Q1 2024 Franklin Resources Inc Earnings Call
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Joanna: Welcome to Franklin Resources earnings Conference call for the quarter ended December 31, 2023, Hello, My name is Joanna and I will be your call operator today.
Joanna: As a reminder, this conference is being recorded and at this time all participants are in a listen only mode.
Joanna: I would now like to turn the conference over to your host Selene, Oh, Chief Communications Officer, and head of Investor Relations for Franklin Resources, you may begin.
Selene: 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.
Selene: 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 are described in more detail and frankly recent filings with the Securities and Exchange Commission, including in the risk factors.
Selene: 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.
Jennifer M. Johnson: Thank you Celine Hello, everyone and thank you for joining us today to discuss Franklin Templeton's results for the first fiscal quarter of 2024, I'm joined by Matt Nicholls, our CFO and CFO and Adam Spector, our head of global distribution, we're happy to answer any questions. You have just a few minutes.
Jennifer M. Johnson: But first I'd like to call out some notable highlights from the quarter, our first fiscal quarter results reflect ongoing momentum in a number of significant areas across asset classes investment vehicles and geographies.
Jennifer M. Johnson: Our efforts are always focused on meeting the varied investment needs of our diverse global client base across market cycles, while staying at the forefront of the asset management industry.
Jennifer M. Johnson: Driven by increased expectations of interest rate cuts by the fed and other central banks admits disinflation. The 2023 market rally was particularly concentrated in the last quarter of the calendar year, regardless of the market environment investors remain cautious.
Jennifer M. Johnson: According to Morningstar global money market assets stood at seven seven trillion as of December 31, 2023.
Jennifer M. Johnson: Highest level since Morningstar started collecting the data in 2007 broadly speaking our specialist investment managers.
Jennifer M. Johnson: Recession risks moderating and expect the global economy to slow over the course of 2024.
Jennifer M. Johnson: But even as the economy slows there are many opportunities for investors to put that cash to work into risk assets specific to the equity markets last year. We saw a small group of stocks dominate market returns with the top five stocks, representing 23% of the S&P five.
Jennifer M. Johnson: Hundreds total market cap compared that to the height of the dotcom bubble in March 2000, when that number was 18%.
Our investment professionals regard companies like the magnificent seven as market leaders the level of relative outperformance for these stocks is likely unsustainable. We believe that this backdrop has created an opportunity for active managers like Franklin Templeton that offer a full range of investment.
Jennifer M. Johnson: <unk> across public and private markets spanning geographic boundaries in vehicles of our clients' choice with greater clarity on interest rates in 2024, and as investors look to deploy cash on the sidelines, we believe Franklin Templeton is well positioned.
Jennifer M. Johnson: In short 2024 is likely to be a year in which balance and diversification are once again rewarded.
Jennifer M. Johnson: During the most recent quarter, our clients gravitated towards alternatives multi asset equity Etfs, and SMA, which all saw positive long term net flows.
Jennifer M. Johnson: Continued client interest in private market strategies led to net inflows for our three largest alternative managers.
Jennifer M. Johnson: Additionally, we continued to see aggregate positive net flows in non U S regions.
Jennifer M. Johnson: We were pleased to announce that our acquisition of Putnam investments closed on January one with a 148 billion in assets under management Putnam adds complementary investment capabilities and a track record of strong investment performance.
Jennifer M. Johnson: 87% or higher of Putnam's mutual fund AUM outperformed peers over the 135 and 10 year periods. The transaction also enhances our presence in the attractive retirement and insurance markets. The addition of Putnam brings Franklin Templeton's AUM.
Jennifer M. Johnson: Approximately one six trillion. In addition, great West Lifeco a member of the Power Corporation group of companies has become a long term shareholder in Franklin resources consistent with its ongoing commitment to asset management. We are delighted to have the talented team at Putnam join us and pleased to.
Jennifer M. Johnson: Great West as a key stakeholder.
Jennifer M. Johnson: Turning now to specific results for the quarter, starting with assets under management, ending AUM increased by 6% to $1 $4 six trillion from the prior quarter and increased by 5% for the prior year quarter, primarily due to market appreciation.
Jennifer M. Johnson: Average AUM declined by 2% from the prior quarter to $1 three nine trillion and increased by 3% from the prior year quarter. Our specialist investment managers continue to produce competitive investment returns across a broad array of strategies.
Jennifer M. Johnson: <unk> performance this quarter resulted in 61%, 46%, 60% and 61% of our strategy composite AUM outperforming their respective benchmarks on a 135 and 10 year period.
Jennifer M. Johnson: Notably investment performance for the five year period jumped from 47% in the prior quarter to 60% in the recent quarter, primarily due to certain taxable fixed income strategies with interest rates at current levels fixed income opportunities are considered more attractive now and going.
Jennifer M. Johnson: Forward may provide a better total return option over high yielding cash equivalents on the mutual fund side. The majority of AUM beat their peer groups and improved percentile rankings quarter over quarter in the one three and 10 year periods. One of our largest funds managed for yield was the primary driver of.
Jennifer M. Johnson: The decline in five year performance turning to flows long term net outflows inclusive of reinvested distributions were 5 billion compared to net outflows of $7 billion in the prior quarter and net outflows of nearly $11 billion in the prior year quarter reinvested distributions were 11.
Jennifer M. Johnson: Compared to almost $3 billion in the prior quarter and $12 billion in the prior year quarter alternative net inflows were $2 7 billion driven by growth in the private market strategies, which were partially offset by outflows in liquid alternative strategies.
Jennifer M. Johnson: Our three largest alternative managers benefits.
Jennifer M. Johnson: Benefit Street partners, Clarion partners and Lexington partners.
