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spk08: Welcome to Franklin Resources Earnings Conference Call for the quarter ended June 30th, 2024. Hello, my name is Sylvie 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. And I would like to turn the conference over to your host, Celine Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.
spk07: Good morning, and thank you for joining us today to discuss your quarterly results.
spk00: 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 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.
spk12: Thank you, Celine. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the third fiscal quarter of 2024. I'm joined by Matt Nichols, our CFO and COO, and Adam Spector, our head of global distribution. We'll answer your questions in a few minutes, but first I'd like to review some highlights from the quarter. During our third quarter, investors continued to be faced with a complex investment landscape due to dynamic financial markets amidst macroeconomic, geopolitical, and election uncertainty, starting with public equity markets. The S&P 500 reached an historic milestone earlier this month, closing above 5,500 for the first time and continuing its streak of strong performance in 2024. Likewise, the NASDAQ 100 also hit record levels, surpassing the 20,000 mark, However, we've seen a pullback in late July as big tech earnings have disappointed and value has outperformed growth stocks month to date. The two big themes of artificial intelligence and inflation drove growth stocks to outperform value stocks in the first half of the calendar year. AI is impacting companies well beyond mega cap tech companies. Everyday companies and governments are examining how AI will improve or disrupt their respective operations and business models. Inflationary trends continue to moderate, which is supportive of markets. But because stock market returns have been so highly concentrated, equity allocations are poised to broaden, as we've seen in the last few weeks, which could provide a sustained boost to sectors and regions that have been overlooked. This trend will likely create investment opportunities favoring active managers. Meanwhile, on interest rates, consensus estimates currently expect two rate cuts by the Federal Reserve in the remainder of the year, which looks broadly appropriate to us. Recent Fed speak signals greater comfort with the latest progress on disinflation and acknowledges some signs of weakening growth momentum. As we get closer to the Fed's rate cutting cycle, we expect traditional fixed income sectors to regain their place as a primary source for yield as cash begins to look less attractive. While spreads are tight at their current levels, we are not anticipating a sharp deceleration in activity, and our fixed income managers continue to find opportunities at attractive yields. Private markets continue to thrive, And our specialist investment managers are seeing very attractive yields in the private credit space and secondary private equity is seeing near unprecedented levels of pricing power. As investors weigh the impacts of these trends, we're seeing a pickup in money in motion and investors becoming more active with alternatives, fixed income, and select equity sectors as top priorities. We also continue to see the trend of clients wanting to work with fewer managers, given the dynamic, complex nature of current markets. In addition, we continue to have success engaging more and more in a consultative way with large clients, leveraging the full strength of our firm. One of the benefits of partnering with Franklin Templeton is the breadth of capabilities we offer through a single global platform. making us a true partner for clients around the world. We offer access to specialist investment managers across public and private markets and asset classes and continue to broaden our investment capabilities to help clients achieve better outcomes. Now, turning to the highlights from the quarter. Ending AUM was $1.65 trillion, flat from the prior quarter and an increase of 15 percent from the prior year quarter, primarily due to the addition of Putnam as well as positive markets. Average AUM increased by 3 percent from the prior quarter to $1.63 trillion and increased by 15 percent from the prior year quarter. In terms of investment performance, Our investment teams have remained true to their distinct disciplines and time-tested approaches. Investment performance remained consistent across the 1, 3, 5, and 10-year periods. This quarter, 53%, 49%, 52%, and 70% of our strategy composite AUM outperformed their respective benchmarks on a 1, 3, 5, and 10-year basis. Turning to flows, long-term net outflows were 3.2 billion. Reinvested distributions were 3.6 billion compared to 3.1 billion in the prior quarter and 3.5 billion in the prior year quarter. 5.9 billion was funded out of the previously announced 25 billion allocation from Great West Life Co., bringing the total funded to $20.2 billion. We continue to make progress executing on our long-term plan of diversification across asset classes, investment vehicles, and geographies. Client demand led to positive net flows in multi-asset and alternative strategies during the quarter. Multi-asset net inflows were $1.8 billion and driven by positive net flows into Canvas, Franklin Income Fund, Fiduciary Trust International, and Franklin Templeton Investment Solutions. The Investment Solutions team takes Franklin Templeton's best thinking and leverages our firm-wide capabilities across public and private asset classes to help provide solutions tailored to our clients' needs. Investment Solutions ended the quarter with AUM of nearly $80 billion across the firm. Alternative net inflows were $1.4 billion driven by growth into private market strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners generated a combined total of $1.1 billion of net inflows. And Franklin Venture Partners generated net inflows of over $300 million. Benefit Street Partners continued to raise funds in alternative credit. In May, we announced the final close of its BSP Special Situations Fund II with $850 million of total capital commitments exceeding its target. Interest from clients to diversify private debt portfolios beyond direct lending into areas like real estate debt has attracted significant high-quality engagement with investors. Turning to secondary private equity, Lexington Partners announced a dedicated strategy and highly experienced team focused on leading single asset continuation vehicle transactions in response to increased investor demand. Lexington has invested approximately $6 billion in CV transactions to date, and the new team will be focused on increasing its participation in CV transactions with a differentiated approach. In secondary private equity, the largest, most established managers continue to see the most interest in flows, reflecting a clear bias toward them in the market. Lexington has been a beneficiary of this trend. Clarion Partners has three open-end funds that perpetually fundraise in the U.S., and this year launched a fourth open-end fund in Europe, focusing on the logistics sector. Clarion continues to be well positioned with over half of AUM in the industrial and logistics sectors and less than 8% of AUM in the office sector. With regard to the wealth management channel, we continue to make strides and open new opportunities for investors given our strength in global retail distribution and dedicated specialist sales team with a focus on investor education. This quarter, we announced the expansion of our retail alternatives initiatives with a dedicated team in the EMEA region. Looking ahead, we remain focused on product development, including new products in secondary private equity and real estate private debt. Just as a reminder, at the start of our fiscal year, we anticipated raising 10 to 15 billion in fundraising and alternatives. And as of this quarter, we are well on our way to reaching the top end of that range, having raised over $12 billion fiscal year to date. It's worth noting that since being part of Franklin Templeton's platform, each alternative asset manager has increased AUM and continued to grow and diversify across strategies, product vehicles, and client type. Fixed income net outflows were $4.8 billion, excluding inflows from Great West, inflows improved approximately 5% from the prior quarter. As we've said on previous calls, we benefit from our broad range of fixed income strategies with non-correlated investment philosophies. Despite mixed performance in certain U.S. taxable strategies, we saw client interest reflected in positive net flows into highly customized multi-sector and global sovereign strategies. Additionally, we continue to benefit from vehicle diversification with cross-border funds, ETFs, and SMAs in fixed income, all in positive net flows. Notably, we saw increasing interest from clients in multi-sector credit strategies, which capitalized on our team's ability to offer multiple credit sector exposure in one strategy in a highly dynamic environment. Equity net outflows were $1.6 billion, significantly improving from outflows of $5.3 billion in the last quarter, and growth sales improved by 16%. Equity net inflows were driven by large cap value and all cap core strategies, and our single country ETFs. Our single country ETFs now total $10 billion in AUM. With a broad lineup of capabilities, we are able to deliver investment expertise across vehicle types. We saw another strong quarter of positive net flows across our retail SMAs, Canvas, and ETF offerings. We are a leading franchise in retail SMAs with $140 billion in assets under management. This quarter, we generated positive net flows of $500 million, the fifth consecutive quarter of net inflows. Through innovative technologies, we are continuing to enable personalized portfolio solutions and improved outcomes for investors. Another good example is Canvas, our custom indexing solution platform. Canvas generated net inflows of $800 million in the quarter. AUM increased by 13% from the prior quarter to $8.2 billion and continues to have a robust pipeline. Meanwhile, our ETF business continues to see strong growth and generated net inflows of approximately $3.3 billion, doubling the prior quarter's net flows and with the 11th consecutive quarter of positive net flows. Our platform provides solutions for a range of market conditions and investment objectives through active, smart beta, and passively managed ETFs. Just five years ago, our ETF AUM was $4 billion. AUM stood at $27 billion at quarter end across more than 100 strategies. As a result of our regionally focused sales model, we continue to deepen our presence across the globe. Our non-U.S. business saw its fifth consecutive quarter of positive net flows and finished the quarter with approximately $492 billion in assets under management. Our institutional pipeline of one unfunded mandates was $17.8 billion, not including the remaining allocation from Great West. We continue to expand our private wealth management business and fiduciary trust international AUM has more than doubled in the past five years from $17 billion to $38 billion. Athena Capital and Pennsylvania Trust acquired in 2020 have grown almost 40% since acquisition. One of our priorities is to further accelerate the growth of our wealth management business through organic investments and acquisitions. Our commitment to innovation, artificial intelligence, blockchain, and machine learning positions us to enhance client outcomes across the rapidly changing technology enabled investment landscape. As various aspects of the asset management industry evolve, we continue to make investments in technology across distribution, investment management, and operations. Earlier this quarter, we announced that we are working with Microsoft to build an advanced financial AI platform, which will help embed artificial intelligence into our sales and marketing processes to create more personalized support for clients. We also announced plans to make a strategic minority investment in InvestNet, a significant industry platform. And earlier this week, we announced the selection of a single platform to unify our investment management technologies