Q2 2025 Franklin Resources Inc Earnings Call
Speaker Change: PAULSEN GMO MYTERIOUS SOLUTION TRENDY IN GRANT MYTHICAL ACOLONY MYSTERIOS PARALYSIS COMPANY PATRIOTIC LIBIDO A Tale Of a Tune A Tale Of a Jerry A Trio A Tale Of Jony And A男 And A Girl A Tale Of Jony And A Girl A Tale Of A Sneak
Speaker Change: Welcome to Franklin Resources Erning's conference call for the corner ended March 31, 2025.
Rob: Hello, my name is Robin, I'll be your call operator today. As a reminder, this conference is being recorded, and at this time all participants are in listening mode. I would now like to turn the conference over to your host, Selene Oh, Head of Invest Relations for Franklin Resources. You may begin.
Selene Oh: Good morning, and thank you for joining us today to discuss your quarterly results.
Rob: Statements made on this conference call regarding Franklin Resources Inc., which are not historical facts or forward-looking statements, was as a meaning of the private security litigation reform act of 1995.
Rob: These forward-looking statements involve a number of known and under-owned 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.
Rob: 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 MDNA sections of Franklin's most recent form 10K and 10Q filings.
Rob: Now, I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.
Jenny Johnson: Thank you, Selene. Welcome everyone, and thank you for joining us to discuss Franklin Templeton's second fiscal quarter results. I'm here with Matt Nicholls, RCFO and COO, and Adam Spector, our Head of Global Distribution.
Jenny Johnson: We'll have to your questions momentarily, but first I'd like to review some highlights from the quarter.
Jenny Johnson: The first few months of 2025 have been marked by significant market turbulence globally resulting from heightened geopolitical trade policy and consequently economic uncertainty. As our clients try to separate the signal from the noise [inaudible]
Jenny Johnson: We are positioned to help them navigate this period of market volatility and benefit from emerging trends.
Jenny Johnson: Periods with major market resets often act as catalyst for client changes to acid allocation and portfolio construction. This is one key reason why our diversified company is designed to benefit a broad range of clients through various market conditions and cycles. [inaudible]
Jenny Johnson: With money on the move, Franklin Templeton is poised to help our clients grow their assets with leading capabilities across public and private investments.
Jenny Johnson: Despite the volatility, we continue to see strong client activity across our key growth areas.
Jenny Johnson: For instance, our institutional one but unfunded pipeline increased by 2.3 billion to 20.4 billion during the quarter. It's highest level since 2022. One of our firm's greatest strengths.
Jenny Johnson: is the depth and breadth of perspective provided by our specialist investment managers who offer investment expertise across the full spectrum of asset classes.
Jenny Johnson: This comprehensive expertise is increasingly valuable as asset owners seek to consolidate relationships with managers who can offer a full range of investment solutions across geographies.
Jenny Johnson: By partnering with Franklin Templeton, clients gain access to broad capabilities delivered through a single integrated global platform.
Jenny Johnson: We provide deep industry insights to help clients protect wealth and unlock opportunities for growth.
Jenny Johnson: In April , for instance, the Franklin Templeton Institute delivered timely insights, advisor materials, and webinars to help clients make sense of headlines and uncover new opportunities.
Jenny Johnson: In the days following April's tariff announcements, the Franklin Templeton Institute held a dozen webinars attended by over 11,000 advisors
Jenny Johnson: Today, our firm reaches all corners of the world. Since our first office outside of North America opened in 1986 in Taiwan, international markets have been a key part of our growth
Jenny Johnson: as one of the first global firms to establish local asset management capabilities over 30 years ago. We have offices in over 30 countries and our clients are located in over 150 countries.
Jenny Johnson: Our goal is to manage each local business on a global scale, focusing on local investing and client needs.
Jenny Johnson: We have 470 billion or about 30 percent of our AUM in countries outside the US and approximately 50 percent of our employees work outside of the US.
Jenny Johnson: Within public equity markets, obviously there were several notable developments that unfolded during the quarter, reflecting a broader shift in global market dynamics. For the first time in many years.
Jenny Johnson: Several foreign markets outperform US indices, signalling a potential reversal of long-standing trends.
Jenny Johnson: As we've been anticipating in the U.S. and abroad, equity performance has broadened beyond the narrow leadership of the magnificent seven, as investors rotated into other sectors, styles and regions.
Europe outpaced the US and the US Dollar Weekend.
Jenny Johnson: We also saw striking reversals in other areas, Bitcoin declined, while gold surged almost 20 percent.
Jenny Johnson: The largest quarterly gain in US dollar terms in over 40 years
Jenny Johnson: The so-called deep-seek moment, spark questions around the need for AI-related spending, contributing to a pullback in previously high flying areas.
Jenny Johnson: Meanwhile, sectors like financials, health care, consumer staples, and utilities have led the market year-to-date, underscoring the shift in investor sentiment and sector leadership.
Jenny Johnson: For the remainder of 2025, our investment teams remain cautiously constructive on the outlook for global equity markets.
Jenny Johnson: The caution stems from uncertainty tied to softer US growth, driven in part by cuts to federal government employment and services, as well as the ripple effects of newly implemented US tariffs and retaliatory measures, particularly from China.
Jenny Johnson: The primary concern is an erosion of profitability related to weaker global economic activity and margin pressures as tariff costs filter their way through supply chains
Jenny Johnson: Well, we've seen sharp declines in the technology sector, including the Magnificent 7, some recovery of mega-caps stocks is likely.
Jenny Johnson: Your P and stocks, particularly in areas related to defense spending and infrastructure, will benefit from stepped up government expenditures as Europe addresses its security concerns.
Jenny Johnson: While new tariffs could be significant and a likely drag on global growth, our consensus is that a recession in the US is not a foregone conclusion.
