The paragraph is a transcript from the Franklin Resources Earnings Conference Call for the quarter ended December 31, 2024. It begins with an introduction by the operator, Matt, and then Selene Oh, the Chief Communications Officer, explains that the call will discuss the company's quarterly results and includes forward-looking statements that carry certain risks and uncertainties. She mentions that these risks are detailed in the company's SEC filings. Selene then hands over to Jenny Johnson, the President and CEO, who acknowledges attendees and mentions key personnel present for the call. Jenny highlights her recent travels across Europe, the Middle East, and Asia to meet with a wide range of important clients, from wealth clients to institutions and sovereign wealth funds, to discuss the quarter's highlights.

Clients are seeking deeper relationships with fewer asset managers capable of meeting a broad range of needs, making global asset managers with public and private market strategies well-positioned to be trusted advisors. The company has strategically diversified its operations across specialists, asset classes, and geographies, expanding its global presence to over 30 countries and approximately $475 billion in assets under management. In the latest fiscal quarter, market volatility increased due to geopolitical events and economic uncertainties. While U.S. equity markets had positive returns, driven by tech and consumer sectors, international markets faced pressure, although they still achieved positive annual returns.

In the coming year, investment management teams expect global equity markets to see higher valuations, led by U.S. growth, with increased dispersion favoring active management. As valuations gain focus, skilled managers can identify mispriced securities for alpha. Investors are reminded to maintain balanced and diversified portfolios. In the rate markets, focus is on inflation and the new U.S. administration's policies, with the Fed likely pausing rate cuts amidst robust growth and potential inflation. Early U.S. economic policies could solidify growth expectations, raising inflation concerns. Uncertainty persists around fiscal policy and tariffs. For fixed income markets, a steepening yield curve suggests benefits from longer maturities, and traditional sectors regain prominence for yield as the Fed's rate cutting nears an end.

The paragraph highlights the opportunities available in both fixed income and private markets, despite tight spreads and reset valuations. There is particular potential in secondaries, real estate equity, and real estate debt, with recent evolutions making these investments more accessible. The global money market assets have reached a record high, presenting further opportunities. The firm, distinguished by its extensive investment capabilities and global presence, continues to capitalize on shifting assets, exemplified by its recent appointment as trustee and manager of the National Investment Fund of Uzbekistan. Additionally, the company's strong first fiscal quarter results reflect its ability to meet client needs during market volatility.

The paragraph discusses the company’s assets under management (AUM), which reached $1.58 trillion, reflecting a decrease from negative markets and outflows from Western Asset. Excluding Western Asset, the company experienced positive long-term net inflows of $18 billion across various asset classes, with equity, multi-asset, and alternatives contributing $17 billion to positive net flows. Equity net inflows were $12.5 billion, boosted by reinvested distributions. Although fixed income saw outflows totaling $66.7 billion, net inflows were positive in certain strategies when excluding Western. Brandywine Global and FT fixed income contributed $1 billion in positive fixed income net flows. The company plans to enhance support for Western Asset Management by integrating corporate functions while maintaining their investment autonomy. Alternatives generated $6 billion in fundraising, with $4.3 billion from private market assets, while realizations and distributions were $3.8 billion.

In January, Franklin Templeton launched the Evergreen Secondaries Private Equity Fund, achieving $900 million in initial fundraising and reaching close to $1 billion in AUM. This, along with BSP Real Estate Debt and Clarion Partners Real Estate Income Fund, showcases the firm's commitment to wealth management alternatives. With a focus on innovation, client education, and a strong local distribution model, they've positioned themselves for growth in the wealth channel, expecting it to represent 20-30% of their alternative capital raises. The Multi-Asset sector saw $3.4 billion net inflows, driven by the Franklin Income Fund, which leverages a flexible strategy to meet investor demand for income and yield across various markets.

The Investment Solutions team concluded the quarter with $88 billion in assets under management (AUM), offering diverse investment strategies. The ETF business experienced its 13th consecutive quarter of positive net flows, adding $2.7 billion, with 9 ETFs surpassing $1 billion in AUM. Retail separately managed accounts (SMAs) had AUM of $146 billion, with net inflows of $2.5 billion excluding Western. The Canvas platform, allowing for the creation of personalized SMAs, saw net flows of $900 million, reaching $10.5 billion in AUM. The institutional pipeline's AUM increased to $18.1 billion, with fixed income mandates representing 45%. Western Asset Management faced significant long-term net outflows of $68 billion during the quarter, ending with $272 billion in AUM across 88 strategies.

The paragraph discusses the expected financial movements and investment performance for Western in January, noting an anticipated $17 billion in net outflows and total assets under management (AUM) of $260 billion, with net inflows of $4.5 billion excluding Western. Despite some short-term declines, investment performance has improved over 3 and 5-year periods for mutual funds and composites, with a majority exceeding benchmarks over these durations. Financially, adjusted operating income declined by 9% from the prior quarter and 1% from the previous year. The company plans cost-saving measures for fiscal 2025, anticipating benefits in 2026, while maintaining a commitment to growth, innovation, and shareholder value enhancement.