across public market asset classes. This will support the simplification of our operation and reduce long-term capital expenditures. Formed in 2018, our Franklin Templeton Digital Assets Group has directly witnessed the revolutionary impact of blockchain technology. The digital asset space has experienced significant growth in recent years, much like the proliferation of new technologies decades ago. Capitalizing on this trend, we launched our second digital asset-backed ETF earlier this week, the Franklin Ethereum ETF, to give our clients additional access to this emerging asset class. Earlier today, we were pleased to announce our collaboration with SBI Holdings, a leading online financial conglomerate in Japan. The proposed joint venture will focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies. The extensive reach of SBI's brand in Japan aligns well with our commitment to help new generations of investors achieve their financial goals through innovative strategies. Turning briefly to financial results, Adjusted operating income was $424.9 million, an increase of 1.3% from the prior quarter, and a decrease of 10.9% from the prior year quarter. Looking ahead, we will continue to invest in the business to support our strategic priorities in asset management and wealth management. Finally, in June, Investment News recognized Franklin Templeton as Asset Manager of the Year. This is a true testament to all of our employees around the world and their commitment to being the ideal partner in helping both individuals and institutions achieve their key financial goals and objectives. I would like to thank our employees for always putting clients first. Now, let's open it up to your questions.
spk03: Operator? Thank you.
spk08: If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. And if anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And we request that you please limit to one question so we can get to as many callers as possible. Please go ahead and press star one now. And your first question will be from Alex Bostein at Goldman Sachs. Please go ahead.
spk02: Hey, good morning. Thank you for taking the question. I was hoping we could start with the Aladdin announcement. I know it's been sort of speculated for the last couple of quarters, so nice to get it out there. But can you talk about the operational benefits and both expense benefits and operating margins ultimately that you expect the platform to deliver, how long it's going to take to get fully implemented, etc.? ? And as part of that, maybe Matt, you can just hit on the expense items for the rest of the year as well. Thanks.
spk01: Yeah, thank you, Alex. Good morning. So a couple of background points first. You know, why we've done this, what we expect to get out of it, and then I'll talk a little bit about the implementation costs and timeline and so on as you've asked. So first of all, you know, why we've done this. We've done this because it unifies our investment management technology across all of our public market businesses, which as you know, extensive amount of specialist investment managers. This importantly was a decision that was made collectively across all of our specialist investment managers and has taken us no less than 18 months to two years to make this decision. In terms of the benefits, it brings several things, including most of what you'd expect, candidly, but most importantly, in the form of one platform versus multiple vendors. I'll just go through a few of the benefits. Portfolio construction and risk management tools, a single investment book of record, integrated order management systems and connectivity, importantly consistent reporting across the firm and this is good for both clients and for internal reporting purposes and it assists in developing cross team, cross specialist investment manager multi-asset solutions. And also, as you know, we've been active strategically in the business adding companies over time. And with a single platform like this, it's easier to add new business. It's easier because it's faster and lower cost to integrate. Thirdly, in terms of implementation costs. So implementation costs are expected to be approximately $100 million over the next three to five years. The peak of these costs would be fiscal 26 and 27, where we expect about 60% of these expenses to be assumed. Importantly, though, we expect to absorb between 50 and 100% of the implementation costs, meaning on a quarterly basis over the next several years, we expect this to be close to neutral from an operating income perspective. At or around fiscal 2028, we expect to begin to realize savings of about $15 million per annum. And then in 2029, we expect that to raise to $25 million at least. Next quarter, we will add approximately $3 million of additional cost to IST associated with the start of this implementation. But again, we've got several things going on that should mean that we can absorb that based on other expense initiatives we have in the firm. So as mentioned, given other initiatives, the impact per quarter should be quite modest, if any. But if anything is important to call out, we will obviously do that per quarter, Alex. And we're most likely going to be able to do that in advance in our quarterly guidance. But as I said, the most important message here is even though this is an expensive implementation exercise, we're going to absorb most of those expenses due to the other efforts that we have going on across the company. In terms of the guide for the next quarter, we expect our effective fee rate to remain stable at 37.5 basis points. We expect comp and benefits to be $825 million at very stable from where we were this quarter. This assumes $50 million of performance fees. We expect IS&T to be between $150 and $155 million. This includes the $3 million that I mentioned earlier with respect to the beginning of our implementation around the investment management platform. Occupancy, we expect to be in the high 70s, around $77, $78 million. And G&A, we expect to be between $175 million
spk04: and $180 million. Great. Thank you for all of that comprehensive as always. Thank you, Alex.
