Q2 2024 Earnings Summary
- Strong Growth in Key Areas and Positive Net Inflows: Franklin Resources reported positive net inflows of $6.9 billion in the quarter, with long-term net inflows spread across asset classes, investment vehicles, and geographies. Fixed income net inflows were $8.3 billion, and there were consistent positive net inflows in ETFs, SMAs, and Canvas offerings, all achieving at least four consecutive quarters of net inflows and reaching record high AUM. The institutional pipeline of won but unfunded mandates increased to $20 billion, one of the strongest it's been, excluding any Great-West Life allocations. This indicates robust future inflows and business growth. , , ,
- Successful Integration of Putnam Acquisition Boosting Sales and Distribution Capabilities: Following the acquisition of Putnam, Franklin Resources became a $1.64 trillion investment manager, with Putnam's AUM increasing by 18% since the announcement in May last year. Putnam contributed positive net flows, and its average monthly gross sales increased by approximately 30% since the acquisition, demonstrating the strength of Franklin Templeton's distribution network. This expansion strengthens their presence in important markets and distribution channels. ,
- Strong Fixed Income Performance and Demand Leading to Increased Flows: The company witnessed significant inflows into fixed income products, with $8.3 billion in net inflows for the quarter. The institutional pipeline growth is heavily weighted towards fixed income, accounting for over 70% of the growth, and when including Benefit Street Partners (BSP) as private credit, the growth in the pipeline from fixed income reaches 97%. Six of their top ten gross-selling funds were in fixed income, indicating strong client interest and positioning Franklin Resources to capitalize on this trend.
- Underlying net outflows in core business: When adjusting for dividends reinvested, initial capital from Great-West Life, and inflows from alternative asset managers, the company's core business appears to be experiencing significant net outflows. Analysts estimated that after these adjustments, net outflows could be as much as $18 billion. This suggests challenges in stabilizing the traditional asset management business. , ,
- Declining effective fee rate due to shift in business mix: The effective fee rate (EFR) is declining, moving into the high 37 to 38 basis points range, down from previous levels. This is attributed to a business mix shift toward lower-fee products such as ETFs, separately managed accounts (SMAs), and the Canvas platform, as well as the addition of Putnam's assets, which have a lower average fee rate. The declining EFR may pressure revenue growth despite asset growth. , ,
- Increased expenses leading to higher expense guidance: Higher-than-expected compensation costs, including performance fees and calendar resets, have led the company to revise its annual expense guidance upward to $4.6 billion to $4.65 billion, representing a less than 1% increase from prior guidance. The increase is driven by higher markets impacting compensation expenses, potentially affecting profitability.
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Core Net Flow Run Rate
Q: What's the core net flow run rate excluding Great-West?
A: Excluding the $14 billion from Great-West, Franklin reported $7 billion in long-term net flows. Core sales, defined as sales less than $100 million and excluding Putnam, were up 14%. Inflows, excluding reinvested distributions and Great-West, increased by 17%. The firm's pipeline grew from $13 billion to $20 billion, none of which includes Great-West Life. -
Outflows and Alternatives Net Flow
Q: How should we view alts net flow trajectory given outflows?
A: Over the last eight quarters, Franklin had $13 billion in net inflows, excluding realizations. Combined inflows from Lexington ($10 billion) and Benefit Street Partners ($5 billion) totaled $27 billion, suggesting outflows elsewhere. While they raised $55 billion in alternatives, $16 billion of outflows were from liquid alts, representing about 6% of their alts portfolio. In the current fiscal year, they've raised $7.3 billion in private markets and nearly $2 billion in liquid alts, netting flat after distributions and FX impacts. -
Expense Guidance and Outlook
Q: What's the outlook for expenses, particularly compensation?
A: Compensation and benefits were higher due to performance fees and higher calendar resets, totaling about $30 million above guidance. Excluding Putnam, expenses were flat. For the full year, expense guidance increased slightly to $4.6 to $4.65 billion, driven by higher markets. -
Effective Fee Rate Trends
Q: How is the effective fee rate trending?
A: The effective fee rate (EFR) dropped to 38.5 basis points, as guided. Going forward, EFR is expected to remain in the mid-38s, influenced by episodic alternative asset fees and business mix shifts, including growth in lower-fee products like ETFs, Canvas, and separately managed accounts. For the next quarter, EFR may be in the high 37s to 38 basis points due to these factors. -
Net Flows Breakdown and Core Business
Q: Is the math showing negative core flows correct, and what's the plan to stabilize?
A: After adjustments, core business net flows might appear negative $18 billion. Management acknowledged growth areas in alternatives, ETFs, and SMAs, emphasizing that these are focus areas. They noted stable to improving outflow rates in traditional businesses. Plans to expand in the retirement channel include utilizing Putnam's target-date products and leveraging their 350+ client-facing wholesalers to increase market share. -
Fixed Income Flows and Market Trend
Q: Are we at the start of larger flows into fixed income?
A: There's strong demand for fixed income, with 70% of pipeline growth in this area, excluding Great-West. Six of the top ten gross-selling funds were fixed income products like corporate bond, core bond, multi-sector, and munis. The interest is broad-based across different products and client types. -
Allocation Shifts to Fixed Income
Q: Will fixed income allocations be much higher in two years?
A: It depends on views about interest rates. If rates stay higher for longer, it may impact returns on equity markets and expectations, possibly affecting allocations. There's a trend of increasing allocations to fixed income among certain clients, but shifts towards alternatives may counterbalance this. -
Institutional Pipeline Details
Q: What drives the fixed income success in the pipeline?
A: Institutional mandates are funded through cash, securities, or transition managers. The pipeline success is due to clients switching managers for performance, extending durations, and adding plus sectors. This success is broad-based across all four fixed income firms, with significant pipelines in core, high yield, and munis. -
ETFs Outside the U.S.
Q: How are you leveraging ETFs outside the U.S.?
A: Franklin's ETFs outside the U.S. have grown significantly, especially in Canada and EMEA. Sustainable-oriented ETFs like green bonds and Paris-aligned S&P 500 are performing well. Approximately half of ETF flows this quarter were from outside the U.S., and they continue to expand active, passive, and smart beta offerings globally. -
Private Markets and Wealth Channel Opportunities
Q: How are you capitalizing on private markets in wealth channels?
A: They're active in the market with products like Lexington's middle-market and co-invest offerings. Focused on the wealth channel, they're leveraging their 350+ wholesalers and the Franklin Templeton Academy for education. The firm believes it has the products and distribution capabilities to meet market needs in alternatives within the wealth channel. -
Fee Rates in Institutional Pipeline
Q: Can you size the fee rate of the institutional pipeline?
A: The fee rates are consistent with their institutional fee rates, which are in the mid- to high 20s basis points. The remaining flows from Great-West are expected to come in at higher fee rates compared to the initial low-fee inflows. -
Base Fee Rate Volatility
Q: What's causing base fee rate fluctuations?
A: EFR variations are due to business mix changes and episodic alternative asset fees. Growth in lower-fee areas like ETFs, Canvas, SMAs, and Putnam's flows contribute to EFR declines. They expect EFR to remain in the 38 basis points range annually, with possible quarterly variations based on product mix and market factors.