The paragraph discusses Franklin Templeton's focus on enhancing its investment strategies, client experience, and growth areas, with the launch of a new U.S. advertising campaign, "your trusted partner for what's ahead." The campaign emphasizes the firm's legacy of adapting to client needs and highlights various capabilities, including public and alternative investments, customized solutions, Canvas, ETFs, and SMAs. In December, Franklin Templeton was recognized as one of the best places to work in money management. The speaker expresses pride in the employees and opens the floor to questions. Alexander Blostein from Goldman Sachs asks about the operating income and management fee contributions from Western, noting continued outflows in January. He also inquires about the strategic vision for Western as it potentially becomes smaller, mentioning the integration of some corporate functions.

The paragraph discusses the strategic and financial implications of integrating Western into a larger firm. Jenny Johnson explains that the goal is to maintain the independence of Western's investment team while integrating other functions like technology and fund accounting to achieve greater scale and make investments in AI and data. Matt Nicholls then provides a financial perspective, detailing that Western's revenue outflows, amounting to $120 billion from August to January, represent approximately 30% of Western's full-year 2024 adjusted revenue and about 3% of Franklin's. The remaining revenue from Western equates to about 6% of Franklin's adjusted revenue.

The paragraph discusses the impact of revenue declines on operating income, emphasizing disciplined management of associated expenses while maintaining client experience excellence. Franklin Resources is expediting the integration of corporate functions with Western as their autonomous agreement is ending, allowing Western to benefit from Franklin's larger asset management scale while maintaining investment autonomy. The company expects expenses to remain similar to last year's after adjusting for certain factors, while strategic investments continue. Margins will dip slightly in the short term due to these integrations but are expected to expand again by fiscal 2026, starting in October.

The paragraph discusses the company's financial strategies and outlook. They anticipate expense reduction initiatives in 2025, leading to $200-$250 million in savings by fiscal 2026. Despite a lower fee rate from Western Asset, they expect new growth areas, mentioned by Jenny Johnson, to offset this and contribute to margin recovery. The company's medium-term margin target remains 30%. Additionally, Johnson highlights significant changes in the fixed income landscape, noting that banks have shifted their traditional roles, focusing more on deal sourcing than merely raising money.

The paragraph discusses the importance of sourcing relationships in private credit, particularly with middle market companies and firms like IPOs or PE firms. It highlights the evolving conversation around structuring private vs. traditional fixed income investments. Although no organizational changes are expected in 2025 or 2026, they are considering the ideal structure as a $500 billion fixed income manager. Alexander Blostein and Matt Nicholls engage in a discussion about achieving cost savings, with Nicholls confirming a plan for $250 million in savings for 2026, starting earnestly by October 1. Dan Fannon from Jefferies questions if there are any other affiliates, like Western, not involved in a profit-sharing model during this integration.

In the paragraph, Jenny Johnson and Matt Nicholls discuss the integration and efficiency improvements of various affiliate and recently acquired businesses. Johnson notes that alternative managers operate more independently due to their specialized functions, unlike traditional managers such as Royce, which still maintains some independence. Nicholls elaborates that when acquiring Legg Mason, they allowed varying levels of autonomy over a five-year integration timeline to ensure a secure consolidation. He explains that going forward, the company will have a streamlined public market operation with distinct investment teams and specialized operations for alternative asset businesses.

The paragraph discusses the progress and synergies following a transaction involving Putnam, approximately a year after its closure. Michael Cyprys from Morgan Stanley inquires about the developments, and Matt Nicholls responds by highlighting the success of the acquisition. He notes that strategic transactions in asset management are often complex, but the Putnam acquisition has been very successful for them, as indicated by significant net new flows of approximately $12 to $15 billion over the past year. The cultural fit of the teams has been positive, contributing to outstanding performance and integration with Franklin. The paragraph also mentions a strategic partnership with Great-West but does not delve into details.

The paragraph discusses a successful business transaction that leveraged a well-performing team and strong global distribution to achieve significant financial gains. The company improved from a zero to 30% margin, increasing operating income from an expected $150 million to about $175-$180 million within a year. Adam Spector highlights how integrating the investment team Putnam with effective distribution resulted in excellent performance, with a significant percentage of assets achieving high ratings. Their gross and net figures have increased substantially, with $13.6 billion in flow in the first quarter, driven largely by core sales and mutual fund sales growth. The company is pleased with both the financial and operational outcomes.

The paragraph discusses the successful partnership with Empower, focusing on new product development and expansion beyond the U.S., particularly in the retirement sector. Putnam's expertise has enhanced this effort, providing a strong team and effective retirement products like a target date suite and a stable value product. Matt Nicholls highlights the benefit of knowledge sharing across various teams, including Franklin Equity Group and others, which enhances strategic and operational efforts. Jenny Johnson notes the strong flow of assets towards top-performing active managers, emphasizing the importance of being a leading player in active management to attract investments.

