I just think all of that affects your margin, but that's the reality of where we need to be.

And then I mentioned that we -- I think we're excited about these 11 new models that -- the outcome-oriented growth, growth income that combine a lot of our traditional funds with some lower fee mixes and then gets you to a more competitive overall fee. And that we think that that is very attractive in this market as well. So I think it's just the recognition that it's not just a world where certainly the buyer or the consultant or the gatekeeper is looking just at your total return. They're looking at where you're positioned in fees.

So we have to. And I think the good news is that we're always on the lower end of that equation. So don't feel like we have a huge amount of changes ahead, but we continue to -- I sit there and I sit with our group, and we look at every fund on a regular basis and go down and see where it's positioned. And we, obviously, do that with the boards as well.

But it just reflects the nature of the forces that all of us are dealing with in this industry. But as Ken said, I think at the end of the day, it doesn't really have a material effect on our overall effective fee rate and what's going to affect that in the next year if emerging markets or international equities or equities are up, that's going to have a much greater effect on our effective fee rate than any tinkering by individual funds.

Michael Cyprys -- Morgan Stanley -- Analyst

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

Greg Johnson -- Chairman and Chief Executive Officer

Yes. I mean, I think it is a concern and certain -- obviously, many academic papers, many journalists have covered this that liquidity in certain markets, a senior-secured debt market and floating rate and things like that that you do need to be careful about. So I think, like most, we look at liquidity and make sure that we feel comfortable and we stress test these things and don't want to be in a position where you're forced selling into a market that doesn't have a lot of buyers. But again, I -- we -- that's not an area where we have a lot of assets.

So -- and why we think a Benefit Street structure that's more like a private equity structure can be, I think, a very effective way to benefit from that dislocation in liquidity with funds that are daily liquid funds. So I just don't think it's a category for us that there's a lot of assets where we would say that's a concern. I mean, we have some funds in those areas, but not -- they're just not significant as far as size.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Our next questions are from the line of Brian Bedell with Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks for taking my follow-up. Just one more on M&A, maybe a longer-term view. I know, Ken, you mentioned you do want to preserve dry powder for potential future opportunities, especially if the markets get tough.

So if -- we are late cycle and if we do move into a bear market and recession period for a prolonged period over the next even two to three years, I mean, Greg, how do you think about large scale M&A where there would be a lot of product rationalization involved and a lot of cost cutting. And then typically those deals are hard to execute well and that's why managers kind of shy away from them, but if we do have it even in much tougher environment both from a market-level perspective and industrywide organic-growth perspective, do you see those deals starting to form and would you be interested in engaging in something like that?

Greg Johnson -- Chairman and Chief Executive Officer

Well, you know, I think, we never say never. And if we think it can add to shareholder value by efficiencies and synergies and costs, that's certainly something we're going to look at. But i think you hit it on the head that the execution it is very challenging. It's very disruptive and very time consuming for management to do that.

And it's also a question of the brand and how much you can throw on distribution and get those synergies. So I think, it's more of the smaller medium managers that will be bought versus the bigger managers that are going to combine. That's where the difficulties lie and if you're not on the smaller group that relies on a narrow distribution platform and that goes to fee-based, and all of a sudden you're not on that platform. Those are the ones that you will probably see move in with larger firms and you're able to benefit by getting different styles and management teams in there.

I think the larger ones are very difficult. They look good on paper, but the execution side is just challenging, as you said.

Brian Bedell -- Deutsche Bank -- Analyst

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

Greg Johnson -- Chairman and Chief Executive Officer

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

Brian Bedell -- Deutsche Bank -- Analyst

Right. Right. OK. Great.

Thanks very much.

Operator

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

Greg Johnson -- Chairman and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 53 minutes

Call Participants:

Unknown Speaker

Greg Johnson -- Chairman and Chief Executive Officer

Patrick Davitt -- Autonomous Research -- Analyst

Ken Lewis -- Chief Financial Officer

Daniel Fannon -- Jefferies & Company Inc. -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Bill Katz -- Citigroup -- Analyst

Rich Byrne -- President of Benefit Street Partners

Robert Lee -- KBW-Equity Research -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Brennan Hawken -- UBS Investment Bank -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

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