Franklin Resources Q3 2024 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
July 26, 2024
Skip to Questions & Answers
Selene Oh
Senior Vice President, Head of Investor Relations at Franklin Resources

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 or forward-looking statements was 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 just described in more detail in Franklin's recent filings with the Securities and Exchange Commission including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the third fiscal quarter of 2024, and I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We'll answer your questions in a few minutes. But first, I'd like to review some highlights from the quarter.

During our third quarter, Investors continue to be faced with a complex investment landscape due to dynamic financial markets, amidst macroeconomic, geopolitical and election uncertainty. Starting with public equity markets. The S&P 500 reached an historic milestone earlier this month closing above 5,500 for the first time and continuing its streak of strong performance in 2024. Likewise, the NASDAQ 100 also hit record levels surpassing the 20,000 mark. However, we've seen a pullback in late July as big tech earnings have disappointed and value has outperformed growth stocks month-to-date.

The two big themes of artificial intelligence and inflation drove growth stocks to outperform value stocks in the first half of the calendar year. AI is impacting companies well beyond mega cap tech companies. Every companies and governments are examining how AI will improve or disrupt their respective operations and business models. Inflationary trends continued to moderate, which is supportive of markets. But because stock market returns have been so highly concentrated, equity allocations are poised to broaden as we've seen in the last few weeks, which could provide a sustained boost to sectors and regions that have been overlooked. This trend will likely create investment opportunities favoring active managers.

Meanwhile, on interest rates, consensus estimates currently expect two rate cuts by the Federal Reserve in the remainder of the year, which looks broadly appropriate to us. Recent Fed speak signals greater comfort with the latest progress on disinflation and acknowledges some signs of weakening growth momentum. As we get closer to the Fed's rate cutting cycle, we expect traditional fixed income search to regain their place as a primary source for yield as cash begins to look less effective. While spreads are tight at the current levels, we are not anticipating a sharp deceleration in activity and our fixed income managers continue to find opportunities at attractive yields. Private markets continue to thrive, and our specialist investment managers are seeing very attractive yields in the private credit space and secondary private equity is seeing near unprecedented levels of pricing power.

As investors weigh the impact of these trends, we're seeing a pickup in money in motion and investors are becoming more active with alternatives, fixed income and select equity sectors as top priorities. We also continue to see the trend of clients wanting to work with fewer managers given the dynamic complex nature of current markets. In addition, we continue to have success engaging more and more in a consultative way with large clients leveraging the full strength of our firm.

One of the benefits of partnering with Franklin Templeton is the breadth of capabilities we offer through a single global platform, makes a true partner for clients around the world. We offer access to specialist investment managers across public and private markets and asset classes and continue to broaden our investment capabilities to help clients achieve better outcomes.

Now turning to the highlights from the quarter. Ending AUM was $1.65 trillion, flat from the prior quarter and an increase of 15% from the prior year quarter primarily due to the addition of Putnam as well as positive markets. Average AUM increased by 3% from the prior quarter to $1.63 trillion and increased by 15% from the prior year quarter. In terms of investment performance, our investment teams have remained true to their distinct disciplines and time-tested approaches. Investment performance remained consistent across the one, three, five and 10-year periods. This quarter, 53%, 49%, 52% and 70% of our strategy composite AUM outperformed their respective benchmarks on a one, three, five and 10-year basis. Turning to flows.

Long-term net outflows were $3.2 billion. Reinvested distributions were $3.6 billion compared to $3.1 billion in the prior quarter and $3.5 billion in the prior year quarter. $5.9 billion was funded out of the previously announced $25 billion allocation from Great-West Lifeco, bringing the total funded to $20.2 billion. We continue to make progress executing on our long-term plan of diversification across asset classes, investment vehicles and geographies. Client demand led to positive net flows in multi-asset and alternative strategies during the quarter. Multi-asset net inflows were $1.8 billion, and driven by positive net flows into Canvas Franklin Income Fund, Fiduciary Trust International and Franklin Templeton Investment Solutions. The investment solutions team takes Franklin Templeton's best thinking and the leverage is our firm-wide capabilities across public and private asset classes to help provide solutions tailored to our clients' needs. Investment Solutions ended the quarter with AUM of nearly $80 billion across the firm. Alternative net inflows were $1.4 billion, driven by growth into private market strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners and Lexington Partners generated a combined total of $1.1 billion of net inflows, and Franklin Venture Partners generated net inflows of over $300 million.

Benefit Street Partners continued to raise funds in alternative credit. In May, we announced the final close of its BSP Special Situations Fund II with $850 million of total capital commitments exceeding its target. Interest from clients to diversify private debt portfolios beyond direct lending into areas like real estate debt has attracted significant high-quality engagement with investors. Turning to secondary private equity.

