Q2 2022 Franklin Resources Inc Earnings Call
Welcome to Franklin Resources earnings Conference call for the third quarter and fiscal year 'twenty. Two Hello. My name is Crazy now of your call. Operator today as a reminder, this conference is being recorded and at this time all participants are in a listen only mode.
I'd now like to turn the conference over to your House 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 statements made 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 1995.
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. These and other risks uncertainties and other important factors.
Glad in more detail and frankly recent filings with the Securities and Exchange Commission, including in 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 Celine Hello, everyone and thank you for joining us today to discuss Franklin Templeton's results for our second fiscal quarter.
I'm joined by Matt Nicholls, our CFO , who recently expanded his responsibilities to include Chief operating officer, and Adam Spector, our head of global distribution.
This quarter global financial markets were impacted by a continuation of macroeconomic pressures due to increased inflation and related higher interest rates, both of which have been significantly exacerbated by geopolitical and economic shifts, resulting from the Russia Ukraine War.
This quarter's volatile market environment challenged industry flows, particularly in taxable fixed income strategies, we were impacted by these pressures and had $11 7 billion in long term net outflows, although we continue to drive net inflows into key growth areas and our effective fee rate remained stable.
The heightened market volatility and implications of a rapidly changing investment environment remind us of the importance of the investments we've made over the past several years to diversify our business to better serve our clients through all market conditions.
Our investment teams each look at the market through a different lens to provide deep expertise and investment specialization for instance, if you look at our fixed income franchise Brandywine Global Franklin Templeton fixed income Templeton global macro and western asset each of these specialist investment manager.
Yours has a different interest rate outlook, resulting in varying investment outcomes across our products.
And although we saw net outflows in certain U S and global taxable strategies those were partially offset by inflows into short duration bank loans and corporate strategies.
Additionally, we've been able to benefit as investors look to reposition their portfolios in search for yield across asset classes. Our flagship income fund and alternative asset strategies, our benefit Street partners and Clarion partners. For example represent important diversification tools for our clients.
E S. P N clarian have been key contributors to our success and generated a combined 2 billion in long term net inflows during the second quarter and each reached record highs in assets under management.
Our multi asset class category recorded $2 3 billion in positive net flows for the quarter driven by the Franklin income fund that has an approach that is adjustable to changing market conditions with 75 billion in U S. A U M. The income fund has also seen increased interest from investors in Asia.
In Europe , and the strategy was recently launched into the SMA a vehicle to meet client demand.
To illustrate how we've been able to diversify into other strategies 17 of our top 20 funds with net inflows are outside of our largest 20 funds and on average now exceed 5 billion in AUM.
Close connectivity with our customers during periods of market uncertainty is extremely important as investors look to reposition their portfolios and we've been actively engaging with our clients with thought leadership from the Franklin Templeton Institute and our specialist investment managers to help navigate how geopolitical and macroeconomic.
Shifts impact their investment decisions and their long term financial goals.
Specifically webinar attendance by financial advisors grew by 62% in the second quarter and video views increased by 90%.
Turning to investment performance strong long term investment performance resulted in 65%, 68% and 77% of our strategy composite AUM outperforming their respective benchmarks over a three five and 10 year period.
There was a decrease in our one year investment performance, primarily due to certain U S. Taxable fixed income strategies, which was partially offset by strong performance in global fixed income strategies with notable improvements in performance for Templeton Global Bond Fund, whose performance is in the top decile for the one year.
Period.
We continue to make progress on our corporate initiatives, which include growing alternative assets advancing technology to customize portfolios interest amaze and expanding our presence in wealth management and Etfs.
Our alternative asset business continues to develop growing 2.3% from the prior quarter to a record 158 billion in AUM with contributions from a diverse group of strategies, including the aforementioned 2 billion of net inflows into benefit Street partners and Clarion partners.
On April 1st we completed our acquisition of Lexington partners, a leading global manager of secondary private equity and co investment funds with total a U M of 57 billion as of March 31st bat, a U M will be included in our quarterly reporting starting in the third quarter and we expect further grew.
As a result of new fundraising.
When including Lexington, Franklin Templeton increased its presence in alternatives by 39% to become a 215 billion manager of alternative assets and area of increasing importance for both individual and institutional investors.
SMA a U M ended the quarter at $126 1 billion, we continued to make progress with SMA strategies, particularly in the use of technology to customize portfolios. This quarter canvas. Our recently acquired custom indexing solution increased by 21% in a U N driven.
By net inflows of 600 million and the number of partnerships grew by 15%.
Wealth management AUM ended the quarter at $34 1 billion Fiduciary Trust international generated its sixth quarter of consecutive positive long term net inflows and we continue to explore ways to accelerate growth of the business via acquisitions.
