Good morning. Welcome to Franklin Resources earnings conference call for the quarter ended March 31, 2023. Hello, my name is Lara, and I will be your call operator today. As a reminder, this conference 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 for Franklin Resources. You may begin.

Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts or 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 sections of Franklin's most recent Form 10-K and 10-Q filings. Now I'd like to 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 results for the second fiscal quarter of 2023. As usual, I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. Despite a difficult market backdrop exacerbated by stress in the regional banking sector, we continue to see positive momentum across our business in terms of long-term flow trends, relative investment performance, diversification by product and vehicle, and financial results. Market dislocations often result in investment opportunities for skilled active investors. In this regard, our investment performance continued to improve across asset classes. This quarter, three of our four asset classes: fixed income, multi-asset, and alternatives generated positive net flows. We also saw continued progress in ETFs and Canvas, our custom indexing solution platform. Flow trends improved across all geographies with our Asia Pacific region reporting positive long-term net flows in the quarter. Furthermore, this prolonged period of heightened market volatility affirms the importance of the investments we've made to diversify our business and better serve our clients, all in an effort to offer more choice and help them achieve long-term financial goals no matter where we are in the economic cycle. As to the specific numbers, starting first with flows, long-term net outflows improved from the prior quarter to $3.7 billion compared to net outflows of $10.9 billion in the prior quarter. Importantly, as mentioned, fixed income, multi-asset, and alternatives all generated positive net flows. Fixed income generated net inflows of $1.8 billion. As we've said on previous calls, we continue to benefit from our broad range of fixed income strategies with non-correlated investment philosophies, and that trend continued this quarter. Client interest continued in U.S. taxable corporate, municipal, and global opportunistic strategies, which were all net flow positive. Multi-asset net inflows were $1.5 billion, driven by Franklin Income Fund, Fiduciary Trust International's high net worth business, and Canvas. Canvas has achieved net inflows each quarter since the platform launched in September 2019, and AUM increased over 13% in the quarter. Alternative net inflows were $1.3 billion, driven by growth into private market strategies, which were partially offset by outflows in liquid alternative strategies. Benefit Street Partners, Clarion Partners, and Lexington Partners each had net inflows with a combined total of $1.5 billion. Equity net outflows were $8.3 billion, reflecting continued risk-off sentiment for many investors, but we did see positive net flows into ETFs, Global equity, and Small Cap Growth equity strategies. ETFs had net inflows of $1 billion and now total approximately $15 billion in AUM. In this quarter, we launched a variant of our flagship Franklin Income Fund in a multi-asset active ETF vehicle. Cash management, which is excluded from long-term AUM and flows had net outflows of $4.3 billion in the quarter and included episodic redemptions of approximately $7.5 billion from a sweep program associated with the regional bank. Our regionally focused sales model has continued to gain traction, and this quarter we experienced improving flow trends across all geographies. I already mentioned the positive long-term net flows in the Asia Pacific region, which were driven by Australia, Korea, and Japan. Our one, but not funded, institutional pipeline was $15.4 billion and reflected the previously disclosed funding of a $7.5 billion institutional fixed income mandate. Given the uncertain market environment, institutional investors continue to be more defensive with a focus on diversification and liquidity. This resulted in less money in motion, particularly in March. Turning now to investment performance. In this environment in particular, it's encouraging to see that the sound long-term investment thesis of many of our largest strategies are playing out, and performance generally improved across all time periods. This quarter, 64%, 63%, 61% and 66% of our strategy composite AUM outperformed their respective benchmarks on a one, three, five, and ten-year basis. The one-year period improved primarily due to certain ClearBridge and Franklin Mutual Series equity strategies. Additionally, we're seeing improvement in the longer-term performance of Western Asset's U.S. taxable fixed income strategies. On the mutual fund side, 67%, 53%, 63%, and 56% of our AUM outperformed their peers on a one, three, five, and ten-year basis. Equity-related products are leading the increase in relative performance for the one-year period, specifically, ClearBridge, Templeton Global Equity Group, and Franklin Equity Group outperformed in March. In addition, half of mutual fund AUM was in funds rated 4 or 5 stars by Morningstar. As I mentioned earlier, over the past several years, we have further diversified our business, and we believe our broad range of investment philosophies and processes differentiate our specialist investment managers from each other and gives us an ability to build the best outcomes for our clients. In March, we proactively engaged with clients to help them navigate financial uncertainty created by stress in the regional banking sector. The Franklin Templeton Institute provided timely updates to our clients through webinars, articles, and video posts. Clients were particularly interested in the numerous panels comprised of our specialist investment managers who offered investment perspectives across asset classes, including venture capital, alternative credit, and traditional fixed income. We continue to see client demand in fixed income, income-oriented, and dividend-yielding products. In addition, as a result of recent market dislocations, alternative capabilities such as secondary private equity, private credit, and real estate continue to be of client interest. Touching briefly on our financial results, ending AUM was $1.42 trillion, an increase of 2.5% from the prior quarter, primarily due to market appreciation, and average AUM increased 5% to $1.4 trillion from the prior quarter. While this quarter's adjusted effective fee rate was in line with the prior quarter at 39 basis points, adjusted operating revenues of $1.5 billion increased 6% from the prior quarter driven by higher adjusted performance fees and average AUM, partially offset by two fewer calendar days. Adjusted operating income was $440.2 million, an 11% increase from the prior quarter, and our adjusted operating margin increased to 28.9% compared to 27.5% in the prior quarter. We continue to maintain a strong balance sheet with total cash and investments of $6.8 billion. Let me wrap up by summarizing that we continue to benefit from our diversified business, our flows, and relative investment performance have been steadily improving, and our balance sheet affords us flexibility, including the ability to further expand our capabilities. Our focus remains on delivering better outcomes for our clients. And finally, my admiration and thanks go to the thousands of employees around the globe who represent Franklin Templeton so well. Now let's turn over to your questions.

