Q2 2021 Franklin Resources Inc Earnings Call
Welcome to Franklin Resources earnings Conference call for the quarter ended March 30 for 2021, Hello. My name is Denise 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.
And those.
I would now like to turn the conference over to your host Selene, Oh head of Investor Relations for Franklin Resources, you may begin.
Good morning, and thank you for joining us today to discuss our quarterly results state and.
And staying on this conference call regarding Franklin resources, which are not historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act and 1995 and.
These forward looking statements involve a number of known and unknown risks uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward looking statements Inc.
And other risks and certainties and other important factors that I've just described in more detail and Franklin <unk> recent filings with the Securities and Exchange Commission, including and the risk factors and the MD&A sections of Franklin's most recent form 10-K and 10-Q filings.
Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.
Thank you Li.
Hello, everyone and thank you for joining us today and discuss Franklin Templeton's second quarter results for Johnson, our executive Chairman Nichols, our CFO and Adam and sector, our head of global distribution and also on the call with me today, and we hope that everyone is well.
We continue to operate our business effectively with over 95% of our employees working from home broadly speaking we are planning for a return to office and September though our approach will be flexible and shaped by local requirement and the.
Status for the pandemic in the countries, where we do business.
We are encouraged by the number of vaccines that are now being distributed worldwide and.
Our rollout rates, obviously vary by country and the progress is very promising having.
Having said that we had been deeply concerned by the suffering and has resulted from a search and cases and India and other parts of the world.
<unk> go out to our employees and clients who have been personally impacted by this terrible disease.
Turning now to our second fiscal quarter. Today, we are pleased to report financial results reflect our continued progress with revenue growth and margin expansion, resulting in a 6% increase and adjusted operating income $581 million.
Our financial flexibility remains strong with cash and investments of $6 $2 billion at March 31, net of 250 million of debt paydown in the quarter.
After only two quarters and the combined company for experiencing organic growth and a number of key areas.
We're now and more robust and diversified active management business and we're encouraged and excited by what the potential.
Our merger has created a differentiated global firm balances scale, and specialization and which we believe offers expanded opportunities for our stockholders and clients and employees as well as the financial professionals with whom we partner.
Turning to performance were seeing an improvement and performance across a broad base of investment strategy from the prior quarter more than two thirds of our strategy composite outperformed their respective benchmarks.
And for key time periods and <unk>.
Number of our mutual funds rated four or five stars by Morningstar increased over 140 funds this quarter.
Turning next to distribution Hartley.
And encouraged by the positive results from our new sales initiatives and efforts to deepen relationships.
More clients purchased both legacy Franklin Templeton and the legacy Legg Mason and strategies as demonstrated by our larger wins during this quarter.
Our expanded distribution efforts drove an increase in gross sales and 32% from the prior quarter across a broad array of fund vehicles and asset classes led by U S. Retail long term inflows increased by $15 9 billion or 19% quarter over.
Quarter to $99 4 billion, excluding reinvested distributions.
Second quarter long term net outflows improved to $4 2 billion compared to $4 5 billion and the prior quarter.
Shortly if you could reinvest and distribution net outflows improved by over $10 billion.
Our sales momentum continued with positive net flows and benefit Street partners clarity and partner Clearbridge Fiduciary Trust International Franklin Equity Group, Franklin Templeton and fixed income Martin Currie voice and western assets.
And we said on previous call apart and has been focused on expanding our alternatives platform and this quarter we did.
Alternative strategies grew by $4 billion to 131 billion and assets under management with contributions from our real estate private credit and retail affirmative.
Clarion partners and benefit Street partners, both reached record AUM level and K two alternative strategies also contributed to positive net flows.
Fixed income inflows increased by 27% to $53 5 billion from the prior quarter due to positive contributions from a diverse group of fixed income strategies, including core bond core plus and corporate.
We are pleased that western assets experienced net inflows of almost $10 billion in the quarter highest level and over a decade.
Equity inflows were $32 4 billion consistent with the prior quarter, excluding reinvested distributions.
