Welcome to the Franklin Resources Earnings Conference Call for the quarter that ended on September 30, 2023. My name is Julie, and I will be your call operator today. 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 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 2023 results. As usual, Matt Nicholls, our CFO and COO and Adam Spector, our Head of Global Distribution, are joining me on the call. Over the past several years, we've made great strides in transforming our business, all in an effort to meet the needs of our clients and shareholders around the globe no matter the market environment. We've done this by creating a diversified company that offers a broad range of investment expertise and capabilities across asset classes, investment vehicles and geographies. Today, we're able to offer our partners and investors the ability to fulfill their comprehensive investment needs across public and private markets and in the vehicle of their choice as one firm with specialist investment managers operating around the globe. In addition, we have made important investments in value-added services, including technology, digital wealth and customization in order to be on the forefront of innovation in areas increasingly important to our clients. As we look back over our fiscal year, challenging global financial markets and geopolitical uncertainty weighed heavily on investor sentiment. The so-called Magnificent Seven, seven large U.S. tech companies, have primarily driven all of the gains in global stocks this year. And in our fourth quarter, we saw heightened volatility lead to increasing pressures and declines across equity and fixed income markets. We believe markets, like the one we're in, reinforce the value of active management with a long-term investment horizon. So often in these times of uncertainty, where the best opportunities to capture value are identified. In this complex and volatile market environment, it's no surprise that there's a tremendous amount of cash sitting in bank accounts and in money market funds, capturing what are the most attractive short-term yields in more than 15 years. Global Money market assets stood at $7.4 trillion as of September 30, the highest asset level since Morningstar started collecting the data in 2007. We have been actively engaging with our clients to understand their needs and address their strategic goals. Many clients continue to look for additional access to private markets, alternative credit, in particular. And as yields have become more attractive, clients have had a renewed interest in fixed income. We continue to provide insights and thought leadership to help them navigate the latest conditions, including drawing upon the resources of our various specialist investment managers and the Franklin Templeton Institute. Against this backdrop, we continue to manage our global business with a focus on areas of organic growth, expense discipline and strategic transactions. As such, this year, we are pleased with the progress made executing on our long-term corporate priorities by expanding our investment capabilities across vehicles and deepening our presence in key markets and channels. For the fiscal year, notwithstanding 20% lower inflows, long-term net outflows improved 23% from the prior year. Long-term net flows were positive in several key areas, including alternatives, multi-asset, ETFs, Canvas and the high net worth channel. In addition, our Asia Pacific region generated positive long-term net flows for the fiscal year. Our EMEA region turned positive in the second half of fiscal 2023 and our non-U.S. regions posted positive net flows in the fourth quarter. One of our strategic priorities has been to increase our scale in key segments of the industry, reflecting long-term client demand. In this pursuit to offer more choice to more clients, we closed the acquisition of Alcentra, a leading European credit manager, doubling our alternative credit AUM. Firm-wide alternative AUM increased by over 13% to $255 billion from the prior year, making Franklin Templeton one of the largest managers of alternative assets. Alternative AUM represents approximately 19% of our long-term AUM and approximately 25% of adjusted revenues, excluding performance fees in fiscal 2023. Alternative assets management fee revenues increased 36% year-over-year. Furthermore, we were pleased to announce the pending acquisition of Putnam Investments with $136 billion of AUM and our relationship with Power Corporation and Great-West Lifeco, strengthening our presence in the retirement and insurance segments. The transaction will enable us to further bolster our presence in these key market segments to better serve all our clients and remains on track to close in the fourth quarter of calendar 2023. Industry-wide, we continue to see consolidation of asset management relationships. In this context, there are increased expectations for value-added services and we believe we are well positioned as a strategic partner due to the breadth and depth of our investment capabilities, technology, content and capital resources. As we look ahead in 2024 and beyond, with better clarity on interest rates and markets in general, there will be an increased likelihood of investors moving money from the sidelines. We believe we are well positioned to capture money in motion as clients benefit from the expertise of each of our specialist investment managers, particularly in areas where there is strong client demand such as alternatives, income, fixed income, solutions and custom indexing. Turning now to our specific numbers for the fiscal year, starting first