Franklin Resources Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2024

There are 10 speakers on the call.

Operator

Welcome to Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year Ended September 30, 2024. Hello. My name is Shamali, 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.

Operator

I would now like to turn the conference over to your host, Colleen Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.

Speaker 1

Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary. 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. These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD and A section of Franklin's A section of Franklin's most recent Form 10 ks and 10 Q filings.

Speaker 1

With that, I'll turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Speaker 2

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Pice and Templeton's Q4 fiscal year 2024 results. On today's call, I'm joined by Matt Nichols, our CFO and COO and Adam Spector, our Head of Global Distribution. As presented in our fiscal year executive commentary, I will comment on the evolution of our business over the past several years as well as highlights from our Q4 fiscal 2024. After that, Matt will review our financial results and then we'd be happy to answer your questions.

Speaker 2

The investor presentation is a new format and includes information that will only be presented annually. In recent years, we have expanded our business in an intentional way, adding a wide range of capabilities to help clients achieve their investment goals through a variety of market conditions and cycles. As I've traveled the world meeting with clients and investors, I've seen firsthand that they recognize and appreciate the many steps we have taken to further diversify our business and position Franklin Templeton to succeed over the long term. Our clients view us as a trusted partner with the ability to fulfill their comprehensive investment needs across public and private markets in investment vehicles of their choice. They appreciate our ability to customize their capabilities and meet their needs through innovative delivery and solutions.

Speaker 2

Franklin Templeton leverages the talent of our multiple specialist investment managers to deliver expertise to our clients across a wide range of investment styles and asset classes. Our investment teams benefit from Franklin Templeton's deep resources and scale with centralized investments in distribution, marketing, data and innovative technologies like blockchain and artificial intelligence.

Speaker 3

Furthermore,

Speaker 2

our model benefits our corporate shareholders with no single specialist investment manager at our firm contributing more than 10% of adjusted operating revenue. And most of our specialist investment managers are diversified within themselves as well. Most recently, we have been investing in AI, blockchain and other important areas relevant to the future of the industry that will benefit our teams and clients. Now turning to the investor presentation, beginning on Slide 78, it's notable how much Franklin Templeton has evolved its business over the past 5 years and where we are focused going forward. Over the past 5 years, we have increased and accelerated the diversification of our AUM via organic growth and targeted acquisitions into higher growth areas of client demand.

Speaker 2

Since the beginning of 2019, we've completed significant acquisitions in areas of growth and to position the firm to offer more choice to more clients in more places. And those acquired specialist investment managers now represent 64% of AUM and 55% of adjusted operating revenue. In that period, our institutional AUM increased from 25% to 45% and we are now well balanced between institutional and wealth management. We have made great strides across a number of key focus areas for the company. Turning to Slide 9 and starting with Investment Management.

Speaker 2

We have now a full spectrum of investment capabilities to help clients meet their varied financial goals. This year, the acquisition of Putnam Investments added strong capabilities such as target date and stable value, which are important in the retirement and insurance channels. And we demonstrated the power of Franklin Templeton's distribution, which led to $11,000,000,000 in net flows into Putnam Products. This is an example of combining outperforming investment performance with powerful distribution resources. Our focus is on continuing to improve investment performance as well as optimizing the range of our investment product offerings.

Speaker 2

We are also in the position to leverage the breadth of our investment capabilities across both public and private markets and we see opportunity as these markets begin to converge. For example, Franklin has been putting late stage venture into mutual funds for over a decade and Franklin's global allocation fund includes private credit strategies. As a leading manager of alternative assets with approximately $250,000,000,000 in AUM, we offer key capabilities including alternative credit, secondary private equity, real estate, hedge funds and venture. Since fiscal year 2019, alternative asset AUM has increased by over 5 times through 3 sizable acquisitions and organic growth. I'm proud to note that since becoming part of Franklin Templeton, each alternative specialist investment manager has expanded and diversified across strategies, vehicles and clients.

Speaker 2

Specifically on the role of alternatives in wealth management, the wealth management channel has approximately only 5% of AUM allocated towards alternatives. But depending on the client's liquidity needs, it can be much higher. Institutions, for example, have been allocating up to 40% for years. Our global distribution footprint, investor education platform and dedicated alternative specialist team combined with our breadth of investment capabilities make us a relevant force in the wealth management channel. This year, we're pleased that we established the alternatives by Franklin Templeton brand in the wealth management channel in the U.

Speaker 2

S. And look to broaden it in EMEA and Asia. Over the next 5 years, our goal is to fundraise at least $100,000,000,000 across private markets and look to add additional capabilities, for instance, in infrastructure as well as to globalize certain strategies. Next, turning to distribution. We are one of the most comprehensive global asset managers with clients in over 150 countries.