Jenny Johnson: It's important to note that the economic impact of terrorists will likely be asymmetric affecting the US far less than our trading partners [inaudible]
Jenny Johnson: The U.S. economy, with its 30 trillion size, and only about 3 trillion in exports, is probably better insulated from recession than countries whose economies are more dependent on exports.
Jenny Johnson: Turning to the rate market, the recent quarter has been dominated by uncertainty on US trade policy and its potential economic fallout [inaudible]
Jenny Johnson: The execution of the terrorist rollout has exacerbated market volatility, nonetheless it has also cast a spotlight on the actual problem of large persistent trade deficits, which over time does need to be addressed, including through smaller US fiscal deficits. [inaudible] and it is the end of the day
Jenny Johnson: The US economy came into 2025 with strong momentum. While last quarter's GDP contracted by 0.3%, this largely reflected a surge in imports ahead of tariffs.
Jenny Johnson: Household Consumption has remained relatively robust and so far labor markets have proved resilient.
Jenny Johnson: Confidence indicators of weakened and many corporations have paused investment plans so underlying activity could well weaken somewhat in the current quarter.
Jenny Johnson: However, the administration's focus reverts to tax cut extensions and deregulation, this, together with progress on trade negotiations, should provide support for growth and allow the U.S. economy to avoid a recession this year.
Jenny Johnson: Bond yields have experienced high volatility, but appear most recently to have become rangebound at levels consistent with relatively resilient economic growth.
Speaker Change: We continue to expect one more rate cut by the Fed this year with additional monetary easing possible should growth deteriorate more sharply, tear up driven price pressures
Speaker Change: and a still large fiscal deficit seem likely to exert some upward pressure on yields.
Speaker Change: Turning to private markets, 2025 started with optimism for a more business tax and regulatory friendly environment with more IPOs and greater M&A activity.
Speaker Change: Heighten, Policy, Uncertainty, and Recent Setbacks, and Global Equity Markets have tippered enthusiasm.
Particularly for IPOs and M&A activity. [inaudible]
Speaker Change: However, we believe that increased market volatility may spur interest in secondary private equity offerings as sources of liquidity
Speaker Change: The undercapitalized secondary market enables firms like Lexington Partners to be highly selective and focus on quality assets as they deploy capital consistently during the year.
Speaker Change: Furthermore, these market dislocations can create attractive buying opportunities for this asset class.
Speaker Change: Increased market volatility also creates an attractive backdrop for our alternative credit businesses like direct lending real estate credit and special situations.
Speaker Change: In these markets, where there is greater dispersion between the best and worst credits, benefit street partners is well positioned, given its conservative approach to underwriting and our deep portfolio management expertise.
Speaker Change: Meanwhile, real estate valuations have declined significantly from their 2021 peaks and our investment teams are finding selective opportunities in areas such as industrials, housing and health care.
Speaker Change: Market dislocations and global volatility often create opportunities for active managers like Franklin Templeton that offer a full range of investment capabilities as reflected in our institutional one but unfunded pipeline.
The highest it's been in three years.
Speaker Change: The pipeline remains diversified by asset class and across our specialist investment managers and is particularly strong in Franklin, Templeton, fixed income. The combination of unpredictable fiscal policies, trade uncertainties, and geopolitical tensions require a balanced approach.
Speaker Change: Now, turning to highlights from the quarter. Our results demonstrate progress across our business. Our assets under management continue to be well diversified across specialist investment managers, asset classes, vehicles and geographies and ended the quarter at 1.54 trillion.
Speaker Change: This was a decrease from the prior quarter due to the impact of long-term net outflows at Western asset and negative markets.
Speaker Change: Excluding reinvested distributions, long-term inflows increased 9% quarter-over-quarter. This quarter, gross sales increased across all asset classes.
Speaker Change: Long-term net outflows were 26.2 billion, including 3.3 billion of reinvested distributions.
Speaker Change: Excluding Western, long-term net inflows were $7.4 billion. X Western, we were net sales positive for the last six quarters in a row.
Speaker Change: Multi-asset and alternatives generated a combined $9.7 billion in positive net flows.
Speaker Change: Equity long-term inflows were 38.9 billion and gross sales have been increased for the past six consecutive quarters [inaudible]
Speaker Change: Giving the risk off environment, equity net outflows were $5.4 billion primarily reflected in growth strategies
Speaker Change: We did see positive net flows into large-cap value, smart beta and international strategies.
Speaker Change: Fixed income net outflows were 30.5 billion. However, excluding Western fixed income net inflows were 2.8 billion, and were positive in multi-sector, munis, stable value, and high yield strategies.
Speaker Change: Franklin, Teppleton, fixed income continues to see positive flows and maintains a strong one but unfunded pipeline.
Speaker Change: Fundraising an alternative, generated $6.8 billion for the quarter of which private market assets totaled $6.1 billion and were broadly distributed across strategies.
Aggregate Realizations and Distributions were 2.8 million.
Speaker Change: We see a significant opportunity in the WELC Management Channel for an alternative business.
Speaker Change: Based on our data and calculations, we project that approximately 800 billion will be allocated to democratize alternative industry-wide over the next five years. And as I've mentioned before, this is a key focus of growth for us.
Speaker Change: Built a dedicated distribution effort and have had success placing our products on a number of leading platforms
Speaker Change: As a result, so far today, a little over 10% of our alternative assets are from the wealth channel We have learned a great deal about this opportunity but it's still early days
Speaker Change: As alternatives, my Franklin Templeton continues to progress in the Wealth Management Channel. It is imperative that we continue to deliver innovative top-performing solutions as well as a first-class client experience. [inaudible]
Speaker Change: This quarter we launched our first perpetual secondary's private equity fund, the Franklin Lexington Private Markets Fund in the U.S. International Designed for Well Channel Clients. These funds raised an initial combined $2 billion.