with assets under management inflows. Ending AUM was $1.37 trillion, an increase of 6% from the prior year, primarily due to market appreciation and the acquisition of Alcentra. Investment performance continues to be strong and resulted in 61%, 48%, 47% and 61% of our strategy composite AUM outperforming their respective benchmarks on a 1-year, 3-year, 5-year and 10-year basis. Compared to the prior year, AUM outperforming benchmarks stayed the same in the 3-year period and declined in the 5-year and 10-year periods. One-year performance improved significantly due to several equity strategies, including non-U.S. strategies and select U.S. taxable fixed income composites. Long-term net outflows were $21 billion and improved by 23% from net outflows of $28 billion in the prior year. Reinvested distributions were $21 billion compared to $32 billion in the prior year. Our long-term net flows while challenged for the year, continued to benefit from a diversified mix of assets and strong presence in key areas. Multi-assets saw a 66% increase in net flows from the prior year and were positive for all 4 quarters, including nearly $8 billion, driven by Franklin Income Fund, Franklin Templeton Investment Solutions and Canvas, our custom indexing solution platform. In fact, our flagship Franklin Income Fund celebrated its 75th anniversary in August. The strategy follows a flexible value-oriented investment philosophy, seeking income and long-term capital appreciation by investing in dividend-paying stocks, bonds and convertible securities. The fund has successfully delivered uninterrupted dividends across all market cycles ever since its launch in 1948. It's also a great example of how we're giving investors greater choice in how they access the strategy, including through SMAs, sub-advice strategies and in an actively managed ETF vehicle around the globe. For the fiscal year, alternative net inflows were approximately $6 billion, driven by growth in private market strategies which were partially offset by outflows in liquid alternative strategies. Benefit Street Partners, Clarion Partners and Lexington Partners together generated net inflows of nearly $11 billion. We continue to make strides in alternative assets unlocking new opportunities for investors in our firm. Retail and high net worth investors remain underallocated in alternatives relative to institutions. Client interest was strong for alternative strategies on wealth management platforms under the alternatives by Franklin Templeton brand in the U.S. which was launched earlier this year. For example, we anticipate over 20% of the total capital raised in our current secondary private equity fund to come from the wealth management channel. We continue to focus on client education initiatives through our alternative-focused podcasts and webinars partnering with the Franklin Templeton Academy. Fixed income net outflows decreased by approximately 50% to $16 billion this fiscal year, with net flows significantly improving starting in the second quarter of the fiscal year. In a year when all eyes were on the bond markets and interest rates, we continue to benefit from having a broad range of fixed income strategies with non-correlated investment philosophies. Brandywine Global saw positive net flows for the year. Franklin Templeton fixed income saw positive net flows in the second half and Western Asset had positive net flows in its core and municipal products for the year. Fixed income strategies also saw net flows in ETFs and starting in the second half of the year in SMAs. With the addition of Putnam, we will further strengthen our fixed income offering, particularly with ultrashort, stable value and longer duration strategies with strong long-term investment performance. Equity net outflows were nearly $19 billion. The risk-off environment continued to impact investor sentiment on select equity growth strategies which were partially offset by net inflows into large-cap core, international, smart beta quantitative and emerging market strategies. We believe that emerging markets equities could be a potential bright spot in equities as investors look across broad markets for opportunities. Turning to ETFs, since launching our ETF business in 2016, we have provided our clients with a broad range of investment strategies and have achieved significant growth milestones. ETFs generated net inflows of nearly $4 billion in the fiscal year, representing four consecutive quarters with net flows of approximately $1 billion and AUM ended the quarter at over $16 billion. We continue to launch new and innovative ETFs based on client interest. During the fourth quarter, both Western Asset and Brandywine Global launched active fixed income ETFs and we expect to see strong client interest in both strategies. We are a leading franchise in SMAs with $113 billion in AUM, an increase of 13% from the prior year. We saw momentum in our SMA platform with $1.3 billion of long-term net flows in the second half of the fiscal year. This year, we continued to expand our SMA capabilities with launches focused on customization such as tax-managed overlay and SMA products of key flagship strategies, including the Franklin Income Fund. Through new technologies, we're continuing to enable personalized portfolio solutions that seek to improve bespoke outcomes for investors. A good example is Canvas which has achieved net inflows each quarter since the platform launched in September 2019 and AUM has more than doubled to $4.8 billion since the acquisition closed. This year, Canvas generated net inflows of approximately $1.5 billion and had 20 new