Franklin Resources, Inc.

Welcome to the Franklin Resources Earnings Conference Call for the quarter ended June 30, 2025. Hello, my name is Maria, 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 within 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 that 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. Welcome, everyone, and thank you for joining us today as we review Franklin Templeton's third fiscal quarter results. I'm here with Matt Nichols, our CFO and COO, and Adam Spector, our head of global distribution. We'll answer your questions momentarily, but before we do that, I'd like to highlight some key developments and themes from the quarter. Over the past few years, Franklin Templeton continues to evolve into one of the world's largest and most diversified investment managers with a full spectrum of capabilities across public and private markets. At the core of this evolution is our commitment to being a trusted partner for what's ahead, helping clients navigate the complexity of global markets with confidence and experience. From individual investors and financial professionals to institutions, we are focused on delivering customized solutions to achieve their long-term financial goals. We do this by leveraging the breadth and depth of our specialist investment teams who bring differentiated expertise. And we offer our strategies through a broad range of investment vehicles, from mutual funds and ETFs to SMAs and private fund structures. As more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles, and regions, we believe our business is well-suited to meet that demand. In today's fast-moving and interconnected investment landscape, Franklin Templeton's global reach is increasingly important. Our capabilities span US and international markets, including emerging markets. positioning us to meet evolving client needs as they allocate and reallocate across regions and through market cycles. Almost 40 years ago, we opened our first office outside of North America in Taiwan, and we were one of the first global firms to build local asset management capabilities. We currently operate in over 30 countries, and our clients are located in over 150 countries. Our goal is to manage each local business combined with global scale, focusing on local investing and client needs. And today we have approximately 500 billion or roughly 30% of our AUM in countries outside the U.S. From our legacy as pioneers in international and income investing to leadership in emerging areas like AI, tokenization, and blockchain, we're committed to keeping our clients on the forefront of investment opportunity. across markets and technologies globally. Innovation is and has always been central to who we are. Our investment teams around the world collaborate closely to provide forward-looking insights and identify new opportunities. A great example of this is the Franklin Templeton Institute, which plays a central role in delivering timely research, thought leadership, and educational resources to help clients interpret and respond to fast-moving market developments. Turning to public equity markets, it's been a tale of two quarters to start calendar 2025. Despite a turbulent April, global equity markets rebounded sharply from Liberation Day setbacks, with the S&P 500 posting one of its fastest ever post-war recovery, rising 25% from its April lows and ending the quarter up nearly 11%. The sharp recovery was led by large cap growth stocks, including most of the Magnificent Seven. The top performing sectors were IT, communication services, industrials, and consumer discretionary, along with the other major domestic indexes. The small cap Russell 2000 index rebounded in the second quarter, gaining 8.5%. International markets have shined so far in calendar 2025, but the outperformance versus U.S. was largely in Q1. Through June, the MSCI IFA is up 19%, helped by a weaker U.S. dollar and expectations that U.S. tariffs will not meaningfully alter the corporate earnings outlook. Emerging markets similarly outperformed. After holding up much better in the first quarter of the calendar year, value stocks lagged growth in this quarter. Large-cap growth outperformed large-cap value by 14% in Q2. Our investment teams remain cautiously constructive on the outlook for the U.S. equity market. While the market remains supported by solid fundamentals, caution stems from the market's already strong advance from its lows and ongoing geopolitical and policy uncertainty. Turning to public fixed income markets and rates, following Liberation Day, the quarter opened with a higher than expected tariffs announcements, which sparked a temporary market sell-off and a spike in volatility. Subsequent data However, suggested that the US economy has remained resilient. Economic activity continued to unfold at a healthy pace, even though volatility in exports and imports makes headline GDP numbers less informative than usual. The labor market remains at or close to full employment. And while tariff hikes have fed through into the prices of specific goods, they have not had a broader impact on inflation. All this seems consistent with the fact that exports and imports play a relatively smaller role in the U.S. than in many other economies. Market conditions stabilized during the quarter as investors' worst fears proved unfounded, and risk assets recovered with global credit spreads spiking but then trending significantly lower. Lower-rated sectors outperformed, as did non-U.S. markets with the U.S. dollar seeing its largest quarterly decline since 2022. The Fed has maintained interest rates unchanged at its May, June, and July meetings, noting that while there are some downside risks to growth, labor markets remain robust, and inflation is still above target. We continue to expect at most one more rate cut by the Fed this year, with additional monetary easing possible should growth begin to deteriorate. Tariff-driven price pressures and a still large fiscal deficit seem likely to exert some upward pressure on yields. Financial markets will likely continue to anticipate and push for more monetary easing than what we are forecasting, likely resulting in a prolonged roller coaster ride of market volatility. In private markets, quarterly volatility in global equity markets continued to act as a constraint on IPOs and M&A activity. As a result, continuation funds and secondary private equity were the primary sources for investor liquidity where Lexington partners provide scaled solutions, expertise, and leadership. The trends shaping the private equity