Your first question comes from Bill Katz from Credit Suisse. Please go ahead.

Okay. Thank you very much. I appreciate all the extra color in the supplement. Maybe, Jenny, one for you. You sort of mentioned that in your prepared comments and also in the press release that you're sort of positioned to take advantage of some structural growth. I was wondering if you could break that down between, maybe, organic opportunities where you sort of see the best incremental flows from here and maybe where things are on the inorganic side? Thank you.

Yes. From an organic perspective, not all flows are the same. The alternative investments continue to perform well for us, offering higher fees and margins. We have exceptional managers in that area and have seen positive inflows. In fixed income, six of our top ten growth strategies are fixed income, three of which are from Western. Despite some performance challenges, Western's six-month performance is top decile, with strong results in Core Bond and Core Bond Plus. We believe there is a long-term trend with products like SMA, and we consider Canvas to have the best technology available. We're gaining consistent inflows in direct indexing and have launched some active strategies using the Canvas platform, allowing us to launch traditional mutual fund strategies with tax efficiency. Regarding ETFs, I have been anticipating significant growth and am hopeful we're approaching that point. The $1 billion in inflows reflects a strong organic growth rate, with about 40% of our ETFs being active. This quarter, the flows were mainly from smart beta and passive investments, with nearly $900 million from the U.S. RIA channel, which is a relatively new area for us. We believe there's great potential there. In multi-asset solutions, we've secured significant wins that will contribute to the current quarter, and we see ongoing opportunities. On the M&A side, we're looking to address product gaps in the alternative space, with infrastructure being the primary gap, even though it's challenging and pricey to acquire. Any traditional acquisitions would need to include strong distribution capabilities. We aim to expand distribution, particularly in retirement, which is a steady source of inflows and works well for mutual funds. Any actions in that area would also require distribution capabilities. Additionally, we're always on the lookout for local asset management opportunities, as 80% of flows in any country typically go towards local assets, especially in fast-growing markets.

And just to add, Bill, to what Jenny just mentioned, I think we should make clear that our number one priority is organic growth, as Jenny just mentioned, all those things. But in certain situations, it simply takes either too long or is frankly impossible to become a leader in an investment category via organic growth. And that's why we've done what we've done with Lexington, BSP, Alcentra, Clarion and Canvas, and there's obviously others in there. But that's the reason why we've done the M&A that we've done, we concluded it's just too hard to get there maybe even impossible, frankly, on an organic level.

