Franklin Resources, Inc.

Welcome to Franklin Resources Earnings Conference call for the quarter ended December 31st, 2020. My name is Rache and I will be your call operator today. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts or forward-looking statements within the meeting of the Private Securities Litigations 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. These and other risks, uncertainties, and other important factors are described in more detail in Franklin recent filings with the Security and Exchange Commission, including in the Risk Factors and MD&A section of Franklin's most recent form 10-K and 10-Q filings. At this time, all participants are in a listen-only mode. If you would like to ask a question at that time, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. The company requests that you limit to one initial question and one follow-up. As a reminder, this conference is being recorded. At this time, I would like to turn your call over to Franklin Resources President and CEO, Jenny Johnson. Ms. Johnson, you may begin.

Hello, and thank you for joining us to discuss Franklin Templeton's results for our first fiscal quarter of 2021. Following the close of the Legg Mason transaction on July 31st, the results we announced earlier this morning include the first full quarter of the combined organization. On the call with me today is Greg Johnson, our Executive Chairman, and Matthew Nichols, our CFO. And joining the call for the first time is Adam Spector, Adam joined our firm last July as managing partner of Brandywine Global and additionally became our executive vice president and head of global distribution on October 1st. To start, we hope that everyone is staying healthy and safe. We'd also like to recognize our incredible employees who continue to work hard every day on behalf of our clients and firm. It has been six months since we closed our acquisition of Legg Mason. and its specialist investment managers. And over that time, all while under a remote work environment, we've made significant progress in bringing our teams together to maximize our collective potential. We're seeing a high degree of stability within the organization, as well as a number of encouraging trends across the business. First off, assets under management reached a record high of approximately 1.5 trillion this quarter, driven primarily by strong market performance. That's an increase of $79 billion or 6% during the quarter. Turning next to operating and financial results, adjusted revenues increased by 20% to $1.5 billion, primarily due to an additional month of leg mason results. Higher revenues and continued expense discipline resulted in a 28% increase in adjusted operating income to $550 million and an increase in operating margin to 37.2%. On the performance front, our investment results improved this quarter with 61%, 66%, 68%, and 75% of our strategy composites outperforming their respective benchmarks for the four key time periods. Looking deeper into those numbers, Western Asset continues to have standout performance and reach $423 billion in long-term assets and $480 billion in total assets, its highest level on both fronts in over a decade. Brandywine performance rebounded strongly and saw net inflows into global multi-sector products in the latter part of the quarter. And as we saw improvement in performance at ClearBridge and across many Franklin Templeton strategies, ClearBridge is another example of one of our specialized investment managers reaching a record in AUM, which was $176 billion at quarter end. Likewise, our fiduciary trust high net worth AUM is at an all-time high of $32 billion, while the business also generated positive net flows for the quarter. Record AUM levels were also reached for Clarion Partners at $58.1 billion. Long-term relative investment performance of our U.S. and international mutual funds also improved this quarter. A significant driver of the improvement was our Franklin Income Fund, and several of our value-oriented equity strategies also generated noteworthy results. We continue to see strong performance in U.S. equities and U.S. fixed income. our mutual funds that are rated four or five stars by Morningstar increased during the quarter and now number 140 funds. On the distribution front, long-term net outflows were 4.5 billion, which includes 12.6 billion of reinvested distributions. But notably, momentum continued to build with positive flows into a number of our specialized investment managers, including Benefit Street Partners, Clarion Partners, ClearBridge, Fiduciary Trust, Franklin Equity Group, Franklin Templeton Fixed Income, Martin Curry, Royce, and Western Asset Management. Franklin Equity Group saw strong inflows, which were led by the Franklin Dynatech Fund, which reached a record $22.5 billion in AUM. As of quarter end, we have a promising institutional pipeline of opportunities and a combined total of one but unfunded win of $11 billion. As we've noted on previous calls, a strategic focus for the firm has been to expand our alternatives platform to offer strategies that do not lend themselves to passive replication. With $127 billion in assets under management in alternatives and robust relationships across the retail channel, we've seen demand for our retail alternative offerings increase. Our EMEA region led the way with a focus on multi-strategy social infrastructure and real estate. Also, importantly, as we look to deliver investment expertise through our client's investment vehicle of choice, We now have a top three market position in the retail SMA business, which saw positive net flows this quarter and increased to $113 billion in assets. In other news, we were excited to launch our new Franklin Templeton Investment Institute, an innovative hub for research and knowledge sharing. Stephen Dover will be leading that effort. With the launch of the institute, we're doubling down on what sets our firm apart. unmatched insight and research from experts on the ground in over 70 locations around the world. At the same time, tapping into the strength of our collective leadership talent, we've expanded Terrence Murphy's role to become head of equities for Franklin Peppleton while retaining his existing role as CEO of ClearBridge Investments. While our equity teams will continue to maintain their individual investment processes and autonomy, Terrence will facilitate collaboration across the groups to drive results and growth. Looking at another key area, capital management remains an important focus. Our strong balance sheet continues to provide us with financial and strategic flexibility to evolve our business. Cash and investments totaled $6.3 billion following the public offering of $750 million aggregate principal senior notes due 2030 issued at a 1.6% coupon. As previously explained, it is our intention to pay down more expensive debt with the proceeds of the offering. Excluding net proceeds from the senior note offerings, we have $5.5 billion in cash and investments. We also continue our track record of dividend growth for the 40th consecutive year with a 4% increase to our regular dividend in December. To wrap things up, Over the past six months, we've created a stronger firm that combines the best of both worlds, global strength and boutique specialization. Our global presence has expanded in key growth markets around the world with a greater range of specialized, high-quality investment capabilities, and we think that all points to a positive future. Now, I'd like to open up the call to your questions. Operator?

Your first question is from Glenn Skor with Evercore.