Franklin Resources Inc Q4 FY2022 Earnings Call

Welcome to the Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year ended September 30, 2022. My name is Candy, and I will be your operator for today's call. As a reminder, this conference call is being recorded. And at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations of Franklin Resources, you may now begin.

Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary. 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 the MD&A section of Franklin's most recent Form 10-K and 10-Q filings. With that, I'll turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2022 results. As usual, Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution, are also joining me on the call. This month, we officially celebrate our 75th anniversary as a company. Our firm was founded on the values of advice, active investment management and helping people achieve the most important financial milestones of their lives. Since 1947, we have transformed from modest beginnings into one of the world's largest investment managers. And today, we partner with millions of clients in more than 155 countries. Although much has changed in 75 years, we are proud to say we have a history of innovation, and we have always maintained our commitment to evolve our organization to meet the needs of our clients and shareholders around the globe. Consistent with this, I'm pleased to say that we made good progress in fiscal 2022 on executing our long-term plan and further diversifying our business by expanding our investment capabilities and deepening our presence in key markets and channels. Since January, macroeconomic and geopolitical uncertainty have resulted in significant volatility and correlated declines in both global equity and fixed income markets. Our assets under management and flows were impacted by these unprecedented conditions and industry-wide pressures. However, as always, we have been actively engaging with our clients by providing insights and thought leadership to help them navigate the latest conditions, including drawing upon the expanded resources of our various specialist investment managers and the Franklin Templeton Institute. This fiscal year, notwithstanding flow pressures, investor interest continued in all asset classes. We benefited from having a diversified mix of assets and generated net inflows in the alternative and multi-asset categories and reduced net outflows in equities offset by increased outflows in fixed income and steep market declines. In terms of our progress, we are more diversified than at any point in our history across asset classes, client type, regions and investment vehicles. Starting with asset classes. We continue to thoughtfully expand our alternative investment capabilities, which are an increasing source of client demand and can offer superior returns. Just a few years ago, we managed about $15 billion in alternative assets. Pro forma for Alcentra, as of September 30, today, we managed $260 billion or approximately 20% of our AUM in alternatives, and these assets account for an even higher percentage of adjusted revenues. This makes Franklin Templeton one of the largest managers of alternative assets. Speaking of Alcentra, we were excited to announce today the completion of our acquisition ahead of schedule. Alcentra is one of the largest European credit and private debt managers. And with this closing, our alternative credit assets under management nearly doubled to $75 billion, and we expand our capabilities into Europe. We now have a meaningful portion of the key alternative categories, including secondary private equity with Lexington Partners, real estate with Clarion Partners, hedge funds with K2 Advisors, alternative credit with Benefit Street Partners and Alcentra and venture capital with Franklin Venture Partners. For the fiscal year, alternative net inflows were $6.3 billion, including outflows in liquid alternative strategies. Our three largest alternative managers, BSP, Clarion and Lexington each had positive net flows with a combined total of approximately $12 billion. There is tremendous opportunity in the democratization of private markets as individual investors are under allocated to the asset class, when compared to institutions. Over the past year, we have focused on product development and suitability, sales and marketing and client education in the distribution of alternatives in wealth management. On the product side, BSP recently