Speaker Change: We now have three perpetual offerings in the major asset classes.
Secondary Private Equity with Lexington Lincoln.
Speaker Change: Real Estate debt with Benefit Street Partners, and Clareans Real Estate Equity. All three of these strategies are north of a billion dollars in assets.
Speaker Change: Since January , we are one of the top ten largest fundraisers of perpetual funds and the largest traditional asset manager.
Speaker Change: As for multi-asset, we saw net inflows of $3.3 billion led by Franklin Templeton Solutions, our custom indexing platform Canvas, Franklin Income Investors, and Fudu Sherry Trust International our Private Wealth Management Business.
Speaker Change: Turning to investment vehicles, we saw strong client demand and positive flows into ETFs, retail SMAs in Canvas.
Speaker Change: RTF Business saw its 14th consecutive quarter of positive net flows attracting 4.1 billion during Q2 and a record high AUM of 37 billion.
Speaker Change: 12 of our ETFs now are over 1 billion in AUM, 10 in the US and 2 non-US [inaudible]
Speaker Change: The growth of our ETF business reflects our commitment to staying at the forefront of innovation.
Speaker Change: During the quarter, we launched the Franklin Crypto Index ETF, which offers investors indirect exposure to the two largest digital assets Bitcoin and Ethereum Ethereum.
Speaker Change: Through a single investment vehicle, the Franklin Crypto Index ETF is our third digital asset ETP launch in just over a year. We also launched Europe's first ever tokenized use. It's fun. The Franklin on-chain U.S. Government Money Fund
Speaker Change: The retail SMA market has experienced considerable growth in recent years, and this trend is expected to continue
Speaker Change: from 2022 to 2024, industry-wide, SMA's South 30% asset growth and are expected to reach 3.6 trillion by the end of 2027 from 2.4 trillion today due to tax advantages and lower minimums.
Speaker Change: Our retail SMA AUM was $144.2 billion with net inflows of $1.5 billion, and excluding Western had record net inflows of $3.2 billion.
Speaker Change: Our non-US business saw positive net flows in the Amia and America's regions, ending the quarter with approximately $470 billion in AUM. As previously mentioned, we benefit from the geographic diversification of the firm.
Speaker Change: Now in terms of investment performance, over half of the mutual fund AUM is outperforming its peer median across the one three five and ten year periods.
Speaker Change: Compared to the prior quarter, investment performance improved in both the one and five-year periods with one of our largest funds managed for yield now outperforming for those same periods.
Speaker Change: Over half of strategy composite AUM is outperforming its benchmark over the three and five year periods and 63% doing so over in the ten year period.
Turning briefly to financial results, Adjusted Operating Income [inaudible]
Speaker Change: was 377.2 million, a decrease of 8.6% from the prior quarter.
Speaker Change: The decrease was primarily due to compensation expense related to the start of the calendar year and the impact of Western partially offset by the prior quarter annual deferred compensation acceleration for retirement eligible employees.
As always, we continue to focus on discipline expense management.
Speaker Change: In January , we announced that Western would integrate select corporate functions into Franklin Templeton, creating efficiencies and giving Western access to broader resources.
Speaker Change: After careful planning, we have begun the integration of certain functions across back office, middle office, and support teams [inaudible]
Speaker Change: Importantly, as with all specialist investment managers, Western's investment team will maintain its autonomy Our top priority is to ensure this process is seamless to clients
Speaker Change: Notwithstanding the recent market challenges, we remain on track in terms of the five-year plan presented at fiscal year end, including priorities across public and private markets, distribution, private wealth management, and innovations in digital assets and technology.
Speaker Change: These combined with disciplined expense management and operational efficiencies, as well as effective capital management will allow us to deliver value to our clients and shareholders over the long term.
Speaker Change: Finally, this quarter, we were excited to bring our New York-based employees together in a modern space with new technology [inaudible]
Speaker Change: We relocated employees from ten separate Manhattan office buildings into one Madison Avenue. We've already hosted clients from around the world and the response has been overwhelmingly positive.
Speaker Change: At Franklin Templeton, we are driven by a shared mission to help people all over the world achieve their most important financial milestones. That mission remains constant even as the industry and our organization continue to evolve. [inaudible]
Speaker Change: A key to that focus is understanding their unique goals and being their trusted partner, in navigating the complexities of the market together.
Speaker Change: We have built an all-weather platform that mitigates concentration risks across specialist investment managers, asset classes, vehicles and geographies for the benefit of all stakeholders .
Speaker Change: And importantly, I'd like to thank our talented and dedicated employees for their commitment, efforts, and always putting clients first. Now let's open the call up to your questions, Operator.
Speaker Change: Thank you. If you like to ask a question, please press star one on your telephone keypad. The confirmation telephone will indicate your line is in the question queue.
Speaker Change: If anyone would you require operator assistance through in the conference, please press star zero from your telephone keypad.
Speaker Change: We request you, let me your question to one question, to allow for additional participants on this call this morning.
Speaker Change: Thank you, and our first question comes from line of Benjamin Budish with Barclays Capital. Please receive your questions.
Speaker Change: Hi, good morning, and thank you for taking the question. Just curious, you know, last quarter we got some guidance on how fiscal year expenses should shake out, you know, common benefits, some of the other line items. Just curious how you're thinking about that now just given some of the market movements and the sort of natural pressure on AUM, whereas there's some flex in the model, how should we be thinking about the range of outcomes for the year. Thank you.
Yeah, why don't I take that it's Matt Good morning.
Bear in mind that we ended April .
Speaker Change: at about the same AUM a little bit below, but it's going to be about 1.535 maybe a little bit a lot higher trillian of AUM where we started the month. So we know obviously that April was very volatile in the markets, but just bear that in mind.
