Q1 2021 Franklin Resources Inc Earnings Call

Welcome to Franklin Resources earnings Conference call for the quarter ended December 31, 2020. My name is for Shay and I will be your operator Cooperator today statements made on this conference call regarding Franklin Resources, Inc, which are not historical facts are forward looking statements within the meaning of the price.

But securities Litigations Reform Act of 1995. These forward looking statements involve a number of other known and unknown risks uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward looking statements. These and other risks uncertainties and other important factors.

Sort of described in more detail and Franklin recent filings with the security and exchange Commission, including and the risk factors and empty and H session of Franklin and most recent form 10-K, and 10-Q filings at this time all participants are in a listen only mode. If you would like to ask the question at that time. Please press star one on your telephone keypad the.

And tone will indicate your line is and the question queue. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. The company requests that you limit to one initial question and one follow up as a reminder, this conference is being recorded at this time I would like to turn your call over to Franklin resources, President and CEO Jenny Zhou.

And MS. Johnson you may begin.

Hello, and thank you for joining us to discuss Franklin Templeton and results for our first fiscal quarter of 'twenty 'twenty one.

Following the close of the Legg Mason transaction on July 31, the results we announced earlier. This morning include the first full quarter of the combined organization.

On the call with me today is Greg Johnson, our executive Chairman and Matthew Nicholls, our CFO and joining the call for the first time is Adam Spector, Adam joined our firm last July as managing partner of Brandywine Global and Additionally, became our executive Vice President and head of global <unk>.

Distribution on October 1st to start we hope that everyone is staying healthy and safe we'd also like to recognize our incredible employees, who continue to work hard every day on behalf of our clients and for.

And it's been six months since we closed our acquisition of Legg Mason and its specialist investment managers.

And the over that time.

All while under a remote work environment, we've made significant progress and bringing our teams together to maximize our collect and potential.

Seeing a high degree of stability within the organization as well as a number of encouraging trends across the business.

First off assets under management reached a record high of approximately 1.5 trillion this quarter driven primarily by strong market performance.

The increase of 79 billion or 6% during the quarter, turning next to operating and financial results adjusted revenues increased by 20% to 1.5 billion, primarily due to an additional month of Legg Mason and results.

Our revenues and continued expense discipline resulted in a 28 per cent increase and adjusted operating income to $550 million and an increase of operating margin of 37, 2%.

On the performance front, our investment results improved this quarter with 61%, 66% ex the <unk>.

8% and 75 per cent of our strategy composites outperforming their respective benchmarks for the four key time periods looking deeper into those numbers Western asset continues to have standout performance and reached 423 billion and long term assets and 400.

And 80 billion and total asset.

Its highest level on both fronts and over a decade.

Randy wind performance rebounded strongly and saw net inflows into global multi sector products and the latter part of the quarter.

And as we saw improvement in performance at Clearbridge and across many Franklin Templeton strategies. Clearbridge is another example of one of our specialized investment managers, reaching a record in a U M, which was 176 billion at quarter end.

Likewise, our fiduciary trust high net worth of AUM.

Is that and all time high of 32 billion on the business also generated positive net flows for the quarter record AUM levels were also reach for Clarion partners at 58.1 billion.

Long term relative investment performance of our U S and international mutual funds also improved this quarter.

Significant driver of the improvement was our Franklin income fund and several of our value oriented equity strategies often generated noteworthy results. We continue to see strong performance and you.

Equities and U S fixed income our mutual funds that are rated four or five stars by Morningstar increased during the quarter and now number 140 funds on.

On the distribution from long term net outflows of $4 5 billion, which includes $12 6 billion of reinvested distributions, but notably momentum continued to build with positive flows into a number of our specialized investment managers, including benefit Street partners Clarion partners.

Clearbridge Fiduciary Trust Franklin equity group, Franklin Templeton, and fixed income Martin Currie and Western asset management.

Franklin equity groups.

The strong inflows, which were led by the Franklin diode techs on which reached a record 22.5 billion of AUM.

As of quarter, and we have a promising institutional pipeline of opportunities and a combined total of one but unfunded wins of $11 billion and.

We've noted on previous calls of strategic focus for the firm has been to expand our alternatives platform the offer strategies and do not lend themselves to pass and replication with 127 billion and assets under management and alternatives and robust relationships across the retail channel we've seen demand for our retail.

And of offerings increase our EMEA region led the way with a focus on multi strategy social infrastructure and real estate.

Also importantly, as we look to deliberate investment expertise through our clients' investment vehicle of choice. We know the top three market position in the retail SMA business, which saw positive net flows this quarter and increased to 113 billion and assets.

And other news we were excited to launch our new Franklin Templeton investment Institute and innovative hub for research and knowledge sharing Steven Dover will be leading that effort with the launch of the institute, we're doubling down on which sets our firm apart unmatched insight and research from experts on the ground and oversee.

70 locations around the world.

At the same time tapping into the strength of our collective leadership talent, we've expanded Terence Murphy's role to become head of equities from Franklin Templeton, while retaining his existing role as CEO of Clearbridge investments.

