Franklin Resources Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2025

There are 9 speakers on the call.

Operator

Welcome to the Franklin Resources earnings conference call for the quarter ended 03/31/2025. Hello. My name is Rob, and I'll be your call operator today. As a reminder, this conference is being recorded. And at this time, all participants are in listen only mode.

Operator

I would now like to turn the conference over to your host, Celine Oh, head of investor relations for Franklin Resources. You may begin.

Speaker 1

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 are forward looking statements 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 and 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.

Speaker 2

Thank you, Celine. Welcome, everyone, and thank you for joining us to discuss Franklin Templeton's second 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 momentarily, but first, I'd like to review some highlights from the quarter. The first few months of 2025 have been marked by significant market turbulence globally resulting from heightened geopolitical, trade policy, and consequently economic uncertainty.

Speaker 2

As our clients try to separate the signal from the noise, we are positioned to help them navigate this period of market volatility and benefit from emerging trends. Periods with major market resets often act as catalysts for client changes to asset allocation and portfolio construction. This is one key reason why our diversified company is designed to benefit a broad range of clients through various market conditions and cycles. With money on the move, Franklin Templeton is poised to help our clients grow their assets with leading capabilities across public and private investments. Despite the volatility, we continue to see strong client activity across our key growth areas.

Speaker 2

For instance, our institutional one but unfunded pipeline increased by 2,300,000,000.0 to 20,400,000,000.0 during the quarter, its highest level since 2022. '1 of our firm's greatest strengths is the depth and breadth of perspective provided by our specialist investment managers who offer investment expertise across the full spectrum of asset classes. This comprehensive expertise is increasingly valuable as asset owners seek to consolidate relationships with managers who can offer a full range of investment solutions across geographies. By partnering with Franklin Templeton, clients gain access to broad capabilities delivered through a single integrated global platform. We provide deep industry insights to help clients protect wealth and unlock opportunities for growth.

Speaker 2

In April, for instance, the Franklin Templeton Institute delivered timely insights, adviser materials, and webinars to help clients make sense of headlines and uncover new opportunities. In the days following April's tariff announcements, the Franklin Templeton Institute held a dozen webinars attended by over 11,000 advisers. Today, our firm reaches all corners of the world. Since our first office outside of North America opened in 1986 in Taiwan, international markets have been a key part of our growth story. As one of the first global firms to establish local asset management capabilities over thirty years ago.

Speaker 2

We have offices in over 30 countries, and our clients are located in over a 50 countries. Our goal is to manage each local business on a global scale, focusing on local investing and client needs. We have 470,000,000,000 or about 30% of our AUM in countries outside The US, and approximately 50% of our employees work outside of The US. Within public equity markets, obviously, there were several notable developments that unfolded during the quarter, reflecting a broader shift in global market dynamics. For the first time in many years, several foreign markets outperformed US indices, signaling a potential reversal of long standing trends.

Speaker 2

As we've been anticipating in The US and abroad, equity performance has broadened beyond the narrow leadership of the magnificent seven as investors rotated into other sectors, styles, and regions. Europe outpaced The US, and the US dollar weakened. We also saw striking reversals in other areas. Bitcoin declined while gold surged almost 20%, the largest quarterly gain in US dollar terms in over forty years. The so called deep seek moment sparked questions around the need for AI related spending contributing to a pullback in previously high flying areas.

Speaker 2

Meanwhile, sectors like financials, health care, consumer staples, and utilities have led the market year to date, underscoring the shift in investor sentiment and sector leadership. For the remainder of 2025, our investment teams remain cautiously constructive on the outlook for global equity markets. The caution stems from uncertainty tied to softer US growth, driven in part by cuts to federal government employment and services as well as the ripple effects of newly implemented US tariffs and retaliatory measures, particularly from China. The primary concern is an erosion of profitability related to weaker global economic activity and margin pressures as tariff costs filter their way through supply chains. Within US equities, a key theme remains broadening as investors seek out returns in companies with durable earnings support and favorable valuations.

Speaker 2

While we've seen sharp declines in the technology sector, including the magnificent seven, some recovery of mega cap stocks is likely. European stocks, particularly in areas related to defense spending and infrastructure, will benefit from stepped up government expenditures as Europe addresses its security concerns. While new tariffs could be significant and a likely drag on global growth, our consensus is that a recession in The US is not a foregone conclusion. It's important to note that the economic impact of tariffs will likely be asymmetric, affecting The US far less than our trading partners. The US economy, with its 30,000,000,000,000 size and only about 3,000,000,000,000 in exports, is probably better insulated from recession than countries whose economies are more dependent on exports.

Speaker 2

Turning to the rate market. The recent quarter has been dominated by uncertainty on US trade policy and its potential economic fallout. The execution of the tariffs rollout has exacerbated market volatility. Nonetheless, it has also cast a spotlight on the actual problem of large persistent trade deficits, which over time does need to be addressed, including through smaller US fiscal deficits. The US economy came into 2025 with strong momentum.

Speaker 2

While last quarter's GDP contracted by point 3%, this largely reflected a surge in imports ahead of tariffs. Household consumption has remained relatively robust, and so far, labor markets have proved resilient. Confidence indicators have weakened, and many corporations have paused investment plans. So underlying activity could well weaken somewhat in the current quarter. However, if the administration's focus reverts to tax cut extensions and deregulation, this, together with progress on trade negotiations, should provide support for growth and allow The US economy to avoid a recession this year.