launched its first multi-strategy interval fund. Additionally, Clarion Partners Real Estate Income Fund and Franklin BSP Capital Corporation, a private Business Development Corporation, were onboarded on two alternative fintech platforms that offer direct access to financial advisers and individuals. Again, this is all part of our broader effort to enable more investors to benefit from diversification of private markets and other alternative strategies. In this regard, to complement institutional focused resources, within our specialist investment managers we have created a dedicated alternatives distribution team that covers wealth management channels. In addition to being diversified, within our alternative asset strategies, we also benefit from a broad range of fixed income, equity and multi-asset strategies. In the multi-asset category, our flagship Franklin Income Fund which has an approach that is adjustable to changing market conditions generated net flows of $4.8 billion in the year due to increased interest from investors in Asia and Europe. Turning to fixed income. We benefited from a broad range of fixed income strategies with non-correlated investment philosophies, including positive net flows into US income, intermediate and highly customized. Notwithstanding the pressure in growth equity in particular, equity net outflows improved by 61% from the prior year, with positive net flows across a diverse array of strategies, including infrastructure, sector, emerging markets, all cap Core and equity income. From a client perspective, less than three years ago, retail investors represented 74% of our asset mix. Today, our business is balanced with approximately 50% individuals and 50% institutions. Furthermore, we continue to expand our private wealth management business and Fiduciary Trust International generated its eighth quarter of consecutive positive long-term net flows. Our firm is also diversified by geography and our efforts to implement a regionally focused distribution model that has shifted decision-making and resources closer to our clients is yielding results. For example, we have seen an improvement in our non-US business, including a 70% reduction in long-term net outflows from the prior year. EMEA long-term net flows turned positive, and there was a significant decrease in long-term net outflows in our APAC region. Turning to diversification by investment vehicle. We continue to build on our strengths in delivering investment expertise through our clients' investment vehicles of choice. Similar to the industry at large, we are seeing strong demand for SMAs and ETFs in particular. We are a leading franchise in SMAs with $100 billion in assets. And this year, we enhanced our position by acquiring O'Shaughnessy Asset Management and its custom indexing platform, Canvas, with positive net flows since acquisition. Today, our ETF AUM is in excess of $11 billion, and we continue to have positive net flows. Our ETF platform is differentiated with approximately 50% of our AUM in actively managed strategies. The evolution of technology in the industry continues to be another area of focus. This year, we made four minority investments in wealth distribution technology firms that expand access to private securities and/or digital assets to individuals. We launched the world's first tokenized US registered mutual fund as well as two digital asset SMA strategies. In June, we opened a second fintech incubator in Singapore and now have corporate investments in 14 early-stage companies, separate from our venture capital funds. In January, we successfully launched the Hello Progress campaign globally to introduce a refreshed view of Franklin Templeton. The campaign reinforced the trusted relationships we have built with clients for 75 years. Highlights the increased breadth of the firm and reflects our commitment to finding innovative ways to meet client needs. Looking forward, we will continue to purposely invest in key areas of growth across all geographies, including technology, alternative assets, customization, wealth management and distribution initiatives that benefit all our investment teams. Of course, none of our efforts this past fiscal year would be possible without the hard work and dedication of our employees, of which I and our leadership team very much appreciate. Now I'd like to turn the call over to our CFO and COO, Matt Nicholls, who will review our financial results from the fiscal quarter and year.