Each had net inflows in the current quarter with a combined total of $3 8 billion.
Jennifer M. Johnson: Client interest was strong across a number of alternative strategies on wealth management platforms under the alternatives by Franklin Templeton brand in the U S. Earlier this month Lexington partners announced the closing of its latest flagship global secondary fund with $22 7 billion of total capital commitments.
Jennifer M. Johnson: Fund 10 ranks among the largest funds raised to date and significantly exceeded Lexington Prior secondary fund, which closed with $14 billion in 2020.
Jennifer M. Johnson: <unk> attracted a diverse group of over 400 investors, including public and corporate pensions sovereign wealth funds insurance companies and wealth channel distribution partners globally. We are delighted that approximately 20% of the capital raised in the fund came from the wealth management channel.
Which demonstrates the power of our coordinated global distribution network. We successfully brought together the alternatives expertise of Lexington, and our alternatives by Franklin Templeton specialist sales team and leveraged our generalist sales team who have deep relationships across.
The adviser market.
Jennifer M. Johnson: Also this month benefit Street partners closed its fifth flagship private credit fund with $4 7 billion of total capital commitments, reflecting the strong demand for the asset class BSP exceeded its fundraising target. We believe the current market opportunity and backdrop for U S direct lending is attractive.
Jennifer M. Johnson: And BSP has significant underwriting experience loan structuring expertise and focus on deep due diligence, which provides us with a significant competitive advantage BSP also announced the completion of the merger between Franklin BSP lending Corporation and Franklin BSP.
Jennifer M. Johnson: <unk> Capital Corporation business development companies BSP.
Jennifer M. Johnson: BSP believes this transaction will be immediately accretive to its shareholders and unlock nearly $700 million of capital that can be deployed into a very attractive origination environment.
Jennifer M. Johnson: Context alternative assets now represent 18% of our AUM and comprise approximately 25% of our total adjusted investment management fees for the last 12 months.
Jennifer M. Johnson: In terms of other areas of activity during the quarter multi asset net inflows were $500 million driven by canvas or custom indexing solution platform and Franklin Templeton investment solutions.
Jennifer M. Johnson: Kansas has achieved net inflows each quarter since the platform launched in September 2019, and Adam.
Jennifer M. Johnson: Has more than doubled to approximately $6 billion since the close of the acquisition. This quarter campus generated net inflows of approximately 400 million and continues to garner client interest across retail and institutional channels equity net inflows were $200 million, including reinvested distributions.
Jennifer M. Johnson: Tribunal of $8 billion, while active equities continued to be impacted industry wide by the risk off environment. We saw positive net flows into all cap growth smart beta all cap value equity income large cap value and small cap core strategies among others, although fixed.
Jennifer M. Johnson: Income net outflows were $8 4 billion client interests drove positive net flows into tax efficient global opportunistic mortgage backed securities and multi sector strategies from a regional perspective, we continue to benefit from a regionally focused distribution <unk>.
Jennifer M. Johnson: <unk>, which resulted in aggregate positive net flows in non U S regions for the third consecutive quarter for context, we now manage approximately 450 billion in non U S markets, including emerging markets that are poised to grow.
Jennifer M. Johnson: Although the U S saw long term net outflows, we were pleased to see our U S. Gross sales, excluding reinvested distributions improved by approximately 15% from the prior quarter.
Jennifer M. Johnson: We continue to see the benefit of offering investors strategies and a range of investment vehicles Etfs for instance generated net inflows of approximately $1 billion, representing the fifth consecutive quarter with net flows of approximately $1 billion, resulting in over a 40% increase in ETF AUM.
Jennifer M. Johnson: From the prior year quarter, including Putnam ETF AUM is approximately 20 billion importantly, we now offer etfs for a dozen different specialist investment managers truly bringing the best Franklin Templeton has to offer to the market earlier. This month, we launched one of the industry's first bitcoin.
Jennifer M. Johnson: Consistent with our emphasis on innovation and staying ahead of disruptive technologies SMA has continued to grow in popularity industrywide as individual investors look to customize their portfolios. According to rally associates SMA represent about two trillion in assets and are expected to reach $2.
Jennifer M. Johnson: Nine trillion by 2026.
Jennifer M. Johnson: SMA AUM ended the quarter at 125 billion and generated positive net flows for a third consecutive quarter.
Jennifer M. Johnson: We continue to make progress with SMA strategies across platforms with canvas Muni ladder and Franklin income strategies, each and a positive flow territory for the quarter. Our institutional pipeline saw increased level of fundings this quarter, bringing won but unfunded mandates to over $13 billion.
Jennifer M. Johnson: The pipeline remains diversified by asset class and across our specialist investment managers, turning briefly to financial results. Adjusted operating income declined by 18, 5% to $417 million from the prior quarter and increased by five 5% from the prior year quarter.
Jennifer M. Johnson: We continue to focus on strong expense discipline, and our net cash and investments position allows us to continue to invest in growth and innovation for the benefit of clients shareholders and employees. Finally in December Franklin Templeton was recognized as one of the best places to work in money management by pension and <unk>.
Jennifer M. Johnson: Investments. This recognition is a source of pride for us and the credit goes to all of our employees around the world who work tirelessly on behalf of our clients I'd like to sincerely thank them for their hard work and dedication to our organization.
Speaker Change: Now, let's open it up to your questions operator.
Thank you thank.
Speaker Change: 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.
Speaker Change: Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker Change: We request that you limit to one initial question and one follow up.
First question comes from Alex <unk> from Goldman Sachs. Please go ahead.
Alex: Hey, good morning, everybody. Thanks for the question.
