Q3 2021 Franklin Resources Inc Earnings Call
Welcome to the Franklin Resources earnings Conference call for the quarter ended June 30th 'twenty 'twenty..1 Hello. My name is Hillary and I will be your call reader today as a reminder of 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.
Good morning, and thank you for joining us today to discuss the quarterly results.
And it's made on this conference call regarding Franklin Resources, Inc.
Which are not historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 of 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 for repurchase.
Great.
These and other risks and certainties and other important factors that I 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.
<unk> and Chief Executive Officer.
Thank you Celine Hello, everyone and thank you for joining us today to discuss Franklin couple tenths of results for our third fiscal quarter, Greg Johnson, Our executive Chairman, Matt Nicholls, our CFO and Adam Specter of our head of global distribution and are also on the call with me today, we hope that everybody is doing well.
This past Saturday and marked 1 year since we closed on our landmark acquisition of Legg Mason and its specialists for investment managers as we stated at the time because the growth story for our firm and our focus continues to be on delivering strong investment results for our valued clients.
And it's been our north star throughout the past year for the past 12 months to the hard work and dedication of our employees. We've made significant strides, bringing together the 2 firms and executing on our growth strategy. We have created a diversified business across asset class vehicle client type and region.
And we're well positioned in key growth areas, where there is client demand, including alternatives fixed income.
And as and ESG investing.
Early on we redesigned and Nimbler and more adaptable distribution model with the more region centric sales approach pushing our decision, making and resources closer to our clients.
And the positive momentum we're seeing around sales flows shows that what we're doing is working our sales initiatives are resulting in deeper relationships and increased diversification inflows across funds vehicles and asset classes. These factors have led to significant improvement in total.
Net flows since the time of the acquisition.
Our combined sales team has been actively cross selling in the U S alone almost 6000 and financial advisors have deepen their relationships with Franklin Templeton through enhanced access to newly introduced capabilities. Specifically this progress has led to growth in key areas of the business.
Since the acquisition, we've grown alternatives by 15% wealth management by 22 per cent and estimates by 25% above all else we've been incredibly aligned in terms of culture and our focus on delivering strong investment results.
Our efforts this past year have translated into a better stronger Franklin Templeton, turning now to our third fiscal quarter, where the momentum has been building ending assets under management reached a record high of 1.55 trillion this quarter and investment performance continues to strengthen.
Across a broad array of investment strategies overall results continue to reflect outperformance and fixed income, including western asset and brain and wine global alternative asset strategies, and global and internationally equity strategies across Franklin Templeton equities Mew.
Mutual funds with 4 or 5 star ratings by Morningstar increased to over 150 funds this quarter.
Turning next to distribution highlights we saw positive net flows into the majority of our specialist investment managers and benefit Street partners Clarian Clearbridge Fiduciary Trust International and Martin Currie, all reached record highs and assets under management.
We were pleased to see a record 3.1 billion and net inflows to alternatives and also that our fixed income net inflows and returned to positive territory at 2.1 billion.
We made progress diversifying our net flows across funds vehicles and asset classes during the quarter scaling smaller products and creating broader sources of revenue. For example, 15 of our top 20 funds with positive flows our products outside of our largest 20 fun.
And each have an average age.
Of less than $2 billion.
In the U S. Our collective sales initiatives are yielding positive results with net flows during the quarter. Specifically, we saw net flows into U S retail, which is our largest distribution opportunity and and global financial institutions, our largest client opportunity on.
And the product development front, we launched the 1 billion pre leverage western asset diversified income funds. This was our largest ever fixed income closed end fund the IPO and illustrates the successful partnering of our Sims investment capabilities with the combined reach of our distribution platform.
Additional recent strategic developments include the close of the acquisition of Gaiam and Hills high yield focused U S. Corporate credit mutual funds and July adding 3 point for billions of assets under management and the announcement of a merger of benefit Street Partners Realty Trust with cap Stead Mortgage Corporation.
And which will create the fourth largest publicly traded commercial mortgage REIT upon closing.
Looking at our financial results, our adjusted operating income increased by 3% to 601 net point 2 million from the prior quarter inclusive of the 1 time impact of costs associated with the successful launch of the Western asset closed end fund that I just mentioned.