That's helpful, Matt. And just maybe one for you as a follow-up. Last quarter, you kind of gave some guidance on both performance fees and expenses and a fair amount of variability on what actually layered through. So I was wondering if you could maybe unpack the big performance for this quarter and then how you sort of see some of the expense lines into the new quarter? Thank you.

Yes, I'll address that. Firstly, regarding the expenses compared to the guidance we provided last quarter, our G&A occupancy in IST was largely in line, and EFR was slightly higher, which was also aligned. The main difference was that compensation and benefits were about $50 million above our guidance, driven by three key factors primarily linked to better performance. First, performance fee compensation increased by $30 million. Second, we saw approximately $10 million in higher resets for the 401(k) plan and other seasonal compensation matters. Lastly, an additional $10 million rise was due to our formulaic approach to compensation, where fund performance plays a significant role. This explains the variance between our guidance and actual results. Looking ahead to the next quarter, we continue to expect the effective fee rate to hover around 39 basis points, consistent with this quarter. To clarify, excluding performance fees, if we assume a performance fee quarter of $50 million, we anticipate compensation and benefits to be around 7.25 million, while IS&T should remain roughly flat at about $120 million. Occupancy costs are projected to be in the high 50s, and G&A is expected to be in the mid-140s, down from the high 40s guidance we provided last quarter. This includes expectations for continued higher travel and expenses as well as slightly elevated placement fees. Regarding performance fees, we acknowledge it's challenging to predict. Given the strong performance of applicable funds, we expect ongoing performance fees and plan to maintain our guidance of $50 million. There are always episodic factors with performance fees influenced by investment timing and redemption activities. In this quarter, for instance, we had more customers reach the five-year performance threshold, triggering a performance fee increase from Clarion, resulting in higher earnings than anticipated, which aligns with our guidance on performance fees.

Thank you, both.

Thank you.

Thank you. Your next question comes from the line of Michael Cyprys from Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for taking the question. I wanted to just circle back to the OnChain money fund announcement that we saw recently. I was hoping you could talk a little bit about your vision there, the opportunity set that you see with this OnChain money fund product? And how you might think about broadening out distribution over time beyond the Benji app to distribute more broadly than that? And I guess, do you also view this as a replacement for stable clients? Just curious how you think about that.

Okay. So, a couple of things. Our OnChain money fund has been in development for a few years in collaboration with the SEC. We created a transfer agency system along with hot and cold storage wallets to support the OnChain money market fund. Following the events in the regional banking sector, we've started to see some inflows as certain DAOs or blockchain platforms needed to move funds from places like Silicon Valley Bank and felt aligned with the philosophy of a blockchain money market fund. This week, we announced the addition of cross-chain capabilities. For those unfamiliar with the crypto space, it’s similar to how iPhone and Android applications often don't interact. We've added Polygon, which is a layer two solution over Ethereum, allowing businesses built on Polygon to access our money market funds. We are initially focusing on this area, but we believe that blockchain will bring many back-office efficiencies over time, and we definitely see the potential to add more products, including a global Benji product.

And just as a follow-up question. It sounds like the overall fee rate guidance, pretty stable, has been stable for a bit. But just big picture, maybe you could talk a little bit about your overall multiyear outlook for pricing across products on your platform. If you look back over the past couple of years, where would you say pricing has moved the most versus maybe what's held in? What surprised you as you look back? And as you look forward, where do you anticipate the most stable versus more movement in pricing as you look out over the next couple of years?

Adam, do you want to take that because you're seeing it on the distribution side?

Sure. So I think where we've seen the pricing move the most is in the traditional large asset classes, fixed income, equity, especially U.S. and fixed income. Those have ground down to a point. But I think they've hopefully hit a bottom here. We also see mandates coming in generally at larger sizes, which has obviously a significant impact on fees. As we see consolidation in the industry among players, that's impacting things. We think that when our fee rate moves, it tends to be a factor of asset mix as opposed to see degradation really because we're really able to earn significantly more on our alternative assets. And when you see the rates move around, that's less our rates degrading and more a shift in the mix.

