Franklin Resources - Earnings Call - Q1 2021

Transcript

Operator (participant)

Welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31st, 2020. My name is Rashay, and I will be your call operator today. 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 MD&A section of Franklin's most recent Form 10-K and 10-Q filings. At this time, all participants are in a listen-only mode.

If you would like to ask a question at that time, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. The company requests that you limit to one initial question and one follow-up. As a reminder, this conference is being recorded. At this time, I would like to turn your call over to Franklin Resources President and CEO, Jenny Johnson. Ms. Johnson, you may begin.

Jennifer M. Johnson (CEO)

Hello, and thank you for joining us to discuss Franklin Templeton's results for our first fiscal quarter of 2021. Following the close of the Legg Mason transaction on July 31st, the results we announced earlier this morning include the first full quarter of the combined organization. On the call with me today is Greg Johnson, our Executive Chairman, and Matthew Nicholls, our CFO. And joining the call for the first time is Adam Spector. Adam joined our firm last July as Managing Partner of Brandywine Global and additionally became our Executive Vice President and Head of Global Distribution on October 1st. To start, we hope that everyone is staying healthy and safe. We'd also like to recognize our incredible employees who continue to work hard every day on behalf of our clients and firm.

It has been six months since we closed our acquisition of Legg Mason and its Specialist Investment Managers, and over that time, all while under a remote work environment, we've made significant progress in bringing our teams together to maximize our collective potential. We're seeing a high degree of stability within the organization, as well as a number of encouraging trends across the business. First off, assets under management reached a record high of approximately $1.5 trillion this quarter, driven primarily by strong market performance. That's an increase of $79 billion, or 6%, during the quarter. Turning next to operating and financial results, adjusted revenues increased by 20% to $1.5 billion, primarily due to an additional month of Legg Mason results. Higher revenues and continued expense discipline resulted in a 28% increase in adjusted operating income to $550 million and an increase in operating margin to 37.2%.

On the performance front, our investment results improved this quarter with 61%, 66%, 68%, and 75% of our strategy composites outperforming their respective benchmarks for the four key time periods. Looking deeper into those numbers, Western Asset continues to have standout performance and reached $423 billion in long-term assets and $480 billion in total assets, its highest level on both fronts in over a decade. Brandywine performance rebounded strongly and saw net inflows into global multi-sector products in the latter part of the quarter, and as we saw improvement in performance at ClearBridge and across many Franklin Templeton strategies, ClearBridge is another example of one of our Specialist Investment Managers reaching a record in AUM, which was $176 billion at quarter end. Likewise, our Fiduciary Trust high-net-worth AUM is at an all-time high of $32 billion, while the business also generated positive net flows for the quarter.

Record AUM levels were also reached for Clarion Partners at $58.1 billion. Long-term relative investment performance of our U.S. and international mutual funds also improved this quarter. A significant driver of the improvement was our Franklin Income Fund, and several of our value-oriented equity strategies also generated noteworthy results. We continue to see strong performance in U.S. equities and U.S. fixed income. Our mutual funds that are rated four or five stars by Morningstar increased during the quarter and now number 140 funds. On the distribution front, long-term net outflows were $4.5 billion, which includes $12.6 billion of reinvested distributions. But notably, momentum continued to build with positive flows into a number of our Specialized Investment Managers, including Benefit Street Partners, Clarion Partners, ClearBridge, Fiduciary Trust, Franklin Equity Group, Franklin Templeton Fixed Income, Martin Currie, Royce, and Western Asset Management.

Franklin Equity Group saw strong inflows, which were led by the Franklin DynaTech Fund, which reached a record $22.5 billion in AUM. As of quarter end, we have a promising institutional pipeline of opportunities and a combined total of one billion in unfunded wins of $11 billion. As we've noted on previous calls, a strategic focus for the firm has been to expand our alternatives platform to offer strategies that do not lend themselves to passive replication. With $127 billion in assets under management in alternatives and robust relationships across the retail channel, we've seen demand for our retail alternative offerings increase. Our EMEA region led the way with a focus on multi-strategy, social infrastructure, and real estate.

Also, importantly, as we look to deliver investment expertise through our client's investment vehicle of choice, we now have a top three market position in the retail SMA business, which saw positive net flows this quarter and increased to $113 billion in assets. In other news, we were excited to launch our new Franklin Templeton Investment Institute, an innovative hub for research and knowledge sharing. Stephen Dover will be leading that effort. With the launch of the institute, we're doubling down on what sets our firm apart: unmatched insight and research from experts on the ground in over 70 locations around the world. At the same time, tapping into the strength of our collective leadership talent, we've expanded Terrence Murphy's role to become head of equities for Franklin Templeton while retaining his existing role as CEO of ClearBridge Investments.

While our equity teams will continue to maintain their individual investment processes and autonomy, Terrence will facilitate collaboration across the groups to drive results and growth. Looking at another key area, capital management remains an important focus. Our strong balance sheet continues to provide us with financial and strategic flexibility to evolve our business. Cash and investments totaled $6.3 billion following the public offering of $750 million aggregate principal senior notes due 2030, issued at a 1.6% coupon. As previously explained, it is our intention to pay down more expensive debt with the proceeds of the offering. Excluding net proceeds from the senior note offerings, we have $5.5 billion in cash and investments. We also continue our track record of dividend growth for the 40th consecutive year, with a 4% increase to our regular dividend in December.