Thanks, Jenny. Fourth quarter ending AUM was $1.3 trillion, reflecting a decline of 6% from the prior quarter due to market depreciation of $62 billion and long-term net outflows of $20.4 billion. Reinvested distributions were $2.5 billion this quarter. Adjusted revenues decreased by 4% to $1.53 billion, and investment management fees, excluding performance fees, declined 5% from the prior quarter, both primarily due to lower average AUM, which decreased 5% from the prior quarter. Adjusted performance fees increased slightly to $133.3 million, compared to $127.1 million in the prior quarter. This quarter's adjusted effective fee rate, which excludes performance fees, was 38.8 basis points compared to 39.5 basis points in the prior quarter. The prior quarter effective fee rate was slightly higher as a result of the shift in AUM mix and the timing of the closing of Lexington Partners. Adjusted operating expenses were in line with the prior quarter at $1.04 billion. Lower compensation and benefits was offset by an increase in G&A, which included $8 million of episodic expenses. Adjusted operating income declined 13% from the prior quarter to $494.1 million, and adjusted operating margin decreased to 32.2% from 35.3%. Fourth quarter adjusted net income and adjusted diluted earnings per share declined by 5% to $394.4 million and $0.78 per share, benefiting from a lower tax rate in the quarter. Turning to fiscal year 2022 results. Ending AUM declined by 15% from the prior year, primarily due to market depreciation of $269 billion and long-term net outflows of $27.8 billion, reflecting an increase of 10% from the prior year. Reinvested distributions were $32 billion. While long-term inflows have been challenged in this risk-off environment, long-term outflows improved 11% from the prior year. Adjusted revenues of $6.5 billion increased by 2% from the prior year benefiting from six months of Lexington and increased performance fees, offset by lower average AUM, which declined 2%. Adjusted operating expenses were $4.2 billion, an increase of 5% from the prior year including the impact of our acquisitions and increased performance fee compensation, partially offset by expense savings. Excluding performance fee compensation and the impact of six months of Lexington adjusted operating expenses decreased by 1%. This led to fiscal year adjusted operating income of $2.3 billion, a decrease of 2% from the prior year. Adjusted operating margin was 35.9%, 180 basis points lower from the prior year. Excluding performance fees, performance fee compensation and the impact of six months of Lexington adjusted operating income decreased by 11%. Compared to the prior year, fiscal year adjusted net income declined 3% to $1.9 billion, adjusted diluted earnings per share was $3.63, also a 3% decline. As a reminder, our fourth quarter last year included a one-time tax benefit of $155 million or $0.30 per share. Reflecting challenging market conditions, during the fiscal year, we strengthened the foundation of our business through prudent and disciplined expense management. Among other measures, we outsourced our global transfer agency function, simplifying our business while reducing future capital expenditures. This initiative follows the previously announced outsourcing of our fund administration and certain other technology functions. From a capital management perspective, we were able to close the acquisitions of both Lexington Partners and O'Shaughnessy Asset Management, make several minority investments and returned $773 million to shareholders in dividends and share repurchases and ended the year with $6.8 billion of cash and investments of approximately level with the year earlier. We will continue to prioritize our dividend, purchase shares to hedge our employee share grants and review targeted acquisitions to reach our objectives at an accelerated pace. As Jenny mentioned, our acquisitions have been driven by goals to deliver a diversified range of investment strategies to more clients in more geographies and in vehicles of choice. This diversification has also added significant cash flow and led to new sources of long-term growth and income potential for our corporate shareholders. In this context, with the closing of Alcentra we have further diversified our alternative asset capabilities, which are in aggregate anticipated to generate approximately $1.3 billion in annual management fee revenue, excluding performance fees. Given our global reach, financial flexibility, business model and experience in execution, we're able to attract highly talented teams and partnerships, looking for a combination of investment independence, support and collaboration on a global and local scale to create new growth opportunities. Looking ahead, these factors position us well to capitalize on potential strategic activity in the sector.