Speaker 2

Bond yields have experienced high volatility but appear most recently to have become range bound at levels consistent with relatively resilient economic growth. We continue to expect one more rate cut by the Fed this year with additional monetary easing possible should growth deteriorate more sharply. Tariff driven price pressures and a still large fiscal deficit seem likely to exert some upward pressure on yield. Market volatility is likely to remain elevated until we get greater clarity on trade and fiscal policy. Turning to private markets.

Speaker 2

2025 started with optimism for a more business tax and regulatory friendly environment with more IPOs and greater m and a activity. Heightened policy uncertainty and recent setbacks in global equity markets have tempered enthusiasm, particularly for IPOs and m and a activity. However, we believe that increased market volatility may spur interest in secondary private equity offerings as sources of liquidity. The undercapitalized secondary market enables firms like Lexington Partners to be highly selective and focused on quality assets as they deploy capital consistently during the year. Furthermore, these market dislocations can create attractive buying opportunities for this asset class.

Speaker 2

Increased market volatility also creates an attractive backdrop for our alternative credit businesses like direct lending, real estate credit, and special situations. In these markets, where there is greater dispersion between the best and worst credits, Benefit Street Partners is well positioned given its conservative approach to underwriting and our deep portfolio management expertise. Meanwhile, real estate valuations have declined significantly from their 2021 peaks, and our investment teams are finding selective opportunities in areas such as industrials, housing, and health care. Market dislocations and global volatility often create opportunities for active managers like Franklin Templeton that offer a full range of investment capabilities as reflected in our institutional one but unfunded pipeline, the highest it's been in three years. The pipeline remains diversified by asset class and across our specialist investment managers and is particularly strong in Franklin Templeton fixed income.

Speaker 2

The combination of unpredictable fiscal policies, trade uncertainties, and geopolitical tensions require a balanced approach. Now turning to highlights from the quarter. Our results demonstrate progress across our business. Our assets under management continue to be well diversified across specialist investment managers, asset classes, vehicles, and geographies and ended the quarter at 1,540,000,000,000.00. This is a decrease from the prior quarter due to the impact of long term net outflows at Western Asset and Negative Markets.

Speaker 2

Excluding reinvested distributions, long term inflows increased 9% quarter over quarter. This quarter, gross sales increased across all asset classes. Long term net outflows were 26,200,000,000.0, including 3,300,000,000.0 of reinvested distributions. Excluding Western, long term net inflows were 7,400,000,000.0. Ex Western, we were net sales positive for the last six quarters in a row.

Speaker 2

Multi asset and alternatives generated a combined 9,700,000,000.0 in positive net flows. Equity long term inflows were 38,900,000,000.0, and gross sales have increased for the past six consecutive quarters. Given the risk off environment, equity net outflows were 5,400,000,000.0, primarily reflected in growth strategies. We did see positive net flows into large cap value, smart beta, and international strategies. Fixed income net outflows were 30,500,000,000.0.

Speaker 2

However, excluding Western, fixed income net inflows were 2,800,000,000.0 and were positive in multisector, munis, stable value, and high yield strategies. Franklin Templeton fixed income continues to see positive flows and maintains a strong one but unfunded pipeline. Fundraising and alternatives generated 6,800,000,000.0 for the quarter, of which private market assets totaled 6,100,000,000.0 and were broadly distributed across strategies. Aggregate realizations and distributions were 2,800,000,000.0. We see a significant opportunity in the wealth management channel for our alternatives business.

Speaker 2

Based on our data and calculations, we project that approximately 800,000,000,000 will be allocated to democratize alternative industry wide over the next five years. And as I've mentioned before, this is a key focus of growth for us. Over the past several years, we have acquired relevant alternative asset management capabilities, built a dedicated distribution effort, and have had success placing our products on a number of leading platforms. As a result, so far today, a little over 10% of our alternative assets are from the wealth channel. We have learned a great deal about this opportunity, but it's still early days.

Speaker 2

As Alternatives by Franklin Templeton continues to progress in the wealth management channel, it is imperative that we continue to deliver innovative, top performing solutions as well as a first class client experience. This quarter, we launched our first perpetual secondary private equity fund, the Franklin Lexington Private Market Fund in The US and internationally designed for Wealth Channel clients. These funds raised an initial combined 2,000,000,000. We now have three perpetual offerings in the major asset classes, secondary private equity with Lexington, real estate debt with Benefit Street Partners, and Clarion's Real Estate Equity. All three of these strategies are north of a billion dollars in assets.

Speaker 2

Since January, we are one of the top 10 largest fundraisers of perpetual funds and the largest traditional asset manager. As for multi asset, we saw net inflows of 3,300,000,000.0 led by Franklin Templeton Solutions, our custom indexing platform, Canvas, Franklin Income Investors, and Fiduciary Trust International, our private wealth management business. Turning to investment vehicles, we saw strong client demand and positive flows into ETFs, retail SMAs, and Canvas. Our ETF business saw its fourteenth consecutive quarter of positive net flows, attracting 4,100,000,000.0 during q two and a record high AUM of 37,000,000,000. 12 of our ETFs now are over 1,000,000,000 in AUM, 10 in The US and two non US.