To wrap things up, over the past six months, we've created a stronger firm that combines the best of both worlds: global strength and boutique specialization. Our global presence has expanded in key growth markets around the world with a greater range of specialized, high-quality investment capabilities, and we think that all points to a positive future. Now, I'd like to open up the call to your questions. Operator?

Operator (participant)

Your first question from Glenn Schorr with Evercore.

Glenn Schorr (Analyst)

Hi, thanks very much. I'm curious, you talked about cross-selling initiatives have started to yield positive results. You talked about Adam being new head of global distribution. Can we drill down a little further, get some color on what Adam's mandate is, what new initiatives are producing these cross-sells, and what's being cross-sold? Thank you.

Jennifer M. Johnson (CEO)

Sure. I mean, there's nothing better than hearing it from the horse's mouth. So fortunately, we have Adam on the line. So Adam, take it away.

Adam Spector (EVP and Head of Global Distribution)

I think I was just called a horse there. So if I think about what we're trying to do, it's really three priorities: grow.

Operator (participant)

Welcome to Verizon Wireless. The wireless customer you called is not available at this time. Please try your call again later. Announcement one switch two two dash four.

Jennifer M. Johnson (CEO)

Not sure what happened there.

Operator (participant)

Welcome to Verizon Wireless. The wireless customer you called is not available at this time. Please try your call again later. Announcement one switch two two dash four.

Adam Spector (EVP and Head of Global Distribution)

Is it gone?

Jennifer M. Johnson (CEO)

Yeah. Adam, are you still?

Adam Spector (EVP and Head of Global Distribution)

I guess so. Sorry.

Glenn, you're still there?

Jennifer M. Johnson (CEO)

Adam, can you? I think Adam's dialing back in. So why don't I start? I mean, we are, for example, our largest distributor has just added 10 new funds. Many of them are Leg Mason funds. And so we're seeing good penetration that is really cross-selling. And again, as we talked about, Franklin was much stronger on the independent side. Leg Mason was much stronger on the wirehouse side. And so we've been able to basically cross-sell platform listings and getting through the gatekeepers on those platforms. So that's worked well. And just to give you an idea, from a diversification of flows, if you look at the top nine, I don't know why I have the top nine instead of the top 10, but top nine accounts for about 38% of our flows. Five of those are Leg Mason funds. Four are Franklin funds.

Three of them are fixed income. Five are equities, and one is balanced. So we're seeing both a diversification by getting products on the platforms, cross-selling on platforms, and getting through the gatekeepers and getting them listed. So we'll continue to see more penetration, as well as good diversification with the types of products so that we don't have kind of the risk of a single large product that potentially gets out of favor. So it's much more diversified. I don't know, Greg, if you want to add anything there.

Adam Spector (EVP and Head of Global Distribution)

I think Adam's on the line.

Adam, you're back on. Great.

Yeah. I don't know how I got cut off on a landline with a cell phone message, but that's a new one in this day and age of working from home. So I did not have the ability to hear what Jenny said, so I'm going to maybe overlap a bit with her comments. But in terms of cross-selling, there are a couple of things I would point to. One, the firms, Legacy Franklin and Legacy Legg Mason, had different strengths. Franklin was really strong, for instance, in the regional broker-dealers, and we've been able to get Western and ClearBridge products on the platform there. We're seeing positive momentum there. At the same time, when we look at something like the wirehouses, where Leg Mason traditionally was a little stronger, we've been able to have some real success with BSP there through Legacy Legg Mason.

The same thing is really true if we look outside of the United States, where Franklin, for instance, was much stronger in Canada. Leg Mason had a real strength in Japan. So we've been able to start some cross-selling initiatives there that are really quite positive. And even within countries outside of the U.S. where both firms were strong, like Germany, we had a situation where Franklin was much stronger in the retail banking world, Leg Mason in the private banking world. And again, that lets us sell one set of products into the other legacy distribution system. Those are the types of cross-selling efforts that have been really strong. I would also say that cross-selling comes into play on defense as well, where we've had clients, for instance, that are in particular strategies that might be higher alpha, higher tracking error strategies.

When they want to de-risk, what we've seen is that that money, instead of leaving our system, can shift to another lower-vol strategy that's within the system. So we're actually doing a better job retaining assets through cross-selling as well.

Glenn Schorr (Analyst)

I think that's a lot of progress and a lot on the come, and you combine that with all your new product offerings. I hate to be too forward-looking, but do you have a shot at getting back towards flat flows sometime towards the end of this year? Are we trending that much in that direction?

Adam Spector (EVP and Head of Global Distribution)

I think we're trending really well. We see momentum. We see it month over month. Sales are strong. Redemptions are getting better. And the other thing is we now have a combined sales force that's been in place for its first full quarter. And let's face it, it takes people a little bit of time to hit their stride, and they're hitting it now. So I'm feeling very good about the future.

Glenn Schorr (Analyst)

Thanks for all of that. I appreciate it.

Adam Spector (EVP and Head of Global Distribution)

Thank you.

Operator (participant)

Our next question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler (Managing Director)

Thanks. Good morning, everyone, and hope you're all doing well. I wanted to come back and dig a little bit deeper on your comments on rising demand for alternatives in the European retail channel. Can you talk about what markets and channels are driving the demand, and also what type of products or characteristics are they looking for, things like yield or low correlation, downside protection? Thank you.

