Q3 2024 Franklin Resources Inc Earnings Call - Q&A
Welcome to Franklin Resources Earnings Conference Call for the quarter ended June 30th, 2024.
Operator: for the quarter ended June 30th, 2020. Hello, my name is Sylvie, and I will be your call operator.
Sylvie: Hello, my name is Sylvie, and I will be your call operator today. As a reminder, this conference is being recorded, and at this time all participants are in a listen-only mode. And I would like to turn the conference over to your host,
Operator: As a reminder, this conference is being recorded. And at this time, all participants are in a listen-only mode, and I would 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.
Sylvie: Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.
Selene Oh: Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts or forward-looking statements, are within the meaning of the Private Security Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements.
Selene Oh: Good morning, and thank you for joining us today to discuss your quarterly results.
Selene Oh: These and other risks, uncertainties, and other important factors are described in more detail in Franklin's 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, Selene.
Speaker Change: Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts or forward-looking statements, was in the meaning of the Private Securities Litigation Reform Act of 1995.
Speaker Change: These forward-looking statements involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements.
Speaker Change: These and other risks, uncertainties, and other important factors are just described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.
Speaker Change: Now, I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.
Jennifer M. Johnson: Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the third fiscal quarter of 2024. I'm joined by Matt Nicholls, our CFO and COO, and Adam Spector, our Head of Global Distribution. We'll answer your questions in a few minutes, but first, I'd like to review some highlights from the. During our third quarter, investors continued to be faced with a complex investment landscape due to dynamic financial markets amidst macroeconomic, geopolitical, and election uncertainty. Starting with public equity markets. The S&P 500 reached an historic milestone earlier this month, closing above 5,500 for the first time and continuing its streak of strong performance in 2024.
Jennifer M. Johnson: Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the third fiscal quarter of 2024. I'm joined by Matt Nicholls, our CFO and COO, and Adam Spector, our Head of Global Distribution.
Jennifer M. Johnson: We'll answer your questions in a few minutes, but first I'd like to review some highlights from the quarter.
Jennifer M. Johnson: Likewise, the NASDAQ 100 also hit record levels, surpassing the 20,000 mark. However, we've seen a pullback in late July as big tech earnings have disappointed, and value has outperformed growth stocks month to date. The two big themes of artificial intelligence and inflation drove growth stocks to outperform value stocks in the first half of the calendar year. AI is impacting companies well beyond megacap tech companies. Everyday companies and governments are examining how AI will improve or disrupt their respective operations and business models.
Jennifer M. Johnson: During our third quarter, investors continued to be faced with a complex investment landscape due to dynamic financial markets amidst macroeconomic, geopolitical, and election uncertainty.
Jennifer M. Johnson: Starting with public equity markets.
Jennifer M. Johnson: The S&P 500 reached an historic milestone earlier this month, closing above 5,500 for the first time and continuing its streak of strong performance in 2024.
Jennifer M. Johnson: Likewise, the NASDA Q1 00 also hit record levels, surpassing the $20,000 mark. However, we've seen a pullback in late July as big tech earnings have disappointed and value has outperformed growth stocks month-to-date.
Jennifer M. Johnson: The two big themes of artificial intelligence and inflation drove growth stocks to outperform value stocks in the first half of the calendar year.
Jennifer M. Johnson: AI is impacting companies well beyond megacap tech companies. Everyday companies and governments are examining how AI will improve or disrupt their respective operations and business models.
Jennifer M. Johnson: Inflationary trends continue to moderate, which is supportive of the market, but because stock market returns have been so highly concentrated, equity allocations are poised to broaden, as we've seen in the last few weeks, which could provide a sustained boost to sectors and regions that have been overlooked. This trend will likely create investment opportunities favoring active managers. Meanwhile, on interest rates, consensus estimates currently expect two rate cuts by the Federal Reserve in the remainder of the year, which looks broadly appropriate to us. Recent FedSpeak signals greater comfort with the latest progress on disinflation and acknowledges some signs of weakening growth momentum.
Jennifer M. Johnson: Inflationary trends continue to moderate, which is supportive of markets.
Jennifer M. Johnson: But because stock market returns have been so highly concentrated.
Speaker Change: Equity allocations are poised to broaden, as we've seen in the last few weeks, which could provide a sustained boost to sectors and regions that have been overlooked. This trend will likely create investment opportunities favoring active managers.
Speaker Change: Meanwhile, on interest rates, consensus estimates currently expect two rate cuts by the Federal Reserve in the remainder of the year, which looks broadly appropriate to us.
Speaker Change: Recent FedSpeak signals greater comfort with the latest progress on disinflation and acknowledges some signs of weakening growth momentum.
Jennifer M. Johnson: As we get closer to the Fed's rate-cutting cycle, we expect traditional fixed-income sectors to regain their place as a primary source of yield as cash begins to look less attractive. While spreads are tight at their current levels, we are not anticipating a sharp deceleration in activity, and our fixed income managers continue to find opportunities at attractive yields. Private markets continue to thrive, and our specialist investment managers are seeing very attractive yields in the private credit space, and secondary private equity is seeing near unprecedented levels of pricing power.
Speaker Change: As we get closer to the Fed's rate-cutting cycle, we expect traditional fixed-income sectors to regain their place as a primary source for yield as cash begins to look less attractive.
Speaker Change: While spreads are tight at their current levels, we are not anticipating a sharp deceleration in activity, and our fixed-income managers continue to find opportunities at attractive yields.
Speaker Change: Private markets continue to thrive and our specialist investment managers are seeing very attractive yields in the private credit space and secondary private equity is seeing near unprecedented levels of pricing power.
Jennifer M. Johnson: As investors weigh the impacts of these trends, we're seeing a pickup in money in motion and investors becoming more active with alternatives, fixed income, and select equity sectors as top priorities. We also continue to see the trend of clients wanting to work with fewer managers, given the dynamic, complex nature of current markets.
Speaker Change: As investors weigh the impacts of these trends, we're seeing a pickup in money in motion and investors becoming more active with alternatives, fixed income, and select equity sectors as top priorities.
Speaker Change: We also continue to see the trend of clients wanting to work with fewer managers, given the dynamic, complex nature of current markets.
Jennifer M. Johnson: In addition, we continue to have success, engaging more and more in a consultative way with large clients, leveraging the full strength of our firm. One of the benefits of partnering with Franklin Templeton is the breadth of capabilities we offer through a single global platform, making us a true partner for clients around the world. We offer access to specialist investment managers across public and private markets and asset classes and continue to broaden our investment capabilities to help clients achieve better outcomes. Now, turning to the highlights from the quarter.
Speaker Change: In addition, we continue to have success, engaging more and more in a consultative way with large clients, leveraging the full strength of our firm.
Speaker Change: One of the benefits of partnering with Franklin Templeton is the breadth of capabilities we offer through a single global platform, making us a true partner for clients around the world.
Speaker Change: We offer access to specialist investment managers across public and private markets and asset classes and continue to broaden our investment capabilities to help clients achieve better outcomes.
Jennifer M. Johnson: Ending AUM was $1.65 trillion, flat from the prior quarter and an increase of 15% from the prior year quarter, primarily due to the addition of Putnam, as well as positive markets. Average AUM increased by 3% from the prior quarter to $1.63 trillion and increased by 15% from the prior year quarter. In terms of investment performance, our investment teams have remained true to their distinct disciplines and time-tested approaches. Investment performance remained consistent across the 1, 3, 5, and 10-year periods.
Speaker Change: Now turn to the highlights from the quarter.
Speaker Change: Ending AUM was $1.65 trillion, flat from the prior quarter and an increase of 15% from the prior year quarter, primarily due to the addition of Putnam as well as positive markets.
Speaker Change: Average AUM increased by 3% from the prior quarter to $1.63 trillion and increased by 15% from the prior year quarter.
Speaker Change: In terms of investment performance, our investment teams have remained true to their distinct disciplines and time-tested approaches.
Speaker Change: Investment performance remained consistent across the 1, 3, 5, and 10 year periods.
Jennifer M. Johnson: This quarter, 53%, 49%, 52%, and 70% of our strategy composite AUM outperformed their respective benchmarks on a 1, 3, 5, and 10-year basis. Trina flows, long-term net outflows were $3.2 billion, and reinvested distributions were $3.6 billion compared to $3.1 billion in the prior quarter and $3.5 billion in the prior year quarter.
Speaker Change: This quarter, 53%, 49%, 52%, and 70% of our strategy composite AUM outperformed their respective benchmarks on a 1, 3, 5, and 10-year basis.
Speaker Change: Turning to flows, long-term net outflows were $3.2 billion. Reinvested distributions were $3.6 billion compared to $3.1 billion in the prior quarter and $3.5 billion in the prior year quarter.
Jennifer M. Johnson: $5.9 billion was funded out of the previously announced $25 billion allocation from Great West Life Co., bringing the total funded to $20.2 billion. We continue to make progress executing on our long-term plan of diversification across asset classes, investment vehicles, and geography. Client demand led to positive net flows in multi-asset and alternative strategies during the quarter. Multi-asset net inflows were $1.8 billion, driven by positive net flows into Canvas, Franklin Income Fund, Fiduciary Trust International, and Franklin Templeton Investment Solutions.
Speaker Change: $5.9 billion was funded out of the previously announced $25 billion allocation from Great West Life Co., bringing the total funded to $20.2 billion.
Speaker Change: We continue to make progress executing on our long-term plan of diversification across asset classes, investment vehicles, and geographies.
Speaker Change: Client demand led to positive net flows in multi-asset and alternative strategies during the quarter.
Speaker Change: Multi-asset net inflows were $1.8 billion and driven by positive net flows into Canvas, Franklin Income Fund, Fiduciary Trust International, and Franklin Templeton Investment Solutions.
Jennifer M. Johnson: The Investment Solutions team takes Franklin Templeton's best thinking and leverages our firm-wide capabilities across public and private asset classes to help provide solutions tailored to our clients' needs. Investment Solutions ended the quarter with AUM of nearly $80 billion across the. Alternative net inflows were $1.4 billion, driven by growth into the private market strategy.