But Mike, looking at the long term, I want to emphasize that our strategy involves mitigating any pressure we face in the traditional asset management space regarding fees. We aim to secure larger mandates with lower fees while simultaneously growing our alternative asset base, which typically offers higher performance fees. So far, this approach has been effective, as our overall effective fee rates have remained stable and even improved. If we continue executing this strategy and successfully win certain traditional mandates, we have the potential to see our fees increase over the next few years. However, this greatly depends on the equity markets. As Adam mentioned, the mix plays a crucial role; if equity markets rise and we maintain our focus on expanding our alternative asset business, we could benefit. Conversely, if the scenario flips, and fixed income performs worse or stays flat, our fee rate may decrease. Nonetheless, we have sound safeguards in place to maintain the stability of our effective fee rate.

There is $16.5 trillion in the fixed income space. Now, people can invest in fixed income and actually earn a return. You could allocate one-third of your pension fund to fixed income and still achieve your 7% target. We hope to see increased inflows in this area. We have experienced some performance challenges, but those are being resolved. We would really like to see significantly larger inflows in fixed income, which could have an impact. Fortunately, we have a strong active equity franchise and the alternatives we are pursuing as a good offset.

Super. Thank you very much.

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

Thanks. Good morning. I wanted to follow up on the alternatives outlook, specifically regarding Clarion. I believe you mentioned there’s a five-year lockup for performance fees. I'm curious if that means it wasn't a redemption like we experienced last year, which triggered a performance piece. I just want to clarify that. Additionally, could you discuss the current situation at Clarion and your perspective on it moving forward? Also, more broadly within the context of BSP and Lexington, while I understand you can't discuss specific funds in the market, could you provide insights on the general demand and fundraising outlook?

I’ll begin, and Adam and Matt can add their thoughts. With Clarion, most of the performance fees came from their standard process of monetizing performance fees when clients reach a five-year mark, rather than from client redemptions. They transitioned from an internal queue to a redemption queue. Unlike other firms, Clarion is not obligated to redeem a certain percentage each quarter; they have the flexibility, and their institutional clients prefer this approach, weighing client liquidity against value preservation in the fund. They typically meet about 10% of the redemption queue, which translates to approximately 5% to 6% of NAV annually. It's worth noting that Clarion has minimal exposure to the office sector, which has faced the most challenges in real estate, while they have a strong presence in industrial and residential properties, helping their performance remain resilient. We believe that as interest rates stabilize in the market, a final rate hike may occur, leading to a greater comfort level regarding real estate values and a potential positive shift in the market. On the broader alternative investments side, there’s a denominator effect impacting the limited partners as their liquid assets have decreased. This situation has made fundraising more challenging, especially in private credit, where our team reports encountering some of the best deals since the global financial crisis. However, attracting funds is tough due to LPs being overallocated to alternatives. Lexington is aiming to raise a $15 billion fund, and LPs have agreed to extend that effort, expecting to exceed the target. We anticipate that around 10% of this fund will come from the wealth channel. We collaborated with a major partner, and they are pleased with the initial fund, which is expected to reach about $500 million, and we believe it will eventually cap out at $1 billion. Overall, LPs are overallocated because their liquid assets have declined, but as equity markets improve, they will start deploying more capital. Additionally, cash flows from private equity have dropped significantly, limiting their ability to fund from existing alternatives, placing them in a tougher position. Nonetheless, they recognize the significant opportunities available right now. I can see that Matt has something to add.

Yes. Regarding the performance fee composition, I want to give you an idea and specifically address your question about Clarion. From the performance fee, approximately 60% comes from quarterly fees, around 10% from realizations, and about 20% from annual fees. As for the five-year threshold, I understand you already know this, but just to clarify - not all clients are on a five-year term. There are numerous customers who have invested at various times, resulting in different five-year thresholds that occur continuously. Every quarter, another group may hit their five-year mark, contributing to meeting the performance fee threshold. Additionally, some performance thresholds may differ from five years. We mentioned the five-year threshold because it represents a significant portion of the performance payout this time.

