Q1 2023 Franklin Resources Inc Earnings Call
Speaker 1: Oh.
Speaker 2: Welcome to the Franklin Resources Earnings Conference call for the quarter ended December 31, 2022. Hello, my name is JP and I will be your call operator today. As a reminder, this conference is being recorded and at this time all participants are in a listen only mode.
Speaker 3: I would now like to turn the conference over to your host, Celine Oh, Head of Investor Relations for Franklin Resources. You may begin.
Speaker 4: Good morning and thank you for joining us today to discuss your quarterly results. Statements made on this conference call regarding Franklin Resources Inc., which are not historical facts or forward-looking statements, was in the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involved a number of known and unknown risks.
Speaker 5: 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 are just described in more detail in Franklin's recent filings with the Securities and Exchange Commission.
Speaker 6: 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.
Speaker 7: for the first fiscal quarter of 2023. I'm joined by Matt Nichols, our CFO and COO, and Adam Spector, our Head of Global Distribution.
Speaker 8: We're pleased to answer any questions you have, but first, I'd like to call it a few highlights from the quarter. Despite the challenging market backdrop in our first fiscal quarter, we saw a number of positive developments to further diversify our business.
Speaker 9: This quarter, we continue to see net inflows into key growth areas, such as into our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners, as well as multi-asset strategies, ETFs, and our custom indexing solution platform, Canvas.
Speaker 10: We were also pleased to see additional positive indicators impacting our business, including an increase in our institutional one-but-unfunded pipeline and improving overall investment performance across our strategies.
Speaker 11: I'll cover all of this in more detail momentarily. While the industry landscape remained under pressure.
Speaker 12: We have continued to benefit from our diversified mix of asset classes, geographies, client types, and investment vehicles.
Speaker 13: Turning now to flows, we generated total net inflows of $6.6 billion this quarter, inclusive of $17.5 billion of net inflows from cash management.
Speaker 14: Long-term net outflows were $10.9 billion and included reinvested distributions of $12.1 billion.
Speaker 15: This quarter, we saw net inflows into key growth areas of client demand. Starting with alternatives, as mentioned earlier, our three largest alternative managers, Benefits Street Partners, Clarion Partners, and Lexington Partners.
Speaker 16: each had net inflows for the quarter totaling 2.4 billion.
Speaker 17: Multi-asset net flows increase almost fivefold from the prior quarter to $2.4 billion, driving the interest in the multi-asset category was our flagship Franklin Income Fund with its flexible approach to changing market conditions.
Speaker 18: The $70 billion U.S. fund is now rated four stars overall by Morningstar and continues to have strong performance.
Speaker 19: Our broader multi-asset solutions strategies were also in net inflows.
Speaker 20: Fixed income net outflows of $13.3 billion were primarily due to certain U.S. taxable and global opportunistic strategies.
Speaker 21: Client interest, however, continued and we benefited from having a broad range of fixed income strategies with non-correlated investment philosophies, including net inflows into certain core bond, U.S. income, and tax-efficient strategies.
Speaker 22: We are pleased to note that Western's performance reverted back to its leadership position during the quarter. At quarter end, 89% of the firm's strategies outperformed the benchmark on an AUM basis for the quarter, and Western's two primary core bond funds were ranked in the top 10 in the world.
Speaker 23: decile on a quarter to date basis versus their respective peer groups.
Speaker 24: Equity net inflows were $300 million and included $9 billion in reinvested distributions.
Speaker 25: This quarter, the risk-off environment continued to impact investor sentiment on certain growth strategies, which were offset by positive net flows into strategies such as large-cap and all-cap value, large-cap core, and emerging markets.
Speaker 26: Cash management generated the highest net inflows in over a decade, with 17.5 billion of inflows were driven by institutional demand for low-risk assets at a higher risk-free rate and diversified across client type.
Speaker 27: As a leading SMA provider, particularly in model delivery, we ended the quarter at $105 billion in SMA AUM.
Speaker 28: Canvas has achieved net inflows every quarter since the platform launched in September 2019 and AUM increased over 25% in the quarter.
Speaker 29: ETFs had $1 billion in net inflows and reached $13.3 billion in AUM.
Speaker 30: We launched the ClearBridge Sustainable Infrastructure ATF during the quarter and added specialized sales resources to strengthen our ETF efforts.
Speaker 31: We were also pleased to see our institutional pipeline of one but not funded mandates increase by $8.8 billion to $23.8 billion and included a $7.5 billion fixed income institutional mandate.
Speaker 32: Turning now to performance, our investment teams have remained true to their distinct disciplines and time-tested approaches, relentlessly searching for those long-term investment opportunities that market dislocations often present.
We saw an uptick in relative investment performance in nearly all standard time periods.
This quarter, the majority of our strategy composite AUM and mutual funds AUM outperformed their benchmarks and peers respectively on a 1, 3, 5, and 10-year basis.
