Q2 2023 Franklin Resources Inc Earnings Call

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Good morning, welcome to Franklin Resources Earnings Conference call for the quarter ended March 31st 2023.

Hello, My name is black and I'll be your call operator today.

Reminder, this conference is being recorded and at this time, all if I guess you'd think they are in a listen only mode. I would now like to turn the conference over to your house, the Lena <unk> 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 of 1995. These forward looking statements involve a number of known and unknown risks uncertainties.

These 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 that I've just described in more detail and frankly recent filings with the Securities and Exchange Commission, including in the risk factors and the.

N DNA 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 the second fiscal quarter of 2023 as usual I'm joined by Matt Nicholls, our CFO and COO and Adam Specter, our head of global distribution, despite a difficult market backdrop exacerbate.

By stress in the regional banking sector, we continue to see positive momentum across our business in terms of long term flow trends relative investment performance diversification by product and vehicle and financial results market Dislocations, often result in investment opportunities for skilled active investors.

And in this regard our investment performance continued to improve across asset classes. This quarter three of our four asset classes fixed income.

Ot assets and alternatives generated positive net flows. We also saw continued progress in Etfs and canvas or custom indexing solution platform flow trends improved across all geographies with our Asia Pacific region reporting positive long term net flows in the quarter. Furthermore.

This prolonged period of heightened market volatility affirms the importance of the investments we've made to diversify our business and better serve our clients all in an effort to offer more choice and help them achieve long term financial goals no matter, where we are in the economic cycle as to the specific numbers.

<unk> first wood flows long term net outflows improved from the prior quarter to 3.7 billion compared to net outflows of $10 9 billion in the prior quarter importantly, as mentioned fixed income multi asset and alternatives all generated positive net flows fixed income generated net inflows.

Lows of one 8 billion and as we've said on previous calls we continue to benefit from our broad range of fixed income strategies with non correlated investment philosophies and that trend continued this quarter client interest continued in U S taxable corporate municipal and global <unk>.

Opportunistic strategies, which were all net flow positive multi asset net inflows were $1 5 billion driven by Franklin income Fund Fiduciary Trust International High net worth business and canvas canvas is achieved net inflows each quarter since the platform launched in September two.

<unk> thousand 19, and AUM increased over 13% in the quarter alternative net inflows were $1 3 billion driven by growth into private market strategies, which were partially offset by outflows in liquid alternative strategies benefit Street partners Clarion partners and Lexington partners.

Each had net inflows with a combined total of $1 5 billion.

Equity net outflows were $8 3 billion, reflecting continued risk off sentiment for many investors, but we did see positive net flows into Etfs global equity and small cap growth equity strategies Etfs had net inflows of 1 billion.

And now total approximately 15 billion in AUM and this quarter, we launched a variant of our flagship Franklin income fund in a multi asset active ETF vehicle cash.

Cash management, which is excluded from long term AUM and flows had net outflows of $4 3 billion in the quarter and included episodic redemptions of approximately 7.5 billion from a sweep program associated with a regional bank or regionally focused sales model has continued.

Gain traction and this quarter, we experienced improving flow trends across all geographies.

Already mentioned the positive long term net flows in the Asia Pacific region.

Which were driven by Australia, Korea, and Japan are won but not funded institutional pipeline was $15 4 billion and reflected the previously disclosed funding of a seven 5 billion institutional fixed income mandate, given the uncertain market environment institutional investors.

Continue to be more defensive with a focus on diversification and liquidity. This resulted in less money in motion, particularly in March.

Turning now to investment performance in this environment in particular, it's encouraging to see that the sound long term investment thesis of many of our largest strategies are playing out and performance generally improved across all time periods this quarter, 64%, 63%.

61% and 66% of our strategy composite AUM outperformed their respective benchmarks on a 135 and 10 year basis.

One year period improved primarily due to certain clearbridge and Franklin mutual series equity strategies. Additionally, we're seeing improvement in the longer term performance of western assets U S taxable fixed income strategies.

On the mutual fund side, 67%, 53%, 63% and 56% of our U M outperformed their peers on a 135 and 10 year basis equity related products are leading the increase in relative performance for the one year period, specifically clearbridge.

Templeton Global equity group and Franklin equity group outperformed in March.

In addition half of mutual fund AUM was in funds rated four or five star by Morningstar as I mentioned earlier over the past several years, we have further diversified our business and we believe our broad range of investment philosophies and processes differentiate our specialist <unk>.

<unk> managers from each other and gives us an ability to build the best outcomes for our clients in March we proactively engaged with clients to help them navigate financial uncertainty created by stress in the regional banking sector. The Franklin Templeton Institute provided timely updates to our clients through Webinars.

Articles and video posts clients were particularly interested in the numerous panels comprised of our specialist investment managers, who offered investment perspectives across asset classes, including venture capital alternative credit and traditional fixed income we continue to see client demand in fixed income.