We continue to see strong interest and our thematic equity strategies and while it's still early days, we're seeing progress and increased interest and our value strategies.
As of this quarters and our institutional pipeline has increased with a combined total of one but unfunded mandates of 13 billion and is diversified across all asset classes.
Aside from our specific results for the quarter. We were also pleased to release, our corporate social responsibility report in April.
We established clear goals and priorities for fiscal year, 2021, ESG investing key among them and we continue to make important strides and keep our diversity inclusion efforts at the forefront.
Before we open it up for questions I'd like to thank our outstanding teams around the globe and continuing their extraordinary work every day on behalf of our clients and firm and they've done. So this past year under challenging circumstances and grateful for everything they do.
Now your questions operator.
Yeah. Thank you if you'd like to ask a question press star one on your telephone keypad. The confirmation 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.
We request that you start by asking one question and then return to the queue for any follow up question. Your first question comes from Dan Fannon with Jefferies. Your line is open.
Thanks, and good morning.
My question is on flows and just kind of the momentum if you look at the for.
Our backlog, which continues to grow could you talk about the difference and the backlog this quarter versus last and then also on the strength and alternatives. If you could talk about the fund raising if it's evergreen are ongoing or if there was some kind of specific closes that maybe.
Drove the strength and this past quarter.
Sure I'll take that it's Adam here. Thanks for the question. If you think about what's happening now and how close are changing the good news is that they are becoming far more diversified which is actually what we've been planning to do.
So we're seeing good flow as equity fixed alternatives as well as and our solutions business and.
And geographically diverse as well the U S remains by far the largest driver of flows but we're seeing very good flows in Europe, and the Americas as well and <unk>.
There are alternatives.
Say two things happened there at the top end of the market, we saw really healthy subscription into Clarion K, two and others from the institutional market, but we are also really trying to address the democratization of alternatives and had some very healthy raises for BSP and others in the wires.
And that's something that I think will continue throughout this year as we have other retail launches for other alternative products throughout our system.
Great. Thank you.
Thank you and your next question comes from Brennan Hawken with UBS. Your line is open.
Hi, Good morning, and thank you this is Adam Beatty and for Brennan.
Just wanted to ask about some of the exchanges from equity into multi assets seem like that had a bit of an effect and the quarter.
And just the trend you were seeing throughout the quarter and maybe the trajectory do you expect a little bit more of that given where the markets have been.
And is there anything in terms of maybe a pull on the mouth and multi asset side debt.
Either through marketing or distribution, where you're kind of accelerating that movement and in some way. Thank you for.
Sure let me address that in two parts first of all in terms of the exchange that is more of a one time.
Thing, where we have essentially.
Reclassified and and tweaked, how we manage and existing funds so that caused a reclassification.
Thats, an accurate change for this quarter, but not something that you should see happening quarter over quarter in terms of solutions in general, though that has become a focus what we see at our largest distribution partners is that there is a focus on having.
Their advisors focused more on asset gathering and lifestyle and portfolio management, which means that the management teams at our biggest partners are really looking to firms like Franklin that are full service offer active.
Sleeves across the entire suite to provide models and solutions and that's where we're seeing a significant pickup in our solutions business and we would imagine that would continue throughout the year.
Great. Thanks for broadening the answer I appreciate it.
Thank you and your next question comes from Robert Lee with <unk>. Your line is open.
Hi, This is Jeff Drezner on for Rob.
Quick question and for in regards to our gross sales for fixed income there's a large step up there, but then there was a bit of a sharper drop and equity gross sales and I'm wondering if you could provide any color and just some of your peers have been showing some more demand and the equity side.
Yeah, we're seeing good demand in fixed income and and and equity and fixed income Western just had an absolutely fabulous quarter and I think that's what drove a lot of the top line on fixed income from an equity standpoint, the great news is that with and value coming back and the marketplace from a return perspective.