In addition, 51% of mutual fund AUM was in funds rated four or five stars by Morningstar.
As I've said time and again, the next decade is not likely to look like the last, and we continue to invest strategically in areas that are shaping the future of our industry.
Alternative investing is one of those areas.
During the quarter, we closed the acquisition of El Centro, a leading European alternative credit manager. This acquisition increased our alternative credit AUM to $78.5 billion.
And as for secondary private equity, as of November 30th, Lexington had raised 12.8 billion for its latest fund and continues its fundraising efforts.
Alternative assets now account for $257 billion, or 19% of our total AUM, and a higher percentage of adjusted revenue. We are now one of the largest managers of alternative assets and are realizing our aspiration to be one of the few diversified
firms globally that offers the major categories of alternative assets.
One of the lessons that 2022 taught many investors is that diversifying beyond traditional asset classes to solve for their long-term goals is probably a good idea.
We think this will drive increased adoption of alternative assets in the Wealth Channel where we've made progress. We continue to focus on product development and suitability, sales and marketing, and client education in the distribution of alternatives in wealth management.
For example, Benefit Street Partners announced the launch of Franklin BSP private credit fund, investing in U.S. middle market private credit seeking to generate strong current income and superior risk-adjusted returns across market cycles.
In November , the Franklin Templeton Academy announced the launch of its alternative education program as part of our ongoing effort to build knowledge and proficiency around the alternative investment landscape. The program offers a comprehensive curriculum on various types of alternatives.
including courses on private equity, real estate, private credit, infrastructure, and hedge strategies.
Touching briefly on our financial results, which reflect two months of El Centro given its closing on November 1st.
Ending AUM was $1.39 trillion, an increase of 7% from the prior quarter, primarily due to market appreciation and the addition of El Centro.
Average AUM decreased by 1.5% to $1.35 trillion. Adjusted revenues were $1.44 billion, a decrease of 6% from the prior quarter.
The decrease was driven by lower adjusted performance fees and lower average AUM.
However, the effective fee rate, which excludes performance fees, was 39 basis points, a slight uptick compared to 38.8 basis points last quarter. Adjusted operating income was $395.1 million, a decline of 20% from the prior quarter.
or 12%, excluding annual deferred compensation acceleration for retirement eligible employees of $37 million.
We continue to benefit from a strong balance sheet with total cash and investments of $6.6 billion at quarter end after reflecting the purchase of El Centro and payment of fiscal year end cash bonuses.
Let me wrap up by saying that over our 75 year history, our North Star has always been the clients we serve. We are committed to continuing to seek opportunities to expand our capabilities to provide investors with financial investments that are important in reaching their goals.
Finally, I would like to thank our global employees without whom our progress would not be possible.
Their work is greatly appreciated and I thank them for their many contributions to our organization.
Now, let's turn it over to your questions.
Operator?
Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in question queue. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.
request the limit to one initial question and one follow-up
Our first question comes from the line of Glen Shore from Evercore. Your line is now open.
I guess question on the fixed income side we saw our flows in fourth quarter but the outlook for 23 should be a lot better for the industry just curious on that thought overall and how you think Western in particular is positioned
in the year ahead. Thanks.
Great. Thanks, Glenn. First of all, as we mentioned in the quarter, the core bond portfolio at Western had net flows. We continue to see really strong sales, the gross sales for Western products.
89% of the strategies outperformed. Actually, Core Plus and Core ranked second and eighth percentage in there against their peers for the quarter. So really good, I think good recent performance. The pipeline, over 10 billion of the pipeline is Western.
As you mentioned, the $7.5 billion mandate is part of Westerns, but beyond that, they're just getting great support. I, you know, here's what makes us really excited.
Many of the institutional players have been a little bit slow. I think we've seen real strikes in our institutional money funds and a lot of flows going there, both in the last quarter and continuing through January . You see institutions waiting to figure out when the rates peak.
But as they ventured back into the space, we have three phenomenal brands between Franklin Brandywine and Western. And to just punctuate that, the Brandywine Global versus Western Core Plus and Franklin Core Plus from their...
in that area. Adam, you want to add anything to that?
Yeah, I would just add, Jenny, that the performance turnaround is really across the board. If you look at where our global bond fund is, that's now top-guess aisle as well. So really good performance everywhere. On top of that, I would say that one of the things that differentiates us is the breadth of fix-in time we offer.
We see a number of DB plans now more fully funded. We're able to offer them liability. Based fixed income, you can look at what we do in high yield and global bonds and unique. It's really a breadth of capability and fixed income and we're seeing demand grow in all of those sectors.
I appreciate it. Thanks. Jenny, maybe I'll keep it at the high level because look, the margin compression is impossible to manage when the market drops as much as it did. Again, as you think rolling forward, we got the benefit of the market lift.
in the fourth quarter and early this year. Just curious on how you're thinking about what you do actively and proactively in 23 and where you think we can get to in a quote.
normal backdrop if there's such a thing.