Alex: So maybe just to get some of the numbers questions out of the way obviously with Putnam closed maybe Matt you can give us an update on a couple of items, but maybe one where do you see the management fee, excluding performance fees and kind of catch up fees jumping off point for the first quarter first calendar quarter of this year.
Matthew Nicholls: And just brought updates I guess on accretion and contribution for Putnam four for this year.
Matthew Nicholls: Okay Alex.
Matthew Nicholls: I should probably just give you the full guidance takes into perspective that will help you get through the update also.
In terms of the effective fee rate.
Matthew Nicholls: Remember last quarter I mentioned, we expect it to be around 39 basis points consistent with previous quarters, we actually ended up with $39 seven a little bit higher the reason for that is about one basis point or nine basis points has to do with the elections and catch up.
Matthew Nicholls: So if you think about that for the second quarter fiscal second quarter guide, we're expecting that to be consistent again, excluding these episodic catch up fee or any other management fee.
Matthew Nicholls: Events to about the high.
Speaker Change: Yes, hi, Jay basis points, very consistent with the previous quarter in the quarters that we presented recently.
Speaker Change: So that's in terms of Paul I'll give the annual guide in the second which includes public. So of course, we closed on January one.
Speaker Change: And so our first full quarter will actually be this guide I am thinking about it.
Speaker Change: So that would be useful to provide.
Speaker Change: The guide for the fiscal second quarter inclusive of Putnam and I will call out the individual components. So you can see that we're being disciplined with our expenses around Franklin and being transparent about the difference between Brad can expenses additions. So I mentioned, the AFR already being in the high 38% excluding any.
Speaker Change: Any.
Speaker Change: Sort of one off.
Speaker Change: Episodic revenue.
Speaker Change: In terms of compensation and benefits.
Speaker Change: Assuming a $50 million.
Speaker Change: <unk> the quarter.
Including Putnam, we'd expect total comp and benefits to be approximately $815 million. This includes $65 million.
Speaker Change: Benefits for Putnam.
Speaker Change: Just to add a perspective, we expect to be able to bring that down to about 50% to 55.
Speaker Change: By the end of the fiscal year.
Hey, Ken this assumes $50 million.
Ken: <unk> please.
Information systems, and technology, we expect to be $155 million for the quarter.
Ken: This includes $25 million.
Ken: Putnam and we expect to bring that 25 million to between $15 million to $20 million.
At the time, we reached the end about physical occupancy.
Ken: Occupancy, we expect to be approximately $80 million.
Ken: Recall in the last call I mentioned that we're going to have a period of double rent based on our consolidation of New York City office space.
Ken: <unk> million dollars.
Ken: Last quarter, I mentioned $8 million, but that was <unk>.
Speaker Change: For sure.
Joseph Heller with two.
Speaker Change: Months.
Speaker Change: Three.
Speaker Change: The double rent. This time, we have a full three months, which is 12 million for the double rent and $10 million for Putnam in this context, I wouldn't guide $10 million down yet because we're still working on real estate optimization and for G&A, we expect.
Speaker Change: Consolidated amount to be $175 million.
Speaker Change: Which includes $35 million ballpark, then we expect this to come down to about $30 million by the time we.
Speaker Change: <unk> reached the end of the.
Speaker Change: Let's see.
Speaker Change: And about fiscal yes.
Speaker Change: In terms of what this means for annual guide.
Speaker Change: Youll recall that in the last guidance, we gave I mentioned that our fiscal.
Speaker Change: Fiscal 2024.
Speaker Change: And then levels of markets and revenue expectations, we expect it to be about flat to 2023, excluding putnam and excluding performance fees and excluding the double rent in New York City.
Speaker Change: I would now that amount, which excludes putnam to about 1% to 2% higher but that's because we now anticipate all else from any revenue would be 5%.
Speaker Change: So for the year.
Speaker Change: Including Putnam and excluding performance fees.
Speaker Change: Including the $50 million of double rent.
We currently expect total adjusted operating expenses for fiscal 2004 to be about $4 55 to $4 6 billion.
Speaker Change: With respect to this assumes.
Speaker Change: <unk> expenses addition to this is about 375 to 300.
Speaker Change: 8 million.
Speaker Change: Yeah.
Speaker Change: In terms of the follow up back to your first question.
Inclusive of Putnam Putnam has a slightly lower effective fee rate. It brings the overall amount down to down about two basis points. So it brings the number for the guide for the year to about the mid <unk> mid to slightly better than mid 30.
Speaker Change: This excludes any catch up fees.
Speaker Change: Fees.
On performance fees as I mentioned at the beginning.
Speaker Change: Great. Okay, I think I got all of that or most of it and I'm sure folks will follow up as well I guess my only other follow up for you I think we've talked about putnam being around $150 million contribution to operating income.
Yes.
Speaker Change: <unk> run rate can we just get an update on where that stands now obviously their asset base is a little bit higher as well, but just wanted to get a sense, whether 150 is still kind of the run rate number we should be thinking about by the end of your fiscal year.
Yes, so just to break that down further so I will start the call with <unk>.
Speaker Change: Just to break this down a little bit so in terms of revenue. We obviously, we don't guide revenue, but we want to be useful in terms of for modeling purposes for the second quarter again fiscal second quarter Putnam revenues Standalone would be about $160 million.
Speaker Change: That $135 million is management fee revenue and $25 million is in the other revenue and thats for the Ta basically.
Speaker Change: We would have say between 85 and $100 million of expenses in the first nine months through our fiscal yes $85 million to $100 million.
Speaker Change: By the time, we reached the end of 930 at the end of our fiscal year our expense savings.