We feel that we are quite well balanced in terms of our exposure to value and growth. The majority of our inflows and equities continue to be on the growth side and things like dine attack Clearbridge has a large cap growth, but we have very strong product and the value side and we're starting to see a pick up there as well.
So if you exclude reinvested distributions from the chart the sales were about flat.
And in fact, the net flows improved into equities and when you actually reinvested distributions.
Okay, great. Thanks, and if I could just quickly for all with one more just in terms of capital management.
And maybe your thoughts and acquiring additional high net worth businesses, and maybe just a general outlook and and the acquisition.
Yes.
Oh go ahead, sorry go ahead.
We've stated that we want to continue to grow fiduciary trust and but as we're looking at those potential acquisitions. We are usually looking not only for <unk>.
Assets, and and expanding our distribution, there, but geographic benefit and maybe in a location that were not located as well as capabilities. So as you know the last two with the piano and we got really a top ESG manager and.
Penn Trust with special needs trusts. So it is still an area of focus for us and we will continue to look for acquired there.
Thank you. Your next question comes from Ken Worthington with Jpmorgan. Your line is open.
Hi, good morning.
The bite and administration has proposed higher dividend and capital gains taxes for the high net worth.
And if these proposals go through do you think they could or would have an influence on your business.
Either the types of products that are sold or the distribution channels through which they are sold.
So and theirs.
We look at ourselves as a firm our expertise is our investment management capability.
We want to be flexible and delivering that expertise and whatever vehicle and our clients would like to receive it.
And that can be and mutual funds that can be a and EPS.
Separately managed accounts.
So theres no question that there's a lot of discussion out there debt.
And the mutual fund has some tax inefficiencies and and Etfs doesn't have.
And then there is the potential to see a shift there. However, you were probably already seeing a bit of that shift.
And many fee based advisors preferred the ETF vehicle so.
And we want it and if that happens you are likely to continue to see an acceleration in that shift.
What we have been hearing for last couple of years from our distributors is you need to be able to package and all of your products in any of these vehicles and big not stick to it. So that you can meet the demand of our varying distribution groups.
And what I would add to that journey is that we believe we'll see increased demand for our muni capabilities, where we have a really strong capability at both Franklin Templeton and fixed income as well as at western and in general.
Taxes take a larger bite of the Apple.
Active management becomes more and more important which we think is in our favor as well.
Okay, and Jenny you mentioned the ETF wrapper since you guys control per city and.
Is that something that youre seeing benefit them in terms of either.
Leads are new business inquiries and any flavor there.
So I think the jury's still out a little bit on weather.
People want a true kind of blind trust for their active management capabilities I think there's debt there's a view that many many other products. It's okay to have.
Some transparency even on the active side we.
We do certainly and certainly and fixed income.
I think there are if you take a small cap strategy youre going to need to have that and in some kind of blind trust and Etfs. So I think that proceeding and has the opportunity to benefit.
But I don't think it will be at the level, maybe when it was launched where people thought it would get all active etfs, where it would be and that kind of stuff.
And that kind of packaging for and ETF.
Thank you very much.
Thank you. Your next question comes from Michael Carrier with Bank of America Merrill Lynch. Your line is open.
Good morning. This is actually Shaun Calnan on for Mike can you guys update us on your distribution efforts are placing legacy Legg Mason products into retail products and did that have a major impact on the improved gross flows and the quarter.
Sure.
One of the two things that I think we need to be successful is cross selling the others getting our general a specialist model right. So from a cross selling perspective.
If you take a look at the two organizations pre merger Franklin had much more of a strength in the regional broker dealer channel lag was a little stronger in the wires there were some geographic differences as well.
One of our major major efforts to make sure that we take advantage.
And of that complementary nature of the two businesses. So if you take a look at what's happened so far year to date we've.
We've cross sold to about 5000, New advisors advisors, who either owned only legacy Franklin and bought legacy like product or vice versa, and that cross selling is having a pretty significant impact another way to look at that geographically is to think about.
The presence that Franklin had and Canada or the Americas.