We also experienced growth in our ETF business in the quarter with positive net flows in approximately 13 billion in AUM, which are balanced between actively managed and passive strategies looking briefly at our financial results.
Adjusted revenues were 1.6 billion a decrease of 6% from the prior quarter, primarily due to lower average AUM two fewer calendar days and a decrease in performance fees.
Expenses were flat quarter over quarter, but would have been lower had it not been for nonrecurring or certain episodic items that are included in our adjusted results. Adjusted operating income was $577 million and importantly, our adjusted effective fee rate stayed relatively consistent.
At 38.5 basis points.
With $6 8 billion in cash and investments as of March 31st the ongoing strength of our balance sheet enables us to invest with confidence in the business and make sure were positioned appropriately in an ever evolving industry.
In closing, it's a transformative time in the asset management industry, while the economic climate and geopolitical tensions present additional complexities and uncertainties over the past two years, we've made significant strides to expand our capabilities and provide our clients with deep expertise and specialization.
It's this broad diversity that is allowing us to navigate through the current volatility I would like to thank our employees for their tireless work and ongoing efforts on behalf our clients now lets turn it over to your questions operator.
Oh I see.
A reminder to ask a question you will need to press Star then the number one telephone really dry question press the pound key please.
Please not that they will only have one question and one follow up per analyst.
Your first question comes from the line of Craig Siegenthaler from Bank of America. Your line is open.
Good morning, Jennie, Matt Hope, you're both doing well and Matt Congrats on the C O appointment.
Well thank you.
So given your large fixed income franchise across western and Brandywine and Franklin I wanted to get your perspective on how investors are reacting to rising rates.
And my question really is are you seeing a different flow pattern or behavior between the retail and institutional channel and then when the monies, leaving do you see where it's going is it going into cash private credit equities and are you able to recapture it.
Well I'm going to I'm going to let Adam get into details, but I mean, we're definitely.
Good flows into like short duration bank loans corporate strategies. So there so it's not all of them.
There's more of a kind of a shift in where it's going but Adam do you want to go into a little bit more details.
Sure. Thanks, Jenny first of all I would say that the.
Changes that we've seen are not really all that different on the institutional and the retail side, we see pretty similar patterns going on right now.
It's really part I think driven by the fact of how professional the wealth channel as these days I don't see that much differently than the institutional channel what we've seen is that core.
Hi strategies intermediate duration, which hit the worst I think if you take a look at active.
Flows for U S mutual funds as an example for the month of March.
Industry without something like $71 billion, and 75% or so of that.
And core taxable fixed income so that part of the market got hit really really hard where is that money going as Jenny see we'd see short duration picking up a lot are short duration sales in some of our funds was up over 80%, we see it going to some credit strategies floating rate and importantly also.
It's a private credit.
We're a significant player.
And that in part is propelling the growth in our alts business, we're into our private markets businesses as Jenny said earlier, we had $2 billion worth of growth in the quarter. The other place.
Especially in some of our wealth channels that we've seen a pivot to use alternative sources of yield fixed income and we're really pleased that we have the ability to offer our clients the income fund.
Which is one of our largest funds at Franklin and one of our top.
Flow generators for the quarter.
Where we saw an increase in our net of over $2 billion quarter over quarter and I think we have to assume some of that money from fixed income its going to there. So we feel good Craig.
All about being able to retain a portion of the outflows, even though the industry the segment, where we're strongest at the worst outflows in the industry.
Okay.
Thank you for that and just as my follow up on a similar Opex you know as.
As we try to forecast the modeled bond flows.
Do you think it gets worse from here just because we only had one rate hike.
And there could be eight or nine more I know that's more of a short duration front end of the curve sort of comment and the long end might matter more but I would love your perspective on this topic, given what you're seeing from clients.
Yeah, I think the good news is one of the themes that we're really pleased to see.
Ross the businesses the diversification. So if you ask about a number of rate hikes like that it's going to impact.
Our various specialist investment managers in different ways, because we have very different and differentiated positioning along the curve.
What I think that means is that regardless of the action that fed takes we're going to have products that are in the performance sweet spot, where we'll be able to continue one of them has continued to grow at one of the things. We're really pleased with is the fact that our sales its more diversified than it's ever been before which means we think we have the ability.
To grow regardless of the macro environment.
Adam Thank you for the responses here.
Thank you.
Thank you next we have bill Katz from Citi. Your line is open Sir.
Okay. Thank you so much for taking the questions. So maybe coming to expenses for a moment.
Seem to be a few sort of ins and outs as I see it I was wondering if you could unpack a little bit about what is the right start point for expenses into the new quarter and how should we be thinking about the expense outlook, maybe with and without the impact of Lexington and does the charge you took for for T. A does that have any.
Incremental synergies or other impacts as we look out over the next several quarters. Thank you.