Speaker Change: For the full 2025 would be at least $150 million.
Speaker Change: This translates to get severe to your question around operating income addition, Alex this translates into probably between $150 $170 million of operating income contribution from the transaction in terms of how we think this translates into obviously there is a lot of moving costs below the line.
Speaker Change: But how this translates into accretion dilution.
Speaker Change: Notably just very slightly accretive maybe one census about that.
In the second fiscal quarter for the first fiscal quarter that we had about limits, it's accretive right away, but Tommy reached the full year.
Speaker Change: It's probably mirror.
Speaker Change: A single day.
Speaker Change: Accretion and that translates into about a 3% increase in situations.
Speaker Change: So yes 24.
So on the nine months.
That's where we expect things to be assuming revenue stays where it is today market stay where they are today.
Great. Okay Super helpful. Thanks, So much ill hop back in the queue.
Speaker Change: Okay.
Speaker Change: Thank you. The next question comes from Craig Siegenthaler from Bank of America. Please go ahead.
Craig Siegenthaler: Thanks, Good morning, everyone hope, you're all doing well.
Craig Siegenthaler: My question is on the alternatives net flow trajectory.
Craig Siegenthaler: If we back out the two flagship fund raises at Lexington and benefit Street.
Craig Siegenthaler: There would have been a large swing in net flows over the last 12 to 18 months. So I wanted your perspective on the forward trajectory.
Craig Siegenthaler: In terms of net flows from all and are you expecting other funds that kind of step up in filling that gap.
Speaker Change: Great. Thanks, Craig.
Speaker Change: So in the last two years, we have had about $40 billion in fund raising for private markets.
Speaker Change: That was offset a bit by $12 billion in net outflows in the liquid alternatives that just gives you a little bit of perspective there.
We anticipate this year.
Speaker Change: Fund raising but team between 10 and 15 billion in the private markets.
Speaker Change: And would expect in this environment.
Speaker Change: That translate into alternatives.
Alternative asset revenue growth in the mid single digits.
So far in Q1.
Speaker Change: Probably have seen that we raised $5 billion in the private markets and that.
Speaker Change: Closing of Lexington flagship fund and BSP.
Speaker Change: In the same period, we had about $1 1 billion in net outflows in the liquid alts.
Speaker Change: Just to kind of look forward for the rest of year and we can't talk about specific funds, but the areas that we think theres strong interest.
Speaker Change: Alternative credit specifically like direct lending.
Speaker Change: See interest both in the U S and Europe.
Speaker Change: There is opportunities in the alternative credit and special situations opportunistic real estate debt as well as CLO and just on that real estate debt point LNG.
Speaker Change: Yes.
Speaker Change: Regional banks, having retracted in that space, we think there's both an opportunity to do very well there.
Speaker Change: And in a strong client interest in that space.
Speaker Change: With respect to secondary just as reminder, Washington does a lot more than just there.
Their flagship offering to have offerings in middle market and called best offerings.
Speaker Change: 2023 was the third consecutive year, where our secondary industry surpassed $100 billion in Sunrise and we think that that continues to be strong demand and just again.
Speaker Change: Supply and demand issue that keeps.
Speaker Change: Keep speeds very high.
Speaker Change: <unk> six trillion deployed in private equity and only 150 billion deployed in secondaries and strong demand.
Speaker Change: Lps and GPS because of liquidation as being down and distributions being down to half.
Speaker Change: A portion of our secondary portfolio has picked up.
Speaker Change: With respect to real estate, our three largest funds at Clarion arm perpetually fund raising.
Speaker Change: We see opportunities to continue to expand in Europe.
Speaker Change: And then we're incredibly excited about the success that we had in the wealth channel.
Speaker Change: Lexington, where 20% of the fund raise of Lex 10 funds came from the wealth channel and this has been years of building up our capabilities with the ft alternatives, where we built both.
A team of specialists, the 30, plus specialists to help assist our wholesaling team, we've leveraged our academy to not only educate our own.
For us, but also to help our distribution partners educate their advisers on how to think about this and so.
Speaker Change: It's a lot of years in the making and we're really excited to see it come together with this fund raise but that same expertise is going to be very helpful. In both private credit as well as real estate.
Speaker Change: And Jamie I would add two things in terms of the momentum we've had in the wealth channel.
Speaker Change: One is the success, we've had to date with with things like Lexington, meaning that we're able to now have more meaningful conversations with our distribution partners about calendar placement many many quarters into the future, which really helps us plan our product launches at the same time, we're now in a position where our distribute.
Speaker Change: <unk> partners want to work with us to co create products. So we're working on doing that together so that the products we come to market with.
Speaker Change: In the wealth management channel are meeting their needs. The final item is.
Speaker Change: That a lot of our success to date has been in the U S markets in terms of wealth management and we're now building out our specialist capabilities, our education, our academy et cetera.
Speaker Change: In markets outside of the U S, where we hope to have a similar level of success in the wealth management channels there.
Speaker Change: Okay.
Speaker Change: Thank you guys.
Speaker Change: Mhm.
Speaker Change: Thank you. The next question comes from Bill Katz from TD Cowen. Please go ahead.
Okay. Thank you very much for taking the question. So first question, maybe switch up the conversation a little bit and just talk about capital you.
William Katz: You announced a.
William Katz: Pretty sizable repurchase authorization have some equity that you have issued in concert with the transaction with Putnam looking at your balance sheet looks like Youre, saying about net cash of zero, if you sort of adjust for the debt how should we be thinking about maybe the tempo or pacing of capital deployment or buyback as we think through the year.
Speaker Change: Yes, Thanks, Bill I'll take that and then Jenny maybe let's call. It also.
