Franklin Resources, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31, 2023. Hello. My name is Joanna, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.
Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts are 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.
Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the first fiscal quarter of 2024. I'm joined by Matthew Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We're happy to answer any questions you have in just a few minutes. But first, I'd like to call out some notable highlights from the quarter.
[Operator Instructions] First question comes from Alex Blostein from Goldman Sachs.
So maybe just to get some of the numbers questions out of the way, obviously, with Putnam closed, maybe, Matt, you can give us an update of couple of items, but maybe one, where do you see the management fee, excluding performance fees and kind of catch-up fees jumping off point for the first quarter, first calendar quarter of this year and just broader update, I guess, on accretion and contribution for Putnam for this year.
Okay. Alex, I mean that should probably just give you the forward guide to put things into perspective, that will help get through the Putnam update also. So in terms of the effective fee rate, remember, last quarter, I mentioned we expect it to be around 39 basis points consistent with previous quarters.
Great. Okay. I think I got all of that or most of it, and I'm sure folks will follow up as well. I guess my only other follow-up for you. I think we talked about Putnam being around $150 million contribution to operating income on exit run rate. Can we just get an update on where that stands now? Obviously, their asset base is a little bit higher as well, but just want to get a sense whether $150 million is still kind of the run rate number we should be thinking about by the end of your fiscal year.
Yes. So just to break that down further, so I'll start the call with all these numbers. But just to break this down a little bit further. So in terms of revenue, obviously, we don't normally guide revenue, but we want to be useful in terms of modeling purposes for the second quarter, again, fiscal second quarter, Putnam revenues stand-alone would be about $160 million.
The next question comes from Craig Siegenthaler from Bank of America.
My question is on the alternatives net flow trajectory. If we back out the 2 flagship fundraisers at Lexington and Benefit Street, there would have been a large swing in net flows over the last 12 to 18 months. So I wanted your perspective on the flow trajectory in terms of net flows from alts. And are you expecting other funds to kind of step up and fill in that gap?
Thanks, Craig. So in the last 2 years, we have had about $40 billion in fundraising for our private markets. That was offset a bit by $12 billion in net outflows in the liquid alternatives. That just gives you a little bit of perspective there. We anticipate this year of fundraising between $10 billion and $15 billion in the private markets. And I would expect in this environment to have that translate into alternative asset revenue growth that's at the mid-single digits.
And Jenny, I would add 2 things in terms of the momentum we've had in the wealth channel. One is the success we've had to date with things like Lexington, mean that we're able to now have more meaningful conversations with our distribution partners about calendar placement many quarters into the future, which really helps us plan our product launches.
The next question comes from Bill Katz from TD Cowen.
So first question, maybe switch up the conversation a little bit, just talk about capital. You announced a pretty sizable repurchase authorization, have some equity that you have issued in consent with the transaction of Putnam. Looking at your balance sheet, it looks like you're saying about sort of net cash of 0 if you sort of adjust for the debt. How should we be thinking about maybe the tempo or pacing of capital deployment or buyback as we think through the year?
Yes. Thanks, Bill. I'll take that. And then, Jenny, maybe you'd like to comment also. So as usual, Bill, we're focused on making sure that we maintain our dividend and the same trajectory that's been on since the 1980s. We are very focused on organic growth investments. There is a ton going on, as you all know, in the industry. And there's a lot of call on capital for internal growth and internal projects and investments. So they're our 2 most important things.
Okay. That's super helpful. And just as a follow-up, Jenny, perhaps for yourself or Matt, or Adam. Any sense or can you give us an update on how the insurance mandates are -- the momentum is building there. I think there was some $20-odd billion that should flow in. So once the deal has been completed, and then how you think about the backlog behind that? And maybe the broader question underneath that is what are the early stage discussions with the enhanced distribution opportunity now that the transaction is complete?
Well, so I mean, obviously, we have the $25 billion that we've talked about with Great-West Life, and that will come in kind of through the year. And it's a mix of multiple our SIMs with the bulk of it actually going to Western, but goes -- it has alternatives in there. And as well as fixed income and equity. And we announced that we're going to be a sub-adviser [indiscernible] And part of that is because we -- when we acquired Western, we acquired real expertise in understanding the insurance space, and we've been able to leverage that capability more broadly. But Adam, you want to talk about some additional things that you're seeing.
Okay. I would say just in terms of scale, our insurance business is about $170 billion now, and that's not including the flows we've talked about from the power-related companies. So it's a very significant business. As Jenny said, to be successful in a lot of the general account area, you've not only need to have investment expertise, but really insurance, domain-specific expertise, technology compliance.