Sorry, so are you asking in the sense of what? M&A in the sense of expense? I'm really talking about the adjusted margin and expenses just you know expenses up revenues down. It's it's
it's hard to do in the short term when the markets drop, but how you're approaching...
that margin or is that an outcome? In other words, do you manage towards it or is it an outcome of the environment?
So I don't think we managed to hurt margin. I'll let Matt jump in on this, but you're absolutely right. I mean, this is one of those businesses where you get a disproportionate benefit to markets going on the upside because your margins can expand, and then you're slammed on the downside because you can't possibly adjust your expenses quickly enough. I think the good news is the work we've been doing.
Part of it is just when you do the amount of M&A we do, you're naturally reinventing how you work and figuring out where you can take out costs. And so we've been able to absorb a lot of the expenses that we've had in the M&A. But Matt, you want to talk about expectations about margins going forward based on where the market is.
Yeah, I mean, I'll just say a few things on that, and I'm happy to provide a guide. Maybe that would be another question that will come up. But, you know, generally speaking, 35 to 40 percent of our just expense base as we communicate in the past is variable in nature with the market and performance.
And we're always very much looking at the other 60 to 65% of our expense base to see if we can be more efficient and effective, in particular in a difficult environment. And frankly, some of the transactions we've done on the M&A side have prompted further reviews of those sorts of activities. So we're very active around that.
In the down market, as you alluded to, Glenn, that we've experienced, it takes some time for carefully considered adjustments to keep up with revenue declines while making sure that we remain competitive in terms of compensation and investing in the business. And we've done both of those things, competitive in comp and...
We continue to invest in the business in a significant way in our opinion. But we've also taken or in the process of taking significant action across the business to make sure that we're being disciplined and continue to be disciplined with our expenses. So we paused non-essential hiring.
We've just completed a voluntary buyout process excluding our investment staff. We've got an execution plan in place to introduce additional operational efficiencies across the firm. As you know in the last three years in addition to savings from a merger transaction.
We've already outsourced operational activity that's created efficiencies for our funds, first and foremost, but have also lowered future capex expenditures for our firm, while frankly also simplifying our company operations. And what this has enabled us to do is to continue to invest.
heavily in the business where we need to in the areas of growth that we've talked a lot about. But at the same time it's also enabled us to keep our expenses very much.
in check.
including the margin.
Okay, thank you for all that, Manjang. Thanks. Thank you.
Your next question comes from the line of Ken Verdington from J.P. Morgan. Your line is now open.
Hi, good morning. Thanks for taking the question. So, Jenny, you mentioned fixed income performance has really improved. Is one quarter of great performance enough given the more positive backdrop for fixed income and credit? And what is the risk that there's a lot of money movement?
in the industry and fixed income for 2023, and Franklin misses it due to weaker performance from last year.
Well, again, I mean, you have Corebond, which is the net flows of, I think, a 1.5 billion this quarter. And Core Plus is one of our top selling funds. So even though it's still in that outflow, it's dramatically improved in outflows.
you know, Templeton Global Bond, I mean, it's amazing when you look at that, as Adam mentioned, it is beating, you know, its benchmarking peers in all four time periods. So it's, you know, a pretty massive turnaround. I think it's outperforming its benchmark, like 1200 basis points for the quarter, which.
you know, you carry that back. So performance is always going to predict the future. If you look at that 87 of 134 fixed income composite, so this is across the firm.
in the 1, 3, 5, and 10 year periods is only underperforming in one period.
So we actually think we're incredibly well positioned and again as I mentioned earlier the diversification of the excess returns between Brandywine, Franklin and Western gives people you know a chance to
to frankly, hedge themselves within our own enterprise. Or if they have a view, can express it with one of our managers. And as we've said, that Western has been a little bit more viewing that I think that rates will probably decline maybe towards the end of the year.
more allocations there.
Great yes, then I that it.
Sorry, that's not just the public markets, that's the private markets also. So Benefits Tree Partners, our center, they've got some very strong performance and interesting funds and both in demand. Great, thank you. Sorry, Adam, I had a question. Yeah, I was just gonna say, we've seen clients build multi fixed income sleeves with different Franklin components. And oftentimes that's adding additional assets because they see how uncorrelated the various strategies are with each other.
Thank you. Your next question comes from the line of Alex Blostein from Goldman Sachs. Your line is now open.
Hey, good morning everybody. Thanks for the question. I was hoping we can dig into your ALTS franchise for a couple of minutes. If we look at the AUM excluding El Centro this quarter, AUM seems to be kind of flat actually down a little bit sequentially.
