Welcome to the Franklin Resources Earnings Conference Call for the quarter ended June 30, 2023. Hello. My name is Joanna and I will be your call operator today. As a reminder, this conference is being recorded. 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 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 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 third fiscal quarter of 2023. As usual, I’m joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. Over the past several years we have been intentional in building a diversified company that offers a broad range of investment expertise and capabilities across asset classes, investment vehicles, and geographies to benefit a broad range of clients through various market conditions and cycles. We believe our corporate model of preserving the investment autonomy of each of our specialist investment managers combined with the resources of a global firm meets the demands of our diverse client base and produces strong long-term results. This quarter, long-term net flows turned positive. Investment performance remains strong and adjusted operating income improved by 8%. Financial markets in general staged a rebalance in the first half of the calendar year. The S&P 500 Index's concentration in five companies is at its most extreme level in more than 30 years. This presents a challenge for those seeking to outperform the index while managing for concentration risk in their equity portfolios, but also represents an opportunity for skilled and disciplined active managers with a long-term horizon. Client focus has always been a hallmark of Franklin Templeton, and we’ve been actively engaging with our clients to assist them in navigating this complex environment. As our industry and client preferences continue to evolve, there is strong demand for asset managers to have a full range of investment options that span geographical regions, both in public and private market strategies. We generated interest in our alternative and multi-asset strategies in particular, which both saw positive net flows during the quarter. In addition, we experienced strong flows in ETFs, SMAs and the high net worth channel, and flow trends continue to improve across all geographies benefiting from our regional sales model and strategy. Our EMEA and Asia Pacific regions both reported positive long-term net flows. That’s the second consecutive quarter of net inflows for Asia Pacific. While we’re always focused on organic priorities, we have previously stated our interest in distribution-led strategic transactions that would further diversify our business and accelerate growth in key markets. With the vision of offering more choice to more clients in important sectors, we are pleased to announce the establishment of a long-term partnership with the Power Corporation of Canada and Great-West Life this quarter. As part of the relationship, we will acquire Putnam Investments, which managed $136 billion in AUM as of April 30, 2023, from Great-West for approximately $925 million, primarily funded with equity. Great-West will make an initial incremental asset allocation of $25 billion to our specialist investment managers within 12 months of closing, with that amount expected to increase over the next several years. Great-West will also become a long-term shareholder in Franklin Resources. Of the equity issued to Great-West, shares representing 4.9% of our common stock are subject to a five-year lock-up. This is a compelling transaction for both firms and we’re looking forward to actively partnering to develop additional opportunities that will be realized over time. The agreement aligns with our focus to further grow insurance client assets and expands the existing relationship between Franklin Templeton and the Power group of companies in the key areas of retirement, asset management, and wealth management. The transaction will also enable us to further increase our investment in retirement and insurance to better serve each and every client in these important segments. Our clients will benefit from expanded and complementary investment capabilities across key asset classes with strong long-term track records. Specifically, the acquisition of Putnam will increase Franklin Templeton’s defined contribution AUM to almost $100 billion. As a reminder, the acquisition of Putnam is expected to be modestly accretive to run rate adjusted EPS by the end of the first year after closing, adding approximately $150 million of run rate adjusted operating income in the first year post-closing, inclusive of cost synergies. The acquisition remains on track to close in the fourth calendar quarter of 2023, subject to customary closing conditions. Turning now to our specific numbers for the quarter, starting first with assets under management and flows, ending AUM increased to $1.43 trillion, primarily due to market appreciation, and we shifted into positive long-term net flows of $200 