spk08: Next question will be from Brennan Harkin at UBS. Please go ahead.
spk05: Good morning. Thanks for taking my question. A couple questions on Lexington. So curious on an update about how much of Lexington 10 has been deployed. And then when we think about the threshold for deployment where Lexington would start to look to kick off fundraising for the next flagship, where does that typically happen? Great. Thanks, Brendan.
spk12: So first of all, Lexington's fundraising focuses this year, just to cover a little bit of that, has been middle market and co-investment, and that's gone well. Meanwhile, they've been obviously deploying Fund 10, And basically the message is that they have been deploying it faster and at higher discounts than historical. So it's looking very good. We don't have a specific date, but it is quite possible that they will enter the market sooner than they anticipated just because of the ability to deploy the capital faster. And I think we all see it, right? The liquidity that's needed in the space. They also, interestingly, We mentioned it in the opening remarks about their continuation vehicles. So they have about $6 billion that they've done where these GPs have a particular holding that they want to retain, but some of the LPs want liquidity, so they spin it out into a new vehicle. Lexington hired a market leader in that. They actually think that there's opportunity to even create a fund in that instead of having it be part of their traditional funds. So I think that's going to be another opportunity for Lexington.
spk14: And, Jenny, the only piece I would add to that is that while Lexington historically has been focused on the institutional market, there are significant efforts underway to ensure that they can better tap the wealth management channel by offering perpetual vehicles in wealth management in both the U.S. and non-U.S. markets. And that's something we're very actively engaged in developing.
spk05: Thanks for that. And just, Jenny, the discounts that you referred to, We had heard that those discounts have actually begun to narrow. Are they still seeing those wide discounts in the marketplace?
spk12: They are definitely starting to narrow, but they are still seeing robust discounts versus historical discounts. They're still better than historical discounts.
spk05: Yes, so still at attractive levels, I guess, even though they've narrowed. Yes, yes. Thank you.
spk08: Thank you. Next question will be from Craig Seegenthaler at the Bank of America. Please go ahead.
spk09: Thanks. Good morning, everyone. So my question is on the $25 billion AUM allocation from Great West. So you're about $5 billion away. You know, after this is reached, probably in a few months, can you talk about the incremental upside to this relationship over time beyond the $25 billion?
spk03: Adam, do you want to take that or...
spk14: Yeah, sure. So with any client, I think you see a relationship grows over time. So the first $25 billion was really something that was more contractually oriented. Throughout that process, we have been able to meet many great Westlife executives, as well as the related power companies. We are in the midst of product development with them. So the initial allocation has really been based on the types of products that insurance companies generally are interested in. I think if you look at most insurance companies, you'll see significant allocations to some core fixed income as well as a tail that goes to alternatives. That has been the allocation we've received so far. But what we've been able to do since acquisition is to work with Great West Life as well as other power companies to develop newer products, both for the retirement platform, as well as doing things on a JV venture on the insurance side. So we are not at a point yet where we can pinpoint what those will be, but there is significant product development going on with Great West. And we think that we will continue to see the allocations broaden out from the core fixed income that has been the basis of things so far.
spk01: The only thing I'd add to that, Adam and Craig, is just for context, obviously we're delighted with the $25 billion arrangement and the $20 billion we've got in so far. But relative to other clients and investment management firms that the Power Group of companies does business with, it's still fairly modest, candidly. So we have a long way to go. with that relationship, and we think of this as a multi-year exercise of building the relationship further versus just something that's happened as a consequence of a transaction. But I think it's important to note, and obviously we expect this. I mean, Power Group and companies have very significant relationships with other investment. That's going to continue.
spk04: All we're doing is pitching for our fair share of it.
spk09: Thank you, Matthew. Thank you.
spk07: Thank you.
spk08: Next question will be from Dan Shannon at Jefferies. Please go ahead.
spk13: Thanks. Good morning. Matthew, I was hoping you could clarify or expand upon, you know, what you guys are doing to offset the implementation costs with the, you know, new tech projects. So, curious, you know, what those initiatives are, if you can be more specific. Is there some phase-in of that, or are those ongoing now, so we shouldn't think about any kind of catch-up period or mistiming of some of the implementation costs versus the ongoing savings?
