Operator:

Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended June 30, 2024. Hello, my name is Sully, and I will be your call operator today. As a reminder, this conference is being recorded. And at this time, all participants are in a listen-only mode. And, I would like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.

Jennifer M. Johnson:

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton’s results for the third fiscal quarter of 2024. I’m joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We’ll answer your questions in a few minutes, but first I’d like to review some highlights from the quarter. During our third quarter, investors continued to be faced with a complex investment landscape due to dynamic financial markets amidst macroeconomic, geopolitical and election uncertainty. Starting with public equity markets. The S&P 500 reached an historic milestone earlier this month, closing above 5,500 for the first time and continuing its streak of strong performance in 2024. Likewise, the Nasdaq 100 also hit record levels surpassing the 20,000 mark. However, we’ve seen a pullback in late July as Big Tech earnings have disappointed and value has outperformed growth stocks month to-date. The two big themes of artificial intelligence and inflation drove growth stocks to outperform value stocks in the first half of the calendar year. AI is impacting companies well beyond mega-cap tech companies. Everyday companies and governments are examining how AI will improve or disrupt their respective operations and business models. Inflationary trends continue to moderate, which is supportive of markets. But, because stock market returns have been so highly concentrated, equity allocations are poised to broaden as we’ve seen in the last few weeks, which could provide a sustained boost to sectors and regions that have been overlooked. This trend will likely create investment opportunities favoring active managers. Meanwhile, on interest rates, consensus estimates currently expect two rate cuts by the Federal Reserve in the remainder of the year, which looks broadly appropriate to us. Recent Fed speak signals greater comfort with the latest progress on disinflation and acknowledges some signs of weakening growth momentum. As we get closer to the Fed’s rate cutting cycle, we expect traditional fixed income sectors to regain their place as a primary source for yield as cash begins to look less attractive. While spreads are tight at their current levels, we are not anticipating a sharp deceleration in activity, and our fixed income managers continue to find opportunities at attractive yields. Private markets continue to thrive, and our specialist investment managers are seeing very attractive yields in the private credit space and secondary private equity is seeing near unprecedented levels of pricing power. As investors weigh the impacts of these trends, we’re seeing a pickup in money in motion and investors becoming more active with alternatives, fixed income and select equity sectors as top priorities. We also continue to see the trend of clients wanting to work with fewer managers given the dynamic complex nature of current markets. In addition, we continue to have success engaging more and more in a consultative way with large clients leveraging the full strength of our firm. One of the benefits of partnering with Franklin Templeton is the breadth of capabilities we offer through a single global platform, making us a true partner for clients around the world. We offer access to specialist investment managers across public and private markets and asset classes and continue to broaden our investment capabilities to help clients achieve better outcomes. Now, turning to the highlights from the quarter. Ending AUM was $1.65 trillion flat from the prior quarter and an increase of 15% from the prior year quarter primarily due to the addition of Putnam, as well as positive markets. Average AUM increased by 3% from the prior quarter to $1.63 trillion and increased by 15% from the prior year quarter. In terms of investment performance, our investment teams have remained true to their distinct disciplines and time tested approaches. Investment performance remained consistent across the 1-year, 3-year, 5-year and 10-year periods. This quarter, 53%, 49%, 52% and 70% of our strategy composite AUM outperformed their respective benchmarks on a 1-year, 3-year, 5-year and 10-year basis. Turning to flows. Long-term net outflows were $3.2 billion. Reinvested distributions were $3.6 billion compared to $3.1 billion in the prior quarter, and $3.5 billion in the prior year quarter. $5.9 billion was funded out of the previously announced $25 billion allocation from Great-West Lifeco, bringing the total funded to $20.2 billion. We continue to make progress executing on our long-term plan of diversification across asset classes, investment vehicles and geographies. Client demand led to positive net flows in multi-asset and alternative strategies during the quarter. Multi-asset net inflows were $1.8 billion and driven by positive net flows into Canvas, Franklin Income Fund, Fiduciary Trust International and Franklin Templeton Investment Solutions. The investment solutions team takes Franklin Templeton’s best thinking and leverages our firm-wide capabilities across public and private asset classes to help provide solutions tailored to our clients’ needs, investment solutions ended the quarter with AUM of nearly $80 billion across the firm. Alternative net inflows were $1.4 billion driven by growth into private market strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners and Lexington Partners, generated a combined total of $1.1 billion of net inflows, and Franklin Venture Partners generated net inflows of over $300 million. Benefit Street Partners continued to raise funds in alternative credit. In May, we announced the final close of its BSP Special Situations Fund II with $850 million of total capital commitments exceeding its target. Interest from clients to diversify private debt portfolios beyond direct lending into areas like real estate debt has attracted significant high-quality engagement with investors. Turning to secondary private equity, Lexington Partners announced a dedicated strategy and highly experienced team focused on leading single-asset continuation vehicle transactions in response to increased investor demand. Lexington has invested approximately $6 billion in CV transactions to-date, and the new team will be focused on increasing its participation in CV transactions with a differentiated approach. In secondary private equity, the largest, most established managers continue to see the most interest in flows reflecting a clear bias toward them in the market. Lexington has been a beneficiary of this trend. Clarion Partners has three open-end funds that perpetually fundraise in the U.S. and this year launched a fourth open-end fund in Europe focusing on the logistics sector. Clarion continues to be well-positioned with over half of AUM in the industrial and logistics sectors and less than 8% of AUM in the office sector. With regard to the wealth management channel, we continued to make strides and open new opportunities for investors given our strength in global retail distribution and dedicated specialist sales team with a focus on investor education. This quarter, we announced the expansion of our retail alternatives initiatives with a dedicated team in the EMEA region. Looking ahead, we remain focused on product development, including new products in secondary private equity and real estate private debt. Just as a reminder, at the start of our fiscal year, we anticipated raising $10 billion to $15 billion in fundraising and alternatives. And as of this quarter, we are well on our way to reaching the top-end of that range having raised over $12 billion fiscal year-to-date. It’s worth noting that since being part of Franklin Templeton’s platform, each alternative asset manager has increased AUM and continued to grow and diversify across strategies, product vehicles and client type. Fixed income net outflows were $4.8 billion excluding inflows from Great-West. Inflows improved approximately 5% from the prior quarter. As we’ve said on previous calls, we benefit from our broad range of fixed income strategies with non-correlated investment philosophies. Despite mixed performance in certain U.S. taxable strategies, we saw client interest reflected in positive net flows into highly customized multi-sector and global sovereign strategies. Additionally, we continue to benefit from vehicle diversification with cross-border funds, ETFs and SMAs and fixed income, all in positive net flows. Notably, we saw increasing interest from clients in multi-sector credit strategies, which capitalize on our team’s ability to offer multiple credit sector exposure in one strategy in a highly dynamic environment. Equity net outflows were $1.6 billion significantly improving from outflows of $5.3 billion in the last quarter, and gross sales improved by 16%. Equity net inflows were driven by large cap value and all cap core strategies and our single country ETFs. Our single country ETF now totaled $10 billion in AUM. With a broad lineup of capabilities, we are able to deliver investment expertise across vehicle types. We saw another strong quarter of positive net flows across our retail SMAs, Canvas and ETF offerings. We are a leading franchise in retail SMAs with $140 billion in assets under management. This quarter, we generated positive net flows of $500 million, the 5th consecutive quarter of net inflows. Through innovative technologies, we are continuing to enable personalized portfolio solutions and improved outcomes for investors. A good example is Canvas, our Custom Indexing solution platform. Canvas generated net inflows of $800 million in the quarter. AUM increased by 13% from the prior quarter to $8.2 billion and continues to have a robust pipeline. Meanwhile, our ETF business continues to see strong growth and generated net inflows of approximately $3.3 billion doubling the prior quarter’s net flows and was the 11th consecutive quarter of positive net flows. Our platform provides solutions for a range of market conditions and investment objectives through active, smart beta and passively managed ETFs. Just five years ago, our ETF AUM was $4 billion. AUM stood at $27 billion at quarter-end across more than a 100 strategies. As a result of our regionally focused sales model, we continue to deepen our presence across the globe. Our non-U.S. business saw its 5th consecutive quarter of positive net flows and finished the quarter with approximately $492 billion in assets under management. Our institutional pipeline of one but unfunded mandates was $17.8 billion not including the remaining allocation from Great-West. We continue to expand our Private Wealth Management business and Fiduciary Trust International AUM has more than doubled in the past five years from $17 billion to $38 billion. Athena Capital and Pennsylvania Trust acquired in 2020 have grown almost 40% since acquisition. One of our priorities is to further accelerate the growth of our Wealth Management business through organic investments and acquisitions. Our commitment to innovation, artificial intelligence, blockchain and machine learning positions us to enhance client outcomes across the rapidly changing technology enabled investment landscape. As various aspects of the asset management industry evolve, we continue to make investments in technology across distribution, investment management and operations. Earlier this quarter, we announced that we are working with Microsoft to build an advanced financial AI platform, which will help embed artificial intelligence into our sales and marketing processes to create more personalized support for clients. We also announced plans to make a strategic minority investment in Envestnet, a significant industry platform. And earlier this week, we announced the selection of a single platform to unify our investment management technologies across public market asset classes. This will support the simplification of our operation and reduce long-term capital expenditures. Formed in 2018, our Franklin Templeton Digital Assets Group has directly witnessed the revolutionary impact of blockchain technology. The digital asset space has experienced significant growth in recent years much like the proliferation of new technologies decades ago. Capitalizing on this trend, we launched our second digital asset backed ETF earlier this week, the Franklin Ethereum ETF, to give our clients additional access to this emerging asset class. Earlier today, we were pleased to announce our collaboration with SBI Holdings, a leading online financial conglomerate in Japan. The proposed joint venture will focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies. The extensive reach of SBI’s brand in Japan aligns well with our commitment to help new generations of investors achieve their financial goals through innovative strategies. Turning briefly to financial results. Adjusted operating income was $424.9 million an increase of 1.3% from the prior quarter and a decrease of 10.9% from the prior year quarter. Looking ahead, we will continue to invest in the business to support our strategic priorities in Asset Management and Wealth Management. Finally, in June, Investment News recognized Franklin Templeton as Asset Manager of the Year. This is a true testament to all of our employees around the world and their commitment to being the ideal partner in helping both individuals and institutions achieve their key financial goals and objectives. I would like to thank our employees for always putting clients first. Now, let’s open it up to your questions. Operator?

Alex Blostein:

Hey, good morning. Thank you for taking the question. I was hoping we could start with the Aladdin announcement. I know it’s been sort of speculated for the last couple of quarters, so nice to get it out there. But, can you talk about the operational benefits and both expense, benefits and operating margins ultimately, that you expect the platform to deliver. How long it’s going to take to get fully implemented, etcetera? And as part of that, maybe Matt, you can just hit on the expense items for the rest of the year as well? Thanks.

Alex Blostein:

Great. Thank you for all of that comprehensive as always.

Operator:

Next question will be from Brennan Hawken at UBS. Please go ahead.

Jennifer M. Johnson:

Hey, Brandon. So, first of all, Lexington’s fundraising focuses this year, just to cover a little bit of that, has been middle market and co-investment, and that’s gone well. Meanwhile, they’ve been obviously deploying Fund 10. And, basically, the message is that they have been deploying it faster and at higher discounts than historical. So, it’s looking very good. We don’t have a specific date, but it is quite possible that they will enter the market sooner than they anticipated just because of the ability to deploy the capital faster. And, I think we all see it, right, the liquidity that’s needed in the space. They also interestingly, we mentioned it in the opening remarks about their continuation vehicle. So, they have about $6 billion that they’ve done where these GPs have a particular holding that they want to retain, but some of the LPs want liquidity, so they spit it out into a new vehicle. Lexington hired a market leader in that. They actually think that there’s opportunity to even create a fund in that instead of having it be part of, their traditional funds. So, I think that’s going to be another opportunity for Lexington.

Brennan Hawken:

Thanks for that. And just, Jenny, the discounts that you referred to, we had heard that those discounts have actually begun to narrow. Are they still seeing those wide discounts in the marketplace? Or they --

Brennan Hawken:

Yes. So, still at attractive levels, I guess, even though they’ve narrowed?

Brennan Hawken:

Thank you.

Craig Siegenthaler:

Thanks. Good morning, everyone. So, my question is on the $25 billion AUM allocation from Great-West. So, you’re about $5 billion away, after this is reached probably in a few months. Can you talk about the incremental upside to this relationship over time beyond the ‘25?

Adam B. Spector:

Yes, sure. So, with any client, I think you see a relationship grows over time. So, the first $25 billion was really something that was more contractually oriented throughout that process. We have been able to meet many Great-West Lifeco executives, as well as, the related power companies. We are in the midst of product development with them. So, the initial allocation has really been based on the types of products that insurance companies generally are interested in. And, I think if you look at most insurance companies, you’ll see significant allocations to some core fixed income as well as a tail that goes to alternatives. That has been the allocation we’ve received so far. But, what we’ve been able to do since acquisition is to work with Great-West, Great-West Lifeco as well as other power companies to develop newer products both for the retirement platform as well as doing things, on a JV venture on the insurance side. So, we are, not at a point yet where we can pinpoint what those will be, but there is significant product development going on, with Great-West, and we think that we will continue to see, the allocations broaden out from the core fixed income that has been the basis of things so far.

Craig Siegenthaler:

Thank you, Matthew.

Dan Fannon:

Thanks. Good morning. Matthew, I was hoping you could clarify or expand upon, what you guys are doing to offset the implementation costs, with the new tech projects. So curious, what those initiatives are, if you could be more specific. And, is there some phase in of that, or are those ongoing now so we shouldn’t think about any kind of catch up period between the or mistiming of some of the implementation costs versus the ongoing savings?

Dan Fannon:

Thank you.

Operator:

Next question will be from Michael Cyprys of Morgan Stanley. Please go ahead.

Jennifer M. Johnson:

Yes. So, I mean, we’ve been in Japan for a long time. Fortunately, Putnam actually has great relationships in Japan. And as a matter of fact, this quarter, I think we had $3.2 billion in net inflows in Japan. Big part of that was institutional business and with Putnam. Japan on the retail side has been a little bit more difficult and it is a market that is beginning to launch ETFs and starting to talk about digital assets. And, honestly the foreign investment shop, it can be difficult to penetrate that. So here with SBI, they have a tremendous reach. I mean, they’re probably the largest digital financial conglomerate. And so it’s I think it’s a 51% owned SBI, 49% Franklin Templeton. And, we’ll be launching joint ETFs. And, as the digital market opens up, we’ll be able to launch products there in the crypto space as well.

Michael Cyprys:

Great. Thank you.

Brian Bedell:

Great. Thanks. Good morning, folks. If you just circle back on the ETF strategy, basically $27 billion like you said. But given the very wide range of products you have and strategies you have across the entire complex, what’s the desire to more substantially expand that ETF franchise? Is there an ability to clone more active product or is it more of a two-pronged strategy of doing that and rolling out more passive product? And then if you could just talk about connecting that with the or how easy it is to do that with the new Aladdin platform realizing it’ll take some time, of course.

Adam B. Spector:

Yeah. I’d add a few things, Jenny. The flow there has been quite strong for us at 3.3 in net flow, this quarter and that’s 7 quarters in a row where we’ve had about a $1 billion or more, in flow. As Jenny said, that flow is coming from a geographically diverse base where we saw about $900 million coming in from EMEA, and about $0.5 billion coming in from the Americas region. I’d also just follow-up with Jenny’s point on being agnostic in terms of vehicles. Our most significant and longest tenured mutual fund, US mutual fund is the income fund. But if we look at the income fund for this quarter just as an example, we saw very slight outflows in the mutual fund, but positive flows in the related SMA, positive flows in the cross border fund, positive flows in the ETF. So, by offering four different vehicle types there, the category for the income strategies in general was net flow positive. And as investor demand becomes more global and shifts away from mutual funds, having multiple vehicles allows us to capture that flow.

Brian Bedell:

That’s great color. Thank you for all that detail.

Ken Worthington:

Hi. Thanks for taking the question. As we think about possible extension of duration by investors at the FedEx later this year, which of your fixed income products do you think are best positioned to benefit with better sales? And then along the same line, some of the big flagship Western funds are still struggling with performance and outflows picked up this quarter, both gross and net. What are the issues sort of weighing on those funds?

Adam B. Spector:

Yeah. I would add a few things. We didn’t really talk about the muni franchise in that, Jenny. The muni performance is really strong. We have about 90% of assets, outperforming on the one year period and about 75% outperforming on the three and five. We think we’ll see significant growth in munis, and the fact that we had a strong SMA franchise there as well as mutual funds, it’s really helping us. In terms of, the shift in rates with, a steeper yield curve, we think we will see money coming out of cash into longer term fixed income, which should benefit us. The other thing we’ve seen is that in a market, with fairly tight credit spreads, we see allocations going more and more to managers who have the ability, to be multi sector or multi credit exposures and, to have the ability to allocate across those different sleeves, and that bodes well for us as well as we are very strong in those areas. The final thing I would note, is that our insurance capabilities are highly specialized, and we’ve seen real growth in fixed income coming from insurance specific mandates where the regulatory, reporting compliance aspects of managing those accounts is as or more important than the alpha generation.