Lexington Partners announced a dedicated strategy and highly experienced team focused on leading single asset continuation vehicle transactions in response to increased investor demand. Lexington has invested approximately $6 billion in CV transactions to date. And the new team will be focused on increasing its participation in CV transactions with a differentiated approach. In secondary private equity, the largest, most established managers continue to see the most interest in flows, reflecting a clear bias toward them in the market. Lexington has been a beneficiary of this trend. Clarion Partners has three open-end funds that perpetually fund raise in the U.S. And this year, launched a fourth open-end fund in Europe, focusing on the logistics sector. Clarion continues to be well positioned with over half of AUM in the industrial and logistics sectors and less than 8% of AUM in the office sector.

With regard to the wealth management channel, we continue to make strides and open new opportunities for investors given our strength in global retail distribution and dedicated specialist sales team with a focus on investor education. This quarter, we announced the expansion of our retail alternative initiatives with a dedicated team in the EMEA region. Looking ahead, we remain focused on product development, including new products in secondary private equity and real estate private debt. Just as a reminder, at the start of our fiscal year, we anticipated raising $10 billion to $15 billion in fundraising and alternatives. And as of this quarter, we are well on our to reaching the top end of that range, having raised over $12 billion fiscal year-to-date.

It's worth noting that since being part of Franklin Templeton's platform, each alternative asset manager has increased AUM and continued to grow and diversify across strategies product vehicles and client type. Fixed income net outflows were $4.8 billion, excluding inflows from Great-West. Inflows improved approximately 5% from the prior quarter. As we've said on previous calls, we benefit from our broad range of fixed income strategies with noncorrelated investment philosophies. Despite mixed performance in certain U.S. taxable strategies, we saw client interest reflected in positive net flows into highly customized multi-sector and global sovereign strategies.

Additionally, we continue to benefit from vehicle diversification with cross-border funds, ETFs and SMAs in fixed income, all in positive net flows. Notably, we saw increasing interest from clients in multi-sector credit strategies which capitalize on our team's ability to offer multiple credit sector exposure in one strategy in a highly dynamic environment. Equity net outflows were $1.6 billion, significantly improving from outflows of $5.3 billion in the last quarter, and gross sales improved by 16%. Equity net inflows were driven by large cap value and all Cap Core strategies and our single-country ETFs, our single-country ETFs now totaled $10 billion in AUM.

With a broad lineup of capabilities, we are able to deliver investment expertise across vehicle types, we saw another strong quarter of positive net flows across our retail SMAs, campus and ETF offerings. We are a leading franchise in retail SMAs with $140 billion in assets under management. This quarter, we generated positive net flows of $500 million, the fifth consecutive quarter of net inflows. Through innovative technologies, we are continuing to enable personalized portfolio of solutions and improved outcomes for investors. A good example is Canvas, our custom indexing solution platform. Canvas generated net inflows of $800 million in the quarter. AUM increased by 13% from the prior quarter to $8.2 billion and continues to have a robust pipeline.

Meanwhile, our ETF business continued to see strong growth and generated net inflows of approximately $3.3 billion doubling the prior quarter's net flows and was the 11th consecutive quarter of positive net flows. Our platform provides solutions for a range of market conditions and investment objectives through active smart beta and passively managed ETFs. Just five years ago, our ETF AUM was $4 billion. AUM stood at $27 billion at quarter end across more than 100 strategies. As a result of our regionally focused sales model, we continue to deepen our presence across the globe. Our non-U.S. business saw its fifth consecutive quarter of positive net flows and finished the quarter with approximately $492 billion in assets under management. Our institutional pipeline of one but unfunded mandates was $17.8 billion, not including the remaining allocation from Great West.

We continue to expand our private wealth management business and Fiduciary Trust International AUM has more than doubled in the past five years from $17 billion to $38 billion. Athena Capital in Pennsylvania Trust acquired in 2020 have grown almost 40% since acquisition. One of our priorities is to further accelerate the growth of our wealth management business through organic investments and acquisitions. Our commitment to innovation artificial intelligence, blockchain and machine learning positions us to enhance client outcomes across the rapidly changing technology-enabled investment landscape.

As various aspects of the asset management industry evolves, we continue to make investments in technology across distribution, investment management and operations. Earlier this quarter, we announced that we are working with Microsoft to build an advanced financial AI platform, which will help embed artificial intelligence into our sales and marketing processes to create more personalized support for clients. We also announced plans to make a strategic minority investment in Envestnet, a significant industry platform. And earlier this week, we announced the selection of a single platform to unify our investment management technologies across public market asset classes. This will support the simplification of our operations and reduce long-term capital expenditures.

