Q3 2023 Franklin Resources Inc Earnings Call
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Welcome to Franklin Resources earnings Conference call for the quarter ended June 30th 2023, Hello. My name is Joanna and I will be I'll call operator today.
As a reminder, this conference is being recorded and at this time all participants are in a listen only mode.
Now, let's turn the conference over to your host Selene, Oh head of Investor Relations for Franklin Resources, you may begin.
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.
Forward looking statements involve a number of known and unknown risks uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward looking statements. These and other risks uncertainties and other important factors that I just described in more detail and frankly recent filings.
With the Securities and Exchange Commission, including in the risk factors and the MD&A sections of Franklin's. Most recent Form 10-K, and 10-Q filings now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.
Thank you Celine.
Hello, everyone and thank you for joining us today to discuss Franklin Templeton to results for the third fiscal quarter of 2023 as usual I'm joined by Matt Nicholls, Our CFO and C O L and Adam Specter, our head of global distribution over the past several years.
We've been intentional in building a diversified company that offers a broad range of investment expertise and capabilities across asset classes investment vehicles and geographies to benefit a broad range of clients through various market conditions and cycles, we believe.
<unk>, our corporate model of preserving the investment autonomy of each of our specialist investment managers combined with the resources of a global firm.
Meets the demands of our diverse client base and produces strong long term results. This quarter long term net flows turned positive.
<unk> performance remains strong and adjusted operating income improved by 8% financial markets in general stage rebounds in the first half of the calendar year. The S&P five hundred's indexes concentration in five companies is at its most extreme level.
More than 30 years.
A challenge for those seeking to outperform the index, while managing for concentration risk in their equity portfolios, but also an opportunity for skilled and disciplined active managers with a long term horizon client focus has always been a hallmark of Franklin Templeton and we've been actively engaged.
With our clients to assist them in navigating this complex environment as our industry and client preferences continue to evolve.
There is strong demand for asset managers to have a full range of investment options that span geographical regions, both in public and private market strategies.
We generated interest in our alternative and multi asset strategies in particular, which both saw positive net flows during the quarter.
In addition, we experienced strong flows in Etfs.
That's amaze and the high net worth channel and flow trends continued to improve across all geographies benefiting from a regional sales model and strategy, our EMEA and Asia Pacific regions. Both reported positive long term net flows that's the second consecutive quarter of net inflows for Asia Pacific.
Vic.
Well, we're always focused on organic priorities. We have previously stated our interest in distribution led strategic transactions that would further diversify our business and accelerate growth in key markets with the vision of offering more choice to more clients and important sectors. We were pleased to announce the establishment of a law.
Long term partnership with power Corporation of Canada, and Great West Life co. This quarter as part of the relationship we will acquire Putnam investments, which manage 136 billion in a U M. As of April 30th 20, twenty-three from great West for approximately.
$925 million, primarily funded with equity great West will make an initial incremental asset allocation of 25 billion to our specialist investment managers within 12 months of closing with that amount expected to increase over the next several.
Yes, great West will also become a long term shareholder and Franklin resources and of the equity issued to great West shares representing 4.9% of our common stock are subject to a five year lockup.
Compelling transaction for both firms and we're looking forward to actively partnering to develop additional opportunities that will be realized overtime.
[noise] agreement aligns with our focus to further grow insurance client assets and expand existing relationship between Franklin Templeton and the power group of companies in the key areas of retirement asset management and wealth management.
The transaction will also enable us to further increase our investment in retirement and insurance to better serve each and every client in these important segments.
Our clients will benefit from expanded and complementary investment capabilities across key asset classes with strong long term track records.
Specifically the acquisition of Putnam will increase Franklin Templeton's defined contribution AUM to almost $100 billion. As a reminder, the acquisition of Putnam is expected to be modestly accretive to run rate adjusted EPS by the end of the first year after closing.
Adding approximately $150 million of run rate adjusted operating income in the first year post closing inclusive of cost synergies.
The acquisition remains on track to close in the fourth calendar quarter of 2023 subject to customary closing conditions.
Now to our specific numbers for the quarter, starting first with assets under management and flows ending a U M increased to 1.43 trillion dollars.
Primarily due to market appreciation and we shifted into positive long term net flows of 200 million inclusive of reinvested distributions are long term net flows continued to benefit from a diversified mix of assets in the quarter led by record.
Net inflows of 4 billion into alternative strategies, our three largest alternative managers benefit Street partners Clarion partners and Lexington partners generated a combined total of almost 5 billion in net inflows.
This included raising over 1 billion in secondary private equity in the wealth management channel.