Speaker 2

Offering clients a diverse range of investment vehicles is not just beneficial, but essential in today's marketplace. Over the last 5 years, we have seen meaningful growth in retail SMAs and both ETFs and custom indexing AUM has grown by over 3 times. In particular, this fiscal year growth accelerated in retail SMAs, ETFs and Canvas AUM each reaching record highs. Our ETF business grew by 89% in the year with positive net flows for the 12th consecutive quarter with net flows at or exceeding $1,000,000,000 for 8 consecutive quarters. And in fact, in the last two quarters, that number has been over $3,000,000,000 each.

Speaker 2

Total assets stand at $31,000,000,000 across active and index strategies from just 0 a few years ago. Canvas AUM increased by 94% from the prior year to $10,000,000,000 and has generated positive net inflows in every quarter since its acquisition in 2021. We increased the number of partner firms by almost 70% from 1 year ago. Over the next 5 years, we are looking to scale ETF AUM by 3 times and canvas assets by 5 times. Today, we are a leading provider of retail SMAs with $145,000,000,000 in assets, an increase of 29% from the prior year.

Speaker 2

Going forward, we are focused on expanding our product offerings. For example, we launched a retail SMA variant of our flagship Franklin Income Fund and launched tax managed option strategies utilizing Canvas. Investment Solutions AUM almost doubled in size to $89,000,000,000 dollars from the prior year with the additions of K2 and Putnam's target date funds and through organic growth. Franklin Templeton Investment Solutions will remain a critical component of our growth strategy by leveraging our capabilities across public and private asset classes to deliver customized solutions to meet our clients' demands. Over the next 5 years, we aim to more than double our solutions platform.

Speaker 2

Additionally, our breadth and depth of investment capabilities, engagement, capital resources and value added services positions us well as a valuable partner. This year, we've been delighted to establish new multibillion dollar relationships with clients in each of our regions and strategic partnerships will remain an important aspect of growth in the future. Turning to Slide 10. 2 other important growth areas are Private Wealth Management and Digital and Technology. In the Private Wealth Management segment, Fiduciary Trust International has a clear opportunity due to the unprecedented intergenerational transfer of wealth.

Speaker 2

This will be the largest wealth transfer in history with $84,000,000,000,000 set to pass from older generations to their heirs through 2,045. Dollars 53,000,000,000,000 will transfer from households in the baby boomer generation. Fiduciary is a fully integrated wealth platform with investment advisory, trust and estate planning, tax planning and custody services. It has an impressive client retention rate of approximately 98%. Since 2019, fiduciary doubled its AUM, reaching an all time high of $39,000,000,000 and had positive net flows annually for the past 3 years.

Speaker 2

Going forward, we look to double the size of this business through organic investments and targeted acquisitions. This represents both a standalone opportunity by owning a wealth manager and also a broader distribution opportunity. Investing in innovation and cutting edge technologies continues to be of strategic importance for the firm. We have made important investments in value added services, including technology and digital wealth in order to be on the forefront of innovation in areas increasingly important to our clients and operations. In addition, as early adopters of artificial intelligence, Franklin Templeton is working to responsibly employ AI to boost productivity, deliver greater value to clients and make our investment processes and operations more efficient.

Speaker 2

A great example is our partnership with Microsoft that was announced last quarter. We are working collaboratively to build an advanced financial AI platform that will help embed artificial intelligence into our sales and marketing processes, creating more personalized support for our clients. In the digital asset space, we continue to look for new ways to leverage blockchain technology. For example, we launched the 1st U. S.

Speaker 2

Registered fund to use a public blockchain to process transactions and record share ownership in 2021. And this year, we launched Franklin Bitcoin ETF and Franklin Ethereum ETF, making it easier for clients to access investment opportunities with our digital asset solutions. Looking forward, there are many more exciting advancements that are underway in this space. Matt will cover capital management, operational integration and expense management shortly. Turning to the market performance during our fiscal year, global equities rose by more than 30%, while global bonds increased by nearly 12%.

Speaker 2

Throughout much of the year, large caps outperformed small caps driven by top technology and communication services firm with growth stocks exceeding value stocks. Investor enthusiasm around artificial intelligence was the major theme over the past 12 months. Moderating inflation and declining bond yields helped the Magnificent Seven stocks advance 53%, while the broader technology sector notched a 52% gain. In our Q4, there was also a corresponding shift in equity market leadership beyond the Magnificent Seven. In fact, only 2 of the 7 stocks in this group have meaningfully outperformed the S and P year to date through October.

Speaker 2

Broader market participation is encouraging for active managers. 8 of the 11 secondtors outpaced the broader S and P 500 during the quarter versus 2 sectors, Technology and Communication Services, have outperformed over the prior 9 months. Both previous winners were laggards in the most recent quarter. Investors' focus has shifted from inflation to concerns about the durability of the global economic expansion and by extension the outlook for corporate profits. And while the Federal Reserve's decision to cut interest rates by 50 basis points in mid September makes a soft landing in 2025 more likely, the market's push for deeper monetary easing may elevate volatility in the coming quarters.