Formed in 2018, our Franklin Templeton Digital Assets Group has directly witnessed the revolutionary impact of blockchain technology. The digital asset space has experienced significant growth in recent years, much like the proliferation of new technologies decades ago. Capitalizing on this trend, we launched our second digital asset-backed ETF earlier this week, the Franklin Ethereum ETF to give our clients additional access to this emerging asset class. Earlier today, we were pleased to announce our collaboration with SBI Holdings, a leading online financial conglomerate in Japan. The proposed joint venture will focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies. The extensive reach of SBI's brand in Japan aligns well with our commitment to help new generations of investors achieve their financial goals through innovative strategies. Turning briefly to financial results.

Adjusted operating income was $424.9 million, an increase of 1.3% from the prior quarter, and a decrease of 10.9% from the prior year quarter. Looking ahead, we will continue to invest in the business to support our strategic priorities in asset management and wealth management.

Finally, in June, investment news recognized Franklin Templeton as Asset Manager of the Year. This is a true testament to all of our employees around the world and their commitment to being the ideal partner in helping both individuals and institutions to achieve their key financial goals and objectives. I would like to thank our employees for always putting clients first.

Now let's open it up to questions. Operator?

Skip to Participants
Operator

Thank you. [Operator Instructions] And your first question will be from Alex Blostein at Goldman Sachs. Please go ahead.

Alex Blostein
Analyst at The Goldman Sachs Group

Hey, good morning. Thank you for taking the question. I was hoping we could start with the Aladdin announcement. I know it's been sort of speculated for the last couple of quarters and nice to get it out there. But can you talk about the operational benefits in both expense benefits and operating margins, ultimately, do you expect the platform to deliver? How long it's going to take to get fully implemented, etc? And as part of that, maybe Matt, you can just hit on the expense items for the rest of the year as well. Thanks.

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

Yeah. Thank you, Alex. Good morning. So a couple of background points first. Why we've done this, what we expect to get out of it? And then I'll talk a little bit about the implementation costs and timeline and as you've asked. So first of all, why have we done this? We've done this because it unifies our investment management technology across all of our public market businesses, which, as you know, extensive amount of specialist investment managers. This importantly was a decision that was made collectively across all of our specialists investment managers and has taken us no less than 18 months to two years to make this decision. In terms of the benefits, it brings several things, including most of what you'd expect, candidly, but most importantly, in the form of one platform versus multiple vendors.

I'll just go through a few of the benefits portfolio construction and risk management tools, a single investment book of record, integrated order management systems and connectivity, importantly, consistent reporting across the firm and this is good for both clients and for internal reporting purposes. And it assists in developing cross-team, cross specialist investment manager multi-asset solutions. And also, as you know, we've been active strategically in the business, adding companies over time. And with a single platform like this, it's easier to add new business. It's easier because it's faster and lower cost to integrate.

Thirdly, in terms of implementation costs. So implementation costs are expected to be approximately $100 million over the next three to five years. The peak of these costs would be fiscal '26 and '27, where we expect about 60% of these expenses to be assumed. Importantly, though, we expect to absorb between 50% and 100% of the implementation costs, meaning on a quarterly basis over the next several years, we expect this to be close to neutral from an operating income perspective. At or around fiscal 2028, we expect to begin to realize savings of about $15 million per annum. And then in 2029, we expect that to raise to $25 million at least. Next quarter, we will add approximately $3 million of additional cost to IST associated with the start of this implementation. But again, we've got several things going on that should mean that we can absorb that based on other expense initiatives we have in the firm.

So as mentioned, given other initiatives, the impact per quarter should be quite modest, if any. But if anything is important to call out, we will obviously do that for a quarter, Alex. And we're most likely going to be able to do that in advance in our quarterly guidance. But as I said, the most important message here is, even though this is an expensive implementation exercise, we're going to absorb most of those expenses due to the other efforts that we have going on across the company.

In terms of the guide for the next quarter, we expect our effective fee rate to remain stable at 37.5 basis points. We expect comp and benefits to be $825 million, very stable from where we were this quarter. This assumes $50 million of performance fees. We expect IS&T to be between $150 million and $155 million. This includes the $3 million that I mentioned earlier with respect to the beginning of our implementation around the investment management platform. Occupancy, we expect to be in the high 70s, around $77 million, $78 million and G&A, we expect to be between $175 million and $180 million.

Alex Blostein
Analyst at The Goldman Sachs Group

Great, thank you for all of that comprehensive answer [Phonetic].

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

Thank you, Alex.

Operator

Next question will be from Brennan Hawken of UBS. Please go ahead.