The alternatives by Franklin Templeton brand today.
Today alternative assets are 257 billion or 18% of our total owned and contribute more significantly to our financial results.
In terms of other areas of activity in the quarter, our multi asset strategies generated another quarter of positive net flows with $2 3 billion. Our solutions team has been gaining success with large institutions building customized solutions across our broad array of investment.
<unk> equity net outflows improved to $3 billion this quarter, including the funding of a previously disclosed $3.2 billion institutional mandate.
Well active equities continued to be impacted by the risk off environment. We saw positive net flows into international large cap core emerging markets, all cap value and small mid cap equity strategies.
Fixed income net outflows were $3 1 billion despite market uncertainty, we experienced increasing demand for fixed income and we benefited from having a broad range of strategies with non correlated investment philosophies.
Client interest continued with net inflows into multi sector core bond enhanced liquidity and tip strategies.
Our regionally focused sales model and strategy resulted in improving flow trends across all of our geographies compared to the prior quarter.
As mentioned earlier, the EMEA and Asia Pacific regions generated positive long term net flows.
From a vehicle perspective, Etfs generated net inflows of $1.1 billion, representing the third consecutive quarter of net flows of approximately $1 billion in au am totaled 16.2 billion at quarter end.
In the quarter. We also launched two thematic Etfs in Europe in both future of food and health and wellness to areas, where we expect to see strong client interest.
Separately managed account AUM ended the quarter at 116 billion and generated positive net flows we continued to expand our SMA offerings in important growth categories, and new market segments to provide clients choice and how they access our investment expertise across the.
Breadth of our products.
This quarter, we had important launches focused on customization such as tax managed overlay and SMA key flagship strategies, including the Franklin income fund.
Canvas or custom indexing solution platform continued its trend of net inflows in each quarter since the platform launched in September 2019, and it's a U M has doubled to $4 $5 billion since the announcement of the acquisition.
This past quarter canvas generated net inflows of approximately $300 million and continues to have a robust pipeline.
Canvas allows financial advisers to build and manage custom indexes in S. Amazed that are individually tailored to the client's specific needs preferences and objectives. We believe custom indexing represents the next progression of direct indexing and Etfs and <unk>.
As a significant long term growth opportunity.
Turning now to investment performance.
Which we're pleased to say remains strong, 63%, 53%, 67% and 63% of our strategy composite AUM outperformed their respective benchmarks in the 135 and 10 year periods respectively.
For mutual fund investment performance, 44%, 58%, 66% and 51% of our U M.
From their peers on a 135 and 10 year basis. This represents improvement in the three year and five year periods from the prior quarter due to strengthened performance in equity and certain fixed income strategies. The one year decline was primarily due.
Two one of the largest funds managed for income, which was overweight utilities and financials, which generate higher yields and underweight technology compared to the S&P 500 touching briefly on our financial results ending AUM increased by <unk>, 7% to 1.43 trillion as of June 30.
<unk> from the prior quarter, reflecting market appreciation and positive net flows average AUM was flat from the prior quarter at 1.42 trillion.
Our effective fee rate remained stable adjusted operating revenue increased by 3% to $1.56 billion.
Adjusted operating income increased by 8.3%.
Two $476 $8 million from the prior quarter adjusted operating margin was 35% compared to 28, 9% in the prior quarter.
We continue to maintain a strong balance sheet with total cash and investments of $6.9 billion as of June 30th 2023.
To wrap up we have worked through another quarter of complicated markets and our progress and success would not be possible. If it weren't for our dedicated employees around the world I would like to thank them for their many contributions and for their unwavering client focus.
Now, let's turn to your questions operator.
Thank you.
If you would like to ask a question. Please press star one 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. Please press star zero on your telephone keypad waiver.
We request that you limit to one initial question and one follow up.
First question comes from Alex Blaustein at Goldman Sachs. Please go ahead.
Hey, good morning. Thanks for thanks for the question, maybe we could start with some of the trends you're seeing in the alternative asset management space.
First I was hoping we could get a little bit more color on how much capital are Lexington raised in the second quarter and their flagship fund and as you highlighted in the deck I'm continuing to find race here. So how large do you think besides could ultimately of that phone be and then when you.
Bend, a little bit broader into private all its generally what else is in the pipeline that you expect to come in over the next six to 12 months.
So you know.
I think we publicly disclose the Lexington, three to $18 2 billion so far.
On their latest fund I think in the quarter. It was about it was little over $3 billion, maybe $3 four.