million, inclusive of reinvested distributions. Our long-term net flows continue to benefit from a diversified mix of assets in the quarter, led by record net inflows of $4 billion into alternative strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners generated a combined total of almost $5 billion in net inflows. This included raising over $1 billion in secondary private equity in the wealth management channel under the alternatives by Franklin Templeton brand. Today, alternative assets are $257 billion or 18% of our total AUM and contribute significantly to our financial results. In terms of other areas of activity in the quarter, our multi-asset strategies generated another quarter of positive net flows with $2.3 billion. Our solutions team has been gaining success with large institutions building customized solutions across our broad array of investment strategies. Equity net outflows improved to $3 billion this quarter, including the funding of a previously disclosed $3.2 billion institutional mandate. While active equities continue to be impacted by the risk-off environment, we saw positive net flows into international, large-cap core, emerging markets, all-cap value, and small-midcap equity strategies. Fixed income net outflows were $3.1 billion. Despite market uncertainty, we experienced increasing demand for fixed income and we benefited from having a broad range of strategies with non-correlated investment philosophies. Client interest continued with net inflows into multi-sector, core bond, enhanced liquidity, and TIPS strategies. Our regionally focused sales model and strategy resulted in improving flow trends across all of our geographies compared to the prior quarter. As mentioned earlier, the EMEA and Asia Pacific regions generated positive long-term net flows. From a vehicle perspective, ETFs generated net inflows of $1.1 billion, representing the third consecutive quarter of net flows of approximately $1 billion, and AUM totaled $16.2 billion at quarter-end. In the quarter, we also launched two thematic ETFs in Europe, in both future food and health and wellness. Two areas where we expect to see strong client interest. Separately managed account AUM ended the quarter at $116 billion and generated positive net flows. We continue to expand our SMA offerings in important growth categories and new market segments to provide clients choice in how they access our investment expertise across the breadth of our products. This quarter, we had important launches focused on customization, such as tax-managed overlay and SMA key flagship strategies, including the Franklin Income Fund. Canvas, our custom indexing solution platform, continued its trend of net inflows in each quarter since the platform launched in September 2019, and its AUM has doubled to $4.5 billion since the announcement of the acquisition. This past quarter, Canvas generated net inflows of approximately $300 million and continues to have a robust pipeline. Canvas allows financial advisors to build and manage custom indexes in SMAs that are individually tailored to the client-specific needs, preferences, and objectives. We believe custom indexing represents the next progression of direct indexing and ETFs and is a significant long-term growth opportunity. Turning now to investment performance, which we are pleased to say remains strong. 63%, 53%, 67%, and 63% of our strategy composite AUM outperformed their respective benchmarks in the 1-, 3-, 5- and 10-year periods respectively. For mutual fund investment performance, 44%, 58%, 66%, and 51% of our AUM outperformed their peers on a 1-, 3-, 5-, and 10-year basis. This represents improvement in the 3-year and 5-year periods from the prior quarter due to strengthened performance in equity and certain fixed income strategies. The 1-year decline was primarily due to one of the largest funds managed for income, which was overweight utilities and financials which generate higher yield and underweight technology compared to the S&P 500. Touching briefly on our financial results, ending AUM increased by 0.7% to $1.43 trillion as of June 30th from the prior quarter, reflecting market appreciation and positive net flows. Average AUM was flat from the prior quarter at $1.42 trillion. While our sector fee rate remains stable, adjusted operating revenue increased by 3% to $1.56 billion. Adjusted operating income increased by 8.3% to $476.8 million from the prior quarter. Adjusted operating margin was 30.5% compared to 28.9% in the prior quarter. We continue to maintain a strong balance sheet with total cash and investments of $6.9 billion as of June 30th, 2023. To wrap up, we have worked through another quarter of complicated markets and our progress and success would not be possible if it weren’t for our dedicated employees around the world. I would like to thank them for their many contributions and for their unwavering client focus. Now, let’s turn to your questions.