Brennan Hawken
Analyst at UBS Group

Hi, good morning. Thanks for taking my question. The -- a couple of questions on Lexington. So curious on an update about how much of Lexington 10 has been deployed. And then when we think about the threshold for deployment where Lexington would start to look to kick off fundraising for the next flagship, where does that typically happen?

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

Great. Thanks, Brennan. First of all, Lexington's fundraising focuses this year, just to cover a little bit of that has been middle market and co-investment and that's gone well. Meanwhile, they've been obviously deploying Fund 10. And basically, the message is that they have been deploying it faster and at higher discounts than historical. So it's looking very good.

We don't have a specific date, but it is quite possible that they will enter the market sooner than they anticipated just because of the ability to deploy the capital faster. And I think we don't see it, right, the liquidity that's needed in the space. They also interestingly, we mentioned it in the opening remarks about their continuation vehicle. So they have about $6 billion that they've done where these GPs have a particular holding that they want to retained, but some of the LPs want liquidity. So they spin it out into a new vehicle. Lexington hired a market leader in that. They actually think that there's opportunity to even create a fund in that instead of having it be part of their traditional funds. So I think that's going to be another opportunity for Lexington.

Adam B. Spector
Executive Vice President Head of Global Distribution at Franklin Resources

And Jenny, the only piece I would add to that is that while Lexington historically has been focused on the institutional market, there are significant efforts underway to ensure that they can better tap the wealth management channel by offering perpetual vehicles in wealth management in both the U.S. and non-U.S. markets, and that's something we're very excellently engaged in developing.

Brennan Hawken
Analyst at UBS Group

Thanks for that. And just, Jenny, the discounts that you referred to, we had heard that those discounts have actually begun to narrow. Are they still seeing those wide discounts in the marketplace? Or...

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

They are definitely starting to narrow, but they are still seeing robust discounts versus historical discounts, still better than historical discounts.

Brennan Hawken
Analyst at UBS Group

Yes. So still at attractive levels, I guess, even though they've narrowed.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

Yeah, yes.

Brennan Hawken
Analyst at UBS Group

Thank you.

Operator

Next question will be from Craig Siegenthaler of Bank of America. Please go ahead.

Craig Siegenthaler
Analyst at Bank of America Securities

Thanks. Good morning, everyone. So my question is on the $25 billion AUM allocation from Great West. So you're about $5 billion away. After this has reached probably in a few months, can you talk about the incremental upside to this relationship over time beyond the $25 million.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

Adam, do you want to take that?

Adam B. Spector
Executive Vice President Head of Global Distribution at Franklin Resources

Yeah. Sure. So with any client, I think you see a relationship grows over time. So the first $25 billion was really something that was more contractually oriented. Throughout that process, we have been able to meet many great West Life executives as well as the related tower companies. We are in the midst of product development with them. So the initial allocation has really been based on the types of products that insurance companies generally are interested in. I think if you look at most insurance companies, you'll see significant allocations to some core fixed income as well as a tail that goes to alternatives. That has been the allocation we've received so far.

But what we've been able to do since acquisition is to work with Great West Life as well as other power companies to develop newer products, both for the retirement platform as well as doing things from a JV -- ensure [Phonetic] on the insurance side. So we are not at a point yet where we can pinpoint what those will be, but there is significant product development going on with Great West. And we think that we will continue to see the allocations broaden out from the core fixed income that has been the basis of things so far.

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

The other thing I'd just add to that, Adam, and Craig, is -- just for context, obviously, we're delighted with the $25 billion arrangement and the $20 billion we've got in so far. But relative to other clients and investment management firms that the power group of companies does business with, it's still fairly modest, candidly. So we have a way to go with that relationship, and we think of this as a multiyear exercise of building the relationship further versus just something that's happened as a consequence of transaction. But I think it's important to note that not we expect this. I mean, the Power group of companies have very significant relationships with other investment that's going to continue or whether this is catching for our fair share of it.

Craig Siegenthaler
Analyst at Bank of America Securities

Thank you, Matthew.

Operator

Thank you. Next question will be from Dan Fannon at Jefferies. Please go ahead.

Daniel Fannon
Analyst at Jefferies & Company Inc.

Thanks, good morning. Matthew, I was hoping you could clarify or expand upon what you guys are doing to offset the implementation costs with the new tech projects. So curious what those initiatives are, if you can be more specific? And is there some phase-in of that? Or are those ongoing now? So we shouldn't think about any kind of catch-up period between the -- or missed timing of some of the implementation costs versus the ongoing savings?