Speaker Change: The Investment Solutions team takes Franklin Templeton's best thinking and leverages
Speaker Change: Our firm-wide capabilities across public and private asset classes to help provide solutions tailored to our clients' needs. Investment Solutions ended the quarter with AUM of nearly $80 billion across the firm.
Speaker Change: Alternative net inflows were $1.4 billion driven by growth into private market strategies.
Jennifer M. Johnson: Our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners, generated a combined total of $1.1 billion of net inflows. And Franklin Venture Partners generated net inflows of over $300 million. Benefit Street Partners continued to raise funds in alternative credit. In May, we announced the final close of its BSP Special Situations Fund II with $850 million of total capital commitments exceeding its target.
Speaker Change: are three largest alternative managers.
Speaker Change: Benefit Street Partners, Clarion Partners, and Lexington Partners generated a combined total of $1.1 billion of net inflows. And Franklin Venture Partners generated net inflows of over $300 million.
Speaker Change: Benefit Street Partners continued to raise funds in Alternative Credit. In May, we announced the final close of its BSP Special Situations Fund II, with $850 million of total capital commitments exceeding its target.
Jennifer M. Johnson: Interest from clients to diversify private debt portfolios beyond direct lending into areas like real estate debt has attracted significant, high-quality engagement with investors. Turning to secondary private equity, Lexington Partners announced a dedicated strategy and highly experienced team focused on leading single asset continuation vehicle transactions in response to increased investor demand. Lexington has invested approximately $6 billion in CV transactions to date, and the new team will be focused on increasing its participation in CV transactions with a differentiated approach. In secondary private equity, the largest, most established managers continue to see the most interest in flows, reflecting a clear bias toward them in the market.
Speaker Change: Interest from clients to diversify private debt portfolios beyond direct lending into areas like real estate debt has attracted significant high-quality engagement with investors.
Speaker Change: Turning to secondary private equity, Lexington Partners announced a dedicated strategy and highly experienced team focused on leading single-asset continuation vehicle transactions in response to increased investor demand.
Speaker Change: Lexington has invested approximately $6 billion in CV transactions to date, and the new team will be focused on increasing its participation in CV transactions with a differentiated approach.
Speaker Change: In secondary private equity, the largest, most established managers continue to see the most interest in flows, reflecting a clear bias toward them in the market. Lexington has been a beneficiary of this trend.
Jennifer M. Johnson: Lexington has been a beneficiary of this. Clarion Partners has three open-end funds that perpetually fundraise in the US. And this year, it launched a fourth open-end fund in Europe focusing on the logistics sector. Clarion continues to be well positioned with over half of AUM in the industrial and logistics sectors and less than 8% of AUM in the office sector. With regard to the Wealth Management Channel, we continue to make strides and open new opportunities for investors given our strength in global retail distribution and dedicated specialist sales team with a focus on investor education.
Speaker Change: Clarion Partners has three open-end funds that perpetually fundraise in the U.S. And this year launched a fourth open-end fund in Europe focusing on the logistics sector.
Speaker Change: Clarion continues to be well-positioned with over half of AUM in the industrial and logistics sectors and less than 8% of AUM in the office sector.
Speaker Change: With regard to the Wealth Management Channel, we continue to make strides and open new opportunities for investors given our strength in global retail distribution and dedicated specialist sales team with a focus on investor education.
Jennifer M. Johnson: This quarter, we announced the expansion of our retail alternatives initiatives with a dedicated team in the EMEA region. Looking ahead, we remain focused on product development, including new products in secondary private equity and real estate private debt. Just as a reminder, at the start of our fiscal year, we anticipated raising $10 to $15 billion in fundraising and alternatives, and as of this quarter, we are well on our way to reaching the top end of that range, having raised over $12 billion for the fiscal year to date.
Speaker Change: This quarter, we announced the expansion of our retail alternatives initiatives with a dedicated team in the EMEA region. Looking ahead, we remain focused on product development, including new products in secondary private equity and real estate private debt.
Speaker Change: Just as a reminder, at the start of our fiscal year, we anticipated raising $10 to $15 billion in fundraising and alternatives, and as of this quarter, we are well on our way to reaching the top end of that range, having raised over $12 billion fiscal year to date.
Jennifer M. Johnson: It's worth noting that since being part of Franklin Templeton's platform, each alternative asset manager has increased AUM and continued to grow and diversify across strategies, product vehicles, and clients. Fixed income net outflows were $4.8 billion, excluding inflows from Great West; inflows improved approximately 5% from the prior quarter.
Speaker Change: And it's worth noting that, since being part of Franklin Templeton's platform, each alternative asset manager has increased AUM and continued to grow and diversify across strategies, product vehicles, and client type.
Speaker Change: Fixed income net outflows were $4.8 billion, excluding inflows from Great West. Inflows improved approximately 5% from the prior quarter.
Jennifer M. Johnson: As we've said on previous calls, we benefit from our broad range of fixed income strategies with non-correlated investment philosophies. Despite mixed performance in certain U.S. taxable strategies, we saw client interest reflected in positive net flows into highly customized, multi-sector, and global sovereign strategies. Additionally, we continue to benefit from vehicle diversification with cross-border funds, ETFs, and SMAs and fixed income, all with positive net flow. Notably, we saw increasing interest from clients in multi-sector credit strategies, which capitalized on our team's ability to offer multiple credit sector exposure in one strategy in a highly dynamic environment. Equity net outflows were $1.6 billion, significantly improving from outflows of $5.3 billion in the last quarter, and gross sales improved by 16%.
Speaker Change: As we've said on previous calls, we benefit from our broad range of fixed income strategies with non-correlated investment philosophies.
Speaker Change: Despite mixed performance in certain U.S. taxable strategies, we saw client interest reflected in positive net flows into highly customized multi-sector and global sovereign strategies.
Speaker Change: Additionally, we continue to benefit from vehicle diversification with cross-border funds, ETFs, and SMAs in fixed income, all in positive net flows.
Speaker Change: Notably, we saw increasing interest from clients in multi-sector credit strategies, which capitalized on our team's ability to offer multiple credit sector exposure in one strategy in a highly dynamic environment.
Speaker Change: Equity net outflows were $1.6 billion, significantly improving from outflows of $5.3 billion in the last quarter, and gross sales improved by 16%.
Jennifer M. Johnson: Equity net inflows were driven by large cap value and all cap core strategies and our single country ETFs, which now total $10 billion in AUM. With a broad lineup of capabilities, we are able to deliver investment expertise across vehicle types. We saw another strong quarter of positive net flows across our retail SMAs, Canvas, and ETF offerings. We are a leading franchise in retail SMAs with $140 billion in assets under management.
Speaker Change: Equity net inflows were driven by large cap value and all cap core strategies and our single country ETFs. Our single country ETFs now total 10 billion in AUM.
Speaker Change: With a broad lineup of capabilities, we are able to deliver investment expertise across vehicle types.
Speaker Change: We saw another strong quarter of positive net flows across our retail SMAs, Canvas, and ETF offerings.
Speaker Change: We are a leading franchise in retail SMAs with $140 billion in assets under management. This quarter, we generated positive net flows of $500 million, the fifth consecutive quarter of net inflows.
Jennifer M. Johnson: This quarter, we generated positive net flows of $500 million, the fifth consecutive quarter of net inflows. Through innovative technologies, we are continuing to enable personalized portfolio solutions and improved outcomes for investors. A good example is Canvas, our custom indexing solution platform.
Speaker Change: Through innovative technologies, we are continuing to enable personalized portfolio solutions and improved outcomes for investors.
Speaker Change: A good example is Canvas, our custom indexing solution platform. Canvas generated net inflows of $800 million in the quarter. AUM increased by 13% from the prior quarter to $8.2 billion and continues to have a robust pipeline.
Jennifer M. Johnson: Canvas generated net inflows of $800 million in the quarter. AUM increased by 13% from the prior quarter to $8.2 billion, and Canvas continues to have a robust pipeline. Meanwhile, our ETF business continues to see strong growth and generated net inflows of approximately $3.3 billion, doubling the prior quarter's net flows and was the 11th consecutive quarter of positive net flows. Our platform provides solutions for a range of market conditions and investment objectives through active, smart beta, and passively managed ETFs. Just five years ago, our ETF AUM was $4 billion. AUM stood at $27 billion at quarter end across more than 100 strategies.
Speaker Change: Meanwhile, our ETF business continues to see strong growth and generated net inflows of approximately $3.3 billion, doubling the prior quarter's net flows and was the 11th consecutive quarter of positive net flows.
Speaker Change: Our platform provides solutions for a range of market conditions and investment objectives through active, smart beta, and passively managed ETFs.
Speaker Change: Just five years ago, our ETF AUM was $4 billion. AUM stood at $27 billion at quarter end across more than 100 strategies.
Jennifer M. Johnson: As a result of our regionally focused sales model, we continue to deepen our presence across the globe. Our non-U.S. business saw its fifth consecutive quarter of positive net flows and finished the quarter with approximately $492 billion in assets under management. Our institutional pipeline of one but unfunded mandates was $17.8 billion, not including the remaining allocation from Great West.
Speaker Change: As a result of our regionally focused sales model,
Speaker Change: We continue to deepen our presence across the globe.
Speaker Change: Our non-U.S. business saw its fifth consecutive quarter of positive net flows and finished the quarter with approximately $492 billion in assets under management.
Speaker Change: Our institutional pipeline of one but unfunded mandates was $17.8 billion, not including the remaining allocation from Great West.
Jennifer M. Johnson: We continue to expand our private wealth management business, and fiduciary trust international AUM has more than doubled in the past five years from $17 billion to $38 billion. Athena Capital and Pennsylvania Trust, acquired in 2020, have grown almost 40% since acquisition. One of our priorities is to further accelerate the growth of our wealth management business through organic investments and acquisitions. Our commitment to innovation, artificial intelligence, blockchain, and machine learning positions us to enhance client outcomes across the rapidly changing technology-enabled investment landscape.