Thank you. First question comes from Alex Blostein at Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for the question. Maybe we could start with some of the trends you’re seeing in the alternative asset management space. First, I was hoping we could get a little bit more color on how much capital Lexington raised in the second quarter in their flagship fund and as you highlighted in the deck continuing to find raise here. So how large do you think the size could ultimately be? And then when you expand a little bit broader into private alts generally, what else is in the pipeline that you expect to come in over the next 6 months to 12 months?

So, I think we publicly disclosed that Lexington raised $18.2 billion so far on their way to fund. I think in the quarter it was about a little over $3 billion, maybe $3.4 billion. And of that, I think what we’re incredibly proud of is the fact that we raised a little over $1 billion in the wealth channel. For a first-time fund, I think the expectation was that if we raised $500 million, that would be pretty good for a first-time fund. We’ve talked in these calls before about how complicated it is to raise alternatives in the wealth channel because it requires not only retraining of your own sales team, but actually training of the financial advisors. So we put a lot of effort over the last 18 months. We’ve built out a 40-person alts specialist team. We’ve used our resources to train our own internal sales folks, as well as helping to train the financial advisors. So that was a great part of it. I think the fund can raise up to $20 billion, and I think it’s quite possible that will happen.

Great. And then just as far as the pipeline of other things there in the hopper as you look out over the next 6 months to 12 months?

Well, it’s specifically in the alternative space. I mean so private credit, we still think is just a great opportunity. Our view is that banks are going to lend less, and they’ve been lending. It is definitely deploying capital that has slowed down due to the fact that M&A has slowed down. I wrote an article yesterday where someone was talking about seeing M&A pick up; that will make a difference. We’re thrilled because having BSP at $78 billion; we cover both the U.S. and Europe. Additionally, one of the things that’s actually really important in these times is having the knowledge and expertise in special situations where you could work out deals. If you have an underlying credit that is struggling because maybe they can’t cover their rates, being able to restructure it is really important, and BSP has that expertise internally. The biggest issue there has been around deploying, but they’re seeing continued good deals and their underlying companies are very strong. Where there are some stresses, they’ve been able to handle those workouts. Again, we think as M&A activity picks back up, they’re going to be able to deploy more capital. They said they’re seeing the best deals since they’ve seen since the global financial crisis. In the case of real estate with Clarion, probably the biggest issue is price discovery. Everybody knows the office story; unfortunately, Clarion has just about 10% exposure to office. That’s not been a big exposure for them. Their focus has been on industrial space, data centers, and things like that, which with AI, frankly, will only get bigger and more in demand, but also multifamily. The story about the underbuilding of multifamily is important. The issue has been a little around the bid-ask, with sellers being willing to accept lower prices and buyers being willing to pay. As we see that move out, I think you’ll see more movement in the real estate space. Just a reminder, their clients are mostly institutional, so they don’t have the kind of requirement for redemptions because the institutions don’t want any kind of fire sale. They have more flexibility on their redemption queues which equates to less than I think 2%, if any. Adam, it looks like you want to add something there.

Sure. I was going to say a couple of things, Alex. First, we see strong fundraising in the traditional markets that they’ve been in, but with stronger public markets, the denominator effect is less of an issue. So we’re feeling really good about the raise for all of our alternative firms in the private markets. I would also say that in the wealth channel, it’s not just the Lexington flagship we’re offering. We have Clarion products in there like CP Reef and opportunity zones that are doing well, launching BDCs and interval funds for BSP, and our venture funds in the wealth channel. So feeling good about that. The Alcentra acquisition has been very positive for us as well, having the ability to launch a European managed product in Europe through our distribution force there, which we think will be a very positive add.

In terms of dry powder, BSP has in excess of $4 billion. Over the next 12 months, they expect to raise several billion dollars more.

Got it. Super helpful. Just a quick follow-up, staying on the alts for a second, and it’s a little bit of a nuanced question, but when we look at the roll forward in the AUM table, it looks like the alt had a negative market. I’m a little surprised just given that the mark-to-market dynamics generally have been positive in other places. So is it a lag? Or is there something idiosyncratic that drove the negative mark-to-market in the alt bucket? Thanks.

I think we had positive marks in BSP and Lexington and slightly negative in mineralizations in real estate. I’m not sure, but it may have been redemption. I’m not sure what you were referring to, Alex.

Okay. We can circle back; it’s probably real estate. I appreciate it. Thanks.

Thank you. Next question comes from Glenn Schorr of Evercore. Please go ahead.