Thank you. Our first question comes from Craig Siegenthaler of Bank of America. Your line is now open. Please go ahead.

Hey good morning, everyone. Hope you're all doing well.

Good morning.

So my question is on Alcentra's investment performance and organic growth. I know this deal just closed, but I was interested to see how the investment performance has trended this year and also how the fundraising and overall organic growth has also trended in 2022?

Good morning, Craig. So I think, look, we just announced the closing today, as you mentioned, we're very glad to be closing ahead of schedule by at least, I think, a couple of months. We're very happy with the team. Performance is good. We're now turning to execution with an emphasis on business growth opportunity for the future. And I think the best way to describe it is that our teams together are going to be in marketing mode quite quickly from here on. So I think that's all we can comment so far.

Great. And Matthew, do I get a follow-up? I forget if it's one or two here?

Yeah. Please go ahead, Craig.

All right. Perfect. My next one is on kind of future liabilities given a very active period of M&A. Just remind us what the next few years look like in terms of liability items like earn-outs from the acquisitions you've already announced?

Yes. So we have about $1.3 billion of deferred payments that are due on previously announced acquisitions over the next four years. We also have $1.4 billion of debt due over the next five years.

Thank you. Our next question comes from the line of Bill Katz of Credit Suisse. Your line is now open. Please go ahead.

I think diamonds for 75 years, Jenny, if I did the math correctly, so congrats on that.

Thank you.

So, regarding expenses, Matt, in your press release or the supplement, you usually provide some information on how to approach these. With the New Year upon us and a lot happening, alongside decreased revenues and some deals, could you give us guidance on how to consider the base expense outlook for fiscal 2023? Should we look at the fiscal fourth quarter as a starting point, or is there a need to normalize the expectations? Please share your thoughts on this.

Thank you, Bill. First, as you know, we typically do not provide revenue guidance because it's challenging to anticipate market trends, which are a significant factor in revenue fluctuations. However, I want to highlight that we are adding Alcentra today, which brings around $35 billion under management to our total AUM. This will also enhance our effective fee rate and other changes that we expect in the coming quarter, aiming to return to the mid-39s range. Regarding expenses, I will review various line items to assist with your modeling for the first quarter of 2023. I recognize it’s early, but I will also offer an annual overview of our expenses, excluding performance fees. For compensation and benefits in the first quarter of 2023, we anticipate performance fees of about $50 million and expect compensation to remain roughly the same as in the fourth quarter of 2022, albeit with two months of Alcentra and an accelerated deferred compensation of $35 million factored in. For IS&T, we expect expenses to hold steady at around $122 million, including Alcentra. For occupancy in the first quarter, we’ll increase that to about $60 million, reflecting a more normalized return to office. G&A expenses are projected to rise to approximately $160 million for the first quarter due to a one-time international outsourcing fee and increased placement fees. Going forward, we expect G&A to decrease to around the mid- to high 140s, inclusive of Alcentra and likely continued elevated placement fees. It’s important to note that G&A also reflects increased travel and entertainment expenses, which have jumped from about $7 million in the second quarter of 2022 to $15 million in the fourth quarter, with expectations of reaching around $20 million going forward. We project a tax rate of 27% for the quarter, which is typically higher, and for the entire year, it should be around 25% to 27%. Looking at the year ahead, although it is early, it may be helpful to mention that excluding performance fees but including a full year of Lexington—remember, we had six months of Lexington last year—we will now have 12 months of Lexington and 11 months of Alcentra. This addition will contribute approximately $225 million to expenses. Excluding performance fees, our total expenses for 2023 are expected to be between $3.95 billion and $4 billion, remaining fairly consistent with 2022, while also accommodating the additional costs associated with the extended duration of Lexington and nearly a full year of Alcentra.

That's very helpful, thank you, Matthew. Jenny, I have a question for you. Regarding the initiatives you've mentioned for retail democratization, can you provide an update on your current position with the major wirehouses in the US and your global distribution partners? Specifically, where do you see opportunities to increase penetration or gain market share?

Yes, I would say that it's complicated because it's not just about entering the platform. There is a lot of education involved. We've taken several steps, including forming a dedicated group staffed with specialists who focus on the alternative channel to support the wealth channel wholesaler. This team is well-versed in different areas. On the product side, BSP has launched our multi-strategy interval fund, and CP Reef has gained good traction, particularly with smaller distributors. We are currently undergoing due diligence with several large platforms, which require a certain scale for inclusion. We've also partnered with CAIS and iCapital, and our products are listed on both platforms, which are significant for us. At a recent conference, financial advisers mentioned how challenging the paperwork and capital calls can be, making it crucial for us to enhance this process, and both CAIS and iCapital are working on this. We are optimistic about our progress and believe we are at a turning point as the major distributors are now conducting their due diligence.

Thank you.

Thanks Bill.

Thank you. Our next question comes from the line of Brennan Hawken of UBS. Your line is now open, please go ahead.

Good morning. Thanks for taking my questions. On Alcentra so you, in the past, have spoken to their distribution capabilities and strengths. Are those primarily on the institutional side? And where does the penetration of the retail channel in Europe stand compared to the US? What's that opportunity set like?