Okay Bill. Thank you good morning, maybe especially just update some guidance and I'll also give some breakdown.
Lexington, So we can sort of reset where we're at milk if both annual.
And some quarterly guidance for next quarter on the breakdowns.
We expect our full year 22, adjusted operating expenses to be in the range of 3.9 to $3 95 billion, excluding performance fees, but now including Lexington partners you may recall.
Last quarter I had said that.
Our expense guide for 'twenty two on adjusted operating expenses would be three point 93 point 95, excluding both performance fees and excluding Lexington, but now it's excluding performance fees, including.
Lexington partners. So that's one important change.
Due to market conditions, and revenues and assets under management and so forth.
Given we've now closed Lexington, as I mentioned I'll give a few line items, which I hope will be useful for the third quarter, we expect G&A to be in the range of $140 million again inclusive of Lexington occupancy to be around 57 million.
And our information services and technology to be information systems, and technology to be around $125 million.
That's all inclusive of Lexington.
That's very helpful. Thank you very much and maybe coming back to alternatives as my follow up Jenny I should I heard you talk about the us with a good growth out of clarity on it and benefit street sort of adding 2 billion, but.
But I also think you mentioned you had some outflows on the liquid side. So if you can maybe unpack that a little bit more and then as you think about Lexington, where are they in their flagship capital raising cycle and how do you see the opportunity sort of leverage it more broadly through the Franklin footprint. Thank you.
Yeah, well so you know.
Some of the outflows were in before.
Macro strategies.
The alternative side.
Hum you know as far as Lexington in the capital range I mean, we're not talking specifically about the fundraise, but if you look at when we announced the deal I think they had 34 billion and fee generating a rabbit ear AUM and now they're up to 42 billion and so you know you can look at comparable secondaries and.
See sort of how they've done on their raise versus others.
We're really excited about it but where we're not giving any more specific details on this particular fund right.
Generally, though the one thing I might add to that is that the distribution team has been working with Lexington, and obviously they have a long history of accomplished fundraise in on their own the areas, where we think we're going to be able to add the most at Franklin Templeton.
Or in the retail distribution of their products as well as in select markets. We've had a number of examples already where they might be strong in a particular country or segment, but they don't quite know everyone in the market, where there's a country where they don't really have a presence. So just like we do with the rest of our specialist investment managers, it's really.
Opt in model.
And we've had discussions with them about where they are strong and where they need some help and we're filling in the gaps, which we think will help their already strong sales process get even better.
And I think actually Adam I think that's a great point I mean, you talk about sort of the big areas of growth.
Alternative is obviously, our big area of focus I mean, BTG came out and said you know in 2025 also represent 16% of AUM, but 46% of global AUM revenue. So as we all know flows all flows arent created equal.
And the big opportunity, we think is in the retail channel. If you just again take the <unk> 13 trillion in assets in the top four largest warehouses, 1% move is 130 billion and they've all stated that they know that the democratization of alternatives is really important as we've seen.
Reduction of.
Companies going public and more and more private credit.
And so we think taking our vast retail distribution capabilities and marrying it with these alternatives it's really complicated.
Training that goes on it's not just getting on the platform. There's a lot of material that has to be there, but it's just a tremendous opportunity and Lexington part of their fund raised has been successful in the retail channel.
So we're excited about the opportunity we actually think secondary private equity is a great way because you don't have the J curve issue for the retail or the wealth channel to actually access private equity.
Thank you very much.
Thanks, Paul.
And your next question comes from the line of Brennan Hawken from UBS. Your line is open Sir.
Yeah.
Good morning. Thank you for taking my questions I just had a follow up on the Matt the expense updated expense guide really helpful to hear.
What are the for the full year does that expectation include what we've seen so far quarter to date or would that be as of 331. When you cut that how should we think about that when we watch the markets and calibrate for that.
It includes market to date, but of course, we obviously know how volatile the market is Brendan.
I think we've highlighted in the past that.
Approximately 35% to 40% of all.
Adjusted expense base is variable.
With market and performance and I.
I think we've also added to that but the other piece of 60% to 65% in terms of.
Long term effectiveness and efficiencies, we continue to view, but so if.
If the market gets tougher we will.
Equipped to to make moves further moves.
Great. That's that's that's helpful and Ah Thanks for that and then you know.
How is it that you guys were.
We hear a lot about.
Some competitors are continuing to make investments in and and whatnot.
How are you balancing.
You know expense discipline and kind of holding the line with continuing to make investments in the business that are so important to your competitive positioning in maintaining your strength.
In the marketplace.
Yeah.
Oh, Oh, Oh go ahead sorry.
Sorry, Matt I was just.
And for more details.
Great.
You will always see us thinking in terms of what's the long term.
