Legg Mason Inc (LM) Q3 2019 Earnings Conference Call Transcript
Legg Mason Inc (NYSE: LM)Q3 2019 Earnings Conference CallFeb. 04, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, and welcome to the Legg Mason Third Fiscal Quarter 2019 Earnings Call. My name is Michelle, and I will be your operator for today's conference. At this time, all participants are in a listen-only. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) Please note that this conference 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.
Alan Magleby -- Head of Investor Relations
Thank you, Michelle. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the fiscal 2019 third quarter ended December 31st, 2018.
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 31st, 2018, and in the company's subsequent filings with the Securities and Exchange Commission.
During today's call, we may also discuss non-GAAP financial information. Reconciliations of the non-GAAP financial information to the comparable GAAP financial information can be found in the press release that 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 a review of the company's quarter, we will then open the call to Q&A.
Now I would like to turn this call over to Mr. Joe Sullivan. Joe?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Thanks, Al. Good evening, and thank you for joining us. We appreciate your continued interest in Legg Mason. With me tonight as always is Pete Nachtwey, our CFO. These are certainly turbulent times, shifting dynamics in foreign relations and global trade policies, the political stalemates of another possible US government shutdown, varying potential Brexit outcomes and evolving monetary policy. The list of major market drivers is certainly long and the result is rising market volatility and increasing investor uncertainty.
Against this backdrop, we firmly believe that active management should always play a critical role in portfolios and now even more so during times of market turbulence. At the core of this belief is the value of thoughtful diversification be at across a portfolio of securities or funds or a portfolio of investment managers, such diversification can mitigate risk and volatility and ultimately enhance returns over time. And we believe this quarter highlighted many of the benefits that diversification brings to Legg Mason.
Now as you all know the S&P 500 Index suffered its second worst December on record declining just over 9%. And for the quarter, the S&P 500 was down 14% and the Russell 2000 was down over 20%. But in contrast, the Barclays Agg finished up 1.6%, reflecting a somewhat late but distinct modification in tone from the Fed and a change in the expectation of future rate hikes. During this time, fourth quarter industry flow metrics were extremely weak in the US with $313 billion of net outflows from US active mutual funds, the largest ever on record.
And just for the sake of comparison, at the height of the financial crisis in 2008, outflows were two-thirds of that number at $195 billion. Yet, Legg Mason's total AUM declined less than 4% for the quarter, reinforcing the benefit of our diversification across asset classes, distribution channels, geographies and affiliates.
Moving on to our retail distribution platform, perhaps somewhat counter intuitively in the midst of such a challenging market environment, our gross sales were up quarter-over-quarter and we achieved modest market share gains, as some of our distribution partners continued to rationalize managers and reallocate assets amid the market's volatility.
We also benefited from our channel and geographic diversification. We continue to see retail channel momentum with positive net sales in Australia, Japan and DCIO in the US. And the diversification of our business continues to create opportunities to grow as we begin 2019, particularly when combined with improving performance in the critical three and five year time frames. Our managers generally viewed the volatility in December as a correction that was long overdue and one that created opportunities for investment out performance. To that point, ClearBridge and Royce saw strong improvements in performance as market leadership and sectors shifted and broadened.
More recently, Western's performance has also improved, as their macro call on slow and steady global growth, very modest inflation, gradual rate increases and opportunity in the emerging markets seems to be playing out. Client interest and activity in terms of searches and RFPs has increased during this volatile period, reflecting the breadth and diversity of our investment strategies and vehicles. Against a backdrop of significant active equity outflows, seven strategies that ClearBridge generated net inflows for the quarter led by international strategies.
EnTrustPermal's coinvestment and direct lending businesses continue to gain traction and Clarion was again in net inflows for the quarter, the seventh consecutive positive net flow quarter. Further, we continue to believe significant growth opportunity exists in the customized investments solution space, where we are investing QS and in technology that will enable greater connectivity between the proprietary asset allocation tools of QS and the entire Legg Mason and affiliate organization. We expect this investment will enhance our solutions capabilities and our ability to leverage our affiliates to provide more comprehensive and customized solutions for our clients.
Our diversification by vehicle also continues to create opportunity for us. CIT vehicles long used to serve the retirement market are increasingly attractive to public pensions that need the reporting attributes of a commingled vehicle and which value their transparency and cost efficiency.
Martin Currie, recently seeded an emerging market equity strategy CIT with $400 million from an existing pension client, who wanted a better solution to access emerging market equities. This new CIT is in addition to the strategies existing mutual fund and SMA structures providing an expanding suite of emerging market vehicles. And staying with the vehicle theme, we are pleased to have launched the first active fixed income ETF in Australia in partnership with Western and BetaShares. Investors in Australia are broadly under allocated to fixed income, and this ETF gives retail investor there easier access to new income possibilities via the Australian Securities Exchange. Clearly, the quarter was difficult but we certainly continue to make substantial progress on a variety of fronts.
And now I'd like to share an important update on the next steps in our collaborative efforts. For some time, we have highlighted the evolving needs and expectations of clients and how Legg Mason broadly has embraced a fresh enterprisewide mindset of collaboration to transform the way we operate and serve clients. We deeply value our independent investment expertise and we recognize the need and opportunity to deliver even better results for clients by increasingly leveraging the breadth and scale of the enterprise. We have previously mentioned how we began our collaborative work in the areas of procurement and the creation of a consolidated financial platform, both of which are well under way.
Through this insight -- through the insight and the confidence gained from these ongoing collaborations, we are now prepared to take a bolder step forward with the creation of a new global operating platform which will make us even more effective. This platform will capitalize on our combined operational scale and the related synergies across operations, technology, fund administration, finance, real estate, human resources, legal and compliance, enterprise risk management and other corporate services at Legg Mason and certain of our affiliates. The platform in our view will enhance services to both internal and external clients, expand business investment capital, create a framework for innovation and increase profitability, which will benefit all stakeholders.