Speaker 2

The growth of our ETF business reflects our commitment to staying at the forefront of innovation. During the quarter, we launched the Franklin Crypto Index ETF, which offers investors indirect exposure to the two largest digital assets, Bitcoin and Ethereum, through a single investment vehicle. The Franklin Crypto Index ETF is our third digital asset ETP launch in just over a year. We also launched Europe's First ever tokenized usage fund, the Franklin Unchained US government money fund. The retail SMA market has experienced considerable growth in recent years, and this trend is expected to continue.

Speaker 2

From 2022 to 2024, industry wide, SMAs saw 30% asset growth and are expected to reach 3,600,000,000,000 by the end of twenty twenty seven from 2,400,000,000,000.0 today due to tax advantages and lower minimums. Our retail SMA AUM was a hundred and 44,200,000,000.0 with net inflows of 1,500,000,000.0, and excluding Western, had record net inflows of 3,200,000,000.0. Our non US business saw positive net flows in the EMEA and Americas regions, ending the quarter with approximately 470,000,000,000 in AUM. As previously mentioned, we benefit from the geographic diversification of the firm. Now in terms of investment performance, over half of the mutual fund AUM is outperforming its peer median across the one, three, five, and ten year periods.

Speaker 2

Compared to the prior quarter, investment performance improved in both the one and five year periods with one of our largest funds managed for yield now outperforming for those same periods. Over half of strategy composite AUM is outperforming its benchmark over the three and five year periods and 63% doing so over in the ten year period. Turning briefly to financial results. Adjusted operating income was 377,200,000.0, a decrease of 8.6% from the prior quarter. The decrease was primarily due to compensation expense related to the start of the calendar year and the impact of Western, partially offset by the prior quarter annual deferred compensation acceleration for retirement eligible employees.

Speaker 2

As always, we continue to focus on disciplined expense management. In January, we announced that Western would integrate select corporate functions into Franklin Templeton, creating efficiencies and giving Western access to broader resources. After careful planning, we've begun the integration of certain functions across back office, middle office, and support teams. Importantly, as with all specialist investment managers, Western's investment team will maintain its autonomy. Our top priority is to ensure this process is seamless to clients.

Speaker 2

Notwithstanding the recent market challenges, we remain on track in terms of the five year plan presented at fiscal year end, including priorities across public and private markets, distribution, private wealth management, and innovations in digital assets and technology. These combined with disciplined expense management and operational efficiencies as well as effective capital management will allow us to deliver value to our clients and shareholders over the long term. Finally, this quarter, we were excited to bring our New York based employees together in a modern space with new technology. We relocated employees from 10 separate Manhattan office buildings into 1 Madison Avenue. We've already hosted clients from around the world, and the response has been overwhelmingly positive.

Speaker 2

At Franklin Pepilton, we are driven by a shared mission to help people all over the world achieve their most important financial milestones. That mission remains constant even as the industry and our organization continue to evolve. A key to that focus is understanding their unique goals and being their trusted partner in navigating the complexities of the market together. We have built an all weather platform that mitigates concentration risks across specialist investment managers, asset classes, vehicles, and geographies for the benefit of all stakeholders. And importantly, I'd like to thank our talented and dedicated employees for their commitment, efforts, and always putting clients first.

Speaker 2

Now let's open the call up to your questions. Operator?

Operator

Thank you. If you'd like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue.

Speaker 3

We

Operator

request you limit your question to one question to allow for additional participants on this call this morning. You. And our first question comes from the line of Benjamin Butish with Barclays Capital. Please proceed with your questions.

Speaker 3

Hi. Good morning, thank you for taking the question. Just curious, last quarter, we got some guidance on how fiscal year expenses should shake out you know, comp and benefits, some of other line items. Just curious how you're thinking about that now just given some of the market movements and the sort of natural pressure on AUM. Where is there some flex in the model?

Speaker 3

How should we be thinking about the the range of outcomes for the year? Thank you.

Speaker 4

Yeah. Why don't I take that? It's Matt. Good morning. Bear in mind that we ended April at about the same AUM, a little bit below, but it it's gonna be about 1.535, maybe a little bit lot higher, trillion of AUM where we started the the month.

Speaker 4

So we know, obviously, that April was very volatile in the markets, but just, just bear that in mind. You know, what I'll do is I'll give you the quarterly guidance and I'll talk about the annual that I touched on in the last quarter. So we expect our effective fee rate for the third quarter to remain in the 38 basis point area. We think that that may increase a little bit going into the fourth quarter to finish the year, but 38 basis point area. We expect complement benefits to come down to around $810,000,000 assuming that we have $50,000,000 of performance fees.

Speaker 4

We expect IS and T to be a hundred and 55,000,000. That's up slightly driven by the fact that we added a vendor in IT. That means that we'll have two vendors overlapping for a period of two quarters that added about $3,000,000. That's not too far different from last quarter, but just up, a few million dollars. Occupancy, we expect to remain flat at around $70,000,000.

Speaker 4

We are shedding the double rent at One Madison, and we have about 3.5 to $4,000,000 of that left for the next quarter, and that will leave us just about $70,000,000, so flat to to the last quarter. And G and A, we expect to be also very similar to this, to the quarter we're reporting today at around 185, million dollars In terms of the full year guidance for full year '25, adjusting for the additional quarter of Putnam and excluding performance fee compensation, we expect our expenses to be roughly flat to 2024, very similar to 2024. We continue to make important strategic investments in the areas that Jenny mentioned in her prepared remarks in alternative assets, ETFs, Canvas, solutions, including digital assets, in particular, and are funding these with cost saves elsewhere in the business. So while our while our, expenses are expected to be flat, to last year for fiscal twenty twenty five adjusted for Putnam and performance fees, as I mentioned, it is important to note that we're being disciplined with the circulation of savings, additional savings in the business into those very significant growth areas for us. And then I'll finally say that, in the last quarter, I mentioned fiscal twenty twenty six because, obviously, we're managing through the Western situation where we've had revenue declines there, but we're supporting the team in terms of expenses that's impacted our margin, again, that I explained last quarter.