So I'm just curious what's upsetting sort of the good fundraising momentum that you mentioned. Now I know the convention of AUM is not the same as fee paying AUM so maybe it just kind of helps unpack what fee paying AUM has done over the last couple of quarters, what it is now, and what are the drivers of fee paying AUM in alts over the next several...
in alternatives, Alex, is driven by the liquid ops area of the firm. It's not our primary kind of private market specialist investment managers in BSP, Clarion and Lexington have all experienced positive flows and organic growth.
So I think what you're referring to is the overall number when you exclude Alsantra where that is. It's slightly negative. That's driven by outflows and softness in both performance and flows on the liquid alts side. So that would be K2 and Western macro ops.
would be the two areas of eating. Everything else is actually growing.
in the Lexington Benefits Free Partners and
and Clarion have all grown.
Yep, and can you help us just break down, you know, fee paying, AUM, kind of what's liquid versus what's illiquid and as you sort of think about the pipeline of opportunities on the more private side of things, it would be helpful just to get a little more granularity. So for instance, like the Lexington, you know, 12.8 billion dollar fund raise.
Is it already all in the fee paying AUM number and is it in management fee or is that going to turn on once the fund is closing? So just a little more granularity that would be helpful.
Yeah, the Lexington fund that's being raised so far, that's all fee paying.
Alex, so it's the future race that they're continuing to work on that isn't yet included.
but the number that we put into the Executive Commentary is included.
Basically, when you ask for liquid versus illiquid, I'm assuming you're talking about tied up assets. Essentially, most of VSP, Clarion, and Lexington partners are all long-term tied up assets. Obviously, K2 has their liquid alts, so those have more flexibility and...
the timing of conversions as you expected today.
Yeah, I would say that the timing is going to be typical of what we've seen in the past. I think it's usually about half of that pipeline or so converts in a quarter. I wouldn't see a real change in that in terms of the fee rate. We tend to have
scaled fee schedule, so when you have larger mandates, those price a little cheaper than smaller mandates. We have a big chunky one in there right now, but in general, I don't see that the fees we've been charging on institutional asset management changing all that much quarter over quarter.
Great. Thanks so much.
Your next question comes from the line of Bill Katz from Credit Suisse. Your line is now open.
Thanks so much. I was wondering if we could just talk a little bit about where you see the exit base fee rate at the end of the year versus what you sort of reported. And then as you think about your commentary about sort of money continuing to go into institutional cash management and some of these larger fixed income mandates.
How does that sort of play off against what's happening on the alternative side?
Yeah, hey Bill. So on the fee rate we expect it to remain around 39 basis points and it may be slightly higher than that for the year as a whole, but that's where we expect it to be as we discussed in the past and you know this well that the upward pressure on the fee rate is if we.
more successful in expanding our alternative asset business and if equities continue to come back.
that pushes up if we get this continued flow into money market funds and broader fixed income on the institutional side in particular that could push the fee rate down. But as we've modeled that and looked at the mix of our business we think that 39 basis points is azimuthally awesome for investing small changes in the market in terms of other
is a very reasonable, excluding performance fees, is a very reasonable guide for the EFR.
Okay, thank you. And as a follow-up, I was wondering, Matt, if you could talk a little bit about maybe update us on expenses and how to think about maybe the run rate numbers. So a couple variables looking at the quarter sort of unpacked the 37 million on this CURT comp side.
Did that pull forward? Expenses and then your guidance last quarter was much more elevated for some of the non-compass what you reported. Can you talk a little about any timing issues there or how to think about the rest of the year. Thank you.
Yes, thanks Bill. There was some movement with respect to some of the numbers in the different components from one quarter to another. But what I'll do is I'll walk through where we see the second quarter of 23 in terms of different components. And then I'll give you a high level of where we think we're going to be for the entire year also.
hopefully would be helpful for modeling purposes. So I already mentioned to you about the 39 basis points for the effective fee rate. That's where we see things remaining in the next quarter. All these numbers obviously are inclusive of continuing to invest in the franchise and a full quarter of El Centro. Last quarter was just two months.
this quarter, of course, it's the full, it'll be the full three months.
For comp and benefits, assuming 50 million performance fees, I'm happy to answer a separate performance fee question, but assuming $50 million per quarter for performance fees, the comp and benefits should be back down to between 700 and 710.
million dollars. This is inclusive of SAT salary increases and the 401k and
So again, comp benefit 700 to 710.
We expect ISNT to be between 1 with 15 and 120, so it's relatively flat.
We expect occupancy to be around 60.
relatively flat and this is inclusive of continued normalization of return to office that we're seeing on a global level.
GNA.
With guide to a high 140 so 147 148 something in that area this is inclusive of our estimate of where we expect placement fees to be and Also reflects continued normalization of T&E expenses, which we put in the 50 20 million
per quarter zone. We expect the tax rate to remain in the 25-27% area.