Specific cost savings initiatives include, consolidated financial and benefits systems, technology sharing across the enterprise and the elimination of duplicative support services. We will be able to better leverage specific affiliate proficiencies around the globe. And let me share some examples of that with you. Across Legg Mason, we are undertaking technology innovation initiatives on a modest scale from robotic technology to streamline accounts payable and AI that accelerates response times for cyber threats, to predictive analytics that anticipate advisor needs by combining flow, sales and marketing data and machine learning to enhance product commentary. All of this and more can make us more nimble, more efficient, more effective and more responsive to clients, if we scale them across our businesses.
Now to be clear, we are not just making short term cost cuts in response to a challenging market, rather, we are creating permanent structural changes that will result in greater effectiveness and enduring efficiencies. As we build this new business platform, we expect to realize $90 million to $110 million in annual savings, creating synergies that will free up capital to improve our operating margin and ultimately allow us more flexibility to invest in growth. And finally, we project implementation costs associated with these synergies to be between $130 million and $150 million. Now that we've made our plans public, we'll be able to work internally with greater transparency to better refine the timing of savings and the related costs which we will continue to share with you beginning next quarter.
I want to emphasize that as our clients preferences evolve and the industry continues to change, we will continue to innovate around the multi-affiliate model, as we increasingly come together when and if it makes sense for our clients, shareholders and employees while preserving the hallmark of Legg Mason, the independence of our investment expertise. We intend to stay laser focused on the development of this platform as we make ongoing progress in leveraging our scale and becoming increasingly efficient, all of which is focused on serving clients better and building a foundation of sustainable growth and profitability.
And with that, let me turn it over to Pete.
Peter H. Nachtwey -- Chief Financial Officer
Thanks, Joe. Let's turn to our highlights on slide two. Legg Mason reported a net loss of $217 million or $2.55 per share driven by non-cash intangible asset impairment charges of $365 million as well as certain tax items in global operating platform development costs. These combined to reduce earnings by $3.28 per share.
As Joe noted, we're developing a new, more efficient global operating platform that will lead to $90 million to $110 million in annual savings, 85% of those savings we see being achieved over the next 24 to 36 months with the majority of those saves realized by the end of fiscal '21. The remaining 15% of the savings are related to real estate which will take a bit longer to fully realize. It's important to note that we will also incur episodic implementation costs to achieve these savings which going forward, we currently estimate to be in $130 million to $150 million range.
Moving onto AUM, our quarter-end assets under management were $727 billion, with long-term net outflows in the quarter of $8.5 billion coming from fixed income at $5.1 billion, equity at 3.3 and alternatives at $100 million. Our global distribution platform reported a slight increase in gross sales from the prior quarter. But consistent with industry trends, we saw a pick up in redemption rates that caused our net sales to become more negative. As for investment performance, 80% and 73% of AUM beat benchmarks for the three and five year periods, while 69% and 71% of AUM beat Lipper category averages for the three and five year periods respectively.
From a capital management standpoint, we paid $30 million of dividends in the quarter. And on the recognition front, Legg Mason and our three largest investment affiliates were once again named Best Places to Work in Investment Management P&I Magazine. Legg Mason was also ranked number three among capital markets companies, and then in the top quintile overall in the Forbes, JUST Capital Rankings. And finally, Western asset is sub-advising first active fixed income ETF in Australia, which as Joe mentioned, launched in early November.
Now let's take a look at our affiliates on slide three. As previously noted, our long-term net outflows in the quarter were $8.5 billion driven by fixed income and equities. Thanks to our asset -- diverse affiliate mix, AUM for the quarter was down just 4%. And you can see at the bottom of the chart that both large and small cap equity indices were down dramatically, while fixed income and real estate industries -- indices were positive which helped to stabilize our AUM versus peers in a highly volatile quarter for the equity markets. Despite the challenging market backdrop last quarter, Western and Clarion saw positive AUM growth. Western's was driven by over $10 billion in liquidity inflows, while Clarion had $900 million in positive real estate AUM flows in the quarter. Unfunded wins and committed but uncalled capital were down slightly from the prior quarter, primarily reflecting fundings, particularly in the month of October. FQ3 is seasonally our lowest quarter for unfunded wins and committed on call capital, but despite that historical fact, this quarter was our third highest quarter ever on record.
Turning to slide four, you can see that the mix of our unfunded wins and committed uncalled capital remains diverse with a little over 60% in fixed income and roughly 20% each for equities and alternatives. The $6.4 billion of unfunded wins and fixed income are spread across multiple flagship strategies and a similar diversification story holds true for the $2.3 billion of equities. Finally regarding alternatives, we are very pleased that our unfunded wins and committed uncalled capital remain strong at a combined $5.1 billion, with EnTrustPermal being the major contributor.
Slide five highlights our global distribution platform. As I mentioned earlier, negative net sales for the quarter were driven by pickup and redemptions consistent with industry trends. While as Joe noted, gross sales were slightly higher than the prior quarter. The pickup and redemption's reflected both the volatility in the markets during the quarter, as well as seasonal tax law selling at the end of the calendar year.
In terms of financial highlights on slide six, you'll note the combined impact of non-cash impairment charges, certain tax items and global operating platform development costs, reduced earnings per share by $3.28. Operating revenues decreased by $54 million or 7%, driven by lower average AUM as well as a $17 million decrease in pass through. Non-pass through performance fees were little over $5 million at the low end of the forecasted range for the quarter. We estimate the next quarters' NPT fees should be in the range of $5 million to $10 million. Also pass through performance fees of Clarion, we estimate will add another $10 millions to our GAAP revenues.