And of that I think what we're incredibly proud of is the fact that we raised a little over $1 billion in the wealth channel first time fund I think the expectation was that if we raised 500 million that would be pretty good for a first time fund.
And.
We've talked on these calls before about how complicated it is to raise alternative in the wealth channel because it requires not only retraining of your own sales team, but actually training of the financial advisors and so we put a lot of effort over the last 18 months, we built out a 40 person also.
Well.
Excellent team, we've used our cash to train our own internal sales folks are as.
As well as helping to train their financial advisors. So that was a big part of it and theirs.
Fun can raise up to $20 billion and.
It's quite possible that that will happen.
Great and then just as far as the pipeline of other things that are in the Hopper as you look out over the next six to 12 months.
Well.
It's really not I mean, so you know private credit we still think it is just a great opportunity to you know our view is that banks are going to even.
Even learned lesson they'd been lending and you know that it is definitely from deploying capital has been slowed down by the fact that M&A slow down just read an article yesterday, where some news talking about they're seeing M&A pick up that will make a difference we're thrilled because having b S. P 78 billion, we cover both the U S.
And Europe , but in addition to that you know what are the things that actually really important in these times is having the knowledge and expertise in special situations, where you could work out deals. So you don't.
If you have an underlying credit that is struggling because of you know the.
Maybe they can't cover their rates being able to restructure it is really important and B E.
Has that expertise internally.
But the biggest issue there it's been around deploying but they're seeing you know continue to see very good deals.
They're they're seeing their underlying companies be very strong and where there are some stresses are they've been able to handle this work out and again, we think is M&A activity picks back up.
Youre going to be they're gonna be able to deploy more capital a big fat you've ever seen the best deals that they've seen since the global financial crisis, and then in the case of real estate with Clarion probably the biggest issue.
Is is price discovery now I think everybody knows the office story. Unfortunately, Clarion has just about 10% exposure to office, but that's not been a big exposure for them.
Their focus has been on industrial space, you know data centers and things like that which with AI, frankly will only get bigger and more demand.
But also our multifamily and I think the story about the under building a multifamily is important.
But the issue has been a little bit around the bid and ask on just you know the sellers being willing to accept lower prices and the and the buyers being willing to pay up so is that as we see that smooth out.
I think you'll see more.
You know more movement in the real estate space.
They just did on the on.
On the rigor.
Redemptions you just a reminder, there are clients are mostly institutional and so they don't have the kind of a requirement to do redemptions because the institutions don't want any kind of fire sale and so they have more flexibility on their reduction.
Which equates to less than two.
2% of anybody.
Adam It looks like you want to add something there.
Sure I was going to say a couple of things Alex out one I think we see strong fund raising in the traditional markets that they've been in but with stronger public markets. The denominator effect is less of an issue. So we're feeling really good about the rates for all of our alternatives firms in the private markets I would also say that in the wealth channel.
Not just the Lexington flagship, we're offering we have clarity on products in there like CP reiff in opportunity zones that are going well launching our bdcs and interval funds for BSP, our venture funds in the wealth channel. So feeling good about that and then they all sentra acquisition has been very positive for us and having the ability to launch.
<unk> European managed product in Europe , Europe through our distribution force there, we think will be a very positive that as well.
And then what do you think.
And then one other data point Alex.
In terms of dry powder B S. P has in excess of $4 billion.
And over the next 12 months, they expect to raise several billion dollars more.
Got it Super helpful. Just a quick follow up staying on the ultra second and it's a little bit little bit of a nuanced question, but when we look at the roll forward in the U M people. It looks like the old has had a negative mark I'm a little surprised just given that you know the mark to market dynamics generally have been positive in all the places. So is it a is it a lag or is there something idiosyncratic.
That drove the negative mark to market in the auto market.
I think we had positive marks in a and B S P and Lexington in the slightly negative.
It might've been realizations in real estate, so I'm not sure but.
It may have been.
Redemptions are so I'm not sure I'm not sure what you were referring to out.
Okay. We can circle back, it's probably real estate all right I appreciate it thanks.
Okay.
Thank you next question comes from Glenn Schorr of Evercore. Please go ahead.
Hi, Thanks very much.
So one of your little further and Putnam is interesting because after a benefit street and Lexington, I think our minds. We're all focused on the world and so I like the partnership we formed with them I like the 25 billion in their bathroom youth use a five year lockup on the stock.
I'm curious on the insurance and retirement channels.
Why are they growing their which strategies and then more importantly, with your broad diversified offerings. What do you expect that you can actually sell into that channel. So I can live with that distribution.