If you think about annual guidance, again inclusive of continued important investments in our organic growth strategies, it's obviously still pretty early in the year and we're experiencing heightened market uncertainty as we've all been talking about.
But all else remaining equal, despite the improved market conditions in the quarter, which has been somewhat of a surprise, I think, to us all. We're going to stay with the annual guidance that I provided last quarter.
which is for the year adjusted operating expenses between 3.95 billion and 4 billion. We're probably be on the higher end of that frankly because of where markets have gone to over the last month or so. But we're keeping the guide between 3.95 and 4 billion excluding...
performance fees, performance fee compensation. Just a reminder that this includes a full year of Lexington. Last year's numbers was only six months, so it's an additional six months for Lexington partners, plus an 11 month of our center as we closed on November 1. For more information, visit the
Our fiscal year end is 9.30.
cases, our expense, our wealth remaining equal are projected to be lower.
than last year, taking into account the Lexington and El Centro additions, lower by low single digits, two, three percent, something in that area.
Thank you.
Thank you. Thank you.
Your next question comes from the line of Brennan Hawken from UBS. Your line is now open.
Thanks for taking my question. So thinking about what drove the variance, Matthew, to the fee rate last quarter, what do you think caused that to work out to be different than you had expected and a little bit lower?
closing from what they were expecting to do a little bit more in December and they decided to hold off until this quarter that we're in now. So that was probably something like a point for basis point difference.
And then product mix was something like a 0.3 difference from where we were thinking that we could be on the high end of the 39. So I think I'd said we expect it to be more in the mid 39s. It could have been as high as 39 points.
seven or eight or something like that could have been as low as 39 and I sort of guided in the middle of that and ended up being a bit thugged because those two things.
The reason for the increase in EFR from 38.8 to 39
was because of we increased alternatives. We added El Centro that probably added something like 0.3 basis points. And then as we've mentioned, we added quite significant money market assets, which is not a really low fee, by the way, but it's obviously a lower fee.
than alternative headsets is probably something like 0.1 or 0.05 of the difference.
And the reason why we feel comfortable with 39 is when we roll the business forward and we look at the projections for our alternative asset business, reasonable market assumptions around equity, and even with the significant opportunities in fixed income, one is neatly sort of offsetting the other and we come out to around 39 basis.
So we think that's a reasonable guide. Okay, thank you. Appreciate that you know forward-looking comments on fee rates are challenging. So thanks for that additional color. That's helpful. Um, when we think about you guys you guys have spoken a lot about the bond outlook and the increased interest. So that's
It's all very, very helpful context. One of the components of concern that I hear from investors is the deterioration that we saw last year in Western's performance track record. Can you speak to whether or not this interest is pertaining to some of those strategies that do tend to be larger that has fallen onto tougher times on the performance end of things?
there's a lot of interest in Western. I mean, they're Corbonne and Corbonne Bluster, some of our biggest grossing sales funds, and Corbonne netted 1.5 billion this quarter. So, Brenton, I think we feel really good about Western and the flows there.
Excellent. Yeah, I would say that also.
CorePlus is still our biggest selling fund, right? They had some performance challenges, but clients stuck with them. They have been doing this for a long time, and again, 89 percent of their AUM outperformed for the quarter.
from a portfolio management perspective and Westerners stock to
you know, what they said they're going to do and this is the outcome from that. But we have a very broad range, as Jenny mentioned, of other views internally and so we have a lot of fixed income opportunities whether one works well or not. And there's others that will offset that.
a lot of opportunities across the franchise, both public and private markets.
And Western pipeline is building significantly as we speak.
Bye.
Thanks for that.
Your next question comes from the line of craves you get taller from Bank of America. Your line is now open.
Good morning, Jenny, Matt. Hope you're both doing well. Good morning, everyone. I'm Matt and I'm here to discuss the
Bye.
So my question is on retail alts. Many pure-alt firms have been building out their retail distribution efforts pretty aggressively since 2020, but Franklin has always had a very strong retail effort going back kind of more than 20 years. So I wanted to hear you articulate how you're using.
your global retail distribution really has an advantage for your all affiliates like Clarion, Lexington, and Benefit Street, and also how the affiliates are also leveraging their own local sales teams versus Franklin at the center.