Ken Worthington:

Great. Thank you.

Bill Katz:

Great. Thank you very much for taking the question. So, there’s a lot of ins and outs, to the franchise right now. And just maybe stepping back for a moment, I guess, where I’m struggling a little bit on the storyline is how do you drive both top line and bottom-line growth here? Because when I adjust for where your flows are coming in versus where they’re going out, it would seem to me that the fee rate may go lower. I’m so curious your thoughts on that. And then given now any incremental savings that you think you can do will sort of supplement the growth for the Aladdin platform. It would seem like you’re more of a top line story than a top line plus expense leverage, but then I worry the fee rate might go lower because of the mix. So, how do we think about how do you get revenue growth from here and then how you turn that into operating leverage? Thank you.

Matthew Nicholls:

Yes. I mean, I think Jenny you covered most of it. I mean, there’s differences from last quarter, Bill, on the EFR, for example, the business mix is probably a little bit under 0.1 basis point, Putnam was 0.9. Now a lot of that has to do with the calculation at the EFR itself. But we thought the 0.9 would be a little bit less than that, hence the slight difference from the guide that I gave. The reason why it ended up being as much as 0.9 is because frankly, Putnam is growing faster than we anticipated, is growing faster now, projections every month it’s growing faster than we thought. For perspective, Putnam’s AUM is 23% higher than when we announced transaction or 13% higher than when we closed the transaction. And they’ve been in positive flows every month since both quarters since. So, what that’s meant is because they’re at a lower effective fee rate, the averaging and the calculation, everything, it means that the EFR has come down a bit. If you take that into account and then you take into account previous quarters where we’ve had episodic boosts to EFR such as Lexington’s catch up fees. Our EFR has actually been fairly stable. I mean, it has come down a little bit, but it’s normally by 0.1 here and there. And that as Jenny mentioned is largely due to a little bit of the mix and frankly the growth in ETF, Canvas, SMA solutions. And we expect that group of things to be growing. It’s very hard to have all of the things flowing that we’ve invested in one quarter. One day we will actually get alternatives, ETFs, Canvas, SMA and solutions all coming together at once where we get the fundraising in ops lined up with all those other more organic and more on-going growth areas of those vehicles. When we do that, we’ve got a good shot at it offsetting the areas of shrinkage that you referenced. I’ll also point out that if you take out some of the larger sort of tax or fixed income areas that you’ve pointed to and others have pointed to, we’d be in positive flows in the business right now. So anyway, just to give you a little bit more information on AFR.

Bill Katz:

Thank you for the very comprehensive answer.

Patrick Davitt:

Hey. Good morning, everyone. I have a follow-up on your answer on the Aladdin expense absorption. A lot of what you described sounds like it would have to come through after implementation. So just to clarify, you’re expecting that absorption to be in lock step with the implementation expense. And if so, how do you turn off all of those extra vendor costs if Aladdin isn’t live yet to fill in that capability? Thank you.

Jennifer M. Johnson:

And I could add that we’re not on a uniform technology platform. So, as you migrate certain SIMs over, you retire their systems. And so it is a little bit lockstep as you go along.

Patrick Davitt:

Thank you.

Operator:

Thank you. This concludes today’s Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin’s President and CEO, for final comments.

Operator:

Thank you. Ladies and gentlemen, this does conclude your conference call for today. You may now disconnect.

Operator:

Welcome to Franklin Resources Earnings Conference Call for the quarter ended March 31, 2024. Hello, my name is Sylvie, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions]

Selene Oh:

Good morning, and thank you for joining us today to discuss our quarterly results.

Jennifer Johnson:

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the second fiscal quarter of 2024. I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution.

Operator:

[Operator Instructions]

Craig Siegenthaler:

First, we have a big picture net flow question. Lots of ins and outs in the $7 billion, especially with the $14 billion and from -- Great-West. So how should we think about the core net flow run rate if we back the $14 billion out of the $7 billion of long-term net flows?

Jennifer Johnson:

So I think it's -- there's a little bit of noise in the alts numbers. If you just look in calendar year 2022 and 2023, we talked last time about how we raised $40 billion in the private markets. But the reality in our alternatives business, we raised $55 billion, and 80% of it was private markets. But the net change in AUM, you saw $40 billion added to the private markets AUM net, net of realizations, distributions, market, everything. But $16 billion negative in the liquid alts portfolio, which represents about 6% of our alts portfolio now. So that's where you're shifting from much -- the good news is it's the higher fee private markets that have had -- that had solid inflows in that window, but it was a little bit masked by the lower fee liquid alts.

Adam Spector:

And Craig, the only thing I would add is that the other thing we've been able to do really is to work more closely with our distribution partners on the wealth management side over the last few quarters and we're able to secure calendar spots further into the future than we ever thought was possible. And I think that speaks well to our future fundraising as well.

Glenn Schorr:

So I wanted to talk about fixed income a little bit. So I see pension-funded status is much, much better and rates are higher. I like the $8.3 billion in flows in the quarter, but I don't know how much of that came from Great-West or something else? So maybe you could talk about that. And then bigger picture, is this -- do you feel this is the beginning of a broader trend, the long-awaited fixed income flows, maybe you can give us a little bit of insight from whether it be RFPs, client combos or the consultants on -- if we're at the [indiscernible] of some larger flows into fixed income?

Adam Spector:

And I would say that it's also pretty broad-based. If you take a look at that funding pipeline, it's really across all 4 of the fixed income firms we have, which all have very significant pipelines right now. And if you take a look at the products we're offering, we're positive in core in high yield and munis was our best-selling segment. So really broad-based fixed income appeal, not just one product.

Adam Spector:

And on the institutional business that you asked about is strong, we're also positive in ETF and SMAs, muni ladders, to lots of different fixed income vehicles doing well for us.

Jennifer Johnson:

Again, I think it depends on your view on rates. And as I think Adam or Matt mentioned, you -- our fixed income teams are all kind of spread out as far as their view on where rates go. The frankly, guys probably think a little bit higher for longer Western is probably more aggressively positioned for rate cuts. So I think it really depends on your views. I do think if rates stay higher for longer, it has impacts on returns on equity markets as far as expectations, private markets as well. So Glenn, I think -- again, I think it's going to depend on where people -- where they think they should position our portfolio. I don't know, Adam, do you want to add anything?

Operator:

Next question will be from Dan Fannon at Jefferies.

Matthew Nicholls:

Yes. Thank you, Dan. Yes. So a couple of things on expenses around the second quarter, I'll get to the comp and benefits in a second. I'd just like to say that notwithstanding the higher resets around compensation calendar resets around compensation that I'll talk about in a minute and meaningfully higher markets. If you exclude Putnam, which was the main addition we had in the quarter, our expenses would have been flat. So notwithstanding higher performance fees than we expected, higher calendar resets than we expected and higher markets than we expected. Our expenses for the quarter would have been flat when you exclude Putnam. So hopefully, that demonstrates some discipline there. In terms of your specific question around comp and benefits for the second quarter.

Matthew Nicholls:

Yes. Thank you for the question. So the EFR for the quarter dropped to 38.5. And I believe that's exactly how we guided for the quarter. And we're able to do that because we had a pretty good feel for the mix that we're coming in, in terms of flows. And I think I also pointed out that we were 1 basis point higher than usual, let's call it, or the effective fee rate for the last quarter was inflated by 1 basis point based on Lexington catch-up fees.

Operator:

Next question will be from Ken Worthington at JPMorgan.

Adam Spector:

You might not like the answer, but the answer is yes. I think we're seeing all of those things, right? So often, people will switch managers because of performance. We see people beginning to extend duration out. Those are usually funded by cash. We should see some of the plus sectors being added to those are funded in a mix of different ways. And then, of course, on the retail side, it's typically a sale of a fund, so you really don't know where that's coming from.

Kenneth Worthington:

Okay. Great. And just on ETFs, how are you thinking about ETFs outside the U.S.? You're having nice success in your franchise within the States. How are you thinking about leveraging the brand? Or are you thinking about leveraging the brand you have and the ETF franchise that you've already built?

Operator:

Next question will be from Alex Blostein at Goldman Sachs.

Jennifer Johnson:

Yes. So I mean we're in the market with a few different things. And as Adam mentioned, we are getting on calendars. This stuff is laid out, we've probably surprised early on to learn this. I mean sometimes up to 2 years in advance. So the areas that we're talking -- Lexington obviously, has capabilities beyond their traditional Fund 10, where they've got middle market and co-invest offerings. In the case of real estate, Clarion's top 3 biggest funds are all perpetual. So they're always fundraising, although we definitely see kind of muted demand for real estate. They've got terrific performance. They've got terrific performance. And so I think when things shift back, Clarion should do very well there because they have very little exposure to office.

Jennifer Johnson:

And the pipeline is -- the fee rate is slightly up from last quarter. But look, any time you want it's institutional, so that's lower fee than your traditional EFRs. And then number two, it's heavily weighted in the fixed income -- well, the new stuff is heavily weighted in fixed income, but probably overall pipeline, I don't know, Adam, a 60-plus percent probably fixed income. So I never know if we give guidance on the actual numbers in the pipeline, but it's -- [indiscernible] Matt, have we given guidance there?

Alexander Blostein:

Got it. Okay.

Operator:

Next question will be from Bill Katz at TD Cowen.

Adam Spector:

So I'm not Matt Nicholls, I can't do the math that quickly. He probably could. So I couldn't quite follow all of that. But I will tell you that the growth areas where some of the things you wanted to pull out alternatives, ETFs, Canvas. I think we said consistently that those are our growth focuses and that they're growing a little faster than the rest of the business. If you take a look at the more traditional business and you look at our outflow rate our decay rate, it's really been stable to improving. So I think over the last few years, we've been able to do a very good job at protecting ourselves on the downside. And as we said earlier, I think Jenny pointed to a notion that we talk about in terms of core sales, which is our smaller sales, which are up pretty consistently at about 14% on average. So stable outflows, increasing quarter sales we're feeling pretty good about the traditional part of the business.

William Katz:

That makes some sense. And just a follow-up on all of that, Matt, maybe for yourself, just your base fee rate, it just seems like it's bouncing around a little more than I would envision just given the sheer sizing of the platform today. So can you help me understand if you're going to be sort of in that 37% range plus for the next quarter. And then you sort of bounce back into the fourth? Is that input to a very high level of flow in the alts managers. And if that's the case, is that just vehicles that are just turning on from capital to raise? Or is that from new money coming in the door? And if so, where might that be?

Jennifer Johnson:

Great. Well, everybody, thank you for participating in today's call. And once again, we would like to thank our employees for their hard work and dedication delivering this quarter. And we look forward to speaking to all of you again next quarter, and everybody stay healthy.

Operator:

Welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31, 2023. Hello. My name is Joanna, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.

Jennifer Johnson:

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the first fiscal quarter of 2024. I'm joined by Matthew Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We're happy to answer any questions you have in just a few minutes. But first, I'd like to call out some notable highlights from the quarter.

Operator:

[Operator Instructions] First question comes from Alex Blostein from Goldman Sachs.

Matthew Nicholls:

Okay. Alex, I mean that should probably just give you the forward guide to put things into perspective, that will help get through the Putnam update also. So in terms of the effective fee rate, remember, last quarter, I mentioned we expect it to be around 39 basis points consistent with previous quarters.

Alexander Blostein:

Great. Okay. I think I got all of that or most of it, and I'm sure folks will follow up as well. I guess my only other follow-up for you. I think we talked about Putnam being around $150 million contribution to operating income on exit run rate. Can we just get an update on where that stands now? Obviously, their asset base is a little bit higher as well, but just want to get a sense whether $150 million is still kind of the run rate number we should be thinking about by the end of your fiscal year.

Craig Siegenthaler:

My question is on the alternatives net flow trajectory. If we back out the 2 flagship fundraisers at Lexington and Benefit Street, there would have been a large swing in net flows over the last 12 to 18 months. So I wanted your perspective on the flow trajectory in terms of net flows from alts. And are you expecting other funds to kind of step up and fill in that gap?

William Katz:

So first question, maybe switch up the conversation a little bit, just talk about capital. You announced a pretty sizable repurchase authorization, have some equity that you have issued in consent with the transaction of Putnam. Looking at your balance sheet, it looks like you're saying about sort of net cash of 0 if you sort of adjust for the debt. How should we be thinking about maybe the tempo or pacing of capital deployment or buyback as we think through the year?

Jennifer Johnson:

Well, so I mean, obviously, we have the $25 billion that we've talked about with Great-West Life, and that will come in kind of through the year. And it's a mix of multiple our SIMs with the bulk of it actually going to Western, but goes -- it has alternatives in there. And as well as fixed income and equity. And we announced that we're going to be a sub-adviser [indiscernible] And part of that is because we -- when we acquired Western, we acquired real expertise in understanding the insurance space, and we've been able to leverage that capability more broadly. But Adam, you want to talk about some additional things that you're seeing.

Operator:

The next question comes from Daniel Fannon from Jefferies.

Matthew Nicholls:

Yes, plus the $93 million that we had this -- in the first quarter. So it's $93 million, $50 million, $50 million, $50 million.

Matthew Nicholls:

So there's no more catch-up fees to book at this point. The fund had its last fundraising in the -- by 12/31 and that's when they sent the press release out that indicated that we have $22.7 billion of additional AUM. And that's all included in our reported numbers.

Matthew Nicholls:

No, not yet.

Brennan Hawken:

So you spoke earlier about fixed income and the attractiveness and demand and a shift from cash and short duration investments. What are you specifically seeing as far as RFP activity? And could you talk about Western and their level of engagement with their client base?

Adam Spector:

Yes. Jenny, I would just add that I think you're spot on that we've really seen strength in a number of areas of fixed income that was masked by some of the outflows in Core and Core Plus. But the performance in Core and Core Plus turned around. If you take a look at the end of the year, Core is up 37 basis points in the index, Core Plus 124. And traditionally, those products get very, very strong inflows after the Fed stops hiking. So we're in the position now from a performance standpoint as well as in the rate cycle, where those products are poised to do quite well.

Matthew Nicholls:

That's right. Yes. And just to -- the reason why I went through the detail is because I want to be very clear that if you take Putnam out of the equation, our expenses are up like 1% or something like that year-over-year. And that's only because -- and again, we don't normally talk about revenue on -- from a guide perspective, it's almost impossible to guide, as you know. But that does assume 5% higher revenue. So just if you often people ask us about margin, the relationship between revenue and expenses and leverage and operating leverage in the system -- well you can see that if we expect revenue to go up 5%, we only expect our expenses to go up between 1% and 2% on a foundational level.

Matthew Nicholls:

That's exactly right. Yes. So on the last day, at the very least on the -- I think we could be a little bit better than this. But on the last day, [ 9, 30 ] when you times that number of savings by the year, it's $150 million at least.

Michael Cyprys:

I wanted to ask about retirement with Putnam and the Great-West strategic relationship, this accelerates your push into the retirement channel. I hope you could talk about some of the steps you're taking and may take over the next 12 months to capture the growth opportunity that you see. Maybe you could elaborate on that as well as which products you think might resonate the most.

Adam Spector:

Yes. So first of all, the Putnam acquisition gave us capabilities. And I think those capabilities are really important in terms of things like stable value where there's $18 billion in assets, ultrashort and target date. If you take a look at target date, it's a third of industry DC AUM right now, had $150 billion in net flow last year. We can now play in that segment where we haven't really been able to play effectively historically.

Michael Cyprys:

Great. And just a follow-up question on the technology front. Just curious how you're thinking about front to back outsourcing opportunities and evolving the tech stack from here. Maybe you could speak to some of the opportunities that you might see from improving data integration across the multiple systems that you have, what sort of factors go into consideration? And any sort of lessons learned you might take away from others that have partnered externally on this front.

Operator:

The next question comes from Patrick Davitt from Autonomous.

Matthew Nicholls:

Yes. Excluding reinvested dividends, it's slightly positive. No, obviously, we closed the transaction, as you know, Patrick, on January 1, I'd say, in the quarter before that and the period we're in now, it's kind of flattish, excluding reinvested dividends. So slightly positive.

Patrick Davitt:

Great. And then one housekeeping item. It wasn't clear to me earlier when you were talking about this, but the $5.5 billion-ish win from Great-West announced last week, is that a part of the $25 billion? Or should we consider it incremental?

Jennifer Johnson:

Yes. I think that's from the -- yes, from the retirement channel. So.

Unknown Executive:

Incremental.

Brian Bedell:

Just one clarification also. I think I'm not sure you mentioned this, but the alternative was I think the $5 billion of private markets to play with them correctly, $5 billion of private markets, less about $1 billion of liquid also is that for the quarter just reported or for the current month quarter.

Matthew Nicholls:

Like a week ago...