Speaker Change: We continue to expand our private wealth management business and Fiduciary Trust International AUM has more than doubled in the past five years from $17 billion to $38 billion.
Speaker Change: Athena Capital and Pennsylvania Trust, acquired in 2020, have grown almost 40% since acquisition.
Speaker Change: One of our priorities is to further accelerate the growth of our wealth management business through organic investments and acquisitions.
Speaker Change: Our commitment to innovation, artificial intelligence, blockchain, and machine learning positions us to enhance client outcomes across the rapidly changing technology-enabled investment landscape.
Jennifer M. Johnson: As various aspects of the asset management industry evolve, we continue to make investments in technology across distribution, investment management, and operations. Earlier this quarter, we announced that we are working with Microsoft to build an advanced financial AI platform, which will help embed artificial intelligence into our sales and marketing processes to create more personalized support for clients. We also announced plans to make a strategic minority investment in InvestNet, a significant industry platform.
Speaker Change: As various aspects of the asset management industry evolve, we continue to make investments in technology across distribution, investment management, and operations.
Speaker Change: Earlier this quarter, we announced that we are working with Microsoft to build an advanced financial AI platform, which will help embed artificial intelligence into our sales and marketing processes to create more personalized support for clients.
Speaker Change: We also announced plans to make a strategic minority investment in InvestNet, a significant industry platform.
Jennifer M. Johnson: And earlier this week, we announced the selection of a single platform to unify our investment management technologies across public market asset classes. This will support the simplification of our operation and reduce long-term capital expenditure. Formed in 2018, our Franklin Templeton Digital Assets Group has directly witnessed the revolutionary impact of blockchain technology.
Speaker Change: And earlier this week, we announced the selection of a single platform to unify our investment management technologies across public market asset classes. This will support the simplification of our operation and reduce long-term capital expenditures.
Speaker Change: Formed in 2018, our Franklin Templeton Digital Assets Group has directly witnessed the revolutionary impact of blockchain technology.
Jennifer M. Johnson: The digital asset space has experienced significant growth in recent years, much like the proliferation of new technologies decades ago. Capitalizing on this trend, we launched our second digital asset-backed ETF earlier this week, the Franklin Ethereum ETF, to give our clients additional access to this emerging asset class. Earlier today, we were pleased to announce our collaboration with SBI Holdings, a leading online financial conglomerate in Japan. The proposed joint venture will focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies.
Speaker Change: The digital asset space has experienced significant growth in recent years, much like the proliferation of new technologies decades ago.
Speaker Change: Capitalizing on this trend, we launched our second digital asset-backed ETF earlier this week, the Franklin Ethereum ETF, to give our clients additional access to this emerging asset class.
Speaker Change: Earlier today, we were pleased to announce our collaboration with SBI Holdings, a leading online financial conglomerate in Japan. The proposed joint venture will focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies.
Jennifer M. Johnson: The extensive reach of SBI's brand in Japan aligns well with our commitment to help new generations of investors achieve their financial goals through innovative strategies. Turning briefly to financial results, adjusted operating income was $424.9 million, an increase of 1.3% from the prior quarter and a decrease of 10.9% from the prior year quarter. Looking ahead, we will continue to invest in the business to support our strategic priorities in asset management and wealth management. Finally, in June, Investment News recognized Franklin Templeton as Asset Manager of the Year.
Speaker Change: The extensive reach of SBI's brand in Japan aligns well with our commitment to help new generations of investors achieve their financial goals through innovative strategies.
Speaker Change: Turning briefly to financial results, adjusted operating income was $424.9 million, an increase of 1.3% from the prior quarter, and a decrease of 10.9% from the prior year quarter.
Speaker Change: Looking ahead, we will continue to invest in the business to support our strategic priorities in asset management and wealth management.
Speaker Change: Finally, in June , Investment News recognized Franklin Templeton as Asset Manager of the Year.
Jennifer M. Johnson: This is a true testament to all of our employees around the world and their commitment to being the ideal partner in helping both individuals and institutions achieve their key financial goals and objectives. I would like to thank our employees for always putting clients first. Now, let's open it up to your questions. Operator.
Speaker Change: This is a true testament to all of our employees around the world and their commitment to being the ideal partner in helping both individuals and institutions achieve their key financial goals and objectives.
Speaker Change: I would like to thank our employees for always putting clients first. Now, let's open it up to your questions. Operator?
Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in question. If anyone should require operator assistance during the conference, please press star zero on your telephone. And we request that you please limit yourself to one question so we can get to as many callers as possible. Please go ahead and press star 1 now.
Speaker Change: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue.
Speaker Change: And if anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And we request that you please limit to one question so we can have, so we can get to as many callers as possible.
Alexander Blostein: And your first question will be from Alex Blostein at Goldman Sachs. Please go ahead. Hey, good morning.
Speaker Change: Please go ahead and press star 1 now. And your first question will be from Alex Blostein at Goldman Sachs. Please go ahead.
Jennifer M. Johnson: Thank you for taking the question. I was hoping we could start with the Aladdin announcement. I know it's been sort of speculated for the last couple of quarters, so nice to get it out there. But can you talk about the operational benefits and both expense benefits and operating margins, ultimately, that you expect the platform to deliver, how long it's going to take to get fully implemented, etc. And as part of that, maybe Matt, you can just hit on the expense items for the rest of the year as well. Yeah, thank you, Alex. Good morning.
Alexander Blostein: Hey, good morning, thank you for taking the question. I was hoping we could start with the Aladdin announcement. I know it's been sort of speculated for the last couple of quarters, so nice to get it out there, but can you talk about the operational benefits and both expense benefits and operating margins, ultimately? Do you expect the platform to deliver? How long it's going to take to get fully implemented, etc.?
Alexander Blostein: And as part of that, maybe Matt, you can just hit on the expense items for the rest of the year as well. Thanks.
Matthew Nicholls: So a little bit of background first, you know, what we expect to get out of it, and then I'll talk a little bit about the implementation costs and timeline and so on, as you've asked. So first of all, you know, why we've done this. We did this because it unifies our investment management technology across all of our public market businesses, which is an extensive amount of specialist investment management.
Matt: Yeah, thank you, Alice. Good morning. So, a couple of background points first. You know, why you've done this, what we expect to get out of it, and then I'll talk a little bit about the implementation costs and timeline and so on as you've asked.
Matt: So, first of all, you know, why have we done this? We've done this because it unifies our investment management technology across all of our public market businesses, which, as you know, have an extensive amount of specialist investment managers.
Matthew Nicholls: This, importantly, was a decision made collectively across all of our specialist investment managers and has taken us no less than 18 months to two years to make this decision. In terms of the benefits, it brings several things, including most of what you'd expect, candidly, but most importantly, in the form of one platform versus multiple vendors. I'll just go through a few of the benefits.
Matt: This, importantly, was a decision that was made collectively across all of our specialist investment managers and has taken us no less than 18 months to two years to make this decision.
Matt: In terms of the benefits, it brings several things, including most of what you'd expect, candidly, but most importantly, in the form of one platform versus multiple vendors.
Matthew Nicholls: One, portfolio construction and risk management tools, a single investment book of record, integrated order management systems and connectivity, importantly, consistent reporting across the firm, and this is good for both clients and for internal reporting purposes, and it assists in developing a cross-team, cross-specialist investment manager, multi-asset solution. And also, as you know, we've been active strategically in the business, adding companies over time. And with a single platform like this, it's easier to add new business. It's easier because it's faster and lower cost to integrate.
Matt: I'll just go through a few of the benefits. One, portfolio construction and risk management tools. A single investment book of record.
Matt: integrated order management systems and connectivity, importantly consistent reporting across the firm and this is good for both clients and for internal reporting purposes.
Matt: and it assists in developing cross-team, cross-specialist investment manager, multi-asset solutions.
Matt: And also, as you know, we've been active strategically in the business, adding companies over time. And with a single platform like this, it's easier to add new business. It's easier because it's faster and lower cost to integrate.
Matthew Nicholls: Thirdly, in terms of implementation costs, implementation costs are expected to be approximately $100 million over the next three to five years. The peak of these costs would be fiscal 26 and 27, where we expect about 60% of these expenses to be assumed. Importantly, though, we expect to absorb between 50% and 100% of the implementation costs, meaning on a quarterly basis over the next several years, we expect this to be close to neutral from an operating income perspective.
Matt: Thirdly, in terms of implementation costs, so implementation costs are expected to be approximately $100 million over the next three to five years.
Matt: The peak of these costs will be fiscal 26 and 27, where we expect about 60% of these expenses to be assumed.
Matt: Importantly, though, we expect to absorb between 50% and 100% of the implementation costs, meaning on a quarterly basis over the next several years, we expect this to be close to neutral from an operating income perspective.
Matthew Nicholls: At or around fiscal 2028, we expect to begin to realize savings of about $15 million per annum. And then in 2029, we expect that to rise to $25 million, at least. Next quarter, we will add approximately $3 million of additional cost to IST associated with the start of this implementation, but again, we've got several things going on that should mean that we can absorb that based on other expense initiatives we have in the firm.
Matt: At or around fiscal 2028, we expect to begin to realize savings of about $15 million per annum. And then in 2029, we expect that to raise to $25 million at least.
Matt: Next quarter, we will add approximately $3 million of additional cost to IST associated with the start of this implementation. But again, we've got several things going on that should mean that we can absorb that based on other expense initiatives we have in the firm.
Matthew Nicholls: So, as mentioned, given other initiatives, the impact per quarter should be quite modest, if any. But if anything is important to call out, we will obviously do that per quarter, Alex. And we're most likely going to be able to do that in advance in our quarterly guidance. But as I said, the most important message here is even though this is an expensive implementation exercise, we're going to absorb most of those expenses due to the other efforts that we have going on across the company. In terms of the guide for the next quarter, we expect our effective fee rate to remain stable at 37.5 basis points.