And with 6.4 billion in cash and investments the ongoing strength of our balance sheet enables us to invest with confidence in the business and make sure we're best positioned to be a leader and an ever evolving industry.
Finally, I want to thank all of our employees for their efforts. This past year working under extraordinary circumstances I'm extremely proud of what we've been able to accomplish on behalf of our clients.
Now your questions operator.
Thank you.
And I ask a question. Please press star 1 on your telephone keypad the comp.
And total indicate your line is and the question queue.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
The request that you limit to 1 initial question and 1 follow up.
Our first question is from Patrick David with Autonomous research.
Hey, good morning, everyone.
For my first question is on the on the.
5 billion 529 redemption.
And will flow through of the mutual funds or is it and.
And more of an institutional wrapped or because the the.
And the mutual fund flow of data, we can see suggest the fairly significant outflow in July and just wondering if that's sort of associated with thanks.
Yeah. Thanks for that question that is and the mutual fund flows those worth of mutual funds that were and that program.
Great. Thanks.
And then on the drivers of the expense guide you mentioned, the being driven by the close and fund launch cost and the performance fee comp, but that would suggest and 80% comp ratio and the poor performance fee, which seems quite high. So is there something else driving the increased orders for is it right to think about the performance of the comp ratio of being that high.
No I think that.
We also had a little rice and and other compensation associated with strong performance and other areas of the firm, but most of it was the performance the related compensation and maybe we should take offline and the 80% of the.
Not less.
The.
For like much less of it.
Thank you.
Thanks, Patrick.
Our next question comes from the line of Dan Fannon with Jefferies.
Thanks, I guess just to follow up a bit on just performance fees and I know these are difficult to predict but this was the largest quarter from you I think and history and so I think the prepared remark said something about diverse set of the contribution. So can you talk about kind of where the performance fees came from and then looking ahead, how we should generally.
Think about this quarter vis vis what might be and the in the future of just given.
And the limited disclosures around around the funds.
Yes, so if the couple of things of that first of all I'd say that about 70% of the performance fees are attributed to our largest alternative asset management and specialized investment managers, that's attributed to Clarion and benefit Street partners.
The 2 though the rest of it comes from the study with diversified group the represents about half of our specialized investment managers so to say.
And the diversified group of.
Of the specialized investment managers that have been outperforming.
The produce the performance fees.
Walt and for the second part of your question.
How should we put this into context this quarter versus the future quarters.
And I think it's important the.
To note that while it reflects the growth of.
And I will turn the divestment business in particular this quarter did include 2 quite large episodic performance fees of the cut at the same time and 1 instance, we had several funds cleared the performance hurdles and became the vegetable for carried interest distributions.
Which had accumulated over several years its about 4 years actually.
And the other a significant tranche of invested capital became perpetual for a long day to performance fees and this fall and had significant investment performance over over the period of which resulted in a loss performance fees. So so this combination of events and timing along with the performance fees and over half of the other specialized investment managers resulted in this.
<unk>.
Performance fees or elevate the performance fee levels I would repeat our guidance on performance fees of $10 million per quarter I think.
You'll you'll agree that sounds quite low, but we think it's best to be conservative around performance fees, but.
But we do acknowledge that is conservative.
Okay. Thanks, that's helpful. And then just generally on alternatives given the strength and flows in the quarter.
Can you talk about just kind of the fund raising environment today, and you know kind of the runway you see for growth here and where the potential biggest contributors for that asset classes at the manager level could come from.
Yeah. There are a few things that are really working.
For us and alternatives 1 of just the quality of the firms that we have we think it's a debt theyre.
Strong and their individual asset classes and we're in a number of different alternative areas from real estate to private debt private equity the hedge funds.
We also have an advantage of being able to raise money for alternatives and the geographically diverse base.
We're seeing growth around the world and our alternatives, it's not just the U S flows.
A number of our alternatives have and ESG component to them, especially and real estate and so that combination of ESG and alternatives.
Is resonating I think quite strongly and finally from the alternative side of that that'd be spent a lot of time concentrating on how to democratize access to alternatives to make sure. It's not just the institutions and the ultra high net worth segment.