Hey, thanks very much. I wanted to drill a little further in Putnam; it's interesting because after Benefit Street in Lexington, I think our minds were all focused in the alt world. I like the partnership we formed with them. I like the $25 billion investing with you, the 5-year lockup on the stock. I’m curious about the insurance and the retirement channels. Were they growing there? Which strategies? And then more importantly, with your broad diversified offering, what do you expect that you can actually sell into that channel to leverage that distribution?

Sure. It’s Adam here. A couple of things. I would say, one, with Putnam, we get tremendous investment performance. I think they’re the only firm that had their fund family in the top 10 for the 3-, 5-, and 10-year periods. So good investment performance across the board. They bring a few investment capabilities that we did not have before. Target date is a good example where they have $6.5 billion, and given that about a third of the assets in defined contribution go into things like that, we’re feeling that that gives us a real leg up. Stable value and Ultrashort are two other areas where they’re quite strong. They have been very strong in both insurance and the defined contribution investment only market. Our plan is to integrate those two distribution teams so that we will be stronger in each and every client that we partner with. We have a broad range of clients in the insurance and DC investment only space. Together, the two teams will be able to serve all of them in a much more effective way.

I just want to add that I’m observing the morning start flows, and it appears that four of the top ten slowing categories are target date funds. We are really excited about having a well-performing target date product, especially given Putnam's expertise in selling into the retirement channel. We believe this will be advantageous for all the retirement platforms we work with. As Adam mentioned, adding two great products in stable value and target date will enhance our suite.

And Glenn, the only thing I’d add on Putnam is just to make the point that, obviously it’s been a month ago, actually over a month now since we announced the transaction; their AUM is up slightly by 2% to 3% based on the market, and the flows have been stable. The performance is still as strong as Adam just outlined. We’ve got team agreements in place with all the key investors, and our planning process around the acquisition of what we expect to get out of the acquisition from both a financial perspective and the strategic perspective, as Adam and Jenny just mentioned, we feel that we’re very much on track as we communicated at the time of the acquisition announcement.

Alright. Thank you for that.

Thank you. The next question comes from Michael Cyprys at Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking the question. Just wanted to ask about capital deployment. The cash balance continues to rise here. Cash and investments at $6.9 billion, nearly $7 billion. Just curious how you’re thinking about putting that to work from here. It sounds like a little bit of debt pay down, some buybacks limited to offset share dilution. It seems like meaningful capital to work in M&A, so just curious how you’re thinking about that opportunity set as you look out from here.

Yes. I think our capital management strategy will remain consistent with what we communicated in the past. Number one is maintaining the trajectory of our dividend, which we’ve had for many, many years. Number two is organic growth opportunities in the business. Number three, as you alluded to, is hedging our employee grants. It might look like we’re a little bit behind on that front in the context of the shares we’ve repurchased to date, but we will catch up on that this quarter and make sure that we are very much in line with that communication that we’ve been consistent about. We have debt that we need to service. We paid down $300 million of debt in July. As announced, that was the term loan we had in place, and we paid that off. We’re saving about $4.5 million by doing that, but we’re retaining the same amount of liquidity by replacing that $300 million term loan with a larger revolver. We’ve taken our $500 million revolving credit facility and a $300 million term loan, which was $800 million in total. We paid off the $300 million term loan and replaced it with one single $800 million 5-year revolving credit facility. So we’ve enhanced our liquidity and financial flexibility by doing that and saved $4 million to $5 million in the process. Then, opportunistic share repurchases on top of that in M&A. Jenny has mentioned several times that we’re very interested in the infrastructure space around M&A, and in the alternative asset space in particular. Regarding opportunistic share repurchases, I would describe that as a consequence of how we decided to fund the Putnam acquisition. We’re issuing 33.3 million shares when the closing date occurs, and we expect to start repurchasing those shares in a methodical manner. All else being equal in fiscal 2024, obviously after the date that we’ve closed the transaction, we certainly expect to pick up share repurchase as a consequence of doing that transaction.