And with a little lighter we're now at about 25% ahead of last year's sales in those regions for a magazine like Mason. So, yes kind of that cross selling that has had a significant impact.
Thank you.
Thank you. Your next question comes from Alex <unk> with Goldman Sachs. Your line is open.
Hi, This is Eric filling in for Alex My question is on the expense guide.
And Neil and the commentary and it was mentioned as true subject to market conditions. So I just wanted to get a sense as to what are the market assumptions and fluids estimates that you have taken.
Taking into consideration for for the rest of the year.
So in terms of the market, we're assuming a flat market, we don't make any additional market overlay assumptions and our guidance.
In terms of the flow trajectory, we're assuming something similar to what we've been experiencing and the improvements that we've been experiencing high for the last two quarters. So.
And so that's why our guidance remains.
Consistent with what we described last quarter.
What pushed it up slightly in terms of debt, we mentioned three seven and $3 8 billion for adjusted expenses.
For set up slightly is the obviously the continued.
The momentum and the market.
But also our performance has improved our flows have improved and our results have improved so by definition that does have an upward.
For pressure on compensation and particular, but we have other offsets and al.
Our cost structure and in that regard.
Understood and just a follow up on that so assuming that this flow trajectory and the markets continue to grind higher what's the sensitivity of this guy to kind of go up for the rest of the year.
I think we fit for the third quarter, we feel good about the continued three seven and three eight.
For the guidance.
For the fourth quarter and 2022, when we reach that point.
Got it. Thank you so much thank you.
Thank you. Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Alright, great. Thanks, good morning folks.
Just wanted to.
Good morning.
Talk about the fixed income business broadly you know obviously when we get when we tend to have a backup and yields were rising long term yield environment.
And on retail bond funds that tends to credit at least a temporary downdraft or spike up and redemption, sometimes its DNA and.
The other day any of these get hit on that but can you talk about for the institutional side it could be a different dynamic.
So can you talk about what.
And where clients are saying about that or what are their concerns about that or what you perceive as client demand. If we do you have.
And it spiked up and yields.
For for Western is would you see a temporary.
Sort of the elevated redemptions on that or do you think that's actually positive.
So we're sort of long term flows.
I mean, and particularly on the institutional side I mean, let's face it.
Pensions insurance companies they need fixed.
Fixed income and that's part of our portfolio both from a cash flow perspective, as well as potentially GAAP and volatility. So we have about 43% of our AUM and fixed income and there are multiple fixed income franchises within within Franklin Templeton and they all manage differently. So we go anywhere from treasuries.
The private credit with the BSP and so they all manage differently.
With a rising rate environment, obviously, youre going to have an impact on the duration component of the fixed income portfolio.
But if you take western for example, only 4% of your AUR.
There's actually and government bonds so.
The rest of it theyre doing theyre managing across sectors bank loan high yield emerging markets.
And if you if you have a rising rate environment chances are that's a better economy economic environment and chances are those the credit component and the sector component outperform so when you look at we actually did a study western and looked back.
2000, and there were 30 times, where you had a significant short term.
<unk>.
Period of rate increase which defined by greater than 15 basis points and a month and was extended and in that.
Western tended to underperform and the short term, but then significantly outperform in fixed line and 12 months, because what and yet and that's versus obviously benchmark and peers and.
And that's because the credit sector component kicked.
Kicked in on the performance so institutional clients.
I understand that and.
And and are willing to kind of works for at least that's been our experience.
And the other thing I would add is that has raised rates as rates rise, we would expect to see some money coming out of lower fee cash and very ultra short products into more core products, which will have a positive impact for us.
That's great if I can sneak in another one on those to Schwab advisor engine platform integration with swap it budgets and that you mentioned.
And any view on how that might impact the sales trends through describe advisor network going forward from where it's been.
Yeah, you know our strategy is to as the World has moved on the on the retail side to more of a fee based environment with somewhere between 75 about 75% flow as kind of go in that direction.
It has pushed because theres, obviously transparencies and what the client is paying me advisor pushed the adviser to be more of a wealth manager and so our goal is to provide additional tools beyond just investment capabilities to help that adviser.