Sure. It's Adam here. So a couple of things I would say one with Putnam, we get tremendous investment performance I think they are the only firm that had their fund family and the.
Top 10 for like the three to five and 10 year periods of good investment performance across the board.
Bring a few.
Investment capabilities that we did not have before target dates as a good example, where they have $6 $5 billion and given that about a third of the assets in D. C are go into things like that we're feeling that that gives us a real leg up stable value in ultra short are two other areas, where they are quite strong.
They have been very strong in both insurance and the D C I O market.
And our plan there is to really integrate those two distribution teams. So that we will be stronger in each and every client that we partner with we have a broad range of clients in the insurance and Dci Aerospace and we think together the two teams will be able to serve all of them.
In a much more effective way.
Yeah.
And I'd just add I mean looking at the Morningstar flows I think it's something like Florida, the top 10.
Slowing categories, our target date funds and so having a good performing target gate with really what puttnam brings his expertise on self.
Selling into the retirement channel that we're really excited we think that that will benefit all the retirement platforms that we do business with and that is as Adam mentioned, just having two great products in the staple diet maternity.
Be nice to add to our suite.
And then Glenn the only thing I'd add on Putnam is just to make the point that obviously, it's been a month ago.
Actually over months now since we announced the transaction.
AUM is up slightly by 2% to 3% based on the market flows have been stable. All the performance is still as strong as Adam just outlined.
We've got a team agreements in place with all the key investors and our.
Our planning process around the acquisition and what we expect to get out of the acquisition.
With a financial perspective, and a strategic perspective as Adam just mentioned.
We felt like we're very much on track as we communicated at the time of the acquisition announcement.
Alright, Thank you for all that.
Okay.
Thank you. The next question comes from Michael Cyprus at Morgan Stanley . Please go ahead.
Hey, good morning, Thanks for taking the question just wanted to ask about capital deployment are the cash balance continues to rise here cash investment $6 9 billion nearly 7 billion just curious how youre thinking about putting that to work from here. It sounds like a little bit of debt Paydowns buybacks are limited to offset share dilution. So it seemed like a meaningful capital put to work at EM.
So just curious how you're thinking about that opportunity set as you all look out from here.
Yeah. So I think I think our capital management strategy is going to remain consistent with what we communicated in the past can number one is maintaining the trajectory of our dividend and we've had over many many years number two is our organic growth opportunities in the business.
Number three as you alluded to its hedging our employee grants.
It might look like we're a little bit behind on that front in the context of the shares repurchase to date.
But.
We will catch up on that in this quarter and make sure that we are very much in line with that communication that we've that we've been consistent about.
We obviously have debt that we need to service, we paid down $300 million of debt.
In July <unk>.
And with that what's the timeline we.
We had in place and we paid that off with saving about four and a half million dollars by doing that but we're retaining the exact same amount of liquidity by replacing that $300 million term loan with a with a larger revolver. So we've taken out 500 million dollar revolving credit facility.
The 300 and all the term loan, which was 800 and total paid off the 300 million at all time zone and replaced it with one single $800 million five year revolving credit facility. So we are we've actually enhance though our liquidity and financial flexibility by doing that and saved $4 million to $5 million in the process.
And then opportunistic share repurchases on top of that in M&A I think Jenny has mentioned several times you know, we're very interested in the infrastructure space around M&A.
Alternative asset space in particular.
And in terms of the opportunity yeah opportunistic share repurchase the way I would describe that is as a consequence of how we decided to fund.
The Putnam acquisition with issuing 33 3 million shares when when the closing date occurred and we expect to start repurchasing those shares.
In a methodical manner.
All else being equal in fiscal 'twenty 'twenty four obviously after the date that we are close to transaction.
So we certainly expect to pick up share repurchase consequences of doing that transaction.
Great. Thanks, just a quick follow up question or more broadly AI Jenner today are getting a lot more attention. These days. So just curious how you're thinking about the potential and opportunity from AI as a revenue or an expense benefit so what sort of impact do you think this can have on the competitive landscape. It maybe you could talk a little bit about how you're experimenting.
To what extent with that today.
Yes, so I think unfortunately, I think that's probably one of the benefits of being headquartered in Silicon Valley, we've been actually doing some work in AI for the last four years. If you you probably have heard matter goes optimization engine tool. That's all built on AI.
And you know we're doing what others are doing around you you know you use AI for Ernie early warning system, So things like risk management business intelligence.
Intelligent automation, so we have a proof of concept or pilot going on where we have our you know it's sort of like a portfolio of research assistant So summarizing 10-K's and annual reports.