Sure. I think what we're seeing globally is that the adoption of Alcentra, a more significant portion of the portfolio is occurring in every region we operate in. We see that in Latin America. We see it in Asia, the US, and EMEA. And to the extent that Alcentra runs a lot of European-based products, we think that they have the best shot of increasing their penetration there in the short run. We're going about it the same way we are everywhere in the world. We think we have a world-class institutional brand; we've got a wealth management distribution presence. And then what we're doing to boost Alcentra in that market is really to add specialists so that there's a specialist team that works between the investment teams and the general salesforce to make sure that we're telling the story the right way. Because as Jenny said, we think that success in retail also is going to be largely based on ease of access as well as education and that's where we're putting a lot of our efforts now. Given that the transaction was just announced today, we're still early in executing on some of that, but we're working on it now.

Thanks.

And I'll just add a couple of points to Adam's remarks. Each of our specialist investment managers that we've acquired in the alternative asset space has had an attractive organic growth rate profile based on historical performance and activity in the institutional client base. And so there's already that embedded growth rate as we acquire the firms. So, the future potential is on top of that that Adam talks about. So, we expect a natural organic growth rate tied to the institutional side of the business. And then that to be boosted, as Adam mentioned, more of the wealth management channels. The additional acquisition targets that we look at that will complete our sort of build out, if you will, of the alternative asset specialist investment managers are exactly the same. They're all institutionally-focused with embedded growth rates on the institutional side, of which we believe there are some very interesting opportunities in the broader channels where Franklin can leverage.

I'm going to add one more point. There's often a bias toward investing in one's home country. However, I can confirm that we are experiencing positive net flows in the EMEA region. The enthusiasm from our distribution team about having local private credit is crucial for enhancing that capability. We are optimistic about this.

Great.

Thanks a lot.

And the final thing is how excited we are about all.

Yes, here we go. I hit a live wire with this one.

We’re going on alternative. Each of our alternative firms is institutionally focused historically and has long-standing distribution, but we are supplementing that with FT relationships where we have particular strength and we're seeing that benefit each and every one of our firms.

Got it. Sorry, ST.

Franklin Templeton.

Thank you for the detailed information. I appreciate it. I would like to shift to a more routine discussion about expenses. Matthew, considering the early stage of things, you helped us understand your expectations for an increase in travel and entertainment costs. Given the current inflationary environment impacting Alcentra, can you clarify how much Alcentra is contributing to the base of 3.95 to 4? Additionally, how much flexibility do you have to reduce that figure as we navigate through this challenging environment throughout the year?

Thank you, Brennan. Regarding Alcentra, it's around $100 million. We plan to integrate all of that into our cost structure without cutting costs. We're also identifying areas within Franklin Templeton to enhance efficiency, aiming for a solid expense structure despite tough market conditions. It's important to clarify that we're not reducing expenses in London where the recent acquisition has occurred. This is a situation where scale can help us find efficiencies across the platform. You're hinting at margins, and we expect them to dip slightly before recovering. Notably, 35% to 40% of our adjusted expenses fluctuate with market conditions, but we are also concentrating on the remaining 60% to 65%. While 35% to 40% is truly dependent on market performance, we have other areas to consider. In a downward market of this magnitude, it requires time for well-thought-out adjustments to match the rapid revenue declines the industry faces. We must ensure we remain competitive with compensation and continue to invest in the business, especially now as the industry evolves. We've already implemented measures such as pausing nonessential hiring and offering voluntary buyouts, which do not affect investment staff. We believe this is a fair and effective method for resizing our workforce, and we have plans to enhance operational efficiencies within the firm through initiatives like expense management. While these may seem basic, they are crucial for getting things right. Given our size, we believe we can achieve significant savings. Our previous actions, even during buoyant market conditions, plus the efficiencies gained from our merger, have already enabled us to outsource certain tasks, benefiting our funds and shareholders while reducing future corporate capital expenditures. This strategy aims to minimize our capital output in non-core operational areas and streamline company operations. By maintaining this disciplined approach over the last three years, we have continued to invest in wealth tech alternatives, SMA customization, and distribution, which we've frequently discussed. You will see us actively pursuing strategic investments in our business while effectively managing expenses even in this challenging environment.

