Franklin Resources, Inc. (NYSE:BEN) Q1 2024 Earnings Call Transcript

Franklin Resources, Inc. (NYSE:BEN) Q1 2024 Earnings Call Transcript January 29, 2024

Franklin Resources, Inc. beats earnings expectations. Reported EPS is $0.65, expectations were $0.57. BEN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended December 31st, 2023. Hello, my name is Joanna and I will be your call operator today. As a reminder, this conference is being recorded and at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.

Selene Oh: 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 described in more detail in Franklin’s recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A section, of Franklin’s most recent Form 10-K and 10-Q filings. Now I would like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Jennifer Johnson: Thank you, Selene. Hello everyone, and thank you for joining us today to discuss Franklin Templeton’s results for the first fiscal quarter of 2024. I’m joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We’re happy to answer any questions you have in just a few minutes, but first I’d like to call out some notable highlights from the quarter. Our first fiscal quarter results reflect ongoing momentum in a number of significant areas across asset classes, investment vehicles and geographies. Our efforts are always focused on meeting the varied investment needs of our diverse global client base across market cycles while staying at the forefront of the asset management industry.

Driven by increased expectations of interest rate cuts by the Fed and other central banks amidst disinflation, the 2023 market rally was particularly concentrated in the last quarter of the calendar year. Regardless of the market environment, investors remain cautious. According to Morningstar, global money market assets stood at $7.7 trillion as of December 31st, 2023, the highest level since Morningstar started collecting the data in 2007. Broadly speaking, our specialist investment managers see recession risks moderating and expect the global economy to slow over the course of 2024. But even as the economy slows, there are many opportunities for investors to put that cash to work into risk assets. Specific to the equity markets, last year, we saw a small group of stocks dominate market returns with the top five stocks representing 23% of the S&P 500’s total market cap.

Compare that to the height of dotcom bubble in March 2000, when that number was 18%. While our investment professionals regard companies like the Magnificent Seven as market leaders, the level of relative outperformance for these stocks is likely unsustainable. We believe that this backdrop has created an opportunity for active managers like Franklin Templeton that offer a full range of investment capabilities across public and private markets, spanning geographic boundaries in vehicles of our clients’ choice. With greater clarity on interest rates in 2024 and as investors look to deploy cash on the sidelines, we believe Franklin Templeton is well positioned. In short, 2024 is likely to be a year in which balance and diversification are once again rewarded.

During the most recent quarter, our clients gravitated towards alternatives, multi-asset, equity, ETFs, and SMAs, which all saw positive long-term net flows. Continued client interest in private market strategies led to net inflows for our three largest alternative managers. Additionally, we continued to see aggregate positive net flows in non-US regions. We were pleased to announce that our acquisition of Putnam Investments closed on January 1st with $148 billion in assets under management. Putnam adds complementary investment capabilities and a track record of strong investment performance. In fact, 87% or higher of Putnam’s mutual fund AUM outperformed peers over the one-year, three-year, five-year, and ten-year periods. The transaction also enhances our presence in the attractive retirement and insurance markets.

The addition of Putnam brings Franklin Templeton’s AUM to approximately $1.6 trillion. In addition, Great-West Lifeco, a member of the Power Corporation group of companies, has become a long-term shareholder in Franklin Resources, consistent with its ongoing commitment to asset management. We are delighted to have the talented team at Putnam join us and pleased to have Great-West as a key stakeholder. Turning now to specific results for the quarter, starting with assets under management. Ending AUM increased by 6% to $1.46 trillion from the prior quarter and increased by 5% from the prior year quarter, primarily due to market appreciation. Average AUM declined by 2% from the prior quarter to $1.39 trillion and increased by 3% from the prior year quarter.

Our specialist investment managers continued to produce competitive investment returns across a broad array of strategies. Investment performance this quarter resulted in 61%, 46%, 60% and 61% of our strategy composites AUM outperforming their respective benchmarks on a one-year, three-year, five-year and 10-year period. Notably, investment performance for the five-year period jumped from 47% in the prior quarter to 60% in the recent quarter, primarily due to certain taxable fixed income strategies. With interest rates at current levels, fixed income opportunities are considered more attractive now and going forward may provide a better total return option over high-yielding cash equivalents. On the mutual fund side, the majority of AUM beat their peer groups and improved percentile rankings quarter-over-quarter in the one-year, three-year and 10-year periods.