For our P. M teams one of the most important things you have to do is to build a fence around your data so that youre not training the world on your own data and so we've had that undergoing we're working on things like conversational AI to for help desk, hoping to respond within 10 seconds.
Yeah.
We've got a pilot going on to generate a draft on commentary you know again, its all training the models to be able to see how good generating marketing material.
So were and were.
Using both the <unk> and Amazon because we're not quite sure what's the best for us from the language model. So we have.
Messages, we've got quite a bit going on here, we've been early in it because they go products sort of got us in there and we think it'll be both you know I think initially it's more of a expense benefit.
An efficiency benefit, but you hope that it makes your portfolio managers in your research assistance more efficient.
And then things like go our revenue generating tools so.
Great. Thank you.
Thank you. The next question comes from Patrick Davitt Autonomous Research. Please go ahead.
Hi, good morning, everyone.
Sorry, if I missed this but is there any change to your expectations for expenses this year.
And do you have any early thoughts on how to think about.
The path and into fiscal 2024, as we enter the fourth quarter. Thank you.
Yes. Thank you so.
I'll go through what we expect in the fourth quarter in terms of the guide and then that will lead to them what the full year.
Our guide is essentially so.
Firstly in terms of our <unk> rates, we expect it to remain around 39 basis points I think it might be slightly higher than 39 basis points in.
In the fourth quarter minutes, that's called out around 39 basis points.
In terms of comp and benefits are kind of seasonal fourth quarter.
For modeling purposes, I would assume $50 million in performance fees. As we've described in the past that would lead us to approximately 740 million daus in comp and benefits.
O I S T.
Is that similar to what we described last quarter at 120 very consistent.
Occupancy in the mid to high Fifty's.
We guided.
High Fifty's last quarter, we came in at a little bit lower than that we expect to be roughly the same again and then G&A, we expect to be in the mid one twos inclusive of continued normalization of TNA.
For the quarter.
In terms of what that means for the year due to higher assets under management better performance increased from raising related too.
Competent.
Increased fundraising related compensation expenses.
Okay Guy had increased slightly to just over 4 billion. It's very similar to what I described last time, but maybe slightly higher than that certainly on the high end of 4.08 or something like that 4.09.
But again, that's all that's assuming the market stays where it is today and its assuming those.
Excluding performance fees that as I've described.
In terms of the margin, though and I think you've asked about this several times in the past that it's obviously difficult to guide on the margin because that means we're guiding revenue essentially but all else remaining equal we'd expect our operating margin to be stable in the 30% area in the next quarter.
Thank you and any thought any thoughts on next year is it still too early.
It's it's it's too early here anything I'd say.
It's interesting question, obviously, because we're going to be in the process of implementing or integrating the Putnam acquisition I think as we've dug further into this post announcement and as we get into the integration work and execution work that we're quite familiar with by now.
I think we can say two things one you can expect from US a continued meaningful expense discipline going into 2024.
And and I think you could see from us.
Actually more potential with.
With the acquisition of Putnam as we integrate because we found other areas within Franklin Templeton that we can be more efficient and as a consequence of the transaction. We've highlighted in the past that one of the benefits of <unk>.
M&A.
We always focus on the growth areas, that's what drives our acquisitions, but our.
The second sort of derivative of the transactions that we've chosen to pursue it has helped us on the on the expense and efficiency side to reexamine, how we do things and reexamine, how we can be better and do things better.
As a result of that I think you'll find that our expense discipline in 2024, it will be will continue and perhaps.
Outperform what we've communicated in terms of what we get out of the apartment acquisition.
Okay, and one quick housekeeping could you give us the exact amount of the catch up fees and then how much how much offsetting placement fee was in expenses. Thank you yes.
Yes, the way Patrick I would look at that for this quarter. It was essentially an operating incomes zero. So in other words, the the revenue associated with the catch up is <unk>.
<unk> the same as an expense in fact, the expenses might have been slightly higher like a million dollars or something like that.
That's in all operating operating income neutral.
And then but then of course going another so we can kind of get to that run rate.
$33 million something like that okay.
And in the low to mid <unk>.
Got it thanks a lot.
Thank you.
Thank you. The next question comes from Craig Siegenthaler from Bofa. Please go ahead.
Thanks, Good morning.
Won the Putnam transaction I know, it's going to bring 25 billion up close and 12 months after closing, but I wanted to come back to you know what could happen from some of the cost cuts because you are cutting a lot of cost out of the company.
I think 150 million so maybe provide some perspective on the potential for merger related dis synergies.
Our outflows on Putnam was $140 billion AUM base.