So yes.
Jennifer M. Johnson: Sure Bill.
Jennifer M. Johnson: We're focused on making sure that we.
Maintain our dividend and the same trajectory that's been on since the 19 eighties.
Jennifer M. Johnson: We are very focused on.
Organic growth investments there is a ton going on as you all know in the industry.
And there's a lot of call on capital in total growth and internal.
Jennifer M. Johnson: Projects and investments.
There are two most important things that we've got debt service coming up this year with $250 million, obviously, if the market becomes.
Jennifer M. Johnson: More reasonably priced in terms of that perhaps we access the debt markets.
Jennifer M. Johnson: At the end of the year or so about that but we want to position ourselves to be able to pay that debt down without cash absolutely going to hedge our employee grants as we always explain and then what I'd say is that.
Jennifer M. Johnson: And this is sort of the interplay between M&A and share repurchases. We've been very active obviously as you know in terms of M&A to make sure. We've got the right strategy as it both institutional and retail and so on as we've discussed extensively.
Jennifer M. Johnson: And when that slows down which has done for us.
Jennifer M. Johnson: We've got one or two more payments. The next one to two years in terms of M&A.
Speaker Change: That's done.
Speaker Change: Be in a position where the M&A, we look at it is much more strategic.
Speaker Change: Involving shares like we've done with with Putnam greatly.
Speaker Change: Slide for example, or it's involving much smaller M&A transactions to fill in gaps a few gaps that we've got and that means we can be more opportunistic share repurchases and as you've seen from the last couple of quarters, we certainly picked up a little bit.
Speaker Change: But the backdrop is complicated markets quite volatile is a lot going on globally that influences the market. So we're constantly assessing that backdrop, but.
Speaker Change: I would say that.
Speaker Change: We would hope all else remaining equal to to move into more of a capital return position as we've demonstrated.
Speaker Change: Dividend and share repurchase over the last couple of quarters.
Speaker Change: The future versus being very much focused on M&A.
Okay. That's super helpful. And this is a follow up Jamie perhaps for yourself or Matt or Adam and thanks for taking the questions any sense or can you give us an update on how the insurance mandates are the momentum is building. There I think there was some 20 odd billion that should flow in so once the deal has been completed and then how do you think about that.
Speaker Change: Backlog behind that and maybe the broader question underneath that is what are the early stage discussions with enhanced distribution opportunity.
Now that the transaction is complete.
Jamie: Well, so I mean, obviously, we have the 25 billion that we've talked about with great West life.
Speaker Change: That will come in through through the year and it's a mix of multiple of our sand with the with the bulk of it actually going to western but goes.
Speaker Change: It is alternatives in there and.
Speaker Change: As well as fixed income and equity.
Speaker Change: And we announced that we're going to be a sub advisor for vulnerable.
Speaker Change: And part of that is because we when we acquired western we acquired real expertise and understanding the insurance space and we've been able to leverage that capability.
Speaker Change: More broadly, but Adam do you want to you want to talk about some some additional things.
Adam Spector: Okay, I would say just in terms of scale, our insurance business is about $170 billion now and that's not including the flows we've talked about from the power related company. So it's a very significant business as Jenny said.
Adam Spector: To be successful in a lot of the general account area, you've not only.
Adam Spector: Need to have investment expertise, but really insurance domain specific expertise technology compliance.
Adam Spector: One of the few firms we think are combined both of those.
Adam Spector: And then the.
Adam Spector: Our partnership with Power Corp has also allowed us to co create products with them.
Adam Spector: That we think will be very successful in the marketplace and youre seeing some launches there.
As well the.
Team there has been at Putnam has been very successful in the DC channel as well as in insurance and we think bringing those salespeople onto our team now that they have a wider array of products to sell we will really hockey stick our efforts there as well.
Adam Spector: And just a little bit more perspective on the $25 billion Bill just to be clear right now for all intents and purposes for modeling purposes. We don't have any of that in I mean, we have a little bit, but it's not really nothing's really hit the revenue line yet.
We expect as Jenny mentioned about two thirds of this to be kind of investment grade and a little bit of emerging market corporate credit across a broad range about specialist investment managers.
Adam Spector: You think about modeling.
Adam Spector: It's probably.
Adam Spector: Appropriate to think about the effective fee rate being in the mid teens I think Jenny mentioned that as a whole this will likely to begin in earnest later on this quarter that we're in now so kind of March time, maybe March April that sort was taken of course, we will update you when we have large.
Adam Spector: Those associated with this we will we provide that context and make sure. We're transparent with you about when that comes in but just to be clear. It beyond the 25 billion, we expect to grow with this a lot of opportunities to grow beyond the 25.
Adam Spector: And even with this we're just alongside other asset managers that also have important relationships with the Tao group of companies. So we're just alongside them, we're increasing our market shift frankly.
Adam Spector: It should be.
Adam Spector: Aligned with what we.
Speaker Change: Got it and the size of about of our franchise.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Daniel Fannon from Jefferies. Please go ahead.
Thanks, Good morning, a couple of clarifications, Matt just wanted to confirm the <unk> guide for comp that was I believe.
Daniel T. Fannon: 815 around that included $50 million of performance fees did the full year guide of the $4 55 to $4 six six assume a $50 million a quarter performance fee contribution.
Speaker Change: Yes, plus the.
Speaker Change: Plus the 93 that we had in the first quarter.
Speaker Change: So it's $93 50 50 50.
Speaker Change: Got it Okay. That's helpful. And then just on the Lexington, what's happening what's the I'd like to just clarify what's in the numbers now.