One of our largest funds managed for yield was the primary driver of the decline in five-year performance. Turning to flows, long-term net outflows inclusive of reinvested distributions were $5 billion compared to net outflows of $7 billion in the prior quarter and net outflows of nearly $11 billion in the prior year quarter. Reinvested distributions were $11 billion compared to almost $3 billion in the prior quarter and $12 billion in the prior year quarter. Alternative net inflows were $2.7 billion, driven by growth into private market strategies, which were partially offset by outflows in liquid alternative strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners, each had net inflows in the current quarter with a combined total of $3.8 billion.

Client interest was strong across a number of alternative strategies on wealth management platforms under the alternatives by Franklin Templeton brand in the US. Earlier this month, Lexington Partners announced the closing of its latest flagship global secondary fund with $22.7 billion of total capital commitments. Fund X ranks among the largest funds raised to-date and significantly exceeded Lexington’s prior secondary fund, which closed with $14 billion in 2020. Fund X attracted a diverse group of over 400 investors, including public and corporate pensions, sovereign wealth funds, insurance companies and wealth channel distribution partners, globally. We are delighted that approximately 20% of the capital raised in the fund came from the wealth management channel, which demonstrates the power of our coordinated global distribution network.

We successfully brought together the alternatives expertise of Lexington and our alternatives by Franklin Templeton’s specialist sales team and leveraged our generalist sales team, who have deep relationships across the advisor market. Also this month, Benefit Street Partners closed its fifth flagship private credit fund with $4.7 billion of total capital commitments. Reflecting the strong demand for the asset class, BSP exceeded its fundraising target. We believe the current market opportunity and backdrop for US direct lending is attractive and BSP has significant underwriting experience, loan structuring expertise and focus on deep due diligence, which provides us with a significant competitive advantage. BSP also announced the completion of the merger between Franklin BSP Lending Corporation and Franklin BSP Capital Corporation business development companies.

BSP believes this transaction will be immediately accretive to its shareholders and unlock nearly $700 million of capital that can be deployed into a very attractive origination environment. For further context, alternative assets now represent 18% of our AUM and comprise approximately 25% of our total adjusted investment management fees for the last 12 months. In terms of other areas of activity during the quarter, multi-asset net inflows were $500 million, driven by Canvas, our Custom Indexing Solution platform, and Franklin Templeton Investment Solutions. Canvas has achieved net inflows each quarter since the platform launched in September 2019, and AUM has more than doubled to approximately $6 billion since the close of the acquisition.

This quarter, Canvas generated net inflows of approximately $400 million and continues to garner client interest across retail and institutional channels. Equity net inflows were $200 million, including reinvested distributions of $8 billion. While active equities continued to be impacted industry-wide by the risk-off environment, we saw positive net flows into all cap growth, smart beta, all cap value, equity income, large cap value, and small cap core strategies, among others. Although fixed income net outflows were $8.4 billion, client interests drove positive net flows into tax-efficient global opportunistic mortgage-backed securities and multi-sector strategies. From a regional perspective, we continue to benefit from a regionally focused distribution model, which resulted in aggregate positive net flows in non-US regions for the third consecutive quarter.

For context, we now manage approximately $450 billion in non-US markets, including emerging markets that are poised to grow. Although the US saw long-term net outflows, we were pleased to see our US gross sales, excluding reinvested distributions, improve by approximately 15% from the prior quarter. We continue to see the benefit of offering investors strategies in a range of investment vehicles. ETFs, for instance, generated net inflows of approximately $1 billion, representing the fifth consecutive quarter with net flows of approximately $1 billion, resulting in over a 40% increase in ETF AUM from the prior year quarter. Including Putnam, ETF AUM is approximately $20 billion. Importantly, we now offer ETFs from a dozen different specialist investment managers, truly bringing the best Franklin Templeton has to offer to the market.

Earlier this month, we launched one of the industry’s first bitcoin ETFs, consistent with our emphasis on innovation and staying ahead of disruptive technologies. SMAs continue to grow in popularity industry-wide as individual investors look to customize their portfolios. According to Cerulli Associates, SMAs represent about $2 trillion in assets and are expected to reach $2.9 trillion by 2026. Our SMA AUM ended the quarter at $125 billion and generated positive net flows for a third consecutive quarter. We continue to make progress with SMA strategies across platforms with Canvas, muni ladder and Franklin income strategies, each in a positive flow territory for the quarter. Our institutional pipeline saw increased level of fundings this quarter, bringing one but unfunded mandates to over $13 billion.

The pipeline remains diversified by asset class and across our specialist investment managers. Turning briefly to financial results, adjusted operating income declined by 18.5% to $417 million from the prior quarter and increased by 5.5% from the prior year quarter. We continue to focus on strong expense discipline and our net cash and investments position allows us to continue to invest in growth and innovation for the benefit of clients, shareholders, and employees. Finally, in December, Franklin Templeton was recognized as one of the best places to work in money management by Pension and Investments. This recognition is a source of pride for us and the credit goes to all of our employees around the world who work tirelessly on behalf of our clients.