Speaker Change: And all I do is I'll give you the courtly guidance and I'll talk about the annual that I touched on in the vast quarter.
Speaker Change: So, we expect our effective V-Ray for the third quarter to remain in the 38 basis point area. We think that that may increase a little bit going into the fourth quarter to finish the year, but the 38 basis point area.
Speaker Change: We expect competent benefits to come down to around $810 million, assuming that we have $50 million of performance fees.
We expect IS&T.
Speaker Change: To be 155 million, that's up slightly driven by the fact that we added a vendor in IT that means that we'll have two vendors overlapping for a period of two quarters that added about three million dollars.
Speaker Change: So it's not too far different from last quarter, but it's just up a few million dollars Occupancy we expect to remain flat at around 70 million dollars We are shedding the double rent One Madison and we have about 3.5 to 4 million dollars of that left for the next quarter
Speaker Change: and that will lead us to about $70 million, so flapped to the law's quarter.
Speaker Change: In terms of the four-year guidance of four-year 25, adjusting for the additional culture of Putnam,
Speaker Change: And excluding performance fee compensation, we expect our expenses to be roughly flat to 2024, very similar to 2024.
Speaker Change: We continue to make important strategic investments in the areas that Jenny mentioned in her prepared remarks in alternative assets, ETFs, Canvas.
in particular. [inaudible]
Speaker Change: and a funding these with cost saves elsewhere in the business. So, while our expenses are expected to be flat
Speaker Change: to last year for fiscal 2025 adjusted for Putnam and performance fees as I mentioned it is important to note that we're being disciplined with the circulation of savings, additional savings in the business into those very significant growth areas for us.
Speaker Change: And then I'll finally say that in the last quarter I mentioned fiscal 2026 because obviously we're managing through the Western situation where we've had revenue declines there, but we're supporting the team.
Speaker Change: in terms of expenses that's impacted our margin, again, that I explained last quarter.
Speaker Change: But I said that we had several expense initiatives underway, both Franklin and Weston.
Speaker Change: and these are expected to position us to enter fiscal 2026 with...
about the $200 to 250 million rum rate. [inaudible]
Speaker Change: of cost savings, going into 26. Just to be clear, that's fiscal 26. So for fiscal 25, we expect a flat situation, for fiscal 26, we expect to achieve 250 million dollar expense savings. The only caveat to this.
Speaker Change: is that as Jenny referenced in her opening remarks, we have several quite significant growth areas in alternative assets. If we grow faster in some of these areas, those additional sales and fund raises do come with additional expenses, which we will highlight in the event that we're in that situation.
All right, that was very detailed. Thank you very much Thank you very much.
Thank you [inaudible]
The
Speaker Change: Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Please just use your question.
Craig Siegenthaler: Thanks, good morning, everyone. My question is on the positive long-term net flow trend, X-Western, and I'm wondering...
Speaker Change: Do you have an estimate for the base for the organic growth rate, including Western? And I'm curious just...
Craig Siegenthaler: Given how the lower fee rate on that Western business is, and you can see that your blended fee rate is rising, and if you don't have the numbers handy, high level commentary will be helpful till. Thank you.
Craig Siegenthaler: Yes, I mean, you know, like, it's a little hard to tell, I can't tell you exactly what the organic growth percentage, but if you just look at...
Craig Siegenthaler: You know, this quarter, right, including Western long-term net flows, we're about 7.4 billion. I think what's...
Craig Siegenthaler: Particularly positive is you excluding Western, you know, the fixed income flows were positive of 2.9 billion, but interestingly
Franklin's fixed income actually had positive flows of 5.4 billion.
Craig Siegenthaler: And, you know, you can see in our one but unfunded institutional pipeline, you know, which is up
Craig Siegenthaler: The biggest sin in that is actually the Franklin Fixed Income, which...
Craig Siegenthaler: Historically, wasn't known for being an institutional manager, and you could see, and part of that is, you know, the great performance and contributions of Putnam, part of that is...
Craig Siegenthaler: I think some of the changes that some of the thigh has made over time and so they're becoming a much more institutional manager and you can see that in those numbers.
Craig Siegenthaler: You know, if you look at private markets, you know, we had 6.8 billion in alternatives fundraising of which 6.1 is private markets of this positive multi assets have been positive
Craig Siegenthaler: Some of the biggest growth areas with vehicles have tremendous growth rates, you know, the 4.1 billion in ETFs is on a base of 37 billion, and we have 135 ETFs
Craig Siegenthaler: We're selling them in all regions, so it's a great opportunity. Our SMA business is $144 billion. We have 200.
You know, individual SMA types of products there and
Craig Siegenthaler: The thing about SMAs is it's actually complicated to get them set up in the SMA channel so the fact that we have such...
Craig Siegenthaler: Diverse Sims, all contributing the SMAs of big area growth, we think is a great opportunity. X Western were positive flows in the U.S. for positive flows internationally, so the challenge has obviously been...
Craig Siegenthaler: is growing, we're growing, and in many cases faster than that, and we're growing in the places we want to grow.
Craig Siegenthaler: So, I think, you know, all of those both very well and again, you know, when we just look at
Craig Siegenthaler: Obviously, equities are outflows as an industry, but you look at what's happened with Putnam. I think they're up quarter of a quarter from acquisition 82% in flows.
Craig Siegenthaler: when you take great performance and you add it to the global
Craig Siegenthaler: distribution platform that we have, that combination can be very positive even for active equities. And of course, market times like this, the volatility, you know, people are reminded why active management matters, you know, active managers have to think about risk adjusted returns.
Craig Siegenthaler: and I always say nobody talks about how beta gets more risky.
Craig Siegenthaler: You know, over time, and when you have a concentration in active managers have to have to consider that. So, volatility is great fertile ground for active managers. You got to prove it, and I think our performance has continued to improve. So, all those things, we think are really positive.
and again, I think the global breadth of our distribution.