Brian Bedell:

Yes. Perfect. Okay. That's clear. And then just more broadly, I guess, just the ETF franchise are growing nicely. Maybe Jenny, if you want to -- and Adam also or Matt, just talk a bit about the -- your long-term vision for active semitransparent ETFs, you've already got 12 managers, using these products to $20 billion in the total ETF, which of course, includes a lot of smart beta. But just how you're thinking about this over, say, the next 2 or 3 years the demand from the marketplace for ETFs, but whether you think it might cannibalize mutual funds where you actually think you can develop strategies that will be incrementally growing sales on top of your mutual fund tranches?

Adam Spector:

Yes. I would just reiterate the point that, for us, ETFs is about the vehicle, not about being passive, just to put some numbers around that 24% of our assets are smart beta and 36% are active. So our passive ETF business, it's only 40% of our AUM is in passive and it was only 20% -- passive was only 20% of our ETF flow for the quarter. So as more and more people begin to consider active management within an ETF wrapper, we think that's great to us.

Jennifer Johnson:

And I think that Canvas is [indiscernible] is more of a threat to the passive mutual fund that has and passive ETF.

Operator:

Thank you. This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO for final comments.

Operator:

Thank you. This concludes today's conference call. You may now disconnect.

Operator:

Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended September 30, 2023. Hello, my name is Julie and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Jennifer Johnson:

Thank you, Selene. Hello, everyone and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2023 results. As usual, Matt Nicholls, our CFO and COO and Adam Spector, our Head of Global Distribution, are joining me on the call. Over the past several years, we've made great strides in transforming our business, all in an effort to meet the needs of our clients and shareholders around the globe no matter the market environment. We've done this by creating a diversified company that offers a broad range of investment expertise and capabilities across asset classes, investment vehicles and geographies. Today, we're able to offer our partners and investors the ability to fulfill their comprehensive investment needs across public and private markets and in the vehicle of their choice as one firm with specialist investment managers operating around the globe. In addition, we have made important investments in value-added services, including technology, digital wealth and customization in order to be on the forefront of innovation in areas increasingly important to our clients. As we look back over our fiscal year, challenging global financial markets and geopolitical uncertainty weighed heavily on investor sentiment. The so-called Magnificent Seven, 7 large U.S. tech companies, have primarily driven all of the gains in global stocks this year. And in our fourth quarter, we saw heightened volatility lead to increasing pressures and declines across equity and fixed income markets. We believe markets, like the one we're in, reinforce the value of active management with a long-term investment horizon. So often in these times of uncertainty, where the best opportunities to capture value are identified. In this complex and volatile market environment, it's no surprise that there's a tremendous amount of cash sitting in bank accounts and in money market funds, capturing what are the most attractive short-term yields in more than 15 years. Global Money market assets stood at $7.4 trillion as of September 30, the highest asset level since Morningstar started collecting the data in 2007. We have been actively engaging with our clients to understand their needs and address their strategic goals. Many clients continue to look for additional access to private markets, alternative credit, in particular. And as yields have become more attractive, clients have had a renewed interest in fixed income. We continue to provide insights and taught leadership to help them navigate the latest conditions, including drawing upon the resources of our various specialist investment managers and the Franklin Templeton Institute. Against this backdrop, we continue to manage our global business with a focus on areas of organic growth, expense discipline and strategic transactions. As such, this year, we are pleased with the progress made executing on our long-term corporate priorities by expanding our investment capabilities across vehicles and deepening our presence in key markets and channels. For the fiscal year, notwithstanding 20% lower inflows. Long-term net outflows improved 23% from the prior year. Long-term net flows were positive in several key areas, including alternatives, multi-asset, ETFs, Canvas and the high net worth channel. In addition, our Asia Pacific region generated positive long-term net flows for the fiscal year. Our EMEA region turned positive in the second half of fiscal 2023 and our non-U.S. regions posted positive net flows in the fourth quarter. One of our strategic priorities has been to increase our scale in key segments of the industry, reflecting long-term client demand. In this pursuit to offer more choice to more clients, we closed the acquisition of Alcentra, a leading European credit manager, doubling our alternative credit AUM. Firm-wide alternative AUM increased by over 13% to $255 billion from the prior year, making Franklin Templeton one of the largest managers of alternative assets. Alternative AUM represents approximately 19% of our long-term AUM and approximately 25% of adjusted revenues, excluding performance fees in fiscal 2023. Alternative assets management fee revenues increased 36% year-over-year. Furthermore, we were pleased to announce the pending acquisition of Putnam Investments with $136 billion of AUM and our relationship with Power Corporation and Great-West Lifeco, strengthening our presence in the retirement and insurance segments. The transaction will enable us to further bolster our presence in these key market segments to better serve all our clients and remains on track to close in the fourth quarter of calendar 2023. Industry-wide, we continue to see consolidation of asset management relationships. In this context, there are increased expectations for value-added services and we believe we are well positioned as a strategic partner due to the breadth and depth of our investment capabilities, technology, content and capital resources. As we look ahead in 2024 and beyond, with better clarity on interest rates and markets in general, there will be an increased likelihood of investors moving money from the sidelines. We believe we are well positioned to capture money in motion as clients benefit from the expertise of each of our specialist investment managers, particularly in areas where there is strong client demand such as alternatives, income, fixed income, solutions and custom indexing. Turning now to our specific numbers for the fiscal year, starting first with assets under management inflows. Ending AUM was $1.37 trillion, an increase of 6% from the prior year, primarily due to market appreciation and the acquisition of Alcentra. Investment performance continues to be strong and resulted in 61%, 48%, 47% and 61% of our strategy composite AUM outperforming their respective benchmarks on a 1-year, 3-year, 5-year and 10-year basis. Compared to the prior year, AUM outperforming benchmarks stayed the same in the 3-year period and declined in the 5-year and 10-year periods. 1-year performance improved significantly due to several equity strategies, including non-U.S. strategies and select U.S. taxable fixed income composites. Long-term net outflows were $21 billion and improved by 23% from net outflows of $28 billion in the prior year. Reinvested distributions were $21 billion compared to $32 billion in the prior year. Our long-term net flows while challenged for the year, continued to benefit from a diversified mix of assets and strong presence in key areas. Multi-assets saw a 66% increase in net flows from the prior year and were positive for all 4 quarters, including nearly $8 billion, driven by Franklin Income Fund, Franklin Templeton Investment Solutions and Canvas, our custom indexing solution platform. In fact, our flagship Franklin Income Fund celebrated its 75th anniversary in August. The strategy follows a flexible value-oriented investment philosophy, seeking income and long-term capital appreciation by investing in dividend paying stocks, bonds and convertible securities. The fund has successfully delivered uninterrupted dividends across all market cycles ever since its launch in 1948. It's also a great example of how we're giving investors greater choice in how they access the strategy, including through SMAs, sub-advice strategies and in an actively managed ETF vehicle around the globe. For the fiscal year, alternative net inflows were approximately $6 billion, driven by growth in private market strategies which were partially offset by outflows in liquid alternative strategies. Benefit Street Partners, Clarion Partners and Lexington Partners together generated net inflows of nearly $11 billion. We continue to make strides in alternative assets unlocking new opportunities for investors in our firm. Retail and high net worth investors remain under-allocated in alternatives relative to institutions. Client interest was strong for alternative strategies on wealth management platforms under the alternatives by Franklin Templeton brand in the U.S. which was launched earlier this year. For example, we anticipate over 20% of the total capital raised in our current secondary private equity fund to come from the wealth management channel. We continue to focus on client education initiatives through our alternative focused podcasts and webinars partnering with the Franklin Templeton Academy. Fixed income net outflows decreased by approximately 50% to $16 billion this fiscal year, with net flows significantly improving starting in the second quarter of the fiscal year. In a year when all eyes were on the bond markets and interest rates, we continue to benefit from having a broad range of fixed income strategies with non-correlated investment philosophies. Brandywine Global saw positive net flows for the year. Franklin Templeton fixed income saw positive net flows in the second half and Western Asset had positive net flows in its core and muni products for the year. Fixed income strategies also saw net flows in ETFs and starting in the second half of the year in SMAs. With the addition of Putnam, we will further strengthen our fixed income offering, particularly with ultrashort, stable value and longer duration strategies with strong long-term investment performance. Equity net outflows were nearly $19 billion. The risk-off environment continued to impact investor sentiment on select equity growth strategies which were partially offset by net inflows into large-cap core, international, smart beta quantitative and emerging market strategies. We believe that emerging markets equities could be a potential bright spot in equities as investors look across broad markets for opportunities. Turning to ETF, since launching our ETF business in 2016, we have provided our clients with a broad range of investment strategies and have achieved significant growth milestones. ETFs generated net inflows of nearly $4 billion in the fiscal year, representing 4 consecutive quarters with net flows of approximately $1 billion and AUM ended the quarter at over $16 billion. We continue to launch new and innovative ETFs based on client interest. During the fourth quarter, both Western Asset and Brandywine Global launched active fixed income ETFs and we expect to see strong client interest in both strategies. We are a leading franchise in SMAs with $113 billion in AUM, an increase of 13% from the prior year. We saw momentum in our SMA platform with $1.3 billion of long-term net flows in the second half of the fiscal year. This year, we continued to expand our SMA capabilities with launches focused on customization such as tax managed overlay and SMA products of key flagship strategies, including the Franklin Income Fund. Through new technologies, we're continuing to enable personalized portfolio solutions that seek to improve bespoke outcomes for investors. A good example is Canvas which has achieved net inflows each quarter since the platform launched in September 2019 and AUM has more than doubled to $4.8 billion since the acquisition closed. This year, Canvas generated net inflows of approximately $1.5 billion and had 20 new partnerships. In addition, it continues to have a robust pipeline. Private Wealth Management AUM ended the quarter at $34 billion with Fiduciary Trust International, generating its 12th consecutive quarter of long-term net inflows. Fiduciary Trust provides personalized solutions to high net worth individuals and multifamily offices with an average client relationship of 16 years. It is a growing client base and a platform well positioned for long-term growth. Since 2010, Franklin Templeton has been the investment manager and sole administrator of Fondul. In July, Fondul's largest holding, Hidroelectrica, Romania's leading energy producer, broke a record as being Romania's largest initial public offering on the Bucharest Stock Exchange. The listing reflects our ability to provide partnerships with public and private institutions in emerging markets to deliver long-term value for all stakeholders and our enduring commitment to developing the country's local capital market, promoting corporate governance and transparency. Looking forward to 2024, we will continue to further expand our business and invest in key areas of growth that extend our ability to offer more choice to more clients in more places, including alternative asset management, insurance and retirement channels, customization and solutions for clients, technology-related distribution and private wealth management, specifically Fiduciary Trust International. We are proud of the work that we have done over the past several years to further grow and diversify our business. It makes us a more resilient organization over the long run and reflects our focus on positioning Franklin Templeton as a premier partner. Finally, I'd like to thank our dedicated employees around the world for all their efforts in this past year to grow our business by always putting our clients first in a continuously evolving industry. Now I'd like to turn the call over to our CFO and COO, Matt Nicholls, who will review our financial results from the fiscal quarter and year as well as provide an update on the Putnam acquisition. Matt?

Operator:

[Operator Instructions] Your first question comes from Michael Cyprys from Morgan Stanley.

Jennifer Johnson:

Right? Adam? Adam is going to take this one.

Michael Cyprys:

Great. And just a follow-up question, maybe for Matt. I think in the release, you mentioned the transfer agency functions globally have now been outsourced. You did that in the U.S., now you took that around the world. I think also you've outsourced fund administration in the U.S. So maybe you could just talk to what's next as you think of about simplifying the business, enhancing efficiencies, what steps might be able to take over the next year or 2? How meaningful might they be? And just curious, any sort of benefits or lessons learned and takeaways that you could speak to on the transfer agency outsourcing.

Jennifer Johnson:

Well and I would just add, Mike, as you know, we've done a lot of acquisitions. And I think one of the reasons they work well is, we take our time on some of the integration. And so there's opportunity, obviously, we'll be integrating Putnam into the -- into our environment. And even some of the Legg Mason SIMs are -- have an opportunity to integrate which we think will simplify the environment.

Operator:

Your next question comes from Craig Siegenthaler from Bank of America.

Jennifer Johnson:

Yes. So I mean, you've got to remember, SMAs exist and the reason we're taking off so much is that in the retail channel, where the world went fee-based, it is difficult for a financial adviser whose client fees, they're being charged every month for advice to buy and hold a mutual fund, right? So if you can deliver the same kind of product in an SMA with the holdings basically on the statement, it looks like the advisers being much more active on that. And so we view ourselves as being vehicle agnostic to how we deliver what is our expertise which is our investment capability. And -- so you take, for example, the Franklin Income Fund. The Franklin Income Fund now is -- we have an ETF version, an SMA version and we're seeing growth in both of those. So any of our products can be delivered in SMA. Today, we have munis. Munis are actually -- have a good growth area in the SMA muni ladders. And so the way we are thinking about our business is, I always say it's like a 3-legged stool. It's product capability, geo-global distribution and vehicles. And the vehicles can be mutual funds, communal trusts, ETFs, SMAs, things like Canvas direct indexing. And we should be flexible about how we deliver those, in whatever market we -- whatever market we're operating in. And I think that nobody has won the breadth of product capability that we have to the breadth of geographic distribution, both on the retail and institutional side. And while we may have been late to things like passive ETFs, we were early actually in the active ETF space. And so being vehicle-agnostic is very important. Now the challenge is on the SMAs, is that you have to get approval at the gatekeeper level and then you have to go out and train individual advisers. So it's a bit like alts in the complexity. But once you do that, then you just get consistent flows coming in. So the long answer is basically, we see any of our flagship funds as being able to be delivered through the SMAs platform.

Operator:

Your next question comes from Brennan Hawken from UBS.

Matt Nicholls:

Sure. Thank you, Brennan. So I'll split it into 3 components, if you'll bear with me. One is, we'll discuss the first quarter guide, our fiscal first quarter guide. Second, I'll give a very preliminary, recognizing how early we are for fiscal year 2024. And then thirdly, I will provide an update on Putnam, because obviously, Putnam, we expect to become an important part of our consolidated guide, if you will. But I want to do that separately because we don't know exactly when it's going to close, so it's speculative at this point but I'll give you that information. And then I'm going to go through the individual components of the expense issues that you focus on, from a modeling perspective. And so firstly, EFR, we expect our EFR to remain in a 39 basis point area, excluding performance fees. Compensation and benefits, we expect -- again, this is first quarter '24 fiscal, we expect compensations and benefits to be at $750 million but please note that this includes $35 million of accelerated deferred comp charges. This also assumes $50 million of performance fees. IS&T, we guided to $125 million, flat to the quarter we just had. Occupancy, we expect that to increase to $65 million from high 50s. And the reason for this is that in New York City, we are transitioning to a more efficient and unified space. We have 9 offices currently in New York City and we are consolidating into 1 major office space in New York. And for a period of about a year, we're going to have the equivalent of double rent on that office. So that means, for the first quarter, this implies 2 months of this, by the way, it's about an $8 million increase; and that $8 million will increase to $12 million of increase, for your occupancy for about a year. After the year is up, that will be -- that will go away and it would normalize back down into the mid-50s again. G&A, we expect to be in the $140 million area and this includes slightly higher T&E and flat placement fees. In terms of our tax rate, we expect that to be 24% to 26% for the fiscal year '24 in terms of full year '24 overall expenses. I'll first of all note that, as I mentioned in my prepared remarks, that between full year '23 and full year '22, we are about 1% lower, excluding performance fees and the various acquisitions that weren't included in the previous year. Full year '24, excluding Putnam, performance fees and the New York City real estate transition that I just walked through, we expect our expenses to be approximately flat, perhaps slightly down. But I would model flat at this point. In terms of Putnam, again, as Jenny and I mentioned that in our prepared remarks, we expect Putnam to close in the calendar fourth quarter and in our fiscal first quarter. We're hoping for December 1. And so the guide that I'm about to provide to you does assume December 1 but that could end up slipping into January 1, for example. But let's hope for December 1. If we close on December 1, from a revenue perspective, we expect to add about $50 million to revenue. Around $42 million of that is expected to be in investment management fees and about $8 million of that is expected to be in services. And you can run rate that by 20 -- by 12 to come up with the annual number for modeling purposes. We expect operating income addition, so the addition to operating income in the first quarter, in other words, for the 1 month, to be between $8 million and $10 million for Putnam. In the second fiscal quarter, we expect to add an incremental $25 million operating income and in both the third and fourth quarters, for Putnam, we expect to add an incremental for both quarters, $25 million to $30 million in operating income, assuming, of course, that revenue remains approximately stable and markets remain stable to where they are. At current levels, we're still guiding, as I mentioned when we announced the transaction to add a total operating income of around $150 million run rate by the time our fiscal year ends in 2024, in other words, by 9/30. This is 10 months, obviously, assuming we close December 1 versus the 12 months that we guided when we announced the transaction. So the change here is not necessarily the $150 million that we've talked about, although we would put that at a minimum at this point based on current markets but the change is when we expect to actually realize the operating income. When we announced the transaction, I described a scenario where we would expect to achieve 25% on a run rate basis at the time of close. And as you can see from the guide of $8 million to $10 million for the first month coming in operating income, this is now indicative of achieving over 50%, let's say, between 50% and 60% of targeted operating income on a run rate basis by the end of month one. So in the actual year, just to be as clear as we can be to help with the modeling. In terms of the actual year, we expect to realize between $85 million and $100 million of operating income and to have reached at least $150 million run rate by 9/30/24, all else remaining equal. And then, the final comment -- sorry, Brennan. I want to make sure this is as complete as possible, so everybody gets the models right. At the end, so what this means in terms of accretion, dilution, because we talked about that, too. At the current time, again, recognizing how volatile the markets are and so on. But the current time, all else remain equal, this would mean a transaction becomes accretive by the second quarter. So in our fourth quarter versus at the end of the first year that we talked about initially. So we're pretty much becoming accretive in this transaction almost right after we close. It's like a couple of months afterwards but let's say just to be conservative at the end of the first 4 quarter after we close. So that would be the end of our second fiscal quarter.