Speaker Change: AUM and flows that we've seen as of 12 31, and then on in terms of catch up fees. We got the disclosure for this quarter and last but should we assume given the final close in January another round of catch up fees here for the.
Speaker Change: The March quarter.
So theres no theres no more catch up fees to book at this point.
Speaker Change: At its last fundraising.
Speaker Change: In the slide 12, 31, and that's when they sent a press release out and indicated that we have $22 seven.
Speaker Change: 7 billion. Additionally, AUM and that's all included in our reported numbers.
And then with Dsp's fundraise be in there as well and at 12 31.
Speaker Change: No not yet.
Okay understood. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Brennan Hawken from UBS. Please go ahead.
Brennan Hawken: Thanks for taking my questions. So you spoke earlier about fixed income and the attractiveness and demand.
Brennan Hawken: And a shift.
Brennan Hawken: From a cash and short duration investments what are you specifically seeing as far as RFP activity.
Brennan Hawken: And could you talk about western and their level of engagement with their client base.
Yes, so maybe just a little bit of color kind of on the industry, but he talks about the $7 seven trillion in money market funds and what's going to be trends transferring from cash into other investments.
Brennan Hawken: First of all Western money market fund is primarily institutional and institutions tend to build in the first two quarters and then spend in the second two quarters having.
Brennan Hawken: Having said that and we don't have a meaningful presence in the retail.
Brennan Hawken: Money market business. However, obviously, we have relationships with those distributors, which we do that's where you're going to capture that transition. So even if you don't have the money market funds. It doesn't mean you get the get the transition. So we've had actually good interest and positive flows in some categories in our fixed income Unfortunately, Max it's masks.
Brennan Hawken: A bit by some performance challenges we've had in the in the core strategies.
Brennan Hawken: Strategies over half of our top 10 gross selling.
Brennan Hawken: Our funds are in the fixed income space and actually from a vehicle standpoint, where positive flows in Etfs and.
Brennan Hawken: Meeting ladder SMA so.
Brennan Hawken: It's really important to think about this as being vehicles gnostic.
Brennan Hawken: Fixed income gross sales are up 8%.
We've had the greatest portion of our institutional pipeline is actually fixed income and multi sector credit high yield global income and western to.
Brennan Hawken: To your question about western they represent the largest portion of that.
Brennan Hawken: So western having good conversations with clients.
Brennan Hawken: Ben.
Brennan Hawken: Lot of very good performing strategies, but have struggled obviously in their core strategy.
Brennan Hawken: Global op.
Brennan Hawken: We're positive in things like tax efficient global opportunistic mortgage backed securities, but I think the most and by the way Putnam brings in really top performing fixed income performance as well plus additional products and things like stable value Ultra ultra short duration.
Brennan Hawken: Intermediate core and really good performance in meetings as well so.
Brennan Hawken: We think cash is still attractive.
Brennan Hawken: And frankly.
Brennan Hawken: Mo would argue the risk reward you got cash, yielding 5% and saying that youll be at least out of the house.
Brennan Hawken: Youre not going to see the full rotation until you see some rate cuts as opposed to just peaking and we just think we're incredibly well positioned both in public fixed income traditional fixed income as well as private credit.
Brennan Hawken: To be able to capture this and RV.
Brennan Hawken: Our view is.
Brennan Hawken: What we're seeing is.
Demonstrates that we're well positioned there.
Speaker Change: I don't know Adam do you want to add anything.
Adam Spector: Jenny I would just add that.
Adam Spector: I think you are spot on that we've really seen strength in a number of areas of fixed income that was masked by some of the outflows in core and core plus but the performance in core and core plus turned around if you take a look at the end of the year core is up 37 basis points on the index core plus 124.
Adam Spector: And traditionally those products get very very strong inflows after the fed stops hiking. So we're in a position now from a performance standpoint, as well as in the rate cycle.
Adam Spector: Those products are poised to do quite well.
Speaker Change: Great. Thank you for all that color and then just Matthew I wanted to reconfirm because a lot of times when you speak to.
Speaker Change: Fences, you speak to it ex <unk>.
Speaker Change: Some items, but it sounds like the $4 $5 five and the $4 six for the fiscal quarter would be inclusive of the double rent would also include the expectation the actual performance fees from this past quarter plus 50 expected in the next few as well as the nine months of Putnam do I have that correct.
Speaker Change: <unk>.
Speaker Change: That's right yes.
Speaker Change: And just to the reason why I went through the detail. It is because I wanted to be very clear that if you take them out of the equation.
Speaker Change: Our expenses.
Speaker Change: Like 1% or so about that year over year.
Speaker Change: And Thats only because again, we don't want me to about revenue.
From a guide perspective, it's almost impossible to go ahead as you know but.
Speaker Change: That does assume 5% higher revenues.
Speaker Change: Often people ask us about margin the relationship between revenue and expenses and leverage operating leverage in the system well you can see that if we expect revenue to go up 5%, we don't expect our expenses to grow between one and 2% on the foundational level.
Speaker Change: And then in addition to that we're adding tuchman, but of course, we're in the process of reducing expenses.
Speaker Change: Around the Putnam acquisition, that's when you get to all these.
When you put all that together you get to the $4 55 to $4 six.
Speaker Change: The $1 billion net.
Speaker Change: Next year, we expect that to.
The further reduction in expenses, I mentioned $3 $75 million for nine months of expenses for Putnam.
Speaker Change: We expect.
Speaker Change: On a dollar for dollar basis for that to come down.
Speaker Change: For 2025, I've said to you that.
Speaker Change: For the year, we expect to actually realize $85 million to $100 million of expenses expense savings from the Putnam transaction.