Matt: So, as mentioned, you know, given other initiatives, the impact per quarter should be quite modest, if any.
Matt: But if anything is important to call out, we will obviously do that per quarter, Alex, and we're most likely going to be able to do that in advance in our quarterly guidance. But as I said, the most important message here is, even though this is an expensive update, I'm going to leave it at that. Thank you.
Matt: Implementation
Matt: exercise, we're going to absorb most of those expenses due to the other efforts that we have going on across the company.
Matthew Nicholls: We expect comp and benefits to be $825 million, very stable from where we were this quarter. This assumes $50 million of performance fees. We expect IS&T to be between $150 million and $155 million. This includes the $3 million that I mentioned earlier with respect to the beginning of our implementation around the investment management platform. Occupancy, we expect to be in the high 70s, around $77 million to $78 million.
Matt: In terms of the guide for the next quarter,
Alexander Blostein: We expect our effective fee rate to remain stable at 37.5 basis points.
Alexander Blostein: We expect comp and benefits to be $825 million, very stable from where we were this quarter. This assumes $50 million of performance fees.
Alexander Blostein: We expect IS&T to be between $150 and $155 million. This includes the $3 million that I mentioned earlier with respect to the beginning of our implementation around the Investment Management Platform.
Alexander Blostein: Occupancy, we expect to be in the high 70s, around $77-78 million, and G&A, we expect to be between $175 and $180 million.
Matthew Nicholls: And G&A, we expect to be between $175 million and $180 million. Great. Thank you for all of that.
Speaker Change: Great. Thank you for all of that. Comprehensive, as always.
Brennan Hawken: Comprehensive, as always. The next question will be from Brennan Hawken at UBS. Please go ahead. Good morning.
Alexander Blostein: Thank you, Alex.
Alexander Blostein: Next question will be from Brennan Hawken at UBS. Please go ahead.
Brennan Hawken: Thanks for taking my question. A couple of questions on where. So, curious about an update about how much of what? Transcripts provided by Transcription Outsourcing, LLC. Great. Thanks, Brennan.
Brennan Hawken: Good morning. Thanks for taking my question.
Brennan Hawken: The couple questions on Lexington so curious on an update about how much of Lexington
Brennan Hawken: 2010 has been deployed and then when we think about the threshold for deployment where Wexington would start to look to kick off fundraising for the next flagship, you know, where does that typically happen?
Unknown Executive: So, you know, first of all, Lexington's fundraising focus this year, just to cover a little bit of that, has been middle market and co-investment, and that's gone well. Meanwhile, they've been obviously deploying Fund 10, and basically the message is that they have been deploying it faster and at higher discounts than historically. So it's looking very good. We don't have a specific date, but it is quite possible that they will enter the market sooner than they anticipated, just because of the ability to deploy capital faster.
Speaker Change: Great. Thanks, Brennan.
Speaker Change: You know, first of all, Lexington's fundraising focuses this year, just to cover a little bit of that, has been middle market and co-investment.
Speaker Change: And that's gone well. Meanwhile, they've been obviously deploying Fun10.
Speaker Change: and basically the message is that they have been deploying it faster.
Speaker Change: and at higher discounts than historical.
Speaker Change: So it's looking very good. We don't have a specific date, but it is quite possible that they will enter the market sooner than they anticipated just because of the ability to deploy the capital faster. And, you know, I think we all see it, right, the liquidity that's needed in the space. It also, interestingly,
Unknown Executive: And I think we all see it, right, the liquidity that's needed in the space. They also, interestingly, we mentioned it in the opening remarks about their continuation vehicle. So they have about $6 billion that they've done where these GPs have a particular holding that they want to retain, but some of the LPs want liquidity, so they spin it out into a new vehicle. Lexington hired a market leader in that. They actually think that there's an opportunity to even create a fund for that instead of having it be part of their traditional funds. So I think that's going to be another opportunity for Lexington.
Speaker Change: We mentioned it in the opening remarks about their continuation vehicle. So they have about six billion.
Speaker Change: that they've done where these GPs have a particular holding that they want to retain, but some of the LPs want liquidity, so they spin it out into a new vehicle. Lexington hired a market leader in that. They actually think that there's opportunity to even create a fund in that instead of having it be part of
Speaker Change: They're traditional funds. So I think that's going to be another opportunity for Lexington.
Adam Benjamin Spector: And Jenny, the only piece I would add to that is that, while Lexington historically has been focused on the institutional market, there are significant efforts underway to ensure that they can better tap the wealth management channel by offering perpetual vehicles in wealth management in both the US and non-US markets. And that's something we're very actively engaged in developing.
Speaker Change: And Jenny, the only piece I would add to that is that while Lebsington historically has been focused on the institutional market, there are significant efforts underway to ensure that they can better tap
Jennifer M. Johnson: The Wealth Management Channel by offering perpetual vehicles in wealth management in both the U.S. and non-U.S. markets. And that's something we're very actively engaged in developing.
Unknown Executive: And just, Jenny, the discounts that you referred to, we had heard that those discounts have actually begun to narrow. Are they still seeing those wide discounts in the marketplace? They are definitely starting to narrow, but they are still seeing, you know, robust discounts versus historical discounts. They're still better than historical discounts.
Jennifer M. Johnson: Thanks for that. And just, Jenny, the...
Speaker Change: The discounts that you referred to, we had heard that those discounts are actually begun to narrow. Are they still seeing those wide discounts in the marketplace or is that- They are definitely starting to narrow, but they are still seeing robust discounts versus historical discounts.
Jennifer M. Johnson: There's still better than historical discounts. Yes, it's so still at attractive levels, I guess even though they've narrowed. Yes. Yes. Thank you
Craig William Siegenthaler: Yes, so still at attractive levels, I guess, even though they've narrowed. Yes, thank you. The next question will be from Craig Siegenthaler at Bank of America. Please go ahead. Thanks. Good morning, everyone.
Speaker Change: Thank you. Next question will be from Craig Siegenthaler at Bank of America. Please go ahead.
Craig William Siegenthaler: So my question is on the 25 billion AUM allocation from Great West. So you're about 5 billion away. You know, after this is reached, probably in a few months, can you talk about incremental upside to this relationship over time beyond the 25? Adam, do you want to take that or not?
Speaker Change: Thanks. Good morning, everyone. So, my question is on the $25 billion AUM allocation from Great West. So, you're about $5 billion away. You know, after this is reached, probably in a few months, can you talk about incremental upside to this relationship over time beyond the $25?
Adam Benjamin Spector: Yeah, sure. So, you know, with any client, I think you see a relationship grow over time. So the first $25 billion was really something that was more contractually oriented. Throughout that process, we have been able to meet many great Westlife executives, as well as the related power companies.
Speaker Change: Adam, do you want to take that or what?
Adam: Yeah, sure. So...
Adam: You know, with any client, I think you see a relationship grows over time. So the first $25 billion was really something that was more contractually oriented.
Speaker Change: Throughout that process, we have been able to meet many great Westlife executives, as well as the related power companies.
Adam Benjamin Spector: We are in the midst of product development with them, so the initial allocation has really been based on the types of products that insurance companies are generally interested in. I think if you look at most insurance companies, you'll see significant allocations to some core fixed income, as well as a tail that goes to alternatives. That has been the allocation we've received so far. But what we've been able to do since the acquisition is to work with great company Westlife, as well as other power companies, to develop newer products, both for the retirement platform, as well as to do things on a JV venture on the insurance side.
Speaker Change: We are in the midst of product development with them.
Speaker Change: So the initial allocation has really been based on the types of products that insurance companies
Speaker Change: generally are interested in. I think if you look at most insurance companies, you'll see
Speaker Change: significant allocations to some core fixed income as well as a tail that goes to alternatives.
Speaker Change: That has been the allocation we've received so far. But what we've been able to do since acquisition is to work with Great West Life, as well as other power companies, to develop newer products, both for the retirement platform, as well as doing things on a JV venture on the insurance side. So we are not at a point yet where we can pinpoint what those will be, but there is significant product development going on with Great West.
Adam Benjamin Spector: So we are not at a point yet where we can pinpoint what those will be, but there is significant product development going on with Great West, and we think that we will continue to see allocations broaden out from the core fixed income. That has been the basis of things so far. The only thing I'd just add to that, Adam and Craig, is, Just for context, obviously, we're delighted with the $25 billion arrangement and the $20 billion we've got in so far. But relative to other clients and investment management firms that the power group of companies does business with, it's still fairly modest, candidly. So we have a long way to go with that relationship.
Speaker Change: And we think that we will continue to see the allocations broaden out from the core fixed income that has been the basis of things so far.
Speaker Change: The only thing I'd just add to that, Adam and Craig, is...
Speaker Change: Just for context, obviously we're delighted with the $25 billion arrangement and the $20 billion we've got in so far.
Speaker Change: But relative to other clients and investment management firms that
Speaker Change: The Power Group of Companies does business with, you know, it's still fairly modest, candidly. So, you know, we have a long way to go with that relationship, and we think of this as a multi-year.
Matthew Nicholls: And we think of this as a multi-year exercise of building the relationship further versus just something that's happened as far as a consequence of a transaction. But I think it's important to note, and obviously, we expect this. I mean, the power group of companies has very significant relationships with other investors. That's going to continue. All we're doing is, you know, pitching for our fair share. Thank you, Matt.
Speaker Change: you know, exercise of building the relationship further versus just something that's happened as far as a consequence of a transaction. But I think it's important to note that obviously we expect this. I mean, the power group of companies have very significant relationships with other investment.
Speaker Change: That's going to continue. All we're doing is, you know, pitching for our fair share of it.
Operator: Thank you. The next question will be from Dan Fannon at Jeffreys. Please go ahead. Thanks. Good morning.
Matthew: Thank you, Matthew. Thank you.
Speaker Change: Thank you. Next question will be from Dan Fannon at Jeffreys. Please go ahead.