Matt Nicholls:

That's pretty thorough.

Matt Nicholls:

First month.

Matt Nicholls:

Yes, just 1 month.

Matt Nicholls:

Correct. They're actual adds. So by the end of that period, we would have added $25 million at the end of the third and fourth quarter, we would have added another $25 million to $30 million. So at the end of the fiscal year, we would have added up to about $100 million. So it's real actually -- operating income addition is not just run rated. And the reason why I add the $150 million run rate is that, that could be achieved -- sort of an accelerated fashion right at the end of the last fiscal quarter.

Matt Nicholls:

Yes. The only other one thing I'd add is that the -- because this is obviously a very important factor in the model as well, as you think about overall AUM and EFR. The Putnam acquisition reduces -- is expected to reduce our EFR by 0.2 basis points because they have a slightly lower EFR than us.

Matt Nicholls:

It's over the years. So -- but yes, I pretty much do -- gradually it comes in because -- but it should be right away in December.

Matt Nicholls:

Yes. Because as you know, we average -- the AUM gets averaged over the period, it comes in. So it's going to be a bit wonky in the first year -- the first quarter, sorry but you'll soon see the full impact of 0.2.

Matt Nicholls:

Exactly, that's a good way of putting it.

Alexander Blostein:

Great. Well, thanks for that. I think we could probably end the call right there. So I did want to ask you guys about fixed income, obviously. And look, Western had some nice stabilization in investment performance early in the year. But the latest moves in interest rates put incremental pressure on core and core plus both, absolute and relative to the benchmark. So how are the conversations with clients, I guess, evolving as you highlighted, the opportunity to maybe rotate some of the cash on the sidelines to longer duration products. How big of a headwind do you think that is? And if more capital ultimately chooses to go back to passive vehicles within fixed income like we've seen this year, how is Franklin as a whole, positioned to maybe take advantage of that opportunity in some of the fixed income refers on the passive side?

Adam Spector:

Yes. I think you hit a lot of the key points, Jenny. Western is having very good conversations with its clients. It continues to be Franklin Templeton's top selling SIM in terms of our gross flows. And if you look at their performance, 88% of their marketed composites have outperformed over the 1-year period. And I think that number, the 10-year period is something like 97%. So yes, in core plus and some other strategies, they've had a tough go of it recently but we see that turning around and we see client interest still being very strong in Western products.

Matt Nicholls:

Right. Sure. Thank you, Alex. So I think the point we're trying to make on this is that, obviously, that the market is complicated, it's fraught with uncertainty. So we want to be careful of how we describe this. But obviously, we've been very active in acquiring companies to make sure we have the right set of investment management capabilities to be as relevant as we possibly can to the most important clients around the world in every asset class and every vehicle that Jenny mentioned. We feel like we're pretty much done in that regard. There's 1 or 2 areas that we've referenced, infrastructure, for example, in the private markets area of alternative assets. And then maybe there's a few distribution things, a couple of technology things. But in terms of large-scale transactions involving hundreds of millions, in certain cases, billions of dollars, we feel like we're done in that regard for the foreseeable future. Never say never but we certainly feel that we're done in terms of strategic planning. And therefore, I think you can expect us to move into more of a capital return mode opportunistically. So what that means is we're going to absolutely protect our dividends, as we've always described and you can expect the same sort of pattern that you've seen since -- in the 1980s. We're going to be very disciplined in buying back our -- and hedging our employee grants. But as you know, we're left over with a fair amount of cash after that, both in terms of earnings -- from earnings but also in terms of our balance sheet and look, with our shares trading where they are, it's a very good opportunity for us. And as you know, we've funded 90% of Putnam transaction with shares and we'd like to repurchase those shares as soon as we can. So we're going to be quite focused on that. We don't want to give a schedule because the market is too uncertain in our opinion and we need to make sure that we are conservative and careful and methodical and all the rest of it that you expect from us. But the pattern of share repurchase that you saw in this last quarter, again, I'm not saying it's going to be the same number but you can expect us to really focus on opportunistic share repurchases in addition to the share employee grants for the reasons that I've just outlined.

Glenn Schorr:

I'm not sure if it's for Adam, for anybody. But so the new DOL rule proposal just came out. And I think this is a long time coming. The focus is updating the definition of what is the fiduciary and investment advice. And given your distribution efforts and prowess in the channel, just curious how you think it may or may not impact Franklin in the various products, various channels.

Glenn Schorr:

Good news. Maybe one follow-up. I appreciate that we're not quite at the finish line yet on Putnam. But as you get to know each other, from my look, I think performance looks good and improving in their products. But as you've gotten closer together, I'm curious what things you're learning, what can you work on for their distribution reach and insurance and retirement?

Adam Spector:

Yes. I would say that in some ways, it reminds me of the Legg Mason transaction when the 2 distribution forces were just so complementary. And if you look at the way that Franklin is built out in the non-U.S. market, as an example, I think that scale there really helps Putnam. If you look at what Franklin Templeton has in terms of SMA capability, ETF capability, that, along with the core Putnam strategy is a real advantage. And finally, I would note that subject to all of the financial comments that Matthew made within those structures, we will be able to add significantly to the sales force. So we'll have a bigger sales force, a more effective sales force by bringing the 2 firms together. That bigger sales force will obviously have more product -- great Putnam product. And so we're feeling that the transaction is really going to help propel us.

Operator:

Your next question comes from Dan Fannon from Jefferies.

Matt Nicholls:

It's ex-performance fees and other comps. So you have to look at the 2 adjusted numbers in that regard. So it's '23...

Matt Nicholls:

So '23 would be like 4.07 [ph] -- something like that, 4.075 [ph]. And then again, if you -- the full year '24 is really right on that number. Again, excluding the performance fees and the real estate issue that -- the transition I mentioned in New York which is about -- that overall transition is about $50 million or something like that.

Jennifer Johnson:

So Lexington's final close will be in December. So they're scheduled on that. Clarion has had improving redemption queues but they're still -- I don't know, Adam, if you want to -- if you have the details on it. But we've had all 3 strategies were positive for the quarter.

Operator:

And your next question comes from Ken Worthington from JPMorgan.

Matt Nicholls:

Yes. So obviously, you've seen the state of the current markets, Ken, resulted in just lower variable compensation, number one. So that's a combination of AUM revenue, less performance, our performance actually improved a little bit. So -- but just generally speaking, that lowered the compensation. Then we had the transaction-related fee that we mentioned on Fondul that has a higher margin associated with it. So that also helped in that regard. So that's probably lower than you would expect. So I'd say just a combination of just expense discipline around how we manage our compensation going in because remember, this is our year-end. So we've made final adjustments based on where the current market is and expect the next quarter to be.

Jennifer Johnson:

Look, I think the market has kind of spoken on this topic which is they want transparent active ETFs. And so that's been our area of focus. And so we haven't really pursued anything there and I don't think there's a lot of growth there.

Patrick Davitt:

Just one, I've been asked. One quick follow-up on Putnam. Could you give us an update on, obviously, we can see the mutual funds but could you give us an update on how the flows have tracked in the September quarter versus the last quarter and maybe last year in this quarter.

Patrick Davitt:

And one quick follow-up. I know it's early days but could you frame the opportunity with the Venerable partnership you just announced. Any kind of details you can give around the pool of AUM you'll be open to the time line for transitioning that AAM to the Venerable branded funds, et cetera?

Operator:

And your next question comes from Brian Bedell from Deutsche Bank.

Matt Nicholls:

Brian, the answer is no. [Indiscernible] $25 billion is incremental. We guided the $25 billion in terms of fee rate in mid-teens because a large portion of that is insurance general account related from [indiscernible]. We expect that to be incremented by about 50%, [ph].

Jennifer Johnson:

Yes, it may be our audio that's having an issue. Brian, did you hear the response?

Jennifer Johnson:

Matt, why don't you try again?

Brian Bedell:

Much better. Yes.

Brian Bedell:

Yes, that's great. And then just the last question, just on private credit versus public credit. So you've got a ton of different solutions across your specialist managers, including alternatives. Maybe just to zero in on the wealth channel. What are your thoughts about the timing of this reallocation toward fixed income when that picks up? And then, maybe just thinking about it with your private credit offerings versus the public side, do you think one will sort of went out over the -- not went out over the other but one will be larger than the other? And is that cadence, if you have to think about it over the next 2 or 3 quarters, is that sort of an equal cadence, do you think? Or do you think there'll be much larger swing into the public fixed income funds given just your scale there?

Operator:

This concludes today's Q&A session. I would now like to turn the call back over to Jenny Johnson, Franklin's President and CEO, for final comments.

Operator:

Thank you. This concludes today's conference call. You may now disconnect.

Operator:

Welcome to the Franklin Resources Earnings Conference Call for the quarter ended June 30, 2023. Hello. My name is Joanna and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Jennifer Johnson:

Thank you, Selene. Hello everyone, and thank you for joining us today to discuss Franklin Templeton’s results for the third fiscal quarter of 2023. As usual, I’m joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. Over the past server years we have been intentional in building a diversified company that offers a broad range of investment expertise and capabilities across asset classes. Investment vehicles and geographies to benefit a broad range of clients through various market conditions and cycles. We believe our corporate model of preserving the investment economy of each of our specialist investment managers combined with the resources of a global firm meets the demands of our diverse client base and produces strong long-term results. This quarter, long-term net flows turned positive. Investment performance remains strong and adjusted operating income improved by 8%. Financial markets in general stage rebalance in the first half of the calendar year. The S&P 500 Indexes concentration in five companies is at its most extreme level in more than 30 years. A challenge for those seeking to outperform the index while managing for concentration risk in their equity portfolios, but also an opportunity for skilled and disciplined active managers with a long-term horizon. Client focus has always been a hallmark of Franklin Templeton and we’ve been actively engaging with our clients to assist them in navigating this complex environment. As our industry and client preferences continue to evolve, there is strong demand for asset managers to have a full range of investment options that span geographical regions, both in public and private market strategies. We generated the interest in our alternative and multi-asset strategies in particular, which both saw positive net flows during the quarter. In addition, we experienced strong flows in ETFs, SMAs and the high network channel, and flow trends continue to improve across all geographies benefiting from our regional sales model and strategy. Our EMEA and Asia Pacific regions both reported positive long-term net flows. That’s the second consecutive quarter of net inflows for Asia Pacific. While we’re always focused on organic priorities, we have previously stated our interest in distribution-led strategic transactions that would further diversify our business and accelerate growth in key markets. With the vision of offering more choice to more clients and important sectors, we will please to announce the establishment of a long-term partnership with the Power Corporation of Canada and Great-West Life Code this quarter. As part of the relationship, we will acquire Putnam Investments, which managed $136 billion in AUM as of April 30, 2023, from Great-West for approximately $925 million primarily funded with equity. Great-West will make an initial incremental asset allocation of 25 billion to our specialist investment managers within 12 months of closing with that amount expected to increase over the next several years. Great-West will also become a long-term shareholder in Franklin Resources. And of the equity issued to Great-West, shares representing 4.9% of our common stock are subject to a five-year lock-up. This is a compelling transaction for both firms and we’re looking forward to actively partnering to develop additional opportunities that will be realized over time. The agreement aligns with our focus to further grow insurance clients assets and expands the existing relationship between Franklin Templeton and the power group of companies in the key areas of retirement, asset management, and wealth management. The transaction will also enable us to further increase our investment in retirement and insurance the better serve each and every client in these important segments. Our clients will benefit from expanded and complementary investment capabilities across key asset classes with strong long-term track records. Specifically, the acquisition of Putnam will increase Franklin Templeton’s defined contribution AUM to almost $100 billion. As a reminder, the acquisition of Putnam is expected to be modestly accretive to run rate adjusted EPS by the end of the first year after closing, adding approximately $150 million of run rate adjusted operating income in the first year post-closing inclusive of cost energies. The acquisition remains on track to close in the fourth calendar quarter of 2023 subject to customary closing conditions. Turning now to our specific numbers for the quarter, starting first with assets under management and flows, ending AUM increased to $1.43 trillion, primarily due to market appreciation, and we shifted into positive long-term net flows of $200 million, inclusive of reinvested distributions. Our long-term net flows continue to benefit from a diversified mix of assets in the quarter, led by record net inflows of $4 billion into alternative strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners generated a combined total of almost five billion in net inflows. This included raising over one billion in secondary private equity in the wealth management channel, under the alternatives by Franklin Templeton brand. Today, alternative assets are $257 billion or 18% of our total AUM and contribute more significantly to our financial results. In terms of other areas of activity in the quarter, our multi-asset strategies generated another quarter of positive net flows with 2.3 billion. Our solutions team has been gaining success with large institutions building customized solutions across our broad array of investment strategies. Equity net outflows improved to $3 billion this quarter, including the funding of a previously disclosed $3.2 billion institutional mandate. While active equities continue to be impacted by the risk-off environment, we saw positive net flows into international, large-cap core, emerging markets, all-cap value, and small-midcap equity strategies. Fixed income net outflows were $3.1 billion. Despite market uncertainty, we experienced increasing demand for fixed income and we benefited from having a broad range of strategies with non-correlated investment philosophies. Client interest continued with net inflows into multi-sector, core bond, enhanced liquidity, and tip strategies. Our regionally focused sales model and strategy resulted in improving flow trends across all of our geographies compared to the prior quarter. As mentioned earlier, the EMEA and Asia Pacific regions generated positive long-term net flows. From a vehicle perspective, ETFs generated net inflows of $1.1 billion, representing the third consecutive quarter of net flows of approximately $1 billion, and AUM totaled $16.2 billion at quarter-end. In the quarter, we also launched two thematic ETFs in Europe, in both future food and health and wellness. Two areas where we expect to see strong client interest. Separately managed account AUM ended the quarter at $116 billion and generated positive net flows. We continue to expand our SMA offerings in important growth categories and new market segments to provide clients’ choice and how they access our investment expertise across the breadth of our products. This quarter, we had important launches focused on customization, such as tax-managed overlay and SMA key flagship strategies, including the Franklin income fund. Canvas, our custom indexing solution platform, continued its trend of net inflows in each quarter since the platform launched in September 2019, and its AUM has doubled to $4.5 billion since the announcement of the acquisition. This past quarter, Canvas generated net inflows of approximately $300 million and continues to have a robust pipeline. Canvas allows financial advisors to build and manage custom indexes in SMAs that are individually tailored to the client-specific needs, preferences, and objectives. We believe custom indexing represents the next progression of direct indexing and ETFs and is a significant long-term growth opportunity. Turning now to investment performance, which we are pleased to say remains strong. 63% 53% 67% and 63% of our strategy composite AUM outperformed their respective benchmarks in the 1-3-5 and 10-year periods respectively. For mutual fund investment performance, 44% 58% 66% and 51% of our AUM outperform their peers on a 1-3-5 and 10-year basis. This represents improvement in the 3-year and 5-year periods from the prior quarter due to strengthened performance in equity and certain fixed income strategies. The 1-year decline was primarily due to one of the largest funds managed for income, which was overweight utilities and financials which generate higher yield and underweight technology compared to the S&P 500. Touching briefly on our financial results, ending AUM increased by 0.7% to 1.43 trillion as of June 30th from the prior quarter reflecting market appreciation and positive net flows. Average AUM was flat from the prior quarter at 1.42 trillion. While our sector fee rate remains stable, adjusted operating revenue increased by 3% to 1.56 billion. Adjusted operating income increased by 8.3% to $476.8 million from the prior quarter. Adjusted operating margin was 30.5% compared to 28.9% in the prior quarter. We continue to maintain a strong balance sheet with total cash and investments of $6.9 billion as of June 30th 2023. To wrap up, we have worked through another quarter of complicated markets and our progress and success would not be possible if it weren’t for our dedicated employees around the world. I would like to thank them for their many contributions and for their unwavering client focus. Now, let’s turn to your questions. Operator?

Alexander Blostein:

Hi, good morning. Thanks for the question. Maybe we could start with some of the trends you’re seeing in the alternative asset management space. First, I was hoping we could get a little bit more color on how much capital Lexington raised in the second quarter in their flagship fund and as you highlighted in the deck continuing to find race here. So how large do you think the size could ultimately be? And then when you expand a little bit broader into private alts generally, what else is in the pipeline that you expect to come in over the next 6 months to 12 months?