Speaker 2

The market expects the Fed to cut rates again this week and this seems like a reasonable assumption. Recent Fed speak signals greater comfort with the latest progress on disinflation. There is however uncertainty on the outlook for the labor market as it is difficult to disentangle the temporary impact of strike actions and hurricanes from the most recent weak jobs data. As the Fed's rate cutting cycle proceeds, we expect traditional fixed income sectors to take 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.

Speaker 2

Meanwhile, in private markets, our specialist investment managers continue to see strong investment opportunities in alternative credit, secondary private equity and select real estate segments. And demand for differentiated expertise is at a premium as these markets continue to gain interest. For example, we're excited by opportunities in alternative credit, particularly in real estate debt, where BSP manages $8,000,000,000 And given the need for liquidity and private equity, we see strong interest in secondary private equity at Lexington. Turning now to fiscal 2024 results in terms of investment performance, mutual fund investment performance improved in the 1, 3 10 year periods from the prior year. Composite investment performance improved in the 5 10 year and stayed essentially flat in the 3 year period from the prior year.

Speaker 2

On flows, long term net outflows were $32,600,000,000 for the fiscal year and reinvestment distributions were 20,700,000,000 dollars Excluding Western Asset Management, long term net inflows were $16,000,000,000 compared to net outflows of $5,200,000,000 in the prior year. We saw a 25% increase in long term inflows from the prior year to $319,000,000,000 We're pleased to see that gross sales have improved across all asset classes in public markets as well as across every region and in both retail and institutional distribution channels. From a regional perspective, our international business continues to grow and we have seen continued momentum with positive long term net flows for the year and AUM surpassing 500,000,000,000 dollars Gross sales in the U. S. Increased by 31%, EMEA by 23%, APAC by 19% and the Americas by 24%.

Speaker 2

And from a client type perspective, retail sales improved 27% and institutional sales increased by 21%. From an asset class perspective, turning to alternatives on Slide 12, In fiscal year 2024, private markets fundraised $14,800,000,000 in line with our targets. Lexington closed its flagship fund with $22,700,000,000 in total capital commitments raised primarily in 2022 and 2023 ranking among the largest funds raised to date in the global secondary private equity market and with approximately 20% raised in the wealth channel. Benefit Street Partners closed its flagship private credit fund and its special situations fund with $4,700,000,000 $850,000,000 in total capital commitments raised respectively with each fund exceeding targets. Clariant Partners AUM remains stable despite weakness in the real estate sector in the year.

Speaker 2

We believe that there is increasing sentiment that worst is behind us. For example, the ODCE benchmark turned positive and there is the beginning of a pickup in transaction volume, strengthening confidence for potential for transactions in fiscal year 2025. Going forward, we are well positioned in the sector with minimal office exposure of 7% and well performing products in strong sectors such as industrial, multifamily and life science. In addition, we're excited about new areas of growth that include European Logistics Fund and investing in new alternative strategies in the U. S, including self storage, student housing, medical and senior living property types.

Speaker 2

Turning to public markets, multi asset net flows were $8,000,000,000 driven by positive net flows in the Franklin Income Fund, Canvas and Franklin Templeton Investment Solutions. On Slide 18, you can see equity sales improved each quarter this year and grew 53% year over year, excluding reinvested distributions. In addition, fixed income long term inflows increased year over year by 26%. Now turning to Western Asset. As you are aware, we launched an internal investigation focusing on certain past trade allocations of treasury derivatives by former co CIO Ken Leach in select Western Asset Managed Strategies.

Speaker 2

The DOJ, SEC and CFTC are conducting parallel investigations and those investigations are ongoing. On August 21, we announced that Ken Leach was on a leave of absence following receipt of a Wells notice from the SEC. We take this matter extremely seriously and are fully cooperating with the government. Since the announcement of the investigations, Western Asset has experienced significantly higher net outflows of $37,000,000,000 in the 4th quarter $49,000,000,000 for the fiscal year. However, today, the Western team of more than 100 highly experienced investment professionals led by Mike Tucannon, who was promoted to sole CIO from co CIO, continues to manage approximately $330,000,000,000 in AUM across 88 marketed strategies.

Speaker 2

The team continues to focus on investment performance and providing leading client service. Mike has been with Western nearly 2 decades and has over 3 decades of industry experience. Since the beginning of the investigations, Western's assets trading policies have been reviewed by 3rd party experts. Per this review, despite being aligned with industry standards, Western has further enhanced its trading policies and practices. In addition, Franklin Resources is working with Western's management team to explore ways to assist Western Asset including adjustments to economic arrangements, operational and revenue synergies.

Speaker 2

This may entail changes that are similar to what we have successfully implemented with our other public market specialist investment managers while maintaining investment process independence. And I'm sure that you understand with an ongoing investigation, we are unable to provide any further information or address questions on this matter at this time. Aside from Western Asset, we think it's important to highlight the breadth of our fixed income investment management expertise, including Franklin Templeton Fixed Income, Brandywine Global and Templeton Global Macro, which have non correlated investment philosophies. As of September 30, these specialist investment teams managed an aggregate $266,000,000,000 in fixed income assets and generated positive net flows of $6,400,000,000 in the fiscal year. Furthermore, Franklin Templeton fixed income comprised the largest component of our 1 but not yet funded pipeline.