Operating expenses increased reflecting the noncash impairments, but excluding those charges, expenses were down $47 million or 8%. Our adjusted operating margin was 21.1% for the third fiscal quarter verses 23.6% in the prior quarter. This primarily reflects lower revenues as well as the global operating platform costs. In addition, our GAAP gap tax rate came in at 23%, reflecting the impact of noncash impairment charges and the other discrete tax items in the quarter. Looking forward, we expect our effective tax rate for FQ4 to come in at 27%. And our cash tax rate, excluding the noncash impairment charge was 7% for the quarter, a rate we expect will hold for the remainder of fiscal '19. Looking out further, we believe cash taxes will be in the single digits until approximately fiscal 2024, which is one year later than our previous projection.
On slide seven, you can see that AUM decreased primarily due to market declines and long term outflows. The operating revenue yield came in at 37 basis points driven by mix and markets, specifically you can see that equity AUM as a percentage of total AUM dropped to 25%, while liquidity AUM increased to 10%.
Operating expenses on slide eight, increased by $318 million due to the intangible impairment charges. Excluding those charges, again expenses were down $47 million reflecting reduced AUM and operating revenues. Higher other expenses include a professional fees of $5.9 million related to our work on the global operating platform as well as higher advertising, conference and T&E expenses in the quarter. Next quarter's operating expenses will include additional global operating platform costs of $9 million to $11 million combined of approximately $3 million in occupancy expenses and $7 million in other operating expenses.
Turning to slide nine, total comp and benefits decreased by $48 million due to decreased incentive comp and lower operating revenues. This led to our comp ratio for the quarter coming in at 54% in line with our forecasted range. Next quarter, we expect our comp ratio to increase reflecting a pickup in seasonal expenses to range for 54% to 56%. We will also have two other items hitting in fiscal Q4, including a noncash charge related to the final tranche of units being issued under the Royce Management Equity Plan. As you may recall, the Royce MEP effectively equities a portion of their team's existing revenue share. So there's no change in the percentage of revenue coming to the parent, but there is a noncash gap charge. The other item relates to an affiliate downsizing program, separate from the global operating platform that was announced to those affiliates employees today. These two items will result in charges of approximately $7 million.
On slide 10, our operating margin as adjusted decreased primarily due to the drop in revenues, but also reflects $5.9 million and costs associated with the global operating platform which reduced the adjusted operating margin by 1%. We would expect next quarters margin to be lower, reflecting the impact of seasonal comp increases as well as the increase in global operating platform costs.
Finally on slide 11, you'll see a roll forward from fiscal Q2's net income of $0.82 per share to this quarter's net loss of $2.35. Last quarter's results included a discrete tax benefit offset by real estate charge and global operating platform costs which decreased earnings per share by $0.01. This quarter's results included $0.14 of lower operating earnings, reflecting reduced revenues and increased other operating expenses. Non-operating earnings were $0.04 higher as a distribution on investment holding more than offset the impact of lower mark-to-market on seed investments. And lastly, fiscal Q3 items included the noncash impairments, net tax expense items and global operating platform development costs totaling $3.28.
So thanks again for your time this evening. And I'll now turn it back over to Joe Sullivan.
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Thanks, Pete. I'd like to close our formal comments this evening with a bit of perspective. As I mentioned, we have been working on achieving greater collaboration across the enterprise for quite some time. And today's announcement is not driven by short-term market conditions, but rather informed by client expectations, industry challenges and the opportunities identified and the insights achieved through our increased collaboration. It is the natural evolution of our corporate strategy over the last five years, which now focuses on further enhancing the client experience.
We are in the process of striking a better balance between the independent expertise that we and our clients deeply value, with the operating efficiency that the industry demands.
We remain committed to our mission of investing to improve the lives of our clients, our stakeholders, our employees and our communities. And we believe that the changes we are announcing today reflect the importance of our continued commitment to put our clients first to help us achieve our mission for all of our constituents.
And with that, we'll be happy to take your questions.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question in the queue comes from Robert Lee with KBW. Please proceed with your question.
Robert Lee -- KBW -- Analyst
Great, thanks. Good afternoon, guys. Thanks for taking my question. I guess, why don't we star-off with the initiatives, the cost savings initiatives and the efficiency initiatives. So first question is, Joe, as part of this three multi-parts. Number one, how is the revenue sharing arrangements with the affiliates going to evolve or change because of this and it's worth thinking of -- also try and get maybe a sense of how we should think of the pattern of costs versus savings, kind of getting the impression that maybe over the next year or so will see the implementation costs flow through at least the first part of the outflow (ph) impact earnings whether maybe later on when we start to see some of the expense saves. And I know you're going to talk about a little bit more next quarter, but just trying to get some sense of how they're going the trade -- what the trade offs will be over the coming say 18 months or so?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Sure. Good questions, Rob. Thank you. Let me maybe provide a little high level perspective on this and then Pete, I'm going to ask you to jump in on the -- some of the other more technical questions if we can. I think at a high level, the way we think about this initiative is, really as a capital allocation question. We can continue to allocate capital efficiently across Legg Mason and the affiliates with significant operational redundancy or together we can choose to come together to create a better combined platform for less by leveraging our collective scale, that's what we're choosing to do it. And in the process, we will realize meaningful synergies, and then importantly, look to invest together those synergies to grow.
I think that, as a enterprise, we see, all of us see that the industry is changing and that in a period of significant margin pressure, more investment than ever is required, and things like technology or marketing or distribution and service and support. In our case, we're in a perverse kind of way, fortunate to have the ability to create that capital to invest without sacrificing other capabilities or quality by eliminating redundancy and redeploying that capital. So we can we can read a play that toward supporting clients better and then ultimately driving growth. So, we kind of see this as a capital allocation question. Pete, do you want to talk about the rev shares and then the timing? I think Rob asked about.