Income oriented and dividend yielding products. In addition, as a result of recent market dislocations alternative capabilities, such as secondary private equity private credit and real estate continue to be a client interest.

Briefly on our financial results ending AUM was 1.42 trillion, an increase of two 5% from the prior quarter, primarily due to market appreciation and average AUM increased 5% to one four trillion from the prior quarter, while this quarter's adjusted effective fee.

Rate was in line with prior quarter at 39 basis points.

Adjusted operating revenues of 1.5 billion increased 6% from the prior quarter driven by higher adjusted performance fees and average AUM, partially offset by two fewer calendar days.

Adjusted operating income was $442 million, an 11% increase from the prior quarter and our adjusted operating margin increased to 28, 9% compared to 27, 5% in the prior quarter.

We continue to maintain a strong balance sheet with total cash and investments of $6 8 billion.

Let me wrap up by summarizing that we continue to benefit from our diversified business our flows and relative investment performance have been steadily improving and our balance sheet affords us flexibility, including the ability to further expand our capabilities our focus remains on delivering better outcomes for our clients.

And finally, my admiration and thanks go to the thousands of employees around the globe, who represent Franklin Templeton so well.

Now, let's turn over to your questions operator.

Thank you if you would like to ask a question. Please press star on your telephone keypad. The confirmation tone will indicate your line is in the question queue.

If anyone should require operator assistance during the conference.

Press Star Zero on your telephone keypad.

We request that you limit to one initial question and one follow up.

Your first question comes from the line of Bill Katz from Credit Suisse. Please go ahead.

Okay. Thank you very much I appreciate all the extra color in the supplement maybe.

Maybe just one for you sort of mentioned that in your prepared comments and also in the press release that you are sort of positioned to take advantage of some structural growth I was wondering if you could break that down between.

Maybe organic opportunities, where you sort of see the best incremental flows from here and maybe where things are on the inorganic side. Thank you.

Yeah, So I mean, I think that from the organic side.

So all flows arent created equal right. So you know anything in the alternatives, which continues to be positive for us tends to have much higher fee rate and margin and we think we have absolutely outstanding managers in that space.

And have continued to see positive flows there fixed income today six out of our 10 top gross strategies or fixed income three of those are western so while western had had some performance challenges.

The you know, they're there actually their six month numbers are.

Top decile and they're now very strong I think ones in three and five and and one is in three five and 10 in core core bond and core bond plus.

We think theres, a secular trend with things like SMA.

And canvas, we think has the best technology out there. We've now launched not only are we consistently gaining.

Flows on the direct indexing side, but we've actually launched some are seeded some active strategies leveraging the canvas platform. So you can imagine you take some of your treaty.

Traditional mutual fund type strategies and be able to launch them with tax efficiency leveraging the at the campus technology and then you know I'd say on the Etfs.

We I've been waiting for the hockey stick I'm I'm hopeful that we're getting there you know the $1 billion in flows.

It's a strong organic growth rate you know, we the largest percentage of our Etfs.

<unk> is actually active I think that's about 40% of our Etfs. The flows this quarter were primarily smart beta and passive.

But you know almost 900 or over $900 million of that came from the U S or a channel, which is a pretty new channel for us. So we think we're just starting to tap into that space and.

And then I would say multi asset solutions, we've gained some some big wins there.

That that are coming in actually in this current quarter.

And we think that theres going to be continued opportunities. So you know I think that that's.

Yeah that that gives you kind of a picture on the organic side, what we've always said on the M&A side is look you know where we're going to focus on areas, where we have product gaps you know from the Alt space. The only place that we think we'd have a real big part of GAAP. It is infrastructure.

But they're hard to buy in very expensive and then anything else on the traditional side would have to include strong distribution capabilities, where we're looking to continue to expand our distribution. Obviously the place everybody loves his retirement because retirement is consistent flows and honestly, it's it's the best place for mutual.

Funds today.

So anything we do there would have to have some sort of distribution capability and then finally I'd mentioned that we've always been a buyer of local asset management, because any country that you go into 80% flows tend to go to local assets. So we always keep our eyes open, particularly in fast growing countries.

And Brian .

Just to add Bill to tour changed just mentioned I think.

We should make clear that our number one priority is organic growth as ginny suspension or those all those things, but in certain situations. It simply takes too long or it's frankly impossible.

To become a leader in an investment category via organic growth and that's why we've done what we've done with Lexington, BSP al Central Clarion campus and there was let's see how it goes in that but that's the reason why we've done the M&A that we've done we concluded this just too hard to get the maybe even impossible frankly.

On an organic level.