Speaker 2

Speaking of the pipeline, this quarter our institutional pipeline of 1 but unfunded mandates was $15,800,000,000 While new wins replenished our funding, the $2,000,000,000 decrease from the prior quarter included a change in value in a client mandate at Western. The pipeline remains diversified by asset class and across our specialist investment managers. Finally this year, we acquired Putnam Investments, which has exceeded our expectations. Since closing on January 1, Putnam's AUM has grown 21% to $180,000,000,000 Putnam continues to deliver a strong track record of investment performance. The transaction also enhanced our presence in retirement and insurance markets with AUM in these channels at $645,000,000,000 Let me wrap up by saying we take pride in the efforts we've made over the past few years to further grow and diversify our business.

Speaker 2

We have navigated challenges, created new opportunities and upheld the high standards that has defined us for over 75 years. Finally, I would like to thank our employees around the world for their unwavering dedication and commitment to always putting our clients first. It's their hard work that is the driving force behind our success. Now I'd like to turn the call over to our CFO and COO, Matt Nichols, who will review our financial results for the fiscal quarter year. Matt, over to you.

Speaker 4

Thank you, Jenny. Turning to the financial results for the Q4. Ending AUM reached €1,680,000,000,000 reflecting an increase of 2% from the prior quarter and average AUM was €1,670,000,000,000 also a 2% increase from the prior quarter. Adjusted operating revenues increased by 4% to €1,700,000,000 from the prior quarter due to higher average AUM and higher adjusted performance fees. Adjusted performance fees were €72,000,000 compared to €57,000,000 in the prior quarter.

Speaker 4

This quarter's adjusted effective fee rate, which excludes performance fees, stayed relatively flat at 37.4 basis points compared to 37.5 basis points in the prior quarter. Our adjusted operating expenses were $1,300,000,000 an increase of 3% from the prior quarter due to higher incentive compensation, advertising and professional fees. This quarter we realized $38,000,000 of Putnam related cost savings representing $6,000,000 of incremental cost savings from the prior quarter. As a result, adjusted operating income increased 6% from the prior quarter to $452,000,000 and adjusted operating margin increased to 26.3% from 25.7%. 4th quarter adjusted net income and adjusted diluted earnings per share decreased by 3% and 2% from the prior quarter to €315,000,000 and 0 $0.59 respectively, primarily due to a higher tax rate from discrete tax expenses in the current quarter and foreign exchange losses, partially offset by higher operating income.

Speaker 4

As of September 30, we impaired the intangible asset related to certain mutual fund contracts managed by Western Asset and recognized a 389,200,000 non cash charge in our GAAP results, primarily due to the decreased AUM resulting from net client outflows and lower discounted future cash flows generated from these management contracts. Turning to fiscal year 2024. Ending AUM was €1,680,000,000,000 reflecting an increase of 22% from the prior year, while average AUM increased 12 percent to €1,570,000,000,000 Our fiscal year reflects 9 months of Putnam Financials. Putnam Financials. Adjusted operating revenues of £6,600,000,000 increased by 8% from the prior year, primarily due to Putnam and higher average AUM, partially offset by lower performance fees.

Speaker 4

Adjusted performance fees of €293,000,000 decreased from €383,000,000 in the prior year. The adjusted effective fee rate, which excludes performance fees, was 38.3 basis points compared to 39.5 basis points in the prior year. Drivers of the decrease included the impact of 0.3 basis points from the transaction related investment management fees and 0.2 basis points catch up fees in secondary private equity last year and 0.1 basis points from the addition of Putnam this year. Our adjusted operating expenses were €4,900,000,000 an increase of 13% from the prior year, primarily due to 9 months of Putnam, higher incentive compensation, double rent related to the consolidation of our New York City office space and higher legal fees primarily due to the Westin asset matter. In addition, as anticipated, over $150,000,000 of annual run rate cost saves related to Putnam were achieved by year end.

Speaker 4

This led to fiscal year adjusted operating income of €1,700,000,000 a decrease of 6% from the prior year. Adjusted operating margin was 26.1% compared to 29.9% in the prior year. Compared to the prior year, fiscal year adjusted net income declined by 4% to €1,300,000,000 and adjusted diluted earnings per share was 2.39 dollars a decline of 8%. The decreases were primarily due to the decline in operating income and a higher tax rate, partially offset by higher investment income. From a capital management perspective, we returned $946,000,000 to shareholders through dividends and share repurchases, funded acquisitions and paid down a $250,000,000 senior note in July.