Right for the business versus any kind of short term so.
We're going to work hard to reduce costs, where we can reduce costs, but never at the expense of strategically positioning us for the long term.
So we're making some significant investments in technology for example.
And in even in the blockchain space and others.
We think theyre going to be important over the long run it'll take a little time for those to pay off meaningfully.
And you hit the bottom line, but they will be really important for us in the long term positioning the business to.
Go ahead, Matt.
Let's say that the only thing I'd add to that is I think part of your question. Brian is how are we doing that you know where are we finding the money from them with when we're managing to reduce expenses.
Keep up with where the market's going and this volatility is it's basically because we've also been through a very significant merger remember so.
When you go through significant mergers even at the holding company level, where we focus the most of the cost synergies.
We had that that creates some flexibility for the company.
And it continues to create flexibility for the company.
In terms of our operation and how we run the firm and.
We have to focus on one thing at a time, but we've certainly earmarked to other areas, where we can make moves when we have time to make the moves candidly.
So that's where we get the additional flexibility for them as we took it.
Excellent thanks for all that color.
Thank you.
Thank you next up we have Alex <unk> from Goldman Sachs. Your line is open Sir.
Great. Thanks, good morning, everybody.
So Jamie maybe just to build on some of your comments around the alternatives and the wealth management and all kind of your aspirations, there with Lexington, especially coming into the fold now.
We've seen a number of players both kind of traditional and the old is trying to tackle the channel but outside of Blackstone. Most people had had a harder time really making a dent at least at least so far in a sizable way so maybe help us frame.
What the asset base is there today across all of your kind of illiquid products on the wealth channel you know warehouses and the like.
And if you look out in next couple of years, what would you consider to be successful would you want that to look like.
I'm trying to think we publicly mentioned what percentage of our.
Up our alternatives.
Or in the retail channel I don't think so.
Here's what I would say.
It is really complicated we are digging in.
I think Franklin Templeton has one of the strongest wealth distribution capabilities in the industry.
And so probably out of the gate view with all of this this should be easy we should be able to take our alternative products and be able to.
Bring them right in that channel. The reality is it requires you know the.
The simplest thing is to actually get on the platforms. The much more difficult thing is the level of training and detailed that's required at each of the financial advisors.
They're understanding how to sell alternatives into positioning in their products, but marketing material that goes in with that reporting of followup reporting capabilities.
And so like our investment in case right. That's one of the types of things that enables the streamlining of a wealth manager to be able to bring alternatives you really have to if you walk into a kitchen today and we the good news is.
We have all of the ingredients to be able to deliver it.
It really really well the difficulty is it's all about bringing those things together and and and and executing on it to be able to kind of bake best meal.
And so we are putting a lot of resources I got to tell you. This is one of my probably top two priorities in the firm and our top two priorities is to get this right and so we're making sure that we're scaling up our teams to be able to fill in the alternatives, making sure that we have the specialists with.
In each of our alternatives to be able to address the wealth market as well as supporting that with the material and the training.
Blackstone from what I understand several years before they were able to really.
A dent in the in the wealth channel are the good news is they paved the road a bit for the rest of us.
But but it is complicated it's more complicated than I think we understood initially.
Got you great I appreciate that there yes.
I cannot yeah, I can add a couple of things so that we don't break out specifically the illiquid alternatives, but alternatives in general and the retail channel for us or over $14 billion and our gross sales in that channel have been over $1 billion a quarter for the last few quarters. So we see strong momentum there.
And as Jenny said.
Excellence in that area requires really good product, which we think we have a significant distribution force, which we have good relationships with the home offices, which we have but then that all needs to be knit together with.
With really superior training education product people product structuring et cetera, and that's where a lot of our attention is at this point because we think we have all the pieces, it's bringing it together and bringing it to our partner firms.
Great. Thanks, so much for that.
My follow up is back to western for a second truly appreciate the industry dynamics and we've obviously seen the flows for longer duration, Mark maybe credit sensitive funds raised a lot of flow headwinds in the last couple of months and that May continue, but as I think about the relative position of western against some of the other larger Bon.
Platforms, the relative investment performance has suffered quite a bit as well and that's not uncommon I guess in times of more kind of credit or duration related dislocation for western just given the nature of the way the way the investor how well understood is that with clients. So in other words do you guys think that the relative underperformance at western could have a longer one.
Last thing effect on their ability to recoup some of the the outflows of the machine right now.
Yeah.
Okay.
Sure.
Couple of things. So one is you know I mean, you talked to western in it and they feel they have a lot of conviction that the market is overestimating. The FET increase now we have different fixed income team Brandywine Franklin Templeton.
That belief.
But that's not the case right. That's the benefit that we have a diverse managers who are truly independent.