That's helpful. Matt and just maybe one for you as a follow up last quarter, you kind of to give some guidance on both performance fees and expenses and a fair amount of variability on what actually layer threats. I was wondering if you could maybe unpack the big performance fee. This quarter and then how you sort of see some of the expense lines into the new quarter. Thank you.

Yes sure.

Matt you want to take that.

Yeah, I'll take that as any thanks so.

Firstly on the expenses relative to the guide that we gave last quarter as hopefully you saw from a G&A occupancy in I S T.

Very much in line also for <unk>.

Slightly higher.

So that was in line it really came down to comp and benefits being about $50 million higher than we had guided and that was driven by three key things. Fortunately all of these were driven mostly by.

Better performance. So one was $30 million increase in performance fee compensation.

Two about $10 million was was higher resets too.

401k plan.

Those sort of seasonal compensation related masses, and then another $10 million with just a formulaic approach we have to compensation.

Performance of bonds are very important.

Aspect of that Formula so that increased by $10 million.

Basically explains the difference between.

Where we guided where we came out in terms of where we expect.

Next quarter, we'll continue to guide the effective fee rate.

Around 39 basis points, so consistent with this quarter.

Excluding performance fees just to be clear.

From a comp and benefits perspective, assuming we have the performance fee quarter $50 million, which will continue to be our guide on performance fees, we would expect benefits to be at 725.

Yeah.

ICT, we'd expect it to remain approximately flat at around 120.

Occupancy in the high Fifty's again, approximately flat G&A.

G&A probably in the mid one <unk> down from the mid <unk>.

Mid to high 40 guide that we gave last quarter and that does include it.

And the assumption of continued higher G&A.

And.

Slightly higher placement.

In terms of just performance fees.

Fees.

I know we get this question and it's very hard to get.

Guide on performance fees as we've as we've talked about in previous.

Quarters.

Given the strong performance and applicable funds, we expect to continue adding performance fees.

And that to be quite consistent.

But we're going to keep our guide of $50 million, they're all obviously episodic characteristics with performance fees related to the time of investment and redemption activity. In this quarter. For example, we just had another group of customers to hit the five year performance thresholds.

Cricket a performance fee.

And increased performance fee out of Clarion for this quarter, which meant that we came in higher than we had anticipated.

That's how we would guide on performance fees.

Yeah.

Thank you both.

Thank you.

Thank you. Your next question comes from the line of Michael Cyprus from Morgan Stanley . Please go ahead.

Hey, good morning, Thanks for taking the question wanted to circle back to the unchanged money fund announcement that we saw recently I was hoping you could talk a little bit about your vision there the opportunity set that you see with this on chain money fund product and how you might think about broadening out distribution over time beyond the benji app to distribute more.

I'll leave at that and I guess do you also view this as a replacement for stable clients. Just curious how you think about that.

Okay. So so a couple of things so I'm trying to obtain money fund.

With the SEC gosh, it's been a few years now since we started it a couple of your process and ultimately we built a transfer agency system.

As well as the hot and cold storage wallet.

To support the on chain money market fund.

We with everything that happened in the regional banking sector. We actually have started to get some flows there as some of these dow's or.

Platforms that the blockchain platforms, we're interested in and needed to move money away from say Silicon Valley Bank and other places and then felt that debt.

We sort of consistently.

You know it philosophically they they like the idea of doing it in a blockchain money market funds are big announcement. This week as it we added what's called cross changed so for those who don't know much about the crypto space I think about your iPhone and your Android iOS you know they don't the applications don't tend to talk to each other you have the same problem in the blockchain.

Space and so when we added polygon to it that that is a layer two over a theory. So that met businesses that built on the polygon, which is a lot now have access to our money market funds, so where we're sort of initially positioning it in that space, Although we think over time.

There's a lot of efficiencies in back office that will come out of <unk>.

Blockchain and we absolutely can see adding other products as well as a global benjy product.

Great. Thank you and just as a follow up question.

It sounds like the overall fee rate guidance pretty pretty stable has been stable for a bit but just big picture, maybe you could talk a little bit about your overall multiyear outlook for pricing across products on your platform and if you look back over the past couple of years, where would you say pricing has moved the most versus maybe what's held in what surprised you.

As you look back and as you look forward, where do you anticipate the most stable versus more of a movement in pricing as you look out over the next couple of years.

Adam you want to take that since Youre seeing it on the distribution side.

Sure. So I think where we've seen the pricing move the most is in the traditional large asset asset classes fixed income equity, especially U S and fixed income notes of ground down to a point, but I think they've hopefully.

Hit a bottom here.

We also see mandates coming in generally at larger sizes, which has obviously a significant impact on fees and as we see consolidation in the industry among.

Among players that's impacting things.

Think that when air fee rate moves it tends to be a factor of asset mix as opposed to see degradation really because we're really able to earn significantly more on our alternative assets somebody you'd see the rate move around that.