Daniel Thomas Fannon: Matthew, I was hoping you could clarify or expand upon, you know, what you guys are doing to offset the implementation costs of the new tech project. Curious, you know, what those initiatives are, if you can be more specific, and is there some phased implementation of that? Or are those ongoing now? So we shouldn't think about any kind of catch-up period between the timing of some of the implementation costs versus the ongoing sales? Yeah, no; I don't think there should be any mistimings.
Daniel Thomas Fannon: Thanks. Good morning.
Daniel Thomas Fannon: Matthew, I was hoping you could clarify or expand upon, you know, what you guys are doing.
Speaker Change: to offset the implementation costs with the new tech project. So, curious.
Daniel Thomas Fannon: You know, what those initiatives are, if you can be more specific, and is there some phase-in of that, or are those ongoing now, so we shouldn't think about any kind of catch-up period between the, or mis-timing of some of the implementation costs versus the ongoing savings?
Matthew Nicholls: But, as I said, Dan, these things are quite complex. And we're not underestimating at all the implementation complexity of a project like this with Aladdin. I should say, though, that, this is an understatement to say we've done extensive planning around this, both with our partners, that is, both over at Aladdin, and Deloitte, the consultant that we've hired to work with us on implementation. We've done extensive due diligence, we've built in contingencies, and we have very significant resources at both Aladdin and Deloitte, and, of course, our own team.
Daniel Thomas Fannon: Yeah, no, I don't think there should be any mistimings. But as I said, Dan, these things are quite complex. And we're not underestimating at all the implementation complexity of a project like this with Aladdin.
Daniel Thomas Fannon: I should say, though, that we've done, this is an understatement to say we've done extensive planning around this, both planning with our partners, that's both over at Aladdin and Deloitte, the consultant that we've hired to work with us on implementation.
Matthew Nicholls: But I don't, I think we've done a ton of work to sort of determine how the implementation expenditures will work. We're extremely focused on this. If there is anything to call out, as I said, I will do that.
Daniel Thomas Fannon: We've done extensive due diligence, we've built in contingencies, and we have very significant resources at both Aladdin and Deloitte, and of course our own team. But I think we've done a ton of work to sort of determine.
Daniel Thomas Fannon: How the implementation expenditures will work. We've been extremely focused on this.
Daniel Thomas Fannon: If there is anything to call out, as I said, I will do that, but we...
Daniel Thomas Fannon: We don't want to jinx ourselves, but we don't expect that to happen. In terms of how we're able to absorb it...
Daniel Thomas Fannon: You know, one of the tangential benefits that I've referenced in previous calls is that
Daniel Thomas Fannon: of acquiring, being so acquisitive over the last...
Daniel Thomas Fannon: Five years, notwithstanding all the additional work and complexity around acquisitions.
Daniel Thomas Fannon: It does lead to future opportunities to integrate and to be more effective and efficient across the different platforms and providers we have.
Matthew Nicholls: But we, we, and again, don't want to jinx it, but we're extremely focused on this. A large portion of the savings is going from multiple providers down to one. Of course, we're going to have other relationships still on the technology side that complement our relationship with Aladdin, but we'll have fewer than that. We also have a much larger-scale relationship. So, of course, the pricing benefits that we have are very meaningful in that regard.
Daniel Thomas Fannon: A large portion of the savings is going from multiple providers down to one. Of course, we're going to have other relationships still on the technology side that complement our relationship with Aladdin.
Matthew Nicholls: The amount of resources we have externally from the Aladdin platform and our partners there and Deloitte are more than we could afford ourselves and frankly absorb some of the costs that we would otherwise have if we were modernizing our own platform, for example. So, it's all of those things sort of combined.
Speaker Change: But we'll have less than that.
Speaker Change: We also have a much larger scaled relationship, so of course the pricing benefits that we have.
Speaker Change: are very meaningful in that regard. The amount of resources we have externally from...
Speaker Change: The Aladdin platform and our partners there in Deloitte are more than we could afford ourselves.
Speaker Change: and, frankly, absorb some of the costs that otherwise we would have if we were modernizing our own platform, for example. So it's all of those things sort of combined.
Matthew Nicholls: We have multiple middle offices. We have multiple systems. We have quite complex technologies.
Speaker Change: We have multiple middle offices, we have multiple systems, we have quite complex technologies. It's all good and it works fine, just to be clear, but this is coming...
Speaker Change: Boiling down into one platform this way, less vendors, more efficiency across our whole firm, which is needed anyway in terms of where the industry is heading, is how we're able to afford to do this in an effective way, as I've described.
Speaker Change: Thank you.
Matthew Nicholls: It's all good and it works fine, just to be clear, but this is coming, boiling down into one platform this way, fewer vendors, more efficiency across our whole firm, which is needed anyway in terms of where the industry is heading, is how we're able to afford to do this in an effective way, as I've described. [inaudible] The next question will be from Michael Cyprys of Morgan Stanley. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Next question will be from Michael Cyprys of Morgan Stanley . Please go ahead.
Michael J. Cyprys: Great, thank you. Just wanted to circle back to the JV that you announced this morning in Japan with SBI. I was just hoping, maybe you could remind us of your footprint in Japan today. Certainly, there are a lot of changes in that market. Just curious how you're seeing that opportunity set evolving. Where do you see some of the biggest opportunities there in Japan? And how does this JV help in terms of tapping into the opportunity set in that market? Yeah, so, I mean, you know, we've been in Japan for a long time.
Michael J. Cyprys: Great, thank you. Just wanted to circle back to the JV that you announced this morning in Japan with SBI. I was just hoping maybe you can remind us of your footprint in Japan today.
Michael J. Cyprys: Certainly a lot of changes in that market. Just curious how you're seeing that opportunity set evolving. Where do you see some of the biggest opportunities there in Japan? And how does this JV help in terms of tapping into the opportunity set in that market? And maybe you could touch upon what the economics will be and how you sort of envision this JV working over time and what success might look like.
Jennifer M. Johnson: Fortunately, Putnam actually has great relationships in Japan. As a matter of fact, this quarter, I think we had $3.2 billion in net inflows into Japan. A big part of that was, you know, institutional business with Putnam. Japan, on the retail side, has been a little bit more difficult, and it is a market that is beginning to launch ETFs and starting to talk about digital assets. And, you know, honestly, as a foreign investment shop, it can be difficult to penetrate that. So here, with SBI, they have a tremendous reach. I mean, they're probably the largest digital, you know, financial conglomerate.
Speaker Change: We've been in Japan for a long time. Fortunately, Putnam actually has great relationships in Japan. As a matter of fact, this quarter, I think we had $3.2 billion in net inflows in Japan. A big part of that was institutional business with Putnam.
Speaker Change: You know, Japan, on the retail side, has been a little bit more difficult, and it is a market that is beginning to launch ETFs.
Speaker Change: and starting to talk about digital assets.
Speaker Change: And, you know, as a, honestly, as a foreign investment shop, it can be difficult to penetrate that. So here with SBI, they have a tremendous reach. I mean, they're probably the largest digital
Jennifer M. Johnson: And so, I think it's a 51% owned SBI, 49% Franklin Templeton. And we'll be launching, you know, joint ETFs. And as the digital market opens up, we'll be able to launch products there in the crypto space as well. And our footprint now in Japan is really not that different from anywhere else in the marketplace. It's nice to be able to have a significant local base there. Because of that, we have a strong institutional business. We've seen the results of that afloat this quarter.
Speaker Change: you know, financial conglomerate. And so it's I think it's a 51% owned SBI, 49% Franklin Templeton, and we'll be launching, you know, joint ETFs. And as the digital market opens up, we'll be able to launch products there in the crypto space as well.
Speaker Change: And our footprint now in Japan really is not that different than anywhere else in the marketplace. It's nice to be able to have a significant local base there. Because of that, we have a strong institutional business. We've seen the results of that afloat this quarter. We've been able to really accelerate some of the great performance that Putnam has and won some assets there. In the retail space, we have a relationship with a number of different distributors. We also have a very strong insurance business in Japan.
Jennifer M. Johnson: We've been able to really accelerate some of the great performance that Putnam has and win some assets there. In the retail space, we have a relationship with a number of different distributors. We also have a very strong insurance business in Japan. The only other thing I would note about SBI is that Japan is not a market that is always recognized for its innovation, and SBI is an exception to that. It's one of the first significant firms to really break through on the digital side in terms of client engagement.
Speaker Change: The only other thing I would note about SBI is that Japan is not a market that is
Speaker Change: always recognized for its innovation, and SBI is an exception to that. It's one of the first significant firms to really be breaking through on the digital side in terms of client engagement.
Jennifer M. Johnson: And we think partnering with them will allow us to be one of the first asset managers to have more of that direct consumer digital engagement model. And the asset base in Japan is now close to $50 billion. Thank you. The next question will be from Brian Bedell at Deutsche Bank. Please go ahead.
Speaker Change: And we think partnering with them will allow us to be one of the first asset managers to have more of that direct consumer digital engagement model in Japan.
Speaker Change: And the asset base in Japan now is close to $50 billion for us.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Next question will be from Brian Bedell at Deutsche Bank. Please go ahead.
Brian Bertram Bedell: Oh, great. Thanks for the morning, folks. Let me just circle back on the ETF strategy, you know, basically $27 billion, like you said, but given the very wide range of products you have and strategies you have across the entire complex, what's the desire to, you know, more substantially expand that ETF franchise? Is there an ability to clone a more active product, or is it more of a two-pronged strategy of doing that and rolling out, you know, more passive products?
Brian Bertram Bedell: Oh, great. Thanks so much, folks.
Speaker Change: Let me just circle back on the ETF strategy, basically $27 billion like you said, but given the very wide range of products you have and strategies you have across the entire complex, what's the desire to more substantially expand that ETF franchise? Is there an ability to clone a more active product or is it more of a two-pronged strategy of doing that?
Brian Bertram Bedell: And then if you could just talk about connecting that with the – or how easy it is to do that with the new Aladdin platform, realizing that'll take some time. So from an ETF standpoint, I mean, actually, our largest category of ETFs is over 40% active. And then the next category is passive, and then smart beta, and then digital.