That can access alternatives and we're raising money in retail as well all of that to me speaks to the ability to have continued strong momentum and fundraising there.
And let me just add.
Yeah.
A lot of discussion about the democratization of alternative of serious.
And I think the all of the strongest retail franchises.
It is complicated and pixel in the retail franchise.
And the aerie serious focus for us for figuring out how to do it and we've had some success and it and then if you think about our great. Our biggest alternative managers with with clarity on it and DSP both of our income generating and that fits very well.
In the retail space and it's a matter of you know.
<unk> debt the advisors on it and getting the brand name out there, but having the relationships that we have we think that that statistic and huge upside opportunity for us there.
It's also good to put the alternatives generally into perspective in terms of where we've come and where we are about 2 and a half years ago, we had about $18 billion and alternative Asics for the management and we know of Hudson and $41 billion on the management.
Obviously and that contains 2 large acquisitions of benefit Street partners and Clarion, but it also includes the embedded 15% of at least organic growth rate over that period. So it is both acquisitions and making opportunities work in terms of all kind of growth.
And the final thing I would add is that we're continuing to add resources. The distribution there and it was the only last quarter that we started of specialized sales group to focus just on alternatives and the U S and we're seeing traction from that already.
Great. Thank you.
Our next question comes from Ken Worthington with J P. Morgan.
Yeah.
Hi, Good morning. This is the message right on for Ken Worthington.
Your first question and Jeff.
At the time.
And these equity fund redemptions that were called out the quarter.
And you highlighted that these assets generate very little and revenue could you kind of give us and education on how much of an equity assets Franklin management that generate little if any revenue.
And what E E and the outlook.
Most of the assets.
You know I don't know the Mi.
Yeah.
And I mean, you obviously.
Yeah things like smart beta and and past debt, obviously are the lower debt.
It was primarily in our Etfs.
And at 14 day, and an ETF 50 per cent of its active.
The low fees, but obviously the path.
And it's lower.
And just kind of stalling a little bit because I'm trying to think through any of your big chunky.
Well channel.
And I can't think of any of them off the top of my head. These were kind of unique relationships.
Debt debt honestly, we had acquired.
And kind of local manager of smaller managers.
Lower lower fees.
Okay. Thank you and then.
And just 1 more.
And that's it and the commentary that Franklin and added a number of new agreements with distribution partner and you can kind of talk about the nature of these agreements and are you trying to make the more.
And making its way for more of a science well, let me distribution partner of ours and then also just talk about how the cost.
The compare with your existing distribution agreements.
Sure I don't think there's a real change and cost of distribution and what I would highlight.
The average agreements of really a direct result of the concerted effort to cross sell so a lot of those additional agreements are onboarding legacy Legg Mason and products to Franklin agreements or vice versa, and we've done book 1 of the.
Statistics, we've called out is that we cross sold to about 6000, new advisors in the U S that is advisors, who used to do business with only legacy Franklin of legacy like Mason, we're able to do that because we're taking on more agreements and putting products on more products on broad platforms.
We also see of real geographic benefit to taking those new platforms on if you think about.
And Europe as an example and email.
Where franklin historically had the stronger distribution footprint.
About 15%.
Our aim is legacy.
And like mix and in terms of retail distribution, but it's about 30% of the flow so getting the products onto those platforms and had a real immediate benefit to us.
Thank you for taking my question.
Our next question comes from Brennan Hawken with UBS.
Good morning, Thanks for taking my question.
Alright, you referenced.
And you referenced the.
The enhancements to our customization capabilities within your SMA offering.
Can you speak to where you are today with that customization and those capabilities and whether.
Whether or not that presents a possible revenue opportunity within that channel and what investment you want to make to enhance that offering and further execute that opportunity.
And let me start and then Adam can can add to it.
About 10% of our FMA business today is already very much.
Tax of Rguest stay anymore.
Individuals that quite well.
And we just believe.
Fundamentally with technology Fintech fraction of patients of shares.
Shares debt this customization of individual accounts and become more and more importantly.
Whether it's for things like tax harvesting and things like E. S T tilt.