Thanks for all the color.

Thanks Brennan.

Thank you. Our next question comes from the line of Dan Fannon of Jefferies. Your line is now open. Please go ahead.

Yeah, hi good morning. This is actually Rick Roy on for Dan. So just thinking about the macro set for fixed income in the coming year, several of your peers have highlighted the potential for increased allocations to fixed income, just given the historically beneficial setup that we've seen. So with the performance of certain flagship Western products that at least the ones that are visible to us, do you see them as the Western franchise as a share winner or loser in this environment? And then maybe just adding on to that, any color on the Brandywine and legacy Franklin fixed income product set would also be helpful.

Adam, do you want?

Thanks for the question. Yeah, we're thrilled about the opportunity for fixed income to offer more value to investors. Right now, fixed income finally has yield embedded in across all the sectors. We have about 121 fixed income composites that we can offer investors and 45 of those are outperforming on the one, three, five and 10-year periods. So we have tremendously attractive fixed income in a range of categories. Core fixed income Core and Core Plus were obviously under pressure this year. But what we've seen is that we're able to compete really very effectively at the shorter end of the curve in credit products in multi-sector and global and we're seeing significant wins there. Despite the performance, Western Core and Core Plus are some of our absolute biggest growth sales products with a healthy pipeline and we're excited for that to continue. So a tough year in performance in some spots, but a really good fixed income lineup across the board. The other thing that we've been able to do effectively this year is pivot out of fixed income securities to equity income strategies, multi-asset class income with our income fund, how things like infrastructure income and able to produce income without duration. So to the extent that people are still worried about rising rates, we have other opportunities, but within traditional fixed income, a range of things that are exciting, and we are seeing increased demand from investors.

Got it. Appreciate the extra context around that. And then if I may, just on the performance fees, obviously, has been somewhat elevated the last two quarters at least. So how might we think about performance fee eligible AUM and where that sits currently, obviously, with Alcentra now in the mix and what assets are below any high watermarks. Just to get an idea of going into next year?

Yes. I don't think we changed our guidance on this. I realize that we have had another quarter of increasing or higher performance fees than we talked about on our previous call, the guidance we've given, which is around $50 million. But I'd just say that about $55 million or so, the performance fees from the fourth quarter was from clients rebalancing or taking strong returns off the table and this triggered an accelerated performance fee payout. So I don't think we were too far above what we suggested, we'd be at except for this acceleration through rebalancing. In terms of the performance, what assets under management or our performance fees linked to it's very much in line with the AUM that has been highlighted in our remarks, which is the full $260 billion. Of course, some of that’s quarterly, some of it is annual. But the potential for performance fees in the future in our business is very significant. The $55 million of rebalancing related performance fees, let's say, is not from a very large rebalancing. It has to be said, it's but they produced a very strong performance fee. And we're so far above the performance threshold in those assets under management that if there's other rebalancing, we will get higher performance fees. But again, I would just stay to the guidance that we provided, it's extremely hard for our guidance and performance fees, as you all know. Not that doesn't mean we're not confidence in our performance is very strong across all of our alternative asset specialist investment managers. But I think $50 million for – for modeling purposes is the right number.

Appreciate it. Thanks so much.

Thanks.

Thank you. Our next question comes from the line of Ken Worthington of JP Morgan. Please go ahead.