Thats less our rates degrading and more of a shift in the mix.

But Mike just longer term just to add to that that what we would expect and this would be part of our strategy. As you know is to try and mitigate any pressure we have in the traditional asset management space around fees and winning hopefully larger mandates that have lower fees in traditional asset management space to supplement that with.

Our growing alternative asset base that tends to be characterized with higher performance fee so far that strategy.

Has been playing out quite well for us in the sense that you know.

Overall effective fee rate stayed relatively stable and even to the upside and if we continue if.

If we continue with the strategy that we have.

Adding where we expect.

Winning mandates where we expect from the traditional side, we do have a chance over the next several years for the effort to creep up but again as you know is highly dependent.

What happens in the equity markets in particular.

Adam just mentioned, it's all about mix if the equity markets go higher and we continue on the path that we're on around building alternative asset business.

And.

If that's higher and broader fixed income is a little bit lower for example stay flat then.

That fee rate will be higher if it's the other way around the fee rate will likely be a little bit lower but again, we've got good hedges in the system for that.

Designed to keep the effective fee rate as stable as possible.

Alright, Thank you, guys and and and and I would just say there's.

It was $16 five trillion in the fixed income space. We finally people can allocate to fixed income and actually get a return.

You could have a third of your pension funds are in fixed income and still hit your 7% target. So obviously, we hope we see a lot more flows there.

We've had some some hiccups in performance, but that's working its way out and so we'd love to see a lot bigger flows into fixed income which could affect it. We just happened to have a great <unk>.

Offset with both a strong active equity franchise and the alternatives that we're doing.

Super Thank you very much.

Thank you. Your next question comes from the line of Dan Fannon from Jefferies. Please go ahead.

Hi, Thanks. Good morning, So wanted to follow up on just the alternatives outlook, specifically clarification on Clarion I think you said the five year lockup for performance fees. So I'm wondering if that so that was not a redemption, which we saw last year, which triggered a performance fee. So just want to clarify that and then just.

Talk about the the ins and outs at Clarion today, and how you see that prospectively looking and then also maybe more broadly within the context of DSP and Lexington, I know you can't talk specifically about funds in the market, but generally just demand in the fundraising outlook.

So I'll start and and Adam.

You and Matt can add so.

With with Clarion.

The bulk of the performance fees were actually their normal process of you know when you when clients hit a five year window you then.

[noise] monetize the performance fee and so that the bulk of that was that as opposed to just redemptions from clients.

They have gone from a catchy and internal queue to now a.

Redemption Q Clarion is different in that they are not required to redeem like like others may be required 5% a quarter Clarion.

Has a choice because they're in the institutional clients prefer that they weigh the clients' liquidity versus making sure that they're there.

Serving value in the fund.

And so they meet about 10% of their redemption, Q, which I think is it.

Annually, it's 5% to 6% of the N V.

It is important to remember that Clarion has very little exposure to office, which has been the biggest area of of pressure in the real estate space.

And are they.

They have been big in industrial and residential and.

So their performance is held up so we think you know as interest rates.

<unk> in the market you know, we probably we feel like there'll be one more raise and then probably sit there.

That did.

The folks will feel comfortable with the values in real estate and and Youll start to see that slip as far as you know all of the alts business Theres, a denominator effect with the L piece right.

We've had a reduction and other liquid assets and to the extent that they'd like to deploy them. There. They are actually finding themselves over allocated in the Alt space. So it's been harder on the fundraising side I mean take take private credit.

Our BSP would tell you that they are seeing the best deals they've seen since the global financial crisis.

But there's definitely some headwinds in raising money just.

Just because of the fact that the L. P R or feel they have an over allocation to it now we've been Lexington set out to raise of $15 billion fund they are.

L. P. 's have allowed them to extend it and they will raise above that and actually I'd love to just point out that in the case of Lexington, We believe 10% of that that fund will come from the wealth channel, we launched a product with a large partner and are they you know.

Said you you should be happy with our first fund at about $500 million and we think that fund will cap out at the cap we extended it to 1 billion. So kind of overall spaces that the Lps are finding themselves.

Oh over allocated because.

You know the markets, they're liquid assets had been down but as the equity markets improved you're actually starting to see them being able to deploy more capital and the other things happened is normal cash flows that come out of things like private equity are down quite a bit. So they haven't been able to fund from their existing alternatives. So just put them in a tougher.

Spot, but they also recognize it's just a tremendous opportunity right now Matt I can see you'd like to say something.

Yeah.

I mean in terms of.

Then the performance fee composition, just to give you some idea and to address your questions specifically around Clarion and the second so out of the performance fees about 60% the proceeds.

It relates to quarterly fees of about 10% realizations about 20% annually.

In terms of the five year threshold point.

I know you know this but just to be just to state the obvious that obviously the whole client base isn't on one five year.

