Franklin Resources, Inc.

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 securities litigation reform act.

Welcome, everyone, and thank you for joining us today as we review Franklin Templeton's first fiscal quarter results. I'm joined today by Matt Nichols, our co-president and CFO, and Daniel Gamba, our co-president and chief commercial officer. We'll answer your questions momentarily, but before we do that, I'd like to review some key themes. We are operating in a period of continued transition for investors, marked by significant market turbulence globally, resulting from heightened geopolitical trade policy and consequently economic uncertainty. Markets are adjusting to a more persistently volatile environment, shifting capital flows, and a growing need for resilience in portfolios. Across regions and client segments, investors are focused on the same fundamental questions, how to generate durable returns, how to manage risk through uncertainty, and how to position portfolios for long-term outcomes rather than short-term noise. That environment is reshaping what clients expect from asset managers. Over the past few months, I've traveled overseas across Europe, the Middle East, and Asia, and in my conversations with clients, it's clear they are no longer looking for individual products in isolation. They're looking for partners who can help them construct portfolios across public and and private markets, deliver personalization at scale, and navigate complexity with discipline and insight. Franklin Templeton is well positioned for this moment. Over years of deliberate planning combined with the strength of a global brand, we have earned the trust of investors around the world. At Franklin Templeton, we bring together specialized investment expertise across public markets, private markets, and digital assets supported by a global platform with reach in more than 150 countries. Clients are increasingly engaging with us across multiple asset classes, reflecting a shift toward integrated solutions and long-term strategic relationships. This alignment between client needs and our capabilities is driving growth. Our diversified platform, continued innovation, and focus on scale and efficiency position us to capture opportunities across market cycles and deliver long-term value for our clients and shareholders. Now, turning to our results for the quarter, which marked another important step forward with tangible progress across the firm. We continue to deepen client partnerships, broaden our investment and solutions capabilities, and strengthen our global platform, key priorities that remain central to our strategy. Our first fiscal quarter continued the momentum we built last year with strong client activity across Franklin Templeton's diversified global platform with positive net flows in both public and private markets. We had record long-term inflows of 118.6 billion, up 40% from the prior quarter and 22% from the prior year quarter. Long-term net inflows were 28 billion, with record AUM and positive net flows across equity, multi-asset, and alternative strategies, as well as ETFs, retail SMAs, and Canvas. Excluding Western asset management, long-term net inflows totaled $34.6 billion, nearly double the prior year quarter, extending our track record to a ninth consecutive quarter of positive flows on a comparable basis. Assets under management ended the quarter at $1.68 trillion. AUM increased from the prior quarter due to long-term net inflows and the acquisition of the PIRA, partially offset by the impact of net market change, distributions, and other. Excluding Western asset, long-term net inflows were $34.6 billion compared to $17.9 billion in the prior year quarter, with nine consecutive quarters of positive net flows. We continue to see strong momentum across our platform with record AUM in three of our four asset classes. Public markets remain a key strength and an important source of growth. Equity, multi-asset, and alternatives generated positive net flows totaling $30.4 billion for the quarter, and excluding Western asset, fixed income delivered its eighth consecutive quarter of positive net flows. Equity net inflows were $19.8 billion for the quarter, including reinvested distributions of $24.6 billion. We saw positive net flows across large-cap value and core, all-cap growth and value sector, international equity, equity income, and infrastructure strategies. Fixed income net outflows were $2.4 billion. Excluding Western assets, fixed income net inflows were $2.6 billion. driven by Franklin Templeton fixed income. Positive momentum continued in multi-sector, municipal, highly customized, stable value, government, and emerging market strategies. Our institutional pipeline of one but unfunded mandates remains strong at 20.4 billion, underscoring sustained demand for our investment capabilities. The pipeline remains diversified by asset class and across our specialist investment teams. Turn to private markets. Franklin Templeton is a leading manager of alternative assets with $274 billion in alternative AUM. Alternative fundraising has been a key contributor to our growth, with $10.8 billion raised during the quarter, including $9.5 billion in private market assets. Fundraising was diversified across our alternative specialist investment managers and reflected client demand in secondary private equity alternative credit, real estate, and venture capital from institutions as well as from the wealth channel. Aggregate realizations and distributions were $4.8 billion. Lexington Co-Investment Partners VI, one of the largest dedicated global co-investment funds, closed in October with $4.6 billion in committed capital. Today, Lexington's AUM stands at $83 billion up 46% since its acquisition in 2022. In addition, we continue to expand our private credit platform with the October 1st closing of the Appear Asset Management Acquisition. This strategic acquisition enhances our direct lending capabilities in Europe, growing lower middle market. In January, BSP Real Estate Opportunistic Debt Fund 2 closed with $10 billion of investable capital. including related vehicles and anticipated leverage across $3 billion of equity commitments. Franklin Templeton's U.S. and European alternative credit businesses are now aligned under an updated Benefit Street Partners brand with $95 billion in private credit AUM at quarter end. Clarion Partners continues to be well positioned with a large diversified portfolio and positive returns despite a challenging capital raising environment. Capital flows remain well below historic averages, largely due to clients seeking more liquidity in private equity overall. Recent M&A activity in the industry underscores the importance of alternative assets, reinforcing the strategic rationale behind our acquisitions and investments, and further highlights our ability to grow our alternative asset platform at scale. Franklin Templeton Private Markets, our alternatives wealth management offering, continues to gain traction and generated