Jennifer M. Johnson (CEO)

Adam, you want to take it?

Adam Spector (EVP and Head of Global Distribution)

I mean, we'll go ahead.

Sure. I think we're really seeing a push for alternatives in all regions and all countries, and that's one of our strengths. If we think about our core priorities of grow, defend, and diversify, diversify is all about moving more forcefully into alternatives. We have $120-some billion in our alternatives book. We're probably the sleepiest, quietest alternatives firm you've never heard of, and we're making progress. You mentioned Europe. I think there's strong demand there. The other thing we see in Europe is strong demand for ESG, and we've got some alternative products that combine alternatives with ESG. That combination has been really strong for us.

The other thing we're working to do is, given that we now can offer so many different vehicle types, we're really trying to take alternatives that used to be predominantly sold in the institutional market in more of a separate account mandate and package them so that they're much more saleable to the broad retail market.

Jennifer M. Johnson (CEO)

And just to add to that, I mean, obviously, everybody in this low-rate environment is looking for yield. And so you see a lot more searches both on the institutional side and, as Adam mentioned, gaining traction on the retail side for private credit with BSP, perfectly positioned, great performance, traditionally just an institutional manager. So being well-received on the and actually have gotten some traction in the retail side, as well as Clarion. Clarion's coming out of this in the real estate space. There's uncertainty in certain spaces for real estate, but they've been large industrial tech. They're one of the largest; I think they are the largest lessor to the cloud storage environment. And so they've performed very, very well. So in a low-yield environment, people are looking for assets with yield, and that has served both Clarion and BSP well.

Craig Siegenthaler (Managing Director)

Got it. And then I just had a quick follow-up coming back to Glenn's question on net flows. You guys just did a big merger. You reduced the size of your sales force, not a lot, but a little bit. So I imagine there could be some dissynergies out there that you're seeing. If there are any dissynergies or any kind of redemptions driven by the merger and they're in the flow run rate today, do you see them dropping off in the future, which would actually help your net flow trajectory?

Jennifer M. Johnson (CEO)

I would say that, let me just start, and then Adam will take over. I would say a couple of things. One is we're only really aware of two, we'll call them deal-based redemptions. One in Korea, which we talked about on the last earnings call, and then most recently, Legg Mason's 529 plan, and part of the issue there was just an agreement that they would only have one 529 plan, and Franklin obviously has one already with the New Jersey 529 plan. Otherwise, we are not seeing any kind of deal issues. With respect to, look, you go from two sales forces to one, you're talking about relationships. On the retail side, just to give you an example, of the, say, 150,000 financial advisors, we're talking less than 0.1% or something. I mean, just a teeny number of complaints with the change of advisor.

We've been really surprised by how little complaints we've had, and ultimately, when you're having to pick kind of who's going to win out in the territory, and that's really because of Legg Mason's strength, again, in the big wirehouses and Franklin's in the independents, so there wasn't the kind of overlap you would have expected on many deals, so there was not really product overlap and not really distribution overlap. Adam, you want to add anything else?

Adam Spector (EVP and Head of Global Distribution)

Jenny hit all the right points. Out of the tens of thousands of advisors we contacted, she's right. We had less than 10 basis points of negative reaction that we track. The other thing I would say is that while in the U.S., the sales force is essentially 50/50, Legacy Franklin, Legacy Leg, that's not true by channel. Our regional channel is predominantly Franklin Templeton people. Our wire channel is predominantly Leg Mason. So that really limited the disruption that we had because we kept the folks who were strongest in specific channels and moved to a channelized approach in sales, which we did not have before at Franklin Templeton.

And it might help to just try and put a little bit of data around this. In the executive commentary, what we did is, in a footnote in some of the charts, we did a little bit of pro forma, assuming we closed the transaction a month earlier to include the full three months of Legg Mason. And when you look at that, you'll notice that the sales are roughly the same, and the redemptions are a little bit lower. So obviously, we want redemptions to come down further. We want sales to go up. But in terms of trying to understand and quantify attrition risk, when we look at the pattern quarter by quarter, it's looking quite encouraging so far.

Craig Siegenthaler (Managing Director)

Great. Thank you, guys.

Thanks, Craig.

Operator (participant)

Your next question, line of Dan Fannon with Jefferies.

Daniel T. Fannon (Analyst)

Thanks. Good morning. I guess one more question just kind of on distribution and sales, and you guys have been discussing the retail opportunity and the momentum you have. I guess, can you talk about the consultants and the institutional potential opportunity? Maybe also just get into the unfunded pipeline, the diversity there, but also kind of those gatekeepers and how progress in terms of opening up those channels might be going.

Adam Spector (EVP and Head of Global Distribution)

Sure. The way I look at unfunded is it's good news. It's essentially staying steady. I think the number's around $11 billion, and it's staying steady not because we're not adding, but because we're actually funding deals out of that. So that's going strong. What I would say in terms of consultants is that Franklin Templeton Central Distribution has historically distributed to the consultant community, the institutional community for the Franklin investment team. Many of the Legg Mason investment affiliates, in fact, I believe all of them, did that on their own. Going forward, we're having a differentiated approach where the Legg Mason SIMs will continue to call on the consultants as they always have. That's been a really successful channel for them. Remember, Legg is much stronger in the institutional business historically. So we're not changing that approach to the investment consultants.