spk01: Yeah, no, I don't think there should be any mistimings, but as I said, Dan, these things are quite complex, and we're not underestimating at all the implementation complexity of a project like this with Aladdin. I should say, though, that, you know, We've done, this is an understatement to say we've done extensive planning around this, both planning with our partners, that's both over at Aladdin and Deloitte, the consultant that we've hired to work with us on implementation. We've done extensive due diligence, we've built in contingencies, and we have very significant resources at both Aladdin and Deloitte, and of course our own team. But I think we've done a ton of work to sort of determine how the implementation expenditures will work. We're extremely focused on this. If there is anything to call out, as I said, I will do that. And again, I don't want to jinx ourselves, but we don't expect that to happen. In terms of how we're able to absorb it, one of the tangential benefits that I've referenced in previous calls of acquiring being so acquisitive over the last five years, notwithstanding all the additional work and complexity around acquisitions, it does lead to future opportunities to integrate and to be more effective and efficient across the different platforms and providers we have. A large portion of the savings is going from multiple providers down to one. Of course, we're going to have other relationships still on the technology side that complement our relationship with Aladdin, but we'll have less than that. We also have a much larger scaled relationship. So, of course, the pricing benefits that we have are very meaningful in that regard. The amount of resources we have externally from the Aladdin platform and our partners there in Deloitte are more than we could afford ourselves and, frankly, absorb some of the costs that otherwise we would have if we were modernizing our own platform, for example. So it's all of those things sort of combined. We have multiple middle offices internally We have multiple systems. We have quite complex technology. It's all good, and it works fine, just to be clear. But this is boiling down into one platform this way, less vendors, more efficiency across our whole firm, which is needed anyway in terms of where the industry is heading, is how we're able to afford to do this in an effective way, as I've described.
spk04: Thank you. Thank you.
spk07: Next question will be from Michael Cypress of Morgan Stanley.
spk08: Please go ahead.
spk11: Great. Thank you. Just wanted to circle back to the JV that you announced this morning in Japan with SBI. I was just hoping maybe you can remind us of your footprint in Japan today. Certainly a lot of changes in that market. Just curious how you're seeing that opportunity set evolving. Where do you see some of the biggest opportunities there in Japan, and how does this JV help? in terms of tapping into the opportunity set in that market? And maybe you could touch upon what the economics will be and how you sort of envision this JV working over time and what success might look like.
spk12: Yeah, so, I mean, you know, we've been in Japan for a long time. Fortunately, Putnam actually has great relationships in Japan. As a matter of fact, this quarter, I think we had $3.2 billion in net inflows in Japan. A big part of that was, you know, institutional business with Putnam. You know, Japan on the retail side has been a little bit more difficult, and it is a market that is beginning to launch ETFs and starting to talk about digital assets. And, you know, honestly, as a foreign investment shop, it can be difficult to penetrate that. So here with SBI, they have a tremendous reach. I mean, they're probably the largest digital financial conglomerate And so I think it's a 51% owned SBI, 49% at Franklin Templeton. And we'll be launching joint ETFs. And as the digital market opens up, we'll be able to launch products there in the crypto space as well.
spk14: And our footprint now in Japan really is not that different than anywhere else in the marketplace. It's nice to be able to have a significant local base there. Because of that, we have a strong institutional business We've seen the results of that flows this quarter. We've been able to really accelerate some of the great performance that Putnam has and won some assets there. In the retail space, we have a relationship with a number of different distributors. We also have a very strong insurance business in Japan. The only other thing I would note about SBI is that Japan is not a market that is always recognized for its innovation. And SBI is an exception to that. It's one of the first significant firms to really be breaking through on the digital side in terms of client engagement. And we think partnering with them will allow us to be one of the first asset managers to have more of that direct consumer digital engagement model in Japan.
spk03: And the asset base in Japan now is close to $50 billion for us. Great. Thank you.
spk07: Thank you.
spk08: Next question will be from Brian Bedell at Deutsche Bank. Please go ahead.
spk06: Oh, great. Thanks for morning, folks. Let me just circle back on the ETF strategy. Basically, $27 billion, like you said, but given the very wide range of products you have and strategies you have across the entire complex, what's the desire to more substantially expand that ETF franchise? Is there an ability to clone a more active product, or is it more of a two-pronged strategy of doing that and rolling out, you know, more passive product. And then if you could just talk about connecting that with the, or how easy it is to do that with the new Aladdin platform, realizing it'll take some time, of course.
