Franklin Resources, Inc.

Welcome to Franklin Resources Earnings Conference call for the quarter ended June 30th, 2023. Hello, my name is Joanna, 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 in 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. 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 third fiscal quarter of 2023. As usual, I'm joined by Matt Nichols, our CFO and COO, and Adam Spector, our head of global distribution. Over the past several years, we have been intentional in building a diversified company that offers a broad range of investment expertise and capabilities across asset classes, investment vehicles, and geographies to benefit a broad range of clients through various market conditions and cycles we believe our corporate model of preserving the investment autonomy of each of our specialist investment managers combined with the resources of a global firm meets the demands of our diverse client base and produces strong long-term results this quarter Long-term net flows turned positive. Investment performance remained strong and adjusted operating income improved by 8%. Financial markets in general staged rebounds in the first half of the calendar year. The S&P 500's indexes concentration in five companies is at its most extreme level in more than 30 years. A challenge for those seeking to outperform the index while managing for concentration risk in their equity portfolios, but also an opportunity for skilled and disciplined active managers with a long-term horizon. Client focus has always been a hallmark of Franklin Templeton, and we've been actively engaging with our clients to assist them in navigating this complex environment. As our industry and client preferences continue to evolve, There is strong demand for asset managers to have a full range of investment options that span geographical regions, both in public and private market strategies. We generated interest in our alternative and multi-asset strategies in particular, which both saw positive net flows during the quarter. In addition, we experienced strong flows in ETFs, SMAs, and the high net worth channel. and flow trends continued to improve across all geographies, benefiting from our regional sales model and strategy. Our EMEA and Asia Pacific regions both reported positive long-term net flows. That's the second consecutive quarter of net inflows for Asia Pacific. While we're always focused on organic priorities, we have previously stated our interest in distribution-led strategic transactions that would further diversify our business and accelerate growth in key markets. With the vision of offering more choice to more clients in important sectors, we were pleased to announce the establishment of a long-term partnership with the Power Corporation of Canada and Great West LifeCo this quarter. As part of the relationship, we will acquire Putnam Investments, which managed $136 billion in AUM as of April 30th, 2023, from Great West for approximately $925 million, primarily funded with equity. Great West will make an initial incremental asset allocation of $25 billion to our specialist investment managers within 12 months of closing, with that amount expected to increase over the next several years. Great West will also become a long-term shareholder in Franklin Resources. and of the equity issued to Great West, shares representing 4.9% of our common stock are subject to a five-year lockup. This is a compelling transaction for both firms, and we're looking forward to actively partnering to develop additional opportunities that will be realized over time. The agreement aligns with our focus to further grow insurance client assets and expands the existing relationship between Franklin Templeton and the power group of companies in the key areas of retirement, asset management, and wealth management. The transaction will also enable us to further increase our investment in retirement and insurance to better serve each and every client in these important segments. Our clients will benefit from expanded and complementary investment capabilities across key asset classes with strong long-term track records specifically the acquisition of putnam will increase franklin templeton's defined contribution aum to almost a hundred billion dollars as a reminder the acquisition of putnam is expected to be modestly accretive to run rate adjusted eps by the end of the first year after closing adding approximately $150 million of run rate adjusted operating income in the first year post-closing, inclusive of cost synergies. The acquisition remains on track to close in the fourth calendar quarter of 2023, subject to customary closing conditions. Turning now to our specific numbers for the quarter, starting first with assets under management and flows. Ending AUM increased to $1.43 trillion, primarily due to market appreciation, and we shifted into positive long-term net flows of $200 million, inclusive of reinvested distributions. Our long-term net flows continue to benefit from a diversified mix of assets in the quarter, led by record net inflows of $4 billion into alternative strategies. Our three largest alternative managers, benefits tree partners, clarion partners, and Lexington partners generated a combined total of almost 5 billion in net inflows. This included raising over 1 billion in secondary private equity in the wealth management channel under the alternatives by Franklin Templeton brand. Today, Alternative assets are $257 billion, or 18% of our total AUM, and contribute more significantly to our financial results. In terms of other areas of activity in the quarter, our multi-asset strategy generated another quarter of positive net flows with $2.3 billion. Our solutions team has been gaining success with large institutions building customized solutions across our broad array of investment strategies. Equity net outflows improved to $3 billion this quarter, including the funding of a previously disclosed $3.2 billion institutional mandate. While active equities continue to be impacted by the risk-off environment, we saw positive net flows into international, large-cap core, emerging markets, all-cap value, and small mid-cap equity strategies. Fixed income net outflows were $3.1 billion. Despite market uncertainty, we experienced increasing demand for fixed income, and we benefited from having a broad range of strategies with non-correlated investment philosophies. Client interest continued with net inflows into multi-sector, core bond, enhanced liquidity, and tip strategies. Our regionally focused sales model and strategy resulted in improving flow trends across all of our geographies compared to the prior quarter. As mentioned earlier, the EMEA and Asia Pacific regions generated positive long-term net flows. From a vehicle perspective, ETFs generated net inflows of $1.1 billion, representing the third consecutive quarter of net flows of approximately $1 billion, and AUM totaled $16.2 billion at quarter end. In the quarter, we also launched two thematic ETFs in Europe in both future of food and health and wellness, two areas where we expect to see strong client interest. Separately managed account, AUM, ended the quarter at $116 billion and generated positive net flows We continue to expand our SMA offerings in important growth categories and new market segments to provide clients choice and how they access our investment expertise across the breadth of our products. This quarter, we had important launches focused on customization, such as tax managed overlay and SMA key flagship strategies, including the Franklin Income Fund. Canvas, our custom indexing solution platform, continued its trend of net inflows in each quarter since the platform launched in September 2019, and its AUM has doubled to $4.5 billion since the announcement of the acquisition. This past quarter, Canvas generated net inflows of approximately $300 million and continues to have a robust pipeline. Canvas allows financial advisors to build and manage custom indexes in SMAs that are individually tailored to the client's specific needs, preferences, and objectives. We believe custom indexing represents the next progression of direct indexing and ETFs and is a significant long-term growth opportunity. Turning now to investment performance, which we're pleased to say remains strong. 63%, 53%, 67%, and 63% of our strategy composite AUM outperform their respective benchmarks in the 1, 3, 5, and 10-year periods, respectively. For mutual fund investment performance, 44%, 58%, 66%, and 51% of our AUM outperform their peers on a 1, 3, 5, and 10-year basis. This represents improvement in the three-year and five-year periods from the prior quarter due to strengthened performance in equity and certain fixed income strategies. The one-year decline was primarily due to one of the largest funds managed for income, which was overweight utilities and financials, which generate higher yield and underweight technology compared to the S&P 500. Touching briefly on our financial results, Ending AUM increased by 0.7% to $1.43 trillion as of June 30th from the prior quarter, reflecting market appreciation and positive net flows. Average AUM was flat from the prior quarter at $1.42 trillion. While our effective fee rate remained stable, adjusted operating revenue increased by 3% to $1.56 billion. Adjusted operating income increased by 8.3% to $476.8 million from the prior quarter. Adjusted operating margin was 30.5% compared to 28.9% in the prior quarter. We continue to maintain a strong balance sheet with total cash and investments of $6.9 billion as of June 30th, 2023. To wrap up, we have worked through another quarter of complicated markets and our progress and success would not be possible if it weren't for our dedicated employees around the world. I would like to thank them for their many contributions and for their unwavering client focus. Now, let's turn to your questions.