Outside of the U.S., some of the smaller former Leg Mason SIMs are beginning to leverage Franklin Templeton's resources, especially in the coverage of field consultants, where those SIMs may cover the research centers on their own, but will have much more connectivity with the field consultants. I would say, in general, what we're trying to do with consultants is similar to what we're trying to do with global financial institutions, is recognizing that many of these large consultants are global firms, and we have to face off with them holistically as a global firm, so that's how we've organized ourselves. And we are really allowing each investment team to tap into our centralized coverage of consultants as they see fit. In general, the larger SIMs like Western might not need help at all in that area, where some of the smaller groups definitely rely on the central distribution team.

Daniel T. Fannon (Analyst)

Great. And then just as a follow-up, in terms of the expense outlook and understand the movement in assets and higher markets drove a bit of the increase, but just curious about your assumption for normalization of travel and marketing and spending that kind of went away this past year as you think about the progress for this year?

Yeah. So in our numbers and in the guidance that we've given, we've assumed that there will be a pickup in travel and some other G&A items like advertising in terms of the combined company and what we need to do there. In the third and fourth quarters in particular, we have moved that forward a bit, but we haven't taken the money out of our assumptions. So we would expect G&A to creep up a little bit in the last two quarters in particular, I would say. But that's included in the $3.75 billion of guidance. I think the number that's more likely to move a little bit, which is what caused the change a little bit in the guidance, is the comp and benefits in line with revenue, and we expect we're selling more, so there's some more commissions involved in that.

It's all linked with the growth of the business. So I think we could expect the compensation line on an adjusted basis to go up a couple or so percent, maybe up 3% in the next quarter. But then, because of the cost savings from the transaction, I would expect that to come down in the third quarter by about 1 or 2%, and then down again in the fourth quarter by about 4%, probably maybe a little bit more than that, which then gets us to the 3.7%-3.75%, maybe a little bit more if the markets stay stable.

Great. Thank you.

Thank you.

Operator (participant)

Next question from Mike Carrier with Bank of America.

Michael Carrier (Analyst)

Good morning, and thanks for taking the questions. First, just a follow-up on the distribution question. Can you provide maybe some context on the process, and importantly, just the timing, getting the full line of a product or as much as you can throughout the distribution channels, and maybe for context, what has happened maybe thus far, and what do we expect in 2021 versus longer term?

Adam Spector (EVP and Head of Global Distribution)

Yeah. I think the way I think about this is we had to go about this in several stages. So the first stage was really selecting the teams, getting them settled into their territories, and that happened. The next stage that we're in the middle of right now is because they're all trained, the sales teams are all trained, but in order for them to really cross-sell effectively, we have to get all of our products cross-listed on the different platforms and research approved. That's really what we're doing now. We've started where you might expect at our largest distribution partners, where we think we can get the most bangs. We've got two of them already where we've onboarded a number of products. We're kind of marching through that, and it's going pretty well.

So it's really a question of getting the back offices set up correctly and getting things on the platforms. The distributors themselves are eager to have it. One of the things we're seeing across the board is that people want to do more business with fewer bigger players. So the fact that we're able to bring such an array of investment styles, and not only investment styles, but different vehicles from funds to SMAs to ETFs to these partners, that makes us much more attractive to them. So they're really working as quickly as they can with us to get our products onboarded. As we get them onboarded, what we're seeing is that we're able to start to sell more.

So for instance, at some of the regionals, we've seen a real uptick in December and January for some legacy Leg Mason product on the regional platforms because those are just getting onboarded now. It's continuing work, but it's going well, and we're a bit ahead of schedule.

Michael Carrier (Analyst)

Okay. Great. And then, Matt, just on expenses, you provided a helpful update. You also mentioned looking at additional ways to operate the business more efficiently. Maybe just what are some of these areas as well as areas that you're looking at from an investment standpoint? Thanks.

Yeah. Thanks, Mike. So I think there's two things there. First of all, as we spend more time together as a joint company, I think just naturally speaking, we find interesting ways to improve how we work together. That's not just operational things. It's how we can share information and improve pricing of that information from various vendors. We spend a lot of money on data and information across the investment teams and across the specialized investment managers. There is a natural embedded leverage in that system in terms of being able to save money, and we're really frankly just scratching the surface on that. And that also benefits the teams away from just cost, away from just cost, but the cost is a good output from that work.

Then we have been working very hard on our operations side and technology side on the future and how to position the firm in terms of capital expenditures, understanding what that is, risk management, and potential cost efficiencies with different partners externally. We have seen some very interesting things there. Nothing specifically to report now, but I think over the next six months to a year, we are going to see some very interesting opportunities for the firm, and we are likely to take action. To put some numbers around it, we do not have any specific guidance today, but we are talking $20-$25 million per annum at least on some of the things we are looking at. We will provide more guidance to that in the next quarter.

Great. Thanks.

Thank you.

Operator (participant)

Next question line of Alex Blostein with Goldman Sachs.