landscape, growing net asset values, significant dry powder, longer holding periods, and shifting distribution patterns point to a secondary market opportunity that is poised to remain attractive for years to come. Private credit remained an area of conviction, though even here, LPs are deploying more selectively. The macro backdrop characterized by higher base rates, modest spread widening, and potential credit deterioration has made quality underwriting and structure more important than ever. Increased market volatility while challenging also creates an attractive backdrop for our alternative credit businesses like direct lending, real estate credit, and special situations. In these markets where there is greater dispersion between the best and worst credits, Benefit Street Partners is well positioned given its conservative approach to underwriting and our deep portfolio management expertise. Real estate capital markets activity remains muted with greater volume in perceived stronger property types. Top-performing property sectors include industrial, multifamily, and self-storage, which continue to have solid long-term underlying property fundamentals. For the fourth quarter in a row, overall property indices showed modestly positive performance signaling more evidence of reaching a bottom after two years of decline. As sentiment changes for real estate, Clarion continues to be well positioned with over 60% of AUM in the industrial and logistics sectors and less than 6% in the office sector. Our overall view of private markets remains constructive. While there may be subtle shifts within private markets, the changing trade policies and elevated geopolitical risks haven't altered our long-term outlook. We continue to favor secondary private equity, real estate, and commercial real estate debt as key areas of opportunity. In today's environment of heightened volatility, shifting trade policies, and geopolitical uncertainty, diversification and active management are not just prudent but essential to mitigate potential risks and maximize returns. Diversification across various asset classes, regions, and sectors can, of course, help cushion the impact of market volatility. And as a diversified active manager, we have the capabilities across public and private assets to customize solutions to help investors to achieve their long-term financial goals. Turning now to our business results. Our third fiscal quarter saw progress across asset classes, investment vehicles, and geographies, highlighting the strength of our diversified global platform. Our assets under management ended the quarter at $1.61 trillion. AUM increased from the prior quarter due to the impact of positive markets and strengthening flows, partially offset by long-term outflows at Western Asset Management. Our institutional pipeline of one but unfunded mandates rose by nearly net $4 billion to a record $24.4 billion. It included $14.8 billion in new wins, reflecting strong client demand across all asset classes and was diversified across specialist investment managers in multiple regions. This quarter, we saw notable mandates in fixed income from our partners in the insurance sector. We remain encouraged by increased client engagement on potential opportunities ahead. Long-term net outflows totaled 9.3 billion, representing a marked improvement from the prior quarter's outflows of 26.2 billion. Excluding Western asset management, long-term net inflows were 7.8 billion this quarter and 7.4 billion in the prior quarter. This quarter represents the seventh consecutive quarter of positive net flows, excluding Western, demonstrating growing momentum across our business. Multi-asset and alternatives continue to have strong, consistent performance and generated another quarter of positive net flows, resulting in a combined 4.3 billion for the quarter. Multi-asset flows have been positive for 16 consecutive quarters. In addition, we saw improving flow trends in fixed income and equities. Equity net outflows were 645 million as market volatility impacted growth strategies more than others. Given our diverse global equity capabilities, we benefited from the broadening of markets into both value and non-US strategies, generating positive net flows into large cap value, international, and emerging markets strategies. Putnam continues to be a strong contributor with positive net flows since acquisition across mutual funds, SMAs, and ETFs. Fixed income net outflows improved to $13 billion this quarter. Excluding Western, fixed income net inflows were 3.5 billion, driven by Franklin Templeton fixed income and Brandywine Global. Flight to safety generated positive flows into munis, stable value, and short duration strategies. Excluding Western, fixed income has generated positive net flows for six consecutive quarters. Western net outflows also moderated on a quarterly basis, and are the lowest since the September quarter of 2024. In addition, money market balances have continued to grow as the Federal Reserve holds the target overnight rate at about 4%. We've had cash management net inflows for four out of the five last quarters, with $2.7 billion in each of the last two quarters, increasing our cash management AUM to $72 billion. This quarter, we continued to successfully execute our long-term corporate priorities, which reflect key areas of long-term growth. Fundraising and alternatives generated $6.2 billion for the quarter, of which private markets assets totaled $5.3 billion. This brings alternative asset fundraising to $19 billion fiscal year to date, including $15.7 billion in private markets, placing us at approximately the middle of of our annual guidance range with one more quarter to go. Fundraising was diversified across alternative specialist investment managers and reflected client demand in secondary private equity, alternative credit, and real estate from institutions as well as from the wealth channel. In June, we announced an agreement to acquire a majority interest in Apira Asset Management, a pan-European private credit firm with approximately 5.7 billion in AUM. The transaction will expand our direct lending capabilities across Europe's lower middle market and reflects our continued commitment to growing our global alternatives platform, which had $258 billion in AUM at quarter end. Apura is complementary to our existing global alternative credit offerings. Alongside benefit street partners in the US and El Centro in Europe, Apura further diversifies our firm's geographic exposure and capabilities within the private credit asset class. This