Peter H. Nachtwey -- Chief Financial Officer
Sure. Yeah, thanks again Rob for those questions. The simplest way to think about it from a rev share standpoint, it will be more or less the lift and shift of costs. And then we're working with affiliates is to what the mechanism would be to adjust. But the idea is that not disadvantage the affiliates from a bonus pool standpoint, but get all these costs that we believe we can capture significant synergies from -- at the parent level. So think of it as a lift and shift in that respect. In terms of timing -- and we try to be very, very thoughtful about what you and others on this call will need for your models.
So, we're going to be giving you on a rolling quarterly basis, whatever the next quarter impacts are in terms of costs to implement this and then what the saves are as they start ramping up. But as Joe also mentioned, we needed to get more people over the wall to really get down to specifics. So I think the two key things hopefully we've given you are -- again the next quarter impacts and then, what you need in terms of your price targets. Though the ultimate level of savings whether you're using a DCF or you are using a forward multiple. The nice to have sort of things we are going to be working toward to get you in April which would be more specificity on the exact timing and geography. But as you said, we'd expect the cost to be a little more front end loaded and the ramp up and saves to come a little bit later.
Operator
Thank you. (Operator Instructions) The next question in the queue comes from Chris Harris with Wells Fargo. Please proceed with your question.
Chris Harris -- Wells Fargo -- Analyst
Thanks, guys. A another question on the cost savings plan. If I'm doing my math correctly, it looks like the plan once fully baked gets you into the 25% or so range on an adjusted margin basis. Longer term, is that kind of how we should be thinking about the impact from this? Or some percentage of the cost save is going to be offset by potential investments you guys like -- might want to make elsewhere?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
So, I think, Chris, the way -- the way we think about this is, the way we think about all of our capital allocation, right? And so, this will certainly increase our EBITDA by $90 million to $110 million. And then from there, when that's fully baked in we will do what we always do, which is determine how we want to allocate our spend off the P&L versus the cash that we that we generate. So I think there's -- we are certainly going to have more investment in the business, we don't have that today. And a fair amount of what we do in terms of investment, you never actually even see it. It's done during our annual budgeting process, most of which we've self funded over the years. We'll continue to do that.
But we also know that, there's an increased requirement for investment in the business and when we do something that would be meaningfully out of your model and we don't have that today. So, I'm just full disclosure -- we don't have anything that we see today. But when that's fully baked in, and then as we've done in the past, we see a material amount that you should be aware of for your models, we will identify it and call it out for you.
Peter H. Nachtwey -- Chief Financial Officer
Yeah, I think, Chris, we're where we see this as a roughly 400 to 500 basis points in margin improvement. And obviously, the volatility in the markets here has impacting everybody's P&Ls, but that 400 to 500 should get us more in the in the high 20s over time. And then as Joe said, again on the investments -- keep in mind, some of those might hit where we see the opportunities for growth or to improve what we do for clients, some of that could be hitting P&L, but we also envision some, that's going to be hitting the balance sheet and then allow us to ramp back up in terms of our return on capital of the shareholders overtime.
Chris Harris -- Wells Fargo -- Analyst
Okay. Thanks, guys.
Operator
Thank you. The next question in the queue comes from a Mac Sykes with Gabelli Research. Your line is open, sir. Please proceed.
Mac Sykes -- Gabelli Research -- Analyst
Hi, good afternoon, everyone.
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Hi, Mac.
Mac Sykes -- Gabelli Research -- Analyst
Joe, I think you've talked about the importance of scale in the past, but if we look at the affiliates today, there seems to be a large bifurcation between the top four and through the rest in terms of AUM at this point. So, how do you reconcile the importance of maintaining the current brands versus having a more consolidated base of affiliates to leverage?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Well, look, these brands have developed -- they've developed -- these companies have developed brands with their investment expertise. I think what we're doing today, Mac is exactly the point. We're looking to create an operating platform that all firms, whether large or small can tap into and benefit from the efficiencies of scale. So that's I think exactly what we're trying to address. And I think it's important -- this is maybe an important place to mention this. I can hear already -- and I understand why, but I can hear already in your questions that this is all about sort of the cost cutting and its really -- or cost savings.
And the reality is yes, we fully expect and will achieve significant synergies as a result of this. But this is about also designing a world-class global operating platform better than what we have today for everyone who's on the platform. And so, yes, we believe we can do better and do more for less but it's not just about going in and asking everybody to cut X percent of their budgets. We are designing a new platform, some things will be outsourced, some things will be insourced. We will choose how we want to design and structure this new global operating platform. So it's not -- it's more than just a cost cutting exercise, it's about building a better operating platform and capability to deliver more for our internal clients as well as our external clients.
Mac Sykes -- Gabelli Research -- Analyst
Maybe just one quick follow-up. Given that the focus that you'll be doing in terms of redesigning this whole platform, how are you thinking about still trying to stay up with innovation in some of the other trends that may occur over the next 24 to 36 months?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
I think Mac, I think they're one in the same. I think as I mentioned in my prepared remarks, our executive who's going to be leading this design phase has made it very clear and I agree with her, that this is about creating innovation and using innovation, using technology and other innovative resources and approaches to designing an even better -- and even better platform. So what we're going to be doing is, standardizing things where it's appropriate to do so, but continuing to differentiate where it's valuable to our clients to do so. So, but we do that by innovating by -- the one thing that's nice is, we've given this group, we've got a team in place working on this already and we've not encumbered them with you have to use this or you can't use that. We've let them kind of Whiteboard it and come up with the best design they can to deliver more for less for our internal clients and for our clients -- external clients. So, I think innovation is core to this creation of this global operating platform.
Operator
Thank you. The next question comes from Kenneth Lee with RBC Capital Markets. Please proceed, sir.