All of our equity teams will continue to maintain their individual investment processes and economy tariffs will facilitate collaboration across the groups to drive results and growth.

Looking at another key area capital management remains an important focus our strong balance sheet continues to provide us with financial and strategic flexibility to ballpark business.

Cash and investments totaled $6 3 billion following the public offering of $750 million aggregate principal of senior notes due twenty-three issued at a 1.6% coupon.

As previously explained and is our intention to pay down more expensive debt with the proceeds of the offering.

Excluding net proceeds from the senior note offerings, we have five 5 billion and cash and investments.

We also continue our track record of dividend growth for the 14th consecutive year with a 4% increase to our regular dividend in December.

To wrap things up over the past six months, we've created a stronger firm that combines the best of both worlds global strike and boutique specialization. Our global presence has expanded in key growth markets around the world with a greater range of specialized high quality investment capabilities, and we think that all points to a pause.

As of the future now I'd like to open up the call to your questions operator.

Your first question flight of Glen score with Evercore.

Hi, Thanks very much.

And I'm curious.

You talked about cross selling initiatives.

Started to yield positive results, you talked about Adam being new head of global distribution of two weeks.

Can we drill down a little further get some color on what Adam's mandate is what new initiatives are producing these cross sells and what's being cross sold.

Sure I mean, there's nothing better than hearing it from the horses mouth. So Fortunately we have Adam on the line so Adam take it away.

And I was just on the horse there.

So if I think about what we're trying to deal with the belief.

Three priorities mountains of Verizon wireless and wireless customers and colleagues is not available at this time. Please try of collagen later announcement, one switch to cash for.

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Later announcement, one switch to cash for.

Okay.

The go.

Yeah, Adam are you still I guess, so sorry.

Plenty of silver.

Thank you.

You are you are.

I think out of backend so why don't I start and we are.

For example.

Our largest distributor has just added 10, new funds many of them are legg Mason and funds.

And we so we're seeing good penetration.

That is really.

You know cross selling and again as we talked about Franklin was much stronger on the independent side Legg Mason was much stronger on the wire outside and so we've been able to do.

Basically cross sell platform listings and getting through the gatekeepers on.

On those on those platforms. So that's worked well and just to give you an idea.

You know from a diversification of flows you look at the top nine and.

Oh I have the top of the top 10, but top nine.

All of it accounts for about 38 per cent of our flows five of those are Legg Mason funds for our Franklin funds.

Three of them on fixed income five of our equities and one is balanced.

So we're seeing both of diversification by getting our products on the platforms cross selling.

In terms of getting true the gatekeepers and getting Alicia So we'll continue to see more penetration as well as good diversification with the types of products. You know said that we don't have kind of the the risk of the the single a single large product the.

Potentially gets out of favor so it's much more diversified and know Greg if you want it and anything there.

And I think Adam.

Adam you back on grade.

How I got cut off on a landline with the cellphone method.

And the new one and this day and age of working from home.

I did not have the the ability to hear what Jenny said so on.

And maybe.

Well, let her comment but in terms of cross selling there are a couple of things I would point to.

One of the firm.

The Franklin and magazine and had different strength Franklin was really strong for instance, and the regional broker dealers and we've been able to get.

The western and Clearbridge product on the platform there we're seeing positive momentum there at the same time, when we look at something like the wires were made.

Nathan traditionally with the little stronger we've been able to have some real success with DSP there.

The legacy Nathan the same thing is really true if we look outside of the United States.

Franklin for instance, with much stronger and Canada.

And had a real strength in Japan.

We've been able to start the cross selling initiatives.

And really quite positive and even within countries.

Outside of the U S, where both firms were strong like Germany.

We had a situation where franklin is much stronger in the retail banking world Legg Mason and <unk>.

Private banking world and again.

And one set of products into the other and legacy distribution system.

As of the types of cross selling efforts that have been really strong.

And so say that cross selling comes into play on the defense as well.

Sure.

And we've had clients for instance debt.

In particular strategies that might be higher alpha higher tracking error of strategies when they want to derisk. What we've seen is debt that money instead of leaving our system can shift to another and lower.

The strategy in the.

System, So we're actually doing a better job retaining assets the cross selling as well.

I think that's a lot of progress and a lot on the common and you combine that with all of your new product offerings.

Hate to be too forward, leading but the.

<unk> shot of getting back the towards flat flows like sometime towards the end of this year are we trending.

That much in that direction.

I think we're trending really well, we see momentum we see at month over month.

Sales are strong and redemptions.

Are getting better and the other thing is we now have a combined sales force.

And for its first full quarter and let's.

Face of it takes people a little bit of time to hit their stride and they're hitting on.

Feeling very good about the future.

Thanks for all of that I appreciate it thank you.

Your next question comes from the line of crack singled her with the credit Suisse.

Thanks, Good morning, everyone and hope you're all doing well.