Speaker 4

But I said that we had several expense initiatives underway at both Franklin and Weston, and these are expected to position us to enter fiscal twenty twenty six with about a two hundred to two hundred and fifty million dollar run rate of cost savings, going into '26. Just to be clear, that's fiscal twenty six. So fiscal twenty five, we expect we expect a flat situation. In fiscal twenty six, we expect to achieve 202 hundred $50,000,000 expense savings. The only caveat to this is that, as Jenny referenced in her opening remarks, we have several quite significant growth areas in alternative assets.

Speaker 4

If we grow faster in some of these areas, those additional sales and thumb raises do come with additional expenses, which we will highlight in the event that we're in that situation.

Speaker 3

Alright. That was, very detailed. Thank you very much.

Operator

Thank you. Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.

Speaker 5

Thanks. Good morning, everyone. My question is on the positive long term net flow trend ex Western. And I'm wondering, do you have an estimate for the base fee organic growth rate, including Western? And I'm curious just given how the lower fee rate on that Western business is, and you can see that your your blended fee rate is rising.

Speaker 5

And and if you don't have the numbers handy, high level commentary would be helpful too. Thank you.

Speaker 2

Yes. I mean, you know, like, it's it's a little hard to tell. I can't tell you exactly what the organic growth percentage. But if you just look at, you know, this quarter, right, excluding Western, long term net flows were about 7,400,000,000.0. I think what's particularly positive is you you excluding Western, you know, the fixed income flows were positive, of 2,900,000,000.0.

Speaker 2

But interestingly, Franklin fixed income actually had positive flows of 5,400,000,000.0. And, you know, you can see in our, one but unfunded institutional pipeline, you know, which is up, the biggest sim in that is actually the Franklin fixed income, which historically wasn't known for being institutional manager. And you could see, and part of that is, you know, the the great performance and and contributions of Putnam. Part of that is, I think some of the changes that's, sold to size made over time. And so they're becoming a much more institutional manager, you can see that in those numbers.

Speaker 2

You know, if you look at private markets, you know, we had 6,800,000,000.0 in in alternatives fundraising, of which 6.1 is private market, so it's positive. Multi assets have been positive. Some of the biggest growth area with vehicles have tremendous growth rates. The 4,100,000,000.0 in ETFs is on a base of 37,000,000,000. And we have a 35 ETFs.

Speaker 2

We're we're selling them in all regions, so it's a great opportunity. Our SMA business is a hundred and 40 4 billion. We have 200, you know, individual SMA types of products there. And the thing about SMAs is it's actually complicated to get them set up in the SMA channel. So the fact that we have such diverse sims all contributing to SMAs, a big area of growth, we think is a great opportunity.

Speaker 2

Ex Western with positive flows in The US with positive flows internationally. I mean, so the challenge has obviously been that, you know, it masks a bit of the really important growth that's happening. But in the areas where the industry is growing, we're growing and in many cases faster than that. And we're growing in the places we wanna grow. So I think, you know, all of those bode very well.

Speaker 2

And, again, you know, when we just look at, obviously, equities are outflows as an industry. But you look at what's happened with Putnam, I think they're up quarter over quarter from acquisition 82% in inflows. When you take great performance and you add it to the global distribution platform that we have, that combination can be very positive even for active equities. And, of course, market times like this, the volatility, you know, people are reminded why active management matters. You know, active managers have to think about risk adjusted returns.

Speaker 2

And I always say nobody talks about how beta gets more risky, you know, over time. And when you have a concentration and active managers have to have to consider that. So volatility is great fertile ground for active managers. You gotta prove it, and I think our performance has, you know, continued to improve. So all those things we think are really positive.

Speaker 2

And again, I think with the the the global breadth of our distribution and and no other firm has the kind of local asset management capabilities that we have in these big growing markets like in India. You know, we we we have local manager. Eighty percent of flows in markets tend to go to local managers. We're local in so many of these markets. So, you know, I don't have that.

Speaker 2

I don't know if I bought Matt time to calculate it or Adam. So go go ahead and you guys could add to it.

Speaker 4

Yeah. Two just add two things. One, the effective fee rate of the assets that we have at Western is in the high 15 basis point areas of 15.8 to, I think, 16. The other thing I'll point out is for April, it's really, it's it's it's obviously early. We're reporting this next week.

Speaker 4

But ex Western, our our lows are about flat flattish for for the month, and that's in a very volatile month. That's worth, worth noting as well. And month by month can obviously change quite a bit and leads to to the results at the end of the quarter, but it's worthwhile pointing that out as the month was so, so, volatile.

Speaker 6

And, Matt, I I would only add that, you know, Jenny talked about having strong sales growth in areas where the industry is growing. But even where the industry is is shrinking in in places like active equity, our gross sales are up six quarters in a row now. So we really do see strength across the business. Gross sales up in every region, in every asset class this quarter. And when it comes to fees, fees are really gonna be impacted by asset mix.