Craig Siegenthaler: and no other firm has the kind of local asset management capabilities that we have in these big growing markets like in India. You know, we have local manager, 80% of flows in markets tend to go to local managers, we're local in so many of these markets.
Craig Siegenthaler: So, you know, I don't have that specific growth number. I don't know if I bought Matt time to calculate it or Adam, so go ahead and you guys can add to it.
Speaker Change: Yeah, two, just add two things. One, the effective fee rate of the assets that we have of Western is in the high 15 basis point areas of 15.8 to, I think, 16.
Speaker Change: The other thing I'll point out is for April , it's really, it's obviously early we're reporting this next week, but ex-Western, our
Speaker Change: Flows are about flatish for the month, and that's in a very volatile month, that's worth noting as well. Month by month can actually change quite a bit and leads to the results at the end of the quarter, but those were for appointing that out as the month was so.
So, Bolotov [inaudible]
Speaker Change: Matt, I would only add that, you know, Jenny talked about having strong sales growth in areas where the industry is growing, but even where the industry is shrinking in places like active equity, our growth sales are up six quarters in a row now, so we really do see strength across the business.
Speaker Change: Growth Cells Up in every region in every asset class this quarter. And when it comes to C's, a C's are really going to be impacted by asset mix.
Speaker Change: and I would only comment there that our business is far more diversified than it once was.
Speaker Change: We look at our top 10 selling strategies for the quarter. Three were in equity, three were in fixed income.
Thank you.
Speaker Change: Thank you. The next question is from the line of Alex Blostein with Goldman Sachs. Please just use your question.
Hey, Jenny. Good morning, everybody.
Alex Blasting: I was hoping we could dig in a little more into your comments around private markets and the traction you're seeing there
Alex Blasting: I guess first, we'd love to get your insight on how the retail products have done through April . I mean, obviously, all the volatility. It seems like the industry has held up quite well. Curious if you're seeing something similar. And I guess when you zoom out a little further, I believe Lexington will be in the market with their large flagship secondary fund. It's an area where there's quite a bit of bright spots and good momentum in that business for the industry as well. So, curious how you think about sizing that as well.
Alex Blasting: What that all means for your aspirations for growth in private markets management fees over the next 12 months.
Alex Blasting: Sure. So a couple things. So one is let me just because we had guided originally to 13 to 20 billion in the private markets.
Alex Blasting: and we're at 10.4 billion so far. So we've raised, in alternatives, I think 12.1 or something, but of that 10.4 is in private markets. So we're, you know, edging up closer to the lower engine of the range, and the message was, we'd be on the higher end of the range if Lexington had a first closed.
Alex Blasting: in September , which we thought was unlikely but a possibility. We now think that that is pushed out further, but the kind of, again, this quarter at 6.1 billion. And by the way, that is well represented from...
BSP, et cetera, so private credit.
Clarion, with real estate .
Alex Blasting: as well as Lexington and Lexington had obviously the Flex and Flex I funds which raised 2.1 billion plus they're in the market with their continuation vehicle and their middle market so they're getting flows there and Franklin Venture also at flow. So that 6.1 represents all four of our alternative managers.
We think going forward.
Alex Blasting: This year, since Lexington probably will push, you know, the close will be more towards the ladder of 25, potentially even early in 26, and I'll talk about kind of what we think that opportunity is there in a second.
Alex Blasting: They're still going to come in probably right in the mid-range of that original range just because of the strength of the other areas that we're getting good positive flows in.
Alex Blasting: Now, the question around, will we see the opportunities? Look, the wealth channel is just a massive opportunity. Today, advisors have about 5% of their book to alternatives.
Alex Blasting: You know, they'd like that number to be closer to 15 percent, you know, our internal calculations.
Alex Blasting: is in the next five years, that's 800 billion, but if you read Goldman's numbers and others, you're talking like a foretry, it's just massive.
Alex Blasting: and our ability to combine the product breadth that we have, and I think we're pretty unusual, maybe one other firm as something similar, with our DNA in the Well Channel.
Alex Blasting: And again, selling alternatives in the wealth channel is hand-to-hand combat.
Alex Blasting: The first and probably easiest thing is to get on the platform. The challenge goes into the education of individual financial advisors, making sure from a suitability because they have to decide client by client with suitable, and then also having the tremendous product capability that you have. So, think about, um...
Today, we have three evergreen perpetual products.
Alex Blasting: that are a billion or more, one for Clarion, one for BSP with BSP's real estate debt fund and now Lexington Flex. So we have tremendous product capabilities there that are perfect for that channel.
Alex Blasting: So we think that you know really good opportunities and then we have 90 people who are just
Alex Blasting: Dedicated, we built this over the last few years to being able to support our market leaders as specialists who are helping our market leaders out there with wholesale or with advisors to think about how to sell those products. And I think the success that we've had on flex is a huge success.
Demonstrates, really what that opportunity is. [inaudible]
Now, with respect to Lexington's Fund 11.
Alex Blasting: You know, they would tell you that the time in the market it is, it is absolutely, you know, a tremendous time to be in secondaries The challenge of course is that the LPs are sitting there with less realizations than they had and to put that in context [inaudible]
Alex Blasting: Between 21 to 24, they were usually getting cash flows from realizations kicked off from their alternatives, portfolios around 20 to 24% of what their AUM in that area was. That's cut in half.
Alex Blasting: So, in order to fund their future opportunities, they have to be able to come up with cash, and that's where you're seeing, you know, that they're going in and talking to Lexington, so as far as opportunity to put money to work [inaudible]
Alex Blasting: and therefore being able to scale the Evergreen Fund alongside with their traditional funds is just a tremendous, you know they have no concerns about the ability to put that to work. [inaudible]
Alex Blasting: And then what's happening is you have managers, they recognize the opportunity in the secondary space.