Tom.

Hundreds of customers.

They've invested at different points of time, so there's different five year thresholds would occur all the time. So every quarter. There can be another group of five year thresholds are met which leads to the.

Which leads to the performance fee thresholds being met and of course some of those different in five years, sometimes you can have different.

Performance thresholds based with based on different timelines, we just called out the five via this time because it happens to be you know a large portion of the performance fee payout.

And the final thing of it.

I would add on Clarion is that traditionally they really have been focused on the institutional market, but we're starting to see much better flows out of the wealth channel now.

Reef is now up on 20 different platforms, we're seeing good growth there.

There are opportunities zone funded is doing well BSP is doing well Jenny spoke about Lexington. So this specialized specialized unit we built in the alternative channel is finally coming online and producing really good.

<unk> in the wealth channel.

Great. Thanks for answering my questions.

Okay.

Thank you. Your next question comes from the line of Brennan Hawken from UBS. Please go ahead.

Good morning, Thank you for taking my questions good to hear.

And see further a commentary about the build out of the wealth management alternatives distribution.

Efforts so.

Curious and also thanks, Jenny for the color about contributions to 10 at Lexington.

You'd flagged that in them and the write ups that makes a lot of sense.

Have you, what's the feedback that you're getting on the team that you've put out there and then when youre thinking about benchmarking that effort against competitors that have seen success.

How has that process gone and how much work is they're continuing to add to those efforts. Thanks.

I'll, let Adam take that since it's his team.

Yeah, well then you know what the answer is gonna be journey. So we're feeling really good.

About the results we've had out there and all I would say is that when we're in the system.

We're getting indications of where they think we should be and we're exceeding those expectations pretty handily. So we're feeling really good about the results I think the results are driven by a few things.

We have a great combination of a strong brand name.

Great investment capability and a specialized distribution force those three things have come together in the wealth channel.

That I don't think other firms can act, we are seeing growth not only in the wires, but in a number of independents and regionals as well. Our next effort here is to really take that alternative.

Specialized approach.

And build out both the product set and the sales team outside of the U S to tap into wealth channels outside of the U S and that's the process. We're in right now.

Great. Thanks for that and I know you you touched on this a little bit for as far as the outlook for for Western and flows but you know when you look at the unfunded mandates unfunded pipeline.

Would you say that theres, an orientation to fixed income there how's the balance look and then how active are the rfps have lots of argue on the RFP front for box. Thanks.

Very active on Rfps for bonds. The good news is where we're seeing the activity is really across the board from high grade credit mandates to high yield to private credit to core to global global opportunistic. So in all the categories were seeing really good growth when it comes to fixed income.

Crazy that we have a 127 composites, but 42 of those are outperforming on the 135 and 10 and what that means is that we're able to compete in most sectors.

Fixed income quite well the pipeline is diversified by asset class at this point, it's not really dominated by fixed income and in fact, the most significant portion of it currently I believe it's from our solutions business, which is really coming along quite nicely.

Thanks for that color.

Okay.

Thank you.

Your next question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead.

Good morning, Jennie, Matt Hope, you're both doing well.

Good morning, sticking with the last topic of fixing can rebound change.

Given your competitive and leading offerings in traditional fixed income we wanted to get your perspective on the potential for large rebalancing into bonds, especially now that it looks like we're nearing the end of the fed's rate hiking cycle.

And also do you have any perspective on the potential inflow mix between active where you're more competitive and then pass it.

Look I would say.

What we've seen on the institutional side is that the institutions have been.

Staying conservative we're waiting for this last probably a fed rate increase.

Staying short duration and pretty high quality, but we're starting to see searches in.

More of a risk on so that tells you that there one getting more comfortable with.

The economic backdrop and to.

That they are starting to feel like we're at the peak of the curve, where we're we think this is just going to be a massive opportunity on the fixed income side.

Once people get comfortable that the fed stops hiking and I think.

Oh My view is the federal will raise and will sit through 2023, probably not a decrease but in that people will try to lock in those higher rates.

Adam do you have a sense passive versus active.

Uh huh.

Not necessarily a huge change in that mix all I would say is that to the extent that we have continued volatility and rates for a little bit here active management tends to do a little better in a situation where you have more movement, we certainly see that across the curve.

So we're seeing really good flows into active.

Thank you.

It's an important time to be active in the fixed income space.

This is not a great time to be passive minute, but that's just my view.

Thank you Jenny.

And then just as my follow up we saw positive net inflows into APAC.

Can you comment on what products and which geographies are driving the net inflows.

Sure.

Asia was really our strongest market in terms of net.

What we've done there really is focused on a few themes that I think we were early in that region and aligning our marketing product and sales all around certain themes and income has been something that has really been winning for us they're our oldest phone as the income fund coming up on its 75th anniversary at over 80 billion.