Speaker 6

And I would only comment there that our business is far more diversified than it once was. We look at our top 10 selling strategies for the quarter. Three were in equity, three were in fixed income, three were in alternatives, and one was multi asset class. So a very diversified business, but with obviously different fee rates. And and where we win more will impact what that fee rate ends up being.

Operator

Yep. Thank you. Thank you. The next question is from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Speaker 3

Hey, Jenny. Good morning, everybody. I was hoping we could dig in a little a little more into your comments around private markets and the traction you're seeing there. I guess, first, would love to get your insight on how the retail products have done through April. I mean, obviously, all the volatility, it seems like the industry has held up quite well.

Speaker 3

Curious if you're seeing something similar. And I guess when you zoom out a little further, I believe Lexington will be in the market with their large flagship secondary fund. It's an area where there's, quite a bit of bright spots, and and good momentum in that business for the industry as well. So curious how you're thinking about sizing that as well and what that ultimately means for your sort of aspirations for growth, in private markets management fees over the next twelve months?

Speaker 2

Sure. So couple things. So one is let me just because because we had guided originally to 13 to 20,000,000,000 in in the the private markets, and we're at 10,400,000,000.0 so far. So we've raised in alternatives, I think, 12.1 or something. But of that, 10.4 is in private market.

Speaker 2

So we're, you know, edging up closer to the lower end of the of the range. And the message was we'd be on the higher end of the range if Lexington had a first close in September, which we thought was, you know, unlikely but a possibility. We we now think that that is pushed out further. But, you know, the the kind of again, this quarter at 6,100,000,000.0, and and by the way, that is well represented from BSP, Alcentra, so private credit, Clarion with real estate, as well as Lexington. And, you know, Lexington had obviously the flex and flexi funds, which raised 2,100,000,000.0, plus they're in the market with their continuation vehicle in their middle market.

Speaker 2

So they're getting flows there. And Franklin Venture also had flows. So that 6.1 represents all four of our alternatives managers. We think going forward, this year, since Lexington probably will push you know, the close will be more towards the latter, of '25, potentially even early twenty six. And I'll talk about kind of what we think that opportunity is there in a second.

Speaker 2

They're still gonna come in probably right we'll we'll still come in probably right in the mid range of of that, original range just because of the strength of the other areas that we're getting good positive flows in. Now the question around where we see the opportunities. Look. The wealth channel is just a massive opportunity. Today, advisers have about 5% of their book to alternatives.

Speaker 2

You know, they'd like that number to be closer to 15%. You know, our internal calculations, is in the next, you know, five years. That's 800,000,000,000. But if you read, like, Goldman's numbers and others, you're talking like a 4,000,000,000,000. It's just massive.

Speaker 2

And our ability to combine the product breadth that we have, and I think we're pretty unusual, maybe one other firm has something similar, with our DNA in the wealth channel. And, again, the the the selling alternatives in the wealth channel is hand to hand combat. The first and probably easiest thing is to get on the platform. The challenge goes into the education of individual financial advisers, making sure from a suitability because they have to decide client by client what's suitable, and then also having the tremendous product capability that you have. So think about, today, we have three evergreen perpetual products that are a billion or more, one for Clarion, one for BSP with BSP's real estate debt fund, and now Lexington Flex.

Speaker 2

So we have tremendous product capabilities, there that are that are perfect for that channel. So we think that, you know, really good opportunities. And then we have 90 people who are just dedicated. We built this over the last few years to being able to support our market leaders as specialists who are helping, our market leaders out there with wholesaler or with advisers to think about how to sell those products. And I think the success that we've had on Flex demonstrates really what that opportunity is.

Speaker 2

Now with the with respect to Lexington's fund eleven, you know, they would tell you that the time of the market, it is it is absolutely, you know, a tremendous time to be in secondaries. The challenge, of course, is that the LPs are sitting there with less realizations than they've had. And to put that in context, between, like, '21 to '24, they were usually getting cash flows from realizations kicked off from their alternatives portfolios around 20 to 24% of what they their AUM in that area was. That's that's cut in half. So in order to fund their future opportunities, they have to be able to come up with cash.

Speaker 2

And that's where you're seeing, you know, that they're going in and talking to Lexington. So as far as opportunity to put money to work, and therefore being able to scale the Evergreen Fund alongside with their traditional funds is is just a tremendous, you know, they they have no concerns about the ability to put that to work. And then what's happening is you have, you know, managers, they recognize the opportunity in the secondary space. And so they wanna do it. They just have to figure out ways to make it, you know, the the the make that space in the in their portfolios.

Speaker 2

But they're actually afraid of missing out on, you know, this vintage. And so, you know, Lexington intends, as you would expect, this fund to be bigger than fund ten. I asked the question, are is there any concern that flex and flexi would in any way cannibalize the 20% that you raised in fund ten, in, you know, in fund eleven? And, no, they're confident that that it is really focused on a different group. And so we think really that that that Flex and, you know, the Evergreen Fund and perpetuals there have actually just opened up to a broader sec section of clients.

Speaker 2

So, you know, if if Matt and and Adam, if there's anything you wanna add here.

Speaker 6

Adam? Yeah. Jenny, the only thing I would say is that you're right. The launch of three scaled perpetuals allows us to constantly be in market, and just being there talking to advisers, giving alts education gives us continued momentum. But that also helps us with our drawdown raises.