over $1 billion in sales for the quarter, underscoring the strength of our global distribution partnerships and client reach. Lexington Partners, Benefit Street Partners, and Clarion Partners each have scaled perpetual funds totaling $6.7 billion in AUM. These are semi-liquid, perpetual vehicles open to ongoing subscriptions, giving investors efficient access to long-term private market exposure. Taken together, these capabilities are driving increased client adoption and strengthening our position as demand for private market solutions continues to grow globally. As investors continue to seek enhanced diversification and differentiated sources of returns, Private assets have taken on a more prominent role within traditional mutual fund structures. We've been incorporating private assets into traditional mutual funds for over a decade. Today, we manage approximately 60 products representing about $160 billion in traditional mutual fund assets that have exposure to private markets. Liquidity is closely and continuously monitored to ensure these products remain aligned with their traditional fund objectives. Multi-asset AUM is nearly $200 billion and had net inflows of $4 billion during quarter, the 18th consecutive quarter of positive net flows led by Franklin Income Investors, Franklin Templeton Investment Solutions, and Canvas. These flows underscore clients' increasing preference for outcome-oriented, diversified solutions across public and private asset classes. an area that Franklin Templeton continues to focus on and evolve through innovation. Clients are increasingly turning to Franklin Templeton for a broad and differentiated set of investment vehicles, and we're seeing that demand translate into sustained growth across our platform with record AUM across ETFs, retail SMAs, Canvas, and investment solutions. Our ETF platform continues to grow at a faster rate than the industry, and reached a new high with $58 billion in AUM and generated $7.5 billion in net flows, marking its 17th consecutive positive quarter. The net flows were inclusive of $3.5 billion in mutual fund conversions. Our focus on active ETFs produced strong results this quarter. Active ETF net flows were $5.5 billion, or approximately 70% of total net flows. Today, we have 15 ETFs that exceed $1 billion in AUM. The industry conversation continues to shift toward delivering personalization at scale, and we see this as a durable, long-term opportunity. Advancements in technology are allowing features of separately managed accounts, such as tax loss harvesting, which were historically underutilized, to be implemented efficiently and consistently across a broad client base. We are well positioned in retail SMAs with our breadth of capabilities, along with our custom indexing technology, Canvas. As a leader in retail SMAs, AUM increased to $171 billion with $2.4 billion in net inflows driven by Putnam, Franklin fixed income, and Canvas. Canvas generated $1.4 billion in net flows and reached $18 billion in AUM. reflecting strong client interest in personalization and tax efficiency. Canvas has been net flow positive since its acquisition in 2022. We are also seeing increased demand for multi-asset model solutions, including portfolios that combine both public and private asset classes. This trend is extending into retirement channels, where investors are increasingly seeking diversification, income, and risk management through more holistic portfolio construction. Investment Solutions leverage our capabilities across public and private asset classes to pursue strategic partnerships. This quarter, Investment Solutions Enterprise AUM surpassed $100 billion. Digital assets also continue to play an important role in modernizing financial infrastructure, and Franklin Templeton remains at the forefront. Earlier this month, the state of Wyoming debuted the nation's first state-issued stable token with Franklin Templeton managed reserves, further demonstrating our leadership in blockchain-enabled investment solutions. Our digital asset AUM is $1.8 billion, inclusive of approximately $900 million in tokenized funds, and approximately 800 million in crypto ETFs. Turning to artificial intelligence, we've made significant progress in advancing our AI efforts. Yesterday, we announced the launch of Intelligence Hub, a modular AI-driven distribution platform powered by Microsoft Azure, building on the advanced financial AI initiatives announced in April 2024. Intelligence Hub delivers our vision for U.S. distribution by modernizing core activities, improving sales effectiveness, and enhancing the client experience. One of Franklin Templeton's strengths is our global presence, and international markets are an integral part of our growth strategy. We currently operate in over 30 countries, and our international business continues to expand with positive net flows for the quarter with strength in EMEA. Now, in terms of investment performance, over half of our mutual fund and ETF AUM is outperforming its peer medium across the three, five, and 10-year periods. Similarly, over half of strategy composite AUM is outperforming its benchmarks over the same time periods. Compared to the prior quarter, mutual fund investment performance increased in the five and 10-year periods and declined modestly in the one and three-year periods due to select U.S. equity strategies. On the strategy composite side, investment performance improved in the 10-year period, was stable in the three-year period, and declined in the one and five-year periods. The one-year decline was primarily driven by the liquidity strategies. Overall, long-term performance remains competitive and continues to support both organic growth and client retention. Turning briefly to financial results, adjusted operating income was $437.3 million, reflecting lower performance fees in the annual deferred compensation acceleration for retirement eligible employees, partially offset by the impact of higher average AUM and realization of cost savings initiatives. We remain disciplined in managing expenses while continuing to invest strategically in areas of growth and innovation for the benefit of all stakeholders. We are confident that our diversified business model, global scale, and client-first culture positions us well to capture the long-term trends reshaping our industry across public and private markets. Finally, in December, Franklin Templeton was once again recognized by pensions and investments as one of the best places to work in money management. I'm proud to lead such a talented and dedicated team, and I want to thank our employees for their continued hard work and commitment to serving our clients. Now, let's open up the call to your questions. Operator?

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance, please press star 0. We request that you limit yourself to one question to allow as many additional participants on the call as possible. Thank you. And the first question is coming from the line of Bill Katz with TD Cowen. Please proceed.