Alexander Blostein:

Great. And then just as far as the pipeline of other things there in the hopper as you look out over the next 6 months to 12 months?

Adam Spector:

Sure. I was going to say a couple of things, Alex. One, I think we see strong fundraising in the traditional markets that they’ve been in, but with stronger public markets, the denominator effect is less than an issue. So we’re feeling really good about the raise for all of our alternative firms in the private markets. I would also say that in the Wealth channel, it’s not just the Lexington flagship we’re offering. We have Clarion products in there like CP Reef an opportunity zone that are going well, launching BDCs and interval funds for BSP, our venture funds in the Wealth channel. So feeling good about that. And then the Alcentra acquisition has been very positive for us and having the ability to launch a European managed product in Europe through our distribution force there, we think will be a very positive add as well.

Alexander Blostein:

Got it. Super helpful. Just a quick follow-up, staying on the alts for a second, and it’s a little bit of a nuanced question, but when we look at the roll forward in the AUM table, it looks like the old had a negative market. And I’m a little surprised just given that the mark-to-market dynamic generally have been positive in other places. So is it a lag? Or is there something idosyncratic that drove the negative mark-to-market in the old bucket of things? Thanks.

Alexander Blostein:

Okay. We can circle back, it’s probably real estate. I appreciate it. Thanks.

Glenn Schorr:

Hey thanks very much. So wanted to drill a little further in Putnam is interesting because after Benefit Street in Lexington, I think our minds were all focused in the old world. And so I like the partnership we formed with them. I like the $25 billion investing with you, the 5-year lockup on the stock. I’m curious on the insurance and the retirement channels, Were they growing there? Which strategies? And then more importantly, with your broad diversified offering, what do you expect that you can actually sell into that channel so like lever that distribution?

Jennifer Johnson:

And I just add -- I mean I’m just looking at the morning start flows, I think it’s something like 4 to the top 10 slowing categories or target date funds. And so having a good performing target date with really what Putnam brings is the expertise on selling into the retirement channel that we’re really excited. We think that, that will benefit all the retirement platforms that we do business with. And then as Adam mentioned, just having two great products and a stable value in the target date to be nice to add to our suite.

Glenn Schorr:

Alright. Thank you for that.

Michael Cyprys:

Hey good morning. Thanks for taking the question. Just wanted to ask about capital deployment. The cash balance continues to rise here. Cash and investment $6.9 billion, nearly $7 billion. Just curious how you’re thinking about putting that to work from here it sounds like a little bit of debt pay down, some buybacks limited to offset share dilution. So it seems like meaningful capital to work in M&A, so just curious how you’re thinking about that opportunity set as you look out from here.

Michael Cyprys:

Great, thanks. Just a quick follow-up question, more broadly, AI, generative AI getting a lot more attention these days. So just curious how you’re thinking about the potential and opportunity from AI? Is this a revenue or an expense benefit? What sort of impact do you think this could have on the competitive landscape? And maybe you could talk a little bit about how you’re experimenting to what extent would that today?

Michael Cyprys:

Great. Thank you.

Patrick Davitt:

Hi, good morning everyone. Sorry if I missed this, but is there any change to your expectations for expenses this year? And do you have any early thoughts on how to think about the path into fiscal 2024 as we enter the fourth quarter? Thank you.

Patrick Davitt:

Thank you. And any thoughts on next year? Or is it still too early?

Patrick Davitt:

And one quick housekeeping. Could you give us the exact amount of the catch-up fees? And then how much offsetting placement fee was in expenses? Thank you.

Patrick Davitt:

In number so we can kind of get to the run rate of management fees.

Patrick Davitt:

Got it. Thanks a lot.

Craig Siegenthaler:

Thanks. Good morning. On the Putnam transaction, I know it’s going to bring $25 billion of flows in 12 months after closing. But I want to come back to what could happen from some of the cost cuts because you’re cutting a lot of costs out of the company. I think $150 million. So maybe I’ll provide some perspective on the potential for merger-related dis-synergies or outflows on Putnam’s $140 billion AUM base.

Adam Spector:

Craig, the other thing I would add is that given the number of transactions we’ve done and the continuity of portfolio management teams post transaction, we’re getting very good reactions from clients that they feel that their investment teams will be stable, and they don’t make -- intend to make any shift, which is very positive.

Craig Siegenthaler:

Thank you, Matthew and Adam. One follow-up on the SMA business. You’ve got a great business here. It’s inflowing. I think you highlighted frankly, Income as one of the flagships that’s driving this and also direct indexing. But what are some of the other funds that are driving flows into the SMA business? And then and when you think -- when you look at sales, what does the mix look like across channel? Is it heavily wirehouse? Is it heavily RIA? I’m curious to see what it looks like?

Craig Siegenthaler:

Thank you.

Brennan Hawken:

Good morning. Thanks for taking my questions. So just wanted to follow up there on the catch-up fees in Lexington. Number one, this was -- you’re still raising it sounds like. So was this a preliminary close? And do you expect there’ll be further catch-up fees at the actual formal close. And I was just running the math on the 33, and I may be a little confused about your prior comment on fees being expected to be flat quarter-over-quarter. Do you think there’ll be more catch-up fees in the coming quarter because it seems as though the catch-up maybe contributed about a basis point this quarter. So I wasn’t quite sure about that. If you could clarify.

Brennan Hawken:

Yes, yes, yes. I appreciate that. Just want to try to understand some of those mechanics. So thanks for laying that out.

Brennan Hawken:

For sure. Yes. This is just sort of noise and whatnot. I just wanted to understand it for modeling purposes. So thank you for that. You guys flagged in your comment document. I believe is what is referred to, that there was some improving performance in taxable fixed income strategies, which led to the lift in the investment performance versus benchmark. So just wanted to confirm that Western and whether or not you’re seeing any impact from this improving performance on either RFP activity or client dialogue and what drove the reversal. Thank you.

Adam Spector:

And to that, I just might add because your question was about RFPs and pipeline and such. What we’re really seeing is if you think about a sales pipeline, a significant build up in late-stage opportunities but what we’re not seeing is the conversion to that as quickly as we would expect to one but not funded. And that is really because we believe a number of institutions are waiting for the interest rate cycle to settle in. Are we going to have one more hike, what will happen to inflation. So that last stage of deployment and final contracting is a little slower, but we do see a bit of a bulge building up in those late-stage opportunities.

Operator:

Thank you. Next question comes from Ken Worthington from JPMorgan. Please go ahead.

Jennifer Johnson:

So I would say that, that depends more on the clients. So for example, FDIS has won mandates in model portfolios in the retail channel and very few of those have so far included alternatives in those model portfolios. On the other hand, they’ve also won insurance mandates that have some combination of alternatives in there. I think that’s more -- I think that question, it depends more on the channel the FDIS, Franklin Templeton Solutions, Investor Solutions Group is serving then how that group performs.

Jennifer Johnson:

And actually, one thing is we also have been working with some retirement platforms who are interested in trying to figure out how to bring alternatives to retirements and building sleeves to go leases and managed accounts and some models in there. So we think that’s a real opportunity.

Jennifer Johnson:

No, I don’t right -- so they can be. No, because it might be that somebody wants an income solution model portfolio right or LDI type and so they will go in, depending on what the client desired outcome is, and they will use multiple of our managers to bring that ultimate solution to the client. If I can it’s a real OCIO type situation. They even do -- they have a team that researches outside managers. But most of their solutions include multiple of our SIMs.

Operator:

Thank you. Next question comes from Dan Fannon of Jefferies. Please go ahead.

Matthew Nicholls:

Yes. So this quarter, it was -- and it has been for the last few, I mean, even though we received performance fees from several of our specialist investment managers, in particular, on the alternative side, there has been a meaningful portion of it driven by our Clarion Specialist Investment Manager on the real estate side. And 80% of the performance fees is driven by multiyear performance thresholds being hit by clients that invested five years ago where a 5-year performance threshold has been hit. We expect going into next quarter performance fees, I think we continue to guide at 50 because it’s so hard to predict this in any form of accuracy but we guide between $50 million and $60 million for the quarter. As you mentioned, going into the -- our first fiscal quarter, which is the last calendar quarter, the fourth calendar quarter, that’s sort of a little bit more widespread across the Specialist Investment Managers, and we may experience a little bit more performance these then. But we’ll provide more guidance on that next quarter when we get to that point.

Adam Spector:

Sure. I think let me go back to where the starting point was, which was that the central distribution team was responsible for globally, all institutional and all Wealth management raising and client servicing for legacy Franklin Templeton. On the Legg Mason side again, it was more the SIMs handled a large portion of their institutional asset management, especially in the U.S. What we’ve seen over the last two years is a gradual movement towards a more coordinated global efforts. I would say that movement is quicker at a smaller firm like Martin Currie, where the benefits of centralized resources are much more significant. If you look at the other end of the spectrum at Western that has a massively well built out global distribution capability of their own. It’s really more episodic where the central distribution team is raising assets for them. So it does depend on the side, but the -- on the size, but the movement has been to find more places to cooperate. And we’re also seeing a lot of benefits in the alternative space where the general salespeople are able to make introductions that then the alternative firms can close on their own.

Adam Spector:

Yes. I can tell you I shy away from that because what we’re trying to build is a culture of cooperation where these teams work together and numbers imply that 1 team did it or the other team did it and what we’re really trying to move towards just where it’s a collaborative effort.

Operator:

Thank you. The next question comes from Brian Bedell at Deutsche Bank. Please go ahead.

Jennifer Johnson:

Well, I actually think it’s in net flows, so that’s why I said there was about $1.5 billion in net flows. Look it is a frustration. During when interest rates grew 0, he was in the 80% equity category because, of course, he look for dividend yielding equity because you couldn’t get anything in income. And then as you’ve been able to earn money in fixed income, you shifted. So now he’s in the 50% to 70%, so yes, it’s honestly, it’s a discussion I personally at with Morningstar on it, and they’re just the problem is there’s no real competitors in the Wealth channel that -- so they can’t build a big enough peer group. And so we often point to the institutional one and his outperformance there. And so to answer your question, yes, I’m sure there are some situations where it gets screened out. On the other hand, the team has tremendous following and loyalty. And one of the challenges has been as the world went to fee-based it’s harder for some financial advisers to buy and hold the income fund for 10 years, like they used to do. And that’s why we really pushed to get it on the SMA platform because they can hold it on an SMA platform, and they do, they love it. They’ll put a client in there and sit through them quite retirement. So it’s a message that we continue to try to get the story out. And I just think that because it’s 14%, it was important that people understand how much it will swing our 1-year category already the categories that came. But he’s going to manage it; the team is going to manage it for yield, which is what the clients expect.

Jennifer Johnson:

Right. Well, I just want to thank everybody for participating in today’s call. And again, I would like to thank our employees for their hard work and dedication, and we look forward to speaking to you all again next quarter. So thank you.

Operator:

Good morning. Welcome to Franklin Resources earnings conference call for the quarter ended March 31, 2023. Hello, my name is Lara, and I will be your call operator today. As a reminder, this conference is being recorded and at this time all participants are in a listen only mode. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Jenny Johnson:

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the second fiscal quarter of 2023. As usual, I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. Despite a difficult market backdrop exacerbated by stress in the regional banking sector, we continue to see positive momentum across our business in terms of long-term flow trends, relative investment performance, diversification by product and vehicle and financial results. Market dislocations often result in investment opportunities for skilled active investors. And in this regard, our investment performance continued to improve across asset classes. This quarter, three of our four asset classes

Bill Katz:

Okay. Thank you very much. I appreciate all the extra color in the supplement. Maybe, Jenny, one for you. You sort of mentioned that in your prepared comments and also in the press release that you're sort of positioned to take advantage of some structural growth. I was wondering if you could break that down between, maybe, organic opportunities where you sort of see the best incremental flows from here and maybe where things are on the inorganic side? Thank you.

Matt Nicholls:

And just to add, Bill, to what Jenny just mentioned, I think we should make clear that our number one priority is organic growth, as Jenny just mentioned, all those things. But in certain situations, it simply takes either too long or is frankly impossible, to become a leader in an investment category via organic growth. And that's why we've done what we've done with Lexington, BSP, Alcentra, Clarion and Canvas, and there's obviously others in there. But that's the reason why we've done the M&A that we've done, we concluded it's just too hard to get there maybe even impossible, frankly, on an organic level.

Matt Nicholls:

Yes.

Matt Nicholls:

Yes, I'll take that, Jenny. So firstly, on the expenses relative to the guide that we gave last quarter, as hopefully you saw from a G&A occupancy in IST, we were very much in line also EFR slightly higher so that was in line. It really came down to comp and benefits being about $50 million higher than we had guided, and that's driven by three key things. Fortunately, all of these were driven mostly by better performance. So one, was $30 million increase in performance fee compensation; two, about $10 million was higher resets to 401(k) plan, other sort of seasonal compensation related matters; and then another $10 million was just a formulaic approach we have to compensation of which performance of funds are a very important aspect of that formula. So that increased by $10 million. That basically explains the difference between where we guided versus where we came out. In terms of where we expect next quarter, we continue to guide the effective fee rate around 39 basis points. So consistent with this quarter. Excluding performance fees, just to be clear, from a comp and benefits perspective, assuming we have a performance fee quarter of $50 million, which will continue to be our guide on performance fees, we'd expect comp benefits to be at 7.25 area and IS&T we'd expect to remain approximately flat at around $120 million, occupancy in the high 50s, again, approximately flat in G&A, probably in the mid-140s, down from the mid-high 40 guide that we gave last quarter and that does include an assumption of continued higher T&E and slightly higher placement fees. In terms of just performance fees, I know we get this question and it's very hard to guide on performance fees, as we've talked about in previous quarters. Given the strong performance in applicable funds, we expect to continue earning performance fees and that to be quite consistent, but we're going to keep our guide of $50 million. There are, obviously, episodic characteristics with performance fees related to both time of investment and redemption activity. In this quarter, for example, we just had another group of customers that hit the five-year performance threshold that triggered the performance fee -- and increased performance fee out of Clarion for this quarter, which meant that we came in higher than we had anticipated, but that's how we've guided on performance fees.

Matt Nicholls:

Thank you.

Michael Cyprys:

Hi, good morning. Thanks for taking the question. I wanted to just circle back to the OnChain money fund announcement that we saw recently. I was hoping you could talk a little bit about your vision there, the opportunity set that you see with this OnChain money fund product? And how you might think about broadening out distribution over time beyond the Benji app to distribute more broadly than that? And I guess, do you also view this as a replacement for stable clients? Just curious how you think about that.

Michael Cyprys:

And just as a follow-up question. It sounds like the overall fee rate guidance, pretty stable, has been stable for a bit. But just big picture, maybe you could talk a little bit about your overall multiyear outlook for pricing across products on your platform. If you look back over the past couple of years, where would you say pricing has moved the most versus maybe what's held in? What surprised you as you look back? And as you look forward, where do you anticipate the most stable versus more movement in pricing as you look out over the next couple of years?

Adam Spector:

Sure. So I think where we've seen the pricing move the most is in the traditional large asset classes, fixed income, equity, especially U.S. and fixed income. Those have ground down to a point. But I think they've hopefully hit a bottom here. We also see mandates coming in generally at larger sizes, which has obviously a significant impact on fees. And as we see consolidation in the industry, among players, that's impacting things. We think that when our fee rate moves, it tends to be a factor of asset mix as opposed to see degradation really because we're really able to earn significantly more on our alternative assets. And when you see the rates move around, that's less our rates degrading and more a shift in the mix.

Jenny Johnson:

I mean -- and I would -- there's $16.5 trillion in the fixed income space. Finally, people can allocate to fixed income and actually get a return. You could have one-third of your pension fund in fixed income and still hit your 7% target. So honestly, we hope we see a lot more flows there. We've had some hiccups in performance, but that's working its way out. And so we'd love to see a lot bigger flows in the fixed income, which could affect it. We just happen to have a great offset with both a strong active equity franchise and the alternatives that we're doing.

Operator:

Thank you. Your next question comes from the line of Dan Fannon from Jefferies. Please go ahead.

Jenny Johnson:

So I'll start. And Adam, you and Matt can add. So with Clarion, the bulk of the performance fees were actually their normal process of when you -- when clients hit a five-year window, you then monetize the performance fee. And so that -- the bulk of that was that as opposed to just redemptions from clients. They have gone from an internal queue to now a redemption queue. Clarion is different in that they are not required to redeem like others, maybe required 5% a quarter, Clarion has a choice because there and the institutional clients prefer this, they weigh the client's liquidity versus making sure that they're preserving value in the fund. And so they meet about 10% of the redemption queue, which I think is annually, it's 5% to 6% of the NAV. It's important to remember that Clarion has very little exposure to office, which has been the biggest area of pressure in the real estate space. And they have been big in industrial and residential. And so their performance is held up, so we think as interest rates come in the market, we probably -- we feel like there'll be one more raise and then probably sit there that folks will feel comfortable with the values in real estate and you'll start to see that flip. As far as all of the alts business, there's a denominator effect with the LPs, right? They've had a reduction in all their liquid assets. And to the extent that they'd like to deploy them, they're actually finding themselves over allocated in the alt space. So it's been harder on the fundraising side. I mean take private credit. Our BSP would tell you that they're seeing the best deals they've seen since the global financial crisis. But there's definitely some headwinds in raising money, just because of the fact that the LPs are fully an over allocation to it. Now we've been -- Lexington set out to raise a $15 billion fund. They are -- the LPs have allowed them to extend it, and they will raise above that. And actually, I'd love to just point out that in the case of Lexington, we believe 10% of that fund will come from the wealth channel. We launched a product with a large partner, and they said you should be happy with the first fund at about $500 million, and we think that fund will cap out at the cap. We extended it to $1 billion. So kind of overall space is that the LPs are finding themselves overallocated because the markets -- their liquid assets have been down. But as the equity markets improved, you're actually starting to see them being able to deploy more capital. The other thing that's happened is normal cash flows that come out of things like private equity are down quite a bit, so they haven't been able to fund from their existing alternatives. So it's just put them in a tougher spot, but they also recognize it's just a tremendous opportunity right now. Matt, I can see you'd love to say something.