And western is really good at communicating with our clients about their positioning and why they are positioned the way they are and the one thing because we've gone back and looked at western's performance over rising rate cycles, and I can tell you. They bounce back very quickly I mean, 100% of cases that we look.
That back to 2000, and even before that within the next six months they outperformed the benchmark.
So you know.
Are they right or wrong, there, there's strong conviction on their positioning they have great relationships with clients and they are doing.
Doing a great job of communicating their positioning.
You know it remains to be seen whether they're correct or not.
Yeah, I'll add a couple of things so that first of all Jeremy said they have great relationships with clients. If you take a look at some of the industry metrics. They are literally off the charts and how they score.
In terms of their client engagement and client service, so very strong client relationships and when you talk about performance.
Well they had a one year period that was really tough intercorrelations broke down in their duration hedge didn't pay off against the credit.
Essentially what happened look at their long term performance, 95% of their assets are outperforming on a three year, 98% are outperforming on the five year that is not a manager that's performance challenge. That's a manager that had soft performance in the short run and our confidence in our sales force.
I have the utmost confidence in them.
Excellent. Thanks, so much.
And Alex it's a different.
It's really addressing a slightly different question, but while we're on the topic I think it's worth noting from a financial perspective.
The operating income impact of the flows you'll referencing and that'll just referencing western I'm referencing.
Just a broader class of fixed income.
Relatively low compared to the positive operating income impact were getting from the growth in alternatives and other growth areas that we've referenced.
Yeah for sure and it's coming through the fee rate as well great. Thanks, So much yes. Thank you.
Thank you and next we have Ken Worthington from J P. Morgan Your line is open hi.
Hi, Thank you I wanted to.
Follow up on Alex's question in your.
Response to Bill Katz.
From a higher level can you talk about the integration of the various alternative platform. So you now have Lexington in the mix like how are you thinking about like where are you going to integrate them and where are you going to not integrate them and so maybe start out with distribution.
In terms of integrating distribution are you kind of combining the different alternative sales forces together.
The being like cross trained but being kept separate and then how are you kind of folding.
Their expertise into your broader sales focus and then the other part of my question is really on product development, how aggressive do you want to be in terms of product development.
New products for maybe other distribution channels, where you have good relationships and Franklin.
And how quickly can you get those products out.
So why don't I start Adam and then I'll and it'll term too.
Here's the good news each of those managers had their own. It most cases, it was really institutional and so they have institutional sales teams institutional relationships.
And where we've left those alone. So you know why mess with success.
But on the on the retail side, there has to be a leveraging of the broader Franklin Templeton and so and this goes for our 18 specialized investment managers, where you have institutional capability you have.
What we call <unk> P M.
Institutional portfolio managers, who are really are product specialists, who sit with the investment team can be called in by the distribution team to come in and talk about the specific products and they reside with the investment team. So they're really an extension of it.
And so we can call on those to help support any of the distribution capabilities.
So you could you could say that line is broadly.
Divided by institutional and wealth channel.
But there's always a little bit of gray in there.
And so if there are relationships that one how it's on an institutional that they don't have our institutional centralized team will bring in and make an introduction into any of our specialized investment managers and it's imperative for us to make sure that there's good collaboration there.
So you know.
Our goal is to continue to have the great momentum as you can see with Lexington, The fact that Dave.
Increased from 34 billion to 42 billion, our pre close that obviously they have a tremendous distribution team, but we also feel strongly that as I mentioned secondary private equity is ideal in the wealth channel.
As far as product capability, you know one of the ways in which we think that the wealth channels get be able to access the alternatives is things like four one K plans, where you have a managed account that has an allocation to alternatives and so we have a centralized product team that is going in and thinking about where they can.
Pull in their capabilities to present, a great combined solution and and we expect our teams to work together to help build those really solution oriented type of products.
Adam you want to add anything to that.
Sure I think the one thing Jenny I would put in at the top is that.
Hopefully it goes without being said, but the one place where we're not going to integrate everything that's on the investment teams or the investment process striking trends are absolutely disgusting.
Genies right that really our distribution model in general is a general step specialist model, where the folks who sit at the center are responsible for knowing our clients better than anyone else and then bringing in the right specialist from the various specialized investment managers on the Alt side institutionally, we're actually.
Adding specialist alternative salespeople.
To introduce the various alternatives to.
She is a relevant gatekeepers and the institutional markets. We also see an uptake in the use of their salespeople outside of the U S or some of the alternative firms don't have.
A significant other presence again, it's really an opt in model and we help you.
Each firm as they need it.
On the wealth platforms.
Branding is an important consideration and I think how we're tackling that at this point is that each of our alternative Sims are going to retain their own branding, but the distribution effort will be under.