And what sort of demanding that kind of customization or for could you get into a portfolio now fiduciary trust at the height.
Network management.
Operator of 19th year. This.
And this year, that's what they did meet the Bureau of high net worth manager oftentimes people come with concentration of holding true holdings from a single company debt, maybe they built and set you customize the rest of the portfolio around that.
And of course, they tend to be high tax bracket people. So cash management is key to what they did and what we're seeing and we've talked about this as the world and taxi day is the demand for financial advisers to provide the type of services. The traditionally were just done by high net worth managers like Felicia.
For us and bringing them much more of the masses and so we think this trend is here to stay.
We have had that capability within our appetite for quite a while we're continuing to develop it and I know Adam you're closer to the day to day of water.
Thanks for that.
Yeah, I think Jeremy really did hit the high points. There. It is already 10% of our 125 billion and Sma's.
Many of them to grow and we're continuing to expand that reach.
And to more FERC, what I would say in general about our SMA business.
Is that Clearbridge and like Mace, and historically had and incredibly strong infrastructure in terms of operational and technological platform for the extra day business. We've now been able to use that platform across the business such that about 50% roughly of the net flow into the estimate of businesses.
From the legacy Franklin investment teams, so really seeing and again the advantage of using and.
Legacy part of 1 firm to benefit the entire organization.
Yeah. Thanks for that we've definitely heard about the success.
Is there anything you can add to the the revenue opportunity tied to those that 10%.
You know I would say in general that when we look at our SMA business.
It tends to be very good revenue business, because it tends to be stickier and mutual fund business, we have a longer average life.
And that has a definite revenue impact I would also say that to the extent that you customize for our client.
Over time that relationship becomes less of about quarter to quarter performance and more about really meeting the client's overall goals, whether those are the ESG goals of our tax efficiency goals, which again leads to longer lived assets, which I think is a positive revenue impact.
It's also the bonus from a profitability perspective, it's.
Even though its low of fee it's high margin business.
Cost less to run.
Because of it exists on the that you use the existing infrastructure and so incremental.
Correct. Thanks for thanks for that yeah.
Okay, and then Matthew.
Understanding your commentary about the chunky nature of the performance fees and the 10 million of quarter is probably conservative, which looks pretty clear, especially after last quarter.
But.
Is there of seasonality, we're kind of getting used to the new business mix here at Franklin and should we think about the seasonality to the performance fees and you.
You almost got there to the comp ratio before but like I, usually think about it as more of like maybe and the ballpark of like half of that 80% and that's viable.
I think that's a good I think that's correct. Yeah I think that's the way it looks I mean I was thinking about Patrick's question I think the way that we look at it in terms of the.
Increased expenses this quarter versus last quarters without the.
Uh huh.
Performance related compensation and without the cash.
Most of and fund launch costs, we would have been slightly down expenses quarter over quarter.
So I think that's important and that allows you to calculate and the the roughly 50 of 60% of.
The performance related compensation, but it really depends Brendan.
Which performance fee, and which specialized investment manager and which mandated is.
And that's a little bit difficult to generalize, but I think in terms of this quarter that's the right.
Answer in terms of the for.
All of the comp ratio of just to take advantage of this to give you a quick update.
For the for the fourth quarter and comparing it to where we're at now.
Our comp ratio as you can see was 44%.
For the quarter, which was consistent to the last quarter and I expect that to the $43.44%.
Next quarter.
It's consistent with comp and benefits being down by about 5%. So that's the comp of benefits.
And in terms of information systems, and technology and <unk>.
That's the up slightly probably 5% to 7% and the fourth quarter and the best driven by the.
Outsourcing initiatives, which ultimately will help and compensation reductions next next yeah, even somewhat into the fourth quarter.
In terms of occupancy expense, we expect this to remain flat in the fourth quarter, perhaps 1% higher because of a working on some interesting.
Opportunities there.
And resulting slightly higher.
The expense, but then followed by meaningful reductions in 2022, but for the quarter or about flat to 1% higher.
And then G&A as you know this quarter was sharply higher because of the closed end fund launch costs without that G&A would have been flat in terms of our expense guidance for the fourth quarter, we're assuming at least 50% normal the split.