So I'll start and then Adam wanted to jump in. So I think, look, retail alts is really complicated. And it's really complicated because you have to start by one, you have to have the right products that sit in the right vehicles, which is tougher in these illiquid asset classes. Then you have to educate and convince the gatekeepers because you need the right utilitylaes in Which the
with its characteristics makes sense in a portfolio. And unlike an institution, I always say that one of the things I think many of you, all providers who sold historically to institutional channels, is you just have to convince an institution why this fits in. Financial advisor has to understand every end client.
liquidity needs, which makes it really tough at the tip of the sphere. The good news for us is we have very good product.
offerings now with all of our managers between, you know, BSP has multiple products with their BDCs and their interval funds, you know Clarion with their CP Reef and their Opportunity Zone. We already, you know, K2 has quite a few products in the liquid alt space. We actually also have, and then Lexington is now just getting launched.
couldn't have a wholesaler necessarily take it all the way to the end sale. And so we've created, we've talked about it, it's been probably almost a, it's probably been six months. It's kind of joint venture between our alternative teams and our distribution team, where we are hiring specialists to support.
the traditional distribution on the retail channel or the wealth channel to be able to, you know, drive that very end sale. And you know, we've been in a phase of doing a lot of hiring there. And I can tell you that we feel good about the traction we're getting.
Adam, you want to add anything more to that?
Well, you took most of it, Jenny, but what I would say is that on top of that, this is a great example of where we're able to use our unique structure in terms of brand. So our alternative firms have great brands in the institutional or less known in the wealth channels.
So we're still really putting the brands forward, the DSP, the Lexington, the Clarion's and the institutional channel. But when we go to market in the wealth channels, we're going to market as alternatives by Franklin Templeton. So that is really playing off of the brand name that resonates so well in those channels.
And again, it's another place where we're using our generalist specialist model so that where our salespeople who have long-standing relationships and significant AUM in the wealth channel, they're going in as the lead, but they're introducing our alternative specialists, which we've built out. So we're 35 people now, and those people are just focused.
on the wealth channel. The other thing I would add to that is that we've invested really heavily in education because we think that the first way to get growth in the channel is product development, having the right product and the right wrappers. Soon after that.
It's building education so advisors understand how to use these products. After that it's sales and that's where we have the alternative specialists working with our field force in concert with each other.
And I'll just add one other thing from a finance perspective for what it's worth.
is this is not a short-term project or something like that in turn. This is a very long-term, very strategic decision that we've made to invest.
in this separate group basically that's between two other major areas of the firm that requires its own separate marketing, sales, product strategy, education as Jenny mentioned. This is a very expensive endeavor that we've thought through very carefully and we justified it by the fact that we have acquired
leading businesses in the alternative markets, alternative asset markets that we think long-term are highly interesting and applicable to the broader markets. But just as a reminder, we acquired these businesses because they had their own institutional growth.
And what we're talking about here on top of that is additional growth in the long term that we think we can capitalize upon.
And as a mark of progress, we are currently in market with Clarion, with BSP, with Lexington, and our venture capital group. All of them in the wealth channel are actively raising assets.
Great, guys. Thank you for the very comprehensive response there. I have a follow-up, and it's more of a CFO-type question for Matt, but I wanted to get a little more color on your AltNet flow definition in the $2.4 billion that you highlighted in the quarter.
Is the inflow the initial sale or is it when the fees actually turn on with the product? And then also do you include realizations in the outflow or are they included in the market appreciation in other line of the E&M roll for it? No, the realizations are included in other market and they're not particularly material for us which is why we.
why we do it that way as we continue to expand our alternative asset business we continue to review that. I don't actually know off the top of my head on the 2.4 billion of positive net inflow what is fee paying is probably 80% of it.
But we'll come back to you on that specifically. I'm pretty sure it's like 80% sometime now.
Excellent. Thank you, Matthew.
Thank you, Matthew. Thanks, Greg.
Your next question comes from the line of Dan Fannin from Jefferies. Your line is now open.
Thanks, good morning. I wanted to have another question on fixed income and understanding or acknowledging your comments on Western and those funds still being on the gross sales side quite strong. But if I look at gross sales since you've owned Lake Mason, this was the second lowest quarter for gross sales. So maybe talk about where you're seeing —
a detraction in gross sales outside of maybe the core and core plus.
Are you speaking specifically just about fixed income or equities as well? Just fixed income. Fixed income, this was the second lowest gross sales number since you've owned like Mason. So we've already talked about Western, so I assume there's something else that may be having some slowdown.
Well, what I would say is that if you take a look at where the yield curve is right now and look at the shape of it and look how much you can make on the short end, and it's a record quarter for us in cash management. So a lot of that really is just, I think, a temporary phenomenon where...
fixed income investors are able to park money on the short end, get a pretty attractive yield and wait for the right entry point.
But munis, we're getting a good traction in munis. We have some in the SMA channel, we have some muni ladders that are very successful for us. I mean actually from a diversification, 11 of our top 20 net inflows are outside our largest 20 funds.
So, you know, it's actually pretty broad diversification. And U.S. income, you know, some of the multi-assets have components in them. Obviously, they're fixed income that are getting flows too. Okay, and then just thinking about performance fees, I know, obviously, very hard to predict, but
It seems like you are seeing redemptions in your liquid strategies. So maybe get a sense of, you know, kind of where performance sits broadly within the alternative universe and how we should, you know, I guess maybe performance-free eligible AUM today versus a year ago, high watermarks, other kind of maybe numbers or things you can put around to give a sense of this year's outlook for performances maybe versus last year or other time periods.