F T alternatives. So there's really a single point of contact in the wealth channel, but the individual brands remain that also really enabled us to do some interesting things in terms of multi affiliate products in that channel the product development is going well.
We're focused both on onetime raised products as well as evergreen products.
And then another area of ours that you know we're focused on ESG.
And the inclusion of ESG into alternative products and something we've focused on as well, which we think will yield significant results.
Okay, Great and just a simple reporting question Theres, a pretty big gap for Lexington between fee paying AUM and AUM.
How are you going to report it are you reporting.
The fee paying or are you going to report the total a U M and you know, we'll just sort of get the gap to close the fee rate or yeah. Yeah. I mean, yeah, just just to be just so we're consistent with how we report all of the things we're going to report all of the U N.
Hum.
With its going to be very transparent about the fee rates I mean, if you take the full a U M. The effective fee rate is probably something like you know low sixties.
If you include just the fee based a U M. It's going to be you know in the mid eighties collaborators plus performance fees.
So that's the way we'll do it okay.
Alright, thank you.
Thank you.
Thank you and next up we have Robert Lee from Kv novel, You. Your line is open.
Great. Good morning, Thanks for taking my questions.
Really two first maybe just to update us on the wealth management channel I know you've talked a bit about it.
We wanted to do some more acquisitions, but it's.
It's up to 35 billions had inflows keep maybe dig a little deeper in some of the.
Your initiatives, there and continuing to drive that kind of very sticky you know our growth business and then I'll have a follow up on Fintech.
Yeah, So I'd say it's.
We really like that business, we have said that.
It's a strategic priority for us to to grow it.
You know as you.
And it had six consecutive quarters of positive net flows.
It's one of those businesses I think the average relationship something like 16 years, its a great sticky business. So we like it we had done the two.
Two acquisitions and I'm really pleased because.
Those specific entities is up like 29%. So we're continuing to look for more opportunities those opportunities will have to be additive to either geographically or.
You'll bring some sort of capability.
And we're always looking at it is an area that you have.
Private equity buying up and consolidating so well that we don't want to chase assets, we usually like somebody who's looking for a long term home to add capability to their to what they can offer our clients by having the broader fiduciary trust.
And you know this is this is one of those businesses.
It's older than Franklin Templeton, it's probably close to 80 years now.
And they really understand multi generational wealth.
Which means education around errors and things and so you know it.
It's the right home for people, who have that type of client.
Okay, Okay, Great and then maybe as a follow up you know you mentioned in the press release for example, and I know it's been.
I think an interest of yours for many years as you know the financial technology and talking about history of innovation and embracing it but could you maybe.
I don't know if there are specific examples that you could call out or point to besides maybe the embark transaction that you know maybe beneath the surface you feel like have been helped you differentiate on the distribution or performance front or maybe.
You know there, they're just early investments, but you're particularly excited about the potential to help.
You know kind of accelerate growth over the next several years.
Yeah, So I'll talk about actually at a a wealth.
Pfizer Fintech comfort as we speak.
You know the advisor engine, which we acquired which has juncture, which is the CRM system.
It's for our age and helps them build their business.
You know it was a it's a small acquisition, but it's a great way to speak to you know I think there's something like 12000 users on the on the CRM system. So it just gives us another way to talk to that channel.
Go which was developed in house as our goes optimization engine as that gets integrated into cloud based.
Kind of a financial planning platform.
You know it gets integrated with.
With other platforms it helps us to.
Sell our models and deliver our models to those clients.
Clients could use open architecture, they can choose our proprietary models. So anything he's the advisor when he became fee based client values the investment as a piece of it but they also expect the advisor to do a lot more things like tax efficiency, which is of course why canvas is so significant.
Our financial planning tax efficiency education, it really the P basis advisor is now expected to deliver with the ultra high net worth channel you suggest delivered to clients, even including a state planning and trust planning. So anything that we can do that bill helps that advisor build their business and create loyalty.
<unk> is how we think of that Fintech ecosystem.
So same actually advisor engine I think that the juncture.
Platform as advisors is about 600 billion in assets.
It just allows us to communicate and to share our case.
Capabilities it obviously their discretion.
And and so helps us build deeper relationships.
Jenny I would also add that it really helps us talk to a wider group of people at an investment advisory firm instead of just talking to people who are in the CIO organization now talking to the business management group, you're talking about how they want to run their business and you're talking to them about how to help grow their business, which in the end helps.
Position you better when you were actually trying to sell an investment.
Yeah.
Great. Thank you so much for the added color I appreciate it.
Thank you next we have Michael Cyprus from Morgan Stanley . Your line is open Sir.
Hey, good afternoon. Thanks for taking the question just.
Just on the SMA front I was hoping you could maybe elaborate a bit more on some of the initiatives. There I think you mentioned that the Franklin income strategy are now offering that in an SMA, maybe you could talk a little bit about how you navigated some of the challenges and complexity of offering.