And its various forms and that's been doing particularly well in Asia, but we've also had big institutional wins in fixed income and equity and alternatives. So it's really been all of the asset classes I think our Asian colleagues. If you take a look at Australia as an example.

That was one of the first markets, where we implemented this general a specialist model where the local sales team is responsible for knowing the client really better than anyone else and then bring in and other members of the Franklin Templeton team given the geography. There that was one of the first places we started and we've seen earlier results there that pronounced 30 months in a row positive net flow.

In Australia in retail so.

Asia has been strong if you see gross flows, though obviously the U S is dominating there.

That's our biggest market by far at about 72%.

Got it thank you Adam.

Thank you. Your next question comes from the line of Alex Alex <unk> from Goldman Sachs. Please go ahead.

Hey, everybody. Good morning. Thanks for the question. So maybe just to stay on the fixed income topic for a second.

I hear your point on active versus passive but year to date fixed.

Fixed income Etfs have overwhelmingly gained share versus active products. So is that largely a retail dynamic or were you referring to is largely an institutional side, where you're starting to see.

Maybe some improvement in active appetite and curious how your private credit offering fits in with them within all of that right because on the one hand, if traditional fixed income strategies continue to get squeezed.

You guys have an opportunity to cross sell into some of the old manager. So how are those kind of separate managers working together to sort of tackle the client for both sides.

So I'll take the second part of that question and Adam I'll leave that the passive and active to you.

Honestly the on the private credit side as I mentioned.

S T folks would say that they are seeing the best deals since the global financial crisis, but this denominator effect is.

Is it an issue of the L piece, but the other side of this is why are they seeing those deals they're seeing those deals because.

Banks are just not wanting to lend and while you can look at structured products and syndicated products and say well you know those are off the bank's balance sheet. The bank still has to retain a portion of that equity and so youre just traditionally.

Traditionally it was about 50 50 kind of syndicated in private credit and I think our private credit team would say that theyre going to see more coming to private credit and less less banks stepping in so I think that changes the dynamic a bit.

Having said that they'll tell you one of the headwinds is you can get secondary.

You could you could buy a bond out in the in the liquid market and get a 9% return in a high yield and.

So that is a headwind for the private credit today.

Because they're there isn't as much differentiation between the returns in the private credit side on the existing portfolios as <unk>.

There is in the liquid market.

So I think that's gonna be a headwind for a little while on the other hand, as you're seeing banks lend less and and these guys get to be more even as long as you have a good origination machine in your private credit manager you're going to get the very good deals are and and you're not going to have as much competition.

So that's why we're very bullish on it despite a little bit of headwinds today.

Adam.

I would also say that it's tough to predict active versus passive I don't know that we have special insight into that but we do have insight into demand for active and there was a tremendous amount and there's plenty for us and that's really across the different asset classes high yield we've seen turnaround quite nicely.

You've got a weakening dollar here, we think our global strategies can do well we have pension plans that are better funded now and we have specific strategies designed.

To help to feed those liabilities those are all active so we're seeing demand really across every single bit of our active portfolio and if you look at traditionally performance.

Western had a rough go of it Theyre top.

Death dial now over the last six months and after a fall like this that typically when they generate their greatest alpha given that there are slightly higher data manager. So this is probably the best type of environment for them right. Now so don't know about passive but feeling pretty good about the opportunities for active.

Gotcha. Thanks for that and then for my follow up maybe asking question.

On the alts business.

You guys are strategically tried to build that out over the last couple of years.

If we look at.

It's been sort of flattish over the last couple of quarters and I know, where you are it doesn't tell the full picture. So maybe help us break down what the management fee is associated with the private or the old book for you guys today and how do you see that growing over the next call. It 12 months based on things, where you sort of see a line of side, whether it's deploying capital on things that have already been.

Raise that will begin earning fees on deployed or sort of funds that you have coming online over the next couple of quarters.

Yes, Matt do you want to cover that but yeah, yeah sure. Thanks Jenny.

Maybe just to take a bit of a step back and review where we've come from two Alex because I think that's important.

Our alternative asset management fee stream.

Screen, let's call it.

The increase from 2021 to 2022 by 50%.

For 2022 to 2023, we expect it to increase by another 30%.

A T just over 80%.

AUM is be generating.

AUM.

It creates a sort of a mid sort of high fifties mid fifties.

But obviously the range is very significant so you got very different businesses within that 80% fee or any.

Okay.

That as a whole it means that our management fee revenue from alternative assets this quarter reached 25%.

Our overall business.

Now obviously, that's a function of the traditional business shrinking a little bit in the markets coming down there in the market as being more stable in alternative assets, but that's.

It's getting very close to about one third.

Cool, let's call it target that we expect it to have in terms of management fee revenue she outperformance speaks to that.