Yeah. So the the 150 million guide that we gave as we announced the transaction that is inclusive of some modest attrition across the company.
And.
We've got that I think we we again.
Have.
Our history, we don't want to Jinx ourself on this of course, but we're extremely focused on asset retention as well as the potential growth.
The overlap is it's relatively modest and this transaction given the.
Yes.
Complementary investment strategy isn't Adam outlined at the beginning.
And therefore, we expect modest a modest attrition from this transaction.
Across the board, which.
And frankly.
We think that any attrition that we get above what we had expected it would be more than offset by.
Other potential operating income and operating expense reductions in the <unk>.
Transaction. So again, we say we stay very firm on the 150, and we think there's potential to be hot.
Alright.
Is that.
Given the number of transactions, we've done and the continuity of portfolio management teams post transaction, we're getting very good reaction from clients that they feel.
Their investment teams will be stable and they don't make intend to make any shifts which are which is very positive.
I would just I would just also add thank you Adam I'd just also add that.
I would never understate.
The complexity of our integration and implementation and working across.
Involving a new a new acquisition, but the 150 is 30% margin.
Okay. So so so it's not a hugely aggressive margin objective from that business, we should be able to get to that.
And exceed it overtime.
Our guide for members in the first year, but after that first year all else remaining equal we suddenly see a yeah.
Other opportunities to go to go beyond that.
Thank you Matthew and Adam one follow up on the SMA business, you've got a great business here, it's been flowing.
You highlighted that Franklin income that's one of the flagship that's driving this and also direct indexing, but what are some of the other funds that are driving close to the end of the SMA business and then and when you think when you look at sales.
What does the mix look like a cross channel is it heavily wire houses it heavily rei I'm curious to see what a upside.
Sure I think the way to think about that is.
Wanted to look at the legacy business and to look at the projection of the business going forward. So if we look at the legacy of the business. It really was strongest at the.
Lake Basin, which means that a significant portion of the assets are with western and Clearbridge and those firms tended to be stronger in the wires. If you look at the trajectory of the business, it's really adding new products like our income fund to the SMA platform.
We're already now since recently launching it on six broker dealers at a number of our age there. So that's where it really where a lot of the momentum is the other place I would say that we have huge opportunity is in our estimate in the SMA business is in munis, where we've seen about a 30% increase in our AUM.
Their year over year, and I think that's a place where we can really grow as well. So again the strategy is to make sure that we give our clients vehicles of choice.
So for all of their key strategies, we'd like to be able to offer them in both the fund format and an SMA format and that's what we're building out right now.
Thank you.
Thank you next question comes from Brennan Hawken with UBS. Please go ahead.
Oh good morning, Thanks for taking my questions.
So.
I just wanted to follow up there on the catch up fees in Lexington.
Number one.
This was you are still raising it sounds like so was this a preliminary close and when do you expect there'll be further catch up fees at the actual formal close.
And I I was just running the math on the 33.
I've made me a little confused about your prior comment on fees.
Fees being expected to be flat quarter over quarter or do you think there'll be more catch up fees and then in the coming quarter because it.
It seems as though the catch up maybe it contributed about a basis point this quarter. So it wasn't quite sure about that.
Yeah, Thanks, Bryan so firstly.
33, but I was just using that as a midpoint. That's got the exact number we're not going to guide on where I'll catch up fees are going but I'll, just say couple of things so.
The.
In terms of the thumb raise I think Jenny mentioned this at the beginning there were couple of things we're allowed to say around the fund ranks number one we're ahead of target.
Two we're at $18.2 billion.
Right now that was what was it.
Just a real filed recently.
Number three we're still fundraising.
Which means to answer your question.
We may have another closing in the next quarter, we don't know exactly but I think it's likely we have some form of.
<unk>.
Closing in that quarter and that could have a.
A positive impact on our effective fee rate, but even without so I'll just be clear about it because I think this is a question that Patrick was getting out early I think even without the catch up.
Fee in the fourth quarter.
If all we would expect it to be around 39 basis points. So we're not all 39 basis points is not reliant upon the catch up.
Okay.
That's I think you're I think that's the question you were trying to get a credit correct. Yeah. Yeah. Yeah. Yeah. Thank you I appreciate that.
I just wanted to try to understand some of those mechanics. So thanks for laying that out.
And then.
And then obviously after the after that.
When we have this moment in time, when we do a closing and we have a catch up fee and then we have expenses associated with raising.
The funds then offset of course.
We don't have those one off expenses, but we do have the normalized.
Alternative asset pie.
Higher fee rate against the assets we're raising.