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

Yeah. No, I don't think there should be any miss timings. But as I said, Dan, these things are quite complex, and we're not underestimating at all the implementation complexity of a project like this with Aladdin. I should say, though, that we've done a -- this is an understatement to say we've done extensive planning around this, both planning with our partners. That's both over at Aladdin and Deloitte, the consultant that we've hired to work with us on implementation. We've done extensive due diligence. We've built in contingencies, and we have very significant resources at both Aladdin and Deloitte and of course, our own team.

But I don't -- I think we've done a ton of work to sort of determine how the implementation expenditures will work. We've been extremely focused on this. If there is anything to call out, as I said, I will do that, but we -- and again, I don't want to jinx sell selves, but we don't expect that to happen. In terms of how we're able to absorb it, one of the tangential benefits I've referenced in previous calls, of acquiring being acquisitive over the last five years, notwithstanding all the additional work and complexity around acquisitions, it does lead to future opportunities to integrate and to be more effective and efficient across the different platforms and providers we have. A large portion of the savings is going from multiple providers down to one. Of course, we're going to have a relationship still on the technology side that complement our relationship with Aladdin but we'll have less than that. We also have a much larger scaled relationship. So of course, the pricing benefits that we have are very meaningful in that regard.

The amount of resources we have externally from the Aladdin platform and our partners there in Deloitte are more than we can afford ourselves and frankly, absorbed some of the costs that otherwise we would have if we were modernizing our own platform, for example. So it's all of those things sort of combined. We have multiple middle offices. We have multiple systems. We are quite complex technologies. It's all good and it works fine, just to be clear, but this is coming, boiling down into one platform this way less vendors, more efficiency across our whole firm, which is needed anywhere in terms of where the industry is heading, is how we're able to afford to do this in an effective way, as I've described.

Daniel Fannon
Analyst at Jefferies & Company Inc.

Thank you.

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

Thank you.

Operator

Next question will be from Michael Cyprys of Morgan Stanley. Please go ahead.

Michael Cyprys
Analyst at Morgan Stanley

Great, thank you. Just wanted to circle back to the JV that you announced this morning in Japan with SBI. I was just hoping maybe you can remind us of your footprint in Japan today. Certainly, a lot of changes in that market. Just curious how you're seeing that opportunity set evolving? Where do you see some of the biggest opportunities there in Japan? And how does this JV help in terms of tapping into the opportunity set in that market? And maybe you could touch upon what the economics will be and how you sort of envision this JV working overtime and what success might look like?

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

Yeah. So I mean, we've been in Japan for a long time. Unfortunately, [Indecipherable] actually has great relationships in Japan a matter of fact. This quarter. I think we had $3.2 billion in net inflows in Japan. A big part of that was institutional business with Putnam. Japan, on the retail side, has been a little bit more difficult, and it is a market that is beginning to launch ETFs and starting to talk about digital assets. And as honestly, the foreign investment shop, it could be difficult to penetrate that. So here with SBI, they have a tremendous reach. I mean, they're probably the largest digital financial conglomerate. And so it's -- I think it's a 51% owned SBI, 49% of Franklin Templeton, and we'll be launching joint ETFs. And as the digital market opens up, we'll be able to launch products there in the crypto space as well.

Adam B. Spector
Executive Vice President Head of Global Distribution at Franklin Resources

And our footprint now in Japan really is not that different than anywhere else in the marketplace. It's nice to be able to have a significant local base there. Because of that, we have a strong institutional business. We've seen the results of that of flows this quarter. We've been able to really accelerate some of the great performance that Putnam has and won some assets there. In the retail space, we have a relationship with a number of different distributors. We also have a very strong insurance business in Japan.

The only other thing I would note about SBI is that Japan is not a market that is always recognized for its innovation and SBI is an exception to that. It's one of the first significant firms to really be breaking through on the digital side in terms of client engagement. And we think partnering with them will allow us to be one of the first asset managers to have more of that direct consumer digital engagement model in Japan. And the asset base in Japan now is close to $50 billion for us.

Michael Cyprys
Analyst at Morgan Stanley

Great, thank you.

Operator

Thank you. Next question will be from Brian Bedell at Deutsche Bank. Please go ahead.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Great. Thanks to [Indecipherable]. Maybe just circle back on the ETF strategy. Basically, $27 billion, like you said. But given the very wide range of products you have and strategies you have across the entire complex. What's the desire to more substantially expand that ETF franchise. Is there an ability to clone a more active product? Or is it more of a two-pronged strategy of doing that? And rolling out more passive product? And then if you could just talk about connecting that with the -- or how easy it is to do that with the new Aladdin platform, realizing that will take some time, of course.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

So from an EPS standpoint, I mean, actually, our largest category of ETFs over 40% is active. And then the next category is passive and then smart beta and then digital. So our focus on ETFs is as a firm, we view ourselves as vehicle agnostic. So whatever the market is interested in having us deliver our capabilities, we'll deliver it in whatever vehicle they like. And there is a strong demand of advisers, particularly in the U.S. who are interested in ETFs, I think is driven a lot by the shift to fee-based. And so it's been important for us to be able to launch products. I think we have over 100 today and to be able to launch products that are appropriate.