Speaker Change: For a full year, that's $150 million at least and expense savings and that's what translates into about $150 million to $170 million of operating income.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: 150, that's the run rate when you exit your fiscal year basically right.
Speaker Change: That's exactly right, yes, so on the last day at.
At the very least on that.
Speaker Change: I think we could be a little bit better than this on the last day nine C. When you times that number of savings by the year $250 million at least.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Michael Cyprus from Morgan Stanley. Please go ahead.
Michael J. Cyprys: Hey, good morning, Thanks for taking the question I wanted to ask about retirement with Putnam and the great West strategic relationship. This accelerates your push into the retirement channels. So if you could talk about some of the steps you're taking and may take over the next 12 months to capture the growth opportunity that you see maybe you can elaborate on that as well as which products you think might resonate.
Thanks.
Adam Spector: Adam sure. Thanks, Mike.
Speaker Change: Yeah, So first of all the.
Adam Spector: Putnam acquisition gave us capabilities and I think those capabilities are really important in terms of things like stable value, where there is $18 billion.
Adam Spector: Assets Ultra short and target date, if you take a look at target data to third.
Adam Spector: Industry DC AUM right now had $150 billion in net flow last year. We can now play in that segment, where we haven't really been able to play effectively historically so from a product standpoint, we're in a much stronger position I would also say that from a sales force.
Adam Spector: <unk> position when we took folks in from Putnam one of the areas, where we added most significantly.
Adam Spector: That retirement and somewhat in the insurance channel as well. So we have just have a much much larger field force so that lets us be better partners both of those things both the expanded field force the expanded products.
Adam Spector: <unk> partners with the power related companies, but with all of our insurance partners and I think that's what's really important to mention is this is not just about being stronger with one partner, it's about being stronger in insurance and retirement.
Adam Spector: Across the board Putnam's D. C assets are about 30% of overall AUM, it's just a real strength in bringing that DNA into Franklin.
Adam Spector: We will be a real benefit and the relationship with empower.
Adam Spector: Allows us to build some custom products together that we can go to market with that we think will really help us win because we can have multiple sales force is now selling the same products, which just gives us leverage.
Speaker Change: Great. Thanks, and just a follow up question on the technology front, just curious how youre thinking about front to back outsourcing opportunities.
Speaker Change: <unk> the tech stack from here, maybe you could speak to some of the opportunities that you might see from improving data integration across multiple systems that you have what sort of factors go into consideration in any sort of lessons learned you might take away from others that are partnered externally on this front.
Speaker Change: Yes. Thanks.
Speaker Change: Mike I'll take that and then Jenny maybe would like to comment.
We're all very involved in this very critical decisions for the company. So as you know we outsourced the transfer Agency Fund administration and thoughts about technology as we've described beforehand.
Speaker Change: We then moved on to.
Speaker Change: Understanding the potential opportunity for <unk>.
Effectively partnering with one single provider for all.
Speaker Change: Investment technology platform, that's a huge undertaking a process that takes a year 18 months just to go through all the analysis, what I'd say on this is the number one point.
And most important to us candidly is that all of our specialist.
Speaker Change: <unk> teams are on board with moving to a single investment technology platform.
We've done a huge amount of work and I would say that we are close to deciding on who that partner.
Speaker Change: Should be.
Speaker Change: It's going to be a long time to implement.
Speaker Change: I wish it was faster, but it's slow it's a very long and complicated process before we can take something like three years to implement so to give you guidance on expense reductions and how that's going to be applied.
Speaker Change: Totally.
Speaker Change: Premature at this stage, but we are encouraged by what we see and what we think we can achieve from this transaction, but candidly there's so many other demands.
Speaker Change: To invest like artificial intelligence data additional teams and.
Speaker Change: Resources that they require to be leader.
Speaker Change: Leading in the industry that while we expect long term savings to be meaningful over time, we've got a lot of other things to circulate that those savings into but again, we'll share that with you when we're through the process with with the partner that we expect to.
Speaker Change: Announced here in the coming quarter or two or so.
Speaker Change: So the update on where the churn do you want to add anything to that Matt.
Matthew Nicholls: Matt that was perfect.
Matthew Nicholls: Great. Thanks, so much.
Matthew Nicholls: Thank you. The next question comes from Patrick Davitt from Autonomous. Please go ahead.
Patrick Davitt: Hey, good morning, everyone.
Alright first on cotton as.
Patrick Davitt: As we try to kind of level set our model expectations could you give an update on how the net flow picture track from announcement through the December quarter with and without reinvested dividends.
Yes, excluding reinvested dividends, it's slightly positive.
Patrick Davitt: No obviously, we we.
Patrick Davitt: We closed the transaction as you know Patrick on January one.
Patrick Davitt: I'd say in the quarter before that.
The period, we're in now.
Patrick Davitt: Kind of flattish, excluding reinvested dividends slightly pulse Adam.
Speaker Change: And I'm, just going to throw one thing in Putnam Scott.
Speaker Change: 85% of their AUM, beating their peers in all time periods, 87% of our mutual funds are are 91% of our mutual funds rated four and five star rating sell both on the equity and fixed income they've got phenomenal performance.
Great. Thanks, and then one housekeeping item it wasn't clear to me earlier when you were talking about this but the.
Speaker Change: $5 5 billion ish win from Great West announced last week is that a part of the 25 billion or should we consider it incremental.
Speaker Change: So that incremental right.
Speaker Change: Yes, I think thats from the.
Yes from the retirement channel so.
Speaker Change: Good morning Bill.
Speaker Change: Incremental great. Thank you.
Speaker Change: Thank you and the next question comes from Brian Bedell from Deutsche Bank. Please go ahead.