Such a strategy like that in SMA, and how youre thinking about offering other additional strategies in the SMA wrapper.
Yeah. The complexity has largely come from a technological and operational standpoint, and that's where Legg Mason had a real lead on the industry. The number one provider of model based Sma's really strong technology and operational platform that we are now on boarding.
Legacy Franklin strategies answer, which is accelerating their growth. So if you take a look recently of what we'd been where we'd been flattish in SMA as.
It's really because we've seen.
Some outflows on the legacy side with groups like western and Clearbridge, but strong inflows.
Onto newer Sims that we've on boarded onto the platform like Martin Currie Franklin Templeton fixed income the canvas platform. So again, we see diversification.
Paying off well in the SMA space, we think that the other way that this could really go is adoption outside of the United States.
Where we have some interest in.
Some of our distribution partners to grow SMA is there as well.
Great and just a follow up question for Matt with the $6 billion of cash and investments on the balance sheet. Maybe you could just help flush out how much would you think is truly excess here that you are sitting with today I think you had called out around 4 billion after regulatory capital and product development.
Is that the right number we should be thinking about that's truly excess or maybe you can help bridge the remaining gap there.
Yes, I mean, I think we would define pure excesses being a lot lower than that.
Conservatively Hallmark services.
We put it around $1 billion.
But as I've mentioned beforehand.
You're talking about.
M&A for example, the <unk>.
Transactions are structured in a way that to set split in this market in particular, the capability to be able to do lots of things with.
But in a structured way so you need less upfront is is.
That means that that amount of excess cash, let's say can be stretched to create a much larger opportunity. If there is one out there for us.
Got it and any help on bridging from the 4 billion down to the $1 billion that you referenced.
Well we have.
Little bit of regulatory capital and there are a few hundred million dollars I think we put that on the chart.
Then we have a we have a.
We have a we could.
Supplemental liquidity.
The provision internally, where we like to have several months of operating expenses.
In the form of cash on our balance sheets. The second thing. The third thing is we just spent $1 billion.
Put that in the footnote in the.
Commentary just to make sure this was clear that the.
<unk> cash and investment so as it as it a 331, but we spent $2 billion of the cash on the upfront consideration for Lexington.
So that's really that bridges the gap really.
And then you got $1 billion surplus that we just talked about.
Great. Thanks, so much.
Thank you.
Thank you next we have Dan Fannon from Jefferies. Your line is open.
Thanks.
Wanted to just follow up on I guess that topic and your appetite here for M&A. Given obviously you just closed on a large deal and you've been acquisitive for some time. So as you think about this backdrop is there.
Certain property and you've obviously been linked also in some of the news more recently with other larger property. So can you talk about your appetite for larger M&A in the short term and longer term, where those kind of product gaps I think are mostly in oleds, but are you looking also in other kind of more traditional areas that you could also round out your product offering.
So I would say we haven't changed any.
Anytime there's a we've obviously done a big deal and the markets are choppy. So the bar gets raised but we're always running the business for the long term. So that's first.
With respect to product gaps I would say that in the alternative space, we actually feel really good about the breadth of capabilities that we have.
Infrastructure is probably the one hole that's widely left and then it's and then it's more about geographic you know it is.
The Clarion for example may not have a lot in in Asia. So it's always hard to sell a real estate manager if there isn't some local product or you.
Benefit Street same thing no more U S focused so if they were capabilities.
But you know bar is very high for US now. We've also said wealth management is important for us and I would say from traditional problem I'm trying to think what the problem is the only area would be if there was an ETF manager that made sense for us.
That could be an interesting sort of traditional.
So far gone with the organic growth on that.
And really like the capabilities, we have but you know if it was the right opportunity you know maybe that would make sense for us.
So and then of course, you know what they say wealth management.
And there's some specialists and.
Do you have any alternative asset area, where we do have a couple of gaps and we've talked about those I mean, I think just at a high level it's worthwhile.
It's worthwhile, making the point that.
From zero pretty much zero three years ago. So we you.
About 15% of our U M is now an old so I think that's probably translates into something like 18, or so percent of revenue and probably more like 20% plus.
And operating income in our objective overall is to you know jetty mentioned earlier that half the revenues are going to eventually come from bolt in some form or another of private markets broadly defined and we intend to continue to increase up sensors contribution from alternative assets.
Got it and then a follow up on flows in and you know just.
The institutional backlog first off if you could maybe talk about the makeup of that historically when like Mason disclosed that it was a lot of western and I do want to follow up on western as well and talk about if you could give us the numbers of.
Kind of the makeup of what would be the core and core plus AUM because those numbers are pretty stark in terms of the performance and if I remember correctly I think most of that is institutional.