Adam Spector:

The final thing I would add on Clarion is that traditionally, they really have been focused on the institutional market, but we're starting to see much better flows out of the wealth channel now. CP Reef is now up on 20 different platforms. We're seeing good growth there. Their opportunity zone fund is doing well. BSP is doing well. Jenny spoke about Lexington, so the specialized unit we built in the alternative channel is finally coming online and producing really good results in the wealth channel.

Operator:

Thank you. Your next question comes from the line of Brennan Hawken from UBS. Please go ahead.

Jenny Johnson:

I'll let Adam take that since it's his team.

Brennan Hawken:

Great. Thanks for that. And I know you touched on this a little bit before as far as the outlook for Western and flows. But when you look at the unfunded mandates and unfunded pipeline, would you say that there's an orientation to fixed income there? How does the balance look? And then how active are the RFPs, however active are you on the RFP for bonds? Thanks.

Brennan Hawken:

Thanks for that color.

Craig Siegenthaler:

Good morning, Jenny and Matt, hope you're both doing well. Sticking with the last topic of fixed in rebalancing, given your competitive and leading offerings in traditional fixed income, we wanted to get your perspective on the potential for large rebalancing into bonds, especially now that it looks like we're nearing the end of the Fed's rate hiking cycle. And also, do you have any perspective on the potential inflow mix between active work you're more competitive and then pass it?

Adam Spector:

Not necessarily a huge change in that mix. All I would say is that to the extent that we have continued volatility in rates for a little bit here, active management tends to do a little better in a situation where you have more movement. We certainly see that across the curve. And so we're seeing really good flows into active.

Craig Siegenthaler:

Thank you, Jenny. And then just as my follow-up, we saw positive net inflows into APAC. Can you comment on what products and which geographies are driving the inflows.

Craig Siegenthaler:

Got it. Thank you, Adam.

Alex Blostein:

Hi, everybody. Good morning. Thanks for the question. So maybe just to stay on the fixed income topic for a second. I hear your point on active versus passive, but year-to-date, fixed income ETFs have overwhelmed the gain share versus active products. So is that largely a retail dynamic? Or what you're referring to is largely on the institutional side? Or are you starting to see maybe some improvement in active appetite. And curious how your private credit offering fits in within all of that, right? Because on the one hand, if traditional fixed income strategies continue to get squeezed, you guys have an opportunity to cross-sell into some of the old managers. So how are those kind of separate managers working together to sort of tackle the client from both sides?

Adam Spector:

I would also say that it's tough to predict, active versus passive. I don't know that we have special insight into that, but we do have insight into demand for active. And there's a tremendous amount, and there's plenty for us and that's really across the different asset classes. High yield, we've seen turn around quite nicely. If you get a weakening dollar here, we think our global strategies can do well. We have pension plans that are better funded now and we have specific strategies designed to help to feed those liabilities. Those are all active. So we're seeing demand really across every single bit of our active portfolio. And if you look at traditional performance, Western had a rough go of it, they're tough decile now over the last six months. And after a fall like this, that's typically when they generate their greatest alpha given that they're a slightly higher beta manager. So this is probably the best type of environment for them right now. So don't know about passive, but feeling pretty good about the opportunities for active.

Jenny Johnson:

Matt, do you want to take that.

Alex Blostein:

Great. Very helpful. Thank you, guys.

Operator:

Thank you. Your next question comes from the line of Ken Worthington from JPMorgan. Please go ahead.

Adam Spector:

Yes. So first thing, equities was our softest asset class, but I would note that if you take a look at our flows ex dividend, they were actually up quarter-over-quarter, and our redemptions were down. So some bright news behind the negative net. If you take a look at the numbers behind that, large-cap growth was the area of the equity market that was hit hardest with negative flows over the last several quarters, and it's a large and it's area where we have the most significant asset base. So we are roughly balanced. We have slightly more AUM and growth versus value, but in large cap growth, we have a number of funds, that area with hit hard, where we see growth is actually in some of the smaller areas like international and small cap where we actually had some positive flows. The truth is that those positive flows are in asset classes that have a smaller slice of the pie, which helped lead to the negative flows overall.

Jenny Johnson:

There could be a couple of billion more potential outflows in that just because they're still in that regional bank. But otherwise, the bulk of it has already passed through. So now it's about positioning our money markets, and obviously, Western's a behemoth in the space. So we are very well positioned for it.

Operator:

Thank you. Your next question comes from the line of Glenn Schorr from Evercore. Please go ahead.

Jenny Johnson:

So that is, as I mentioned, I think that's one of our areas that we think is a big opportunity of growth. And again, our roots with the flagship Franklin Income Fund and being around for 75 years. We think we're pretty good at it. So it's been an area of big focus. And actually, in April, we have a couple of wins in the multi-asset space that came from our solutions group. So right now, I don't think we have consistent quarterly flows there, but we're starting to get -- there's a strong pipeline and we're starting to get more consistent flows in the space. And I would say that -- and Adam could probably speak to it since he was CEO of Brandywine at the time. But the difference between what Legg was trying to pull together were that the sims didn't even talk to each other, let alone the parent is much, whereas today, I think there's just a much greater just the sims willing to work with each other and come up with ideas. I mean discussions between Western and benefits on Benefit Street Partners on joining private credit and liquid credit, our local asset management team that managed [indiscernible] fixed income reaching out to Benefit Street Partners and doing a [indiscernible] private credit product. So I just think that there's – one is they're coming out of not only the multi-asset solutions group who's working with them. But also we're actually finding the investment teams, the various SIMs are coming up with ideas to work with each other.

Glenn Schorr:

Thank you, all.

Brian Bedell:

Great. Thanks. Good morning, folks. I just -- if I can ask a two-parter in fixed income. And that is maybe switching to the retail public side. If you can characterize how you're seeing demand for in the classic Franklin taxable bond franchise, also the global franchise as well, considering, obviously, we have much higher rates and the comments you made earlier on the stability of rates. And then the second part would be on the Western side, if -- again, it's good that we're moving into a higher rate back drop that's more sustained, that's more sort of plateauing potentially, and you sound very excited about institutional mandates picking up. I guess, how would that fare or how do you see any kind of risk to future flows if we move into a credit cycle in the later part of the year in, say, a recession scenario? And that would be more for the Western set.

Adam Spector:

Yes. When we talk about the traditional Franklin side of things as well in addition to Western, our global macro performance has turned around. That's an area where we're seeing the story, which is positive. And let's not forget our Munis business, which is something like $76 billion. We're seeing strong growth there placement on more systems. So I think both of those as well as Western, Brandywine and then the private credit thing, all of those are going to go well. The truth is that you can now actually meet your return assumptions with the significant portion of your assets allocated to bonds. That is the strongest tailwind we could hope for share fixed-income.

Adam Spector:

Look, I would say that the two biggest fixed income are core and core plus, they tend to be the drivers of gross sales as well as the drivers of redemption just based on the share side.

Operator:

Thank you. We have a last question coming from the line of Finian O'Shea from Wells Fargo. Please go ahead.

Jenny Johnson:

Yes. So the leadership that BSP is driving the really -- to the extent that there's integration, the integration with Alcentra. And we've now gone out and won. First thing you do is you make sure that you retain your key employees. And so we feel like we've stabilized the team there. We've met with all of their key clients. And so that's both the BSP folks move on with the central folks and meeting with the key clients. So we actually we feel really good about. That first step and making sort of stabilization. I can tell you that our distribution team in Europe is very excited to have a private credit manager to be able to distribute, that is local European private credit, but again, the private credit market faces a little bit of the headwinds that we talked about that BSP has faced. So there's -- in April, we have good CLO progress. And I think Alcentra is 49% of our CLOs. So we're still -- we feel good about that. I think though that we -- the fact that they're stable and now moving forward is I think is where we hope they'd be at this point, and I think that's where they are.

Matt Nicholls:

I'm sorry. We have one other question that came through on the screen without answer. Can everybody hear me?

Matt Nicholls:

Okay, great. So we had a question that was a follow-up on the guidance, quarterly guidance. And the question was, how does that impact our annual guidance. We gave an annual guidance range last quarter of $3.95 billion to $4 billion of adjusted expenses, annual adjusted expenses. And I'll just say, obviously, we're only halfway through the year, but all else remaining equal, despite improved market levels, improved flows, improved performance which push out formulary compensation, as I referenced on the question from Bill Katz. We're only slightly increasing the upper end of our guidance range to $4.05 million billion. So the guide would be $3.95 billion to $4.05 billion for the year. And right now, we expect to be on the upper end of that range, excluding performance fees. Thanks for the question.

Jenny Johnson:

Great. Well, everybody, thank you for participating in today's call. And once again, we'd like to thank our employees for their hard work and dedication, and we look forward to speaking to you again next quarter. Thanks, everybody.

Operator:

Welcome to the Franklin Resources Earnings Conference Call for the quarter ended December 31, 2022. Hello. My name is JP and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Jennifer Johnson:

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the first fiscal quarter of 2023. I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We're pleased to answer any questions you have. But first, I'd like to call out a few highlights from the quarter.

Operator:

[Operator Instructions] Our first question comes from the line of Glenn Schorr from Evercore.

Jennifer Johnson:

Great. Thanks, Glenn. I mean, first of all, as we mentioned in the quarter, the core bond portfolio Western had net flows, we continue to see really strong sales -- on the gross sales for Western products. 89% of the strategies outperformed. Actually, Core Plus and Core ranks second and eighth [ percentage ] in there against their peers for the quarter. So really good -- I think, good recent performance. The pipeline -- over $10 billion of the pipeline is Western. As we mentioned, the $7.5 billion mandate is part of Western's. But beyond that, they're just getting great support.

Adam Spector:

Yes. I would just add, Jenny, that the performance turnaround is really across the board. If you look at where our Global Bond Fund is, that's now top decile as well. So really good performance everywhere. On top of that, I would say that one of the things that differentiates us is the breadth of fixed income we offer.

Glenn Schorr:

Jenny, maybe I'll keep it at the high level because look, the margin compression is impossible to manage when the market drops as much as it did. Again, as you think rolling forward, we got the benefit of the market lift in the fourth quarter and early this year. Just curious on how you're thinking about what you do actively and proactively in '23 and where you think we can get to a "normal" backdrop if there's such a thing?

Glenn Schorr:

I apologize. I'm really talking about the adjusted margin and expenses, just expenses up, revenues down, it's hard to do in the short term when the markets drop. But how you're approaching that margin? Or is that an outcome? In other words, do you manage towards it? Or is it an outcome of the environment?

Matthew Nicholls:

Yes. I mean, I'll just say a few things on that, and I'm happy to provide the guide. Maybe that would be another question that will come up. But generally speaking, 35% to 40% of our adjusted expense base, as we've communicated in the past, is variable in nature with the market and performance. And we're always very much looking at the other 60% to 65% of our expense base to see if we can be more efficient and effective in particular in a difficult environment.

Operator:

Your next question comes from the line of Ken Worthington from JPMorgan.

Jennifer Johnson:

Well, again, I mean you have the Core Bond, which was the net flows of I think of $1.5 billion this quarter. And Core Plus is one of our top-selling selling funds. So even though it's still in the net outflows, it's dramatically improved in outflows. Templeton Global Bond, I mean, it's amazing when you look at that, as Adam mentioned, it is beating its benchmark and peers in all 4 time periods.

Adam Spector:

Yes, I was just going to say we've seen clients build multi-fixed income fleets with different Franklin components and oftentimes adding additional assets because they see how uncorrelated the various strategies are with each other.

Alexander Blostein:

I was hoping we can dig into your alt franchise for a couple of minutes. If we look at the AUM, excluding Alcentra this quarter, AUM seems to be kind of flat, actually down a little bit sequentially. So I'm just curious what's offsetting sort of the good fundraising momentum that you mentioned. Now I know the convention [ of ] AUM is not the same as fee-paying AUM. So maybe just kind of help us unpack what fee-paying AUM has done over the last couple of quarters, what it is now? And what are the drivers of fee-paying AUM in alts over the next several quarters?

Matthew Nicholls:

The core of the question and then Jenny and Adam, you should answer more, is the outflows and the softness that we've experienced in alternatives, Alex, is driven by the liquid alts area of the firm. It's not our primary kind of private market specialist investment managers in BSP, Clarion and Lexington have all experienced positive flows and organic growth. So I think what you're referring to is the overall number when you exclude Alcentra, where that is. It's slightly negative. That's driven by outflows and softness in both performance and flows on the liquid alts side.

Alexander Blostein:

Yes. And can you help us just break down fee-paying AUM, kind of what's liquid versus what's illiquid? And as you sort of think about the pipeline of opportunities on the more private side of things. It would be helpful just to get a little more granularity. So for instance, like the Lexington $12.5 billion or $12.8 billion fundraise, is already all in the fee-paying AUM number? And is it a management fee? Or is that going to turn on once the fund is closing? So just a little more granularity, that would be helpful.

Jennifer Johnson:

Go ahead, Matt.

Jennifer Johnson:

And basically, when you ask for liquid versus illiquid or tied up -- I'm assuming you're talking about tied up assets. Essentially, most of BSP, Clarion and Lexington Partners are all long-term tied up assets. Obviously, K2 has their liquid alts. So those have more flexibility, and you see that in redemption numbers as well as macro opps.

Adam Spector:

Yes. I would say that the timing is going to be typical of what we've seen in the past. I think it's usually about half of that pipeline or so converts in the quarter. I wouldn't see a real change in that. In terms of the fee rate, we tend to have scaled fee schedules. So when you have larger mandates, those priced a little cheaper than smaller mandates, we have a big chunky one in there right now. But in general, I don't see that the fees we've been charging on institutional asset management changing all that much quarter-over-quarter.

William Katz:

I was wondering if you could just talk a little bit about where you see the exit base fee rate at the end of the year versus what you sort of reported. And then as you think about your commentary about sort of money continue to go into institutional cash management, and some of these larger fixed income mandates. How does that sort of play off against what's happening on the alternative side?

Matthew Nicholls:

Yes. Thanks, Bill. Yes. There was some movement with respect to some of the numbers in the different components from one quarter to another. But what I'll do is, I'll walk through where we see the second quarter of '23 in terms of different components. And then I'll give you a high level of where we think we're going to be for the entire year also, which hopefully would be helpful for modeling purposes.

Operator:

Your next question comes from the line of Brennan Hawken from UBS.

Matthew Nicholls:

Yes. So we decided to -- or our partners at Lexington Partners decided to hold off on a closing from what they're expecting to do a little bit more in December and they decided to hold off until this quarter that we're in now. So that was probably something like a 0.4 basis point difference.

Brennan Hawken:

Appreciate that -- forward-looking comments on fee rates are challenging. Thanks for that additional color, that's helpful. When we think about -- you guys have spoken a lot about the bond outlook and the increased interest. So that's it's a very, very helpful context. One of the components of concern that I hear from investors is the deterioration that we saw last year in Western's performance track record. Can you speak to whether or not this interest is pertaining to some of those strategies that do tend to be larger. That has fallen on to tougher times on the performance end of things? Or is it into other products? Or is the interest happening despite that setback in performance because there's focused on -- there's a focus on different sort of time frames and whatnot. Any additional color would be great.

Adam Spector:

Yes, I would say that also Core Plus is still our biggest selling fund, right? They had some performance challenges, but clients stuck with them. They've been doing this for a long time. And again, 89% of their AUM outperformed for the quarter.

Adam Spector:

And Western's pipeline is building significantly as we speak.

Craig Siegenthaler:

So my question is on retail alts. Many pure alt firms have been building out their retail distribution efforts pretty aggressively [ since ] 2020. But Franklin has always had a very strong retail effort going back kind of more than 20 years. So I wanted to hear you articulate how you're using your global retail distribution really as an advantage for your old affiliates like Clarion, Lexington, Benefit Street? And also how the affiliates are also leveraging their own local sales teams versus Franklin at the center?

Adam Spector:

Well, yes, you took most of it, Jenny. But what I would say is that -- on top of that, this is a great example of where we're able to use our unique structure in terms of brand. So our alternative firms have great brands in the institutional are less known in the wealth channel. So we're still really putting the brands forward the BSP, the Lexington to Clarion in the institutional channel. But when we go to market in the wealth channels, we're going to the market at alternatives by Franklin Templeton. So that is really playing off of the brand name that resonates so well in those channels.