Yeah, thanks Dan. So performance fees as you know, as you just said, you know, difficult to predict. But given the strong performance in related funds, and we do have strong performance, I think literally, I mean, I think it's in 90% of our alternative asset funds or
in the area where they're outperforming or in strong performance territory, let's say, in the performance fee zone.
you know, we expect to continue earning performance fees on a fairly consistent basis at this point. And that's why we've guided to 50 million per quarter up from, you may remember, you know, several quarters ago, we used to guide 10 to 25 or something like that, but that's now up to 50 million per quarter. And we think that.
we think that we can achieve that on a fairly consistent level. There are however, as you alluded to, there are some episodic characteristics within performance fees related to time and redemption type activities. So for example, in the last quarter that we reported, I highlighted I believe on the call that we had
a redemption that led to a $55 million additional performance fee.
for the quarter out of Clarion.
So, you know, our guide is going to remain at 50 million. And all I'd say is that we have, based on our performance and our mix of assets and the time arising with the funds, you know, we have potential to exceed that as we continue to grow our alternative asset business. But I'd certainly say forward-looking performance is looking strong.
on both an absolute and relative basis. Now we've expanded our alternatives significantly. It's the reason why we've guided higher to 50 million per quarter. But as you know last year we had 500 million performance fees so it shows what the potential is but again we think 50 is the right guide for that per quarter.
Thank you.
Your next question comes from the line of Patrick Davitt from Autonomous Research. Your line is now open.
Good morning everyone. One kind of broader philosophical question. You're obviously getting really good traction with your ETF suite and Newsflow kind of suggests that you've been more active converting mutual funds to ETFs than some others. Obviously bond ETFs appear to be getting a lot more traction over the last year or so.
Could you speak to your willingness to get more aggressive with ETF conversions for some of your more larger strategies? And what is the debate kind of for and against going down that road?
So, first of all,
you know, we're really proud of our ATF franchise and you know the team that we have, you know, they were all very experienced. They were, you know, originally with BGI back then and you know, we've launched the suite and today.
I think at the end of the quarter we announced it was about 13.3 billion ATS. We had 44% were active, 30% passive and 26% smart beta. We were really one of the first multi-factor smart beta managers.
In this quarter, even though on $13.3 billion in AUM, we had a billion in net sales, so clearly one of the fastest growing of that, $200 million was essentially a conversion from mutual funds. But the other $800 million came from actual sales.
mutual fund to be exactly the same because that can cause suitability issues. And so you have to be really careful about differentiating the ETF and the mutual fund. And in the case of the two that we converted, we thought they were a really well-positioned fund.
but probably in the not getting traction in that channel, many advisors sell just ETF so they won't sell a mutual fund. So in order to get traction with those advisors, you actually have to have ETF. So we're always looking at our lineup and deciding whether or not it makes sense to do a conversion.
There's a little bit of complexities in doing a conversion because sometimes the existing fund holders may not be able to make, you know, want to hold a ETF and so you have to go through that process. But anywhere where we think there's a well-performing but not getting traction mutual fund, we will consider whether it should be converted into an ETF.
And the only add I would add to that is we have to look at who holds the mutual fund to the extent, for instance, that it has a large retirement or 401k holding. That can sometimes make the conversion a little more complicated. As Jenny said, our ETF strategy I think is pretty differentiated.
with the 44% inactive, it's also global. That's the other thing I would add. So when we look at that billion dollar flow, about half of that came from outside of the US. And we're also willing to put differentiated asset classes like our infrastructure income into an ETF. I think that's a little different.
And then the final piece I would add is that even when we're in passive, which is the minority of our ETFs, they're in niches where we think we can be highly cost competitive and differentiated like single country ETFs.
I think the other thing I'd add, we put this into the prepared remarks.
but
It's not insignificant point that we've reorganized this group in ETS to be more focused with their own sales effort embedded within the team. And it's similar frankly to what Jenny has reorganized around our multi-asset solutions area. These are the areas where we are heavily investing.
with resources and focus as opposed to them being part of a very large group that's attempting to do lots of different things. So, and we're seeing some green shoots from that reorganization work and focus across the franchise and I point out both multi-asset solutions.
and the ETFs in that regard.
in that regard. Thank you.
Your next question comes from the line of Mike Brown from KBW. Your line is now open.
Great. Hi, good morning.
So I wanted to ask on...
Good morning. I wanted to ask on real estate, so with Clarion's just over 80 billion or 83 billion or so, there's clearly some challenges facing the industry. Can you just provide us with an update on what you're seeing from this asset class and how you think investor sentiment could progress from here? And then if possible, could you just touch on how much the reopening of a Pomona
that contributes to performance fees and other revenue? Yeah, I'll take the first part of that question, Matt. I'll have you touch the performance fees. So, remember, Kerry has primarily been an institutional manager, so it's only been recently that we've brought them into the Wealth and Retail channel. And so...