Kenneth Lee -- RBC Capital Markets -- Analyst
Hi. Thanks for taking my question. I think you've touched on this briefly and this is the question on the new global operating platform. How should we think about who's going to be bearing that the implementation costs, the $130, $150 million, is this sort of like purely within the parent level or that -- will the affiliates be bearing some of that costs. And then conversely in terms of the incremental benefits, in terms of incremental revenues generated as well as the expense savings, maybe give us some thoughts about how that -- those that -- those benefits will be claimed to either the affiliates or the parent level Legg Mason. Thanks.
Peter H. Nachtwey -- Chief Financial Officer
Yeah, Ken, thanks for those questions. First of all, the simplest way to think about this is, the parent going to be absorbing all the costs of the implementation. So the parent also going to be retaining all the benefits. So that piece of it is basically very clear. And on the forward basis in terms of some of the outcomes Joe was alluding to got a bunch of work going on with the affiliates around growth initiatives, where we both will benefit a proportionate for the rev share that the parent (inaudible). But to keep it simple, the $90 million to $110 million is coming to the parent and the $130 million to $150 million will be in (inaudible). Does that help?
Kenneth Lee -- RBC Capital Markets -- Analyst
Yeah, very helpful, very helpful. And just one quick follow-up. Is there any related updates on deleveraging plans given the potential costs associated with a new global operating costs going forward? Thanks.
Peter H. Nachtwey -- Chief Financial Officer
No, as we've said, we intended to effectively retire the 2019 notes when they come due in the middle of the summer.
Operator
Thank you. The next question comes from Dan Fannon from Jefferies. Your line is open, please proceed.
Dan Fannon -- Jefferies -- Analyst
Thanks. Good afternoon. So more on the implemented -- on the optimization plan. I guess, are all the affiliates participating? Just thinking about some -- with your distribution, you're not everybody uses what you provide. So just curious about the participation from your current affiliates. And then as we think about the addressable fixed costs or cost base that this $90 million to $110 million is coming from? Just to get some sense of what percentage you're looking to address?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
So Dan let me answer the first part, then I think Pete can pick up on the second part. First of all, I'd ask you to remember that all of our affiliates are participating in what is the initial collaboration work on procurement and the common financial platform. And as I mentioned in my opening comments, that those two initiatives are well under way. In this design phase of our new global operating platform, we've started this by working with the largest affiliates, where, when in combination with Legg Mason, we can leverage scale and then for those whose businesses are more straightforward in nature or whose businesses or firms were especially important to participate in this design phase.
I would tell you that, the participants by our affiliates number or total more than 85% of our AUM is represented by affiliates that are in this design phase. I would say at this point, just really, the only firm that I don't expect or that's maybe declared not to be part of this incremental part of our -- of the global operating platform will EnTrustPermal. And I think that's just, a lot of its given the nature of their business which is quite different. We've got a couple of other of our affiliates that are evaluating and may or may not come on. But as I said, we've got about 85% of our AUM represented on the platform.
Peter H. Nachtwey -- Chief Financial Officer
And then Dan in terms of the cost base, it's roughly in the range of $750 million. And if you're going to crank the percentage on that pretty quick, it's going to shake out between 10% to 15%. So one of the ways to think about this is just kind of back office merger synergies that we never really tried to capture in this model. But I think you'll find that this is very consistent with what companies typically experienced when they're doing M&A.
Dan Fannon -- Jefferies -- Analyst
Great. And just as a follow-up in terms of the impairment charges that were taken in the quarter, could you break those down and on the EnTrustPermal side, is this still Permal related impairments or is the more recent EnTrust addition a part of what was taken this quarter?
Peter H. Nachtwey -- Chief Financial Officer
So, yeah, it really was combination of the two things. It was commingled funds and really kind of the legacy, what I call, your grandfather's fund to funds predominantly more so in the Permal side but also a little bit on the EnTrust side. And then as well, the rare trade name it was part of that. So, but the -- what we're seeing -- and an important thing to remember on the EnTrustPermal side of life is, they're working to disrupt themselves. They know that the traditional fund-of-funds is kind of not where the big part of the markets going to be. There's always going to be some users of those, but not the big institutional clients. And they're going out to those clients and getting them involved in some of the other things they're doing, including the marine finance, the aircraft leasing business that Joe is talking about, that they're ramping up, et cetera.
Unfortunately, when those clients move assets from the commingled funds over into these new vehicles, the gap doesn't allow us to move the asset over. So it's not like we're necessarily losing clients, in some respects not even losing AUM, we're just shifting around within the system.
Joseph A. Sullivan -- Chairman and Chief Executive Officer
But we -- I mean we are fair, we are loosing and there has been attrition there. But to your point -- to Pete's point, EnTrust has done a really good job at retaining a fair amount of what would otherwise just leave the commingled -- would leave the firm because they are in commingle vehicles and vehicles that are not as attractive anymore. And so, that's a big part of the reason we did the EnTrust transaction, brought Gregg Hymowitz and team onboard was because they were further ahead in terms of evolving that business and we're seeing that take place.
Operator
Thank you, sir. The next question in the queue comes from Craig Siegenthaler with Credit Suisse. Your line is open.
Craig Siegenthaler -- Credit Suisse -- Analyst
Hey. Good evening, Joe and Pete.
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Hi, Craig.
Craig Siegenthaler -- Credit Suisse -- Analyst
So, I'm sure it's not a big surprise, but I want to come back to the new global operating platform initiatives. And among the five plus areas you listed earlier on the call that you refocus on cutting. And I heard the IT, legal compliance, real estate. I'm just wondering like, what the two or three biggest drivers are to get you to that $90 million to $110 million?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Well, I think -- look, I think there's a number of areas. One is clearly, and this is a sensitivity, but clearly, there's going to be redundancy. I've mentioned that redundancy in headcount and in positions, I mean, that's going to be a part of it. We have some real estate considerations, we have technology consolidations that we can take advantage of. We have an opportunity here to really to reimagine and without being burdened by legacy commitments or systems. We can look at everything that we have and that we want to retain and that's great. And we can move to things that are different and more efficient from a cost perspective.