Speaker Change: Rolling out, you know, more passive product. And then if you could just talk about connecting that with the, or how easy it is to do that with the new Aladdin platform. Realizing that'll take some time, of course.
Speaker Change: So from an ETF standpoint, I mean, actually our largest category of ETFs over 40% is active, and then the next category is passive, and then smart beta, and then digital. So, you know, our focus on ETFs is...
Jennifer M. Johnson: So, you know, our focus on ETFs is that, as a firm, we view ourselves as vehicle agnostic. So whatever the market is interested in having us deliver our capabilities, we'll deliver it in whatever vehicle they'd like. And there is, you know, strong demand from advisors, particularly in the U.S., who are interested in ETFs, which I think is driven a lot by the shift to fee-based. And so it's been important for us to be able to launch products.
Speaker Change: As a firm, we view ourselves as vehicle agnostic.
Speaker Change: So whatever the market is interested in having us deliver our capabilities, we'll deliver it in whatever vehicle they like.
Speaker Change: And there is a, you know, strong demand of advisors, particularly in the U.S.
Speaker Change: who are interested in ETFs.
Speaker Change: I think is driven a lot by the shift to fee-based, and so it's been important for us to be able to launch products. I think we have over 100 ETFs.
Jennifer M. Johnson: I think we have over 100 ETFs today and should be able to launch products that are appropriate. There has been some feedback about a concern about launching clones between a traditional mutual fund and an ETF because it can bring suitability issues to distribution platforms. And so we like to either look at existing mutual funds and potentially convert them if an ETF is a better way to deliver them, or launch some sort of ETF that is a slightly different approach.
Speaker Change: Today, and to be able to launch products that are appropriate. There has been some feedback about a concern of launching clones between a traditional mutual fund and an ETF, because it can bring suitability issues.
Speaker Change: to the distribution platforms, and so we like to either look at existing, say, mutual funds and potentially convert them if an ETF is a better way to deliver it, or launch.
Speaker Change: Some sort of ETF that is a slightly different approach.
Jennifer M. Johnson: Now, interestingly, we're getting a lot of demand from Latin American pensions that are interested in our single-country ETFs, which are, I believe, the lowest price in the market. And so we've been getting good, strong flows there. We're getting flows from Europe, as well as Japan. And, you know, so it's really global.
Speaker Change: Now, interestingly, um...
Speaker Change: We're getting a lot of demand.
Speaker Change: from Latin America Pensions.
Speaker Change: that are interested in our single-country ETFs, which are, I believe, the lowest price in the market. And so we've been getting good, strong flows there. We're getting flows from Europe as well as Japan. And, you know, so it's really global. Our view is...
Adam Benjamin Spector: Our view is, in a lot of these markets, ETFs are becoming the vehicle choice. And so we need to be able to support that. I don't know if, Adam, you want to add anything to that. Yeah, I'd add a few things, Jenny.
Speaker Change: In a lot of these markets, ETFs are becoming the vehicle choice, and so we need to be able to support that. I don't know if, Adam, you want to add anything to that.
Adam Benjamin Spector: You know, the flow there has been quite strong for us at $3.3 billion in net flow this quarter, and that's seven quarters in a row where we've had about a billion dollars or more in flow. As Jenny said, that flow is coming from a geographically diverse base, where we saw about 900 million coming in from EMEA and about half a billion coming in from the Americas region. I'd also just follow up with Jenny's point on being agnostic in terms of vehicles.
Adam: Yeah, I'd add a few things, Jenny. You know, the flow there has been quite strong for us at 3.3 in net flow this quarter, and that's seven quarters in a row.
Adam: where we've had about a billion dollars or more in flow. As Jenny said, that flow is coming from a geographically diverse base where we saw about 900 million coming in from EMEA and about half a billion coming in from the Americas region.
Speaker Change: I'd also just follow up with Jenny's point on being agnostic.
Adam Benjamin Spector: You know, our most significant and longest tenured mutual fund, U.S. mutual fund, is the income fund. But if we look at the income fund for this quarter, just as an example, we saw very slight outflows from the income fund, but positive flows in the related SMA, positive flows in the cross-border fund, and positive flows in the ETF. So by offering four different vehicle types there, the category for the income strategies was, in general, net flow positive.
Speaker Change: In terms of vehicles, you know, our most significant and longest tenured mutual fund, U.S. Mutual Fund is the income fund.
Speaker Change: But if we look at the income fund for this quarter, just as an example, we saw very slight outflows in the mutual fund, but positive flows in the related SMA, positive flows in the cross-border fund, positive flows in the ETF.
Speaker Change: So, by offering four different vehicle types there, the category for the income strategies in general was net flow positive, and as investor demand becomes more global and shifts away from mutual funds, having multiple vehicles allows us to capture that flow.
Adam Benjamin Spector: And as investor demand becomes more global and shifts away from mutual funds, having multiple vehicles allows us to capture that flow. And actually, I'm just going to say one thing about that. It's often viewed that ETFs are potentially lower-margin, and I think that comes out of the history of it being sort of early on passive. You know, honestly, it depends on the kind of strategy.
Speaker Change: And that's it, I'm just gonna...
Speaker Change: I'll say one thing on that. It's often viewed that ETS are a potentially lower margin, and I think that comes out of the history of it being sort of early on passive.
Speaker Change: You know, honestly, it depends on kind of the strategy in the case of the income fund where we're having so much success.
Jennifer M. Johnson: In the case of the income fund, where we're having so much success with those other vehicles, the pricing is actually very much in line with what the mutual fund is, and arguably, over time, the cost to us will be less with the ETF and the SMA because you don't have the transfer agency and the fund administration costs in the same way that you do with the mutual fund. That actually was one of the drivers in our decisions to outsource those things because it allows us, as the business shifts, to have greater flexibility in the expenses supporting the business. That's a great color!
Speaker Change: In those other vehicles, the pricing is actually...
Speaker Change: very much in line with what the mutual fund is, and arguably over time, the cost to us will be less.
Speaker Change: with the ETF and the SMA because you don't have the transfer agency and the fund administration costs.
Speaker Change: in the same way that you do with the mutual fund. That actually was one of the drivers in our decisions to outsource those things because it allows us, as the business shifts, to have greater flexibility in the expense supporting the business.
Jennifer M. Johnson: Thank you for all that detail. Thank you. The next question will be from Ken Worthington at J.P. Borgen. Please go ahead.
Speaker Change: That's great color. Thank you for all that detail.
Speaker Change: Thank you. Next question will be from Ken Worthington at JP Morgan. Please go ahead.
Kenneth Brooks Worthington: Hi, thanks for taking the time to answer the question. As we think about possible extension of duration by investors, if the Fed acts later this year, which of your fixed income products do you think are best positioned to benefit from better sales? And then, along the same line, some of the big flagship Western funds are still struggling with performance, and outflows picked up this quarter, both gross and net. What are the issues sort of weighing on So, first of all, you know, as if rates go down, I think we're probably guessing two cuts this year, obviously, cash becomes less interesting as your fixed income allocation, and you're going to probably see people move more into other fixed income.
Kenneth Brooks Worthington: Hi, thanks for taking the question. As we think about possible extension of duration by investors if the Fed acts later this year, which of your fixed income products do you think are best positioned to benefit with better sales?
Speaker Change: And then along the same lines, some of the big flagship Western funds are still struggling with performance and outflows picked up this quarter, both gross and net. What are the issues sort of weighing on those funds?
Speaker Change: So, um...
Speaker Change: First of all, you know, as if rates go down, I think we probably are guessing two cuts this year.
Speaker Change: Obviously cash becomes less interesting as your fixed income allocation, and you're going to probably see...
Kenneth Brooks Worthington: We've had two out of our three SIMs in positive net flows in fixed income. As a matter of fact, you know, Franklin's performance is excellent with 71% of AUM, outperforming peers in the one, three, and five-year. Brandywine has 92% of their AUM outperforming peers in the five-year category. And five out of our top ten gross selling strategies are in fixed income, and that actually includes some Western strategies. You know, we have positive flows in for a lot of different vehicles. So our cross-border with our Euro short duration is in positive flows.
Speaker Change: [inaudible]
Speaker Change: Sims in Positive Net Flows in Fixed Income.
Speaker Change: As a matter of fact, you know, Franklin's performance is excellent with 71% of AUM outperforming peers in the one, three, and five-year. Brandywine has 92% of their AUM outperforming peers in the five-year category.
Speaker Change: And five out of our top 10 bro-selling strategies are in fixed income, and that actually includes some of Western's strategies. You know, we have positive flows in...
Speaker Change: But
Speaker Change: A lot of different vehicles. So our cross-border with our Euro short duration is in positive flows, our ETFs and fixed income are positive flows, our retail SMAs are in positive flows, and we have positive flows in our closed-end funds.
Jennifer M. Johnson: Our ETFs and fixed income are in positive flows. Our retail SMAs are in positive flows, and we have positive flows in our closed-end funds. And actually, the largest portion of our institutional pipeline is fixed income. And again, that does not include Great West Life.
Speaker Change: And actually, the largest portion of our institutional pipeline is fixed income, and again, that does not include Great West Life.
Jennifer M. Johnson: Interestingly, if you think about passive and how it potentially impacts fixed income, the areas that passive has actually cannibalized to some extent have really been in that core and core plus space. And so in multi-sector, the highly customized munis, Adam helped me out on the other strategies in there, you're not seeing that kind of cannibalization from passive. And then Western, as we've talked about, their positioning has been for a longer duration.
Speaker Change: Interestingly, if you think about passive and how it potentially impacts fixed income, it's been the areas that passive has actually cannibalized to some extent, has really been in that core and core plus space. And so in multi-sector, the highly customized, munis,
Speaker Change: Adam, help me out on the other strategies in there. You're not seeing that kind of cannibalization from...