I wanted to come back and dig a little bit deeper on your comments on rising demand for alternatives and the European retail channel can you talk about what markets and channels are driving the demand.

And also what type of products or characteristics are they looking for.

Like yield on low correlation downside protection. Thank you.

Sure.

Really thin.

I'll push for alternatives in all regions and all countries and that's one of our strengths as we think about our core priorities of grow defend and diversify diversify is all about moving more forcefully into alternative.

We have $121 billion and our alternatives book for probably the sleek yeah. The quietest alternatives from you've never heard of it and we're making progress you mentioned Europe I think there's strong demand and there the other.

We see and Europe is strong demand for ESG and we.

We've got some alternative products that combine alternatives with the ESG that.

Combination has been really strong sales.

The other thing we're working to do is given that we now can offer so many different vehicle types.

We're really trying to take alternative debt used to be predominantly sold and the institutional market and more of a separate account mandate and package them. So that they're much more scalable to the broad retail market.

And just to add to that I mean, obviously everybody and this.

The low rate environment is looking for yield and.

So you see a lot more searches both on the institutional side and as Adam mentioned, gaining traction on the retail side for private credit would be S. P perfectly position and great performance of traditionally just and institutional manager of shows being well received on the and actually have.

Gotten some traction in the retail side as well as clarity and Clarient and coming out of this.

And the real estate spacers uncertainty and certain spaces for real estate.

But they've been large industrial tech you know there and there are one of the largest I think they are the largest of.

The lease or to.

And the cloud storage environment, and so they performed very very well so and are in a low yield environment people are looking for assets with the yield and that has served both clarity and the N V. S P well.

Got it.

And then I just had a quick follow up coming back to Glenn's question on net flows.

You guys just did a big merger.

And you reduce the size of your sales force not a lot, but a little bit so I imagine there could be some dis synergies out there that you're seeing.

If there are any dis synergies or any kind of redemptions driven by the merger and their and the flow run rate today.

Do you see them dropping off and the future, which should actually help you and net flow trajectory.

I would say debt, let me just start and then Adam will take of a I would say a couple of things. One is we were on the really aware of two we'll call them deal based redemptions of one in Korea, which we talked about on the last earnings call and the most recently.

Mike Mason and slide 20 and play on.

And part of the issue. There was there was just an agreement that they would only have one 529 planet and Franklin obviously has.

As one of already with the New Jersey, 529, glad and otherwise we're not seeing any.

Any kind of deal issues with respect to book.

You go from two sales forces to one you're talking about relationships on the retail side just given the example of the let's say 150000 financial advisors and we're talking life.

Less than 1% of shop, and they just teeny number of complaints with the change of advisor we've been really surprised.

And by how little complaints we've had.

And ultimately when you're having to pick kind of who's going to who's going to win out of territory and that's really because of Legg Mason strike began in the the.

Big warehouses and Franklin in the in the independent so there wasn't the kind of overlap you would've expected on many deals. So there was not is not really product overlap and not really distribution overlap Adam you on them.

Jenny hit all of the all the.

Bright points out of the tens of thousands of advisors, we contact and she's right, we had less than 10 basis points of negative.

The action that we track the other thing I would say at that fall and the U S. Sales force is essentially 50, 50 and legacy Franklin and legacy.

And that's not true by channel and our regional channel is predominantly Franklin Templeton and people.

<unk> channel is predominantly.

So that really limited the disruption that we had because we kept the folks who were strongest and specific channel and move to of Channelize approach and sales, which we did not have before it.

And just it might help to just try and put a little bit of data around this we in the exact of commentary.

What we did is and a footnote and some of the charts we did.

It's a little bit of pro forma ring, assuming we close the transaction a month earlier to include the full three months of Legg Mason and when you look at that you will notice that the.

The sales of roughly the same.

And the redemptions or at all of a bit lower so obviously, what we want redemptions to come down further we want sales to go up but in terms.

Trying to understand and quantify.

Attrition risk when we when we look at the pattern quarter by quarter.

It's looking quite encouraging so far.

Great. Thank you guys.

That's correct.

Your next question on line of Dan Fannon with Jefferies.

Hi, Thanks, Good morning, I guess, one more question just kind of on distribution and sales and you guys have been.

And we're discussing the retail opportunity and the momentum you have I guess can you talk about the consultants and the institutional potential opportunity.

And also just get into the won but unfunded pipeline and the diversity of there, but also kind of those gatekeepers and how progress in terms of opening up those channels might be going on.

Sure.

The way I look at won but unfunded and Thats. The good news is essentially staying steady I think the number is around $11 billion and and sustained steady not because we're not adding because of.

Actually funding deals out of that so that is going strong.

What I would say in terms of consultants is that.

Franklin Templeton and central distribution has historically distributed to the consultant community of the institutional community.

The Franklin and investment teams many of the Legg Mason investment affiliates in fact, I believe all of them did that on their own going forward, we're having.

Differentiated approach, where the Legg Mason.

Simms will continue to call on the consultants and they.