Normalized TNA.
And which.
The took about $125 million of G&A for the fourth quarter.
Alright, and I got a lot of extra credit on that question, so I'm going to quit.
Okay.
Our next question comes from Brian Bedell with Deutsche Bank.
Hey, great. Thanks, very much 1 quick clarification on that question is that sequential growth or year over year.
And sorry, Brian which sequential the wood.
On the expense guidance you gave Brendan as it is.
And that sequential growth.
Culturally of a quarter, so fourth quarter versus the quarter, yes, Okay, Yes, I just want to clarify that thank you.
And my my my broader question is on ESG and the 200 billion of of U M that you referenced.
And that's up from 175 billion and the prior quarter.
2 if you can talk about.
Proportion of that was due to net flows into ESG products compared with any kind of reclassifications or funds that I have now.
And.
We are free.
Re categorized as ESG and and and then importantly of the $200 billion. What would you say is and exclusionary strategy as opposed to.
Yeah.
The investment in and and sustainable investment.
So.
Let me try to tackle that.
I don't have the exact because I would say in general when we think about that $200 billion. It's not primarily exclusionary based at all and instead I would say if you had to try to categorize it think about it as more assets that are in line with the European article 8 of our article 9 definition, that's roughly how we think about.
What that $200 billion is.
Most of the change there really is due to either market performance or flows because we're seeing very strong flows.
Especially in Europe.
If I take a look at our European assets I think ESG is going to be key and every single market. Europe is just a little bit of head right now.
Believes that article 8 and 9 type assets that 200.
Billion dollar number that represents something like 15% of our AUM.
In the EMEA region, but 30% of air flow.
And 50% of our pipeline. So it is becoming more and more important and so I think youll see that number of rise overtime.
Okay.
And.
That.
We kind of break that category.
We think the way Europe is done it with the article 6.8 and 9 is the good framework to think about it and we.
We are pleased that we have so many products qualified it gets 25 of article 8 and I think.
Now 8 strategies for article 9.
But what really.
Satisfying.
The diverse across all of our sins.
And we kind of put it into 4 categories of nomadic tilted the items base can be things like sharia and suite of bonds.
And then impact and and yeah.
And we're talking clarity and Martin Currie, Franklin Westar and <unk>.
And so really across all of our different and we have the.
And it fit into these 8 non categories, which is which is debt.
Thanks, Tom just positioning.
Okay.
Helpful. And then and then just and maybe if I were on and that the institutional versus retail breakdown is it would you classify this as more of it.
Retail products that are getting the designated the the article 8.9 and you also mentioned customized at the amaze I think earlier and <unk>.
Another question about.
And if you'll be the client being able to customize ESG.
ESG considerations into the SMA, maybe if you can just talk about how significant that is.
Yeah, I would say and that 200, the customize the SMA it's not.
And that's part of that number because of lot of that customization Israeli tax loss harvesting.
So I don't think that's a huge part of that number.
Institutionally, we are seeing significant demand for ESG, and I think and in certain markets in Europe and Australia.
It's hard to win any new institutional mandates unless you have the ESG integration so.
And so I see that as the theme across both retail and institutional.
Got it and then just lastly for the flow number that you mentioned it was market and performance of I'm, sorry performance and flows that drove the 175 to 200 is it fair to say you had more than the 10 to 12 billion of inflows into what you would consider ESG products, if we back out market for the second quarter.
I think we're gonna have to get back to you and that I don't have that number in front of debt.
Okay, great. Thank you so much.
Thanks, Brian.
Our next question comes from Bill Katz with Citigroup.
Okay. Thank you very much for taking the question this morning.
First question coming back to expenses for a moment what is your market assumption as you think through the fourth quarter and and then maybe the broader question is Matthew mentioned that there's some synergies coming and I don't know that's just for the remaining synergies with the the deal if there's anything new any way to sort of at least initially ring fence, how you're thinking about fiscal 'twenty 2.
Maybe excluding performance fee contribution on the comp side or the close and fund vehicles just for comparison perspective.
What was the first question Bill.
The first question.