You go from 1.3 to $1 4 billion.

Management fee revenue and you know what our performance fees, where last year. If we had a few hundred million dollars also that this year you are getting to the high one billions in terms of.

Contribution in revenues.

I think that we we see a future where that are outside of.

Yes.

Additional potential acquisitions.

That should grow at an organic growth rate of between five and 10% and it would be great. If it was 10% or higher.

Just being conservative in the 5%, 10% tariff it has actually grown organically by 5% to 10% in terms of what we've acquired.

The area of shrinkage that we've experienced in the alternative asset AUM, Alex I think you're referring to.

Is all on the on the liquid side.

The business, we have a couple of 70.

Sandy sizable strategies there.

Had some performance issues.

On this year and late last year and that led to outflows that let's just say overall we.

Oh very much on target in terms of what we expect the alternative asset contribution to be against the overall business number one number two where we expect the F ought to be and how that helps us hedge the traditional asset management business, where we expect performance fees to be and where the overall business mix is and what's the generator.

You must not be generating.

Great very helpful. Thank you guys.

Thanks, Alex.

Thank you.

Your next question comes from the line of Ken Worthington from Jpmorgan. Please go ahead.

Hi, good morning, and thanks for taking the questions.

First on gross inflows into equity funds are or the equity business.

Gross inflows were soft this quarter you highlighted some of the areas that are working quite well Etfs global small cap small cap.

What parts of the big business are struggling most here, where we're sort of the delta that you saw this quarter versus last quarter or like clearly you mentioned the risk off environment, but where are you seeing the incremental pain today versus what you saw in prior quarters.

Yeah. So first thing equities was our softest asset class, but I would note that if you take a look at our flows ex dividend they were actually up quarter over quarter and our.

Redemptions were down so stomach bright news behind the negative net if you take a look at.

The numbers behind that large cap growth was the area of the equity market that was hit hardest with negative flows over the last several quarters and it's a large and an area where we have the most significant asset base.

We were roughly balanced we had slightly more AUM in growth versus value, but in large cap growth. We have a number of fun that area was hit hard where we see growth is actually in some of the smaller areas like international and small cap, where we actually had some positive flows.

So that those positive flows are in asset classes that have a smaller slice of the pie, which helped lead to the negative flows overall.

Okay. Thank you.

Then it.

It was a big quarter for money market funds helped by the stress in the banking sector in March to what extent is Franklin in western benefiting from this transition from banks to money funds and how is Franklin's cash management business broadly positioned.

If and as more money comes out of the banks in the future and then I guess lastly, you mentioned a one off outflows as part of our sweep program are there more outflows to come from that program or is it sort of like one and done.

Uh huh.

There could be a couple of billion more.

Potential outflows in that.

Just because they're still in that that regional bank, but otherwise the the bulk of it has already passed through so now it's about positioning our money markets and you know obviously.

Obviously, you know westerns.

Behemoth in the space. So we think we are very well positioned for it.

Okay, great. Thank you.

Thank you. Your next question comes from the line of Glenn Schorr from Evercore. Please go ahead.

Hi, there.

Okay.

Hello, So I guess that you referred to the solutions orientation, a few times I just wanted to circle back.

My feeling is legg wasn't work in progress before Franklin was a work in progress trying to deliver the franchise because of the multi asset multi boutique nature of it I think Franklin was better at it and then you were in the process of smoothing them together you add in a bunch of private market. So my question is where do you think you were at in.

Of being able to deliver large multi asset mandates.

And is that something you're working on and should we expect to see in the future. Thanks.

Thanks, Matt.

Is that as I mentioned I think that's one of our areas that we think is a big opportunity of growth and again, our roots with the flagship Franklin income fund and being around for 75 years, We think we're pretty good at it.

So it's been an area of big focus in actually in April we have a couple of of wins in the multi asset space that came from our solutions group. So right right now I don't think we have consistent quarterly flows there, but we're starting to get it. It's a it's a there's a.

Strong pipeline and we're starting to get a more consistent flows in this space and I would say that.

And and and Adam could probably speak to it since he was CEO at Brandywine at the time, but you know the difference between with language trying to pull together where that.

Since it didnt, even talk to each other let alone.

The parent is much whereas today I think there's just a much greater.

The teams are willing to work with each other and come up with ideas I mean discussions between western and benefits on benefit Street partners on.

Joining private credit and liquid credit.

Our local asset management team.

Managed sharia fixed income.

Reaching out to benefit Street partners in doing that Sharia private credit products. So I just think that there is one is theyre coming out of not only the multi asset solutions group who's working with them, but also we're actually finding the investment teams are very Sims are coming up with ideas to work with each other.

Absolutely and I think the other nice thing about the solutions business is that we're strong on the institutional side with large platforms insurance companies et cetera, but the other nice thing is that through using our technology base through our <unk>.