And just a little bit more perspective on the $25 billion, Bill, just to be clear. But right now, for all intents purposes, for modeling purposes, we don't have any of that in. I mean we have a little bit, but it's not really nothing's really hit the revenue line yet. We expect, as Jenny mentioned, about 2/3 of this to be kind of investment grade and a little bit emerging market and other corporate credit across a broad range of our specialist investment managers.
The next question comes from Daniel Fannon from Jefferies.
A couple of clarifications. Matt, I just want to confirm the 1Q guide for comp that was, I believe, $815 million around that included $50 million of performance fees. Did the full year guide of the $455 million to $466 million assume a $50 million a quarter performance fee contribution?
Yes, plus the $93 million that we had this -- in the first quarter. So it's $93 million, $50 million, $50 million, $50 million.
Yes. Got it. Okay. That's helpful. And then just on the Lexington what's happened -- I'd like to just clarify what's in the numbers now in terms of AUM and flows that we've seen as of 12/31. And then in terms of catch-up fees, we got the disclosure for this quarter and last, but should we assume given the final close in January, another round of catch-up fees here for the March quarter?
So there's no more catch-up fees to book at this point. The fund had its last fundraising in the -- by 12/31 and that's when they sent the press release out that indicated that we have $22.7 billion of additional AUM. And that's all included in our reported numbers.
And the would BSP's fundraise be in there as well? 12/31?
No, not yet.
The next question comes from Brennan Hawken from UBS.
So you spoke earlier about fixed income and the attractiveness and demand and a shift from cash and short duration investments. What are you specifically seeing as far as RFP activity? And could you talk about Western and their level of engagement with their client base?
Yes. So Brennan, maybe just a little bit of color kind of on the industry everybody talked about the $7.7 trillion in money market funds and what's going to be transferring from cash into other investments. And first of all, Western's money market fund is primarily institutional and institutions tend to build in the first 2 quarters and then spend in the second 2 quarters.
Yes. Jenny, I would just add that I think you're spot on that we've really seen strength in a number of areas of fixed income that was masked by some of the outflows in Core and Core Plus. But the performance in Core and Core Plus turned around. If you take a look at the end of the year, Core is up 37 basis points in the index, Core Plus 124. And traditionally, those products get very, very strong inflows after the Fed stops hiking. So we're in the position now from a performance standpoint as well as in the rate cycle, where those products are poised to do quite well.
Great. And then just, Matthew, I wanted to reconfirm because a lot of times when you speak to expenses, you speak to it ex some items, but it sounds like the $4.55 billion and the $4.6 billion for the fiscal quarter would be inclusive of the double rent would also include the expectation -- the actual performances from this past quarter plus [ 50 ] expected the next few as well as the 9 months of Putnam. Do I have that correct?
That's right. Yes. And just to -- the reason why I went through the detail is because I want to be very clear that if you take Putnam out of the equation, our expenses are up like 1% or something like that year-over-year. And that's only because -- and again, we don't normally talk about revenue on -- from a guide perspective, it's almost impossible to guide, as you know. But that does assume 5% higher revenue. So just if you often people ask us about margin, the relationship between revenue and expenses and leverage and operating leverage in the system -- well you can see that if we expect revenue to go up 5%, we only expect our expenses to go up between 1% and 2% on a foundational level.
Yes. That's -- that $150 million, that's the run rate when you exit your fiscal year basically right?
That's exactly right. Yes. So on the last day, at the very least on the -- I think we could be a little bit better than this. But on the last day, [ 9, 30 ] when you times that number of savings by the year, it's $150 million at least.
The next question comes from Michael Cyprys from Morgan Stanley.
I wanted to ask about retirement with Putnam and the Great-West strategic relationship, this accelerates your push into the retirement channel. I hope you could talk about some of the steps you're taking and may take over the next 12 months to capture the growth opportunity that you see. Maybe you could elaborate on that as well as which products you think might resonate the most.
Adam, you want to take that?
Yes. So first of all, the Putnam acquisition gave us capabilities. And I think those capabilities are really important in terms of things like stable value where there's $18 billion in assets, ultrashort and target date. If you take a look at target date, it's a third of industry DC AUM right now, had $150 billion in net flow last year. We can now play in that segment where we haven't really been able to play effectively historically.
