FRANKLIN RESOURCES INC Q2 FY2025 earnings call

Key Highlights

• Market Turbulence: First few months of 2025 saw market turbulence due to geopolitical and trade issues; Franklin Templeton aims to help clients navigate volatility and benefit from emerging trends.
• Institutional Pipeline: Institutional one but unfunded pipeline increased to $20.4 billion, highest since 2022, diversified by asset class and strong in fixed income.
• Investment Performance: Over half of mutual fund AUM outperforms peer median over various periods; over half of strategy composite AUM outperforms benchmark over three and five-year periods.
• Expense Management: Adjusted operating income decreased 8.6% from prior quarter due to compensation expense and Western impact, but partially offset by prior quarter deferred compensation acceleration. Focus on disciplined expense management.
• Relocation: Relocated New York-based employees to One Madison Avenue, received positive feedback.

Assets under management: Ended at $1.54 trillion, down from prior quarter due to long-term net outflows at Western Asset and negative markets. Excluding reinvested distributions, long-term inflows increased 9% QoQ. Gross sales rose across all asset classes. Long-term net outflows were $26.2 billion (including $3.3 billion reinvested distributions); ex Western, long-term net inflows were $7.4 billion.

Fixed income: Excluding Western, fixed income net inflows were $2.8 billion, positive in multisector munis, stable value, and high yield strategies. Franklin Templeton fixed income had positive flows of $5.4 billion.

Alternatives: Fundraising and alternatives generated $6.8 billion, with private market assets totaling $6.1 billion. Launched first perpetual secondaries private equity fund, raising initial combined $2 billion.

ETFs: Fourteenth consecutive quarter of positive net flows, attracting $4.1 billion during Q2, with AUM of $37 billion and 12 ETFs over $1 billion.

Retail SMAs: AUM was $144.2 billion, with net inflows of $1.5 billion.

Non-US business: Had positive net flows in EMEA and Americas region, ending the quarter with approximately $470 billion in AUM.

Fiscal Guidance

• Third Quarter: Expected effective fee rate to remain in the 38 basis point area, may increase a bit in fourth quarter.
• Full Year 2025: Adjusting for additional quarter of Putnam and excluding performance fee compensation, expenses expected to be roughly flat to 2024.
• Fiscal 2026: Expecting $200 to $250 million run rate of cost savings, but additional growth in alternative assets could bring additional expenses.

Risks

• Market Volatility: Global market turbulence due to geopolitical, trade, and economic uncertainty can impact AUM and performance.
• Western Asset Integration: Integration of Western Asset's functions needs to be seamless to clients, with potential risks to client experience during integration.
• Tariff Impact: Economic impact of tariffs could be asymmetric, affecting US less than trading partners, but still a risk to profitability and growth.

Question and Answer

• **Q: Thoughts on fiscal year expenses given market movements and AUM pressure?

A: Matt Nichols discussed quarterly and annual guidance on fee rate, comp and benefits, IS&T, occupancy, G&A, and full-year expectations, noting strategic investments in growth areas and potential cost savings with risks from faster growth in alternatives.

• **Q: Positive long-term net flow trend ex Western?

A: Jenny Johnson and Matt Nichols/Adam Spector discussed ex Western net inflows, fixed income positive flows, institutional pipeline strength in fixed income, private markets growth, ETF and SMA growth, and global distribution strength.

• **Q: Private markets insights, retail products, and sizing?

A: Jenny Johnson and Adam Spector talked about private markets fundraising progress, Lexington's fund situation, retail product performance, and large opportunity in wealth channel for alternatives.

• **Q: Fixed income flows and Western health?

A: Jenny Johnson and Adam Spector discussed fixed income strategies with positive flows, Western's performance, gross sales, and client allocations despite outflows.

• **Q: International business contribution and growth?

A: Adam Spector talked about international business gross sales growth in all regions, regional trends, and positioning in non-US strategies.

• **Q: Western WAMCO flows and alliances?

A: Jenny Johnson and Matt Nichols discussed Western's net outflows and gross sales, and strategic thinking on alliances for public-private market intersection.

• **Q: Private markets product building and $800B opportunity?

A: Jenny Johnson and Adam Spector discussed private markets product development, success with perpetual funds, and large opportunity in wealth channel for alternatives.

• **Q: $470B non-US AUM and client shift?

A: Adam Spector discussed non-US AUM sourcing, client preference for nondollar assets and value stocks, and positioning to capture flows.

• **Q: Great Western relationship and commitments?

A: Matt Nichols and Adam Spector discussed Great Western's initial commitment allocation, remaining commitments, and potential new opportunities in insurance channel.