You always have that's been a really successful channel for them remember life is much stronger on the institutional business. Historically, so we're not changing that approach to the investment consulting.

Outside of the U S. Some of the smaller former Legg Mason and our.

We're beginning to leverage.

Franklin Templeton's resources, especially.

And the coverage of field consultants, where those things make cubbies research centers on their own but we will have much more connectivity.

The.

Field consultants I would say in general what we're trying to do with consultants of similar to what we're trying to do with global financial institutions is recognizing that many of these large consultants and global firms and we have to faithful and holistically as a golfer. So that's how we've organized ourselves.

And we are really allowing each investment team to tap into our centralized coverage of consultants as they see fit.

In general.

The larger.

And the western might not need and help at all and that area of where some of the smaller groups definitely rely on the central distribution fees.

Okay.

Great and then just as a follow up in terms of the expense outlook and understand the the movement of assets and higher markets drove a bit of the increase but just curious about your assumption for normalization of travel and marketing and the spending that you kind of went away. This past year as you think about the progress for this year.

Yeah, so in our numbers and and the guidance that we've given and we assumed that there will be a pickup in <unk>.

Travel.

And from other.

G&A items like advertising and.

In terms of the combined company and what we need to do the in the the.

Third and fourth quarters, and particular weak we have moved that forward a bit but we haven't taken the money out of our assumptions. So we would expect G&A to creep up a little bit.

And the next.

The the last two quarters in particular I would say, but that's included in the 3.75 billion.

The guidance I think the the number that's more likely to move a little of it which is what caused the change a little bit and and the guidance is the comp and benefits in line with revenue and.

We expect with selling more so that's the simple commissions involved and that it's all linked with the growth of the business. So I think we could expect the.

Compensation line on the adjusted basis to go up you know of.

Couple of soap the center, maybe up 3% and the next quarter of it then because of the.

Because of the cost saves from the transaction of expect that to come down and the third quarter by about one of 2% and then down again and the fourth quarter by about 4% profit, maybe a little bit more than that which then gets us to the to the three seven to $3 75, maybe a little bit more if the market.

The stable.

Great. Thank you.

Thank you.

Next question and the final Mike carrier with Bank of America.

Good morning, and thanks for taking the questions.

First just a follow up on the distribution question.

Maybe some context on the process and importantly, it and just the timing of getting.

<unk>.

And like the full lineup of products there as much the can throughout the distribution channel and maybe.

For context of what has happened thus far and what it is.

The step in 'twenty, one versus longer term.

Yes.

Think the way I think about the as we head and go about this and several stages. So the first stage is really selecting the the team getting and settled into their territories and that happened. The next phase that we're in the middle of right now.

Is because they're all trained on the sales teams on train, but in order for them to really cross sell effectively we have to get.

All of our products cross and listed on the different platforms and research approved.

That's really what we're doing now we've started where you might expect at our largest distribution partners, where we think we can get the most bang.

Got two of them already where we've on boarded a number of products.

We are kind of marching through that and it's going pretty well.

So it's really a question.

And getting the back offices set up correctly and getting things on the platform. The distributors themselves are eager to have it.

One of the things, we're seeing that across the board is that people want to do more business with fewer bigger players. So the fact that we're able to bring such an array of investment style and not only investment styles, but different vehicles from funds. The SMA the Etfs to these partners.

That makes us much more attractive to them. So they're really working as quickly as they can with us to get our products on board as we get on on board. It. What we're seeing is that we're able to start to sell more so for instance, and some of the regional.

And we've seen of real uptick.

December and January for some of the legacy Legg Mason product on the regional platforms because of those are just getting on board now.

And if continuing work, but it's going well and we're a bit ahead of schedule.

Okay, Great and then just on expenses you provided a helpful. Upbeat and you also mentioned looking at additional ways to operate the business more efficiently.

And just what are some of these areas as well as areas that youre looking at from the investment.

Thanks.

Yeah. Thanks, Mike So I think there's two things the first of all as we spend more time together as a joint company.

I think just naturally speaking, we find interesting ways to to improve how we work together that's not just the operational things, it's how we can share information and and.

And and improve the price of that information from various vendors.

We spent a lot of money on data and information across the investment teams and the cross the specialized investment managers there is the natural embedded.

The leverage in that system in terms of being at a safe money and we're just really frankly, just discretion of the subs on that and.

That also benefits the teams away from just cost of rent.

Away from just cost of it the cost of good output from that work and then.

We we have been working very hard on our operations and technology side on the future and how to position the firm in terms of.

Capital expenditures on the studying what that is free.

Risk management.

And <unk> and potential cost efficiencies with different partners externally and we've seen some very interesting things. There's nothing specific to report now, but I think over the next.

The six months to a year.

We're going to see some very interesting opportunities for the for the firm and we're likely to take a take action.

And and that if you and to put some numbers around it.

We don't have any specific guidance today.

But yes.

And we're talking of 20 $25 million per annum at least on some of the things we're looking at and we'll provide more guidance to that and the next quarter.

Okay. Thanks.

Sure.