Great, thanks. Just a quick follow-up question, more broadly, AI, generative AI getting a lot more attention these days. Just curious how you’re thinking about the potential and opportunity from AI? Is this a revenue or an expense benefit? What sort of impact do you think this could have on the competitive landscape? Maybe you could talk a little about how you’re experimenting to what extent would that be today?

Yes, I think one of the advantages of being based in Silicon Valley is that we’ve been working on AI for the past four years. Our gold optimization engine tool is built on AI, and we’re employing AI for early warning systems like risk management, business intelligence, and intelligent automation. We have a pilot project acting as a portfolio research assistant, which summarizes 10-Ks and annual reports for our portfolio management teams. It’s crucial to develop a thorough understanding of your data to avoid overexposing it. We are also exploring conversational AI for our help desk to respond within 10 seconds and running a pilot to produce draft fund commentary, focusing on training models to generate effective marketing material. We’ve utilized both Azure and Amazon while determining the best language model for our needs. Overall, we have a lot in progress in this area. We got a head start due to the GO product, which we believe will initially provide expense and efficiency benefits, while enhancing the productivity of our portfolio managers and research assistants; tools like GO are also revenue-generating.

Great. Thank you.

Thank you. The next question comes from Patrick Davitt at Autonomous Research. Please go ahead.

Hi, good morning everyone. Sorry if I missed this, but is there any change to your expectations for expenses this year? Do you have any early thoughts on how to think about the path into fiscal 2024 as we enter the fourth quarter? Thank you.

Thank you. I'll outline our expectations for the fourth quarter and how that translates into our full-year projections. We anticipate our EFR rate will stay around 39 basis points, possibly slightly exceeding that in the fourth quarter, but we’ll keep it at around 39 basis points. For the fourth quarter, I would model $50 million in performance fees, which would result in approximately $740 million in compensation and benefits. Our IS&T expenses are expected to mirror what we discussed last quarter at 120, which remains consistent. Occupancy costs are projected to be in the mid-to-high 50s. Last quarter, we guided to the high 50s, but we came in a bit lower, and we expect to see similar results again. In general and administrative expenses, we estimate costs will be in the mid-140s, factoring in the ongoing normalization of travel and entertainment. For the year, with higher assets under management, improved performance, and increased fundraising-related compensation and expenses, our overall guidance has modestly increased to just over $4 billion. This is quite similar to what I mentioned previously, but perhaps slightly higher, certainly on the upper end at $4.09 billion. This guidance assumes the market remains stable, excluding performance fees. Regarding our margin, I know you've asked about this multiple times over the past year. It's challenging to provide guidance on margin as that essentially means we are also guiding on revenue, but all else being equal, we anticipate our operating margin will remain stable around the 30% range in the next quarter.

Thank you. And any thoughts on next year? Or is it still too early?

It's too early to provide concrete guidance. However, I can mention that we will be in the process of implementing the Putnam acquisition. As we delve deeper into the post-announcement phase and begin our integration work, there are two key points to consider. First, we plan to maintain a strong focus on managing expenses as we head into 2024, and we may find additional efficiencies during the integration of Putnam. We have previously stated that while M&A is primarily about growth opportunities, it also offers benefits in terms of efficiency. Therefore, we anticipate that our expense management in 2024 will remain robust and possibly exceed our expectations regarding the advantages of the Putnam acquisition.

And one quick housekeeping. Could you give us the exact amount of the catch-up fees? And then how much offsetting placement fee was in expenses? Thank you.

Yes. The way, Patrick, I would look at that for this quarter is that essentially operating income is neutral. The revenue associated with the catch-up is practically the same as the expense. In fact, the expenses might have been slightly higher, like $1 million or something like that. First of all, operating income neutral. And then...

In number so we can kind of get to the run rate of management fees.

$33 million, something like that. In the low to mid-30s.

Got it. Thanks a lot.

Thank you. The next question comes from Craig Siegenthaler from BofA. Please go ahead.