Speaker 4

Stepping back as we look over the last 5 years, we delivered a predictable capital management policy and prioritized returning capital to our shareholders, totaling over €4,000,000,000 including €3,000,000,000 in dividends and €1,100,000,000 in share repurchases. Our dividend, which has increased every year since 1981, has grown at a compound annual growth rate of approximately 4%. Our balance sheet provides flexibility to invest in the growth of our business organically and inorganically. We have co investments in ccapital of €2,400,000,000 to develop and scale new products. Additionally, the acquisitions we've made since 2019 represent 55 percent of our adjusted operating revenue and meaningfully contribute to our operating cash flow.

Speaker 4

Importantly, these investments provide new sources of growth and relevance to our clients. In addition, while continuing to invest in long term growth initiatives, we also continue to strengthen the foundation of our business through disciplined expense management and operational efficiencies, especially given the ongoing transformation of our industry. Over the last 5 years, we've created operational efficiencies both at the enterprise level as well as broader efforts to enhance synergies across our specialist investment managers. For example, we've outsourced our fund administration and our global transfer agency. In addition, we have achieved targeted cost savings ahead of schedule as seen in our acquisitions of Legg Mason and Putnam.

Speaker 4

Looking ahead, we plan to further simplify our firm wide operations, including the previously announced unification of our investment management technology on a single platform across our public market specialist investment managers. Before I turn to guidance, a brief update on preliminary October flows. As we will announce next week in our monthly AUM reporting, Franklin expects to report slight long term net outflows for October excluding Western Asset. Western's long term net outflows in October are expected to be $18,000,000,000 For Western, this follows long term net outflows of $7,700,000,000 in August and $27,900,000,000 in September. As previously announced, excluding Western, Franklin had $5,700,000,000 in long term net inflows in the Q4.

Speaker 4

Turning to guidance for the next fiscal quarter. Guidance assumes flat markets is based on our best estimates as of today and does not include the impact of any possible future developments from the Western Investigations. We expect our EFR to be in the mid-thirty seven basis point area, but slightly higher than this past quarter, excluding adjusted performance fees. We expect compensation of benefits to be $860,000,000 This assumes $50,000,000 of performance fees. Please also note that this includes $45,000,000 annual accelerated deferred compensation.

Speaker 4

The prior year quarter included €41,000,000 of such accelerated deferred compensation. For IS and T, we're guiding to €155,000,000 to €160,000,000 inclusive of €4,000,000 higher spend for Gen AI and our investment management platform. We expect occupancy to be flat between €78,000,000 €80,000,000 inclusive of double rent related to our transition to a more efficient and unified space in New York City. As previously explained, the double rent will begin to phase out in the second half of fiscal year twenty twenty five. G and A expense is expected to be in the €180,000,000 area and includes slightly higher legal fees.

Speaker 4

In terms of our GAAP tax rate, we expect fiscal 2025 to stay in the same range of 24% to 26%. But note that our Q1 typically has a higher tax rate due to discrete items related to deferred compensation vesting. And now we would like to open the call for questions. Operator?

Operator

Thank And our first question comes from the line of Bill Katz with TD Cowen. Please proceed with your question.

Speaker 2

Okay. Thank you very much

Speaker 5

for taking the question this morning. I appreciate that you can't speak particularly to WAMKO. I certainly understand that. I guess, what I'm intrigued by is your commentary of potentially revamping some of the economic relationships with the franchise. I was wondering if you could potentially flesh that out a little bit.

Speaker 5

And then separately, I'm wondering if whether or not the WAMKO overhang is affecting gross sales in any other segments. It's not clear from what you're sharing, but I'm sort of wondering at the margin, what you're hearing on the institutional side in particular, given the ongoing investigation? Thank you.

Speaker 2

Great. Thanks, Bill. So far, the outflows even within Western, I think it's like 72% are focused on essentially core, core plus and macro ops. So even within Western, it's pretty focused on those strategies. They're about $90,000,000,000 today.

Speaker 2

And Ken received as well as notice, Westerns had outflows of $53,600,000,000 So, there are some instances at Western where clients who were in other strategies just didn't were concerned about the headline risk and did actually redeem. But I think it's been fairly controlled there. And we have not seen it really flow over into the other Franklin strategies. It's definitely part of the conversations, but it hasn't had a tremendous impact on the other strategies. Matt, I'll have you kind of answer the question around how we're approaching and thinking about the economic relationship and to remind you, Bill, the relationship with Western is pretty unique.

Speaker 2

I would say you can't do hostile acquisitions in the asset management business because it's all about the people and their investment process. And Western was fairly unique for us in this 5 year autonomous arrangement that we had. But obviously, in light of current situations that we're just having a conversation around how we should think about that. Our model in general is where we'd apply common sense. It's a slightly different.

Speaker 2

There's no exact one size fits all. Even today, Templeton and Mutual Series, which were acquired in the 90s, have slightly different models with us. For example, one insists on the trading folks their traders to be on their desk, others use our global trading platform. So we always try to have a practical approach. But Matt, you want to take kind of the specific conversations around it?

Speaker 4

Yes. Okay. Thank you. Thanks, Jenny. Thanks, Bill.