Alexander Blostein (Analyst)

Hey, guys. Great. Good morning. Thanks for taking the question. I wanted to follow up with respect to cross-selling opportunities. And given the combined franchise, you guys have a really robust set of products and capabilities, and you named quite a bit in terms of where you're seeing cross-selling opportunities for the combined firm. I was wondering if you could just kind of maybe narrow this down a little bit. And if we were to focus on three affiliates where you're seeing sort of the most incremental dollars of net inflows from cross-selling, what are those affiliates?

Adam Spector (EVP and Head of Global Distribution)

I guess I don't really think about it in terms of the most dollars. I think about it as where is there significant demand? So obviously, given Western's broad exposure to everything fixed income and their size and breadth, we're seeing a lot there. ClearBridge, I would say, has a very strong capability in ESG, and that's across the board. With that in favor, ClearBridge is seeing real growth. Brandywine has a few income-oriented funds that are global, given the demand for income that strong. Royce, Martin Currie, we saw inflows for them that were more than 5% of the firm, so strong demand there. If you take a look at a group like Clarion, what's more in demand than alternatives, and they're the top of their game in real estate? So really, across the board, we're seeing demand for all of our firms.

Jennifer M. Johnson (CEO)

And I would just add that sort of giving the Leg Mason crossing into a lot of the traditional Franklin, and the reverse of that is in some of the big wirehouses, we're getting interest on BSP, Dynatech getting phenomenal sort of Franklin Equity Group support. And so it's really about bringing the entire firm to where we have deep relationships. And again, there just wasn't the overlap. So any of those kind of key products across the board are making sense at any of the firms. It's just filling in and complementing where, say, we didn't have the representation.

Adam Spector (EVP and Head of Global Distribution)

Yeah, Jenny, and I misunderstood the question. I thought it was a one-way question. You're right. So there's equal strength going both directions. And the other thing we're seeing is that, for instance, there's some products that have been around for decades that we're able to offer in new vehicle types. And that's another way to cross-sell that's really attractive. And we're seeing significant growth in our FMA business there.

Alexander Blostein (Analyst)

Great. Thanks for that, and I guess along similar lines of new business, sorry if I missed this, but $11 billion pipeline, can you specify which affiliates comprise the pipeline and what's the fee rate associated with that AUM on base?

Adam Spector (EVP and Head of Global Distribution)

I do not have that data. I will have to get back to you from IR on that.

I mean, most of it's fixed income with Western, which you'd expect, and some Franklin Templeton Fixed Income as well would be the top two of the pipeline of funded wins.

Alexander Blostein (Analyst)

Got it. Thanks very much.

Operator (participant)

Your next question from Patrick Davitt with Autonomous Research.

Patrick Davitt (Analyst)

Hey, good morning, everyone. It's Patrick Davitt. Thanks for the call. First question on the fee rate, obviously already came in a little bit above what you guided to last quarter, probably I guess because the market came in so much better than you expected. So is it still fair to assume kind of 36 to 38 with a more normal market, or do you think it could track even higher given you're already above what you guided to last quarter?

I think the way that we just sort of described that. I mean, the reason why it was higher is because of mainly the increase in equities in the quarter because of the strength of the equity markets. And then we grew in alternatives also. And I think the right way to answer the question is when we think about the things that push up the fee. It's if we're higher in equities and alternatives and lower global bond outflows. If any of our outflowing areas that we've experienced over the last several quarters that you're very familiar with, if any of those turn in just a little way, that also helps with the fee rate. And we saw that in the last quarter also in having less outflows in those areas.

What pushes the fee rate down is if we scale up much faster in institutional fixed income and/or if we see outflows in the higher fee areas that I just talked about. I think we model out, and I think we've talked about this, a fairly steady fee rate for the year, all else remaining equal. We don't see any reason why we shouldn't be in the 38% area, but there could be a continued significant momentum in institutional fixed income, which could be a very positive reason for the fee rate going down, a little bit all else remaining equal. So I think 36% is pretty very, very much on the low end of things. And I think we wouldn't say guide to higher, but I certainly say we would expect to be close to where we are today for the year.

Great. Thanks. Very helpful. My follow-ups on the India situation, which looks like it's finally getting close to resolution. So could you update us on how much AUM we could see come out as those funds open up again, that's already been turned off, so we can kind of adjust our estimates when you report AUM? And then I guess more broadly, the news has been pretty negative. So any update on the impact to the broader Indian franchise would be helpful.

Jennifer M. Johnson (CEO)

So I mean, first of all, we're thankful that the shareholders voted overwhelmingly in support of winding up those funds. And then most recently, the Supreme Court came out and approved our being able to distribute the cash in them, which I think is maybe 42% if I'm remembering the right percentage of assets. So that'll go out pretty soon. We are taking a fee on those assets right now, so it's already out from a fee standpoint. And then we continue to see flows, decent flows, but also redemptions in the remainder portion of our business, both the equity and the liquid assets. We're very much committed to India, and we continue to see support in that market.

Patrick Davitt (Analyst)

Thanks. Thank you.

Operator (participant)

Your next question, line of Brian Bedell with Deutsche Bank.

Brian Bedell (Analyst)

Hey, thanks. Good morning. Can you hear me?

Adam Spector (EVP and Head of Global Distribution)

Good morning.

Brian Bedell (Analyst)

Good. Yeah. Can you hear me?

Adam Spector (EVP and Head of Global Distribution)

Yes. Hey, Brian.