Thanks. Good morning. On the Putnam transaction, I know it’s going to bring $25 billion of flows in 12 months after closing. But I want to come back to what could happen from some of the cost cuts because you’re cutting a lot of costs out of the company, I think $150 million. So maybe provide some perspective on the potential for merger-related dis-synergies or outflows on Putnam’s $140 billion AUM base.

Yes. The $150 million guide that we gave when we announced the transaction is inclusive of some modest attrition across the company; that’s how we’ve got that. Again, we’re extremely focused on asset retention and the potential growth. The overlap is relatively modest in this transaction given the complementary investment strategies that Adam outlined at the beginning, and therefore, we expect modest attrition from this transaction across the board. We believe any attrition that exceeds what we had expected would be more than offset by other potential operating income and operating expense reductions from the transaction. We stay firm on the $150 million, and we think there’s potential to be higher than that.

Craig, the other thing I would add is that given the number of transactions we’ve done and the continuity of portfolio management teams post-transaction, we’re getting very good reactions from clients. They feel that their investment teams will be stable and they don’t intend to make any shifts, which is very positive.

I would also add, thank you Adam. I’d just also add that I would never understate the complexity of integration and implementation and working across the firm involving a new acquisition. But the $150 million is at a 30% margin; it’s not a hugely aggressive margin objective from that business. We should be able to get to that and exceed it over time. Remember, our guide is on the first year; but after that first year, all else remaining equal, you should certainly see other opportunities to go beyond that.

Thank you, Matthew and Adam. I have a follow-up regarding the SMA business. You have a strong business there with considerable inflows. I believe you mentioned Franklin Income as one of the leading funds contributing to this, along with direct indexing. What are some additional funds that are driving inflows into the SMA business? Also, regarding sales, how does the mix appear across different channels? Is it primarily wirehouse or heavily RIA? I'm interested to see what that looks like.

Sure. I think the way to think about that is one, look at the legacy business, and two look at the projection of the business going forward. The legacy business was strongest at the old Legg Mason, which means that a significant portion of the assets are with Western and ClearBridge, and those firms tended to be stronger in the wirehouses. If you look at the trajectory of the business, it’s really adding new products like our income fund to the SMA platform. We’re already now since recently launching it on six broker-dealers and a number of RIAs there. That’s where really a lot of the momentum is. Another area where we have huge opportunity is in our SMA businesses in munis, where we’ve seen about a 30% increase in our AUM year-over-year. That’s a place where we can really grow as well. The strategy is to make sure we give our clients vehicles of choice; for all our key strategies, we’d like to offer them in both fund format and SMA format, and that’s what we’re building out right now.

Thank you.

Thank you. Next question comes from Brennan Hawken at UBS. Please go ahead.

Good morning. Thank you for taking my questions. I wanted to follow up on the catch-up fees in Lexington. It sounds like you are still raising. Was this a preliminary close? Do you anticipate further catch-up fees at the actual formal close? I have been calculating the figures and I may be a bit confused about your earlier comment on fees being expected to remain flat quarter-over-quarter. Do you think there will be additional catch-up fees in the upcoming quarter? It seems like the catch-up may have contributed approximately a basis point this quarter. I would appreciate any clarification on this.

Thank you, Brennan. I mentioned 33 as a midpoint, but that's not the precise figure. We won't provide guidance on our catch-up fees. Regarding the fund raise, as Jenny noted earlier, there are a few things we can share. First, we're ahead of target. Second, our current total is $18.2 billion, as highlighted in a recent filing. Third, we are still fundraising, which suggests we might have another closing in the next quarter. While we can't say for certain, it's probable that we will have some kind of closing during that time, which could positively influence our effective fee rate. Even without the catch-up fee in the fourth quarter, we anticipate our effective fee rate will be approximately 39 basis points. This figure is not solely dependent on the catch-up fee, which I believe is the point you were trying to clarify, right?

Yes, yes, yes. I appreciate that. Just wanted to understand some of those mechanics. So thanks for laying that out.