Speaker 4

So maybe I think your question gets to a couple of things. 1st of all, economic arrangements, but also economics related to the situation through Western. So if we pass it to perspective, I'll just start by saying that the press tends to report that Western Asset is our largest specialist investment manager, but that's just by AUM. I think you know that Bill along with everybody else that covers us. Obviously a much more important measure, the key measure of course is financial contribution of the business.

Speaker 4

And so I think it's worthwhile going through this a little bit and explain that for example, in terms of adjusted operating revenue on a run rate basis, Weston is probably something like our 5th or 6th, largest specialist investment manager. And on the impact so far, if you run rate the $53,000,000,000 of out flows that Western's experienced since August, Western's annualized revenues would be expected to be declining by about 20%. So far that's just the Western revenue, which equates to about 2% decline at the Franklin Resources level. Obviously, operating income impact will initially be higher. This is to your point on margin, will initially be higher because expenses are not able to be reduced at the same rate as revenue.

Speaker 4

But importantly, at Franklin Resources, we have areas that can help achieve some of the offsets over time, such as, as we talked about on this call, the addition of Putnam, growth in alternative assets, ETFs, SMAs, Canvas, our large equities business, our other fixed income SIMs, international and so on, in addition to the expense discipline and other levers that we have. But look, this doesn't mean for a second that this is not important to us. It's very important to us. Weston has hundreds of hard working long term employees with families, a strong investment team with a long term track record, as Jenny has mentioned, together with producing good investment outcomes for clients. It's a team approach.

Speaker 4

And under CIO, Mike Buchanan, they're very focused on investment performance and client service. Our North Star, if you will, has always been to achieve sustainable growth across our whole company. And Western is important to this and this has certainly been a dent in that progress as you can see from the results that we're highlighting today. But as Jenny said, this is exactly why we're working with Western Management on providing assistance where possible, in particular keeping the investment team in a good place while management works through this. So in summary, the economic arrangement that we have with Western over these 5 years, that's going to have to be adjusted to accommodate a decline in the revenue and the operating income and that's what we're working through right now.

Speaker 3

And Bill, I would add one thing. You asked about institutional flows in general. We have really worked hard over the last few years to build better relationships with institutions around the globe. If you take a look at where we were last year, ex Western last fiscal year, we raised $2,200,000,000 in the institutional channel. This year, that net number more than doubled to $5,600,000,000 So we're feeling actually quite positive about the trajectory of that institutional business.

Operator

Thank you. Thank you. Our next question comes from the line of Benjamin Budish with Barclays. Please proceed with your question.

Speaker 6

Hi, good morning and thank you for taking the question. I wanted to ask about one of your 5 year targets, the $100,000,000,000 of fundraising raising across private markets. Could you unpack that a little bit? Just how much do you expect to come from, say, cross selling across the investment managers you've acquired over the last several years? How much is predicated on future M and A?

Speaker 6

How much do you think will come from the retail versus wealth channel? Any more details around that target would be appreciated. Thank you.

Speaker 2

Sure. So let me start the focus on that is actually from our existing managers. So and just to give you a perspective on the growth that we've had, since we acquired BSP, they've doubled in size. Clarion's up just under 40%. Lexington, I think we've only owned them for about 2 years and they're up a little under 30%.

Speaker 2

So we've been successful in growing those and our projections of the $100,000,000,000 comes from really looking at what those opportunities are. Just to give you a little guidance for 25. So last year in 2024, we gave a range of $10,000,000,000 to $15,000,000,000 in sales and achieved 14.8 dollars This year, we're saying we think it'll be between $13,000,000,000 $20,000,000,000 in gross sales. And that comes from real estate, secondaries, private credit and venture. So all those are kind of bottoms up built in that.

Speaker 2

And the reason the range is fairly large is it will really depend on whether Lexington is able to do a first close of their flagship once they decide on the timing of their Lexington flagship 11 fund. So far, Fund 10, they've been able to deploy it faster and at higher discounts than historical levels. So we're hopeful that they'll be in the market and do a first close. But that's obviously a big portion of that number. It also depends on real estate coming back in favor.

Speaker 2

We think the signs are all showing that the winter of real estate may be over and that we should see things picking back up next calendar year. And we have some, I think, a really diverse set of offerings that are coming out in the market. So not only does Lexington have their flagship fund, but we think continuation vehicles are going to be more and more important area. We're launching a perpetual vehicle in the wealth channel, which is something very new. We think that opens up a lot of opportunities.

Speaker 2

They've obviously been doing their co invest in middle market. So Lexington is going to have a lot more offerings in market. We're also launching a real estate debt fund. If you look at private credit, there's probably a lot of areas that people would say private credit is getting pretty tight in some of the spreads. But it happens to be that BSP has a real expertise in real estate debt.

Speaker 2

They have about $10,000,000,000 or $9,000,000,000 that they manage there today. And we think with the regional banks pulling back in this area that that's going to be a really interesting opportunity. It's unclear whether it's going to be part of the real estate portfolio allocation or the private credit allocation. But we think that has a lot of great demand there. So if you think about just in $25,000,000,000 that that ranges from $13,000,000,000 to $20,000,000,000 we feel comfortable in the projection over the next 5 years to hit that $100,000,000,000 number.