Brian Bedell (Analyst)

Oh, good. Great, great. Okay. Thanks for taking my questions. Just one on, to extend on the fee guidance of the approximately 38 basis points, what is the expectation for money market fund or money market cash management product fee waivers in that, I guess, coming into the year?

Yeah. Again, yeah. So it's embedded in that already. We currently have about something like an $8 million fee waiver at the holding company level or the corporate level because of the revenue share with those involved, principally with the money market fund business that sort of mutes the impact on the overall firm. So it's $8 million. Now, we expect that to probably be close to $10 million by the end of the year, but that's all embedded within the fee rate guidance we just gave.

Got it. Perfect. Thank you. And then maybe follow-up for both Adam and Jenny on the ESG progress. Obviously, you said pretty strong demand in Europe and within alternative products as well. And it sounds like ESG is fairly well integrated in the research process based on how you're describing it. But maybe if you could talk about whether you still think there is more integration to happen across the research investment portfolio management research process, and especially the plan for leveraging that and launching new ESG-dedicated products. And if you can also comment on the AUM that you see right now in your ESG-dedicated products.

Jennifer M. Johnson (CEO)

So I always find it interesting. I was talking recently, and somebody gave me a fact or a stat that something like a third of asset managers' assets are ESG. And the reality is that I think maybe we have an advantage as a real global player. Anybody is a global player and has operated in markets in Europe or Australia has had to have this very focused and incorporated into their investment process. So it's our belief that there's going to be no credible manager out there, certainly at an institutional level, without being able to clearly articulate how they're considering ESG risks in their investment process. And we feel very good about all of our teams, and they're having incorporated their consideration of those risks in their investment processes.

As a matter of fact, we've talked about our investment data lake where we have unique sources of data that are contributed by various teams, and they're available for any teams for their analysis. We've done the same thing on ESG. So we have a portion of our investment data lake that is dedicated to ESG. So for example, our global macro team gets 14 different feeds. It goes into the ESG data lake, and that data is now cleansed and available for any of the teams to consider it in their process. And that's important, as we all know, because ESG, the top five ESG providers only correlate 57% of the time. So you can imagine that it really takes active management and engagement to get accurate ESG information. So to answer your question, it is absolutely well incorporated in all of our processes.

We also, Europe is coming out with something, Article 6, Article 8, and Article 9, and we have been very focused on ensuring, I think it's the March date, that the products that are selling there and the ones that are in the pipeline to sell there qualify for those. So Article 6 is, it is ESG evaluated and considered. Article 8 is, I overweight ESG considerations in my portfolio construction. And Article 9 is really kind of impact investing. And so we have products like our Paris Aligned. We're the first active global green bond ETF. We have a social infrastructure, and those are getting good flows there as well as they qualify for Article 9. So we think ESG remains to be seen.

And I just anecdotally, prior to the lockdown, I had visited U.S. institutions a year before the lockdown, and it was very mixed in the U.S. whether or not they were focused on ESG. And right before the lockdown, I visited institutional investors, and every single one was talking about ESG. So that's why we are focused and committed. Adam, I don't know if I stole all your time there, but I appreciate that.

Adam Spector (EVP and Head of Global Distribution)

I would only say that one of the advantages here of being a global firm is that while this is kind of a trend that is strong and developed, but a little bit newer in the U.S., we've been active in France and the Nordics and Australia for years, and it's just part of what you do. It has to be 100% integrated into your investment process, so all of our investment teams have ESG that's integrated. What we're moving to do is to create more impact funds kind of at the far extreme of the ESG spectrum, but we're completely integrated with ESG across all of our teams at this point.

Brian Bedell (Analyst)

That's great color. Thank you.

Operator (participant)

Next question line of Michael Cyprys with Morgan Stanley.

Jennifer M. Johnson (CEO)

Hey, Michael.

Michael Cyprys (Analyst)

Hey, good morning. Thanks for taking the question. I just wanted to circle back on retail SMAs. I think you had mentioned you had about $113 billion of retail SMAs. I was just hoping you can kind of give us a sense of maybe how that breaks down by asset class and channel. If you could just talk about some of your initiatives to accelerate growth with the retail SMAs and which strategies are you most optimistic on growth in the SMA vehicle?

Adam Spector (EVP and Head of Global Distribution)

I think the places where we're most optimistic about SMAs as a vehicle are for those strategies that are most in demand. So Franklin Income Fund is still something we sell a lot of. Dynatech, Franklin Technology, all of those products have very good flows, very good sales. And I think we can move more from a fund sale to offering different vehicles. On the Leg Mason side, ClearBridge and Western have been leaders in that for years. From a channel perspective, we've had the most strength with the SMA business in the wires, and we're starting to expand more of our SMA business.

Michael Cyprys (Analyst)

Great. Just maybe as a quick follow-up on the SMA side, I guess just any color you could share around the fee rate and margin profile for your SMA business, maybe how that compares versus, say, the 40 Act mutual fund vehicles. And I imagine it's lower fee, maybe a little bit more costly to serve, but arguably probably the duration of the assets is probably a little bit longer, a little bit more stickier. So I was just curious any color you could elaborate around that?

Gregory E. Johnson (Executive Chairman)

Well, we'll come back to you on that with specifics. I just don't know.