Craig Siegenthaler:

I have a follow-up, and it's more of a CFO-type question for Matt. But I wanted to get a little more color on your alt-net flow definition in the $2.4 billion that you highlighted in the quarter. Is the inflow, the initial sale? Or is it when the fees actually turn on with the product? And then also, do you include realizations in the outflow? Or are they included in the market appreciation, other line of the AUM roll forward?

Operator:

Your next question comes from the line of Dan Fannon from Jefferies.

Jennifer Johnson:

Are you speaking specifically just fixed income or equities as well, which...

Adam Spector:

Well, what I would say is that if you take a look at where the yield curve is right now and look at the shape of it and look how much you can make on the short end and it's a record quarter for us in cash management. So a lot of that really is just, I think, a temporary phenomenon where fixed income investors are able to park money on the short end, get a pretty attractive yield and wait for the right entry point.

Daniel Fannon:

Okay. And then just thinking about performance fees, I know obviously very hard to predict, but -- it seems like you are seeing redemptions in your liquid strategy. So maybe get a sense of kind of where performance sits broadly within the alternative universe and how we should, I guess, maybe performance-fee eligible AUM today versus a year ago, high watermarks, other kind of maybe numbers or things you can put around to give a sense of this year's outlook for performance fees maybe versus last year or other time periods?

Patrick Davitt:

I just have one kind of broader philosophical question. You're obviously getting really good traction with your ETF suite and news flow kind of suggest that you've been more active converting mutual funds to ETFs than some others. Obviously, bond ETFs appear to be getting a lot more traction over the last year or so. So could you speak to your willingness to get more aggressive with ETF conversions for some of your more larger strategies? And what is the debate kind of for and against going down that road?

Operator:

Your next question comes from the line of Mike Brown from KBW.

Jennifer Johnson:

Yes, I'll take the first part of that question. Matt, I'll have you touch on the performance fees. So remember, Clarion has primarily been an institutional manager. So it's only been recently that we've brought them into the wealth and retail channel. And so with respect to that, it's a very small -- CPREIF is a small fund that is growing quickly, and there's been minimal redemption requests there.

Michael Cyprys:

Matt, a question for you. I wanted to come back to expenses. So I hear you on a net basis that it's about 2% to 3% lower. I was hoping you might be able to elaborate on how you're able to achieve that? What would you say are the top 3 to 5 areas that are most meaningful in driving that decline. And do you view this as a 1-year efficiency drive? Or would you envision limited to declining expenses as you look out beyond this year?

Jennifer Johnson:

Okay. Well, I just want to thank everybody for participating in today's call. And once again would like to thank our employees for their hard work and dedication, and we look forward to speaking to all of you again next quarter. Thank you.

Operator:

Welcome to the Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year ended September 30, 2022. My name is Candy, and I will be your operator for today's call. As a reminder, this conference call is being recorded. And at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations of Franklin Resources, you may now begin.

Jenny Johnson :

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2022 results. As usual, Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution, are also joining me on the call. This month, we officially celebrate our 75th anniversary as a company. Our firm was founded on the values of advice, active investment management and helping people achieve the most important financial milestones of their lives. Since 1947, we have transformed from modest beginnings into one of the world's largest investment managers. And today, we partner with millions of clients in more than 155 countries. Although much has changed in 75 years, we are proud to say we have a history of innovation, and we have always maintained our commitment to evolve our organization to meet the needs of our clients and shareholders around the globe. Consistent with this, I'm pleased to say that we made good progress in fiscal 2022 on executing our long-term plan and further diversifying our business by expanding our investment capabilities and deepening our presence in key markets and channels. Since January, macroeconomic and geopolitical uncertainty have resulted in significant volatility and correlated declines in both global equity and fixed income markets. Our assets under management and flows were impacted by these unprecedented conditions and industry-wide pressures. However, as always, we have been actively engaging with our clients by providing insights and thought leadership to help them navigate the latest conditions, including drawing upon the expanded resources of our various specialist investment managers and the Franklin Templeton Institute. This fiscal year, notwithstanding flow pressures, investor interest continued in all asset classes. We benefited from having a diversified mix of assets and generated net inflows in the alternative and multi-asset categories and reduced net outflows in equities offset by increased outflows in fixed income and steep market declines. In terms of our progress, we are more diversified than at any point in our history across asset classes, client type, regions and investment vehicles. Starting with asset classes. We continue to thoughtfully expand our alternative investment capabilities, which are an increasing source of client demand and can offer superior returns. Just a few years ago, we managed about $15 billion in alternative assets. Pro forma for Alcentra, as of September 30, today, we managed $260 billion or approximately 20% of our AUM and alternatives, and these assets account for an even higher percentage of adjusted revenues. This makes Franklin Templeton one of the largest managers of alternative assets. Speaking of Alcentra, we were excited to announce today the completion of our acquisition ahead of schedule. Alcentra is one of the largest European credit and private debt managers. And with this closing, our alternative credit assets under management nearly doubled to $75 billion, and we expand our capabilities into Europe. We now have a meaningful portion of the key alternative categories, including secondary private equity with Lexington Partners, real estate with Clarion Partners, hedge funds with K2 Advisors, alternative credit with Benefit Street Partners and Alcentra and venture capital with Franklin Venture Partners. For the fiscal year, alternative net inflows were $6.3 billion, including outflows in liquid alternative strategies. Our three largest alternative managers, BSP, Clarion and Lexington each had positive net flows with a combined total of approximately $12 billion. There is tremendous opportunity in the democratization of private markets as individual investors are under allocated to the asset class, when compared to institutions. Over the past year, we have focused on product development and suitability, sales and marketing and client education in the distribution of alternatives in wealth management. On the product side, BSP recently launched its first multi-strategy interval fund. Additionally, Clarion Partners Real Estate Income Fund and Franklin BSP Capital Corporation, a private Business Development Corporation, were on-boarded on two alternative fintech platforms that offer direct access to financial advisers and individuals. Again, this is all part of our broader effort to enable more investors to benefit from diversification of private markets and other alternative strategies. In this regard, to complement institutional focused resources, within our specialist investment managers we have created a dedicated alternatives distribution team that covers wealth management channels. In addition to being diversified, within our alternative asset strategies, we also benefit from a broad range of fixed income, equity and multi-asset strategies. In the multi-asset category, our flagship Franklin Income Fund which has an approach that is adjustable to changing market conditions generated net flows of $4.8 billion in the year due to increased interest from investors in Asia and Europe. Turning to fixed income. We benefited from a broad range of fixed income strategies with non-correlated investment philosophies, including positive net flows into US income, intermediate and highly customized. Notwithstanding the pressure in growth equity in particular, equity net outflows improved by 61% from the prior year, with positive net flows across a diverse array of strategies, including infrastructure, sector, emerging markets, all cap Core and equity income. From a client perspective, less than three years ago, retail investors represented 74% of our asset mix. Today, our business is balanced with approximately 50% individuals and 50% institutions. Furthermore, we continue to expand our private wealth management business and Fiduciary Trust International generated its eighth quarter of consecutive positive long-term net flows. Our firm is also diversified by geography and our efforts to implement a regionally focused distribution model that has shifted decision-making and resources closer to our clients is yielding results. For example, we have seen an improvement in our non-US business, including a 70% reduction in long-term net outflows from the prior year. EMEA long-term net flows turned positive, and there was a significant decrease in long-term net outflows in our APAC region. Turning to diversification by investment vehicle. We continue to build on our strengths in delivering investment expertise through our clients' investment vehicles of choice. Similar to the industry at large, we are seeing strong demand for SMAs and ETFs in particular. We are a leading franchise in SMAs with $100 billion in assets. And this year, we enhanced our position by acquiring O'Shaughnessy Asset Management and its custom indexing platform, Canvas, with positive net flows since acquisition. Today, our ETF AUM is in excess of $11 billion, and we continue to have positive net flows. Our ETF platform is differentiated with approximately 50% of our AUM in actively managed strategies. The evolution of technology in the industry continues to be another area of focus. This year, we made four minority investments in wealth distribution technology firms that expand access to private securities and/or digital assets to individuals. We launched the world's first tokenized US registered mutual fund as well as two digital asset SMA strategies. In June, we opened a second fintech incubator in Singapore and now have corporate investments in 14 early-stage companies, separate from our venture capital funds. In January, we successfully launched the Hello Progress campaign globally to introduce a refreshed view of Franklin Templeton. The campaign reinforced the trusted relationships we have built with clients for 75 years. Highlights the increased breadth of the firm and reflects our commitment to finding innovative ways to meet client needs. Looking forward, we will continue to purposely invest in key areas of growth across all geographies, including technology, alternative assets, customization, wealth management and distribution initiatives that benefit all our investment teams. Of course, none of our efforts this past fiscal year would be possible without the hard work and dedication of our employees, of which I and our leadership team very much appreciate. Now I'd like to turn the call over to our CFO and COO, Matt Nicholls, who will review our financial results from the fiscal quarter and year. Matt?

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Craig Siegenthaler of Bank of America. Your line is now open. Please go ahead.

Matt Nicholls:

Good morning.

Matt Nicholls:

Good morning. Craig. So I think, look, we just announced the closing today, as you mentioned, we're very glad to be closing ahead the schedule by at least, I think, a couple of months. We're very happy with the team. Performance is good. We're now turning to execution with an emphasis on business growth opportunity for the future. And I think the best way to describe it is that our teams together are going to be in marketing mode quite quickly from here on. So I think that's all we can comment so far.

Matt Nicholls:

Yeah. Please go ahead, Craig.

Matt Nicholls:

Yes. So we have about $1.3 billion of deferred payments that are due on previously announced acquisitions over the next four years. We also have $1.4 billion of debt due over the next five years.

Matt Nicholls:

Thank you.

Bill Katz:

I think diamonds for 75 years, Jenny, if I did the math correctly, so congrats on that.

Bill Katz:

So question just on expenses. Matt, normally in the press release or the supplement, you'll sort of put some information in there, sort of, how to think about expenses. Given the New Year, you got a lot going on. Revenues are down, you got some deals. Can you give us a sense how we should think about maybe the -- excuse me, the base expense outlook for fiscal 2023? And how to think about whether the fourth quarter -- fiscal fourth quarter as a jumping off point, or we need to normalize and just how to think that through, if you don't mind.

Bill Katz:

That's very helpful, thank you, Matthew. And then, Jenny, maybe one for you. Just in terms of -- you listed off a number of things you're doing on the retail democratization side. Can you just maybe level set where you are today in terms of maybe the more major wirehouses, both in the US and your distribution partners globally and where you might be able to sort of increase penetration or just see some market share opportunity?

Bill Katz:

Thank you.

Operator:

Thank you. Our next question comes from the line of Brennan Hawken of UBS. Your line is now open, please go ahead.

Adam Spector:

Sure. I think what we're seeing globally is that the adoption of Alta, a more significant portion of the portfolio is occurring in every region we operate in. We see that in Latin America. We see it in Asia, the US, and EMEA. And to the extent that Alcentra runs a lot of European-based product, we think that they have the best shot of increasing their penetration there in the short run. We're going about it the same way we are everywhere in the world. We think we have world-class institutional brand; we've got a wealth management distribution presence. And then what we're doing to boost Alcentra in that market is really to add specialists so that there's a specialist team that works between the investment teams and the general salesforce to make sure that we're telling the story the right way. Because as Jenny said, we think that success in retail also is going to be largely based on ease of access as well as education and that's where we're putting a lot of our efforts now. Given that the transaction was just announced today, we're still early in executing on some of that, but we're working on it now.

Matt Nicholls:

And I'll just add a couple of points to Adam's remarks. Each of our specialist investment managers that we've acquired in the alternative asset space has had an attractive organic growth rate profile based on historical performance and activity in institutional client base. And so there's already that embedded growth rate as we acquire the firms. So, the future potential is on top of that that Adam talks about. So, we expect a natural organic growth rate tied to the institutional side of the business. And then that to be boosted, as Adam mentioned, more of the wealth management channels. The additional acquisition targets that we look at that will complete our sort of build out, if you will, of the alternative asset specialist investment managers are exactly the same. They're all institutionally-focused with embedded growth rates on the institutional side, of which we believe there are some very interesting opportunities in the broader channels where Franklin can leverage.

Adam Spector:

Great.

Adam Spector:

And the final thing is how excited we are about all.

Adam Spector:

We’re going on alternative. Each of our alts firms is institutionally focused historically and has long-standing distribution, but we are supplementing that with FT relationships where we have particular strength and we're seeing that benefit each and every one of our firms.

Jenny Johnson:

Franklin Templeton.

Brennan Hawken:

Yes, yes. Got it. Franklin Templeton. Sorry, that's -- yes, that's obvious. Okay. Thanks for all of that. Really appreciate the thorough color. I'd love to transit into maybe a more mundane topic on expenses. And so, Matthew, thinking about the -- I know you caveated it, right, early days and whatnot. You helped us sort of quantify the -- what your expectation is for an uplift to T&E. And obviously, it's an inflationary environment that you've got Alcentra. But how much is Alcentra adding into that 3.95 to 4 base? And how much do you have wiggle room in order to continue to grind that down through the year as we work through this very, very challenging environment.

Brennan Hawken:

Thanks for all the color.

Operator:

Thank you. Our next question comes from the line of Dan Fannon of Jefferies. Your line is now open. Please go ahead.

Jenny Johnson:

Adam, do you want?

Rick Roy:

Got it. Appreciate the extra context around that. And then if I may, just on the performance fees, obviously, has been somewhat elevated the last two quarters at least. So how might we think about performance fee eligible AUM and where that sits currently, obviously, with Alcentra now in the mix and what assets are below any high watermarks. Just to get an idea of going into next year?

Rick Roy:

Appreciate it. Thanks so much.

Operator:

Thank you. Our next question comes from the line of Ken Worthington of JP Morgan. Please go ahead.

Matt Nicholls:

In terms of -- if you define investing in the business in areas where basically we have very little operating income today that we expect to grow in the future, we're increasing that substantially in 2023 because we think there's very substantial opportunities in the future. So we intend to increase our investment in that area. I'll ask Jenny if you.

Matt Nicholls:

Yes. I just emphasize that our number one priority, and I think Jenny just mentioned this clearly is organic growth strategy internally. So, the question you had around have -- are we increasing the dollar investments organically? The answer is yes. We are increasing those. In terms of the other activity around M&A, as Jenny mentioned, I think we mentioned in our prepared remarks, we have $6.8 billion of cash and investments. That's roughly level with last year, exactly this time last year after two important acquisitions and four minority investments and other investments we've made in the business, of course, a lot of that is made possible through operating income, cash flow and so on. But when we look forward and when you think about the guidance I just provided, to you. We still have the room to make the organic investments, which are very important. But also we have to -- our balance sheet to continue to make targeted acquisitions, which, as Jenny mentioned, the bar is higher now, but the level of interest in some of these things is certainly not waned in any way.

Michael Cho:

Okay, great. Thank you.

Michael Cyprys:

Great. Thanks. Good morning. Maybe just coming back to Alcentra, can you talk about where you see the most compelling opportunity set to accelerate the growth at Alcentra. Is that from retail distribution in Europe? And maybe you could talk about what actions you might take there with Alcentra to help them accelerate growth?

Matt Nicholls:

I think the additional thing I would add to Adam's comments is I think it's important to note the fact that this transaction is one that we described as globalizing a specialist investment manager we already have in DSP. So we're globalizing the business. And Alcentra and BSP becoming part of a global team as opposed to a largely US and a large European business. That helps with fundraising, it helps with strategy formation. It helps with talent retention and origination. We just become a more interesting place for both investors, ideas, and talent. And that was one of the reasons why we thought this was very compelling and why we acquired Alcentra is something that another -- the point that Jenny mentioned a second go around the bar being high. Obviously, the first thing we always ask ourselves is can we do this ourselves? Can we build this business organically? And there are some things that just frankly take too long to get to a leadership position or even frankly gain credibility in a particular strategic area. And in our view, it would have taken us too long to do these ourselves. So we're delighted to acquire Alcentra for that to help globalize also outstanding PSP team and leadership.

Jenny Johnson:

Yeah. So it's a tokenized money market fund, technically, you could go on at the Apple Store and download the Benji app and have a wallet that accesses that money market fund. We built a transfer agency system on the blockchain. So all the shareholders' books and records are there. That I'm a believer that you will see 40 Act funds expressed over time in tokenized records. And that will have an impact on things like ETFs and traditional mutual funds. If you think about a token, it can have a smart contract that prices all the underlying investments immediately, so you can always have an NAV that's dynamic, even ETFs are only priced a couple of times a day. So we did it, because we think that this is an important space that's going to happen over time, and we wanted to understand the marketplace there. And we are talking to firms about how to leverage it. You have to hold those tokens in a crypto wallet, so if that isn't part of your infrastructure as a distributor, it's not that valuable to you today, but it will be over time. We also did an investment in a company called Eaglebrook, and we have several strategies there. Where they are fundamental research on some of the coins in the marketplace, we think these two things ultimately converge. Where you'll have traditional sort of investment capabilities that are held in a token or coin and you will have companies that will be reflected by a coin and investors will have both on their platform. But, I think, it's really early stages in this.