spk12: So from an ETF standpoint, I mean, actually our largest category of ETFs, over 40% is active. And then the next category is passive and then smart beta. and then digital. So, you know, our focus on ETFs is, as a firm, we view ourselves as vehicle agnostic. So whatever the market is interested in having us deliver our capabilities, we'll deliver it in whatever vehicle they like. And there is a, you know, strong demand of advisors, particularly in the U.S., who are interested in ETFs. I think it's driven a lot by the shift to fee-based. and so it's been important for us to be able to launch products. I think we have over 100 ETFs today, and to be able to launch products that are appropriate. There has been some feedback about a concern of launching clones between a traditional mutual fund and an ETF because it can bring suitability issues to the distribution platforms, and so we like to either look at existing, say, mutual funds and potentially convert them if an ETF is a better way to deliver it, or launch some sort of ETF that is a slightly different approach. Now, interestingly, we're getting a lot of demand from Latin America pensions that are interested in our single country ETFs, which are, I believe, the lowest price in the market. And so we've been getting good, strong flows there. We're getting flows from Europe, as well as Japan, And, you know, so it's really global. Our view is in a lot of these markets, ETFs are becoming the vehicle of choice. And so we need to be able to support that. I don't know if, Adam, do you want to add anything to that?
spk14: Yeah, I'd add a few things, Jenny. You know, the flow there has been quite strong for us at 3.3 in net flow this quarter. And that's seven quarters in a row where we've had about a billion dollars or more in flow. As Jenny said, that flow is coming from a geographically diverse base where we saw about 900 million coming in from EMEA and about half a billion coming in from the Americas region. I'd also just follow up with Jenny's point on being agnostic in terms of vehicles. Our most significant and longest tenured mutual fund, U.S. Mutual Fund, is the income fund. But if we look at the income fund for this quarter, just as an example, we saw very slight outflows in the mutual fund, but positive flows in the related SMA, positive flows in the cross-border fund, positive flows in the ETF. So by offering four different vehicle types there, the category for the income strategies in general was net flow positive. And as investor demand becomes more global and shifts away from mutual funds, having multiple vehicles allows us to capture that flow.
spk12: And actually, I'm just going to say one thing on that. It's often viewed that ETFs are potentially lower margin, and I think that comes out of the history of it being sort of early on passive. You know, honestly, it depends on kind of the strategy. In the case of the income fund where we're having so much success in those other vehicles, the pricing is actually very much in line with what the mutual fund is, and arguably over time, the cost to us will be less with the ETF and the SMA because you don't have the transfer agency and the fund administration costs in the same way that you do with a mutual fund. That actually was one of the drivers in our decisions to outsource those things because it allows us, as the business shifts, to have greater flexibility in the expense supporting the business.
spk06: That's great, Keller. Thank you for all that detail.
spk08: Thank you. Next question will be from Ken Worthington at JP Borgen. Please go ahead.
spk10: Hi. Thanks for taking the question. As we think about possible extension of duration by investors if the Fed acts later this year, which of your fixed income products do you think are best positioned to benefit with better sales? And then along the same lines, some of the big flagship Western funds are still struggling with performance and outflows picked up this quarter. both gross and net, what are the issues sort of weighing on those funds?
spk12: So, first of all, you know, if rates go down, I think we probably are guessing two cuts this year. Obviously, cash becomes less interesting as your fixed income allocation, and you're going to probably see, you know, people move more into other fixed income. We've had two out of our three SIMs in positive net flows in fixed incomes. As a matter of fact, you know, Franklin's performance is excellent with 71% of AUM outperforming peers in the one, three, and five-year. Brandywine has 92% of their AUM outperforming peers in the five-year category. And five out of our top ten gross selling strategies are in fixed income, and that actually includes some of Western's strategies. You know, we have positive flows in... a lot of different vehicles. So our cross-border, our euro short duration is in positive flows. Our ETFs in fixed income are in positive flows. Our retail SMAs are in positive flows. And we have positive flows in our closed-end funds. And actually, the largest portion of our institutional pipeline is fixed income. And again, that does not include Great West Life. Interestingly, if you think about passive and how it potentially impacts fixed income, it's been the areas that passive has actually cannibalized to some extent has really been in that core and core plus space. And so in multi-sector, the highly customized, munis, Adam helped me out on the other strategies, you're not seeing that kind of cannibalization from passive. from the passive. And then, you know, Western, as we've talked about, their positioning has been longer duration. So as rates come down, that actually, you know, is potentially a benefit as far as the positioning. And, you know, we've seen it in their kind of one-month performance has improved a lot.
