Franklin Resources, Inc.

Good morning. Welcome to Franklin Resources Earnings Conference call for the quarter ended March 31st, 2023. Hello, my name is Lara 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. I would now 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 your quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts or forward-looking statements, was of 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. 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. 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 the second fiscal quarter of 2023. As usual, I'm joined by Matt Nichols, our CFO and COO, and Adam Spector, our head of global distribution. Despite a difficult market backdrop exacerbated by stress in the regional banking sector, we continue to see positive momentum across our business in terms of long-term flow trends, relative investment performance, diversification by product and vehicle, and financial results. Market dislocations often result in investment opportunities for skilled, active investors. And in this regard, our investment performance continued to improve across asset classes. This quarter, three of our four asset classes, fixed income, multi-asset, and alternatives generated positive net flows. We also saw continued progress in ETFs and Canvas, our custom indexing solution platform. Flow trends improved across all geographies, with our Asia Pacific region reporting positive long-term net flows in the quarter. Furthermore, this prolonged period of heightened market volatility affirms the importance of the investments we've made to diversify our business and better serve our clients, all in an effort to offer more choice and help them achieve long-term financial goals, no matter where we are in the economic cycle. As to the specific numbers starting first with flows, long-term net outflows improved from the prior quarter to $3.7 billion compared to net outflows of $10.9 billion in the prior quarter. Importantly, as mentioned, fixed income, multi-asset, and alternatives all generated positive net flows. Fixed income generated net inflows of $1.8 billion. And as we've said on previous calls, we continue to benefit from our broad range of fixed income strategies with non-correlated investment philosophies, and that trend continued this quarter. Client interest continued in U.S. taxable corporate, municipal, and global opportunistic strategies, which were all net flow positive. Multi-asset net inflows were $1.5 billion, driven by Franklin Income Funds. Fiduciary Trust International's high net worth business, and Canvas. Canvas has achieved net inflows each quarter since the platform launched in September 2019, and AUM increased over 13% in the quarter. Alternative net inflows were $1.3 billion, driven by growth into private market strategies, which were partially offset by outflows in liquid alternative strategies. Benefit Street Partners, Clarion Partners, and Lexington partners each had net inflows with a combined total of $1.5 billion. Equity net outflows were $8.3 billion, reflecting continued risk-off sentiment for many investors. But we did see positive net flows into ETFs, global equity, and small-cap growth equity strategies. ETFs had net inflows of $1 billion and now total approximately $15 billion in AUM. And this quarter, we launched a variant of our flagship Franklin income fund in a multi-asset active ETF vehicle. Cash management, which is excluded from long-term AUM and flows, had net outflows of $4.3 billion in the quarter and included episodic redemptions of approximately $7.5 billion from a suite program associated with a regional bank. Our regionally focused sales model has continued to gain traction, and this quarter we experienced improving flow trends across all geographies. I already mentioned the positive long-term net flows in the Asia Pacific region, which were driven by Australia, Korea, and Japan. Our one but not funded institutional pipeline was $15.4 billion, and reflected the previously disclosed funding of a $7.5 billion institutional fixed income mandate. Given the uncertain market environment, institutional investors continue to be more defensive with a focus on diversification and liquidity. This resulted in less money in motion, particularly in March. Turning now to investment performance, in this environment in particular, it's encouraging to see that the sound, long-term investment thesis of many of our largest strategies are playing out and performance generally improved across all time periods. This quarter, 64%, 63%, 61%, and 66% of our strategy composite AUM outperformed their respective benchmarks on a one, three, five, and 10-year basis. The one-year period improved primarily due to certain clear-bridged and Franklin Mutual Series equity strategies. Additionally, we're seeing improvement in the longer-term performance of Western Assets' U.S. taxable fixed income strategies. On the mutual fund side, 67%, 53%, 63%, and 56% of our AUM outperform their peers on a 1, 3, 5, and 10-year basis. Equity-related products are leading the increase in relative performance. For the one-year period specifically, ClearBridge, Templeton Global Equity Group, and Franklin Equity Group outperformed in March. In addition, half of mutual fund AUM was in funds rated four or five star by Morningstar. As I mentioned earlier, over the past several years, we have further diversified our business, and we believe our broad range of investment philosophies and processes differentiate our specialist investment managers from each other and gives us an ability to build the best outcomes for our clients. In March, we proactively engaged with clients to help them navigate financial uncertainty created by stress in the regional banking sector. The Franklin Templeton Institute provided timely updates to our clients through webinars, articles, and video posts. Clients were particularly interested in the numerous panels comprised of our specialist investment managers who offered investment perspectives across asset classes, including venture capital, alternative credit, and traditional fixed income. We continue to see client demand in fixed income, income-oriented, and dividend-yielding products. In addition, as a result of recent market dislocations, alternative capabilities such as secondary private equity, private credit, and real estate continue to be of client interest. Touching briefly on our financial results, ending AUM was $1.42 trillion, an increase of 2.5% from the prior quarter, primarily due to market appreciation, and average AUM increased 5% to $1.4 trillion from the prior quarter. While this quarter's adjusted effective fee rate was in line with prior quarter at 39 basis points, adjusted operating revenues of $1.5 billion increased 6% from the prior quarter, driven by higher adjusted performance fees and average AUM, partially offset by two fewer calendar days. Adjusted operating income was $440.2 million, an 11% increase from the prior quarter, and our adjusted operating margin increased to 28.9% compared to 27.5% in the prior quarter. We continue to maintain a strong balance sheet with total cash and investments of $6.8 billion. Let me wrap up by summarizing that we continue to benefit from our diversified business. Our flows and relative investment performance have been steadily improving and our balance sheet affords us flexibility, including the ability to further expand our capabilities. Our focus remains on delivering better outcomes for our clients. And finally, my admiration and thanks go to the thousands of employees around the globe who represent Franklin Templeton so well. Now let's turn over to your questions. Operator?