Franklin Resources, Inc. — 2024 Q2
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 March 31, 2024. Hello, my name is Sylvie, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions]
Good morning, and thank you for joining us today to discuss our quarterly results.
Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the second fiscal quarter of 2024. I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution.
[Operator Instructions]
First, we have a big picture net flow question. Lots of ins and outs in the $7 billion, especially with the $14 billion and from -- Great-West. So how should we think about the core net flow run rate if we back the $14 billion out of the $7 billion of long-term net flows?
So Craig, thanks for the question. Let me -- let me answer that question in first, kind of how we're positioning ourselves, and I will -- I promise you, I will get to those points and Adam can add some additional cover -- color. So -- the way we're positioned the firm, I think of it as in 4 key secular trends that has driven our acquisition strategy and what we think will drive flows now and in the future. So the first obviously is our movement to alternatives. We think that it's not going away, private credit is here to stay, banks are going to lend the same way that they've done in the past, private equity is here to stay. And so if you look at our breadth of capabilities from Lexington, Clarion, BSP, Alcentra we think we have the broadest alternatives capability of any traditional asset manager.
We're looking forward to seeing your AI announcement later this week. We have a follow-up on outflows. Over the last 8 quarters, we added it up, Franklin had a $13 billion of all inflows. And I know this excludes realizations too. If we add up Lexington $10 million and Benefit Street $5 million. Combined, they add a $27 billion. So all flows look to have been maybe negative $14 billion excess 2 flagship fundraises. So a similar question, but [indiscernible] on the alts business, how should we think about the [indiscernible] net flow trajectory just given that dynamic?
So I think it's -- there's a little bit of noise in the alts numbers. If you just look in calendar year 2022 and 2023, we talked last time about how we raised $40 billion in the private markets. But the reality in our alternatives business, we raised $55 billion, and 80% of it was private markets. But the net change in AUM, you saw $40 billion added to the private markets AUM net, net of realizations, distributions, market, everything. But $16 billion negative in the liquid alts portfolio, which represents about 6% of our alts portfolio now. So that's where you're shifting from much -- the good news is it's the higher fee private markets that have had -- that had solid inflows in that window, but it was a little bit masked by the lower fee liquid alts.
Yes. Craig, just for perspective, I'd say, for the last quarter that we're just reporting on, realizations and distributions was $2.6 billion, for example, and we had negative FX of another $1 billion. But we do -- we get these questions, and I think we're going to try and improve our disclosure on this to try and help the question around this. Now we've got the bulk of our alternative assets together. Remembering in previous quarters, we've always said, when we were much smaller, we've always said, look, realizations and distributions just not -- they're just not significant enough to report and break down the explanation of AUM, but they're now getting to the point where we're going to start providing that level of detail. But just for information, the last quarter, again, the one we're reporting almost $2.6 billion of realizations and distributions and $1 billion negative FX.
And Craig, the only thing I would add is that the other thing we've been able to do really is to work more closely with our distribution partners on the wealth management side over the last few quarters and we're able to secure calendar spots further into the future than we ever thought was possible. And I think that speaks well to our future fundraising as well.
Next question will be from Glenn Schorr at Evercore.
So I wanted to talk about fixed income a little bit. So I see pension-funded status is much, much better and rates are higher. I like the $8.3 billion in flows in the quarter, but I don't know how much of that came from Great-West or something else? So maybe you could talk about that. And then bigger picture, is this -- do you feel this is the beginning of a broader trend, the long-awaited fixed income flows, maybe you can give us a little bit of insight from whether it be RFPs, client combos or the consultants on -- if we're at the [indiscernible] of some larger flows into fixed income?
Yes. Thanks, Glenn. So interestingly, let's face it. As long as people believe rates have peaked and potentially will come down, they're going to go longer duration, right? So the only thing is you're now starting to hear the noise for the first time where actually people think rates may be longer -- higher for longer and somebody was even talking about a potential rate increases. So that could slow things. But let me give you what we're seeing.
And I would say that it's also pretty broad-based. If you take a look at that funding pipeline, it's really across all 4 of the fixed income firms we have, which all have very significant pipelines right now. And if you take a look at the products we're offering, we're positive in core in high yield and munis was our best-selling segment. So really broad-based fixed income appeal, not just one product.
Yes. And they're also -- last thing I'd say on that is they're also positioned differently in terms of their view on where rates are going. So that means where we've had some performance weaknesses. It's being offset not always fully but being partially offset by strength in other parts of the franchise.
And on the institutional business that you asked about is strong, we're also positive in ETF and SMAs, muni ladders, to lots of different fixed income vehicles doing well for us.
Just [indiscernible] follow up on that same topic is have allocations changed a lot? In other words, I hear you on the flows. That's a very bullish commentary for the forward look. But if you took a snapshot of a year ago and 2 year ago allocations to where we are now and maybe 2 years forward, do you think we'll see a major equity fixed income shift? Or I know it's a lot broader than that. But like will fixed income allocations be a lot higher 2 years out?