Great. And just a follow-up question on the technology front. Just curious how you're thinking about front to back outsourcing opportunities and evolving the tech stack from here. Maybe you could speak to some of the opportunities that you might see from improving data integration across the multiple systems that you have, what sort of factors go into consideration? And any sort of lessons learned you might take away from others that have partnered externally on this front.
Yes. Thanks, Mike, I'll take that and then Jenny, maybe would like to comment. Because we're all very involved in these very critical decisions for the company. So as you know, we outsourced transfer agency, fund administration and parts of that technology, as we've described beforehand. We then moved on to understanding the potential opportunity for effectively partnering with one single provider for our investment technology platform.
No, Matt, that was perfect.
The next question comes from Patrick Davitt from Autonomous.
First, on Putnam, as we try to kind of level set our model expectations. Could you give an update on how the net flow picture tracked from announcement through the December quarter with and without reinvested dividends.
Yes. Excluding reinvested dividends, it's slightly positive. No, obviously, we closed the transaction, as you know, Patrick, on January 1, I'd say, in the quarter before that and the period we're in now, it's kind of flattish, excluding reinvested dividends. So slightly positive.
And I'm just going to throw one thing in. I mean Putnam's got 85% of their AUM beating their peers in all time periods. 87% of mutual funds are -- or 91% of mutual funds are rated 4- and 5-star ratings. So both on the equity and fixed income, they've got phenomenal performance.
Great. And then one housekeeping item. It wasn't clear to me earlier when you were talking about this, but the $5.5 billion-ish win from Great-West announced last week, is that a part of the $25 billion? Or should we consider it incremental?
Incremental.
Yes. I think that's from the -- yes, from the retirement channel. So.
So it is incremental.
Incremental.
And the next question comes from Brian Bedell from Deutsche Bank.
Just one clarification also. I think I'm not sure you mentioned this, but the alternative was I think the $5 billion of private markets to play with them correctly, $5 billion of private markets, less about $1 billion of liquid also is that for the quarter just reported or for the current month quarter.
Well, so BSP -- so they closed their fund in this quarter. And so you don't see those flows in last quarter. So we're talking about in Matt, what was the date that they closed the [ 4.7 ].
Like a week ago...
This quarter. So -- and just the different BSP charges when they call capital, so they don't have catch-up fees like Lexington does.
Yes. Perfect. Okay. That's clear. And then just more broadly, I guess, just the ETF franchise are growing nicely. Maybe Jenny, if you want to -- and Adam also or Matt, just talk a bit about the -- your long-term vision for active semitransparent ETFs, you've already got 12 managers, using these products to $20 billion in the total ETF, which of course, includes a lot of smart beta. But just how you're thinking about this over, say, the next 2 or 3 years the demand from the marketplace for ETFs, but whether you think it might cannibalize mutual funds where you actually think you can develop strategies that will be incrementally growing sales on top of your mutual fund tranches?
Yes. So I think the key to think about with ETFs and frankly, SMAs A lot of the growth is driven from the fact that the world has moved more towards fee-based and how distribution fees are paid and things like traditional mutual funds. And then obviously, the tax efficiencies and ETFs. So we view it as our expertise is our investment -- risk-adjusted investment capabilities, risk-adjusted returns. We have a very small passive suite in the ETFs, but we really focus on active management. And we are agnostic to the vehicle in which we deliver that. So we look at the ETF as a vehicle which works really well in certain channels.
Yes. I would just reiterate the point that, for us, ETFs is about the vehicle, not about being passive, just to put some numbers around that 24% of our assets are smart beta and 36% are active. So our passive ETF business, it's only 40% of our AUM is in passive and it was only 20% -- passive was only 20% of our ETF flow for the quarter. So as more and more people begin to consider active management within an ETF wrapper, we think that's great to us.
And I think that Canvas is [indiscernible] is more of a threat to the passive mutual fund that has and passive ETF.
We had another question come in to clarify a point around guidance on performance fees. So just to be clear, the [ 815 ] guide that I gave around the fiscal second quarter guidance, includes an assumption of $50 million of performance fees. The annual guide of $4.55 billion to $4.6 billion is excluding performance fees. Just as you know, we always give our annual guide excluding performance fees. I just want to be clear on that. That's fully inclusive of Putnam. It includes the double rent, but it excludes performance fees.
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.
Great. Well, thank you, everybody, for participating in today's call. And once again, I just want to thank our employees for their hard work and dedication to be able to deliver this quarter. And we look forward to speaking to you all again next quarter. Thanks, everybody.
Thank you. This concludes today's conference call. You may now disconnect.