The paragraph introduces the operator and host of the Franklin Resources Earnings Conference Call and reminds participants that the call is being recorded. The host, Selene Oh, then gives a brief disclaimer about forward-looking statements and turns the call over to President and CEO, Jennifer Johnson, who introduces the other speakers and highlights the company's positive results for the first fiscal quarter of 2024.

In 2023, the market rally was driven by expectations of interest rate cuts and investors remained cautious. Money market assets were at a record high and recession risks are moderating. Despite the slowing economy, there are still opportunities for investors. The top five stocks dominated market returns, but this level of outperformance is likely unsustainable. Franklin Templeton offers a range of investment capabilities and is well positioned for investors looking to deploy cash. In 2024, balance and diversification are expected to be rewarded.

In the most recent quarter, there were positive net flows in alternatives, multi-asset, equity, ETFs, and SMAs, as well as in non-US regions. The acquisition of Putnam Investments, with its strong investment performance and presence in retirement and insurance markets, has increased Franklin Templeton's AUM to approximately $1.6 trillion. Great-West Lifeco has also become a long-term shareholder. AUM increased by 6% from the previous quarter and 5% from the previous year, primarily due to market appreciation. The specialist investment managers have consistently produced competitive investment returns, with majority of strategy composites outperforming their benchmarks over one-year, three-year, five-year, and 10-year periods.

In the recent quarter, investment performance increased from 47% to 60% due to fixed income strategies. Long-term net outflows were $5 billion, with reinvested distributions of $11 billion. Alternative net inflows were $2.7 billion, with growth in private market strategies and outflows in liquid alternatives. The three largest alternative managers had net inflows of $3.8 billion. Client interest in alternative strategies on wealth management platforms was strong. Lexington Partners closed its latest flagship global secondary fund with $22.7 billion, exceeding their previous fund.

Fund X attracted a diverse group of investors, including public and corporate pensions, sovereign wealth funds, insurance companies, and wealth management partners. 20% of the capital raised came from the wealth management channel, showcasing the strength of their global distribution network. Benefit Street Partners closed their fifth private credit fund with $4.7 billion in commitments, exceeding their fundraising target. This reflects the strong demand for US direct lending and BSP's competitive advantage in underwriting and loan structuring. BSP also completed a merger between two business development companies, which is expected to be beneficial for shareholders. Alternative assets now make up 18% of their AUM and 25% of their total adjusted investment management fees. Multi-asset net inflows were $500 million, driven by their Custom Indexing Solution platform and Franklin Templeton Investment Solutions.

Canvas, a platform launched in September 2019, has experienced net inflows every quarter and has doubled its AUM to $6 billion since its acquisition. This quarter, it generated net inflows of approximately $400 million and has garnered interest from both retail and institutional clients. While active equities were impacted by the risk-off environment, there were positive net flows in various strategies. Fixed income saw net outflows, but there were positive net flows in tax-efficient global opportunistic mortgage-backed securities and multi-sector strategies. Non-US regions saw positive net flows for the third consecutive quarter. In the US, there were long-term net outflows, but gross sales improved by 15% from the previous quarter. ETFs also saw positive net inflows, with over a 40% increase in AUM from the previous year. Franklin Templeton now offers ETFs from a dozen different specialist investment managers.

The company recently launched a bitcoin ETF and is seeing growth in SMAs. Financial results showed a decline in adjusted operating income but the company remains focused on expense discipline and investing in growth and innovation. The company was recognized as one of the best places to work in money management and the credit goes to the employees. The operator then opens the floor for questions.

The speaker, Matt, is providing an update on the numbers for Putnam, a company that recently closed. He mentions that the effective fee rate for the first quarter of the year was higher than expected due to catch-up fees, but for the second quarter, it is expected to be consistent with previous quarters. He also mentions that the annual effective fee rate, including Putnam, is expected to be in the high 38 basis points. He clarifies that this includes the expenses for both Franklin and Putnam and that they are being transparent about the difference between the two.

The company expects to pay approximately $815 million in compensation and benefits, including $65 million for Putnam, assuming a $50 million performance fee quarter. They also anticipate reducing this amount to $50-55 million by the end of the fiscal year. Information systems and technology expenses are expected to be $155 million, including $25 million for Putnam, and they plan to bring this down to $15-20 million by the end of the year. Occupancy costs are expected to be around $80 million, including $12 million for double rent in New York City and $10 million for Putnam. The company also expects to reduce general and administrative expenses from $175 million to $30 million by the end of the fiscal year. As a result, their annual guide for fiscal 2024 is now expected to be 1-2% higher than previously anticipated, with a projected 5% increase in revenue for the year.

The company expects total adjusted operating expenses for fiscal '24 to be around $4.55 billion to $4.6 billion, including Putnam expenses and the $50 million of double rent. This would bring the overall effective fee rate down to about mid-38 basis points. The contribution to operating income from Putnam is estimated to be around $150 million by the end of the fiscal year, with $135 million in management fee revenue and $25 million in other revenue. The company expects to save between $85 million and $100 million in expenses by the end of the fiscal year.

The company expects to save at least $150 million by the end of the fiscal year, resulting in an operating income contribution of between $150 million and $170 million. This will lead to slight accretion in the first fiscal quarter and high-single digit cents accretion for the full year. The trajectory of net flows in alternatives has been affected by recent flagship fund raises, but the company has still raised $40 billion in the last two years.