Next question line of Alex Blaustein with the Goldman Sachs.

Hey, guys great. Good morning, Thanks for taking the question.

And I wanted to follow up.

With respect of cross selling opportunities and given the combined franchise you guys have a really robust set of products and capabilities and you named quite a bit.

In terms of where you're seeing cross selling opportunities for the combined firm I was wondering if you could just kind of maybe narrow this down a little bit and if we were to focused on three of affiliates, where you're seeing sort of the most incremental dollars of net inflows from cross selling what are those affiliates.

I guess I don't really think about it and in terms of the most dollars I think about it is where's the whereas there is significant demand. So obviously, given the westerns broad exposure to everything and fixed income and their size and breadth. We are seeing a lot theyre clearbridge I would say has.

And a very strong capability.

And in ESG.

And that's across the board with that in favor of Clearbridge has seen royalty.

For anyone who has a few income.

Reenter the funds that are global given the demand for income that strong.

Royce Martin Currie, and we saw inflows for them and that more and more than five per cent of the firms of strong demand. There. If you take a look and.

And of group like clarity on of what's more on demand and alternatives and near the top of their game and real estate.

So really across the board and we're seeing demand for all of other firms well.

And I would just add.

And that's sort of giving the the legg Mason crossing into a lot of the traditional Franklin and and the reverse of that is you know and some.

Of the great Big wire houses, we're getting interest on the BSP.

The <unk> getting phenomenal.

Franklin equity group and <unk>.

And so it's really about.

Bringing the.

Entire firm to where we have deep relationships and.

And it just wasn't the overlap so any of those kind of key products across the board are making sense at any of the programs, it's just filling and and complementary where we didn't have the representation, yes, Jenny and I misunderstood. The question I thought it was a one way question Youre right. So there's equal strength going both directions and the other thing we're seeing.

Is that fair.

For instance, there is some products that have been around for decades that we're able to offer in new vehicle types and that's another way to cross sell and that's really attractive.

And we're seeing significant growth and our SMA business there.

Great. Thanks for that and I guess, along similar lines of new business.

Sorry, if I missed this bit of $11 billion pipeline can you specify which affiliates comprised the pipeline and what the fee rate associated with that of you on this.

And I do not have that data and we'll have to get back to you from IRR on that.

Most of most of its fixed income.

And with western which you'd expect and from Franklin Templeton and fixed income as well would be the top two.

Of the pipeline of unfunded wins.

Got it thank you very much.

Your next question the line of David David.

Inc. With autonomous research.

Hey, good morning, everyone. It's Patrick David Thanks for the Port of call.

First question on the on the fee rate, obviously already came in a little bit above what you guided to last quarter, probably I guess because of the market came and so much better than you expected. So is it still fair to assume kind of 36 to 38 with a more normal market or do you think it could track even higher.

Given you're already above what you guided to last quarter.

I think the look the way the we'd just sort of describe debt I mean, the reason why it was higher is because of the mainly that the increase and equities.

And in the quarter because of the strength of the equity markets.

And then we grew and alternatives also and I think the right way to answer. The question is when we think about the things that the push up the fee. It took were higher and equities and alternatives.

And Lo of global bond outflows.

And if any of out flowing areas.

We've experienced over the last several.

Quarters that you're very familiar with any of those turn interest of me just a little way that also helps with the.

The the fee rate and we saw that the last cultural fit and having less outflows in those areas what pushes the.

The write down is if we scale up much Boston in institutional fixed income.

And or if we see the.

Outflows in the and the pilot.

The areas that we just that I've just talked about.

I think we we model out and I think we've talked about this.

You know a fairly steady fee rate for the year all else remaining equal.

We don't see any reason why we shouldn't be.

And the 38 area.

There could be of continued.

Momentum in and institutional fixed income.

Which could be a very positive reason for the fee rate going down the lot of parallels from any equal so.

Debt.

I think 36 is pretty.

Very very much on the low end of things and I think we we would wouldnt say guide to hire but I certainly say, we would expect to be close to where we are today for the year.

Okay. Thanks very helpful.

The follow ups on the India situation, which looks like it's finally getting close to resolution. So could you update us on how much we could see come out.

The funds open up again, that's already been turned off so we can kind of adjust your estimates when you reported AUM and then I guess more broadly the news flow has been pretty negative so any update on the impact of the broader Indian franchise would be helpful.

So I mean first of all we.

And we're thankful that the shareholders voted overwhelmingly in support of of winding up the funds.

And then most recently the Supreme Court came out and.

The approved or being able to distribute the cash and on which I think is maybe 42% of if I'm remembering right out of percentage of assets.

And that will go out pretty soon.

We are we are taking the fee on those assets right now so it's already out from the standpoint.

And then the we continue to see flows recent flows but also of redemptions in the remainder of portion of our business book, the equity and the liquid assets.

Much committed to India.

And we.

We continue to see support.

And in that market.

Thanks.

Thank you.

Your next question the line of Brian Bedell with Deutsche Bank.