Hi. Good morning, everyone. This is Michael Cho in for Ken. I just wanted to just go back, follow up on the 2023 framework that was provided. I guess Matt, you talked about investing in the business and it seems more important than ever. And I guess my question is, in terms of your intention to continue investing and diversify your business in terms of alts and wealth and fintech I guess, would your intention also be to increase or decrease or even – even maintain the pace of investment when we think about the efforts to diversify the business as we look into 2023.

In terms of investing in areas where we currently have very little operating income but expect to see growth in the future, we are planning to significantly increase that investment in 2023 because we see considerable opportunities ahead. So, we intend to enhance our investment in that area. I'll ask Jenny if you have anything to add.

Maybe I misunderstood the question. But we've been pretty clear about our approach to acquisitions from an investment perspective. Our view is that we have the broadest lineup of alternative managers compared to any traditional asset manager. If you compare our performance fees to those of other traditional managers, you'll notice the difference. Yes, there are still some gaps, such as in infrastructure, and we’ve discussed the need to globalize our various capabilities. If opportunities arise, we would be interested. We've also mentioned enhancing our distribution, so any investments that help us improve distribution capability and the wealth channel are key areas of focus. Currently, the threshold for acquisitions is higher as we are managing a few large acquisitions. However, having founder involvement and a 75-year history means we always keep cash on hand to seize opportunities when they present themselves, and we feel we have that flexibility. At the same time, we will be selective because we are pleased with our current lineup.

Yes, I want to emphasize that our top priority is our internal organic growth strategy. In response to your question about whether we are increasing our dollar investments organically, the answer is yes, we are increasing those. Regarding our M&A activities, as mentioned, we currently have $6.8 billion in cash and investments, which is similar to where we were at this time last year after completing two significant acquisitions and four minority investments. Much of this has been made possible through our operating income and cash flow. As we look ahead and consider the guidance I just provided, we still have the capacity to make essential organic investments. Additionally, our balance sheet allows us to pursue targeted acquisitions. While the criteria have become stricter, interest in potential opportunities remains strong.

To provide more insight into our organic investments, these have all been factored into Matt's guidance. The Franklin Templeton Alternatives Group we established is newly staffed with expertise in distributing alternatives to the wealth channel, representing a significant investment. Additionally, we continue to invest in FinTech and tools that can assist financial advisers. While these investments may not be profitable on their own, they become valuable when combined with models and other capabilities, requiring ongoing investment. All of this is included in our earnings guidance.

Thank you. Our next question comes from the line of Michael Cyprys of Morgan Stanley. Your line is now open, please go ahead.

Great. Thanks. Good morning. Maybe just coming back to Alcentra, can you talk about where you see the most compelling opportunity set to accelerate the growth at Alcentra. Is that from retail distribution in Europe? And maybe you could talk about what actions you might take there with Alcentra to help them accelerate growth?

Yeah, absolutely. I think the first thing we want to state is that they've got a really high quality team on their own. We've met with them recently, and we think standalone, they can do quite well. That being said, we have a huge footprint in the EMEA region. As Jenny said, we find there's a significant home bias, home market bias to all investors, retail and institutional. And what we've seen with some of our other alternative capabilities that we try to distribute in EMEA is that there can be a desire for more European based private credit. So we think that is one of the areas where we can take our significant footprint in the region and add it to their institutional capabilities. I would say that in the wealth management channel, that is more greenfield. That's going to be where there's fewer assets at play where allocations are rising significantly. There, I think being an earlier player focusing on education, focusing on making the placement easier will give us a leg up there. The final thing I would note is that while I think most of our alternative managers are strong in the major markets, it really helps at FT where we have a presence on the ground in over 30 markets. So in some of those smaller markets where our alternative firms might not get to on their own, and we have significant relationships. That's the place where we can really boost distribution.

I would like to emphasize that this transaction represents the globalization of our specialist investment manager, DSP. By integrating Alcentra and BSP into a global team rather than primarily a US and European business, we enhance our capabilities in fundraising, strategy formation, and talent retention. This transformation makes us a more attractive option for investors, fresh ideas, and talent. This was a key reason for our acquisition of Alcentra, as we believe the bar for success is high. We consistently evaluate if we can develop this business organically, but some areas take too long to establish credibility or achieve a leadership position. We believe acquiring Alcentra accelerates our efforts to globalize our excellent PSP team and leadership.