Speaker 3

All

Operator

Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Speaker 7

Thanks. Good morning. Matt, I wanted to follow-up just on the context of this year of fiscal 2025 and just the outlook for expenses. I know there's a lot of moving parts with the Western dynamics, but could you talk about kind of core expense growth and either contextualize with or without Western in terms of what legal or unknowns might come through to think about the kind of growth in the expense base for the core business?

Speaker 4

Yes. Good morning, Dan. So look, obviously, it's super early for the year. I gave guidance on the call sorry, prepared remarks for the quarter. But if I think through the year, if you normalize for full year of Putnam and exclude performance fees and with the same caveats I gave in my prepared remarks around the Western situation, we would expect expenses to be quite similar to the last fiscal year.

Speaker 4

In general, we would expect revenue loss from Western to be made up from other areas of growth that justifies that expense base. Obviously, if we experience a decline in any part of our business, well, that'll be offset by very careful expense management. We have a number of initiatives going on as we've already highlighted across our investment management platform, operations, certain levels of integration, all that help participate in our ability to pull certain levers to manage either expected or unexpected reductions in revenue or increase in investments that we need to make across the business. So again, I'd say just very carefully and cautiously, all else remaining equal and normalizing for a full year of Putnam, excluding performance fees that plus the caveats I gave on my prepared remarks that we would expect

Speaker 3

our

Speaker 4

expenses to be substantially similar to the last fiscal year that we've just closed. And I think that's the best way of looking at it right now. So expense growth remaining very much in check.

Speaker 7

Great. That's helpful. But just to clarify, what would be 1 quarter of Putnam just to think so we can kind of normalize for the 9 to 12 months to kind of get to a dollar amount?

Speaker 4

1 quarter of Putnam expenses will be wait one second, like $125,000,000

Speaker 7

Great. Thank you.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Speaker 8

Hey, good morning. Thanks for taking the question and thanks for the new PowerPoint deck presentation disclosure there across. Appreciate that. Just if we think about your targets and objectives over the next 5 years, just curious what that would translate into in terms of revenue, operating income and EPS in 5 years' times? And what sort of growth might that be when you sort of pull it all together?

Speaker 8

And then if maybe you could just remind us how much Western contributes to AUM revenues and operating income today? Thank you.

Speaker 4

Yes. I mean, Western's contribution is probably right now on a run rate basis around 9%, 8%, 9% of our adjusted operating revenues. In terms of operating income, it's a little bit more than that. But as I mentioned a moment ago, it's moved to being much closer to it. So we're working through those things as we speak, as I mentioned earlier and as Jenny touched on.

Speaker 4

In terms of our organic growth trajectory, what we're hoping to achieve is to get into the low single digits growth on average as a business. We're obviously not there now because of some of the issues we're working through on the Western side that we've been very transparent about. But also look, Mike better than most, the industry trends and when you look at where we were 5 years ago, and where we are today, we're a much more balanced business. I mean, 5 years ago, a very large portion of our business was in mutual funds, retail distribution and the United States. We're extremely different business now, but we still have to work through achieving scale in the areas of investment.

Speaker 4

So we've talked about ETFs, we talked about Canvas, we talked about alternative assets. We've talked about other areas of the firm that we're growing. A number of these things aren't really scaled yet to the degree that we expect them to be given the investment we're putting in. That's why we put a 5 year timeline on some of these things because it takes time to get there. Once we get there, we think it's very reasonable that notwithstanding some of the areas of shrinkage that we could be a low single digit growth business overall the whole including the whole franchise.

Speaker 4

And obviously that's taking out the Western situation, getting through that and normalizing our revenues it was before that. And then looking at the areas of growth versus the areas of shrinkage and the overall business that we have under the hood here. But I don't know whether Jenn, you want to add anything to that.

Speaker 2

Well, I was just going to say, no, I think you hit it right, but just one additional. Without Western's outflows, I think our organic growth rate runs at about 1.3%. And when you do the kind of acquisitions that we've done and you really try to put together a best athlete team, the reality is it takes time for distribution to settle in because even if you take, say, the best salesperson in a region, you're actually breaking relationships with some other people. So it takes time. And even with Putnam, we took on a lot of the Putnam team.

Speaker 2

And so part of this is kind of digesting that. And then as Matt said, you take our ETFs, we've talked about how over the last 8 quarters we had $1,000,000,000 But actually in the last two quarters, our ETFs had over $3,000,000,000 in net flows and they're up 88%, but they're still only 31 $1,000,000,000 So that's a fast growing important area. We think we have a great team, great products. We were not late to the active ETFs game. So we think we have good opportunities there.