Then obviously, after we have the closing, we see a catch-up fee, and then we have expenses associated with raising the funds. After that, we don’t have those one-off expenses, but we do have the normalized alternative asset higher fee rate against the assets we’re raising on the entire AUM, which is around the 1% area. That’s the aspect of the fees I would focus on that helps our EFR on the long-term. That’s what helps us remain around that 39 basis points.

For sure. Yes. This is just sort of noise and whatnot. I just wanted to understand it for modeling purposes. So thank you for that. You guys flagged in your comment document that there was some improving performance in taxable fixed income strategies, which led to the lift in the investment performance versus benchmark. Just wanted to confirm that Western, and whether or not you’re seeing any impact from this improving performance on either RFP activity or client dialogue and what drove the reversal. Thank you.

Yes, the performance at Western has significantly improved in core, core plus, and macros, and it is now in the first quartile year-to-date. We've observed a notable uptick in net flows, and it seems like they may have turned a corner, though I'm not certain if we will see positive results this month. Additionally, regarding the one-year mutual fund ETF performance at 44%, it is crucial to recognize the impact of the Franklin Income Fund, which contributes 14% to that number. There is currently no category for multi-asset income in the retail channel at Morningstar; however, in the institutional category, it is positioned in the 11th percentile. The average yield in that category is around 4.25%, while the Income Fund yields 5.75%. Similarly, the peer average in the retail category yields 1.84%, compared to our 5.75%. If a true income category existed at Morningstar, the Income Fund would be in the top quartile, pushing our overall performance up to 58%. The $1.5 billion in net flows for the Franklin Income Fund demonstrates that the income strategy remains highly relevant today, just as it was when my grandfather started it over 70 years ago, despite the lack of direct peers in this space.

To that, I just might add because your question was about RFPs and pipeline. What we’re seeing is if you think about a sales pipeline, a significant build-up in late-stage opportunities. But what we’re not seeing is the conversion to that as quickly as we would expect; it’s not funded. That is really because we believe a number of institutions are waiting for the interest rate cycle to settle in. They’re asking whether we’re going to have one more hike, what will happen to inflation. The last stage of deployment and final contracting is a little slower, but we do see a bit of a bulge in those late-stage opportunities.

Got it. Thanks very much.

Thank you. Next question comes from Ken Worthington from JPMorgan. Please go ahead.

Hi, good morning. When commenting on the improvements in multi-asset product flows, you mentioned Solutions as a contributor. To what extent are alternative investment capabilities important to growing Franklin Solutions AUM? To what extent are your existing alternative products already integrated with your public market capabilities within the Solutions ecosystem?

I would say that, that depends more on the clients. For example, FDIS has won mandates in model portfolios in the retail channel, and very few of those have so far included alternatives in those model portfolios. On the other hand, they’ve also won insurance mandates that have some combination of alternatives in there. I think that question depends more on the channel the FDIS, Franklin Templeton Solutions, Investor Solutions Group is serving than how that group performs.

The other thing, Jenny, that I would add is that we can really build traditional only a mix or what we’re starting to do now is to build alts-only solutions as well, where if a client wants to have a single source for private equity, venture, private debt, or real estate, I think we’re one of the few firms that can build those for clients.

One thing is we also have been working with some retirement platforms who are interested in figuring out how to bring alternatives to retirements and building sleeves to go leases and managed accounts and some models in there. We think that’s a real opportunity.

Okay. So Solutions really isn’t about combining these different capabilities together and providing a solution that results from the combination. It’s really just solutions in single silos marketed out?

No, that’s not accurate. They can be. Someone might want an income solution model portfolio or an LDI type, and depending on the client's desired outcome, they will utilize multiple managers to provide the best solution. In a true OCIO scenario, they even conduct research with outside managers. However, most of their solutions involve multiple of our SIMs.

Got it. Thank you.

Thank you. Next question comes from Dan Fannon of Jefferies. Please go ahead.