Western: from the passive. And then, you know, Western, as we've talked about, their positioning has been long, longer duration. So as rates come down, that actually, you know, is potentially a benefit as far as the positioning. And, you know, we've seen it in their kind of one month performance has improved.
Jennifer M. Johnson: So as rates come down, that actually is potentially a benefit as far as the positioning is concerned, and we've seen it in their kind of one month performance has improved a lot. Yeah, I would add a few things. We didn't really talk about the MUNI franchise in that Jenny.
Adam Benjamin Spector: The MUNI performance is really strong. We have about 90% of assets outperforming on the one-year period and about 75% outperforming on the three and five. We think we'll see significant growth in MUNIs. And the fact that we have a strong SMA franchise there as well as mutual funds is really helping. In terms of the shift in rates with a steeper yield curve, we think we will see money coming out of cash into longer-term fixed income, which should benefit us.
Speaker Change: A lot.
Speaker Change: I would add...
Speaker Change: Yeah, I would add a few things. We didn't really talk about the Muny franchise in that, Jenny. The Muny performance is really strong. We have about 90% of assets.
Speaker Change: outperforming on the one-year period and about 75% outperforming on the three and five. We think we'll see significant growth in munis and the fact that we have a strong SMA franchise there as well as mutual funds. It's really helping us.
Speaker Change: In terms of the shift in rates with a steeper yield curve, we think we will see money coming out of cash into longer-term fixed income, which should benefit us. The other thing we've seen is that in a market
Adam Benjamin Spector: The other thing we've seen is that in a market with fairly tight credit spreads, we see allocations going more and more to managers who have the ability to be multi-sector or multi-credit exposures and have the ability to allocate across those different sectors, and that bodes well for us as well, as we are very strong in those areas. The final thing I would note is that our insurance capabilities are highly specialized, and we've seen real growth in fixed income coming from insurance-specific mandates where the regulatory reporting compliance aspects of managing those accounts are as or more important than the. And I'm just going to add one thing on cash management, because a lot of people look at all the dollars in money market funds and think that that's going to move out.
Speaker Change: with fairly tight credit spreads.
Speaker Change: We see allocations going more and more to managers who have the ability to be multi-sector or multi-credit exposures.
Speaker Change: And to have the ability to allocate across those different sleeves, and that bodes well for us as well, as we are very strong in those areas. The final thing I would note is that our insurance capabilities are highly specialized.
Speaker Change: And we've seen real growth in fixed income coming from insurance-specific mandates where the regulatory reporting compliance aspects of managing those accounts is as or more important than the alpha generation.
Adam Benjamin Spector: But our money market funds, you know, Westerns, Tencent, Sovereign Wealth, and Corporate Treasurers, who aren't allocating as a temporary in between. And as a matter of fact, Western had $2 billion in net flows, which really came from a product that was very competitively priced and attracted money from corporate treasurers. And then actually, Franklin's product, which is a Luxembourg product, had $800 million in flows. I think that was the fastest growing money market fund on some lists that I saw, which were really offshore clients who wanted to take advantage of the yields in the U.S. And I think that product now, it's a Luxembourg U.S. dollar short-term money market fund, and it's now $1.1 billion in AUM.
Speaker Change: And I'm just going to add one thing on cash management because a lot of people, you know, look at all the dollars in money market funds and think that that's going to
Speaker Change: You know, move out. But our money market funds, you know, Westerns, Tencent, Sovereign Wealth and Corporate Treasurers, who aren't allocating, you know, as a temporary in between, as a matter of fact, Western had $2 billion in net flows, which really came from a product that was very competitively priced.
Speaker Change: is a Luxembourg product.
Speaker Change: had $800 million in flows. I think that was the fastest growing money market fund from some lists that I saw, which was really offshore clients who wanted to take advantage of the yields in the U.S.
Speaker Change: And I think that product now, it's a Luxembourg U.S. dollar short-term money market fund, and it's now $1.1 billion in AUM.
Jennifer M. Johnson: Great. Thank you. Thank you. The next question will be from Bill Katz at TD Cowan. Please go ahead.
Speaker Change: Great, thank you.
Speaker Change: Thank you. Next question will be from Bill Katz at TD Cowan. Please go ahead.
William Raymond Katz: Great, thank you very much for taking the question. So, there's a lot of ins and outs to the franchise right now, and I just may be stepping back for a moment. I guess where I'm struggling a little bit on the storyline is, how do you drive both top line and bottom line growth here? When I adjust for where your flows are coming in versus where they're going out.
William Raymond Katz: Great, thank you very much for taking the question. So, there's a lot of ins and outs to the franchise right now, and I just may be stepping back for a moment. I guess where I'm struggling a little bit on the storyline is how do you drive both top line and bottom line growth here?
Speaker Change: When I adjust for where your flows are coming in versus where they're going out
Jennifer M. Johnson: It would seem to me that the fee rate may go lower, so I'm curious about your thoughts on that. And then, given now, any incremental savings that you think you can do will sort of supplement the growth of the Aladdin platform. It would seem that I'd give more of a top-line story than a top-line plus expense leverage story. But then I worry the fee rate might go lower because of the mix. So how do we think about how do you get revenue growth from here? And then how do you turn that into operating leverage?
Speaker Change: It would seem to me that the fee rate may go lower, so I'm curious your thoughts on that, and then given now the any incremental savings that you think you can do will sort of supplement the growth for the Aladdin platform
Speaker Change: It would seem that I give more of a top-line story than a top-line plus expense leverage, but then I worry the fee rate might go lower because of the mix. So how do we think about how do you get revenue growth from here, and then how do you turn that into operating leverage? Thank you.
Jennifer M. Johnson: Thank you. So I'm going to start and then, Matt, have you kind of jump on to some of the EFR and some of the other things. You know, look, I think that one of the things that, you know, the pivot into adding alternatives, obviously one of the benefits of that is that it's just a much higher fee, even excluding performance fees as a baseline investment management fee. And, you know, this year, if you – we got it to $10 to $15 billion.
Speaker Change: So I'm going to start, and then Matt, have you kind of jump on to some of the EFR and some of the other things. You know, look,
Speaker Change: I think that one of the things that, you know, the pivot into adding alternatives, obviously one of the benefits of that is that's just a much higher fee, even excluding performance fees as a baseline investment management fee. And, you know, this year...
Jennifer M. Johnson: We're going to end up close to $15 billion, and yet, you know, the AUM is pretty flat, and that's really because inflows plus market are sort of offset by some outflows and realizations and distributions. But it was a year where you weren't in the market with a flagship secondary PE fund from Lexington, and frankly, real estate's been really soft. So while, you know, Clarion Partners has three of their largest funds are open-ended, and there's perpetual fundraising, you know, there just haven't been huge allocations to real estate. So let me hit a couple of those because I do think there's opportunity for that pipeline to expand. Let me start with real estate.
Matt: If you we got it to 10 to 15 billion We're going to end out up close to 15 billion and yet you know the the AUM is pretty flat and that's really because of inflows plus market is sort of offset by some
Matt: Some outflows and really realizations and distributions.
Speaker Change: But it was a year where we weren't in the market with a flagship secondary PE fund from Lexington. And frankly, real estate's been really soft. So while Clarion Partners has three of their largest funds are open-ended and there's perpetual fundraising,
Speaker Change: You know, there just hasn't been huge allocations to real estate.
Speaker Change: So let me hit a couple of those because I do think there's opportunity for that pipeline to expand.
Jennifer M. Johnson: You know, I think there's a feeling that this market is really bottomed, and that's driven by two things. One is more clarity on where rates are as well as probably more realistic marks, that the bid and ask spreads are coming closer. And in talking to folks at Clarion, you know, think about it. Office used to be 35% of the index. It's now down to 17%.
Speaker Change: Let me start with real estate.
Speaker Change: Yo.
Speaker Change: I think there's a feeling that this market has really bottomed.
Clarion: And that's driven by two things. One is more clarity on where rates are as well as probably more realistic marks, that the bid and ask spreads are coming closer. And in talking to folks at Clarion, think about it, Office used to be 35% of the index. It's now down to 17%. So finally, maybe there's more to go on Office as far as dropping in the marks, and Clarion only has 8% allocated to Office.
Jennifer M. Johnson: So, maybe there's more to go on office as far as dropping the marks goes, and Clarion only has 8% allocated to office. But you've had a huge adjustment in pricing. As a matter of fact, Clarion's seeing RP volumes go up a little bit. You're starting to see rescissions and redemption cues.
Clarion: But you've had a huge adjustment in pricing. And as a matter of fact,
Speaker Change: Clarity of Seeing, RFP volumes go up a little bit, you're starting to see rescissions and redemption cues.
Jennifer M. Johnson: And more importantly, some of the properties that they've sold in, like, logistics, have sold for above the appraised value, and some of the multifamily properties have sold above where the marks were. So that's kind of a sign that the real estate market's getting healthy again, and I think the feeling is that by the end of 24, we're going to start to see managers allocating back to real estate. I already mentioned Lexington where they've been deploying Fund 10 faster, and so hopefully, we'll be in the market sooner for their next fund.
Clarion: And more importantly, some of the properties that they sold in like logistics have sold for above the appraised value and some of the multifamily above where the marks were. So that's kind of a sign that the real estate market is getting healthy again. And I think the feeling is by the end of 24, we're going to start to see managers allocating back to real estate.
Clarion: I already mentioned about Lexington, where they've been deploying Fund 10 faster, and so hopefully we'll be in the market sooner for their next fund. And again, this is just a supply and demand issue, which is so much has been deployed.
Jennifer M. Johnson: And, again, this is just a supply and demand issue, which is that so much has been deployed in the alternative space, and there's a need for liquidity for a variety of reasons. And we do see M&A starting to pick up, but there are needs for that liquidity, and, you know, there's only a handful of large secondary managers that can buy big LP positions when needed, and so that's been where we've been able to have true pricing power in the secondaries.
Speaker Change: In the alternative space, and there's a need for liquidity for a variety of reasons, and we do see M&A starting to pick up.