And so technology is going to be a good example of that. But I would say, I mean, there's going to be a redundancy in positions. I would say, real estate. I would say technology. Pete, am I missing anything?
Peter H. Nachtwey -- Chief Financial Officer
Yeah, it's pretty well Pro rata across all of the support functions, Craig when they're based on their size. And beyond that, it's kind of hard to give you more details at this stage.
And you know in terms Craig, in terms of technology. I mean one of the things that we've never been able to really capitalize on. Our technologies and capabilities that are embedded in individual affiliates that are not shared across affiliates. And so now for the first time, we're going to be able to do that. That'll take some time. But we have unique and distinct capabilities at various of our affiliates that can now be leveraged across other affiliates either in support of clients or in support of the investment managers and things like that. So, it's about becoming more efficient but it's also about leveraging existing capabilities that are resident and only leveraged within certain affiliates.
Craig Siegenthaler -- Credit Suisse -- Analyst
Got it. And then this part wasn't clear, so maybe just walk us through this point again. But will the affiliate also share in the onetime implementation costs? So I'm just wondering is the actual total implementation costs including what may affect their comp level or their bonus points? Is it more than 150, or is the implementation costs only borne to Legg Mason shareholder?
Peter H. Nachtwey -- Chief Financial Officer
Yeah, again, Craig, the best way to think about it is just kind of lift and shift that we're going to identify the costs that we think, we can do much more effectively on a centralized basis. So, it's not just about cutting that, it's important to keep coming back to that. We think we'll just do it much, much better taking advantage of our scale. But we are going to absorb all the costs of getting the saves at the parent level and the parents are going to retain all of the savings.
Joseph A. Sullivan -- Chairman and Chief Executive Officer
I want to make a -- this is maybe a point -- a place to make an important point. This isn't Legg Mason centrally deciding, all the affiliates plugging into a Legg Mason capability or Legg Mason HR or Legg Mason IT, but this is about a design team putting together the best of what is within our affiliates or within Legg Mason or outside of the firm and creating an operating platform to which we Legg Mason are contributing our scale and our needs, OK? So I just want to make that clear, because I think it's distinct. This design team that we have is led by an executive from Western and it is also on the team, there are more affiliates, and actually Legg Mason executives participating on the design team.
So this is not, again, something that we're expecting all the affiliates to plug into as part of Legg Mason. We are part of the design team ourselves, but just a part of it.
Operator
Thank you, sir. The next question in the queue comes from Patrick Davitt with Autonomous Research. Your line is open, please proceed.
Patrick Davitt -- Autonomous Research -- Analyst
Hey, good afternoon. Thank you. We saw last year the core bond strategies in Western that the Fed's more aggressive rate hike stance had been a problem for performance here and there but the pipeline has held up pretty well. I'm curious how that looks now that the Fed appears to be in a more hold stance. It would seem to me that, that might be a better environment for the strategy. And wondering if you're starting to see more traction with it given, I guess that more dovish stance?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
So a couple of thoughts. One, I think you need to start, I mean, it always helps to start with performance. And we've seen, as I mentioned in my prepared remarks, that Western's thesis around the markets and rates and opportunities, the curve, emerging markets and things like that. We've seen that those -- that, that thesis is starting to play out and the performance has turned in a positive way, so that's always helpful and always important. We did see, as part of December, and we have seen a little bit in January some rebalancing that is not unusual at year end ever and it's also not unusual given the kind of violent moves that we had in the marketplace.
What we do see though, we have some our activity levels across the enterprise, as I mentioned in my notes, searches and our fees and things like that did pick up and that certainly included on the fixed income side both at Western and Brandywine. And so we are seeing, I would say of our unfunded wins at the end of December, I would say something on the order of 50% to 60% or so are in fixed income. And then January, we've seen a continued pick up in that regard. So probably, two-thirds in January or December of our unfunded wins and maybe picking up even a little bit beyond that in January. So, I think performance has helped both at Brandywine and Western.
And I think -- we saw in January, for example, a nice -- we actually during the quarter, the fourth quarter, we actually outperformed and took share in retail fixed income, we've seen that pick-up nicely going from outflows in that fourth quarter but the lower or slower outflows, lower outflows than the industry to now picking up in January back to inflows. So, I would say, we feel really good about where we are on the fixed income side right now. But it's going to be lumpy, just because there are these rebalancings that happened in December and sometimes into January.
Patrick Davitt -- Autonomous Research -- Analyst
Okay, thanks. And just as a quick follow-up. I know you hate talking about it, but is there any reason to believe that you aren't seeing kind of a similar significant improvement in inflow trends that we've heard from some of the other firms thus far in January?
Peter H. Nachtwey -- Chief Financial Officer
I think we're -- I mean, I think we're seeing a significant improvement. I would say just to -- because I think this is where you're going with this. We would right now and it's, again, still early and we're going to have some ticking and tying to do before we can we report numbers, but we're going to be out modestly in January at least the it looks right now. That is driven by fixed income, which I just mentioned. And really on the institutional separate accounts side, and again, that's largely rebalancing. We're positive in equities, we're positive in alternatives at the moment, that can obviously, before Dionne gets the final numbers and racks and stacks it. But right now, we will be modestly out in total.
Operator
Thank you. The next question comes from Brian Bedell with Deutsche Bank. Your line is open, please proceed.