spk14: I would add a few things. We didn't really talk about the Muni franchise in that, Jenny. The muni performance is really strong. We have about 90% of assets outperforming on the one-year period and about 75% outperforming on the three and five. We think we'll see significant growth in munis. And the fact that we have a strong SMA franchise there as well as mutual funds, it's really helping us. In terms of the shift in rates with a steeper yield curve, we think we will see money coming out of cash into longer-term fixed income. which should benefit us. The other thing we've seen is that in a market with fairly tight credit spreads, we see allocations going more and more to managers who have the ability to be multi-sector or multi-credit exposures and to have the ability to allocate across those different sleeves. And that bodes well for us as well, as we are very strong in those areas. The final thing I would note is that our insurance capabilities are highly specialized, and we've seen real growth in fixed income coming from insurance-specific mandates where the regulatory reporting compliance aspects of managing those accounts is as or more important than the alpha generation.
spk12: I'm just going to add one thing on cash management because a lot of people look at all the dollars in money market funds and think that that's going to you know, move out. But our money market funds, you know, Westerns tend to have sovereign wealth and corporate treasurers who aren't allocating, you know, as a temporary in-between. As a matter of fact, Western had $2 billion in net flows, which really came from a product that was very competitively priced and attracted money from corporate treasurers. And then actually Franklin's product, which is a Luxembourg product, had $800 million in flows. I think that was the fastest-growing money market fund from some lists that I saw, which was really offshore clients who wanted to take advantage of the yields in the U.S. And I think that product now, it's a Luxembourg U.S. dollar short-term money market fund, and it's now $1.1 billion in AUM.
spk10: Great. Thank you.
spk08: Thank you. Next question will be from Bill Katz at TD Cowan. Please go ahead.
spk16: Great. Thank you very much for taking the question. So there's a lot of ins and outs to the franchise right now. And I'm just maybe stepping back for a moment. I guess where I'm struggling a little bit on the storyline is how do you drive both top line and bottom line growth here? Because when I adjust for where your flows are coming in versus where they're going out, it would seem to me that the fee rate may go lower. I'm so curious your thoughts on that. And then given now any incremental savings that you think you can do will sort of supplement the growth for the Aladdin platform, it would seem that you're more of a top-line story than a top-line plus expense leverage. But then I worry the fee rate might go lower because of the mix. So how do we think about how do you get revenue growth from here? And then how do you turn that into operating leverage? Thank you.
spk12: So I'm going to start. And then, Matt, have you kind of jumped onto some of the EFR and some of the other things? You know, look, I think that one of the things that, you know, the pivot into adding alternatives, obviously one of the benefits of that is that's just a much higher fee, even excluding performance fees as a baseline investment management fee. And, you know, this year, if you, we guided to 10 to 15 billion, we're going to end out up close to 15 billion, and yet, you know, the AUM is pretty flat, and that's really because of inflows plus market is sort of offset by some outflows and really realizations and distributions. But it was a year where we weren't in the market with a flagship secondary PE fund from Lexington. And frankly, real estate's been really soft. So while, you know, Clarion Partners has three of their largest funds are open-ended and there's perpetual fundraising, you know, there just hasn't been huge allocations to real estate. So let me hit a couple of those because I do think there's opportunity for that pipeline to expand. Let me start with real estate. I think there's a feeling that this market has really bottomed, and that's driven by two things. One is more clarity on where rates are as well as probably more realistic marks, that the bid and ask spreads are coming closer. And in talking to folks at Clarion, Think about it. Office used to be 35% of the index. It's now down to 17%. So finally, maybe there's more to go on Office as far as dropping in the marks, and Clarion only has 8% allocated to Office. But you've had a huge adjustment in pricing. As a matter of fact, Clarion's seeing RP volumes go up a little bit. You're starting to see rescissions and redemption queues. And more importantly, some of the properties that they've sold in like logistics have sold for above the appraised value and some of the multifamily above where the marks were. So that's kind of a sign that the real estate market's getting healthy again. And I think the feeling is by the end of 24, we're going to start to see managers allocating back to real estate. I already mentioned about Lexington where they've been deploying Fund 10 faster than and so hopefully we'll be in the market sooner for their next fund. And again, this is just a supply and demand issue, which is so much has been deployed in the alternative space, and there's a need for liquidity for a variety of reasons. And we do see M&A starting to pick up, but there are needs for that liquidity, and there's only a handful of large secondary managers that can buy big LP positions when needed. And so that's been where we've been able to have true pricing power in the secondaries. And then I mentioned on BSP, we think this real estate debt, there's some parts of private credit that have been pretty tight, but real estate debt because of the retrenchment of regional banks has made this just fertile ground for real opportunity, both from institutional clients interested in and really great conversations were happening with distributors who are interested in the Wealth Channel and offering products there. So we think that we've been kind of, if you just look at this year for alternatives, you're kind of at a baseline, and I think there's a lot more opportunity as some of this gets healthy. And that right there carries some of the fees up. I did mention the reduction in our fees, You know, a lot of the EFR was an adjustment because we added Putnam. And so it's not just – if the asset mix is fixed income takes a much bigger percentage than equity, of course you're going to have it, but you're not seeing the degradation because of vehicles as much as I think people, you know, are thinking that's happening. We're not seeing that to the same level. And then, Matt, do you want to cover anything?