There is -- there has been some feedback about a concern of launching clones between a traditional mutual fund and an ETF because it can bring suitability issues to the distribution platforms and so we like to either look at existing, say, mutual funds and potentially convert them if an ETF has a bent way to deliver it or launch some sort of ETF that is a slightly different approach. Now interestingly, we're getting a lot of demand from Latin America pensions that are interested in our single country ETFs, which are, I believe, the lowest price in the market. And so we've been getting good strong flows there. We're getting flows from Europe as well as Japan. And so it's really global. Our view is in a lot of these markets, ETFs are becoming the vehicle choice. And so we need to be able to support that. I don't know, Adam, if you want to add anything to that?

Adam B. Spector
Executive Vice President Head of Global Distribution at Franklin Resources

Yeah. I'd add a few things, Jenny. The flow there has been quite strong for us at 3.3% in net flow this quarter, and that's seven quarters in a row where we've had about $1 billion or more in flow. As Jenny said, that flow is coming from a geographically diverse base where we saw about $900 million coming in from EMEA and about $0.5 billion coming in from the Americas region. I'd also just follow up with Jenny's point on being agnostic in terms of vehicles. Our most significant and longest tenured mutual fund, U.S. mutual fund is the income fund. But if we look at the income fund for this quarter, just as an example, we saw a very slight outflows in the mutual fund, but positive flows in the related SMA, positive flows in the cross-border fund positive flows in the ETF. So by offering four different vehicle types there, the category for the income strategies in general was net flow positive and as investor demand becomes more global and shifts away from mutual funds having multiple vehicles allows us to capture that flow.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

And actually, I'm just going to say one thing on that. It's often viewed that ETFs are potentially lower margin, and I think that comes out of the history, but being sort of early on passive. Honestly, it depends on kind of the -- in the case of the income fund where we're having so much success in those other vehicles, the pricing is actually very much in line with what the mutual fund is. And arguably, over time, the cost to us will be less with the ETF and the SMA because you don't have the transfer agency and the fund administration costs in the same way that you do with the mutual fund. That actually was one the drivers in our decisions to outsource those things because it allows us as the business shifts to have greater flexibility in the expense supporting the business.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

That's great color. Thank you for all that detail.

Operator

Thank you. Next question will be from Ken Worthington at JPMorgan. Please go ahead.

Kenneth Worthington
Analyst at J.P. Morgan

Hi, thanks for taking the question. As we think about a possible extension of duration by investors if the Fed acts later this year, which are your fixed income products do you think are best positioned to benefit with better sales. And then along the same lines, some of the big flagship Western funds are still struggling with performance and outflows picked up this quarter, both gross and net. What are the issues sort of weighing on those funds?

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

So first of all, as if rates go down, I think we probably are guessing to cut this year. Obviously, cash becomes less interesting as your fixed income allocation, and you're going to probably see people move more into other fixed income. We've had two out of three SIMs in positive net flows in fixed income. As a matter of fact, frankly, the pro forma excellent with 71% of AUM outperforming peers in the one, three and five-year [Indecipherable] at 92% of their AUM outperforming peers in the five-year category. And five out of our top 10 gross selling strategies are in fixed income, and that actually includes some Western strategies.

We have positive flows in a lot of different vehicles. So cross-border, our euro short duration is in positive flows. Our ETFs and fixed income are positive flows our retail SMAs are in positive flows, and we have positive flows in our closed-end funds. Interest -- and actually, the largest portion of our institutional pipeline is fixed income. But again, that does not include Great-West Life. Interestingly, if you think about passive and how it potentially impacts fixed income. It's been the areas that passive has actually cannibalized to some extent, has really been in that core and core plus space.

And so in multisector, the highly customized munis Adam helped me out on the other strategies. You're not seeing that kind of cannibalization from -- from the passive. And then Western as we've talked about their positioning has been longer duration. So as rates come back, that actually is -- is potentially a benefit as far as the positioning, and we've seen it in the kind of one month performance has improved a lot. Adam?

Adam B. Spector
Executive Vice President Head of Global Distribution at Franklin Resources

I would add -- yeah. I would add a few things. We didn't really talk about the muni franchise in that, Jenny. The muni performance is really strong. We have about 90% of assets outperforming on the one-year period and about 75% outperforming on the three and five. We think we'll see significant growth in munis. And the fact that we have a strong SMA franchise there as well as mutual funds is really helping us. In terms of the shift in rates with a steeper yield curve, we think we will see money coming out of cash into longer-term fixed income, which should benefit us.