With respect to that, it's a very small CP reef. It's a small fund that is growing quickly, and there's been minimal redemption requests there. From the institutional side, first of all Clarion's real estate portfolios have focused on industrial, multifamily life sciences.
self storage, that's 85% of their portfolios, and those have held up incredibly well. And as a matter of fact, I think their performance has only dropped about 1.5%. With respect to rejection views, you have seen
them move from positive cues to now negative requests.
In those, you know, they're not as for me institutional clients There's a real recognition that you don't want to hurt the value of the portfolio by creating, you know false liquidity and so they actually can choose whether or not They want to meet any of those redemption requests and on average, you know, they target to try to meet about you know 10% of the redemption queue and that's
often about 5 to 6 percent of a nav per quarter. So it's very different than the issues that you have in the wealth channel. And again, they're really new to that wealth channel. CP Reef I think is structured very similar to B Reef as far as the interval nature.
of those who are just, we think that's the right way to do it for that channel. But again, their clients today are really primarily institutional clients.
And sorry, the redemption cues mostly have been, it has not been performance issues because they've done very, very well in performance. It's been the fact that other parts of the institutional clients portfolios haven't performed well and they've needed to rebalance because now they're overweighted on real estate.
Matt, you want to touch on those, please? Yeah, will do. Thanks, Jenny. And one very important correction, Jenny, sorry to create you, but one very important correction is that when Jenny mentioned about, you know, the fact that the
basically the 10% of the queue.
being paid out. That doesn't translate into 5 to 6% of NAV.
Per quarter it's five six percent of nav per annum. That's for them for the year Just want to make sure that that's very clear. Okay, and that's of their choice just to be clear as Jenny also Mentioned there isn't any Forced liquidation in an industry like this where you know wouldn't necessarily be the most productive for the portfolios or for the investors
So, in terms of performance fees, frankly, Clarion is quite significantly above the threshold. So we would be surprised if we didn't see continued performance fees being paid on a meaningful portion of Clarion funds.
over the next year or plus.
Your next question comes from the line of Michael Cypress from Morgan Stanley . Your lightness now open.
Hey, good morning. Thanks for squeezing me in. Matt, question for you. I wanted to come back to expenses. So, hear you on a net basis that it's about 2 to 3% lower. I was hoping you might be able to elaborate on how you're able to achieve that. What would you say are the top 3 to 5 areas that are most meaningful and driving that decline?
beyond the air. Obviously, there's always a portion of variable expenses that you expect to come down as a function of the market. We're very disciplined around that. So almost to mix those two things, but because we've been through a meaningful merger involving hundreds of millions of dollars of expense reductions and efficiencies, it basically forces.
view to look very carefully at all of the operation. And look, we've doubled the size of our company from an assets and management perspective. We're much more diversified across the franchise. Our operation is therefore quite a bit more complicated, but at the same time, there's some interesting synergistic work that can be done.
to gain leverage from having that type of operational expertise across the franchise. We also are very fortunate to have centers of excellence in Hyderabad and in Poland and we intend to further capitalize on the fact that we've been in those places for many many years. It's not a new thing for us to have those.
sense of excellence. So we're very focused on that. It's really a combination of being obviously in a difficult market, being more disciplined around who do we really need to hire, who do we really need to replace.
when we have departures. It's executing upon the voluntary buyout and reducing layers in the organization and expanding and analyzing, you know, span and layers of control. And it's the execution plan around our transactions where we've really been able to...
take more costs out than we anticipated and a lot of that's gone to the margin and given us margin expansion opportunities on the upside, but also reasonable amounts gone into investing in the business. So we're always careful to balance getting the margin right and managing to keep investing in the business.
While we've done the largest outsourcing already on the operational side with Fund Administration and Transparency, the other big project for example we're looking at across the firm now is our investment technology operation.
That's a really major one, multi-year project. And all of our specialist investment managers are on board with this. We believe that having a consistent system and vendor across the firm makes a ton of sense. We can have specialization still. We believe that having a consistent system and vendor across the firm makes a ton of sense. We believe that having a consistent system and vendor across the firm makes a ton of sense.
in the individual groups, but it's things like this that makes a material difference in how efficient we are, how effective we are, and candidly how we work together across the company. This concludes today's Q&A session.
I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO for final comments.
Okay, well, I just want to thank everybody for participating in today's call. And once again, would like to thank our employees for their hard work and dedication. And we look forward to speaking to all of you again next quarter. Thank you.
This concludes today's conference call. You may now disconnect. Hi guys. Hello? Hello? Hi guys. My name is
This concludes today's conference call. You may now disconnect. Hi guys. Hello?