And with manager and deepens, our relationships with that so.
And in the case of advisor engine, there are tools within advisor engine and it may be a simple the.
And the CRM system juncture.
Debt and advisory bit sitting on the Schwab platform and cutting on the shop Schwab platform may want to use some of those tools force. Some of the clients are all of their clients and they won't use it unless you have integrated to the custody level. So.
It remains to be seen how that plays out but that's essentially our goal is to just make it as easy for a financial adviser to do business with us and to provide those additional types of services.
Debt for example, like go which ends up.
Abiding goals based investment model.
And so that you deepen the relationships and and.
Hopefully up stickier assets would be advisors.
That's great color. Thank you.
Thank you. Your next question comes from Patrick Davitt with Autonomous Research. Your line is open.
The last you answered all my questions. Thank you from Doug.
Your next question comes from Craig Siegenthaler with Credit Suisse. Your line is open.
Hi, Good morning, everyone and thank you for taking my questions and this is actually a karim <unk> filling in for Craig. My first question is on flows I was wondering if you could expand on the reason behind six billing and fixed income institutional redemption was.
Was it performance related or did decline and want to move and the money in house.
And also does this particular clients have other mandates with Franklin Templeton.
Thank you.
You know what.
And why clients make particular moves I think you never quite know.
I would say in general with some large sovereign institutions, we do see a trend.
And source some places I think this was just not the right mandate for them at the right time.
And that clients still does have significant assets with us as an institution and we feel solid with the overall relationship. We just happen to lose one piece of the overall relationship there a lot of money, but only a portion of our overall relationship.
Got it. Thank you very much and if I could sneak one more can you maybe comment on the sustainability of retail flows given the large government stimulus and strong equity market, which may be making current activity level levels unsustainable.
Okay.
Well I can only tell you what we're doing not what the government is going to do from a stimulus policy and I'm feeling really confident about what we're doing and sales.
We post merger really brought the best of the two firms together, we feel really confident and the field force we have out there.
Got folks in.
New territories now for six months, we're seeing the results of that interaction we've put a specialist generalist model in place.
And I see no.
Abatement in terms of the activity, we're having and the level of engagement, we're having and feel really really good about where we are from flows. If you look at U S. Retail is by far the largest segment of our overall business. It's the place we've put the most attention.
Post merger to make sure we get the integration right and we're seeing huge benefits from it and so I'm feeling pretty good about the future.
Thank you very much.
Thank you. Your next question comes from Michael <unk> Morgan Stanley. Your line is open.
Hi, Good morning, Stephanie filling in for Mike and my question is around the fee rate given the improvement and performance fees. This quarter do you think the outlook for generating performance fees has improved and to the rest of the year and then just any help on how we should think about the fee rate exiting the quarter and trending from here.
Yes, I mean look the fee rate this quarter was supported by.
A couple of quite large low fee redemptions, we had gross and alternatives we had.
Good support and equities.
So it solidified where the current rate is we feel quite good for the year to say that.
Yes.
The high end of our guidance at 38 basis points potentially 38 39 basis points.
Is the right way to model it for the for the entire year.
Yeah.
Great. Thank you and then just one quick one on crypto currencies do you see a commercial opportunity and crypto and if so how are you approaching the opportunity from types of products or investments that you might be considering thank you.
[laughter] so.
I am not at all.
A huge fan of things like bitcoin because I.
Thank you know over time.
And.
Government and <unk> got so big governments would wanted to step in and regulate because they like to control the currency. So I'll put that out there first that is not to be confused with total <unk> both have assets because I think that day.
That will unlock illiquid assets debt.
And interesting and also toke and ice coins.
And that helped facilitate business model.
And that is that theres nothing backing a bitcoin, but there is something backing a point that actually has a functional.
And.
Functional capabilities, so I think theres, a theres a lot of.
Education, that's kind of happened out there around tokenism mission.
And I do think that blockchain will completely.