Brian Bedell: Great. Thanks. Good morning, Thanks for taking my question I just wanted one clarification also I think.
Im not sure you mentioned this but.
Brian Bedell: The alternative.
Brian Bedell: Yes, I think the $5 billion of private markets.
Brian Bedell: Correctly $5 billion of private markets less about $1 billion of liquid also is that for the.
Brian Bedell: The quarter just reported or.
Brian Bedell: For the current market.
Brian Bedell: Well so BSP.
Brian Bedell: They closed their fund in.
Brian Bedell: This quarter.
Brian Bedell: And so you don't see those flows in last quarter. So we're talking about in.
Brian Bedell: Matt what was the date that they closed.
Brian Bedell: For Canada.
Brian Bedell: Yes.
Matthew Nicholls: Like two weeks ago.
Matthew Nicholls: Does this quarter, so and just the difference BSP.
Matthew Nicholls: Charges when they call capital.
Matthew Nicholls: I don't have catch up fee cycle Lexington does.
Speaker Change: Yes, perfect. Okay. That's.
Speaker Change: Perfect and then just more broadly I guess just.
Speaker Change: If you're a franchise growing nicely maybe Jenny if you.
Speaker Change: And Adam also or Matt just talk about the.
Speaker Change: Your long term vision for active.
Speaker Change: Semi transparent Etfs.
Speaker Change: We got 12 managers are using these products are up to $20 billion in.
Speaker Change: And that's where ETF, which of course includes a lot of smart beta.
Speaker Change: Right.
Just how youre thinking about this over say the next two or three or two or three years the demand from the marketplace for Etfs, whether you think it might cannibalize mutual funds, where you actually think you you can develop strategies that will be incremental.
Speaker Change: And incrementally growing sales on top of your mutual fund.
Speaker Change: So I think the key to think about with Etfs and frankly SMA.
Speaker Change: A lot of the growth is driven from the fact that the world is moving more towards fee based and how distribution fees are paid in things like traditional mutual funds.
Speaker Change: Then obviously the tax efficiencies and Etfs, So we view it as our expertise is our investment risk adjusted investment capabilities risk adjusted returns.
Speaker Change: We have very small passive.
Speaker Change: Sweet in the Etfs, but we really focus on active management and we are agnostic to the vehicle in which we deliver that so we look at the ETF is it as a vehicle, which works really well in certain channels.
Speaker Change: On the wealth side, you're starting to see more growth internationally.
Speaker Change: Etfs more discussions like in places I, just came from Asia, where you haven't seen that kind of penetration there, but they are interested in them.
Speaker Change: And then things like SMA.
Speaker Change: Also.
Speaker Change: Very much growing in the wealth channel.
Speaker Change: And we look at Kansas is a great way to bring tax optimization to the SMA platform.
Speaker Change: So that it can be leveraged as a tool to provide.
Speaker Change: Tax efficient active SMA two.
Speaker Change: <unk> to the market.
Speaker Change: We've had close to $1 billion a quarter inflows into Etfs I think we are now over 21 billion.
Speaker Change: We've added putting them into it.
Speaker Change: Really great success diversifying.
Our strategy into these other types of vehicles. So the Franklin income fund now we have the Franklin income focused ETF, which is again.
Speaker Change: Really well received in the market since it was launched as well as having traction outside the U S. So.
Speaker Change: Etfs are incredibly important to us.
Speaker Change: Yes, it will probably cannibalize some of the mutual funds.
Speaker Change: But in.
Speaker Change: In our case, where we have been underpenetrated in the areas of retirement, that's actually been an area, where the tax benefit of Etfs hasn't made a difference and you are seeing very strong.
Speaker Change: Support for mutual funds in the retirement channel so as we grow there we're able to.
Speaker Change: Makeup for any of that cannibalization in that retirement channel. While also growing our Etfs. So Adam do you want to add anything to that.
Adam Spector: I would just reiterate the point that for US Etfs is about the vehicle not about being passive just to put some numbers around that.
Adam Spector: 24% of our assets our smart data in 36% are active so our passive ETF business, that's only 40% of our AUM is in passive.
Adam Spector: And with only 20% passive was only 20% of our ETF flow for the quarter, So as more and more people begin to consider active management within an ETF wrapper, we think thats, great to us and to the point about cannibalization.
Adam Spector: We would also say that direct indexing is the real threat to mutual funds and that's why we're so thrilled to have canvas onboard to see the growth there to see our ability to actually use canvas to manage active portfolios now as well, we think that puts us in a very good position.
Adam Spector: And I think that the direct indexing is more of a threat to the passive mutual funds.
Adam Spector: Okay and passive Etfs.
Adam Spector: Yes.
Speaker Change: Great color. Thank you so much.
Speaker Change: We had a we had another question come in to clarify a point around guidance.
Speaker Change: On performance fees, so just to be clear the 815.
Speaker Change: Around the fiscal second quarter guidance includes an assumption of $50 million of performance fees.
Speaker Change: Annual guide of four five.
Speaker Change: 6 billion is excluding performance fees, just as you know, we always give out annual guidance excluding performance fees just wanted to be.
Speaker Change: Clear on that.
Fully inclusive of Putnam it includes the.
Speaker Change: The double rent.
Speaker Change: Excludes performance fees.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes today's Q&A session I would now like to hand, the call back over to Jenny Johnson fragrance, President and CEO for final comments.
Jennifer M. Johnson: Great well. Thank you everybody for participating in today's call and once again I just want to thank our employees for their hard work and dedication to be able to deliver this quarter and we look forward to speaking to you all again next quarter. Thanks, everybody.
Speaker Change: Thank you. This concludes today's conference call you may now disconnect.
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