I’d like to sincerely thank them for their hard work and dedication to our organization. Now let’s open it up to your questions, operator.

See also 25 States with Highest Average Salary in America and Top 19 Industries That Are Hiring Right Now.

Q&A Session

Operator: Thank you. [Operator Instructions] First question comes from Alex Blostein from Goldman Sachs. Please go ahead.

Alexander Blostein: Hey, good morning, everybody. Thanks for the question. So maybe just to get some of the numbers’ questions out of the way, obviously with Putnam close, maybe, Matt, you can give us an update of a couple of items, but maybe one, where do you see the management fee, excluding performance fees and kind of catch up fees, jumping on point for the first quarter — first calendar quarter of this year, and just broader updates, I guess, on accretion and contribution for Putnam for this year.

Matthew Nicholls: Okay, Alex, I mean, I should probably just give you the full guide to put things into perspective, that’ll help get through the Putnam update also. So in terms of the effective fee rate, remember, last quarter I mentioned we expected to be around 39 basis points, consistent with previous quarters. We actually ended up at 39.7, a little bit higher. The reason for that is about 1 basis point or 0.9 basis points was to do with the Lexington catch-up fees. So if you think about that for the second quarter, fiscal second quarter guide, we’re expecting that to be consistent, again, excluding these episodic catch-up fee or any other episodic management fee events to about the high 38, so high 38 basis points, very consistent with the previous quarter and other quarters that we presented recently.

So that’s in terms of EFR. I’ll give the annual EFR guide in a second, which includes Putnam, because of course, we closed Putnam on January 1, and so our first full quarter will actually be this guide I’m giving you now. I thought it would be useful to provide the guide for the fiscal second quarter inclusive of Putnam, but I will call out the individual components of Putnam, so you can see that we’re being disciplined with our expenses around Franklin and being transparent about the difference between Franklin expenses and Putnam additions. So I mentioned the EFR already being in the high 38, excluding any sort of one-off episodic revenue. In terms of compensation and benefits, assuming a $50 million performance fee quarter, including Putnam, we’d expect total comp and benefits to be approximately $815 million.

This includes $65 million of comp and benefits for Putnam. Just for further perspective, we expect to be able to bring that down to about $50 million to $55 million by the end of the fiscal year. Again, this assumes $50 million of performance fees. Information systems and technology, we expect to be $155 million for the quarter. This includes $25 million for Putnam, and we expect to bring that $25 million down to between $15 million and $20 million by the time we reach the end of our fiscal year. Occupancy, we expect it to be approximately $80 million. Recall, in the last call, I mentioned that we’re going to have a period of double rent based on our consolidation of New York City office space of $12 million. Last quarter I mentioned $8 million, but that was only for a short quarter in terms of how long we’re — two months out of the three for the double rent.

This time we have full three months, which is $12 million for the double rent and $10 million for Putnam in this context. I wouldn’t guide the $10 million down yet, because we’re still working on real estate optimization. And for G&A, we expect the consolidated amount to be $175 million, which includes $35 million for Putnam. We expect this to come down to about $30 million by the time we reach the end of the — the end of our fiscal year. In terms of what this means for annual guide, you’ll recall that in the last guide we gave, I mentioned that our fiscal 2024 at the — then levels of markets and revenue expectations was expected to be about flat to 2023, excluding Putnam and excluding performance fees and excluding the double rent in New York City.

I would now guide that amount, which excludes Putnam to about 1% to 2% higher, but that’s because we now anticipate all else remaining or for that, revenue would be 5% higher for the year. Including Putnam and excluding performance fees, but including the $50 million of double rent, we would currently expect total adjusted operating expenses for fiscal ’24 to be about $4.55 billion to $4.6 billion. And for perspective, this assumes the Putnam expenses addition to this is about $375 million to $380 million. In terms of the EFR, back to your first question for the year, inclusive of Putnam, because Putnam has a slightly lower effective fee rate, it brings the overall amount down to — down about 0.2 basis points. So it brings the number for the guide for the year to about the mid-38, mid to slightly better than mid-38.

This excludes any catch-up fees, episodic fees or performance fees, as I mentioned at the beginning.

Alexander Blostein: Great. Okay. I think I got all of that or most of it, and I’m sure folks will follow up as well. I guess my only other follow-up for you, I think we talked about Putnam being around $150 million contribution to operating income at the kind of exit run rate. Can we just get an update on where that stands now? Obviously, their asset base is a little bit higher as well, but just want to get a sense whether $150 million is still kind of the run rate number we should be thinking about by the end of your fiscal year.