On the entire U M, which is as you know you know around the one 1% area. So that that's the that's the aspect of the fees that I would focus on that helps out for on the on the long.
Long term that that's what helps us have made around that 39 basis points.
Oh for sure Yeah. Yeah. Yeah. This is just sort of noise and whatnot I just wanted to understand for modeling purposes.
So thank you for that.
You guys flagged a in your comment document.
I believe.
What is referred to that there was some improving performance in taxable fixed income strategies.
Which led to the lift in the investment performance versus benchmark. So just wanted to confirm.
That's western and whether or not you're seeing any impact.
Impact from this improving performance on either RFP activity or client dialogue and what drove the reversal. Thank you.
Yes.
This significantly improved performance at western.
In core core plus and macro ops.
I remember the numbers exactly but it's a first quartile year to date.
And what we've seen is.
I see.
Significantly improved net flows.
To the point, where I thought we might be positive this month at western but I'm not sure it will be quite but it's.
Yeah.
It feels like they've kind of turned the corner there.
I wanted to address one other just performance because on the one year mutual fund ETF performance at 44% I think it's really important to understand how significant the Franklin income fund can be in swinging. So that's 14% of the mutual fund ETF number.
The Franklin income fund.
That is in there is no such category for multi asset income in the retail channel at Morningstar. There is an institutional category and if you were to compare it to the institutional category they would be in the 11th percentile.
The peer average yield in that category is about four point to five versus being compliant at 575% are the peer average in the retail category yields 184% versus 575%. So if there were an income category at Morningstar.
It would be in the top quartile and that looks like it's up to 58% and because its so significant I just feel like it's important to understand there just isn't a category. Unfortunately that $1 $5 billion in flows that we've had net flows in the Franklin income pub proves that the income strategies as well.
But today as when my grandfather started its 70 plus years ago. Despite the fact that there are no true peers in that space.
Yeah.
Thank you for that color.
And to that I, just might add because your question was about rfps and pipeline and such.
What we're really seeing is if you think about our sales pipeline is significant buildup in late stage opportunities.
But what we're not seeing is the conversion to that as quickly as we would expect to one but not funded and that is really because we believe a number of institutions are waiting for the interest rate cycle to settle in are we going to have one more hike what will happen to inflation. So that last stage of deployment in final contracting is a little slower, but we do see a bit of a bulge.
Building up in those late stage opportunities.
Got it thanks very much.
Yes.
Thank you next question comes from Ken Worthington from JP Morgan. Please go ahead.
Hi, good morning.
When commenting on the improvements in multi asset product flows you mentioned solutions as a contributor.
To what extent, our alternative investment capabilities important to growing Franklin solutions, a U M and to what extent are your existing alternative products already integrated with your public market capabilities within the solutions.
Ecosystem.
Okay.
So you know I would say that that depend more on the client. So for example, <unk> has won mandates in model portfolios and retail channel and.
Very few of those have so far included alternatives in those model portfolios on the other hand, they also want insurance mandates.
That have some combination of alternative sitting there so I think that's more a.
I think that question it depends more on the channels the MTI asses at Franklin Templeton and fluid solutions Investor Solutions group is serving.
Then.
Then how that performs.
The other thing that I would add to that is that we can really build.
Traditional only a mix or what we're starting to do now is to build also only solutions as well.
Where if a client wants to have a single source for private equity venture private debt real estate I think we're one of the few firms that can build those for clients.
And actually one thing is we also have been working with some retirement platforms, who are interested in trying to figure out how to bring alternatives to retirements and building sleeves to go into the same accounts.
And some models in there so we think that's a real opportunity.
Okay. So solutions really isn't about combining these different capabilities together and providing a solution that results from the combination it's really just solutions and single silos marketed out.
No I don't know right. So they can be no because it.
It might be that somebody wants and income solution model portfolio, right or a L. D I type and so they will go in and depending on what the client.
Desired outcome is and then we'll use multiple of our managers to bring that ultimate solution to the client.
Okay. Okay.
A real CIO type situation, they even do they have a team that researchers outside managers.
But but most of their solutions include multiple of.
Of our sins.
Okay got it thank you.
Yeah.
Thank you next question comes from Dan Fannon of Jefferies. Please go ahead.
Thanks, Good morning wanted to clarify on performance fees, what the funds or affiliates that were the contributors and I know here the guidance and you've been consistent with that but you've also consistently been above that in terms of the results. So as you think about where high watermark set and we think about fourth quarter and even potentially.
Into December which has some other crystallization, how we should think about maybe.