Speaker Change: But there needs to be that liquidity. And there's only a handful of large secondary managers that can buy big LP positions when needed. And so that's been where we've been able to have true pricing power in the secondaries. And then I mentioned on BSP, we think this real estate debt, there's some parts of private credit that have been pretty tight. But real estate debt, because of the retention rate,
Jennifer M. Johnson: People's retrenchment of regional banks has made this just fertile ground for real opportunity, both from institutional clients interested in and really great conversations we're having with distributors who are interested in the Wealth Channel and offering products there. So we think that we've been kind of – if you just look at this year for alternatives, you're kind of at a baseline, and I think there's a lot more opportunity as some of this gets healthy, and that right there carries some of the fees up.
Speaker Change: The Retrenchment of Regional Banks
Speaker Change: has made this just a...
Speaker Change: Fertile ground for real opportunity, both from institutional clients interested in, and really great conversations we're having with distributors who are interested in the Wealth Channel and offering products there.
Speaker Change: So we think that we've been kind of, if you just look at this year for alternatives, you're kind of at a baseline, and I think there's a lot more opportunity as some of this gets healthy. And that right there carries some of the fees up.
Jennifer M. Johnson: I did mention the reduction in our fees; a lot of the EFR was an adjustment because we added Putnam. And so it's not just – if the asset mix, if fixed income takes a much bigger percentage than equity, of course, you're going to have it, but you're not seeing the degradation because of vehicles as much as I think people are thinking that's happening. We're not seeing that at the same level.
Speaker Change: I did mention, you know, the reduction in our fees.
Speaker Change: You know, a lot of the EFR was an adjustment because we added Putnam.
Speaker Change: And so, it's not just...
Speaker Change: If the asset mix in fixed income takes a much bigger percentage than equity, of course you're going to have it, but you're not seeing the degradation because of vehicles as much as I think people are thinking that's happening. We're not seeing that to the same level.
Matthew Nicholls: Matt, do you want to cover anything? Yeah, I think Jenny covered most of it. The differences from last quarter, Bill, on the EFR, for example, the business mix was probably a little bit under 0.1 basis points. Putnam was 0.9.
Speaker Change: cover anything? Yeah, I mean, I think Jenny you cover most but I mean
Speaker Change: There's differences from last quarter, Bill, on the EFR, for example, the business mix was probably a little bit under 0.1.
Matthew Nicholls: Now, a lot of that has to do with the calculation of the EFR itself, but we thought the 0.9 would be a little bit less than that, hence the slight difference from the guide that I gave. The reason why it ended up being as much as 0.9 is that, frankly, Putnam has just grown faster than we anticipated. It has grown faster than our projections. Every month, it's growing faster than we thought.
Speaker Change: basis point putnam was 0.9 now a lot of that's to do with the calculation of the EFR itself
Speaker Change: But we thought the 0.9 would be a little bit less than that, hence the slight difference from the guide that I gave. And the reason why it ended up being as much as 0.9 is because, frankly, part of them has just grown faster than we anticipated. It's grown faster now. Projections every month, it's growing faster than we thought. For perspective...
Matthew Nicholls: For perspective, Putnam's AUM is 23% higher than when we announced the transaction and 13% higher than when we closed the transaction, and they've been in positive flows every month since, for both quarters since. So what that means is that because they're at a lower effective fee rate, the averaging and the calculation, everything, it means that the EFR has come down a bit. If you take that into account, and then you take into account previous quarters where we've had episodic boosts to EFR, such as Lexington's catch-up fees, our EFR has actually been fairly stable. I mean, it has come down a little bit, but it's normally by 0.1s here and there, and that, as Jenny mentioned, is largely due to a little bit of the mix.
Speaker Change: You know, Putnam's AUM is 23% higher than when we announced the transaction and 13% higher than when we closed the transaction, and they've been in positive lows every month since, both quarters.
Speaker Change: So what that's meant is because they're at a lower effective fee rate, the averaging and the calculation, everything, it means that the EFO has come down a bit. If you take that into account, and then you take into account
Speaker Change: previous courts where we've had episodic
Speaker Change: Boosts to EFR such as Lexington's catch-up fees.
Speaker Change: Now, AFR has actually been fairly stable. I mean, it has come down a little bit, but it's normally by 0.1s here and there. And that, as Jenny mentioned, is largely due to...
Matthew Nicholls: And frankly, the growth in ETF canvas, SMA solutions, and we expect that group of things to be growing. It's very hard to have all of the things flowing that we've invested in in one quarter. One day, we will actually get alternatives, ETFs, canvas, SMA, and solutions all coming together at once, where we get the fundraising in alts lined up with all those other more organic and more ongoing growth areas of those vehicles.
Jennifer M. Johnson: A little bit of the mix and frankly the growth in ETF, Canvas, SMA solutions and we expect that group of things.
Jennifer M. Johnson: to be growing. It's very hard to have all of the things flowing that we've invested in in one quarter.
Speaker Change: One day, we will actually get, you know...
Speaker Change: alternatives, ETS, Canvas, SMA and solutions all coming together at once where we get the fundraising in alts lined up with all those other more organic and more ongoing growth areas of those vehicles.
Matthew Nicholls: When we do that, we've got a good shot at offsetting the areas of shrinkage that you referenced. I'll also point out that if you take out some of the larger sort of tax or fixed income areas that you've pointed to and others have pointed to, we'd be in positive flow, in the business right. So anyway, just to give you a little bit more information on the ESR. And Bill, the final thing I would add is Jenny talked a lot about alternatives, and wealth management is something we're obviously focusing on that I think is very positive from an EFR perspective.
Speaker Change: When we do that, we've got a good shot at offsetting the areas of shrinkage that you reference. I'll also point out that if you take out some of the larger sort of tax or fixed income areas that you've pointed to and others have pointed to, we'd be in positive flows.
Speaker Change: in the business right now.
Speaker Change: So, anyway, just to give you a little bit more information on the AFL.
William Raymond Katz: And Bill, the final thing I would add is Jenny talked a lot about alternatives and wealth management. It's something obviously we're focusing on that I think is very positive from an EFR perspective. And the final thing I would note is that our core sales, and we think about that as sales that are less than $100 million, are up at about 14%. That tends to often be higher fee business, and we see very significant continued growth in core sales.
Matthew Nicholls: And the final thing I would note is that our core sales, and we think about that as sales that are less than $100 million, are up at about 14%. That tends to often be higher-fee business, and we see very significant continued growth in that.
Matthew Nicholls: Thank you for your very kind words. Thank you. The next question is from Patrick Davitt at Autonomous Research. Please go ahead. Good morning, everyone.
Speaker Change: Thank you for the very comprehensive answer.
Speaker Change: Thank you.
Speaker Change: Next question is from Patrick Davitt at Autonomous Research. Please go ahead.
Michael Patrick Davitt: I have a follow-up question on your answer about the Aladdin expense absorption. A lot of what you described sounds like it would have to come through after implementation. So just to clarify, are you expecting that absorption to be in lockstep with the implementation expenses? And if so, how do you turn off all of those extra vendor costs if Aladdin isn't live yet to fill in that capability?
Michael Patrick Davitt: Good morning, everyone. I have a follow-up on your answer on the Aladdin expense absorption.
Michael Patrick Davitt: A lot of what you described sounds like it would have to come through after implementation. So just to clarify, you're expecting that absorption to be in lockstep with the implementation expense?
Speaker Change: And if so, how do you turn off all of those extra vendor costs if Aladdin isn't live yet to fill in that capability? Thank you.
Matthew Nicholls: Thank you. It's inclusive of that. So there will be periods of time where we're paying for both Aladdin and other vendors, but the quarterly view or vision that I provided to you includes that assumption, adjustments to, or impact to operating income per quarter based on our plan over the next five years. Remembering, of course, that a portion of the hundred million dollars is capitalized, so that gets spread out over more years. Probably something like 50% of it gets capitalized over more years than three to five.
Speaker Change: It's inclusive of that. So there will be periods of time where we're paying for both Aladdin and we're paying for other vendors, but the quarterly
Speaker Change: kind of view or vision that I provided to you includes that assumption. So we still think that there will be very modest
Speaker Change: Adjustments to our impact to operating income per quarter based on our plan over the next five years. Remembering, of course, that a portion of the $100 million is capitalized.
Speaker Change: So that gets that gets spread out over over more years probably something like 50% of it gets capitalized over over more years than three to five
Matthew Nicholls: And I just add that we're not on a uniformed platform, technology platform. So as you migrate certain SIEMs over, you retire their system. And so it is a little bit lockedstep as you go along. Yeah, we have. And the other thing is that we, at the time that we're implementing Aladdin, we are also implementing other important opportunities across the company that, again, offset, as I mentioned earlier, offset the sort of double pay you have to pay across different vendors. And that's why, when you get to the outer years, like 28, 29, and so on, when that gets eliminated, you start talking about $25-plus million of savings.
Speaker Change: And I just add that we're not on a uniformed platform, technology platform, so as you migrate certain SIEMs over, you retire their systems. And so it is a little bit lock-stepped as you go along.
Speaker Change: opportunities across the company that that again offset as I mentioned earlier offset those that this sort of double
Speaker Change: The double pay you have to pay across different vendors, and that's why when you get to the outer years, like 28, 29 and so on, when that gets eliminated, you're starting talking about 25, you know, plus million dollars of savings.
Speaker Change #100: Thank you.
Jennifer M. Johnson: Thank you. Thank you. This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments. Well, I just want to thank everybody for participating in today's call, and once again, we'd like to thank our employees for their hard work and dedication. We look forward to speaking with all of you again next quarter. Take care, everybody. Thank you. Ladies and gentlemen, this concludes the conference call for today. You may now disconnect.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO , for final comments.
Jennifer M. Johnson: Well I just want to thank everybody for participating in today's call and you know once again we'd like to thank our employees for their hard work and dedication and we look forward to speaking with all of you again next quarter. Take care everybody.
Speaker Change #101: Thank you. Ladies and gentlemen, this concludes the conference call for today. You may now disconnect.