Operator:

Thank you. So our next question comes from the line of Brian Bedell of Deutsche Bank. Your line is now open. Please, go ahead.

Matt Nicholls:

You mean 2023, Brian?

Matt Nicholls:

All right. For the end of the year, yes, it's around $3.87 billion so --

Matt Nicholls:

That, as you -- we guided -- as you may remember, in the last call, we guided to 3.9% to 3.95% and then I said we'd be on the lower end of that -- so we're actually about $35 million inside of our guidance.

Jenny Johnson:

So, I actually think the way to describe kind of the ESG is actually looking at the European framework with Article 8, 9 and Article 6, because it -- I actually think they do a pretty good job of defining it. You see Asia following it, and I think the US will probably model the concepts around it. So we have about $35 billion in 48 strategies and Article 8 and 9 and positive flows there. We were very conservative, I think, in our initial evaluation. Our compliance group was quite active in determining what would be categorized in those 6, 8, 9. So we feel very good about that. I think you're only going to see more requirement around transparency and to document how your process is, whatever you say show us that you're doing it and most regulators you see it in the US, you see it in Europe are saying, if you don't document and show us that you're actually doing what you say you're doing, we're not going to give you credit for it. You see it was like the UK 2022 stewardship code. Again, it's all about kind of documentation there. I do think that there is a recognition a couple of things. One is that you should measure ESG considerations with risk to the underlying company and then portfolios to the risk of externalities. And that often these get blended, I think you're going to start my just gut feel is, over time, there will almost be two different measurements for that. So I think that's a natural progression. And then I think that there's a recognition that, oh, by the way, we're fiduciaries. And so you need to consider returns in all of this, and that has to be part of the measurement as well. And I think you capture that in the Stewardship Code, the UK Stewardship Code 2. So I think it's here to stay. I think it's just a natural evolution of transparency and over time better and better data and remembering that we're all fiduciaries and then I will again remind that we are asset managers, not asset owners. So we are at the discretion of our clients as far as their desires, and we talk and educate them on things, but in the end, it's their money.

Operator:

Thank you. This concludes today’s Q&A session. I would now like to hand the call to Jenny Johnson, Franklin's President and CEO for final comments.

Jenny Johnson:

Great. Well, I just want to thank everybody for participating in today’s call. And once again, I would like to thank our dedicated employees for their hard work this past fiscal year and they are laser focused on our clients, and we look forward to speaking to all of you again next quarter. Thank you.

Operator:

Welcome to the Franklin Resources Conference Call for the Quarter End June 30, 2022. Hello, my name is Daniel and I'll be your call operator today. As a reminder this conference is being recorded. And at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Jenny Johnson:

Thank you, Selene. Hello, everyone and thank you for joining us today to discuss Franklin Templeton's third fiscal quarter results. Matthew Nicholls, our CFO and COO and Adam Spector, our Head of Global Distribution are on the call with me. Since January, macro economic and geopolitical factors have contributed to global financial markets experiencing a period of volatility not witnessed in decades with substantial drawdowns of both equities and fixed income markets. These declines have challenged investor sentiment and industry flows, particularly in fixed income. Assets under management and flows were impacted by these industry wide pressures. We continue to benefit from a diversified mix of assets. As investors look to reposition their portfolios, we've seen interest in our alternatives and multi-asset strategies, which both experienced strong net inflows during the quarter. In addition, notwithstanding flow pressures in fixed income, investor interest remains robust across the asset class. Over the past few years, we've been very deliberate in transforming our company by expanding our investment capabilities, and deepening our presence in key markets and channels. This diversification combined with our financial flexibility serves us well across market cycles, and is creating broader sources of revenue, positioning our company for future success. This quarter, we continue to make progress building our alternative asset business, which is less correlated to public markets, and a source of increasing client demand. We now have specialist investment managers that represent a meaningful portion of the key alternative categories. On April 1, we closed the acquisition for Lexington Partners, a leader in secondary private equity, where current markets create further interesting opportunities. At the end of May, we announced the acquisition of Alcentra, and we're pleased to welcome the Alcentra team to Franklin Templeton. This acquisition was an opportunity for us to enter the European alternative credit sector at meaningful scale and globalize our current U.S. alternative credit business Benefit Street Partners as one of the largest European credit and private debt managers, Alcentra has approximately $38 billion in AUM, with global expertise across a broad array of credit strategies. Given the current challenging market conditions, we are pleased to have carefully structured the transaction to help mitigate risks. Alcentra has a strong team that will benefit from the scale, stability and cultural alignment of being part of a combined alternative credit specialist investment manager led by Benefit Street Partners long tenured and experienced senior management team. Pro forma for Alcentra's AUM, our alternative credit AUM doubles to approximately $77 billion and our aggregate alternative AUM increases to over $260 billion representing 19% of our AUM and an even higher percentage of our adjusted revenues. As mentioned this quarter's market environment challenged industry flows. And while we continue to benefit from a diversified mix of assets, we had third quarter long-term net outflows of $19.8 billion. Fiscal year-to-date, long-term net outflows were $7.4 billion. This quarter's continued market dislocation, rising rate environment, and the need for inflation hedging has heightened investor interest in alternatives. Our net inflows increased to $2.1 billion this quarter, and included outflows in certain liquid alternative strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners each had net inflows with a combined total of $4 billion. Fundraising momentum in this area continues. Our multi-asset net inflows were $1.6 billion, which represented the fourth consecutive positive quarter for the asset class. In this broad market sell off environment where investors are focused on income generating strategies, we benefited from having strong income funds managed for yield with notable investment track records and customization strategies. The first half of 2022 saw the worst fixed income net outflows for the U.S. mutual fund industry since 2000 with six consecutive months of net outflows. While current interest in the asset class continues to be strong, and our fixed income inflows increased by 6% from the prior quarter, net outflows were $14.3 billion primarily due to certain U.S. taxable and muni strategies. We benefited from having a broad range of fixed income strategies with non-correlated investment philosophies, including net flows into taxable U.S. income, multisector bond, corporate and enhanced liquidity strategies. Equity net outflows were $9.2 billion. This quarter the risk off environment impacted investor sentiment on certain growth strategies, which were partially offset by positive net flows into infrastructure, emerging markets and sector specific equity strategies. Consistent with what we've learned throughout our 75 year history, we've been front and center with our clients to help them navigate this period of high market volatility, rising rates and inflation and fears of recession. In this period of uncertainty, the importance of thought leadership and active engagement have increased. Clients are looking to us to provide them with investment solutions focused on income, inflation hedged alternative and customization strategies, as they look to rebalance their portfolios and reallocate risk across a variety of asset classes. Last year, we shifted through regionally focused sales model to meet the varying demands of our global business, shifting decision making and resources closer to our clients. This quarter, we saw the benefits of geographical diversification outside the U.S. with improving net sales trends in EMEA and positive net flows in the Americas. Net flows for non-U.S. regions improved by 79% fiscal year-to-date from the year-ago period. Touching briefly on our financial results, which reflect the acquisition of Lexington Partners, adjusted revenues were $1.6 billion relatively flat from the prior quarter and a decrease of 3% from the prior-year quarter. Our adjusted effective fee rate increased to 39.5 basis points, compared to 38.5 basis points in the prior quarter. Expenses were flat quarter-over-quarter and a 1% improvement from the prior-year quarter. Adjusted operating income was $567 million for the quarter, a decrease of 2% from the prior quarter, and a decline of 6% from the prior-year quarter. Our balance sheet position remains strong with total cash investments in excess of $6 billion after upfront cash consideration of almost $1 billion was paid for the acquisition of Lexington. Let me wrap up by saying that over the past several years, we've significantly diversified the firm to serve more clients across a broader range of investment strategies with deep expertise and specialization in both public and private markets through more vehicles across geographies. Although the current market landscape presents challenges for the investment industry, and our firm within it, we are proud of the progress that we have made to date to help our clients in both good and challenging market conditions. Finally, I'd like to thank our dedicated employees whose hard work and commitment to help people all over the world achieve the most important financial milestones of their lives. Now let's turn it over to your questions. Operator?

Glenn Schorr:

Thank you very much. So Jenny, I enjoyed the comps in prepared remarks on the wealth management alternatives and everything that you're doing on the education front. So I'm curious from a product standpoint, how you're thinking about just making drawdown funds available or putting retail-specific products in motion, specifically semi-liquid products like order and liquidity? Because we've seen some hiccups lately as markets pull back and seeing gross sales free up, so I'm just curious how you're thinking about the products that you're bringing into that channel?

Adam Spector:

Yes. Glenn, I just might add that when we talk about the distribution of alternatives to the wealth platform, yes, that's a broad strategic effort, but each platform is a little bit different. And so I think one of the things we've been able to do well over the last few quarters is to engage with kind of the head gatekeepers of each platform to say what type of a strategy is really best for you. Some want perpetual, some want other things, some want a product where there's going to be a broad consortium of banks participating the deal, others want something that's more bespoke for their platform. So we've really been able to be a little more specific about what we're offering on each platform, and I think that will pay significant benefit.

Jenny Johnson:

Well, interesting -- sorry. I'll start and then, Adam, you can fill in. I mean, you're saying some of our biggest growth flows are still into fixed income. So while I think there's been redemptions, and obviously, much heavier redemptions on the retail channel than on the institutional channel, we still see strong flows into asset class. And then I would just say one thing that I'm not sure is fully appreciated, we cover the spectrum on views on -- in the fixed income market. So when you look at Brandywine, the Franklin fixed income and Western, we actually -- their alpha generation only correlates 0.15x, right? So there's always something performing in that category. And what you see is whether it's insurance companies or others, there is a need for fixed income types of investments and returns in income generating. And frankly, that may be in the private markets as well as the public markets, but there's definitely demand there. Adam, do you have anything to add?

Glenn Schorr:

That definitely makes sense. Thank you.

Michael Cho:

This is Michael Cho. I'm in for Ken today. I wanted to shift gears a little bit and ask a little bit about the recent launch of the blockchain-based money market fund. I realize it's been in the press for a little while now, but some time has passed. I'm just curious, kind of a few things. One, I mean, what are kind of your objectives of launching a fund on the blockchain? And then two, I think I saw on the seller chain, but -- but kind of what were your considerations when you pick that one versus Ethereum or versus a private chain? And then query, like, again, sometimes has passed. Any lessons learned you like to share so far?

Michael Cho:

Okay, great. That is wonderful, thanks Jenny.

Unidentified Analyst:

Yes, hi. Good morning everyone. This is actually Rick on for Dan. So I wanted to tack on to the fixed income discussion from earlier. So just looking at the data that we have available to us, and you guys living this business well, clear that a sizable chunk of the deterioration you guys are seeing in outflows are coming from retail. But just like thinking about the large institutional base and nature of the Western franchise, could you maybe speak on trends and conversations you're having with that client base and the platform more specifically?

Adam Spector:

Yes. And if you look at --

Adam Spector:

Yes, we're up quarter-over-quarter. Remember that Core and Core Plus are about 1/3 of Western's total AUM. They have a lot of other things that are doing exceedingly well. And on top of that, even within the Core and Core Plus plan, we've got a very significant institutional pipeline.

Operator:

The next question comes from Alex Blostein of Goldman Sachs. Please proceed.

Matthew Nicholls:

Do you want to start, Jenny, okay?

Matthew Nicholls:

Okay. Alex, on the management fee incomes from -- on the management fee revenue from the alternative asset managers that we have, we'll likely aggregate something like, on an annualized basis, $1.2 billion to $1.3 billion. I think we've communicated that in the past, and that's consistent with what we said. That's about 50% up from the previous year. And that excludes performance fees, of course, as we've explained. So that's where we're at on the management fee revenues.

Matthew Nicholls:

And then -- and then if you're looking for the -- for an idea of what the overall alternative asset business is relative to the size of our franchise, if we pro forma the business for Alcentra, for instance, where about 19% of our alternative management would be in the alternative asset space, 21% of revenue roughly in, probably up to something like 1/4 of our operating income will be from Alternative Assets as a whole.

Operator:

Thank you. The next question comes from Patrick Davitt from Autonomous Research. Please proceed.

Jenny Johnson:

Yes. Well, first, I mean, the turnover that happened obviously happened all before the deal was announced. It was really at the senior level, and I think that the area of concern was the direct lending. And the rest of the business has been growing very well and has had very good performance. And so I think it's important to block the noise around that, but I think that it's important to understand that was just at a very senior level, which is why there's an opportunity with the fact that we can roll it in with Benefit Street Partners that already has a good senior leadership team. And then one of the things that I think we understand really well and why we've been successful in acquisitions is we understand that you're buying an investment team and their investment process, and so it's important that you have retention. And so we've built in retention to ensure that we minimize any kind of -- the future, anybody leaving in the future. I think that what's really exciting is that we are -- our distribution in Europe has continued to improve. And now you take a product like this that we think that -- our distribution is incredibly excited about having private credit to be able to sell. And so being able to bring these 2 things together, we are very, very optimistic. So I don't know, Adam, anything else you want to add?

Matthew Nicholls:

I'll just end by saying, Patrick, that as you know, we study M&A pretty hard in the asset management arena, including both traditional and alternative assets. And we felt that globalizing, as Jenny just mentioned, globalizing our alternative credit capabilities by adding Europe is very important given the growth potential in -- across that region, frankly, both the U.K. and Europe. And we concluded, while we like to grow things organically ourselves, it's our #1 priority is always to grow organically where we can. There are some things that just take too long to become a leader. Too long to grow, too long to be relevant, frankly. And in our opinion, it would have taken us perhaps a decade to create what Alcentra has become, just like it's taken 15 years to become what Benefit Street Partners has become. And we just concluded that this was the best way to become a true global leader in alternative credit. So that's why we did what we did. And to your point on price, the price is driven a little bit around some of the uncertainty in the overall market. But also it's just a function of how M&A can be structured, and we've done that very carefully. And we've got in the growth of the business, and we expect there to be growth. As Jenny mentioned, there are multiple sectors, multiple strategies at Alcentra, and most of them have grown quite nicely, and we expect that to continue post-close.

Patrick Davitt:

Great, helpful. Thanks. And just one quick follow-up. Would you be willing to give the total AUM in kind of this core flagship strategies at Western? There's so much of institutional that we can't see. I don't think we've got an update on that in a while.

Patrick Davitt:

Core and Core Plus.

Patrick Davitt:

Sure, great.

Operator:

Thank you. The next question comes from Stephanie Ma of Morgan Stanley. Please proceed.

Matthew Nicholls:

Yes. So on overall expenses, I think in the last call in the last quarter, we guided to $3.9 billion to $3.95 billion of adjusted operating expenses for the full fiscal year ended 9/30. The update to that I would say is that we expect to be on the lower end of that. So instead of just saying $3.9 billion to $3.95 billion, we expect to be closer to $3.9 billion and then to $3.95 billion. And remember, that includes Lexington. So we -- a couple of quarters ago, I think I explained that we were in the $3.9 billion to $3.95 billion excluding performance fees and excluding Lexington. Last quarter, we said $3.9 billion to $3.95 billion excluding performance fees, including Lexington. This quarter, we're saying $3.9 billion to $3.95 billion excluding performance fees, including Lexington and would be on the lower end, we believe, all else remaining equal for the year. In terms of specifics around that, I think last quarter, I guided to the different line items and we'd expect those to be approximately the same. So G&A to be approximately $140 million, occupancy around $57 million and IS&T to be around $125 million, and all those things are obviously inclusive of Lexington partners. And then our comp ratio, we've guided to around 45% for the year, and we expect that to also be at 45% for the year. In terms of performance fees, we don't guide on performance fees, frankly. I mean, the way I've communicated this in previous calls is to say that we think for modeling purposes, $30 million to $40 million is reasonable. Obviously, we acknowledge the fact that we've been higher than that for a few quarters now. But again, it's very hard to calculate where our performance fees are going to be. But all I'd say is that obviously, the reason why performance fees have gone up is because we're performing well in a number of our asset classes, both across real estate and credit. And other areas, frankly, we've crossed about 9 of our specialist investment management companies, although it's concentrated AB&3. It's because we're just getting larger in alternative assets that the potential to earn more performance fees is going up as we continue to increase our alternative asset business. But I'm sticking with --

Jenny Johnson:

So I believe that we have said that we would like to extend our ownership in there now that the regulations have changed, and so we're in discussions to do that. We also have a wholly-owned fee, which would give us other optionality if that -- we were not able to buy 100%. Look, China is a massive, important market. We were early as far as firms, asset managers who did joint venture partners. We have unbelievably excellent performance, have had really stable investment teams there. We hired Dr. Ben Mang, who is our Chairman of Asia-Pacific and is well connected. And we -- it has been a profitable business for us. We think it can be much more meaningful as far as its contributions over the long run.

Operator:

Thank you. Next question comes from the line of Alex Blostein of Goldman Sachs. Please proceed.