acquisition brings our pro forma private credit AUM to nearly $90 billion. On both a relative and absolute basis, Alternatives by Franklin Templeton, our alternatives business in the wealth management channel, has been a strong contributor over the course of this year. We have invested heavily in this business to meet the growing demand in this critical area. Over the past few years, We have focused on designing suitable products, investing in client education and supporting wealth advisors. Our substantial distribution resources and coverage model includes a dedicated alternative specialist team that we have significantly expanded over the past two years. Our perpetual secondary private equity funds, Franklin Lexington private markets funds are nearing 2.5 billion in gross sales fiscal year to date And we are excited to expand into new markets in Europe and Asia, leveraging our global distribution footprint. Additionally, our two other primary alternative managers, Benefit Street Partners and Clarion Partners, each have perpetual funds with at least $1 billion in AUM. These are semi-liquid perpetual vehicles and are open to ongoing subscriptions. Over the long term, we believe there is a significant opportunity for alternatives in wealth management. especially given the average wealth management client has approximately 5% or less of their portfolio allocated to alternatives. And depending on the client's liquidity needs, it could be much higher. Institutions, for example, have been allocating 30% or more. It is essential for us to provide opportunity for broader client participation in the investment returns generated in private markets. In addition, we're developing products with strategic partners in the retirement channel for private market investments to be included in defined contribution retirement plans. Client demand also continued across investment vehicles. Our ETF platform achieved its 15th consecutive quarter of positive net flows, attracting $4.3 billion and reached a new high of $44.1 billion in AUM, 19% growth from the prior quarter. We have over 13 ETFs with over $1 billion in AUM across equities and fixed income, and since acquisition, Putnam's ETF lineup has more than tripled in AUM, reflecting the strength of our global distribution platform. Retail SMAs had another quarter of positive net flows, and AUM is up 8% to $156.3 billion, a new high watermark for our retail SMAs. Our leading SMA franchise saw continued progress driven by growth in Putnam, Franklin Templeton fixed income, Canvas, and Franklin Income. Canvas, our custom indexing platform, attracted notable inflows, with Canvas AUM of $13.7 billion, increasing 20% from the prior quarter. The platform has been in positive inflows since acquisition. As I mentioned earlier, one of Franklin Templeton's strengths is our global presence and international markets are an integral part of our growth strategy. Our international business continues to expand with positive net flows for the quarter. Speaking of international markets, in May, I joined senior leaders in the Middle East to engage directly with government officials, policy leaders, and some of the region's most influential institutional investors. The visit reinforced Franklin Templeton's long-term commitment to helping shape global capital markets in the region. This quarter, we worked with two of Saudi Arabia's leading institutions to invest in the country's financial markets, broadening investment offerings for both Saudi and international investors. We continue to be selected as a trusted partner to official institutions in emerging markets, including central banks and sovereign wealth funds. This quarter, we became the trustee and manager of the 1.7 billion National Investment Fund of the Republic of Uzbekistan. This strategic mandate builds on our 15-year track record of managing mandates in frontier and emerging markets. We were also honored to be recognized as the Asset Manager of the Year by the publication Central Banking, reflecting the progress we are making with this client base. This quarter, we launched an intraday yield feature on Benji, our tokenized money market fund, making investing faster, more transparent, and accessible 24-7. This is another example of how Franklin Templeton has always been at the forefront of change, whether it's providing investors with access to new investment opportunities, improving how they manage their money, or leveraging new technology to make it more efficient. Before I turn to investment performance, I wanted to provide a brief update on July flows. While it's early and we will formally report preliminary July AUM and flows next week, Western's long-term net outflows are expected to be approximately $3 billion for the month of July and had ending AUM of approximately $236 billion. Excluding Western, we expect long-term net inflows of approximately $3 billion. Now, in terms of investment performance, Over half of our mutual fund AUM is outperforming its peer median across the three, five and 10 year periods. The one year would also be in the top half, excluding one of our largest funds managed for yield. Similarly, over half of the strategy composite AUM is outperforming its benchmarks over the same time periods. Compared to the prior quarter, mutual fund investment performance increased in the three, five year and 10 year periods and declined in the one year period. again, primarily due to the categorization of one of our largest funds managed for yield. Turning briefly to financial results, adjusted operating income was $378 million, flat from the prior quarter, driven by lower compensation expenses, offset by the impact of Western outflows and lower average AUM. We continue to focus on expense discipline and operational efficiencies, Our balance sheet remains strong, providing flexibility to pursue strategic investments and return capital to shareholders. Finally, at Franklin Teppleton, our collective purpose is clear. To help our clients all over the world achieve the most important financial milestones of their lives. Central to our approach is a deep understanding of each client's goals, allowing us to serve as a trusted partner through the complexities of the financial markets. We have built a resilient business that is diversified across investment teams, asset classes, vehicles, and regions, delivering value to all stakeholders. I'd like to express my thanks to our talented and dedicated employees around the world whose client-first mindset drives our continued success. Now let's open the call to your questions. Operator?