The operator introduces the Franklin Resources Earnings Conference Call for the Quarter Ended June 30, 2024, and turns it over to Selene Oh, Chief Communications Officer and Head of Investor Relations. Selene reminds listeners that the call is being recorded and that all participants are in a listen-only mode. She then introduces Jennifer M. Johnson, President and CEO of Franklin Templeton, who will discuss the company's results for the third fiscal quarter of 2024. Johnson is joined by Matt Nicholls, CFO and COO, and Adam Spector, Head of Global Distribution. Johnson highlights the challenges faced by investors in a complex investment landscape and briefly mentions the performance of public equity markets.

The S&P 500 and Nasdaq 100 have reached record levels, but have seen a pullback due to disappointing Big Tech earnings and a shift towards value stocks. Artificial intelligence and inflation have been major drivers of growth stocks, but equity allocations are expected to broaden, creating opportunities for active managers. The Federal Reserve is expected to make two rate cuts, and traditional fixed income sectors may become a primary source for yield. Despite tight spreads, fixed income managers are still finding opportunities for attractive yields.

Private markets are seeing high yields in the private credit and secondary private equity space, leading to an increase in money in motion and more active investing in alternatives, fixed income, and select equity sectors. Clients are also looking to work with fewer managers and are seeking a consultative approach from firms like Franklin Templeton. The firm's AUM remained flat from the previous quarter but saw a 15% increase from the previous year due to the addition of Putnam and positive market performance. Investment performance remained consistent across various time periods. Long-term net outflows were $3.2 billion.

In the fourth quarter, reinvested distributions increased to $3.6 billion and $5.9 billion was funded from Great-West Lifeco. The company continues to diversify across asset classes and saw positive net flows in multi-asset and alternative strategies, with $1.8 billion in net inflows for multi-asset and $1.4 billion for alternative. The investment solutions team ended the quarter with $80 billion in AUM. The three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners, had a combined total of $1.1 billion in net inflows. Benefit Street Partners also closed its BSP Special Situations Fund II with $850 million in total capital commitments. Lexington Partners announced a dedicated strategy and team for single-asset continuation vehicle transactions in response to increased demand from investors.

Lexington has invested $6 billion in CV transactions and plans to increase its participation in this area. Clarion Partners has seen success in secondary private equity, particularly in the industrial and logistics sectors. They are also expanding their retail alternatives initiatives with a new team in the EMEA region. The company is on track to meet its fundraising goals for the year and has seen growth and diversification since joining Franklin Templeton's platform. Fixed income net outflows were $4.8 billion, but inflows have improved by 5%. The company benefits from its diverse range of fixed income strategies.

Despite mixed performance in certain U.S. taxable strategies, the company saw positive net flows in highly customized multi-sector and global sovereign strategies. They also benefited from vehicle diversification and saw increasing interest in multi-sector credit strategies. Equity net outflows improved significantly and were driven by large cap value and all cap core strategies, as well as single country ETFs. The company also saw positive net flows in retail SMAs, Canvas, and ETF offerings, with strong growth in the ETF business. Innovative technologies, such as the Canvas platform, continue to drive personalized portfolio solutions and improved outcomes for investors.

Over the past five years, our ETF AUM has grown from $4 billion to $27 billion across more than 100 strategies. Our non-U.S. business has seen positive net flows for the 5th consecutive quarter, reaching $492 billion in assets under management. We are expanding our Private Wealth Management business, with AUM doubling in the past five years and recent acquisitions growing by 40%. Our focus is on further accelerating growth through organic investments and acquisitions, with a commitment to innovation and technology. We are working with Microsoft to build an advanced financial AI platform and have announced plans to invest in Envestnet. We have also selected a single platform to unify our investment management technologies and simplify our operations.

The Franklin Templeton Digital Assets Group, formed in 2018, has launched a new digital asset backed ETF and announced a collaboration with SBI Holdings to focus on ETFs and emerging asset classes. The company's adjusted operating income has increased slightly from the previous quarter, and they plan to continue investing in the business. In June, Investment News recognized Franklin Templeton as Asset Manager of the Year. The company's CEO thanks their employees for their commitment to clients. The call then opens up to questions, with the first one asking about the Aladdin announcement, which had been speculated for a few quarters.

The company has implemented a new investment management technology platform that will bring several benefits, including unifying their public market businesses, improving portfolio construction and risk management, providing consistent reporting, and facilitating the integration of future business acquisitions. The decision to implement this platform was made collectively by all of the company's specialist investment managers and is expected to cost approximately $100 million over the next three to five years.

The company expects to incur significant expenses in fiscal years 2026 and 2027 for implementation costs, but they anticipate being able to absorb 50-100% of these costs through other expense initiatives. They expect to see savings of $15 million per year starting in fiscal 2028, increasing to $25 million in 2029. Next quarter, they will incur an additional $3 million in costs for the implementation, but they believe they can absorb this through other efforts. The effective fee rate is expected to remain stable, and comp and benefits to be $825 million. IS&T will be between $150 million and $155 million, including the $3 million for implementation. Occupancy is expected to be in the high-70s, and G&A between $175 million and $180 million.

The operator introduces a question from Brennan Hawken at UBS about Lexington's deployment and fundraising. Jennifer M. Johnson responds by stating that Lexington has been deploying Fund 10 faster and at higher discounts than in the past, and they may enter the market sooner than expected. She also mentions their new continuation vehicle and the potential for creating a fund in that area. Matthew Nicholls adds that Lexington is making efforts to tap into the Wealth Management channel by offering perpetual vehicles.