The final thing I would add on Clarion is that traditionally, they really have been focused on the institutional market, but we're starting to see much better flows out of the wealth channel now. CP Reef is now up on 20 different platforms. We're seeing good growth there. Their opportunity zone fund is doing well. BSP is doing well. Jenny spoke about Lexington, so the specialized unit we built in the alternative channel is finally coming online and producing really good results in the wealth channel.

Great. Thanks for answering my questions.

Thank you. Your next question comes from the line of Brennan Hawken from UBS. Please go ahead.

Good morning. Thank you for answering my questions. It's great to hear more about the development of the wealth management alternatives distribution efforts. I appreciate the insights regarding the contributions to Fund 1 at Lexington. You mentioned that in the write-up, so it really adds clarity. What feedback have you received about the team that you've established? Additionally, how has the process of benchmarking your efforts against successful competitors been? How much ongoing work is there to enhance those efforts? Thank you.

I'll let Adam take that since it's his team.

Yes. Well, then you know what the answer is going to be, Jenny. So we're feeling really good about the results we've had out there. And all I would say is that when we're in the system, we're getting indications of where they think we should be, and we're exceeding those expectations pretty handily. So we're feeling really good about the results. I think the results are driven by a few things. We have a great combination of a strong brand name of great investment capability and a specialized distribution force. Those three things have come together in the wealth channel in a way that I don't think other firms can act. We are seeing growth not only in the wires, but in a number of the independents and regionals as well. Our next effort here is to really take that alternative specialized approach and build out both the product set and the sales team outside of the U.S. to tap into wealth channels outside of the U.S., and that's the process we're in right now.

Great. Thanks for that. And I know you touched on this a little bit before as far as the outlook for Western and flows. But when you look at the unfunded mandates and unfunded pipeline, would you say that there's an orientation to fixed income there? How does the balance look? And then how active are the RFPs, however active are you on the RFP for bonds? Thanks.

Very active on RFPs for bonds. The good news is where we're seeing the activity is really across the board from high-grade credit mandates to high yield to private credit to core to global, global opportunistic. So in all the categories, we're seeing really good growth. When it comes to fixed income, crazy that we have 127 composites, but 42 of those are outperforming on the one, three, five, and ten. And what that means is that we're able to compete in most sectors of fixed income quite well. The pipeline is diversified by asset class at this point. It's not really dominated by fixed income. And in fact, the most significant portion of it currently, I believe, is from our solutions business, which is really coming on quite nicely.

Thanks for that color.

Thank you. Your next question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead.

Good morning, Jenny and Matt, hope you're both doing well. Sticking with the last topic of fixed in rebalancing, given your competitive and leading offerings in traditional fixed income, we wanted to get your perspective on the potential for large rebalancing into bonds, especially now that it looks like we're nearing the end of the Fed's rate hiking cycle. And also, do you have any perspective on the potential inflow mix between active work you're more competitive and then passive?

I would say that on the institutional side, institutions have been remaining cautious. We are anticipating the last Fed rate increase, staying focused on short-duration and high-quality investments. However, we're beginning to see an increase in searches for more risk-oriented investments. This indicates that institutions are becoming more comfortable with the economic environment and are starting to believe we are at the peak of the interest rate cycle. We see this as an immense opportunity in fixed income once there is confidence that the Fed will stop raising rates. My perspective is that the Fed will raise rates and maintain them throughout 2023, likely without any decreases, leading investors to try to secure those higher rates. Adam, can you provide insight into passive versus active management?

Not necessarily a huge change in that mix. All I would say is that to the extent that we have continued volatility in rates for a little bit here, active management tends to do a little better in a situation where you have more movement. We certainly see that across the curve. And so we're seeing really good flows into active.

It's an important time to be active in the fixed income space. This is not a great time to be passive in it. But that's just my view.

Thank you, Jenny. And then just as my follow-up, we saw positive net inflows into APAC. Can you comment on what products and which geographies are driving the inflows?