Thanks, good morning. I wanted to clarify on performance fees, what funds or affiliates were the contributors. I know I hear the guidance, and you’ve been consistent with that, but you’ve also consistently been above that in terms of the results. So as you think about where high watermarks sit, and we consider fourth quarter, and even potentially into December, which has some other crystallizations, how should we think about maybe where performance sits for that performance-eligible AUM?

Yes. This quarter has seen performance fees coming from several of our specialist investment managers, especially on the alternative side, with a notable contribution from our Clarion Specialist Investment Manager in real estate. A significant 80% of these fees are due to multiyear performance thresholds being met by clients who invested five years ago. We anticipate performance fees in the next quarter to be around $50 million, understanding that predictions can be challenging. However, our guidance remains between $50 million and $60 million for the upcoming quarter. As we approach our first fiscal quarter, which aligns with the last calendar quarter, we expect a broader distribution of performance fees among Specialist Investment Managers, and we may see higher performance fees at that time. We will share more guidance on this in the next quarter.

Okay. That’s helpful. And then, Adam, just a broader question on distribution. Given all of the acquisitions over the last several years, I was hoping you could update us on how much of the AUM is actually utilizing the centralized distribution at this point? Where you are in onboarding, whether it’s some of the Specialist Managers or acquisitions that are more recent in terms of closing, in terms of fully onto that platform to think about the momentum and where you are in that process?

Sure. Let me go back to where the starting point was, which was that the central distribution team was responsible for global, institutional, and all wealth management raising and client servicing for legacy Franklin Templeton. On the Legg Mason side, again, it was more the SIMs handled a large portion of their institutional asset management, especially in the U.S. What we’ve seen over the last two years is a gradual movement toward a more coordinated global effort. I would say that movement is quicker at a smaller firm like Martin Currie, where the benefits of centralized resources are much more significant. If you look at the other end of the spectrum at Western, which has a massively well-built out global distribution capability of their own, it’s really episodic where the central distribution team is raising assets for them. It does depend on the size, but the movement has been to find more areas to cooperate. We’re also seeing a lot of benefits in the alternative space where the general salespeople can make introductions that the alternative firms can then close on their own.

Is there any way to put numbers around that in terms of what still is held at the affiliate manager level versus...

Yes. I can tell you I shy away from that because what we’re trying to build is a culture of cooperation where these teams work together. Numbers imply that one team did it or the other team did it, and we’re really moving toward cooperation.

Okay. Thank you.

Thank you. The next question comes from Brian Bedell at Deutsche Bank. Please go ahead.

Great. Thanks, good morning everyone. Just want to hop back on the Franklin Income Fund for one second. I think that’s from that moderate allocation Morningstar category. I agree with what you’re saying about the performance and the sort of mischaracterization of it. Do financial intermediaries use that Morningstar? Or have you seen them use that Morningstar categorization in terms of, I guess, just recommending the fund? Because I do see it still in outflows despite the improved performance.

I believe the net flows are around $1.5 billion, which is frustrating. When interest rates were at zero, the fund was primarily in the 80% equity category because investors sought out dividend-yielding equities due to a lack of income opportunities. As fixed income returns improved, the allocation shifted to between 50% and 70%. I've discussed this with Morningstar, but the issue is that there are very few competitors in the wealth channel that can create a substantial peer group. We often reference the institutional sector where there has been outperformance. To address your question, there are definitely cases where it might be filtered out. However, the team has a strong following and loyalty. The challenge is that as the industry moved towards fee-based models, it's become more challenging for some financial advisers to maintain a buy-and-hold strategy for income funds over a decade as they used to. This is why we are working to include it on the SMA platform; advisers appreciate having it there, and they are willing to invest their clients in it for the long term. We are consistently trying to communicate this. It's important to recognize how much this can impact our one-year category. The team is focused on managing it for yield, which aligns with client expectations.

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

Right. I want to thank everybody for participating in today’s call. Again, I would like to thank our employees for their hard work and dedication, and we look forward to speaking to you all again next quarter. Thank you.

Thank you. This concludes today’s conference call. You may now disconnect.