Franklin Resources, Inc.

Welcome to Franklin Resources' earnings conference call for the two-quarter and fiscal year 2022. Hello, my name is Grace, and I'll be your call operator today. As a reminder, this conference is being recorded, and at this time, all participants are in original mode. I would like to turn the conference over to your host, Celine Oh, Head of Investor Relations for Franklin Resources. You may begin.

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 fact or forward-looking statements, was in the meaning of the Private Securities 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. 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. Now, I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Celine. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for our second fiscal quarter. I'm joined by Matt Nichols, our CFO, who recently expanded his responsibilities to include chief operating officer, and Adam Spector, our head of global distribution. This quarter, global financial markets were impacted by a continuation of macroeconomic pressures due to increased inflation and related higher interest rates, both of which have been significantly exacerbated by geopolitical and economic shifts resulting from the Russia-Ukraine war. This quarter's volatile market environment challenged industry flows, particularly in taxable fixed income strategies. We were impacted by these pressures and had $11.7 billion in long-term net outflows, although we continue to drive net inflows into key growth areas and our effective fee rate remains stable. The heightened market volatility and implications of a rapidly changing investment environment remind us of the importance of the investments we've made over the past several years to diversify our business to better serve our clients through all market conditions. Our investment teams each look at the market through a different lens to provide deep expertise and investment specialization. For instance, if you look at our fixed income franchise, Brandywine Global, Franklin Templeton Fixed Income, Templeton Global Macro, and Western Asset, each of these specialist investment managers has a different interest rate outlook resulting in varying investment outcomes across our products. And although we saw net outflows in certain U.S. and global taxable strategies, those were partially offset by inflows into short duration bank loans and corporate strategies. Additionally, we've been able to benefit as investors look to reposition their portfolios in search for yield across asset classes. Our flagship income fund and alternative asset strategies of Benefit Street Partners and Clarion Partners, for example, represent important diversification tools for our clients. BSP and Clarion have been key contributors to our success and generated a combined $2 billion in long-term net inflows during the second quarter, and each reached record highs in assets under management. Our multi-asset class category recorded $2.3 billion in positive net flows for the quarter, driven by the Franklin Income Fund that has an approach that is adjustable to changing market conditions. With $75 billion in U.S. AUM, the Income Fund has also seen increased interest from investors in Asia and Europe, and the strategy was recently launched into the SMA vehicle to meet client demand. To illustrate how we've been able to diversify into other strategies, 17 of our top 20 funds with net inflows are outside of our largest 20 funds and on average now exceed $5 billion in AUM. Close connectivity with our customers during periods of market uncertainty is extremely important as investors look to reposition their portfolios. And we've been actively engaging with our clients with thought leadership from the Franklin Templeton Institute and our specialist investment managers to help navigate how geopolitical and macroeconomic shifts impact their investment decisions and their long-term financial goals. Specifically, webinar attendance by financial advisors grew by 62% in the second quarter, and video views increased by 90%. Turning to investment performance, strong long-term investment performance resulted in 65%, 68%, and 77% of our strategy composite AUM outperforming their respective benchmarks over a three-, five-, and 10-year period. There was a decrease in our one-year investment performance primarily due to certain U.S. taxable fixed income strategies, which was partially offset by strong performance in global fixed income strategies with notable improvements in performance for Templeton Global Bond Fund, whose performance is in the top decile for the one-year period. We continue to make progress on our corporate initiatives, which include growing alternative assets, advancing technology to customize portfolios in our SMAs, and expanding our presence growing 2.3% from the prior quarter to a record $158 billion in AUM, with contributions from a diverse group of strategies, including the aforementioned $2 billion of net inflows into Benefit Street Partners and Clarion Partners. On April 1st, we completed our acquisition of Lexington Partners, a leading global manager of secondary private equity and co-investment funds with total AUM of $57 billion as of March 31st. That AUM will be included in our quarterly reporting starting in the third quarter, and we expect further growth as a result of new fundraising. When including Lexington, Franklinton by 39% to become a $215 billion manager of alternative assets, an area of increasing importance for both individual and institutional investors. SMA AUM ended the quarter at $126.1 billion. We continue to make progress with SMA strategies, particularly in the use of technology to customize portfolios. This quarter, Canvas, our recently acquired custom indexing solution, increased by 21% in AUM, driven by net inflows of $600 million, and the number of partnerships grew by 15%. Wealth management AUM ended the quarter at $34.1 billion. Fiduciary Trust International generated its sixth quarter of consecutive positive long-term net inflows, and we continue to explore ways to accelerate growth of the business via acquisitions. We also experienced growth in our ETF business in the quarter with positive net flows in approximately $13 billion in AUM, which are balanced between actively managed and passive strategies. Looking briefly at our financial results, adjusted revenues were $1.6 billion, a decrease of 6% from the prior quarter, primarily due to lower average AUM, two fewer calendar days, and a decrease in performance fees. Expenses were flat quarter over quarter, but would have been lower had it not been for non-recurring or certain episodic items that are included in our adjusted results. Adjusted operating income was $577 million, and importantly, our adjusted effective fee rate stayed relatively consistent at 38.5 basis points. With $6.8 billion in cash and investments as of March 31st, the ongoing strength of our balance sheet enables us to invest with confidence in the business and make sure we're positioned appropriately in an ever-evolving industry. In closing, it's a transformative time in the asset management industry while the economic climate and geopolitical tensions present additional complexities and uncertainties. Over the past two years, we've made significant strides to expand our capabilities and provide our clients with deep expertise and specialization. It's this broad diversity that is allowing us to navigate through the current volatility. I would like to thank our employees for their tireless work and ongoing efforts on behalf of our clients. Now let's turn it over to your questions. Operator?