Alex Blasting: and so they want to do it. They just have to figure out ways to make that space in their poor voice, but they're actually afraid of missing out.
Alex Blasting: on this vintage. And so, you're Lexington in 10s, as you would expect this fund to be bigger than the fun 10s.
Speaker Change: I asked the question, or is there any concern that flex and flex I would in any way cannibalize the 20% that you raised in fund 10 in, you know, in fund 11 and know they're confident that it is really focused on a different group and so we think really that flex and, you know, the evergreen funds that perpetuals there have actually just opened up to a broader section of clients.
Speaker Change: So, you know, if Matt and Adam, if there's anything you want to add here [inaudible]
Patrick
Patrick: Yeah, Jenny, the only thing I would say is that you're right. The launch of three scales per petrol allows us to constantly be in market and just being there talking to advisors, giving all its education gives us continued momentum. But that also helps us with our draw-down races. And it's not just the Lexington flagship where we can raise money from the recal channel, it's things like.
Patrick: Co-invest and Continuation Vehicles, Middle Market. Those products also have good momentum in the retail channel and are held by the fact that we're always in market with the perpetuals.
Very helpful. Thank you.
Speaker Change: The next question is from the line of Dan Fannon with Jeffries, please just use their question [inaudible]
Dan Fannin: Thanks. My question's on fixed income. You've mentioned flow's ex-western being positive. Could you expand upon some of the strategies that are seeing or that success and then also just an update on western?
Speaker Change: and where you think you are in the kind of redemption trends in the conversations they're having with clients and just an overall update on the health of that subsidiary would be helpful. Thank you.
Speaker Change: So I'll start on Western, and then Adam, why don't you cover the fixed income strategies if we're getting, you know, most traction and so look you know Western good news is during this really volatile time Western's performance has been very good. [inaudible]
Speaker Change: We can refill confidence that the team is stable, engaged, and very motivated. I think it's important to remember Western is a $245 billion asset manager on its own. So it has scale and size on its own.
You know, this-
Speaker Change: April has 10 billion in outflows which was anticipated obviously difficult but you know that is the reality but I think it masks the fact that they also have 5 billion in gross sales
Speaker Change: and they continue to be part of the institutional one but unfunded pipeline, so institutions are still allocating.
Speaker Change: to Western, they still have great relationships with a lot of insurance companies, strong community and cash franchises, still getting flows into corn for plus.
Speaker Change: So, there's still support there, and then I would just say, again, this demonstrates...
Speaker Change: I think the strength of our model, if you look at Franklin in the past, we had oftentimes real concentration on very successful products. Now we have...
Speaker Change: true diversification across. And so you look at the flows that are going into both the private credit side of the business as well as Franklin Fixingcom and the good news is we're able
Speaker Change: despite having won this sim going through a difficult time to be able to pivot and have and capturing the opportunities in the market in in fixed income with other sims and Adam you were talking about the specific. Thank you for your time.
Adam Spector: Sure, if I take a look at where we're having specific success, um...
Adam Spector: You know, Munis was one area. We raised about a billion dollars in Munis. That was a really strong area for us [inaudible]
Adam Spector: We also saw good flows and stable value and high yield as well, where we have a number of top performing
about products.
Adam Spector: The insurance sector is something that's been strong for us across the board and customized and corporate strategies there. We've seen very good flows and depending on how you want to bucket CLOs with $2 billion raised in CLOs, that's been quite strong for us.
Adam Spector: Short duration is the other area. We see that clients on both the retail and institutional side, U.S. and non-U.S. want to keep a little powder dry until the rate situation...
Adam Spector: Clarifies a bit. And for that reason, we've seen very good flows into our short duration product.
Adam Spector: The final thing I would note is that depending on how things unfold on the macro side, we're very well positioned in some of our non-dollar fixed income products and we think that those could well accelerate there as well.
Adam Spector: and I'll just, I just want to, because I gave a little bit information in April , those numbers are preliminary, we do anticipate despite this incredibly volatile time to be about flat in April as far as flows. [inaudible]
Adam Spector: And from a fixed income standpoint, if we look at things going forward about half of our one but unfunded pipeline is fixed income and the largest single component of that is Franklin
The End of The End of The End
Thank you [inaudible]
Speaker Change: The next questions are in the line of Michael Cyprys with Morgan Stanley . Please receive your question.
Good morning, thanks for taking the question.
Speaker Change: I always hope you could spend a moment on your international business. You guys have a pretty broad, large overseas footprint. I was hoping you could elaborate a bit more on how it's contributing to revenues and flows today, where you're seeing the most traction overseas. And if you could talk to some of your initiatives to help accelerate the growth.
Speaker Change: from Overseas, and particularly how you see demand evolving for non-US strategies in this backdrop. Thank you.
Speaker Change: Great, Adam, do you want to take that? Do you want... [inaudible]
Speaker Change: Player with locally oriented and global product in most of the markets we serve.
Some of the trends we see are regional specific [inaudible]
Speaker Change: For instance, Australia tends to be a more alternative oriented market for us Asia tends to be a more income oriented market for us. There's some things like US technology that tend to sell well for us across the board.
Speaker Change: in terms of how we're set up, our business in Asia tends to be a bit more institutionally focused than in some other markets.
Speaker Change: and I would say a market like Canada tends to have most of the hand-to-hand retail distribution that we see in other places.
Speaker Change: If we look at our success, core sales is doing well in all of those markets.
Speaker Change: Our bumpiest ride this quarter was probably in the APEC region and that's just because we happened to have a number of large institutional clients there who were de-risking their portfolios and we were on the riskier side of the asset allocation there.
in terms of our exposure to equities. [inaudible]
and higher return on in fixed income products. Nothing I think that is...