Great. Thanks, Good morning can you hear.

Alright, Sir can you hear me yes.

Yes.

Okay, great great. Okay. Thanks, Thanks for taking my questions just one on the gist of your extend on on the guidance.

Got it.

Approximately 30 basis points.

What is the expectation for money market fund of money of Mercury and cash.

Cash management product fee waivers.

And that I guess coming into the year come to me again, the yes, so it's embedded in that already and we currently.

The have about something like an 8 million dollar.

And the waiver at the.

And the holding company level or the corporate level.

As of the revenue share with those involved.

Principally with the money market fund business that debt.

Sort of.

And the sour the impact on on the overall firm's it's 8 million now we expect that to part of it be close to $10 million by the end of the year, but that's all embedded within the the.

And the fee rate cuts, which escape.

Got it perfect. Thank you and then maybe the follow up on for both Adam and Jenny on the.

ESG progress, obviously, you said pretty strong demand in Europe, and and within alternative products.

As well on it.

It sounds like E.

ESG is fairly well integrated and the research process based on how you're describing it but maybe if.

If you could talk about whether you still think there is more integration to happen across the research and investment portfolio management research process.

And especially the plan for.

Leveraging that and launching new.

ESG dedicated products and the if you. If you can also comment on the AUM that you see right now and and your ESG dedicated products. So I always find it interesting I was talking recently and somebody.

And somebody gave me a fact that debt.

Something like a third of asset managers assets or ESG and the reality is and I think maybe we have and advantages of real global player anybody as a global player.

And is operating and markets in Europe, or Australia has had to have this very focused and incorporate into their investment process and so it's our belief that there's going to be no credible manager out there certainly on an institutional level without being able to clearly articulate.

They are considering ESG risks in their investment process and we feel very good about all of our teams and they are having incorporated their consideration of those risks and the investment process as a matter of fact.

And we've talked about our investment data Lake, where we have unique sources of data that are contributed by various teams and they are available for any teams for their analysis. We've done the same thing on ESG. So we have the a portion of our investment data like the dedicated to ESG. So for example, our global macro team gets 14 different feeds it goes into the.

ESG data Lake and that data is now Glenn and available for any of the teams to consider it and their process and that's important as we all know because ESG.

And the top five ESG providers only correlate <unk> 57 per cent of the time. So you can imagine that it really takes active management and engagement to get accurate ESG information.

So.

To answer your question it is absolutely well incorporated in all of our processes.

We also yeah.

Europe is coming out with something article six of article eight and article nine and we have been very focused on ensuring I think it's the March date that the products that are selling there.

And the ones that are pipeline to sell their qualify for those the article six is a it is ESG evaluated and considered the article eight is I've over.

Overweight ESG considerations and my portfolio of construction and the article nine is really kind of impact investing and so we have products like our Paris aligned with the first active global.

Green Bond Etfs.

We have a social infrastructure and and those are getting good good.

Flows there as well as they qualify cortical mine so we.

We think ESG remains to be seen and I, just anecdotally of prior to the lockdown.

And visited U S institutions.

A year before the lockdown and it was very mixed in the U S whether or not they were focused on ESG and the right before the lockdown.

Visited institutional investors and every single one was talking about ESG. So that's why we are focused and.

And committed Adam I don't know if we sold all of your standard.

I would only say that one of the advantages here of being the global firm is that while this is kind of a trend that is strong and develop a little bit newer and the U S.

We've been active in France, and the Nordics and Australia for years and it.

It's just part of what you do it has to be 100% integrated into your investment process. So all of our investment teams have ESG. The integrated what we're moving to do is to create more impact funds and kind of at the far extreme.

Of the ESP each day.

But we're completely integrated with the ESG across all of our teams at the.

Okay.

Great color. Thank you.

Next question line of Michael Cyprus with Morgan Stanley.

Hey, Michael.

Hey, good morning, and thanks for taking the question I just wanted to circle back on the sales.

And this remains within the book.

And 113 billion of retail at the moment I was hoping you can kind of give us a sense of maybe how that breaks down by asset class and channel and you can just talk about some of the your initiatives to accelerate growth with the retail us amaze and which strategies are you most optimistic on growth and the SMA vehicle.

I think the places where we're most optimistic about SMA as a vehicle or for those strategies that are most in demand.

So.

Franklin income fund is still something we sell a lot of Diana <unk> Franklin technology all of those products have very good flows very good sales and I think we can move more from a.

And the sale to offering different vehicles.

On the Legg Mason sides of Clearbridge and western have been leaders in that four of them for years from a channel perspective.

<unk> had the most strength with the SMA business and the wires and we're starting to expand more of our estimate.

Sure.

Great just maybe as a quick follow up on the SMA side I guess, just any color you could share around the fee rate and margin profile per your SMA business, maybe how that compares versus say the 40 Act mutual fund vehicles, and I imagine as lower fee, maybe a little bit more costly to serve.

But arguably probably the duration of the assets is probably a little bit longer.

A little bit more stickier. So I was just curious any color you could elaborate around that.