Speaker 2

And then I look at it and say, if you think about the big trends that are so important, the fact that we have the breadth of capabilities in the private markets, as well as the capabilities that we have on the traditional markets, I don't think there's another asset manager that has that same kind of capability. And then you combine it with the fact that we have $500,000,000,000 sourced from clients outside the United States. We sell over $80,000,000,000 outside the U. S, which is tremendous. It takes decades to build those kind of relationships and reputation in various markets.

Speaker 2

And then one thing that I think people don't fully understand is we're pretty unusual and unique in the local asset management capability. You go into any market and 80% of flows tend to go into domestic products. India, we are the 1st foreign manager, but we launched domestic products in India. We are viewed as a local player competing against local asset managers. And this year, we raised our largest equity fund there with and we hadn't done it in 15 years.

Speaker 2

Mexico, Middle East, in the Middle East, we've been there for 25 years. But interestingly, we're actually one of the largest Islamic finance managers as global asset managers for Sharia and Sukuk. And so as the Middle East becomes more and more important, we can serve both global products as well as local capabilities. And then we also have local asset management in places like Canada, the UK, Australia. So again, if you're a global provider, you tend to go with global products.

Speaker 2

But we've always also focused on this ability to deliver local. And we think international, when you look at the demographics of the emerging economies to be considered a local player in these markets is really powerful. So I just wanted to add that on top of Matt's points.

Speaker 3

And Jenny, the only thing I would add to that is it's starting a little earlier. We now are building scale on auto areas that you mentioned, especially in things like private markets in the wealth channel. We started with institutional quality managers. We built up all specialists to cover that channel. That team is now 85 people strong, not only in the U.

Speaker 3

S, but in EMEA, in APAC and in the Americas. And when we go to market in those channels, we've learned it's important to come in scale. So now we have evergreen products in real estate, in private credit, in secondaries and all of those products are coming with scale, which will really allow us to accelerate our efforts in that channel. Yes.

Speaker 2

And actually, you just reminded me, just one last thing is that, we mentioned it in the opening comments, but like the Franklin Equity team has been doing late stage venture in their mutual funds for over a decade. It actually is really a complicated thing to do. And so our ability as the world starts to converge with public and private products, our ability to do that with the capabilities, I think of it as the ingredients we have as a firm, I think are really tremendous.

Speaker 8

Great. Thanks so much for all the color.

Speaker 4

Thanks Mike.

Operator

Thank you. Our next question comes from the line of John Dunn with Evercore ISI. Please proceed with your question.

Speaker 9

Hi, thanks. Maybe just a quick one on wanting to double in the Private Wealth Management. Has there been a kind of change or could you describe the appetite for firms to join your platform and how aggressive do you think you'll be over the next several years?

Speaker 3

Yes. I mean if you think about sure, where we first started was with CQX, a Clarion product, and we just had a very few partners in that space for that evergreen. We're now up to over 20 partners there. So we see that we're able to onboard to far more platforms and that's really helping us. The other thing we've been able to do in that channel is to co develop products with our wealth management partners, which means that we have a little more backing and we're able to get in the calendar earlier.

Speaker 3

That was a bigger lesson for us as well is getting on the calendar early. And finally, I would say scale. In the mutual fund world, you can start smaller, work your way up. What we found in the private asset area was that it was important to come to market with scale from the beginning to be able to offer a diversified product and that requires really sourcing significant AUM at the very beginning of the launch. And we've been able to do all of those things.

Speaker 3

So feel good about the launch of our evergreens in the wealth management channel. And Matthew, do you want to add anything there?

Speaker 4

Yes. The only thing I'll add is I think Paula John's question may have been about fiduciary trust and our growth targets as it relates to our own wealth management business. And all I'd say John is in that front, on that front, Fiduciary is a full scale platform. It's a great business. It's grown quite nicely over the last several years.

Speaker 4

And as we focus so much on building out our asset management business, we haven't really turned much attention to what else we could do with that very valuable platform that we have. So our intention is, as Jenny mentioned in her prepared remarks, is to capitalize on that business that we have and spend more time attracting teams to join that platform. When we've done that, we've been quite successful doing it and the teams have done well on the platform and grown and helped the overall business growth. So what we need to do is over the next year or 2 really focus on how we can turn that into a natural sort of strategic operation, if you will, in terms of having people on the team, bringing new teams over and joining the platform, so we can grow that out.

Speaker 9

Got it. Thanks very much.

Speaker 4

That's got all the resources that any wealth manager would need to offer their clients.

Speaker 9

Got it. Thanks.

Operator

Thank you. Thank you. And this concludes today's Q and A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO for final comments.

Speaker 2

Great. Well, everybody, thanks for participating in today's call. And I just again want to thank all of the Franklin Templeton employees for all their hard work and dedication, as well as the Western employees who are in particularly working hard and focusing on their clients and delivering and continuing improving and very good performance despite all the distractions. And I just will say we look forward to speaking to you next quarter. Thanks everybody.

Operator

Thank you. This concludes today's teleconference call. You may now disconnect.

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Franklin Resources Q4 2024
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