Great. And just a follow-up question. Maybe more for Jenny, I wanted to come back to the money fund that you guys cited as registered to use the blockchain. I was hoping you could elaborate on that. What's the timing and process look like to bring that to the marketplace? How an individual or institution may be able to access that fund and the benefits that you see there?

Yeah. So it's a tokenized money market fund, technically, you could go on at the Apple Store and download the Benji app and have a wallet that accesses that money market fund. We built a transfer agency system on the blockchain. So all the shareholders' books and records are there. That I'm a believer that you will see 40 Act funds expressed over time in tokenized records. And that will have an impact on things like ETFs and traditional mutual funds. If you think about a token, it can have a smart contract that prices all the underlying investments immediately, so you can always have an NAV that's dynamic, even ETFs are only priced a couple of times a day. So we did it because we think that this is an important space that's going to happen over time, and we wanted to understand the marketplace there. And we are talking to firms about how to leverage it. You have to hold those tokens in a crypto wallet, so if that isn't part of your infrastructure as a distributor, it's not that valuable to you today, but it will be over time. We also did an investment in a company called Eaglebrook, and we have several strategies there. Where they are fundamental research on some of the coins in the marketplace, we think these two things ultimately converge. Where you'll have traditional sort of investment capabilities that are held in a token or coin and you will have companies that will be reflected by a coin and investors will have both on their platform. But, I think, it's really early stages in this.

Great. Thank you.

Thank you. So our next question comes from the line of Brian Bedell of Deutsche Bank. Your line is now open. Please, go ahead.

Thanks very much. Good morning, everyone. First question for Matthew, could you clarify the 2022 adjusted expenses excluding performance fees? I know we've typically used the formula for that, but do you have a specific dollar amount for this fiscal year?

For the end of the year, it's around $3.87 billion.

3.78.

That, as we previously guided, in the last call, we indicated a range of 3.9% to 3.95% and mentioned that we would be on the lower end of that, so we're actually about $35 million below our guidance.

I believe the best way to understand ESG is by examining the European framework, specifically Articles 6, 8, and 9, as they effectively define the criteria. Asia appears to be following this approach, and it's likely that the US will adopt similar concepts. Currently, we manage around $35 billion across 48 strategies that meet Article 8 and 9 criteria, and we have seen positive inflows in this area. We took a conservative approach during our initial assessment, and our compliance team was actively involved in classifying our offerings under those articles. We are confident about this classification. There's an increasing demand for transparency and documentation of processes; regulators in both the US and Europe are emphasizing that if firms cannot prove they are following through on their claims, they will not receive credit. This is reminiscent of the UK’s 2022 Stewardship Code, which heavily focuses on documentation. There is a growing understanding that ESG considerations should be assessed alongside the risks to the underlying companies and their portfolios, as these factors often intersect. I foresee a future where we have distinct metrics for these assessments. Additionally, it's recognized that, as fiduciaries, we must incorporate return considerations into our evaluations. This is also reflected in the UK Stewardship Code. I believe this focus on transparency and improved data will continue to evolve, while also reminding us that we are asset managers rather than asset owners; we operate based on our clients' wishes, providing guidance and education, but ultimately, it is their capital.

Great. Thank you.

Thank you. This concludes today’s Q&A session. I would now like to hand the call to Jenny Johnson, Franklin's President and CEO for final comments.

Great. Well, I just want to thank everybody for participating in today’s call. And once again, I would like to thank our dedicated employees for their hard work this past fiscal year and they are laser focused on our clients, and we look forward to speaking to all of you again next quarter. Thank you.

Thank you. This concludes today's conference. You may now disconnect your lines.