And we'll come back to you on that with specifics I, just thought yeah and I.

The thing I would.

Just highlight there I mean.

That's the major any great traction because in a fee based environment.

And it.

It allows the financial adviser to the.

Appear to be much more active and their investment decisions. So we think that trend is really important and that's also why direct index.

It will be important in the future.

Remember that there are not a lot of those kind of embedded fees.

Debt are.

Arguably distribution and service fees and and estimate that you may have in a mutual fund.

So that's why you can't look at the top line fee rate and compare it apples to apples because it and quite that but we will come back with the.

With more details.

Is it fair to say that it has longer duration capital that the assets are stickier does any thoughts on that last point.

Yes.

Yes.

Yes.

Think of it as being a minimum of if it's on.

The average carbon and the exact I think it's like five years or something and.

Something like that as you think about the average across the industry.

The well come back to you on the <unk>.

<unk> of all of those specifics.

The sleep.

Thank you.

Next question of line of Robert Lee with <unk> K B W.

Mr. Lee Your line is open.

Sorry about that thanks for taking my questions.

Maybe Jamie you, possibly through and the little bit more into this.

Oh the optimization engine.

I'm trying to get a sense of.

And what that is precisely because it seems like there's different aspects to it and.

And while it's still early days, how you were thinking about that it's helping to drive.

The demand like what should we be looking for it and see if that's working and that's great.

Sure sure.

Sure. So let me see.

So first of all think of it as a.

And really good financial planning tool the cloud based so it can be tied into any platform out there, but we think it's in the skin.

That's why we filed the patent on it.

Because so let's say Rob you of three goals and your goals are I want to retire I want to put some money aside from my kids and.

And I want to if theres enough leftover and I'm doing really well I'd like to buy that second home on the beach I must have enough money to retire it would be nice if I can help my kids and what the heck of an ROE on the die on that on that second home.

Do you think about traditional.

Kind of financial planning models.

Interview, you'd come up with the portfolio of based on your risk and it would be of single portfolio. What gold does is it follows your guide path trajectory to your likelihood of achieving that goal and if youre doing really well and ahead of it rolls the money down and don't think of it as the waterfall into your next goal when you achieve that it rolls it down into your final go.

All of our however, but you have and if you think about how you structure of those portfolios are very different you are not going to get the second home unless you stay high octane all out.

And your glide path on retirement as Youre getting older and closer you're going to want to be more conservative. So it adds that dimension, we worked with the University and Duke.

And I can tell you we are data analytics team came up with this on AI team came up with it we pitched the idea they were a little skeptical and what they looked at the date of that said this really works.

And so as it has resonated very well as we've shown because it's a very simple sort of way to think about and.

And it resonates with clients well, because youre not talking about benchmarks and things Youre talking about things that absolutely means something to them and we built it with easy Apis to connect into various platforms and we find global demand.

We are talking to affirm and China, who are interested in it.

So we see Asia Europe, it's just really resonated well.

The platforms.

And.

And would I be correct. Some of this is less about it being a source of incremental revenue and it's on.

All of that's kind of driving.

And of the.

The assumed project and make the on products and strengthening those relationships.

We do.

Have the choice of either closed architecture, all our products or and open architecture and I think.

Fees, if we for the assets that are open architecture.

But it just depends and we can be flexible with that but yes, it's a way to create a solution based.

The sale of of.

And our investment teams.

And as Adam and I mean, we really view ourselves as a.

Where we're and investment manager were fundamental across all different types of investment capabilities, you want the deliberate and whatever way in which our clients want to receive it settled vehicle ignostic whether it's.

The traditional mutual funds and Ti T SMA ETF or in a solutions based kind of modeled portfolio like go provides or we'll build them individually for our distribution.

The bidders.

And maybe a follow up just kind of connecting the Etfs and the ESG.

And you've talked on waste about and USG capabilities and if you look on the marketplace early in the U S.

And the seems like it's through the ETS products the.

A lot of investors have initially been kind of get and trying to capture their exposure. So.

And you kind of talk about how well your own plans are for that.

All of them.

And how youre thinking of.

And I'm trying to drive ETF growth through ESG or is there like the significant product launch.

The most of the trying to get a feel for one of those to connect.

Yeah, I think it's fair to say debt.

There are.

Set of financial advisors that just like the sell Etfs and you don't have.

And that category, you are not going to resonate with those financial advisors and so.

Uh huh.

We are focused on being able to provide kind of flexibility or whatever the vehicles are in our 12 billion of our largest categories active per second I think this is.

The smart beta and the third is path of although.

Our country Etfs were starting to get traction on there.

The low price, but they are significantly.

They're somewhere between 40, and 60 basis points and there than the competitive country.

And small, but as we get more traction will take will even pick up more on the institutional side, Matt did you want add anything to that.

Sure.

And I had one thing to that.

And.

And that debt, we think of Etfs and I think this is different and it's on as a way to offer of different vehicle. The clients not of specific investment strategy. So just to put a little more data behind what Jenny said of our $12 billion.