In terms of the potential for redemptions as you think about that book, maybe in the context of the institutional backlog as a whole for the firm and then kind of looking at the western potential risk of some of the institutional.
Kind of some context around kind of a more near term dynamics in conversations with with clients and flow trends.
Sure first of all have we had challenges in core and core plus absolutely.
But they're still very very significant asset gatherers and among our top funds for gross sales. So while the net hasnt been strong we still see a real commitment of clients there and I think that shows in the funding pipeline, where we still have a significant chunk of western product in there.
But if you take a look at that and we don't really break it down by Sim, but I don't believe there's anyone sim that accounts for more than 25% of that funding pipeline. So again as we continue to diversify our business, we're seeing diversification on the wealth front as well as on the institutional front the other thing about Wes.
Stern is they manage a lot more.
And core and core plus and as sales have slowed down in those areas, we've seen a pick up.
Some of the other areas and again.
Western is more active than some of their other funds and you don't get to a point where you have.
95% of your assets outperforming over the three year without taking some risk in the shorter term.
And right now that risk Hasnt paid off.
But I think the market understands well the way that western manages money and it will pay off over time as Jenny said every time they had a dip like this before they've come roaring back.
Okay. Thank you.
Thank you and we have a follow up question from Bill Katz from Citi. Your line is open.
Okay. Thanks, so much taking the extra question, maybe a two parter Jenny mentioned that are getting the old trying to the retail wealth management as sort of one or two of your key priorities can you maybe expand on what your top priority is and then for Matt I'm sorry to belabor. The question here can you come back and unpack the expense numbers, a little bit more and it's pretty substantial.
The improvement in efficiency certainly appreciate revenues are down.
Much of the incremental savings is coming from the legacy business versus maybe more synergize the opportunity with them with Lexington. Thank you.
Okay.
Yeah. So I mean, I would say are pretty.
One is to making sure that we have the right product capabilities for the future and so that's.
Why do we keep our eye open on Hum on M&A opportunities to is making sure that we're able to distribute them.
In all the channels, where appropriate and so bringing that we recognize as I said not all flows are equal that alternatives accounted for 15% of AUM and 46% of revenues is a really important area of growth. So we got to figure out how to get that done right.
And then I think from a disruption we think about.
I'm, making sure that right now that we're not just focused on what has to be done now, but we're focused on working around the corners and so that's why we keep our eye on Fintech investments.
Things, we think blockchain can be very disruptive.
So those are kind of the high level strategic initiatives that we think about and then it's about operating this business as effectively and efficiently as we can there's you know fees only go one way in this business and so you have to be constantly pushing yourself to make sure you are as efficient as possible. We made the decision to outsource a lot of our back office and that.
The recognition that the.
Honestly the surface providers had become more efficient then we could be initially we were the largest global manager and there wasn't any service provider that could cover us completely now there is a and so those are all ways to continue to reinvent the way we operate our company to make sure that we always have.
Efficiencies to deal with the fee pressure as well as the capability to invest in new opportunities.
And in terms of the cost question expenses question Bill.
There is.
Zero I mean, it might be a tiny amount, but that there are zero cost synergies associated with <unk>.
The Lexington transaction, it's all about revenue synergies for us as it is by the way across all of the alternative asset firms, we will Sims that we've acquired.
There may be things like workday financial and implementing that across the firm and.
Modest expense savings around that but that doesn't really impact it doesn't move the needle. So there was zero zero.
The expense reduction side referred to from the Lexington transactions or from legacy and.
In response to the market dynamics.
Actually I had one more on a priority because I can't even believe I'm bearish then.
Look sustainable finance is here to stay.
And you know we made the hire of incentives. So that we can have a voice at the top of the table.
We think ESG is probably the wrong.
Tom It's really about long term.
The impact of companies as well as to the community and environment.
And you look at Europe , where ESG and we recognize with the current conflict in prices of oil that people may change their priorities and how they think about it but.
But the reality is in our own world, we see 40% of the pipeline coming from really article eight and Marron type products and we think that's here to stay.
So making sure that we are on our product development and as Adam mentioned, including in the alternative space, making sure that we have pop sustainable finance type of product is really important to us.
Thank you again.
Thanks Bill.
Thank you. This concludes today's Q&A session I would have liked to have like all of it back to Jenny Johnson Franklin President and CEO for final comments.
Well.
Once again I would just like to really thank our employees for their hard work and remaining focused on our clients and each other and particularly this time this has been a core.
Order of really massive outreach to clients.
And thank you all for participating in this call and we look forward to speaking to you again next quarter.
Thank you operator. Thank you. Thank you presenters. This concludes today's conference call. Thank all for joining you may now disconnect.
Yeah.
Hi.
Good morning.
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Yes.
Sure.
Okay.