Jennifer M. Johnson
President and Chief Executive Officer at Franklin Resources
Thank you, Celine. Welcome, and thank you for joining us to discuss Franklin Templeton's fiscal quarter results. I'm here with Matt Nichols, our CFO and COO; and Adam Spector, our Head of Global Distribution. We'll answer your questions shortly, but first, I will review the quarter's highlights. Over the past few months, I've traveled across Europe, the Middle-East and Asia and met with key clients ranging from wealth clients to institutions and sovereign wealth funds to other large asset owners. What's clear to me from these conversations is that clients want deeper relationships with fewer asset managers that can meet more of their needs. As one of the few global asset managers with extensive public and private market strategies, we believe we are well-positioned to be a trusted adviser to our clients around the world. In recent years, we have intentionally diversified our company across specialist investment managers, asset classes, vehicles and geographies to benefit a broad range of clients through various market conditions and cycles. Ever since we opened our first offices outside of North-America 40 years ago, our global presence and perspective has been a strategic advantage, enabling us to reach new investors. Today, our global footprint includes offices in over 30 countries serving clients in over 150 and represents approximately $475 billion in assets under management. During our first fiscal quarter, market volatility ticked higher with geopolitical uncertainty, the US presidential election, central bank actions and inflation. Starting with public equity markets. Global equities fell by about 1% during the quarter, while the S&P 500 posted a total return of 2.4% and the Nasdaq 100 notched a 5% gain. The US equity market saw positive returns, while other regions like Europe, the UK, Japan, China and emerging markets faced pressure in-part due to the US presidential election results, trade tariff concerns and economic growth uncertainties. While activity markets returns were a bit more modest than the three previous quarters. The major trends remained in-place. The US large-caps outperforming US small caps driven by technology and communication services firms. Growth stocks in the US outperformed value stocks for both the quarter and the year. The largest gains came from tech and consumer, while materials and healthcare lagged. International equity markets stalled in Q4, but still delivered positive returns for the year. In the coming year, our investment management teams believe that earnings growth is likely to support higher valuations across global equity markets with the US continuing to lead the way. We also believe that dispersion within global equity markets will continue to increase, meaning that top performers should come from more than just mega cap tech companies. And we've seen signs of this starting to play-out in the December quarter and more pronounced this week as Deep Seek raised questions about the race to capture value from AI. This dispersion favors active management and the ability to move quickly in today's dynamic markets. Valuations are likely to come more into focus and skilled active managers can identify mispriced securities to generate alpha. It's also a reminder that investors should focus on-balance and diversification of their portfolios. Meanwhile, turning to the rate market, investor focus is centered on two issues, the inflation picture and uncertainty surrounding the policies of the new US administration. Following robust US growth numbers and relatively sticky inflation data, we expect the Fed to adopt a prudent pause in its easing over the next several months, something the markets may have overestimated. Early US government economic policy moves, especially on regulations and tariffs, could solidify expectations of sustained robust growth, which in-turn would point to some inflationary pressures. We see uncertainty remaining elevated for a while as markets try to anticipate US fiscal policy and distinguish between rhetoric and reality regarding proposed tariffs. So what does this mean for fixed-income markets? The yield curve continues to steepen and over-time, investors will benefit from going up the curve. As the Fed's rate cutting cycle seems close to an end, traditional fixed-income sectors are regaining their role as a primary source for yield. Given the still robust pace of activity in spread sectors, our fixed-income managers continue to find opportunities at attractive yields even as spreads remain relatively tight. Turning to the private markets. As valuations have reset from their 2021 levels, we believe that allocating capital in the coming year looks attractive across much of the private market ecosystem. Specifically, we see opportunities in secondaries, real-estate equity and real-estate debt. We believe funds that deploy capital in today's market environment can negotiate favorable pricing, terms and covenants. With product evolution making these investments more accessible to a larger group of investors and with more flexible features, financial professionals are increasingly allocating client assets in these versatile and valuable strategies. A tremendous opportunity exists with global money market assets at record highs of $8.9 trillion as of December 31, according to Morningstar. Investors who have sat on the sidelines have not been able to capture significant returns over the past couple of years. As one of the world's most comprehensive asset managers, our broad investment capabilities, extensive global distribution network and local asset management expertise continued to differentiate us in an increasingly competitive industry and allow us to be well-positioned to capture money in motion. In fact, just this week, we were appointed as Trustee and Manager of the National Investment Fund of Uzbekistan, we are pleased to partner with the government of Uzbekistan in support of the development of their local capital markets. For over 15 years, we have actively managed similar specialized emerging markets mandates, including Fondule, a London and Bucharest listed Romanian closed-end fund. Turning now to our business. Our first fiscal quarter results demonstrated progress across our key growth areas, enabling us to meet the needs of our clients amid heightened market volatility. Our AUM continues to be well-diversified across asset class, client type and region and ended the quarter at $1.58 trillion, a decrease from the prior quarter due to negative markets and long-term net outflows from Western assets. Excluding reinvested distributions, long-term inflows improved by 34% from the prior year quarter. Long-term net outflows were $50 billion, including $20 billion of reinvested distributions. Excluding Western Asset Management, our long-term net inflows were approximately $18 billion and positive in every asset class. Three of our asset classes, equity, multi-asset and alternatives generated a combined $17 billion in positive net flows. Equity net inflows were $12.5 billion and included reinvested distributions of $16.5 billion. We saw positive net flows into large-cap value, smart beta quantitative, listed infrastructure and all cap core strategies. Investment performance continues to be strong across all periods as investors return to risk assets. Fixed-income net outflows were $66.7 