Jennifer M. Johnson (CEO)

Yeah, and the thing I would just highlight there, I mean, SMAs are gaining great traction because in a fee-based environment, it allows the financial advisor to appear to be much more active in their investment decisions. So we think that trend is really important. It's also why direct indexing. We think it will be important in the future. Remember that there are not a lot of those kind of embedded fees that are arguably distribution or service fees in an SMA that you may have in a mutual fund. So that's why you can't look at the top-line fee rate and compare it apples to apples because it isn't quite that. But we will come back with more details.

Michael Cyprys (Analyst)

Right. But is it fair to say that it is longer duration capital that the assets are stickier? Just any thoughts on that last point?

Adam Spector (EVP and Head of Global Distribution)

Yes. Yeah. Yeah. I mean, I think we think of it as being a minimum of. It's an average. I can't remember the exact. I think it's like five years or something like that as you think about the average across the industry. But we'll come back to you on details around our specifics, fees, and.

Michael Cyprys (Analyst)

Great. Thank you very much.

Gregory E. Johnson (Executive Chairman)

Thank you.

Operator (participant)

Next question line of Robert Lee with KBW. Mr. Lee, your line is open.

Robert Lee (Analyst)

Sorry about that. Thanks for taking my questions. Maybe, Jenny, can you possibly drill in a little bit more into this GOE, Goals Optimization Engine? Just trying to get a sense of what that is precisely because it seems like there's different aspects to it. And while it's still early days, how you're thinking about that is helping to drive demand. What should we be looking for to see if that's working as anticipated?

Jennifer M. Johnson (CEO)

Sure. Sure. So first of all, think of it as a really good financial planning tool that's cloud-based so it can be tied into any platform out there. But we think it's unique, and that's why we filed a patent on it. So let's say, Rob, you have three goals, and your goals are, "I want to retire. I want to put some money aside for my kids. And I want to, if there's enough leftover and I'm doing really well, I'd like to buy that second home on the beach. I must have enough money to retire. It'd be nice if I could help my kids. And what the heck? I'm rolling the die on that second home." If you think about traditional kind of financial planning models, they interview you. You'd come up with a portfolio based on your risk, and it would be a single portfolio.

What GOE does is it follows your glide path trajectory to your likelihood of achieving that goal, and if you're doing really well and ahead, it rolls the money down into, think of it as a waterfall, into your next goal. When you achieve that, it rolls it down into your final goal or however many you have, and if you think about how you structure those portfolios, they're very different. You're not going to get the second home unless you stay high octane all out, but your glide path on retirement, as you're getting older and closer, you're going to want to be more conservative, so it adds that dimension. We worked with universities on doing it. I have to tell you, our data analytics team came up with this. Our AI team came up with it. We pitched the idea. They were a little skeptical.

When they looked at the data, they said, "No, this really works." It has resonated very well as we've shown because it's a very simple sort of way to think about, and it resonates with clients well because you're not talking about benchmarks and things. You're talking about things that absolutely mean something to them. We've built it with easy APIs to connect into various platforms. We find global demand. We are talking to a firm in China who are interested in it. We see it in Asia, Europe. It's just really resonated well with platforms.

Robert Lee (Analyst)

And would I be correct to assume that this is less about it being a source of incremental revenue and all that's kind of driving assumed it's driving demand for your own products and strengthening those relationships?

Jennifer M. Johnson (CEO)

Right. We do have the choice of either closed architecture, all our products, or an open architecture. And I think there's some fee for the assets that are open architecture. But it just depends, and we can be flexible with that. But yes, it's a way to create a solution-based sale of our investment teams. And as Adam said, I mean, we really view ourselves as, we're an investment manager. We're fundamental across all different types of investment capabilities. We want to deliver it in whatever way in which our clients want to receive it. So vehicle agnostic, whether it's a traditional mutual fund, UIT, SMA, ETF, or in a solutions-based kind of model portfolio like Go provides, or we'll build them individually for our distributors.

Robert Lee (Analyst)

And maybe a follow-up, just kind of connecting the ETF and ESG. I mean, you've talked at length about some of your ESG capabilities, and if you look in the marketplace, certainly in the U.S., it seems like it's through the ETF product that a lot of investors have initially been kind of trying to capture their exposure. So can you kind of talk about what your own plans are for since you're now having about $12 billion of AUM, but how you're thinking of trying to drive ETF growth through ESG, or is there a significant product launch ahead of us to try and get a feel for how those two connect for you?

Jennifer M. Johnson (CEO)

Yeah. I think it's fair to say that there are a set of financial advisors that just like to sell ETFs. And if you don't have products in that category, you are not going to resonate with those financial advisors. And so we are focused on being able to provide kind of flexibility around whatever the vehicles are. In our $12 billion, our largest category is active. Our second, I think, is Smart Beta. And the third is passive. Although our country ETFs, we're starting to get traction on. They're low priced, but they're significantly somewhere between 40-60 basis points cheaper than their competitive country. They've been small, but as we get more traction, we'll even pick up more on the institutional side. Matt, did you want to add anything to that? I don't know if you were.

I could add one thing to that, Jenny.

Okay. Adam.

That's how we think of ETFs, and I think this is different than some as a way to offer a different vehicle to clients, not a specific investment strategy. So just to put a little more data behind what Jenny said, of our $12 billion, roughly six of it is active, three of it is Smart Beta, and only three of it is market cap weighted passive. That's a little different than what we see at some others. I think that's going to guide our growth in the future.