Our performance sits for that performance eligible.
Okay.
Yeah. So this.
This quarter it was and it has been for the last few I mean, even even though we.
Receipt performance fees from several of our specialist investment managers in particular on the alternative side.
There has been.
A meaningful portion of it driven by Aw Clarion.
Specialist investment manager on the real estate side.
And 80% of the performance fees is driven by multiyear performance thresholds being hit by clients invested you know five years ago.
We're a five year performance.
Threshold has been that's been a hit.
We expect going into next quarter.
Performance fees I think you know we continue to guide at $50, it's so hard to predict.
But any form of accuracy.
But we'd guide between 50 and $60 million for the quarter as you mentioned going into the fall.
Our first fiscal quarter.
Which is the.
Laughter and lost a calendar quarter fourth calendar quarter.
That's sort of a little bit more widespread across the specialist investment managers.
And we may experience, a little bit more performance fees then but.
Well provide more guidance on that next quarter, when we get to that point.
Okay. Thanks, that's helpful. And then just a broader question on distribution given all of the acquisitions over the last several years I was hoping you could update us on how much of the AUM is actually utilizing the centralized distribution at this point and where you are in terms of Onboarding.
Whether it's some of the specialist managers or acquisitions that you know.
There are more recent in terms of closing in terms of fully onto that platform to think about the momentum and where you are in that process.
Sure I think let me go back to where the starting point was which was that's a central distribution team was responsible for globally, all institutional and all our wealth management, raising and client servicing for legacy Franklin Templeton.
Mason side again it was more.
<unk> handled a large portion of their institutional asset management, especially in the U S. What we've seen over the last two years is a gradual.
Movement towards a more coordinated global effort I would say that movement is quicker at a smaller firm like Martin Currie, where the benefits of centralized resources are much more significant if you look at the other end of the spectrum out of Western that has a massively well built out global distribution.
They have their own it's really more.
Episodic.
Where the central distribution team is raising assets for them. So it does depend on the side, but on.
On the size, but the movement has been defined more places to cooperate.
And we're also seeing a lot of benefits in the alternative space, where the generalist salespeople are able to make introductions.
Then the alternative firms can close on their own.
Is there any way to put numbers around that in terms of like what still is held at the affiliate manager level versus yeah.
I can tell you I shy away from that because what we're trying to build as a cultural cooperation where these teams work together and numbers imply that one team did it or the other team did it and what we're really trying to move towards is where it's a collaborative effort.
Okay. Thank you.
Yeah.
Thank you. The next question comes from Brian Bedell Deutsche Bank. Please go ahead.
Great. Thanks, good morning, everyone.
Just want to hop back on the Franklin income fund for one second I think that's something that's moderate allocation Morningstar category, but and I agree with what you're saying about.
The performance in the sort of Miss characterization of it but.
Do you financial intermediaries used at.
Morningstar, where have you seen them use at Morningstar.
Got it organization in terms of I guess, just recommending the fund because I do see it's still an outflow with respect to improve performance.
Well I actually think it's been it's been a net flows. So that's why I said there was about $1 5 billion in net flows look.
It is a frustration during when interest rates through zero. He was in the 80% equity category because of course, he looked for dividend yielding.
<unk> equity because you couldn't get anything in income.
And that piece as you've been able to Ted.
Earned money in fixed income he shifted and so now he's in the 50% to 70%.
So yeah. It's it it's honestly, it's a discussion I personally had with Morningstar on it and they're just the problem is there's no real.
Competitors in the in the wealth channel that so they can't build a big enough peer group.
And so we often point to the institutional one in his outperformance there.
And so to answer your question, Yes, I'm sure there are some situations where it gets screened out on the other hand is tremendous heat at the team has tremendous following and loyalty.
And one of the challenges has been as the world went to fee based it's harder for some financial advisers to buy and hold the income fund for 10 years like they used to do and that's why we really push to get it on the SMA platform.
Because they can hold it.
On an SMA platform and they do it they love it took quick decline in there and sit through them quite retirement. So it's a message that we continue to try to get the story out and I think that's because it's 14%. It is important that people understand how much it will swing, our one year category or any of the categories.
Ken.
But he's going to manage it and the team's going to manage it for yield which is what the clients expect.
Thank you. This concludes today's Q&A session I would now like to hand, the call back over to Tony Johnson of Franklin President and CEO for final comments.
Great well I just want to thank everybody for participating in today's call and again.
Like to thank our employees for their hard work and dedication and we look forward to speaking to you all again next quarter. So thank you.
Thank you. This concludes today's conference call you may now disconnect.