And so I was just asking about on expenses just the the guidance for the fourth quarter is that assuming flat markets like it has been historically was yeah. Yeah, yeah, yeah, it's assuming flat flat market for the fourth quarter.
So and and.
The performance fees at the rate that I, just talked about versus anything that might be elevated.
In terms of 2022.
Oh, the at the moment for all of the folks on the fourth quarter and and provide you with 2022 views.
When we talk about the fourth quarter, but just as a reminder of the.
On the expense reductions associated with the merger transaction.
And we've achieved.
The notional amount of about $150 million or expect to achieve that amount and bye bye.
By year and that means that in 2022, we will achieve the other 150 and so that's that's the sort of the stake in the ground in terms of expense reductions and the 2022 oils for many equal.
Okay, and then just a follow up just to unpack a couple of different things and when I look at the data you had I caught the U S turned positive this quarter, which would imply that the international book was still flowing.
And maybe you could walk through maybe whats the difference between what's happening the non U S versus U S. And then just sort of following up on on the ESG could you unpack, maybe the equity component and I. Appreciate that you called out a couple of idiosyncratic outflows, but you know any of any sort of color on sort of what's coming in the door versus of what is exiting.
<unk>.
Sure.
So let me kind of.
Think of that so from a regional perspective.
The us is really our largest market is somewhere between 70 and 75% of total AUM.
And we are net flow positive both for the quarter and year to date.
Things are working really well there we're continuing to do well with their biggest partners we're cross selling.
And really well and then the other thing I think we've done incredibly well and the U S. If the start to bring more specialists to bear from across our investment teams alternatives Etfs et cetera, the client relationships. So that's been really strong.
Americas and.
And our European business are roughly flat and the outflows really have been in Asia the age.
And outflows are you.
You know, what's going on and India, that's the <unk>.
And that's a good portion of it some of those 1 off of equity outflows.
Outflows.
And we're in Asia and as well.
And at Asia, and then we've also.
Talk a little bit about some of the issues we've had in Japan. The good news is that we're seeing of turnaround now and Asia. Our Japanese pipeline is really building and it's more diversified and we're adding new clients. There are Australia and detailed business is incredibly strong I think for something like 15 months in a row.
And net positive flow and Australia, and retail so really starting to see Asia turnaround and that's been the reason and thats been the.
Slowest for us in terms of your other question about what do we see and the future I really think of distribution is having 1 part that's really and the machine build that debt.
Working.
And that's the kind of continual grind day in and day out to make sales deferred asset.
And that's just growing well for us really across the board.
And the machine is working we're working really well in terms of the central distribution teams with our seamless distribution teams.
And we're executing on our plan it's the.
Big Chunky stuff that just hasn't been breaking our weight and lately and the.
That's what's been really impacting them.
Some of the the negative numbers, we've got a lot, though in the pipeline a lot of deals we're working on and I think those bigger things will start to break for us shortly.
Thank you so much.
Yeah.
Our next question comes from Glenn Schorr with Evercore.
All of the Alright, guys I wanted to.
Hello, and so I wanted photoshop on that thought of like I can see the increased diversification of your flows and like the anecdotes you gave us on 15 of the top 20 net flow of funds outside of your largest 'twenty.
Alright, I am curious about the large 20, they'll also meaning close by and large.
And and I noticed gross sales are still down on the quarter on quarter and he said seasonality, but how should we think about what you expect on both gross sales and net flows given that the biggest funds.
Oh, and contributing and won't take away from all of the efforts that you've talked about on the diversification of Panther, great, but the big pumps per month.
So so 2 things 1 there really is the seasonal effect, we've gone back for as far as we have data for the combined companies and this quarter. It was always the slowest for gross sales so.
There is a seasonal effect that that's historic.
In terms of the largest funds right. If you think about things like <unk>.
Western core or Gyn attack or the income fund those are still among our comp.
Comp selling fun and our and.
And positive flow. So a number of the largest funds still are growing. So we do think that we have the right balance between the absolute largest funds growing but it's not.
Only the largest funds that are growing we've got a number of funds that are under say $2 billion.