billion. Excluding Western, fixed-income net inflows were positive into multi-sector, core bond and high-yield strategies. As highlighted on previous calls, we benefit from our broad range of fixed-income strategies with non-correlated investment philosophies. Brandywine Global and FT fixed-income both generated positive net flows totaling a combined $1 billion in fixed-income strategies in the quarter. This past year has presented significant challenges for Western Asset Management and we are committed to supporting them. In the near-term, we will integrate select corporate functions, creating efficiencies and giving access to broader resources, while ensuring Western's investment team autonomy. These enhancements will be seamless for clients. This quarter, fundraising and alternatives generated $6 billion, of which private market assets totaled $4.3 billion. Aggregate realizations and distributions were $3.8 billion. In January, we launched our first Evergreen secondaries private-equity fund, the Franklin Lexington Private Markets Fund designed for the wealth channel. The fund achieved an initial fundraising cap of $900 million in assets under management. We have also launched a parallel product internationally. Today, our Evergreen funds are reaching important milestone of nearly $1 billion in AUM for each of our alternative managers. Franklin Lexington Private Markets Fund and secondary private-equity, BSP real-estate debt and Clarion Partners Real Estate Income fund. These are semi-liquid perpetual vehicles and we look-forward to further capital subscriptions. These are great examples of how our wealth management alternatives business, Alternatives by Franklin Templeton, has all the essential elements to win in this space. Over the past few years, we have focused on designing innovative, suitable products, investing in client education and supporting wealth advisors. Our large local distribution coverage model is comprised of a dedicated alternative specialist team that works with our overall sales force. The wealth channel is approximately 10% of our alternative AUM. Looking ahead, as allocation to alternatives increase and we launch products in the channel, we expect wealth clients to gradually grow to represent 20% to 30% of our alternative capital raises. Multi-asset net inflows were $3.4 billion, led by Franklin Income Fund, our custom indexing platform Canvas and Franklin Templeton Investment Solutions. Income and yield continue to be top-of-mind for investors. Franklin Income Fund's flexible approach enables it to invest in dividend-paying stocks, bonds and convertible securities and is a great example of a strategy in high-demand across multiple geographies and in different vehicles. The investment solutions team leverages a global network of investment teams across our specialist investment managers to offer innovative and diversified strategies, including private strategies and ended the quarter with $88 billion in AUM. Turning to investment vehicles. Clients showed interest in a diverse range of investment options, including ETFs, retail SMAs and canvas. Our ETF business saw its 13th consecutive quarter of positive net flows, attracting $2.7 billion during Q1. Nine of our ETFs now are over $1 billion in AUM. From an asset class perspective, eight of these nine funds are equity strategies and the largest ETF being Franklin US core bond with $2.3 billion in assets. Retail SMA AUM was $146 billion and excluding Western had net inflows of $2.5 billion. Canvas, a web-based software platform, allows financial professionals to create personalized SMAs for their clients, including tax managed efficient products and has enhanced our leadership in SMAs. Through the use of technology, we continue to partner closely with clients to develop personalized portfolio solutions. Canvas had record net flows of $900 million with AUM of $10.5 billion, a 10% increase from the prior quarter. At quarter-end, our institutional pipeline of one but unfunded mandates increased by $2.3 billion to $18.1 billion in AUM and remains diversified across asset classes and specialist investment managers. Despite the challenges with Western, fixed-income mandates have grown and now represent 45% of the pipeline. Before I turn to investment performance, I wanted to provide a brief update on Western Asset Management. In the quarter, Western experienced significantly higher long-term net outflows of $68 billion, of which $38 billion of it occurred in the month of December. By December 31, Western Asset managed $272 billion in AUM across 88 marketed strategies. While it is preliminary as we report January AUM inflows next week, Western's long-term net outflows are expected to be approximately $17 billion for the month of January and had AUM of approximately $260 billion. Excluding Western, we expect long-term net inflows of approximately $4.5 billion. Now in terms of investment performance, our investment teams have remained true to their distinct disciplines and time-tested approaches and continue to produce competitive investment returns. Mutual fund investment performance improved in the three and five-year periods from the prior quarter across all asset classes was unchanged for the 10-year period and the modest decline in the one-year period was primarily due to US equity strategies. Two-thirds of mutual fund AUM outperformed their respective peers over the three-year period. Compared to the prior quarter, composite investment performance improved in the three-year period, stayed relatively flat in the 10-year period and decline in the one and five-year periods. More than half of the AUM in our strategy composites are beating their respective benchmarks for the three and five-year periods and 63% in the 10-year period. Turning briefly to financial results, adjusted operating income was $412.8 million, a decrease of 9% from the prior quarter and a decrease of 1% from the prior year quarter. In connection with Western, and as a whole, we will be implementing additional cost-savings initiatives during fiscal 2025, of which the benefits will be realized in fiscal 2026. We remain committed to our long-term vision of strategically investing in the business to best serve our clients, while managing expenses and maintaining our focus on enhancing shareholder value. Looking ahead, I'm excited about the many opportunities we have to drive growth and innovation. With a clear vision and strong progress already underway, we're focused on elevating the performance of our investment strategies, outstanding client experience and continued growth in our most critical areas. This month, we announced the launch of an exciting new US advertising campaign, your trusted partner for what's ahead. This campaign highlights Franklin Templeton's rich legacy of evolving with our clients' needs, while showcasing the breadth of our capabilities for financial professionals. Some of the highlighted capabilities include our public and alternative investments, customized solutions, canvas, ETFs and SMAs. Finally, in December, Franklin Templeton was recognized again as one of the best places to work-in money management by pension and investments. I'm proud to lead such talented and dedicated employees who work tirelessly on behalf of our clients. And I'd like to thank them for their hard work and dedication to our organization. Now let's open up the call to your questions. Operator?