spk01: Yeah, I mean, I think, Jenny, you covered most of it. I mean – There's differences from last quarter, Bill, on the EFR, for example. The business mix was probably a little bit under 0.1 basis point. Putnam was 0.9. Now, a lot of that's to do with the calculation of the EFR itself, but we thought the 0.9 would be a little bit less than that, hence the slight difference from the guide that I gave. And the reason why it ended up being as much as 0.9 is is because, frankly, Putnam has just grown faster than we anticipated. It's grown faster than our projections. Every month it's growing faster than we thought. For perspective, Putnam's AUM is 23% higher than when we announced the transaction and 13% higher than when we closed the transaction, and they've been in positive flows every month since, both quarters since. So what that's meant is because they're at a lower effective fee rate rate, the averaging and the calculation, everything, it means that the EFR has come down a bit. If you take that into account, and then you take into account previous quarters where we've had episodic boosts to EFR, such as Lexington's catch-up fees, our EFR has actually been fairly stable. I mean, it has come down a little bit, but it's normally by 0.1s here and there. And that, as Jenny mentioned, is largely due to a little bit of the mix, and frankly the growth in ETF, Canvas, SMA solutions, and we expect that group of things to be growing. It's very hard to have all of the things flowing that we've invested in in one quarter. One day we will actually get alternatives, ETFs, Canvas, SMA, and solutions all coming together at once where we get the fundraising in alts lined up with all those other more organic and more ongoing growth areas of those vehicles. When we do that, we've got a good shot at offsetting the areas of shrinkage that you reference. I'll also point out that if you take out some of the larger sort of tax or fixed income areas that you've pointed to and others have pointed to, we'd be in positive flows in the business right now. So anyway, just to give you a little bit more information on EFR.
spk14: And, Bill, the final thing I would add is Jenny talked a lot about alternatives. Alternatives and wealth management is something, obviously, we're focusing on that I think is very positive from an EFR perspective. And the final thing I would note is that our core sales, and we think about that as sales that are less than $100 million, are up at about 14%. That tends to often be higher fee business, and we see very significant continued growth in core sales.
spk16: Thank you for the very comprehensive answer.
spk08: Thank you. Next question is from Patrick Navit at Autonomous Research. Please go ahead.
spk15: Good morning, everyone. I have a follow-up on your answer on the Aladdin expense absorption. A lot of what you described sounds like it would have to come through after implementation. So just to clarify, you're expecting that absorption to be in lockstep with the implementation expense. And if so, how do you turn off all of those extra vendor costs if Aladdin isn't live yet to fill in that capability? Thank you.
spk01: It's inclusive of that. So there will be periods of time where we're paying for both Aladdin and we're paying for other vendors. But the quarterly kind of view or vision that I provided to you includes that assumption. So we still think that there will be very modest adjustments to or impact to operating income per quarter based on our plan over the next five years. Remember, of course, that a portion of the $100 million is capitalized. So that gets spread out over more years. Probably something like 50% of it gets capitalized over years. over more years than three to five.
spk12: And I just add that we're not on a uniformed platform, technology platform, so as you migrate certain SIMs over, you retire their systems. And so it is a little bit lockstep as you go along.
spk01: Yeah, and we have... And the other thing is that we... The time that we're implementing Aladdin, we are also implementing other important systems across the company that, again, offset, as I mentioned earlier, offset the sort of double pay you have to pay across different vendors. And that's why when you get to the outer years, like 28, 29, and so on, when that gets eliminated, you're starting talking about $25-plus million of savings.
spk03: Thank you.
spk04: Thank you.
spk08: Thank you. This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments.
spk12: Well, I just want to thank everybody for participating in today's call. And, you know, once again, would like to thank our employees for their hard work and dedication. And we look forward to speaking with all of you again next quarter. Take care, everybody.
spk08: Thank you. Ladies and gentlemen, that concludes the conference call for today. You may now disconnect.
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