The other thing we've seen is that in a market with fairly tight credit spreads, we see allocations going more and more to managers who have the ability to be a multi-sector multi credit exposures and to have the ability to allocate across those different sleeves and that bodes well for us as well as we are very strong in those areas.

The final thing I would note is that our insurance capabilities are highly specialized, and we've seen real growth in fixed income coming from insurance specific mandates where the regulatory reporting compliance aspects of managing those accounts is as or more important than the alpha generation.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

I just going to add one thing on cash management because a lot of people look at all the dollars in money market funds and think that that's going to move out. But our money market funds, Westerns tend over wells and corporate treasurers who are allocating the temporary in between. As a matter of fact, Western had $2 billion in net flows, which really came from a product that was very competitively priced and attracted money from corporate treasurers.

And then actually Franklin product, which either is a Luxembourg product had $800 million inflows, I think that was fastest growing money market fund from some lists that I saw, which was really offshore clients who wanted to take advantage of the yields in the U.S. And I think that product now is a Luxembourg U.S. dollar short-term money market fund, and it's now $1.1 billion in AUM.

Kenneth Worthington
Analyst at J.P. Morgan

Great, thank you.

Operator

Thank you. Next question will be from Bill Katz at TD Cowen. Please go ahead.

William Katz
Analyst at TD Cowen

Great. Thank you very much taking the question. So there's a lot of ins and outs to the franchise right now. And just maybe stepping back for a moment. I guess where I'm struggling a little bit on the storyline is how do you drive both top line and bottom line growth here? Because when I adjust for where your flows are coming in versus where they're going out it would seem to me that the fee rate may go lower. So curious your thoughts on that. And then given now the any incremental savings that you think you can do will sort of supplement the growth for the Aladdin platform. It would seem like you're more of a top line story than a top line plus expense leverage, but then I worried the fee rate, Michel lower because of the mix. So how do we think about -- how do you get revenue growth from here? And then how you turn that into operating leverage? Thank you.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

So I'm going to start -- and then, Matt, have you kind of jumped on to some of the EFR and some of the other things. Look, I think that one of the things that the pivot into adding alternatives, obviously, one of the benefits of that is that's just a much higher fee even excluding performance fees as a baseline investment management fee. And this year, if you -- we guided to $10 billion to $15 billion. We're going to end out up close to $15 billion, and yet the AUM is pretty flat. And that's really because of inflows plus market is sort of offset by some outflows and -- and really realizations and distributions. But with a year where you -- we weren't in the market with a flagship secondary PE fund from Lexington. And frankly, real estate has been really soft. So while clear partners as three of the largest funds are open ended and there is perpetual fundraising there just hasn't been huge allocations to real estate.

So let me hit a couple of those because I do think there's opportunity for that pipeline to expand. Let me start with real estate. I think there's a feeling that this market has really bottomed, and that's driven by two things. One is more clarity on where we are as well as probably more realistic marks that the bid and ask spreads are coming closer. And in talking to folks at Clarion, think about office used to be 35% of the index. It's now down to 17%. So finally, maybe there's more to go on office as far as dropping in the marks and Clarion only has 8% allocated to office. But you've had a huge adjustment in pricing.

And as a matter of fact, Clarion seeing RFP volumes go up a little bit. You're starting to see recessions [Phonetic] and redemption queues. And more importantly, some of the properties that they sold and like logistics have sold for above the appraised value and some of the multifamily above where the markets were. So that's kind of a sign that the real estate market is getting healthy again, and I think the feeling is by the end of '24, we're going to start to see managers allocating back to the real estate.

I already mentioned about Lexington, where they've been deploying Fund 10 faster. And so hopefully, we'll be in the market sooner for their next fund. And again, this is just a supply and demand issue, which is so much has been deployed in the alternative space, and there's a need for liquidity for a variety of reasons. And we do see M&A starting to pick up but their needs for that liquidity, and there's only a handful of large secondary managers that can buy big LP positions when needed.

And so that's been where we've been able to have true pricing power in the secondaries. And then I mentioned on BSP, we think this real estate debt. There's some parts of private credit that have been pretty tight, but real estate debt because of the rate entrenchment of regional banks has made this just fertile ground for real opportunity, both from institutional clients interested in and really great conversations were happening with distributors who are interested in the wealth channel and offering products there.