Where we see a lot of momentum and I think that speaks really glenn to the longer term stability of the business and 1 of the things we're trying to focus on it and really build a stable base for years to come and I think when you are too focused and warn geography, and 1 of the vehicle type and 1 investment team.
That creates a little and stability in the business. So we're glad that a few of those funds are still growing our net flow positive, but we wanted to add diversification to the mix as well.
Awesome. Thanks, so much I appreciate it.
Our next question comes from the line of Alex <unk> with Goldman Sachs.
Hey, good morning, everybody. Thanks for taking the question.
I wanted to start with your outlook for the closed end fund market, where obviously you saw you and the market last quarter with the product some of your peers have been fairly active there as well.
As the market environment conducive to do more of those kinds of things.
And then if show me and me and be talk a little bit about the strategies, where that would make most sense.
Yes, I think what we've seen is and now that there is.
And the ability to kind of.
Structure of closed end funds and a way and that's a little different than they were done years ago. It really significantly more receptivity to the vehicle I think it works well for investors for the index.
The manager as well as for the distributors. So I think we're going to see more of them certainly when you have the $1 billion plus range.
Wanted to do more we're currently.
And discussion with the number of distributors for a range of.
The different products and I think youll see us come to market again.
Great.
And then lots of discussion on the call obviously around the diversification of the business and kind of really building out and scaling some things. If you guys of either build the required over the last couple of years.
As I think about the Apple the return profile on the forward basis from an M&A perspective, maybe give us your kind of updated thoughts there as well.
Overall, the organic opportunity be and as part of Franklin.
Kevin.
Okay.
Go ahead Charlie.
Let me just start Matt and then maybe you can got true.
So we've kept the and we've always said that we kept the strong balance sheet, because we wanted to be opportunistic and and have the ability is.
We believe we have the broadest product lineup and the industry and so from an acquisition to go out and do a large scale acquisition, we would only be adding assets as opposed to capabilities.
And and often there's the strategic buyer of that we'll spend more again and we will when youre just adding.
Asset.
So, it's probably unlikely, but we never say never for the right opportunity came up we'd be open to having said that we've been I think pretty well.
Clear on the areas that we're focused on expanding we want to go out of alternative business. It is a major priority for US we view that and you think about net growth opportunities and it's going on and while were 141 billion and I think bigger than most people realize as far as our Alt a.
The business, it's still less than 10% of our AUM.
And and we think that there's more opportunity to grow there.
We already stated that we like the high net worth business. Its fiduciary Trust again, it's 1 of the Premier.
Players in that space against the operating their 90 years.
A very fragmented market and we'd like to do more acquisitions there and.
And we're finding is there's more pressure on small RIAA the.
And you wanted to and you pick a part of who has the capabilities of the fiduciary.
Trust and tax planning.
No generation education, all of those things are now being demanded and.
So you will see as we said I think when we were $20 billion that we would we see yourself going to 50, we're already at 33 billion and we'll continue to look to expand there.
And then I would just say debt.
And if were operating as we'd like to have more scale and places like Etfs.
We love our ETF franchise, we think we have a phenomenal team if something came up in the in a particular region that could be interesting to us but today at 50% active we actually think we've got really good products and that state.
And then I would just say that we've talked about in the past and the Fintech side. These will be more smaller investment or acquisition there'll be things that are specifically designed to help our distribution capabilities things like our investment and embarked.
And that was designed specifically for and.
Greater penetration of the distribution and turned out to be a good investment too and those types of things are.
And we'll continue.
Focus there.
Yes, and again I think.
Yeah, and the necessary covered it perfectly I think just a little bit more on the upside I mean I.
Got it.
The way, we sort of think about the alternatives businesses Thats, probably about 15% of our adjusted revenue of at the moment and we would like that to be significantly more of them that.
And as you know it sort of large and growing area of asset management, and we have a really small market share overall, we think it's great. What we have and we're very pleased with the growth rate, both organically and the ability to bolt things on such that the REIT transaction, we just did with benefit Street partners.
We've got real missing we've got real missing components of the overall trend of asset strategy group debt.
And sort of formed which as a grouping of companies and the alternative asset space and for example, we have nothing and the equity alternative asset arena.
So so we're very focused on that and we think we're very good home and we think we've got the right structure to.