In this paragraph, Brennan Hawken asks Jennifer M. Johnson about the discounts in the marketplace and she confirms that they have begun to narrow but are still at attractive levels. The next question is from Craig Siegenthaler about the $25 billion AUM allocation from Great-West and the potential for further growth in the relationship. Adam B. Spector explains that the relationship will continue to grow over time, with initial allocations focused on core fixed income and alternatives, but plans for product development and joint ventures in the future.

Matthew Nicholls discusses the ongoing product development and future plans for the Power Group of Companies. He mentions the $25 billion arrangement and $20 billion already invested, but notes that it is still modest compared to other relationships. He also mentions the need to pitch for their fair share of investments. Later, he clarifies that the company is working on initiatives to offset the implementation costs of new technology projects, but there should be no mistiming of these costs and savings.

The speaker acknowledges that extensive planning has been done with partners Aladdin and Deloitte to implement changes. They have also done due diligence and have contingencies in place. The company has significant resources and does not expect any issues to arise. The speaker also mentions that being acquisitive in the past has led to future opportunities for integration and cost savings. The company will be going from multiple providers to one, leading to pricing benefits and a larger scale relationship. The resources provided by Aladdin and Deloitte are more than the company could afford on their own, making the modernization process more cost effective. The speaker clarifies that the company currently has multiple middle offices and systems, but they are functioning well.

The speaker discusses the new joint venture in Japan with SBI and how it will help tap into the market's opportunities. They mention their current presence in Japan and the difficulties in penetrating the retail market. The JV will allow for the launch of joint ETFs and potential products in the crypto space. Their footprint in Japan is similar to their presence in other markets.

The speaker discusses the success of their ETF strategy, which currently has $27 billion in assets. They mention their focus on expanding their ETF franchise, with a mix of active, passive, smart beta, and digital products. They also mention their vehicle-agnostic approach as a firm.

The company is focused on delivering its capabilities to meet the demands of the market, including a strong demand for ETFs from advisors in the U.S. They have over 100 ETFs and are open to converting existing mutual funds or launching new ETFs to meet the needs of different markets. They have seen strong flows from Latin America, Europe, and Japan, indicating that ETFs are becoming a popular choice globally. In the last 7 quarters, they have had over $1 billion in net flow, with significant contributions from EMEA and the Americas. The company is also agnostic towards vehicle types, with their most successful mutual fund being the income fund.

The company saw slight outflows in the mutual fund, but positive flows in the related SMA, cross border fund, and ETF. Having multiple vehicles allows them to capture global demand. ETFs are often viewed as lower margin, but the pricing for the income fund is in line with the mutual fund. The company outsourced certain expenses to have greater flexibility as the business shifts. The question asks about the potential impact of duration extension on fixed income products and the reasons for outflows in flagship Western funds.

Johnson and Spector discuss the impact of potential interest rate cuts on Franklin Templeton's fixed income investments. They mention that two of their three SIMs have had positive net flows in fixed income, with Franklin's performance being particularly strong. They also note that five of their top 10 selling strategies are in fixed income, and that their institutional pipeline is primarily focused on fixed income. They mention that passive investments have cannibalized some of their core and core plus fixed income strategies, but not their highly customized munis or Western's longer duration strategies. Spector adds that their muni franchise has strong performance, with a high percentage of assets outperforming in the one, three, and five year periods.

The speaker discusses their expectation for growth in municipal bonds, as well as the potential for money to shift from cash into longer term fixed income. They also note the importance of being able to allocate across different sectors and credit exposures. Additionally, they mention the growth in fixed income from insurance-specific mandates. The other speaker adds that their money market funds have seen net flows from corporate treasurers and offshore clients.

The speaker is discussing the franchise and how they plan to drive both top line and bottom-line growth. They mention the pivot into adding alternatives, which has a fee based on investment management. They also mention that AUM is flat due to inflows, market performance, and outflows. The speaker believes there is opportunity for expansion in the pipeline, specifically in real estate. They also mention that there is a feeling that the market has bottomed.

The real estate market is starting to improve, with prices becoming more realistic and RFP volumes increasing. Managers are expected to start allocating back to real estate by the end of 2024. There is a need for liquidity in the alternative space, leading to an increase in M&A activity. Real estate debt is seen as a promising opportunity for institutional clients and distributors.

The speaker believes that there is more opportunity for alternatives in the future, and the reduction in fees is due to the addition of Putnam. Putnam has been growing faster than expected, leading to a decrease in the EFR, but overall, the EFR has remained stable.

The company's growth in ETF, Canvas, SMA solutions is expected to offset areas of shrinkage, and the company is focusing on alternatives and wealth management. The company expects Aladdin expense absorption to be in line with implementation expenses, and it includes turning off extra vendor costs if Aladdin is not live yet.

The speaker explains that there will be periods of time where they will be paying for both Aladdin and other vendors, but this is factored into their quarterly view and will only have a modest impact on operating income per quarter for the next five years. They also mention that a portion of the $100 million will be capitalized and spread out over more years. Another speaker adds that the implementation of Aladdin and other opportunities will offset the double payment for different vendors. In the outer years, there will be significant savings of over $25 million. The speaker thanks everyone for participating and thanks employees for their hard work.

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