Franklin Resources, Inc. (NYSE:BEN) Q2 2024 Earnings Call Transcript

Franklin Resources, Inc. (NYSE:BEN) Q2 2024 Earnings Call Transcript April 29, 2024

Franklin Resources, Inc. misses on earnings expectations. Reported EPS is $0.56 EPS, 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 March 31, 2024. Hello, my name is Sylvie, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions]

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 just described in more detail in Franklin’s recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin’s most recent Form 10-K and 10-Q filings.

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Q&A Session

Now I’d 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 second fiscal quarter of 2024. I’m joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution.

We’ll answer your questions in just a few minutes. But first, I’d like to review some highlights from the quarter. In terms of public equity markets, 2023 was, to some extent, a tale of 2 markets, the Magnificent Seven and the S&P 493 with the former contributing the lion’s share of returns.

So far in 2024, in the public equity markets, we’ve seen a significant dispersion emerge in performance among the Magnificent Seven, leading to a better environment for fundamental research to capture alpha and when augmented by robust risk management can deliver compelling portfolio results for clients.

Given the current backdrop, we believe equity allocation should, in general, tilt towards sectors and regions that are being overlooked due to the heavy concentration in the largest companies. In addition, the theme of artificial intelligence will likely continue to be a significant stock driver, both positive and negative for the haves and have-nots over time.

Meanwhile, on interest rates, consensus estimates currently indicate a notable decrease in the number of expected cuts for 2024 by the Federal Reserve from 6 to now 2. Fed speak increasingly signals openness to delaying rate cuts to later in the second half of this year on the back of improving economic growth and slower disinflation.

Against this background, while cash may continue to look attractive in the very near term, fixed income opportunities will likely provide a better total return option over high-yield and cash equivalents as the cutting cycle commences.

Looking at private markets, secular trends and macro tailwinds continue to create opportunities in alternative credit, secondary private equity and select areas of real estate. In addition, investor demand for private market exposure is increasing given its diversification benefits, potential for higher risk-adjusted returns and as a hedge against inflation.

Broadly speaking, these signals point to a complex market environment that creates opportunities for active managers. This quarter, my executive team and I had the opportunity to travel extensively outside the U.S. to meet with many of our key clients to hear firsthand what is top of mind and how Franklin Templeton can better serve them.

As a global active manager with $1.6 trillion in assets under management and operating in 35 countries around the world, we believe that Franklin Templeton is positioned to take advantage of the money in motion by assisting our clients with a broad range of investment capabilities across public and private assets in vehicles of choice.

We were also pleased to learn that our clients recognize the steps we have taken over the past few years to further diversify and strengthen our presence in important markets and distribution channels outside the U.S. We, again, saw aggregate positive net flows in non-U.S. regions, which now have approximately $490 billion in assets under management.

Furthermore, a number of our clients continue to progress toward working with fewer asset managers and in this regard, expect not only a broad range of investment capabilities, but also other services, including technology, portfolio construction, customization and thought leadership.

At Franklin Templeton, we leverage the skills of multiple specialist investment managers to deliver expertise across a wide range of investment styles and asset classes. Our investment teams benefit from Franklin Templeton’s scale, with centralized investments in content, technology, data and most recently, artificial intelligence where we’re excited about collaborating with leaders in technology on AI platforms.

Moreover, the diversity of our model benefits our corporate shareholders, given that no single specialist investment manager at our firm represents more than 12% of adjusted operating revenue and most of our specialist investment managers are diversified within themselves as well.

Turning to highlights from the quarter. Ending AUM increased by 13% to $1.64 trillion from the prior quarter and increased by 16% from the prior year quarter due to the addition of Putnam as well as positive markets and net inflows. Average AUM increased by 13% and 11% to $1.58 trillion from the prior quarter and the prior year quarter, respectively.

Investment performance continues to be strong and resulted in 62%, 51%, 62% and 69% of our strategy composite AUM outperforming their respective benchmarks on a 1-, 3-, 5- and 10-year basis, benefiting from the addition of Putnam.

In terms of mutual funds, investment performance resulted in 51%, 60%, 44% and 56% of mutual fund AUM outperforming their peers on a 1-, 3-, 5- and 10-year basis, and performance strengthened versus peers across the 3-, 5- and 10-year time periods quarter-over-quarter.

Our long-term net flows were $6.9 billion in the quarter, including reinvested distributions of $3.1 billion and $13.7 billion was funded out of the $25 billion allocation from Great-West. Long-term net inflows were spread across asset classes, investment vehicles and geographies. Fixed income, multi-asset and alternative assets led the way from an asset class perspective and we continue to see growth in our separately managed account, ETF and Canvas offerings. Each have achieved at least 4 consecutive quarters of net inflows and all are at record high AUM.

Long-term inflows of $85 billion increased by 23% from the prior quarter and 37% from the prior year quarter. Excluding reinvested distributions, which are seasonally elevated in the prior quarter and inflows from Great-West, long-term inflows increased by 17% from the prior quarter and 15% from the prior year quarter.

In terms of flows by asset class, fixed income net inflows were $8.3 billion, we saw client interest reflected in positive net flows into core bond highly customized corporate bond, multi-sector municipal and high-yield strategies.

Equity net outflows were $5.3 billion. We saw positive net flows into large-cap value and smart beta. Excluding reinvested distributions, which are seasonally elevated in the prior quarter, equity net outflows improved by 29% from the prior quarter. Multi-asset net inflows were $2.9 billion, driven by Franklin Templeton Investment Solutions, the Franklin Income Fund and Canvas, our custom indexing solution platform.

Alternative net inflows were $1 billion, driven by growth in the private market strategies, which were partially offset by outflows in liquid alternative strategies.