Speaker 6

And it's not just the Lexington flagship where we can raise money from the retail channel. It's things like co invest and continuation vehicles, middle market. Those products also have good momentum in the retail channel and are helped by the fact that we're always in market with the perpetuals.

Speaker 3

Very helpful. Thank you.

Operator

The next question is from the line of Dan Fannon with Jefferies. Please proceed with your question.

Speaker 3

Thanks. My my my question is on fixed income. You've mentioned flows ex Western being positive. Could you expand upon some of the strategies that are seeing or that success? And then also just an update on Western and where you think you are in the kind of redemption trends and the conversations they're having with clients and, you know, just just an overall update on on the health of that subsidiary would be helpful.

Speaker 3

Thank you.

Speaker 2

So why don't I I'll start on Western, and then, Adam, why don't you cover the fixed income strategies that that we're getting, you know, most traction in? So look. You know, Western good news is during this really volatile time, Western's performance has been very good. We can we feel confident that the team is stable, engaged, and very motivated. I it's important to remember, Western is a $245,000,000,000, you know, asset manager on its own.

Speaker 2

So it has scale and size on its on its own. You know, the April has 10,000,000,000 in outflows, which was anticipated. Obviously, difficult, but, you know, that is the reality. But I think it it masks the fact that they also have 5,000,000,000 in gross sales, and, they continue to be part of the institutional one but unfunded pipeline. So institutions are still allocating, to Western.

Speaker 2

They still have great relationships with their you know, with a lot of insurance companies, you know, strong muni and cash franchises, still getting flows into core and core plus. So there's still support there. Then I would just say, again, this this demonstrates, I think, the strength of our model. You know, if you look at Franklin in the past, we we we had oftentimes real concentration on very successful products. Now we have true diversification across.

Speaker 2

And so you look at the flows that are going into both the private credit side of the business as well as Franklin fixed income. And the good news is we're able, despite having one sim going through a difficult time, to be able to pivot and have and capturing the opportunities in the market in, in fixed income with other sims. And, Adam, you wanna talk about the specific

Speaker 6

Sure. If I take a look at where we're having specific success, you know, Munis was one area. We raised about a billion dollars in Munis. That was a really strong area for us. We also saw good flows and stable value and high yield as well where we have a number of top performing products.

Speaker 6

The insurance sector is something that's been strong for us across the board and in customized and corporate strategies there. We've seen very good flows. And depending on how you wanna bucket CLOs with $2,000,000,000 raised in CLOs, that's been quite strong for us. Short duration is the other area. We see that clients on both the retail institutional side, US and non US, want to, keep a little powder dry, until the rate situation clarifies a bit.

Speaker 6

And for that reason, we've seen very good flows into our short duration product. The final thing I would note, is that depending on how things unfold on the macro side, we're very well positioned in some of our nondollar, fixed income products, and we think that flows could well accelerate there as well.

Speaker 2

And and I'll just, I just wanna because I I gave a little bit information in April. Those numbers are preliminary. We do anticipate despite this incredibly volatile time to be about, flat in, in April as far as flows.

Speaker 6

And and from a fixed income standpoint, if we look at things going forward, about half of our one but unfunded, pipeline, is fixed income, and the largest single component of that is Franklin fixed income.

Operator

Thank you. The next question is from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Speaker 5

Hey. Good morning. Thanks for taking the question. I was hoping you could spend a moment on your international business. You guys have a a pretty broad, large overseas footprint.

Speaker 5

I was hoping you could elaborate a bit more on how it's contributing to revenues and flows today, where you're seeing the most traction overseas, and if you could talk to some of your initiatives to help accelerate the growth from overseas and, particularly, how you see demand evolving for non US strategies in this backdrop. Thank you.

Speaker 2

Great. Adam, you wanna you wanna take that? You want?

Speaker 6

Yep. Look. We we we're positive in terms of our momentum in gross sales in every region, and we are, as Jenny said in her remarks, in over 30 countries on the ground. That allows us to play as a local player with locally oriented and global product in most of the markets we serve. Some of the trends we see are regional specific.

Speaker 6

For instance, Australia tends to be a more alternative oriented market for us. Asia tends to be a more income oriented market for us. There's some things like US technology that tend to sell well, for us across the board. In terms of, how we're set up, our, business in Asia tends to be, a bit more institutionally focused than in some other markets. And I would say a market like Canada, tends to have most of the kind of hand to hand, retail distribution that we see, in other places.

Speaker 6

If we look at our success, core sales is doing well in all of those markets. Our bumpiest ride this quarter was probably in the APAC region, and that's just because we happen to have a number of large institutional clients there who who were derisking their portfolios, and and we were on the riskier side of the asset allocation there in terms of our exposure to equities and higher return oriented fixed income products. Nothing, I think, that is telling about the future, but the Asian market does tend to be more institutional, and we were on the wrong side of some allocations there this quarter. If we take a look at the overall AUM, it is about $470,000,000,000, outside of The US. And for this quarter, we are net flow positive, in both the EMEA and Americas regions with gross sales up in every region.

Operator

Our next question is from the line of Bill Katz with TD Cowen. Please proceed with your question. Great. Thank you very much. Can you guys just clarify, excuse me, just the flows at WAMKO.

Operator

Was the $10,000,000,000, was that the net of the 5,000,000,000, or is that the net outflows? And then the broader question, Jenny, it seemed like you put together a pretty strong platform that can invest across credit both, or private markets, both public and private. But there have been a number of alliances coming up around you, KQR and Capital Group, I think, a couple weeks ago now, Blackstone, Wellington, and Vanguard. What's your thinking strategically about setting up an alliance that might accelerate the opportunity set as the public private world sort of becomes more intersected? Thank you.