Brian Bedell -- Deutsche Bank -- Analyst
Great, thanks. Thanks very much. (inaudible). Just coming back to the global platform, maybe the global platform. Maybe two questions on it, one, just the timing of when you think the say, the cost saves will begin to outweigh the implementation costs. And then, just like as you build this, obviously, this is a very long term project. And as you mentioned, Joe, there's a lot of design work to do and you wanted to get it out in the open. Can this evolve significantly from where you are now? i.e. either generate more cost saves? Or as you mentioned that, you're going to be using it for external clients? Can you make this almost were have you envisioned this to become even almost a business model or a potential revenue or sales generator?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Good thoughts. It's an interesting idea. Look, I think -- I think what's going to happen, I want to be careful about this. We've got a lot of wood to chop just to get the $90 million to $110 mill. But I think what's going to happen is now that we're public and now that we're working not just within Legg Mason but within all of our affiliates and we've got a design team that is cross functional and cross affiliate and across Legg Mason. We're going to get in I think, and find other opportunities to work more collaboratively whether that be from a cost perspective or from a revenue perspective. And so I think this is to me -- we've been talking now for a better part of a year about increased collaboration at Legg Mason. Now we're putting meat on the bones, real meat on the bones with respect to this from an efficiency standpoint.
But we're also working from an effectiveness standpoint. We've got teams working across Legg Mason and our affiliates on growth initiatives. And we are working on how do we serve clients better, how can we be more effective with clients? And so I think this is the beginning of a really intensified level of collaboration. Certainly on the cost side, we're going to be very aggressive on making sure that we're not-- we have an opportunity to rebuild this platform and redesign this platform in the most efficient and effective way possible. And that's where we come up with this $90 million to $110 million and we are very confident with that. But that we -- I have to believe that as we get in there, we start uncovering more things, we can find ways to be even more efficient. But really, for me on the growth side more effective and how we work together with clients, I think is going to be the exciting thing, because that's really enduring long term. Pete, do you want to give more--?
Peter H. Nachtwey -- Chief Financial Officer
Yeah, and going back on the timing questions. And Brian, the one of the things for everybody on the phone, one of the things we're very focused on is, by the time we're doing our March quarter call, we'd hope to have a lot more detail in terms of the timing, but right now, it's a little bit difficult to give. What we're very focused on is, we always referred to as the hippocratic oath of first do no harm. So, we want to make sure, as we're focused on the end game that we're being very cautious about anything that impacts clients, we think very little of this impacts clients, but anything that remotely touches there, we've got to be very careful and it's a people business. So, we've got to be very sensitive to our people.
Having said that as I said earlier, we do see the implementation costs being a bit more front-end loaded and the save starting to ramp a bit later. So that probably starts to flip over in kind of mid 2021 when you'd be seeing where we think of a big slow down of the implementation costs and much more of the actual savings ramping up. And I keep in mind, there is a piece of this, and again we'll look to get you more details in -- off the March call. But on real estate that's going to be out we think a couple years beyond that. And again, one of the things I described this as episodic, because we expect it to be lumpy when we've got contract breakage, whether that's leases or other types of things. So as we get more clarity on that, we will get it to you.
Brian Bedell -- Deutsche Bank -- Analyst
It's great. Great, thanks for all the color.
Operator
Thank you. The next question in the queue comes from Bill Katz with Citigroup. Your line is open sir, please proceed.
Bill Katz -- Citigroup -- Analyst
Okay. Thank you very much. I think I'll leave the ops opportunities aside for now. Just looking at the fundamentals, Joe, just looking at the slide that has a fee rates by bucket. Could you talk a little bit about the drivers of the decline in the equity and the alternative book. How much as just sort of market non-US versus US versus mix and how you sort of see that trending as new business comes in the door?
Peter H. Nachtwey -- Chief Financial Officer
Actually maybe I'll take a stab at that an then Joe can add in if he got other thoughts. But on the equity side, a good bit of that has been Royce which is much higher end because of small capital that all predominantly retail as well. But then, clearly as we saw what happened in the equity markets in terms of the overall average. And then on the alternative side, we've got the commingled funds typically are higher fee, they also come along with a typically higher distribution expense to them, but that's been a bit higher fees than the things that it's replacing, and particularly Clarion. Clarion overall is a higher average yield than what we have at a blended rate. But being a primarily a core real estate manager, their fees are not what EnTrustPermal and the other types of also would be. So it's really those in combination of Royce on the equity side some other things and then the swap between EnTrustPermal, Legacy and Clarion.
Brian Bedell -- Deutsche Bank -- Analyst
Okay. And just follow-up by sharing the (inaudible) to global ops as I think about it a little bit more. As you think about your P&L on a go-forward basis, pro forma
a follow-up by sharing, when you come back to global (inaudible) think about little more. As you think about your P&L on a go forward basis, pro forma for all the adjustments you make over the next few years? Are you more or less margin sensitive versus a typical rev share one you're through all the redesign?
Peter H. Nachtwey -- Chief Financial Officer
We say more or less margin sensitive. You mean just are numbers sensitive or we as a management team more sensitive?
Bill Katz -- Citigroup -- Analyst
Is there -- are the earnings a little sensitive from a profit margin perspective versus maybe the prior model?
Peter H. Nachtwey -- Chief Financial Officer
Yeah, I think, what we are going to have is, we're going to have of the operating leverage coming to the parent. In the past that, we see that a lot of that just in the rev share model. So this gives us -- certainly that causes some challenges on the way if revenues are declining, then we've got to be very aggressive amazing costs but we're not managing this business for decline, we're managing it to grow and as it grows we'll be keeping more that operating leverage at the parent level.
Joseph A. Sullivan -- Chairman and Chief Executive Officer
But in many respects, I would argue Bill that it derisks the company because, if you think about it , if we get into really difficult markets, particularly for the smaller affiliates, they can't cut costs at a smaller affiliates fast enough to meet -- make up or match the market in some cases. And so, I think this ultimately, we would be more in a position. We haven't had to do this so far but we will be more in a position to have to kind of adjuster or manage rev share agreements in more difficult market environments. So I would argue this actually derisks the firm from that, because we can control those costs a little bit better.