Sure. Asia has been our strongest market in terms of net inflows. We focused on a few key themes there and were early in aligning our marketing, product, and sales around those themes, with income being particularly successful. Our oldest fund, the income fund, will soon celebrate its 75th anniversary and has over $80 billion across its various forms, performing well in Asia. We have also secured significant institutional wins in fixed income, equity, and alternatives across all asset classes. For example, in Australia, we implemented a generalist specialist model where the local sales team understands the client better than anyone else while involving other members of the Franklin Templeton team. This approach began in Australia, leading to 30 consecutive months of positive net flow in retail. While Asia has shown strength, the U.S. still leads in gross flows, representing our largest market at about 72%.

Got it. Thank you, Adam.

Thank you. Your next question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead.

Hi, everybody. Good morning. Thanks for the question. So maybe just to stay on the fixed income topic for a second. I hear your point on active versus passive, but year-to-date, fixed income ETFs have overwhelmed the gain share versus active products. So is that largely a retail dynamic? Or what you're referring to is largely on the institutional side? Or are you starting to see maybe some improvement in active appetite? And curious how your private credit offering fits in within all of that, right? Because on the one hand, if traditional fixed income strategies continue to get squeezed, you guys have an opportunity to cross-sell into some of the old managers. So how are those kind of separate managers working together to sort of tackle the client from both sides?

I'll address the second part of your question, and Adam can handle the first part. On the private credit side, the BSP team has mentioned that they are encountering the best deals since the global financial crisis, although the denominator effect is a concern for the LPs. The reason they are finding these deals is that banks are hesitant to lend. While it may seem that structured and syndicated products are outside of the banks' balance sheets, banks still need to hold a portion of that equity. Traditionally, the balance was around 50-50 between syndicated and private credit. Our private credit team expects to see more deals in private credit and fewer from banks, which alters the dynamics somewhat. However, one challenge is that investors can purchase a bond in the liquid market and obtain a 9% return in high yield. This poses a challenge for private credit because the returns on existing portfolios in private credit are not significantly different from those available in the liquid market. This situation may present a headwind for some time. Conversely, as banks continue to reduce lending, if our private credit manager maintains a strong origination capability, we can secure excellent deals with less competition. That's why we remain optimistic about private credit despite some current headwinds. Adam?

I would also say that it's tough to predict, active versus passive. I don't know that we have special insight into that, but we do have insight into demand for active. And there's a tremendous amount, and there's plenty for us and that's really across the different asset classes. High yield, we've seen turn around quite nicely. If you get a weakening dollar here, we think our global strategies can do well. We have pension plans that are better funded now and we have specific strategies designed to help to feed those liabilities. Those are all active. So we're seeing demand really across every single bit of our active portfolio. And if you look at traditional performance, Western had a rough go of it, they're tough decile now over the last six months. And after a fall like this, that's typically when they generate their greatest alpha given that they're a slightly higher beta manager. So this is probably the best type of environment for them right now. So don't know about passive, but feeling pretty good about the opportunities for active.

And for my follow-up, maybe asking a question on the Alt business. You guys have strategically tried to build that out over the last couple of years. If we look at AUM, it's been sort of flattish over the last couple of quarters, and I know AUM doesn't tell the full picture. So maybe help us break down what the management fee is associated with the private or the old book for you guys today. And how do you see that growing over the next, call it, 12 months based on things where you sort of see a line of sight, whether it's deploying capital on things that have already been raised that will begin earning fees undeployed or sort of funds that you have coming online over the next couple of quarters?

Matt, do you want to take that.

Sure, thanks, Jenny. Let’s take a moment to review our progress. Our alternative asset management fees increased by 50% from 2021 to 2022, and we anticipate another 30% growth from 2022 to 2023. Over 80% of our assets under management are generating fees, which results in a fee ratio in the mid to high 50s. However, there’s significant variation across the different businesses within that 80% of fee-generating AUM. Consequently, our management fee revenue from alternative assets this quarter accounts for 25% of our total business revenue. This shift is partly due to a slight contraction in our traditional business and the stability in alternative assets. We are nearing our target of one-third for management fee revenue. Including performance fees, our management fee revenue potentially increases from $1.3 billion to $1.4 billion, with several hundred million in performance fees this year bringing us close to $1 billion in revenue contribution. We foresee organic growth of 5% to 10%, and while achieving 10% or more would be ideal, we are conservatively estimating in the lower range. We’ve seen organic growth align with that 5% to 10% estimate. The decrease in alternative asset AUM you mentioned pertains to the liquid side of our business, where we faced performance challenges leading to some outflows. Overall, we remain aligned with our expectations for alternative asset contributions to the overall business, the expected fee ratios, and our strategy to hedge against challenges in traditional asset management.