Put in place to make it very attractive for those companies out there and another journey already mentioned wealth distribution and the other thing I would think about around this in many ways of capital allocation question.
And.
With all the income profile now.
If you.
Take the the very important dividend into account.
A couple of hundred million dollars of share repurchases to make sure the way at least offset.
Compensation grants.
As with the $1 billion.
And to invest approximately.
And in the firm and that's Unlevered.
And that will be fully invest in the firm in terms of acquisitions in terms of investing and the business across all of the Sims I think we mentioned in our prepared remarks for example, the we've allocated $440 million.
And of new seed and co invest capital since we announced the.
And that's already turned into over 4 billion of AUR.
And so it's almost like a tenfold.
And that record in terms of turning it from the AUM returns perspective, so we see a lot of opportunities there and we're being very disciplined about how we think about that the the <unk>.
Size of our balance sheet gives us more confidence to spend that money each year.
And <unk>.
Frankly, we're very active across these areas strategically.
Alright, Thanks, Jamie Thanks, Matthew.
Thank you.
Our next question comes from the line of Michael Cyprus with Morgan Stanley.
Hey, good morning, Thanks for taking the question.
And I was just hoping to dig in a little bit more on the alternative opportunity set all of its products within the retail channel. If you could just talk a little bit about how you guys are thinking about the opportunity set there would seem that there could be opportunities for clarity on what the private REIT with benefit street with the private BDC I know you have sort of public entities. There can you just elaborate on.
The opportunity set which products can make the most sense and how big could the speak for Franklin.
And it sounds like you work and our alternatives of marketing group, because I think you've really hit on 2 of the most important opportunities for us where we're spending.
Significant attention I think the other thing that we really need to deal with the work with our distribution partners to understand.
What.
They're looking for the other thing we've seen some growth and as our hedge.
The hedge fund business and the retail channel I think that could be.
The really strong but BSP clarion.
Obviously 2 of the the biggest offerings I would also say that and some more of the traditional asset classes like fixed income.
There are ways to structure of things.
Sure.
So that it has more of and alternatives.
To it as well as the characteristics of that 1 would expect from alternative investments and a more traditional asset class and we're seeing that and the retail channel as well.
And Adam I would just say.
You take the clarity and I mean, 1 of the pieces of feedback.
Feedback, we're getting from some of our large distribution partners is the concern that they have of oil concentration and managers and they want diversification and here you've got cleary and it.
61 billion and.
With the unbelievable performance coming out of the Covid period.
And it really has only been and institutional distribution and so we just think there's just tremendous upside there because there's a desire on the distribution side to hit diversified there.
The manager and we've got the distribution team to support the.
You know that the alternatives business and and really the product share.
And and the final thing I would add is that the fundraising in that channel trends could be.
And kind of a multi pronged thing you bring a fun period, 1 and then you can come back the market a year later ex number of quarters and.
So I do see the real potential to have sequential growth and a raises there and those advisers become more comfortable with the brand and the process of allocating the alternatives.
And then the other sort of additional point is that the wrong.
There are some very attractive alternative asset stretches the we don't yet own because you don't have the capability that we think.
It's very logical connection with the loss of distribution business like house.
And.
And we don't talk about it but I think we.
To add a little bit.
Yeah, we have a very strong venture group and while Theyre small and the individual private funds and they actually came out of our wealth franchise at Franklin.
You can see the ability to put in the illiquid assets and mutual funds and so their travel book I don't know, Matt and I think it's about $2 billion.
And then share investment.
And a large part of it within our traditional kind of mutual fund, but they are now starting to be selected as the lead against very competitive other fees.
On offer and so we're really excited because we think there's a lot of opportunity there.
Great. Thanks, so much.
This concludes today's Q&A session I would now like to hand, the call back over to Jenny Johnson of Franklin President and CEO for final comments.
Yes, I just wanted to.
And I, thank everybody for the time today and we.
We appreciate the.
We appreciate you guys, taking the top of the call and wish everybody a.
The next day.
Of the Delta very and everything to stay healthy.
And thanks, everybody.
Thank you. This concludes today's conference call you may now disconnect.
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