Operator
Thanks. The next question to queue comes from Mike Carrier with Bank of America Merrill Lynch. Your line is open.
Michael Carrier -- Bank of America Merrill Lynch -- Analyst
Thanks, guys. Just a few clean ups here. First, just on the -- I think the discrete items and then the global operating from class in the quarter. If you could just let us know like which line items those came through? And then on the guidance for the next quarter, just on the comp side? I think you mentioned the 54%, 56% ratio and then you mentioned some of those onetime items, I think the $7 million. Is that because it just onetime? Is the 54%, 56% kind of course, it just the seasonal costs? And then we should expect the $7 million in the one-time?
Peter H. Nachtwey -- Chief Financial Officer
Yeah, well, so this quarter, virtually all the onetime costs, the related global operating platform were in the other expenses. so no -- nothing really impacting comp at this stage. And really the same thing next quarter, that's all going to be another expense in real estate. And I'm not sure, actually I had mentioned. The real estate charge relates to something we're going to be downsizing space here in Baltimore. So all those things. Our comp stuff is really going to happen later, and this is where -- as I said before, this is where we can be very focused on doing the right thing. It's a people business, and we're just getting a lot of people over the wall to focus on where we go from here. And then the 54% to 56% (ph) does not include that anything for global operating platform at the stage.
Michael Carrier -- Bank of America Merrill Lynch -- Analyst
Okay, got it. And just on the discrete items, just where were those, because the global op, I think you mentioned on -- in the other expenses?
Peter H. Nachtwey -- Chief Financial Officer
Yeah, and that was all intact. So a couple things you may recall. Yeah, December is a quarter where we do true-ups normally for the fiscal year for GAAP purposes and then we were still getting echoes from the the Trump Tax Act as are many companies. So Marriott came out talking about that today that there's going to be a number of things that's going to have legacy items as they come out with more specifics around the regs, so there's a couple of those things in there. But that's why we keep coming back to cash tax as most of that just impacts our GAAP number and makes the cash number still hanging in there about 7% cash tax rate.
Operator
Thank you. We have time for one more question, and this question comes from Michael Cyprys with Morgan Stanley. Please proceed with your question.
Michael Cyprys -- Morgan Stanley -- Analyst
Hey, good evening. Thanks for squeezing me in here. Just coming back to the global operating platform beyond the cost saves that you spoke about. I guess, what goals do you have for this? Within three years time, do you view it as successful. What will have occurred and can also you also elaborate around your goals around improving the client experience? How different like that look in three years time?
Joseph A. Sullivan -- Chairman and Chief Executive Officer
So, good questions. I that, I'd like to see us come together, and I mentioned this a little bit earlier in terms of the client experience. I think we've got opportunities from a technology standpoint that are sort of latent or resident within various of our affiliates that again can be leveraged across more. And I think that we can -- by coming together and leveraging existing technologies and then secondarily investing in more and new and different technologies. I think we can support our clients in a more effective way. I also think that, that we can -- I think what we need to do is, if you think about it, the way we support clients these days is in nine or 10 different ways. And I think increasingly, we've talked about the fact that clients are doing business with fewer partners.
And so the question we have to ask ourselves is, how do we support our clients, our collective clients in ways that they want to be supported. And are there thing that we can do? And we haven't solved for that, we've haven't landed on that, we're working on that and it's different by geography, right? It's different in the US and it's different by channel in the US. There's certain ways that we is appropriate for us to cover the home offices in the intermediary channel. There's different ways that you cover insurance sub advisors. There's just different ways depending upon the channel, the geography. And so I think utilizing technology, making it easy to do business across our affiliates with potentially in the ways we contract with them and things like that.
We just make it by virtue of our model a bit more cumbersome than other firms with whom they're doing business. And so we need to look for ways to reduce those barriers and those challenges to doing business with us. Already many of our affiliates work through our global distribution platform and share sort of coverages in remote locations where it would be hard for any affiliate to necessarily have personnel there or staff there. Are there more opportunities for us to share and expand our global footprint to be able to serve and cover more clients? Those are the kinds of things that we're currently exploring.
Michael Cyprys -- Morgan Stanley -- Analyst
Great. Thank you.
Operator
Thank you. That concludes our question-and-answer session. I would like to turn the floor back over to Mr. Sullivan for closing comments.
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Great. Thank you, Michelle. I appreciate it. And my thanks to all of you for your interest in Legg Mason. As the industry changes and the needs and expectations of our clients continue to evolve, so we need to change and evolve as our clients expect. We continue to feel very good about our independent specialized investment managers and the performance that they deliver and our ability to create products and vehicle to deliver the strategies our affiliates manage and access to those strategies that we provide through multiple channels in a global footprint. And now we're especially excited about our intensified spirit of collaboration within the enterprise that is leading us to deliver even more for clients.
I want to offer my special thanks to Legg Mason and affiliate colleagues, who keep clients at the center of all we do and I look forward to updating you on our progress next quarter. Good night.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect your lines at this time.
Duration: 64 minutes
Call participants:
Alan Magleby -- Head of Investor Relations
Joseph A. Sullivan -- Chairman and Chief Executive Officer
Peter H. Nachtwey -- Chief Financial Officer
Robert Lee -- KBW -- Analyst
Chris Harris -- Wells Fargo -- Analyst
Mac Sykes -- Gabelli Research -- Analyst
Kenneth Lee -- RBC Capital Markets -- Analyst
Dan Fannon -- Jefferies -- Analyst
Craig Siegenthaler -- Credit Suisse -- Analyst
Patrick Davitt -- Autonomous Research -- Analyst
Brian Bedell -- Deutsche Bank -- Analyst
Bill Katz -- Citigroup -- Analyst
Michael Carrier -- Bank of America Merrill Lynch -- Analyst
Michael Cyprys -- Morgan Stanley -- Analyst
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