Speaker 2

Yeah. Thanks, Bill. Actually, I knew it when I said it that I probably confused a little bit. It is a net net outflow number that that is inclusive of the 5,000,000,000 in gross sales. I was just trying to make the point that there are clients still allocating.

Speaker 2

But as you can see, there's obviously redemption pressures there at Western. Look. I think that my view is, I I think we are incredibly fortunate to have the stable of alternatives capabilities that we have, that we did it early, and it's gonna be extremely difficult for traditional managers to build that kind of cape one is it's virtually impossible to do, you know, organically. It's really hard to scale organically, especially this mature in the alternative space. And, honestly, the the write off that we have this this quarter was our attempt to do a private equity at Climate Alpha Fund organically.

Speaker 2

And so but to be able to go out and acquire is difficult. And if you're a partnership, it's impossible. So one is I am incredibly pleased with the product capabilities that we have. And I have to tell you, just take the f f brand product, which is the real estate debt fund. That actually came out of a conversation that the BSP team, they have about 10,000,000,000.

Speaker 2

They had, at the time, 10,000,000,000 about real estate debt. And they thought, well, gosh, if we have to foreclose on a property, we we don't run properties. We should talk to Clarion and get some advice from them. And in those conversations, Clarion said, hey. There's a bit of real retrenchment of regional banks and the real estate's, debt funding.

Speaker 2

You guys should, you know, think about that. And and there before we launched that product that came out of literally the the leadership teams of two different sims just talking. That to us is the great opportunity. And so when we look, we have done part partnerships. We launched a partnership with Apollo, in the DC space where I think it's Leaf House, where where Clarion is asleep, Apollo is asleep.

Speaker 2

So we're gonna do those two. Where we think the great opportunity is going to be going forward is actually now just imagine you're a research analyst and you only cover, say, high yield, and you don't have any insights into what's going on in the private market. It's literally like managing and researching with half the data. So we actually think over time, the ability to think about how these teams are structured and how you have to be careful because there's, you know, ethical walls and information walls that are there. But how they're structured to be building products and, gaining insights, that it's gonna be better that these the managers are under the same umbrella instead of just being sleeves.

Speaker 2

And then the final piece is it's not clear whether the gatekeepers want managers to put together their own partnership or whether they wanna serve in that role where they're selecting who the two sleeves are. And so I think that, you know, that remains to be seen. But I have to say, I like where we are. We, you know, we we we are both open to partnerships as well as able to build, you know, products and opportunities across private and public ourselves.

Speaker 7

Thank you.

Operator

The next question is from the line of Glenn Short with Evercore ISI. Please proceed with your question.

Speaker 8

Hello there. Follow-up on on private markets if we could. So I watch a lot of basketball, so I've seen a lot of the Franklin Templeton, Alternatives by Franklin Templeton advertising. It's been, I think, good general brand building. I'm curious when it gets towards if it gets to specific products or if that's a hand to hand thing in in the channel.

Speaker 8

And then bigger picture, I think a lot of us agree with your 800,000,000,000 over the next five years. Probably a lot of us would take the over. How much of that do you think you touch through Lexington, Clarion, and BSP? And and do you have interest in building out the the asset classes within current markets that you wouldn't be touching right now that are part of that 800 expected growth?

Speaker 2

Thanks. Great. Thanks. I'll start, and then, Adam, please, feel free to fill in. So first of all, I think that the only thing we don't really have is infrastructure if that actually takes off in the in the private space.

Speaker 2

But the private markets in the wealth channel, it matters. What is your distribution capabilities? Our DNA is in the wealth channel. We sell to a % of an adviser's book, which means we have more people out there touching the adviser. And then when you find the adviser interested in, in, you know, alternatives, we can bring in both the education from our academy and our institute as well as one of the 90 specialists who can focus on alternatives.

Speaker 2

So our ability to cover the globe on on you know, in the wealth channel with just scale of people, I think it's it's gonna be difficult for the folks who are just alternative managers to be able to to do that. The second thing is so so one, it's that education. The second thing is, do you have those the capabilities? And as I said, you know, other than infrastructure, I think we cover it completely. And the third is do you have the right vehicles?

Speaker 2

And the fact that we're sitting here today with Clarion, VSP, so private credit real estate, and and secondaries with perpetual products that are over a billion dollars. So you immediately have scale. It's just a huge opportunity, versus others who are gonna try to enter the market. And I think that, you know, we we told the story about the success we had with Lexington Funds ten in the wealth channel with, a large distributor. And, Adam, if you I think it's, like, something like 44% of the advisers, correct me on what the numbers, had never sold an alternative product before.

Speaker 2

You know, the fact that our flex fund, when we came out, you know, we just launched it with a couple of distributors and some small RIAs, and we ended up, shutting it off early because we were worried about the ability to source deals and keep the quality of deals versus keeping too much in cash. So we we literally slowed it down and then and then didn't it open it up to to more firms as quickly as we thought because we wanna make sure that we could, you know, source those deals and get the cash to work. Unlike a drawdown where you're calling the money when you need it, the the challenge you always have in perpetuals is if if you end up with too much demand and you can't source good deals, you're gonna be you know, your performance is gonna fall a little bit. And so, you know, it's clear that there's huge demand there. And then the fact that we were able to take FlexEye internationally and raise, you know, just under 800,000,000 in the first quarter, I think, again, demonstrates the breadth of our capability of support there.

