Q4 2024 Earnings Summary
- Franklin Templeton has significantly diversified its business over the past five years, becoming a more balanced firm with growth in ETFs, private markets, and expansion into international markets, which positions it well for future growth.
- The company's ETF business is experiencing rapid growth, with over $3 billion in net flows in each of the last two quarters, up 88%, indicating strong momentum in this area.
- Franklin Templeton's unique local asset management capabilities in markets like India, Mexico, and the Middle East allow it to capitalize on local growth opportunities, enhancing its competitive advantage.
- The ongoing investigations into Western Asset Management are causing significant outflows and impacting revenues. Since the announcement of the investigations, Western Asset has experienced net outflows of $53.6 billion. As a result, Western's annualized revenues are expected to decline by about 20% so far, equating to a 2% decline at the Franklin Resources level. This significant decline in a key subsidiary's revenues poses a risk to the company's overall financial performance.
- The company's organic growth may be challenging to achieve given its reliance on offsetting declines from Western Asset. Management acknowledges that without Western's outflows, organic growth runs at about 1.3%. With uncertainties surrounding Western Asset and the time needed for new initiatives like ETFs and private markets to scale up, the company may struggle to meet its target of low single-digit growth.
- Potential spillover effects from the Western Asset issues could negatively impact other parts of the business. While management states they have not seen a significant impact on other strategies beyond Western, they acknowledge that it is "definitely part of the conversations". This suggests a risk that clients' concerns about the investigations could lead to outflows in other areas.
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Western Asset Outflows Impact
Q: How are Western Asset's outflows impacting your business?
A: Western Asset has experienced $53.6 billion in outflows since Ken received his Wells notice. This is mainly in their Core, Core Plus, and Macro Ops strategies. Western's annualized revenues are expected to decline by about 20%, equating to about a 2% decline at the Franklin Resources level. The operating income impact will initially be higher since expenses can't be reduced at the same rate as revenue. We are adjusting our economic arrangements with Western to accommodate this decline. -
Expense Outlook and Putnam Integration
Q: What's the outlook for expenses, including Putnam's impact?
A: Normalizing for a full year of Putnam and excluding performance fees, we expect expenses to be similar to the last fiscal year. One quarter of Putnam expenses is about $125 million. We will manage expenses carefully, especially considering the Western situation. -
5-Year Growth Targets
Q: What are your revenue and growth projections over next 5 years?
A: We aim to achieve low single-digit growth on average. Without Western's outflows, our organic growth rate runs at about 1.3%. We are building scale in areas like ETFs, which had over $3 billion in net flows in the last two quarters, up 88%, totaling $31 billion in AUM. Our breadth in private and traditional markets, along with our international presence, will drive growth. -
Private Markets Fundraising Goal
Q: Can you discuss the $100 billion private markets target?
A: The $100 billion target over 5 years is based on our existing managers. Since acquisition, BSP has doubled in size, Clarion is up nearly 40%, and Lexington up nearly 30%. For fiscal 2025, we project gross sales between $13 billion and $20 billion in private markets. This depends on factors like Lexington's flagship fund launch and the real estate market's recovery. -
Institutional Flows Beyond Western
Q: How are institutional flows outside Western Asset?
A: Excluding Western, last fiscal year we raised $2.2 billion in the institutional channel, which more than doubled to $5.6 billion this year. We have worked hard to build better relationships with institutions globally. -
Private Wealth Management Expansion
Q: What's your plan for growth in private wealth management?
A: We are expanding partnerships in the wealth channel, now up to over 20 partners with products like CPREX from Clarion. We co-develop products with wealth management partners and emphasize launching with scale. We also intend to grow our Fiduciary Trust platform by attracting more teams to join.