The paragraph discusses the importance of diversification and a trend towards more active management in the institutional side, highlighted by events like DeepSeek. It mentions that since a recent acquisition, Putnam has seen a 68% increase in quarterly growth sales across various investment vehicles, including ETFs. In a Q&A, Bill Katz from TD Cowen seeks clarification on expense guidance from Matt Nicholls, who confirms that expenses are expected to remain flat to 2025 when excluding certain factors. Nicholls also notes that while they aren't providing a specific estimate, contributions from WAMCO are expected and they are working diligently with Western and its clients, emphasizing transparency with investors regarding their progress.

The paragraph discusses financial projections and expectations related to expense management for the years 2025 and 2026. A summary and update on Western's management fee rates will be provided monthly to track the progress of their 6% rate. The company aims to have roughly flat expense guidance for 2025, excluding uncertain performance fees. They plan to reduce expenses by $200 million to $250 million by the end of fiscal year 2026, with these reductions becoming fully realized by then. Updates on the progress of these reductions will be provided throughout 2025. The conversation clarifies that the expense reductions are anticipated to be achieved on a run-rate basis by the end of 2026.

The paragraph discusses a company's strategic efforts to maintain flat expenses despite significant investments and expansions. Matt Nicholls explains that while the organization has added about 1,000 employees and increased its sales force across various areas, including alternative asset management and ETFs, they have been able to control expenses through ongoing efficiency efforts. The company uses these initiatives to manage margins strategically and anticipates changes in performance over a five-year outlook. Nicholls emphasizes the company's proactive role in addressing industry changes and maintaining competitive sales growth.

The paragraph discusses the financial outlook and guidance for a business, highlighting investment efforts balanced with maintaining margins. It addresses a $250 million reduction in expenses relative to a $4.7-$5 billion expense base. The firm anticipates an increase in effective fee rates due to inflows into higher fee strategies and provides detailed quarterly expense projections: $815-$820 million for compensation and benefits, $150 million for information technology, $70-$75 million for occupancy due to reduced double rent from office moves, and $190 million for general and administrative expenses. The tax rate is expected to be between 25% and 27%. The increase in G&A costs is attributed to more spending on advertising and legal expenses related to the Western matter.

In the paragraph, Benjamin Budish from Barclays asks about the growth in wealth fundraising, specifically how it is expected to constitute 20% to 30% of total capital raises in the alternative investment sector. Jenny Johnson responds by highlighting their success in raising funds from the wealth channel, citing Lexington's Fund 10 as an example, where 20% of the $22.7 billion came from wealth sources. She notes their substantial efforts in building out distribution and the company's strong foundation in the wealth channel, demonstrated by their global team dedicated to alternative investments. Furthermore, she mentions the launch of three cornerstone perpetual products in real estate debt, secondaries, and equity, which collectively raised nearly $1 billion. A specific perpetual fund was capped at $900 million after initial fundraising efforts.

The paragraph discusses the fundraising strategy and growth potential for a fund, emphasizing different investment channels like institutional, wealth, and retirement. The fund raised $900 million in January and aims to continue fundraising, including internationally. The wealth channel shows strong interest, supported by expert teams and educational initiatives like the Franklin Templeton Academy. In the retirement channel, while there are opportunities due to natural cash flows, market penetration will be slow due to its complex, fee-sensitive nature. The focus is on providing high-quality investment alternatives without resorting to underperforming managers.

The paragraph discusses the opportunities and challenges in the retirement platform infrastructure and wealth management channels, emphasizing the importance of both drawdown and perpetual products. Adam Spector highlights the firm's success with $1 billion-scale perpetual vehicles in private debt, real estate, and secondary markets, as well as their global reach in the U.S., EMEA, Middle East, and Asia. The firm is focusing on educating people about alternative investments and improving investor services by cutting expenses and collaborating with major distributors to co-develop products.

The paragraph discusses a strategic partnership approach to launching a product with a major partner, planning launches a year ahead for better results. Jenny Johnson provides an update on fundraising for Alternatives, reiterating a guidance target of raising $13 billion to $20 billion this year, contingent on Lexington's Fund 11's first close. The paragraph highlights that $6 billion was raised in Alternatives this quarter, with $4.3 billion in private markets contributing to the target. It notes that $900 million raised by Lexington will be counted next quarter. The operator then introduces Patrick Davitt from Autonomous Research, who inquires about the impact of recent large insurance variable annuity (VA) wins on quarterly flows.

The paragraph discusses Franklin's strategy to become a key partner to a smaller number of clients across various sectors, such as DB, DC, and insurance. Unlike many large active managers losing major VA mandates, Franklin has been successful in securing large mandates by expanding relationships with insurance companies seeking to consolidate their managers to a select few who can offer a broad range of asset classes and expertise. Adam Spector and Jenny Johnson highlight a significant win with Venerable and mention ongoing conversations with other potential partners, emphasizing the importance of expertise and educational resources like their academy in these partnerships.

The paragraph is the closing segment of a teleconference call. Patrick Davitt expresses gratitude, and the operator announces the end of the question-and-answer session. Jenny Johnson, Franklin Templeton's President and CEO, thanks participants and acknowledges the hard work and dedication of the company's employees. She looks forward to the next quarterly call. The operator concludes the teleconference, and participants are told they may disconnect.

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