Again, I think it depends on your view on rates. And as I think Adam or Matt mentioned, you -- our fixed income teams are all kind of spread out as far as their view on where rates go. The frankly, guys probably think a little bit higher for longer Western is probably more aggressively positioned for rate cuts. So I think it really depends on your views. I do think if rates stay higher for longer, it has impacts on returns on equity markets as far as expectations, private markets as well. So Glenn, I think -- again, I think it's going to depend on where people -- where they think they should position our portfolio. I don't know, Adam, do you want to add anything?
Yes. I think it depends on the client, right? You mentioned more fully funded pension plans, right? If we get a wave of more immunization going on, we're going to see that drive fixed income flows. At the same time, really in every channel around the world. What do we see is a move towards alternative. That money is coming out of all of the other traditional buckets. So I think both of those are kind of competing with each other and pushing fixed income allocations in the opposite direction.
Next question will be from Dan Fannon at Jefferies.
I guess, Matt, maybe we could start with some expense questions. So curious about what the delta was in comp versus your guidance and then as we think about the seasonal impacts of some of this quarter, how much do you expect to roll off as we go into 2Q? And then maybe update us on kind of the full year outlook for expenses.
Yes. Thank you, Dan. Yes. So a couple of things on expenses around the second quarter, I'll get to the comp and benefits in a second. I'd just like to say that notwithstanding the higher resets around compensation calendar resets around compensation that I'll talk about in a minute and meaningfully higher markets. If you exclude Putnam, which was the main addition we had in the quarter, our expenses would have been flat. So notwithstanding higher performance fees than we expected, higher calendar resets than we expected and higher markets than we expected. Our expenses for the quarter would have been flat when you exclude Putnam. So hopefully, that demonstrates some discipline there. In terms of your specific question around comp and benefits for the second quarter.
Great. That's helpful. And then maybe just a follow-up on that with regards to the effective fee rate I think you had talked about it coming into the mid 38s as the year progressed. So I guess, given where mix is AUM levels, all the dynamics that go into that, how do you see that trending?
Yes. Thank you for the question. So the EFR for the quarter dropped to 38.5. And I believe that's exactly how we guided for the quarter. And we're able to do that because we had a pretty good feel for the mix that we're coming in, in terms of flows. And I think I also pointed out that we were 1 basis point higher than usual, let's call it, or the effective fee rate for the last quarter was inflated by 1 basis point based on Lexington catch-up fees.
Next question will be from Ken Worthington at JPMorgan.
On the institutional pipeline, when you win an institutional fixed income mandate, are you getting a bunch of cash? Or are you getting a portfolio of securities that you transition and then remanage and do you get a sense of where the assets are coming from? If it's going into fixed income, is it investors going from rates to credit? Are they going from equities to fixed income? Are they going from cash to fixed income? Or are they just switching managers because of performance? So any view on what you've seen in this pipeline that's driving the fixed income success you're having?
You might not like the answer, but the answer is yes. I think we're seeing all of those things, right? So often, people will switch managers because of performance. We see people beginning to extend duration out. Those are usually funded by cash. We should see some of the plus sectors being added to those are funded in a mix of different ways. And then, of course, on the retail side, it's typically a sale of a fund, so you really don't know where that's coming from.
Okay. Great. And just on ETFs, how are you thinking about ETFs outside the U.S.? You're having nice success in your franchise within the States. How are you thinking about leveraging the brand? Or are you thinking about leveraging the brand you have and the ETF franchise that you've already built?
Yes. Our ETFs outside of the U.S. have grown in 2 important ways. One, I don't think this was the point of your question, but our single country ETFs, so ETFs that focus on the country, even if they're sold in the U.S. That's been a huge success for us. We were able to price those very competitively. But also in terms of ETFs that we're selling outside of the U.S. regardless of investment mandate, we've seen real growth there in Canada and in EMEA, in particular. Some of that is the single country flow. As Jenny mentioned in his remarks, we've seen some of the more sustainably oriented products go quite well. Green bonds, Paris-aligned, S&P 500 would be 2 that are examples of that.
Next question will be from Alex Blostein at Goldman Sachs.
Jenny, I was hoping to dig into your comments from the prepared remarks when you talked about being quite busy over the next 12 months with respect to private markets. Could you, I guess, expand on that a little bit? And I'm assuming wealth is going to be part of the answer. So when you think about the opportunity set in the wealth channel and lots of other folks coming in, with offerings already and it seems like that part of the market is getting a little bit busier. What are you guys doing to make sure you don't miss the window and opportunity there?
Yes. So I mean we're in the market with a few different things. And as Adam mentioned, we are getting on calendars. This stuff is laid out, we've probably surprised early on to learn this. I mean sometimes up to 2 years in advance. So the areas that we're talking -- Lexington obviously, has capabilities beyond their traditional Fund 10, where they've got middle market and co-invest offerings. In the case of real estate, Clarion's top 3 biggest funds are all perpetual. So they're always fundraising, although we definitely see kind of muted demand for real estate. They've got terrific performance. They've got terrific performance. And so I think when things shift back, Clarion should do very well there because they have very little exposure to office.