<unk> optimization engine, we're actually able to take asset allocation solutions orientations to the wealth channel and we're seeing a pretty significant pick up there. So it's really solutions across the board from wealth institutional.

Thank you all.

Okay.

Thank you.

Next question comes from the line of Brian <unk> from Deutsche Bank. Please go ahead.

Great. Thanks, good morning folks.

Just if I can ask a two parter in fixed income.

And that is.

Maybe switching to the retail public side, if you can characterize how you're seeing demand for them are in and.

The classic Franklin taxable bond franchise also the global franchise as well.

Considering you know obviously, we have much higher rates and the comments you made earlier on the stability of rates.

And then the second part would be on the western side. If if I'm you know again, it's good that we're moving into a higher rate back drop that's more sustained that's more sort of a plateauing.

Telling potentially and you sound very excited about institutional mandates picking up.

I guess, how how would that fair or how do you see any kind of risks to future flows if we move into a credit cycle in the later part of the year and let's say a recession scenario and that would that would be more for the western side.

Well as I mentioned six of our top 10, grossing strategies are all fixed income and that's a mix of both Franklin.

Brandywine and and western so and as we've talked about on prior calls there's very little correlation between how brandywine excess returns are as to western <unk> and Franklin. So it's nice that we are we really come at it from a diversified portfolio of investment teams.

Hum.

Yeah.

I'll, let Adam talk about kind of the flow thing I would just comment on the credit cycle.

That is where active management makes all the difference and so.

Honestly.

As we even if we move into kind of a deeper recessionary environment as opposed to a lighter recessionary environment, it's going to make all the difference that you had an active approach to to to your portfolio in fixed income Adam you want to add.

Yes.

I would yeah, when we talk about the traditional Franklin side of things as well in addition to western or global macro performance has turned around that is an area, where we're seeing the story really change, which is very positive and let's not forget our muni business, which is something like $76 billion, we're seeing strong growth there and we're seeing.

Placement on more systems. So I think both of those as well as western Brandywine and then the private credit thing all of those are going to work well. The truth is that you can now actually meet your return assumptions with a significant portion of your assets allocated to bonds that is the strongest.

When we could hope for fixed income.

And then just I guess, where are you seeing in the redemptions on the retail fixed income said coming from Missouri.

Or is there still sort of pressured.

Well I would say that the two biggest fixed income products, our core and core plus do they tend to be the drivers of gross sales as well as the drivers of redemptions just based on the sheer size.

Great great. Thanks very much.

<unk>.

Thank you we have a last question coming from the line of Finian O'shea from Wells Fargo. Please go ahead.

Hi, everyone. Good morning.

Question on all Sentra can you talk about the progress on integration into benefit Street. If that is complete in your mind and then on the product and distribution side for that platform any color you can provide from early discussions with Lps.

On their receptivity to do more given its greater scale and capital and origination. Thank you.

Yes, So you know that the leadership at BSP is is driving them.

The really big to the extent that there's integration the integration without sentra and we've now gone out and one first thing you do is you make sure that you retain your key employees and so we feel like we've stabilized the team there.

We've met with all of their keep clients and so that's both the BSP folks going out with the all central folks and meeting with our key clients. So we actually we feel really good about.

You know that that first step in making sure their stabilization I can tell you that our distribution team in Europe is very excited to have a private credit manager to be able to distribute that is local European.

Private credit.

But again, the private credit market faces a little bit of the headwinds that we talked about the BSP is has faced.

So there's they're there.

In April we have good CLO.

Progress and and I think I think all centers, 49% of our CLO. So we were.

We're still we feel good about that.

I think though that.

That we.

The fact that they're stable and now moving forward is.

I I think is where we hope hope they'd be at this point and I think that's where they are.

Oh.

Thank you.

This concludes today's Q&A session I would now like to hand, the call back Oh I'm sorry.

Sure.

I'm sorry, we have one other questions that came through on that on the screen, but I have to answer.

Can everybody hear me.

And I will just say, let's see.

Tony Hawk way through the year, but all else remaining equal despite improved market levels improved flows improved performance, which pushup formula that compensation as I referenced on the question from Bill Katz.

We're only slightly increasing the upper end of our guidance range to 4.05.

So the guide would be $3 95 billion to 4.0 at $5 billion for the year right now we expect to be on the upper end of that range excluding performance fees.

Thank you for the question.

Thank you Okay. This can cause.

I would now like to turn the call back over to MS. Jenny Johnson Banker's best Adnan CEO for final comments.

Well everybody. Thank you for participating in today's call and.

And once again, we'd like to thank our employees for their hard work and dedication and we look forward to speaking to you again next quarter. Thanks, everybody.

Thank you so much present.

And thank you everyone. This concludes today's conference call you may now disconnect.

Yeah.