Robert Lee (Analyst)

Okay. Great. And maybe one last quick one for Matt. Performance fees, $25 million and change this quarter. Of course, it's always difficult to predict, but any guidance you can give on how we should think of where you sit now, how we should think of that kind of rolling in the next couple of quarters?

Gregory E. Johnson (Executive Chairman)

Yeah. I do think it was seasonably quite high for us this quarter. So I think you could expect it to be a bit lower next quarter. Maybe $10 million is a good estimate. And then rising again at the end of the year back to, say, $20 million. And then because of the arrangement with Clarion, our performance fees in 2022 will become larger again because we end up getting a larger share of those performance fees.

Robert Lee (Analyst)

Great. That's helpful. Thanks for taking my questions.

Gregory E. Johnson (Executive Chairman)

Sure.

Operator (participant)

Your final question?

Adam Spector (EVP and Head of Global Distribution)

Sorry. Just before we start the next question, I just wanted to address the SMA question because we got the answer to that. So I think it was Mike Cyprys had the question. So the average fee is in the mid-30s for the SMAs. And the life that you're asking about is between six and eight years. So it's lower fee, but we generally hold them for longer periods. So that's why it's a very good business for us. Just wanted to make sure we answered that question.

Operator (participant)

Your final question comes on the line of Bill Katz with Citigroup.

William Katz (Analyst)

Okay. Thank you very much. Good morning. Thank you for taking my questions today. So Matt, just one for you. Just going back to the fiscal 2021 expense guide, I think last quarter you sort of spelled it at 3.7 was a pretty firm number regardless of market action. I may be paraphrasing. Is that still the case? Because I heard 3.7 to 3.75, and I appreciate some moving parts on the comp and the G&A line. But is 3.7 still the anchor number, or is there some now upside to that?

Gregory E. Johnson (Executive Chairman)

Yeah. So yeah. So Bill, thank you for the question. So I said $3.7 billion as long as the market increase was within sort of the low- to mid-single-digit. Obviously, we've gone quite considerably above that, which does put some pressure on the increase in compensation. As I mentioned, for the second quarter, we can expect compensation line to go up by 2%-3%. But then that should come down again based on the expense discipline that we've communicated. So 1%-2% down in the third quarter, another 4% down in the fourth quarter, all else remaining equal. So that's if the assets under management stay at sort of roughly the level they're at today. So I'd say that on all the other line items, it's very little change.

I think if anything, we're finding ways to create more expense opportunities to bring expenses down, as I communicated a moment ago. But I think that the $3.7 billion, mostly as a function of the markets being up in the high single digits to double digits, low double digits, is leading us to guide a little bit higher than the $3.7-$3.75 billion. If it comes back down again, it'll be $3.7 billion again. But that's the range. We're trying to keep that as tight as possible, as also communicated.

William Katz (Analyst)

Okay. Perfect. Thank you for the clarification, and then, Jenny, just one for you, just as you've sort of been talking through a lot of the cross-sell momentum. Do you think at the big picture level now, Franklin is where they need to be in terms of its footprint? I guess more specifically, is there any sort of appetite for M&A? And if so, what or where you might be thinking about filling in any residual gaps?

Jennifer M. Johnson (CEO)

So I would say that, look, first and foremost, we are going to catch this ball. We are going to make sure that the four deals that we did last year are well integrated. And that is absolutely our focus. And we're laser-focused on that. Now, having said that, we feel really good with where they are. The two acquisitions by Fiduciary Trust already are getting flows that surprised us how quickly they worked out. We feel very good with Leg Mason. AdvisorEngine was a technology one. They were pretty independent. So the first focus is just making sure those continue to do well. Having said that, we've said that we will continue to grow. We want to double our size of Fiduciary Trust. So as opportunities come up, I think we do some smaller bolt-on acquisitions there. We'd love to continue to expand in the alternative space.

If something made sense there, that's just a hard space to acquire, and we think that fintech is disrupting traditional distribution, so you'll see us continuing to make investments, whether they're acquisitions. It just has to be the right one, but we'll certainly make investments in places where we think there's greater distribution opportunity with some fintech investments.

Gregory E. Johnson (Executive Chairman)

Yeah. I would just add to Jenny's point about alternatives. It's difficult to find the exact right one for us, given the breadth of the alternatives we have. But there are quite a few out there that we've met that we think would be a great fit for our firm and a great fit for our alternative asset strategy. We have revenues in the alternative asset space of over $550 million or something like that for the year. And we would absolutely like to grow that. And we see plenty of opportunities out there. It's a matter of timing and finding the right one that fits with the rest of the pieces we've already got.

William Katz (Analyst)

Thank you very much.

Gregory E. Johnson (Executive Chairman)

Thank you.

Operator (participant)

I would like to hand the call back over to CEO Jenny Johnson for final comments.

Jennifer M. Johnson (CEO)

Great. Well, thank you, everyone, for participating in today's call. We're really proud of what we've been able to achieve in this truly unique environment, and we are excited to see the opportunities that lie ahead. Once again, I'd like to thank all our employees for their significant efforts, dedication, and client focus. We look forward to speaking to you all again next quarter. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.