Great. Very helpful. Thank you, guys.

Thanks Alex.

Thank you. Your next question comes from the line of Ken Worthington from JPMorgan. Please go ahead.

Hi, good morning. And thanks for taking the questions. First on gross inflows into equity funds or the equity business. The gross inflows were soft this quarter. You highlighted some of the areas that are working quite well, ETFs global small cap. What parts of the business are struggling most here? Where was sort of the delta that you saw this quarter versus last quarter? Like clearly, you mentioned the risk off environment, but where are you seeing the incremental pain today versus what you saw in prior quarters?

Yes. So first thing, equities was our softest asset class, but I would note that if you take a look at our flows ex dividend, they were actually up quarter-over-quarter, and our redemptions were down. So some bright news behind the negative net. If you take a look at the numbers behind that, large-cap growth was the area of the equity market that was hit hardest with negative flows over the last several quarters, and it's a large area where we have the most significant asset base. So we are roughly balanced. We have slightly more AUM in growth versus value, but in large cap growth, we have a number of funds, that area with hit hard, where we see growth is actually in some of the smaller areas like international and small cap where we actually had some positive flows. The truth is that those positive flows are in asset classes that have a smaller slice of the pie, which helped lead to the negative flows overall.

Okay. Thank you. And then it was a big quarter for money market funds helped by the stress in the banking sector in March. To what extent is Franklin and Western benefiting from this transition from banks to money funds? And how is Franklin's cash management business broadly positioned if and as more money comes out of the banks in the future? And then I guess, lastly, you mentioned the one-off outflow as part of a sweep program. Are there more outflows to come from that program? Or is it sort of like one and done?

There could be a couple of billion more potential outflows in that just because they're still in that regional bank. But otherwise, the bulk of it has already passed through. So now it's about positioning our money markets, and obviously, Western's a behemoth in the space. So we are very well positioned for it.

Okay. Great. Thank you.

Thank you. Your next question comes from the line of Glenn Schorr from Evercore. Please go ahead.

Hi there. I wanted to revisit the solutions orientation that you've mentioned a few times. My impression is that Legg was a work in progress while Franklin was also developing their franchise, given the multi-asset and multi-boutique structure. I believe Franklin handled this better, and now you are in the process of bringing them together. Additionally, you are incorporating a number of private markets. My question is, where do you currently stand in your ability to deliver large multi-asset mandates? Is this something you are actively working on, and can we expect to see progress in the future? Thanks, Matt.

I believe this is a significant growth opportunity for us. With our longstanding history tied to the flagship Franklin Income Fund, which has been around for 75 years, we feel competent in this area. It has been a key focus for us. Recently, in April, we achieved a few successes in the multi-asset sector through our solutions group. While we haven't seen consistent quarterly flows yet, we have a strong pipeline and are beginning to see more reliable inflows in this area. Adam might provide more insights, especially given his experience as CEO of Brandywine during that time. The past attempts by Legg to consolidate efforts faced challenges since the different teams did not communicate well. In contrast, there is now a much greater willingness among the various teams to collaborate and generate ideas. For instance, we have discussions happening between Western and Benefit Street Partners concerning private credit and liquid credit, and our local asset management team is engaging with Benefit Street Partners to develop a private credit product. Overall, the investment teams are increasingly coming together to share ideas and work collaboratively.

Absolutely. And I think the other nice thing about this solutions business is that we're strong on the institutional side with large platforms, insurance companies, et cetera. But the other nice thing is that we're using our technology space through our goals optimization engine. We're actually able to take asset allocation solutions orientation to the wealth channel, and we're seeing a pretty significant pickup there. So it's really solutions across the board from wealth to institutional.