Roughly <unk> of it is active three of the smart data and only three of it is market at weighted passive that's a little differently.

And some others.

Net.

The guide our growth and future.

Okay, great and maybe.

One last quick one for Matt.

<unk> fees $25 million and change this quarter.

The way, it's difficult to predict and any guidance you can give on how we should think of.

And where you sit down and how we should think of.

And that kind of moving in the next couple of quarters.

Yes, I do think it was favorably.

Hi for Us <unk>.

And this this quarter. So I think you could expect it to be a bit low and next quarter, maybe 10 million daus of good estimate and then rising again.

At the end of the year.

Back to say $20 million.

Our net and then because of the arrangement with Clarion output.

And our performance fees and 2022 will become larger again.

Because we ended up getting a larger share of those performance fees.

Great. That's helpful. Thanks, Thanks for taking my questions.

Sure.

So the question.

Just sorry, just before we start next Chris I just wanted to address the SMA question, because we have got the answer to that so I think of as Mike. So I appreciate the question.

So the the.

The.

Average fee is in the midst the tis for the Sma's.

And the life that you were asking about is between six and eight years. So it's.

The.

The lower fee, but the but we generally hold them for longer periods.

So that's why.

A very good business for us.

I just wanted to make sure we also of that question.

And your final question comes from the line of Bill Katz with Citigroup.

Okay. Thank you very much good morning, Thank you for taking my questions today.

Matt just one for you just going back to the fiscal 'twenty. One expense guide I think last quarter, you sort of felt that at $3 seven was a pretty firm number regardless of market action and I may be paraphrasing is that still the case, because I heard of $3 seven to $3 75, and I appreciate some moving parts on the comp and the G&A line, but is three seven and three seven still of the anchor number or is there some net.

The upside to that.

Yes.

Yes, so Phil Thank you for the question, So I said $3 7 billion.

As long as the market.

The increase was within the sort of the low single low to mid single digits.

Obviously, we've gone quite considerably above that.

Which does put some.

And the pressure on the.

On the increase in compensation as I mentioned for the.

The second quarter, we can expect compensation line to go up by.

By 2% to 3%.

But then that should come down again based on the expense discipline that we've communicated so at one 2% down and the third quarter of another 4% down and.

In the fourth quarter, all else remaining equal so that's if the if the assets under management staff.

Sort of rough the levels they're at today.

So I'd say that the on.

And all of the other line items.

Very little change.

And I think if anything we're finding ways to to create more expense opportunities to bring expenses down as I communicated.

A moment ago, but I think the $3 7 billion, mostly as a function of the markets being up and the high.

High single digits to double digits as the law.

Low double digits.

He is leading us to guide a little bit higher and the three seven to $3 seven $5 billion. If it comes back down again, it will be $3 7 billion of the kit, but but that's the that's the range and we're trying to keep that as type of.

And as possible as also communicated okay perfect. Thank you for the clarification and then Jay just one for you just as you sort of been talking through a lot of the cross sell momentum do you think at the Big picture of living now Franklin is where they need to be in terms of its footprint I guess more specifically is there any sort of appetite for EM.

And if so what or where you might be thinking about filling and any residual caps.

So I would say that like first and foremost we're going to catch this fall and youre going to make sure that the four deals that we did last year.

And are well integrated and that is absolutely our focused and.

We're laser focused on that now and having said that we feel really good with where they are that the two acquisitions by fiduciary trust have already here getting flow.

You got surprised at how quickly they.

It worked out we feel very good where with like Mace and advisor and he was a technology when they were pretty independent.

The first focus is just making sure those.

You need to do well, having said that we've said that we will continue to grow we want and we wanted to double our size of the fiduciary trust. So as opportunities come up I think we do some smaller bolt on acquisitions, there, we'd love to continue to expand and the alternative space.

If something made sense, there and that's just the hard space to acquire.

And we think the Fintech is disrupting traditional distribution and so you'll see us continuing to make investments whether there.

Acquisitions, just has to be the right one, but we will certainly make investments in places, where we think there's greater distribution opportunity with some fintech investments.

Yes, I'd say I would just that Chinese point of Battle Curtis.

It's difficult to find the debt the exact right one.

And for us given the breadth of the alternatives, we have but they're all quite of few out there that we've met that we think of would be of great fit.

And the great fit for alternative asset strategy will have we have revenues in the alternative asset space of over $550 million of something like that for the year.

And we would absolutely like to grow that and we see plenty of opportunities.

Out there, it's a matter of share.

Timing and finding the right one.

That's the with the rest of the pieces we've already got.

Thank you very much.

Thank you.

And.

And our lifetime.

On the call back over to CEO, Jenny Johnson for final comments.

Great well. Thank you everyone for participating in today's call. We're really proud of what we've been able to achieve and this truly unique environment and we are excited to see the opportunities that lie ahead.

Once again I'd like to thank all our employees for their significant efforts dedication and client focus and we look forward to speaking to you all again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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