Speaker Change: Telling about the future, but the Asian market does tend to be more institutional and we were on the wrong side of some allocations there this quarter. If we take a look at the overall AUM, it is about
Speaker Change: $470 billion outside of the U.S. And for this quarter, we are net flow positive in both the EMIA and America's regions.
with gross sales up in every region.
Speaker Change: Our next question is from the line of Bill Katz with TD Cowan. Please just see it with your question.
Speaker Change: Great, thank you very much. You guys just clarified, excuse me, just the flows at WAMPGO was the $10 billion was that?
Speaker Change: The net of the five billion, or is that the net outflows?
and then the broader question, Jenny.
Speaker Change: It seemed like you put together a pretty strong platform that can…
Speaker Change: Invest across credit bulls or private markets, both public and private, but there have been a number of alliances coming up around you, K-Current Capital Group, I think a couple weeks ago, now Blackstone and Wellington in Vanguard are going to go ahead.
Speaker Change: What you're thinking strategically about setting up the lines that might accelerate the opportunity set as the public-private world sort of becomes more intersected, thank you.
Speaker Change: Yeah, thanks. Well, actually, I knew it when I said it that I probably confuse it a little bit. It is a net outflow number that is inclusive of the five billion growth sales. I was just trying to make the point that there are clients still allocating, but as you can see, there's obviously redemption pressures there at Western. Look, I think...
that, if you might give up, is I think we are incredibly—
fortunate to have the stable of alternatives capabilities that we have.
Speaker Change: that we did it early and is going to be extremely difficult for traditional managers to build that kind of what is it's virtually possible to do
Speaker Change: You know, organically, it's really hard to scale organically, especially this mature in the alternative space and honestly the the right off that we have this stuff.
Speaker Change: This quarter was our attempt to do a private equity climate alpha fund organically and so but to be able to go out and acquire is difficult and if you're a partnership it's impossible.
Speaker Change: So, what is, I am incredibly pleased with the product capabilities that we have with.
and I have to tell you, just take these. [inaudible]
Speaker Change: Team, they have about 10 billion they had at the time, 10 billion about real estate [inaudible]
Speaker Change: Dad, and they thought, well, gosh, we have to foreclose our property. We don't run properties. We should talk to Clarion and get some advice from them.
Speaker Change: And in those conversations, Clarence said, hey, there's been a real retrenchment of regional banks in the real states debt.
Speaker Change: Funding, you guys should, you know, think about that and there before we launch that product that came out of literally the the leadership teams of two different sims just talking. [inaudible]
Speaker Change: That to us is the great opportunity and so when we look we have done partnerships We launched a partnership with Apollo in the DC space where I think it's leaf house where we're clarion is a slave Apollo is a slave so we're gonna do those two
Speaker Change: Where we think the great opportunity is going to be going forward is actually now just imagine your research analyst, and you only cover...
Say hi, Yield.
Speaker Change: And you don't have any insights into what's going on in the private market. It's literally like managing and researching with half the data.
Speaker Change: So we actually think over time the ability to think about how these teams are structured and how you have to be careful because there's, you know, ethical walls and information walls that are there [inaudible]
Speaker Change: But how they're structured to be building products and gaining insights that it's going to be better that these the managers are under the same umbrella instead of just being sleaze [inaudible]
Speaker Change: and then the final piece is, it's not clear whether the gatekeepers want managers to put together
Speaker Change: Their own partnership, or whether they want to serve in that role, where they're selecting [inaudible]
Who the two sleeves are? [inaudible]
Speaker Change: And so I think that remains to be seen, but I have to say, I like where we are, we are both open to partnerships as well as able to build products and opportunities across private and public ourselves.
Thank you.
Speaker Change: The next question is from the line of Glenn Short with Evercore ISI. Please see your third question.
Speaker Change: Hello there. How up on private markets, if we could. So I watch a lot of basketballs, I've seen a lot of the Franklin Templeton Alternatives by Franklin Templeton advertising spin. I think good general brand
Speaker Change: I'm curious when it gets towards, if it gets to specific products, or if that's a hand-to-hand thing in the channel, and then bigger picture.
Speaker Change: I think a lot of us agree with your 800 billion over the next five years. Probably a lot of us would take the over [inaudible]
Speaker Change: How much of that do you think you touch through Lexington Clare and BSP? And do you have interest in building out the asset classes within public markets that you wouldn't be touching right now that are part of that 800 expected great thing?
Speaker Change: Great, thanks, I'll start and then Adam, please feel free to fill in. So, first of all, I think that the only thing we don't really have is infrastructure, if that actually takes off in the private space, but the private markets in the wealth channel.
Speaker Change: It matters. What is your distribution capabilities? Are DNAs in the wealth channel?
We sell to a hundred percent of an advisor's book.
Speaker Change: which means we have more people out there touching the advisor and then when you find the advisor interested in
Speaker Change: In, you know, alternatives, we can bring in both the education from our Academy and our Institute, as well as one of the 90 specialists.
Speaker Change: Who can focus on alternatives? So our ability to cover the globe on, you know, in the well channel with just scale of people, I think it's gonna be difficult for the folks who are just alternative managers to be able to do that. [inaudible]
Speaker Change: The second thing is, so one, it's that education. The second thing is, do you have the capabilities? And as I said, you know, other than infrastructure, I think we cover it completely. And the third is, do you have the right vehicles and the fact that we're sitting here today? All right.
Speaker Change: with Clarion, VSP, some private credit real estate and secondaries with
Speaker Change: Perpetual products that are over a billion dollars, so you immediately have scale is just a huge opportunity.
Speaker Change: versus others who are going to try to enter the market. I think that we told the story about the success we had. [inaudible]
Adam Spector: with Lexington Funds 10 in the wealth channel with a large distributor and Adam, I think it's like something like 44% of the advisors correct me on what the numbers had never sold an alternative product before.