Thank you, all.

Thank you. Your next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.

Good morning, everyone. I'd like to ask a couple of questions regarding fixed income. First, can you provide insight into the demand for your traditional Franklin taxable bond franchise, as well as your global franchise, especially given the current higher interest rates and your earlier comments about rate stability? Second, regarding the Western side, it's encouraging to see us transitioning into a more sustained higher rate environment, and you seem optimistic about the increase in institutional mandates. How do you foresee any potential risks to future flows if we enter a credit cycle later this year, particularly in a recession scenario?

As I mentioned, six of our top ten grossing strategies are all in fixed income, which includes a mix from Franklin, Brandywine, and Western. As we've discussed in previous calls, there is very little correlation between Brandywine's excess returns and those of Western, and it's beneficial that we approach our investments with a diversified portfolio managed by different teams. I’ll let Adam address the flow aspect. I just want to comment on the credit cycle, where active management plays a crucial role. If we enter a deeper recession as opposed to a milder one, having an active management strategy for your fixed income portfolio will be vital. Adam, would you like to add anything regarding the flow?

Yes. When we talk about the traditional Franklin side of things as well in addition to Western, our global macro performance has turned around. That's an area where we're seeing the story, which is positive. And let's not forget our Munis business, which is something like $76 billion. We're seeing strong growth there placement on more systems. So I think both of those as well as Western, Brandywine and then the private credit thing, all of those are going to go well. The truth is that you can now actually meet your return assumptions with a significant portion of your assets allocated to bonds. That is the strongest tailwind we could hope for share fixed income.

And just, I guess where are you seeing the redemptions on the retail fixed income side coming from? Is there any areas that are still sort of pressure?

Look, I would say that the two biggest fixed income are core and core plus, they tend to be the drivers of gross sales as well as the drivers of redemption just based on the share side.

Great. Thanks very much.

Thank you. We have a last question coming from the line of Finian O'Shea from Wells Fargo. Please go ahead.

Hi, everyone. Good morning. A question on Alcentra. Can you talk about the progress on integration into Benefit Street, if that is complete in your mind? And then on the product and distribution side for that platform? Any color you can provide from early discussions with LPs on their receptivity to do more given its greater scale in capital and origination? Thank you.

Yes. The leadership at BSP is actively overseeing the integration with Alcentra. We have successfully retained our key employees and stabilized the team. We have also engaged with all of their major clients, and we feel positive about this initial stabilization step. Our distribution team in Europe is eager to work with a private credit manager focused on local European private credit, although the private credit market has been facing some challenges similar to those encountered by BSP. In April, we made good progress with CLOs, and Alcentra represents 49% of our CLOs, which gives us confidence. Overall, we believe that the stability and forward momentum we are seeing align with our expectations at this stage.

Thank you. This concludes today's Q&A session. I would now like to hand the call back over to -

I'm sorry. We have one other question that came through on the screen without answer. Can everybody hear me?

Yes.

Okay, great. So we had a question that was a follow-up on the guidance, quarterly guidance. And the question was, how does that impact our annual guidance. We gave an annual guidance range last quarter of $3.95 billion to $4 billion of adjusted expenses, annual adjusted expenses. And I'll just say, obviously, we're only halfway through the year, but all else remaining equal, despite improved market levels, improved flows, improved performance which push out formulary compensation, as I referenced on the question from Bill Katz. We're only slightly increasing the upper end of our guidance range to $4.05 million billion. So the guide would be $3.95 billion to $4.05 billion for the year. And right now, we expect to be on the upper end of that range, excluding performance fees. Thanks for the question.

Thank you. I would now like to turn the call back over to Ms. Jenny Johnson, Franklin President and CEO, for final comments.

Great. Well, everybody, thank you for participating in today's call. And once again, we'd like to thank our employees for their hard work and dedication, and we look forward to speaking to you again next quarter. Thanks, everybody.

Thank you so much, presenters. And thank you, everyone. This concludes today's conference call. You may now disconnect.