Yeah.
Lately change sort of how this how our industry and how the financial services industry operates their back office.
I think it has as I said has the real capability of democratizing illiquid assets.
And that some would argue might even take some of the premium out of alternative space over a long period of time.
But that would be my.
And for that question.
Just to add one other thing on the wealth side.
Having the capability to field, let's call it digital assets and general he is going to be important for the future. So we all focused on the capability front and that record.
Yes.
Great very helpful. Thank you.
Thank you again to ask a question. Please press star and the number one and your telephone keypad. Your next question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks for taking my follow up it's on ESG.
And detail.
And the commentary on that just wanted to.
See if you are able to assess what the flows were into the ESP dedicated products or what you call a specific focus.
For the quarter and then the 175 billion that you mentioned with specific focus just wanted to go and on that a little bit of simple Legg Mason.
And it's taken us the bigger part of that.
<unk>.
Not sure. If you can go into some color on some of the bigger parts of that 175 debt youre, including and that does it include any exclusionary product for example.
So let me give you my little Spiel on ESG, why Adam looks a little more detail on the actual flows and some of them. So.
First of all we would 93% of our.
ESG factors and when we think it's here to stay we don't think anybody could be active manager.
And without ESG and.
All of our investment teams incorporate ESG factors into our investment process and we think that one is that the reason, we're so far along and that is one as an active manager we think debt.
And the data out there is not particularly good and it requires engagement by investment teams with companies to actually gather the data and number two having has a large and having a large presence in both Europe and Australia were really these trends kind of started.
We had to develop these products.
Way before they became really important and the U S and we think you know.
And then again, despite the industry coalescing around things like SaaS, B and Tcf D.
Right now it really and credit requires engagement of and active manager to do true ESG kind of screening.
When you look at Europe, They have something called article six article eight and article nine.
Article six as you do the screens are 93% for AUR and would qualify that.
And article eight we have 25 products there and article article eight is a tilt towards ESG factors and article nine is really impact and we had eight funds there.
We're seeing good flows into our two Paris aligned climate Etfs.
Our European total return and our.
And I will think.
Climate are both reaching $1 billion good flows into our social infrastructure Fund I know Clearbridge U S equity sustainability fund its been and net sales for the last 12 months so to answer a little bit of your question, we're seeing flow.
<unk> and AR and AR.
<unk> set of products.
And.
What's interesting I think youre seeing is the supply side.
And the ESG is really increasing it you hear like Europe, one third of their COVID-19.
COVID-19 relief fund will go into green bonds, which is doubling the size of the market, obviously with the bite and infrastructure.
That gets passed youre going to see increase there.
And so there'll be a lot more supply, which will continue to drive this.
Okay and.
Adam I don't know if you want to add.
Any additional details for that.
I think Ken and you hit on all the high points I would just say that the great thing about our ESG capabilities is that yes, we have it and the traditional asset classes equities fixed income, but also and solutions and alternatives and in alternatives in places like K, two Clarion et cetera, where we're also seeing significant flows and I think that.
Combination of ESG and all this is going to be a real winner for us.
That's super helpful and sorry, if I just back out.
The onetime redemption of the $6 billion and the India Fund.
And we'd have about 3 billion of positive flows for the quarter.
Got it.
Fair to fair to say.
ESG funds would've driven.
And you're on a net basis, a significant portion of that.
How does the three.
I don't think we know.
We don't necessarily okay.
But youre right Youre right Youre right on and $3 for that yet.
Okay, great. Thank you.
Okay. Thank you for that ends our Q&A session I would like to hand, the call back over to Jenny Johnson Franklin President and CEO for final comments.
Okay.
Thank you everybody for participating in todays call through.
Through the work that we've done over the past year, we built a really truly differentiate and investment firm and our progress highlights why we are more confident than ever about our future.
And once again I'd like to thank all our employees for their significant efforts dedication and client focus and.
And we look forward to speaking with all of you again next quarter. So thank you everybody.
This concludes today's conference call you may now disconnect.
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