I got you. Okay. All makes sense. And then clarification for you guys on the pipeline. It sounds like there's a bunch of things in the institutional pipeline, as you discussed earlier. Is it -- could you guys help us just size the fee rate of the institutional pipeline, excluding Great-West as you described it? And then I guess is it fair to assume that the remaining piece of Great-West that's going to come in will be coming in at a much high fee rate? So kind of north of that teen-ish basis points, just given that the back end or what's come through came at a pretty low fee rate?
And the pipeline is -- the fee rate is slightly up from last quarter. But look, any time you want it's institutional, so that's lower fee than your traditional EFRs. And then number two, it's heavily weighted in the fixed income -- well, the new stuff is heavily weighted in fixed income, but probably overall pipeline, I don't know, Adam, a 60-plus percent probably fixed income. So I never know if we give guidance on the actual numbers in the pipeline, but it's -- [indiscernible] Matt, have we given guidance there?
I would say it's consistent with our institutional fee rate.
Got it. Okay.
It's in the mid- to high 20s, Alex, and then -- but it can be -- it's gone from anything from the mid- to high 20s to our overall effective fee rate. depending on the quarter and depending on the type of the -- the nature of the pipeline in a particular time. And then the -- to answer your second question, yes, the additional flows we expect to come in will be higher on average on the rest of the Great-West Life flow. And that's expected over the next 12 months. As we've said, we'll, of course, put that detail into our monthly flow. So you can see that, and then we'll provide detail on the effective fee rate when we have these calls and provide updated information.
Next question will be from Bill Katz at TD Cowen.
Okay. I apologize on London weather. So in terms of if I start with your reported net flows of 6.7 and I back out the 3.1 of dividends reinvested, which the industry doesn't include, I get down about 3.5. If I back out the initial capital from Great-West, that's minus $10 billion. If I then back out the $1.4 billion from the 3 alt managers you highlighted, I get to about $11 billion. And then if I back out the Canvas, ETF and the SMA, I think that gets about minus $18 billion for what I would consider to be a long-holding business. A, is that math correct? And B, if it is, what's the go-to plan here to sort of stabilize that part of the business?
So I'm not Matt Nicholls, I can't do the math that quickly. He probably could. So I couldn't quite follow all of that. But I will tell you that the growth areas where some of the things you wanted to pull out alternatives, ETFs, Canvas. I think we said consistently that those are our growth focuses and that they're growing a little faster than the rest of the business. If you take a look at the more traditional business and you look at our outflow rate our decay rate, it's really been stable to improving. So I think over the last few years, we've been able to do a very good job at protecting ourselves on the downside. And as we said earlier, I think Jenny pointed to a notion that we talk about in terms of core sales, which is our smaller sales, which are up pretty consistently at about 14% on average. So stable outflows, increasing quarter sales we're feeling pretty good about the traditional part of the business.
And I'll just add, look, we've been very open and honest that we've been underrepresented in the retirement channel. As I mentioned on the last quarter's call, we were ranked 14th on Empower's platform, and it's similar in some of the others. And with this acquisition of Putnam and the relationship and the absorption of their retirement team as well as their target date products, 1/3 of retirement flows go to the qual side investment plans, and they've got phenomenal performance of their target date products as well as stable value, we think we are poised to -- and again, if we just take our market share, it's a massive increase -- the retirement channel is still a very traditional asset-oriented channel, traditional mutual funds, equities and fixed income.
And then the last thing I'd just add, Bill, is that this area you're trying to get to, which we actually have a little bit -- it's not really 18, but we think of it as I think it's more like 10 that we got to. But when you get to those numbers, it's very concentrated in areas where performance is even more important than usual, let's call it. And in those areas, performance has begun to improve, certainly on the equity side, in particular, quite significantly. So we've seen quite a slowdown in those outflows.
And Bill, I would add that it's sometimes difficult to separate investment product from the vehicle itself. We have a number of businesses where an investment team is positive, but they're positive because their SMA, their usage, their ETFs are all positive, and the mutual fund might be negative. So is that the core business, they're not, right? At the traditional asset class, they're gaining flow, but they're gaining it because of the vehicle choice, not necessarily because the mutual fund is positive.
That makes some sense. And just a follow-up on all of that, Matt, maybe for yourself, just your base fee rate, it just seems like it's bouncing around a little more than I would envision just given the sheer sizing of the platform today. So can you help me understand if you're going to be sort of in that 37% range plus for the next quarter. And then you sort of bounce back into the fourth? Is that input to a very high level of flow in the alts managers. And if that's the case, is that just vehicles that are just turning on from capital to raise? Or is that from new money coming in the door? And if so, where might that be?
Well, remember, the annual guide I gave included the first quarter or so where we had an elevated EFR for the reason that I explained around the catch-up fees and so on. I think we were pretty close to 40 basis points at one point. We've been trying to be quite clear about that. So when you normalize that out, you get into the 38.
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, everybody, thank you for participating in today's call. And once again, we would like to thank our employees for their hard work and dedication delivering this quarter. And we look forward to speaking to all of you again next quarter, and everybody stay healthy.
Thank you. Ladies and gentlemen, this does indeed conclude today's conference call. You may now disconnect your lines.