In the coming year, the company expects to raise between $10 billion and $15 billion in the private markets, resulting in mid-single digit growth in alternative asset revenue. In the first quarter, $5 billion was raised in the private markets, while $1.1 billion was lost in liquid alternatives. The company sees strong interest in alternative credit, specifically in direct lending, special situations, opportunistic real estate debt, and CLOs. There is also a growing demand for secondary offerings, with fees remaining high due to limited supply. In real estate, the company's three largest funds are continually fundraising, with opportunities for expansion in Europe.

The speaker is excited about the success of the Lexington fund in the wealth channel, which was made possible by years of building capabilities and a team of specialists. They have also leveraged their academy to educate their own force and distribution partners on alternative investments. This momentum has allowed for more meaningful conversations and co-creation of products with distribution partners. They are now expanding their specialist capabilities and education to markets outside of the US. Switching topics, the speaker is asked about capital.

The company is focused on maintaining its dividend and investing in organic growth. They have debt service coming up and may access the debt markets if they become more affordable. The company has been active in M&A but will slow down in the next few years. They may consider more strategic M&A involving shares or smaller transactions to fill in gaps.

The company is planning to increase their share repurchases and move towards more capital return in the future. They have recently seen a lot of volatility in the market and are constantly assessing the situation. They also have a $25 billion deal with Great-West Life and are discussing potential opportunities for enhanced distribution now that the transaction is complete.

The company's insurance business is worth $170 billion and they have expertise in both investment and insurance domains. Their partnership with Power Corp has allowed them to create successful products and they expect a significant increase in sales with the addition of Putnam's sales team. The $25 billion in new assets will likely have an effective fee rate in the mid-teens and will begin to have an impact on revenue in the next few months. The company will update investors on any large inflows associated with the new assets.

The speaker clarifies that the company expects to grow beyond the $25 billion mentioned, and that they are working alongside other asset managers. They also mention an increase in market share and the capabilities of their franchise. The speaker also confirms that the first quarter compensation guide includes $50 million of performance fees and that there will be no more catch-up fees for Lexington. The recent fundraise for BSP is not yet included in the reported numbers.

In this paragraph, Jennifer Johnson discusses the attractiveness of fixed income investments and the shift from cash and short-duration investments. She mentions that Western's money market fund is primarily institutional and that they have good interest and positive flows in some categories in their fixed income investments. She also notes that Western's clients have been struggling in their core strategy, but they are having good conversations and represent the largest portion of their institutional pipeline.

The paragraph discusses the positive outlook for fixed income investments and the strong performance of Putnam's fixed income products. The company is well-positioned to capture opportunities in public and private credit. The recent outflows in Core and Core Plus products are expected to turn around as the Fed stops hiking rates. The company's expenses for the fiscal quarter include the cost of double rent, actual performances from the past quarter, expected performances for the next few months, and nine months of Putnam.

Matthew Nicholls explains that the company's expenses are expected to increase by only 1% year-over-year if Putnam is taken out of the equation. This is due to a 5% increase in revenue, but the company is also working to reduce expenses related to the Putnam acquisition. They expect to realize $85 million to $100 million in expense savings for the year, which will translate into $150 million to $170 million in operating income. This will be the run rate at the end of the fiscal year.

Michael Cyprys from Morgan Stanley asked about the impact of the Great-West strategic relationship on Franklin's retirement channel growth. Jennifer Johnson deferred to Adam Spector, who highlighted the capabilities gained from the Putnam acquisition, such as stable value, ultra-short, and target date products. He also noted the expanded sales force and improved partnership opportunities with insurance and retirement companies. Spector emphasized that the benefits of the Putnam acquisition extend beyond one partner and will strengthen Franklin's position in the overall insurance and retirement industry.

The speaker discusses the benefits of their relationship with Empower and the potential for building custom products together. They also mention their plans for outsourcing and improving their technology stack, including partnering with a single provider for their investment technology platform. However, the process is expected to take a long time and no specific details on expense reductions or implementation are available at this stage.

The speaker provides an update on the company's recent transaction and mentions the need to invest in other areas such as artificial intelligence and data. They also mention an upcoming announcement with a partner in the next quarter or two. A question is asked about the net flow picture for Putnam, to which the speaker responds that it is slightly positive. The speaker also adds that Putnam has had strong performance in both equity and fixed income. Lastly, the speaker mentions a $5.5 billion win from Great-West announced last week.

The $5 billion of private markets and $1 billion of liquid alts were closed in the current quarter. The ETF franchise has been growing and the company has a long-term vision for active, semi-transparent ETFs with 12 managers already using the products. The total ETF also includes smart beta.

Jennifer Johnson, CEO of Franklin Templeton, discusses the growth potential of ETFs and how they fit into the company's overall strategy. She explains that ETFs and SMAs are becoming more popular due to the shift towards fee-based compensation and the tax efficiencies they offer. The company sees ETFs as a vehicle to deliver their active management expertise and is not concerned about cannibalizing their mutual fund business. They have had success in diversifying their strategies into ETFs and have seen significant inflows, with the Franklin Income focused ETF being well received both domestically and internationally. Overall, ETFs are a crucial part of Franklin Templeton's growth strategy.

The speaker explains that while ETFs may cannibalize some of the mutual fund business, their strong presence in the retirement channel helps to offset any potential losses. They also mention that their ETF business is not solely focused on passive investments, with a significant portion being in smart beta and active management. The threat of direct indexing is seen as a bigger concern for mutual funds, and the company is excited about the potential growth through their acquisition of Canvas. The clarification is also given that their annual guidance does not include performance fees.

The paragraph states that the double rent is included in the expenses, but performance fees are not. The speaker, Jenny Johnson, thanks the employees for their hard work and looks forward to speaking with everyone again next quarter. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.