Speaker 2

Adam, you wanna add anything to that?

Speaker 6

I I would only add, Jenny, that when we raised the money for Flex and FlexEye, we did it really with with significantly only two partners, because we wanted to to launch and launch right and have an appropriate escrow escrow process. We are about to, broaden that group out and are working on doing that, and we have significant demand there. That really should help us. The other thing I would note is that there are different types of advisers. You have at the high end, you you have private bankers who have been doing alternatives for years, have well diversified portfolios, and might be adding drawdown funds.

Speaker 6

You have others who are going to want to do perpetual products like like flex, FB red, CP red, etcetera. But what we're starting to do now is to talk to advisers who have never done alternatives before. And the fact that we have such broad reach on the traditional side is allowing us to get that access early and provide that education. Our belief is that being the first one in to provide that education is gonna allow us to execute on sales in the coming quarters.

Speaker 2

Great.

Operator

Thanks.

Speaker 4

And and and only thing I'd Jen, the only thing I'd add is that we do actually have liquid infrastructure, and we do have infrastructure debt. We have in infrastructure debt, although it's a little bit a little bit smaller. So Jenny's point, we do wanna add, private equity infrastructure. And to Jenny's earlier remarks, I think I think the the only way for us to really do that is to acquire something. So over time, we've mentioned this on multiple calls, we're we're likely to do that in some form or another.

Operator

The next question is from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Speaker 7

Great. Thanks. Good morning. Thanks for taking my question. Maybe just go back to the $470,000,000,000 First, can you clarify, I think that's by the region where the product is domiciled as opposed to the strategy.

Speaker 7

It's a and this is on Slide six, I think, by region. And if you can clarify that, and then the question really is, if there is a rotation away from U. S. Strategies into non U. S.

Speaker 7

Strategies, how are you positioned from that dynamic within these regions? So would they be potentially selling Franklin U. S. Strategies, but then are you positioned well to capture that flow into non U. S.

Speaker 7

Strategies? And then I guess even more broadly, how do you feel you're positioned if there's just a, you know, a a general, you know, client shift in terms of, you know, competition versus, you know, other peers?

Speaker 6

Sure. Okay. Great. So the $470,000,000,000 really is where the AUM is sourced for, not what we're investing for. So that 470,000,000,000 is sourced from outside of The United States.

Speaker 6

I think if you see investor behavior, there were a few shifts we saw recently. One of them was a preference for non dollar assets. I think that was the right investment decision if you take a look. If you take a look, especially on the smaller cap markets, if you look at, you know, German small and mid cap versus US small and mid cap for the for for the recent period, that was one of the strongest trades out there. So there was a performance difference and I think that drove some of the allocation.

Speaker 6

We are well positioned and have a number of international and global equity products. In fact, that's some of the hallmarks of what we're known for outside of The United States. So that trend, I think, actually bodes well for us. The other thing I would say is that if there were two trends we saw on that allocation on the equity side, one was a little more to non dollar. The other was a shift from growth to value.

Speaker 6

To the extent that you're you're buying growth stocks, you have to predict a little further into the future. I think the future is a bit murkier to us all right now, and that gives value stocks a bit of an advantage in the minds of many investors, especially, where valuations are. So we have seen a shift of allocations, from growth to value on the equity side. That's another area, where we have some real relative strength.

Speaker 7

That's great color. Thank you.

Operator

Thank you. Our next question is from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.

Speaker 3

Hey. Good morning, everyone. You mentioned the insurance channel earlier. In that vein, could you update us on where the Great Western relationship stands? How much of their initial commitment is still left to fund, and any new potential commitments in the works?

Speaker 3

Thank you.

Speaker 2

Great. Matt, you wanna take that?

Speaker 4

Yes. So, first of all, we've we've formed a really great relationship with with the power group of companies. Out of the initial $25,000,000,000 that they agreed to allocate to us, we have about three to four left, I think. It's so we're we're in the low 20 billions. So that that's that.

Speaker 4

But we continue to explore many other different avenues of growth across our franchise and their franchise. So I'd say that the, that that partnership is living up to its expectations in terms of what we described when we announced the transaction. In terms of the Putnam, the Putnam aspect of that overall transaction, I think we mentioned this on the last call, we we really, couldn't be happier with the with the strength and quality of that team, and the output speaks for itself. We have almost, I think, $30,000,000,000 of net new flows from Putnam since we closed the transaction last January. I don't whether, Adam, you have anything to add to to that.

Operator

Just in terms of

Speaker 6

I would only say that just in terms of the future, we we have had success in the insurance channel. We recently, got some significant mandates from an insurance company that consolidated from 20 or so managers down to four. We're in discussions, with others, for similar types of, opportunities and feel that we offer these clients, really a a breadth of opportunity, in a channel where so much of the allocation goes to alternatives, we are very well positioned.

Operator

Thank you. Thank you. This concludes today's question and answer session. I would now like to turn hand the call back over to Jenny Johnson, Franklin's president and CEO, for final comments.

Speaker 2

Great. Well, listen, everybody. Thank you for participating in today's call. And, you know, once again, we're a people business. I'd like to thank our employees for their hard work and dedication, and we look forward to speaking with you again next quarter.

Speaker 2

Thanks, everybody.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Franklin Resources Q2 2025
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