Yeah, so we think that we've been kind of -- if you just look at this year for alter it is you're kind of at a baseline and I think there's a lot more opportunity with as some of this gets healthy. And that right there carries some of the fees up. I did mention the reduction in our fees a lot of the EFR was an adjustment because we added Putnam. And so it's not just -- the asset mix is fixed income takes a much bigger percentage than equity, of course, you're going to have it, but you're not seeing the degradation because of vehicles as much as I think people are thinking that's happening. We're not seeing that to the same level. And then Matt, do you want to cover anything?

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

Yeah. I mean, I think, Jenny, you covered most of it. I mean there's differences from last quarter, Bill, on the EFR for example, the business mix was probably a little bit under 0.1 basis point, Putnam was 0.9. Now a lot of that has to do with the calculation of the AFR itself, but we thought the 0.9 would be a little bit less than that, hence, the slight difference from the guide that I gave. And the reason why it ended up being as much as 0.9 is because, frankly, partner has just grown faster than we anticipated. It's growing faster now, projections every month, it's growing faster than we thought.

For perspective, Putnam's AUM is 23% higher than when we announced the transaction and 13% higher than when we closed the transaction, and they've been in positive flows every month since we're both quarters since. So what that's meant is because they're at a lower effective fee rate, the averaging and the calculation, everything it means that the AFR has come down a bit. If you take -- if you take that into account and then you take into account previous quarters where we've had episodic boosts to EFR such as Lexington's catch-up fees our EFR has actually been fairly stable. I mean, it has come down a little bit, but it's normally by 0.1s here and there. And that, as Jenny mentioned, is largely due to a little bit of a mix.

And frankly, the growth in ETF Canvas, SMA solutions, and we expect that group of things to be growing. It's very hard to have all of the things flowing that we've invested in, in one quarter. One day, we will actually get alternatives, ETFs, Canvas, SMA and solutions all coming together at once where we get the fund raising in as lined up with all those other organic more ongoing growth areas of those vehicles. When we do that, is we've got a good shot at offsetting the areas of shrinkage that you referenced.

I'll also point out that if you take out some of the larger sort of tax or fixed income areas that you've pointed to and others have pointed to, we've been positive flows in the business right now. So anyway, just to give you a little bit more information.

Adam B. Spector
Executive Vice President Head of Global Distribution at Franklin Resources

And Bill, the final thing I would add is, Jenny talked a lot about alternatives, alternatives and wealth management is something obviously we're focusing on that I think is very positive from an EFR perspective. And the final thing I would note is that our core sales and we think about that as sales that are less than $100 million are up at about 14%. That tends to often be higher fee business, and we see very significant continued growth in core sales.

William Katz
Analyst at TD Cowen

Thank you for the very comprehensive answer.

Operator

Thank you. Next question is from Patrick Davitt at Autonomous Research. Please go ahead.

Patrick Davitt
Analyst at Autonomous Research

Hey, good morning, everyone. I have a follow-up on your answer on the Aladdin expense absorption. A lot of what you described sounds like you would have to come through after implementation. So just to clarify, you're expecting that absorption to be in lockstep with the implementation expense? And if so, how do you turn off all of those extra vendor costs if Aladdin isn't live yet to fill in that capability? Thank you.

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

It's inclusive of that. So there will be periods of time where we're paying for both Aladdin and we're paying for other vendors. But the quarterly kind of view or vision that I provided to you includes the assumption. So we still think that there will be very modest adjustments to or impact to operating income per quarter based on our plan over the next five years. Remember, of course, a portion of the $100 million is capitalized. So that gets spread out over more years, probably something like 50% of it gets capitalized over more years than three to five.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

And I'd just add that we're not on a uniform platform -- technology platform. So as you migrate certain SIMs over, you retire their systems. And so it is a little bit lockstep as you go along.

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

Yeah. We have -- and the other thing is that we -- the time that we're implementing Aladdin, we are also implementing other important opportunities across the company that, again, offset, as I mentioned earlier, offset those -- the sort of double the double pay you have to pay across different vendors. And that's why when you get to the outer years like '28, '29 and so on when that gets eliminated, you're started talking about $25-plus million of savings.

Patrick Davitt
Analyst at Autonomous Research

Thank you.

Matthew Nicholls
Executive Vice President Chief Financial Officer Chief Operating Officer at Franklin Resources

Thank you.

Operator

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.

Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources

Well, I just want to thank everybody for participating in today's call. And once again, I would like to thank our employees for their hard work and dedication, and we look forward to speaking with all of you again next quarter. Take care, everybody.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Selene Oh
    Senior Vice President, Head of Investor Relations
  • Jennifer M. Johnson
    President and Chief Executive Officer
  • Matthew Nicholls
    Executive Vice President Chief Financial Officer Chief Operating Officer
  • Adam B. Spector
    Executive Vice President Head of Global Distribution
Analysts

Alpha Street Logo