Adam Spector: You know, the fact that our Flex Fund, when we came out [inaudible]
Adam Spector: You know, we just launched it with a couple of distributors and some small RAs and we ended up...
Adam Spector: Shutting it off early because we were worried about the ability to source deals and keep the quality of deals versus keeping too much in cash. So we literally slowed it down and then and then didn't it open it up to more firms as quickly as we thought because we wanted to make sure that we could [inaudible]
Adam Spector: I think, again, demonstrates the breadth of our capability of support there. Adam, you want to add anything to that?
Adam Spector: I would only add, Jenny, that when we raised the money for flex and flex I, we did it really with significantly only two partners.
Speaker Change: because we wanted to launch and launch right and have an appropriate escrow process.
Speaker Change: We are about to broaden that group out and are working on doing that. I don't have significant demand there. That really should help us.
Speaker Change: The other thing I would note is that there are different types of advisors. You have at the high end, you have private bankers who have been doing alternatives for years, have well-diversified portfolios, and might be adding drawdown funds. You have others who are going to want to do perpetual products like Flex.
Speaker Change: FB Red, CP Redx, etc. But what we're starting to do now is to talk to advisors who have never done alternatives before. And the fact that we have such broad reach on the traditional side is allowing us to get that access early and provide that education.
Speaker Change: Our belief is that being the first one in to provide that education is going to allow us to execute on sales in the coming quarters.
Speaker Change: Great. The only thing I'd add is that we do actually have liquid infrastructure.
Speaker Change: and we do have infrastructure debt. We have infrastructure debt, although it's a little bit smaller. So, to Jenner's point, we do want to add
Speaker Change: Private Equity Infrastructure, and to Janie's earlier remarks, I think the only way for us to really do that is to acquire something. So over time, we've mentioned this on multiple calls, we're likely to do that in some form or another.
Speaker Change: The next questions are in the line of Brian Bedell and with Deutsche Bank. Please excuse their question.
Brian Bedell: Great. Thanks, Good morning. Thanks for taking my question. Maybe just go back to the $470 billion. First, can you clarify? I think that's by the region where the product is domiciled as opposed to the strategy. And this is on the right six, I think.
by Region Inn.
Brian Bedell: If you can clarify that, and then the question really is if there is a rotation away from US strategies and non-US strategies.
How are you positioned?
Brian Bedell: from that dynamic within these regions. So, you know, would they be potentially selling, you know, Franklin U.S. strategies, but then are you position well to capture?
Brian Bedell: that flow into non-US strategies, and then I guess even more broadly, how do you fill your position if there's just a general
Brian Bedell: Okay, great. So the $470 billion really is where the AUM is sourced for not what we're investing for. So that $470 billion is
Ah.
Sourced from outside of the United States
Speaker Change: I think if you see investor behavior, there were a few shifts we saw recently. One of them was a preference for non-dollar assets.
Brian Bedell: I think that was the right investment decision if you take a look. If you take a look especially on the smaller Kat markets, if you look at, you know, German, small and mid-cap versus US small and mid-cap for the recent period, that was one of the strongest trades out there. So there was a performance difference, and I think...
Brian Bedell: that drove some of the allocation. We are well-positioned and have a number of international and global equity products. In fact, that's some of the hallmarks of what we're known for outside of the United States. So that trend, I think, actually, but was well for us.
Brian Bedell: I predict a little further into the future. I think the future is a bit murkured. It was all right now, and that gives value stocks a bit of an advantage in the minds of many investors, especially where valuations are. So we have seen a shift of allocations.
Brian Bedell: from growth to value on the equity side. That's another area where we have some real relative strength.
Great color, thank you.
Thank you [inaudible]
Speaker Change: Our next question is from the line of Patrick Davitt with Autonomous Research. Please receive your question.
Speaker Change: Hey, good morning, everyone. You mentioned the insurance channel earlier. In that man, could you update us on where the Great Western Relationship stand? How much of their initial commitment is still left to fund and any new potential commitments in the work? Thank you.
Great. Matt, you want to take that? Yeah.
Yes, so-
That's who we...
Speaker Change: We've formed a really great relationship with the power group of companies out of the initial $25 billion that they agree to allocate to us. We have about three to four left, I think, so we're in the low $20 billion.
Speaker Change: So that's that, but we continue to explore many other different avenues of growth [inaudible]
Speaker Change: across our franchise and their franchise. So let's say that that partnership is...
Speaker Change: Living up to its expectations in terms of what we described when we announced the transaction.
in terms of the Putnam aspect of that overall transaction.
Speaker Change: I think we mentioned this on the last call. We really couldn't be happier with the strength and quality of that team and the output speaks for itself. We have almost, I think, $30 billion of net new flows from Putnam since we closed the transaction last January .
Speaker Change: I don't know where the Adam you have anything to add to that.
Speaker Change: I would only say that just in terms of the future, we have had success in the insurance channel. We were recently got some significant mandates from an insurance company that consolidated from 20 or so managers down to four, wherein discussions with others for similar types of opportunities.
Speaker Change: and feel that we offer these clients really a breadth of opportunity especially in a channel where so much of the allocation goes to alternatives, we are very well positioned.
Thank you.
Speaker Change: Thank you. This concludes today's question and answer session. Oh, now let's turn hand the call back over to Jenny Johnson, Franklin's president, CEO of Final Commons.
Jenny Johnson: Great. Well, listen everybody. Thank you for participating in today's call and once again we're a people business. I'd like to thank our employees for their hard work and dedication. And we look forward to speaking with you again next quarter. Thanks everybody.
Jenny Johnson: Thank you. This concludes today's conference call. Come me now, disconnect and see that.