FRANKLIN RESOURCES INC Q1 FY2025 earnings call

Market Overview

• Market volatility due to geopolitical uncertainty, U.S. Presidential election, etc. U.S. equities had positive returns, while international equities faced pressure.
• Private markets seen as attractive with opportunities in secondaries, real estate, etc.

Business Progress

• AUM diversified, long-term inflows improved, positive net flows in Equity, Multi-Asset, Alternatives.
• Western Asset faced significant long-term net outflows, but focus on client experience and integration of corporate functions.
• Launched new funds like Franklin-Lexington Private Markets Fund and partnerships, e.g., National Investment Fund of Uzbekistan.

Investment Performance

• Mutual fund performance improved in 3 and 5-year periods, composite performance mixed.
• Financial results: adjusted operating income was $412.8 million, a decrease of 9% from prior quarter and 1% from prior year quarter.

Franklin Resources' AUM ended the quarter at $1.58 trillion, a decrease from the prior quarter due to negative markets and long-term net outflows from Western Asset. Excluding Western Asset Management, long-term net inflows were approximately $18 billion and positive in every asset class. Equity net inflows were $12.5 billion, including reinvested distributions of $16.5 billion, with positive net flows into large cap value, smart beta quantitative, listed infrastructure, and all cap core strategies. Fixed income net outflows were $66.7 billion, but excluding Western, fixed income had positive inflows into multi-sector, core bond, and high yield strategies. Alternatives fundraising generated $6 billion, with private market assets totaling $4.3 billion. Multi-Asset net inflows were $3.4 billion. The ETF business saw its 13th consecutive quarter of positive net flows, attracting $2.7 billion during Q1. Retail SMA AUM was $146 billion, and Canvas had record net flows of $900 million with AUM of $10.5 billion.

Expenses

• 2025 expenses expected to be flat excluding performance fees, 2026 expected to have ~$200-250 million expense reduction. Effective fee rate expected mid to high 37s.
• Compensation benefits ~$815-820 million, info systems ~$150 million, occupancy $70-75 million, G&A ~$190 million.

Western Asset

• Revenue impact of Western outflows ~3% of Franklin's 2024 adjusted revenue, remaining revenue ~6% of Franklin's adjusted revenue. Margin target of 30% remains.

Alternatives

• Expect wealth clients to grow to 20-30% of alternative capital raises, with perpetual vehicles reaching ~$1 billion AUM.

• Western Asset Challenges: Significant long-term net outflows, impact on revenue and operating income, need for integration of corporate functions while maintaining investment team autonomy.
• Market Volatility: Geopolitical uncertainty, central bank actions, inflation can impact market returns and AUM.
• Competition: Increasing competition in the asset management industry, need to maintain differentiation.

Q: Alex Blostein from Goldman Sachs asked about Western Asset's operating income, strategic vision, and savings from integration.

A: Jenny Johnson and Matt Nicholls discussed Western's financial impact, integration plans, and strategic considerations, including margin targets and expense reductions.

Q: Dan Fannon from Jefferies inquired about Putnam's progress, synergies, and partnership with Great-West Life.

A: Matt Nicholls, Jenny Johnson, and Adam Spector updated on Putnam's performance, strong flows, and partnership benefits.

Q: Michael Cyprys from Morgan Stanley asked about Putnam's progress and Great-West Life partnership.

A: Matt Nicholls and Jenny Johnson provided updates on Putnam's performance, synergies, and the Great-West Life partnership.

Q: Bill Katz from TD Cowen clarified expense guidance and revenue contribution from WAMCO.

A: Matt Nicholls reiterated expense guidance, effective fee rate expectations, and transparency on Western's progress.

Q: Brennan Hawken from UBS asked about the $200-250 million expense reduction and efficiency efforts.

A: Matt Nicholls explained the 2026 expense reduction, expense guidance across quarters, and firm-wide efficiency efforts.

Q: Benjamin Budish from Barclays inquired about Alternative side growth and wealth fundraising.

A: Jenny Johnson and Adam Spector discussed wealth channel growth, perpetual vehicles, education, and retirement channel opportunities.

Q: Patrick Davitt from Autonomous Research asked about VA wins and Franklin's trend vs. others.

A: Jenny Johnson and Adam Spector talked about VA wins, consolidation strategies, and Franklin's position in winning consolidation deals.