partnerships. In addition, it continues to have a robust pipeline. Private Wealth Management AUM ended the quarter at $34 billion with Fiduciary Trust International generating its twelfth consecutive quarter of long-term net inflows. Fiduciary Trust provides personalized solutions to high net worth individuals and multifamily offices with an average client relationship of 16 years. It is a growing client base and a platform well-positioned for long-term growth. Since 2010, Franklin Templeton has been the investment manager and sole administrator of Fondul. In July, Fondul's largest holding, Hidroelectrica, Romania's leading energy producer, broke a record as being Romania's largest initial public offering on the Bucharest Stock Exchange. The listing reflects our ability to provide partnerships with public and private institutions in emerging markets to deliver long-term value for all stakeholders and our enduring commitment to developing the country's local capital market, promoting corporate governance and transparency. Looking forward to 2024, we will continue to further expand our business and invest in key areas of growth that extend our ability to offer more choice to more clients in more places, including alternative asset management, insurance and retirement channels, customization and solutions for clients, technology-related distribution and private wealth management, specifically Fiduciary Trust International. We are proud of the work that we have done over the past several years to further grow and diversify our business. It makes us a more resilient organization over the long run and reflects our focus on positioning Franklin Templeton as a premier partner. Finally, I'd like to thank our dedicated employees around the world for all their efforts in this past year to grow our business by always putting our clients first in a continuously evolving industry. 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 as well as provide an update on the Putnam acquisition.

Thanks, Jenny. Fourth quarter earning AUM was $1.37 trillion, reflecting a decline of 4% from the prior quarter and average AUM was $1.42 trillion, flat from the prior quarter. Adjusted operating revenues increased by 1% to $1.6 billion from the prior quarter and included adjusted performance fees of $98 million compared to $116 million in the prior quarter. This quarter's investment management fees benefited from $36 million in connection with Fondul and were partially offset by lower catch-up fees of $17 million in secondary private equity. This quarter's adjusted effective fee rate which excludes performance fees, was 40.2 basis points, an increase of 1 basis point due to transaction-related management fees earned from Fondul. Adjusted operating income increased 7% from the prior quarter to $512 million and adjusted operating margin increased to 32.4% from 30.5%. The increase from the prior quarter is primarily due to higher investment management fees, the aforementioned management fees earned from Fondul and lower compensation and benefits expense, partially offset by lower performance fees. The specific operating income from Fondul and secondary private equity catch-up fees was $35 million for the quarter. Fourth quarter adjusted net income and adjusted diluted earnings per share increased by 31% and 33% from the prior quarter to $427 million and $0.84, respectively. The increase in adjusted net income and adjusted diluted EPS is primarily due to higher other income, higher adjusted operating income for the reasons mentioned and lower taxes. Adjusted EPS increased by $0.05 due to Fondul and secondary private equity catch-up fees in the quarter. Turning to fiscal year 2023 results; ending AUM increased by 6% from the prior year, while average AUM declined by 5%. Adjusted operating revenues of $6.1 billion decreased by 6% from the prior year and included an additional 6 months of Lexington and 11 months of Alcentra. Adjusted performance fees of $383 million decreased from $515 million in the prior year. The adjusted effective fee rate which excludes performance fees, was 39.5 basis points compared to 38.9 basis points in the prior year, primarily due to a full year of Lexington and 11 months of Alcentra. While continuing to invest in long-term growth initiatives, we also continue to strengthen the foundation of our business through disciplined expense management and operational efficiencies. Our adjusted operating expenses were $4.3 billion, an increase of 3% from the prior year, again, including a full year of Lexington and 11 months of Alcentra. Excluding performance fee related compensation and the full year impact of Lexington and Alcentra, adjusted operating expenses were down slightly from the prior year. This led to fiscal year adjusted operating income of $1.8 billion, a decrease of 22% from the prior year, primarily due to lower average AUM, driven by market declines and to a lesser degree, net outflows. Adjusted operating margin was 29.9%, compared to 35.9% in the prior year. Compared to the prior year, fiscal year adjusted net income declined 28% to $1.3 billion and adjusted diluted earnings per share was $2.60, a decline of 28%. From a capital management perspective, after returning $870 million to shareholders through dividends and share repurchases and funding the acquisition of Alcentra and other acquisition-related payments, we ended the year with $6.9 billion of cash and investments. We will continue to prioritize our dividend which has increased every year since 1982. Purchased shares to hedge our employee share grants and where applicable, review targeted acquisitions to reach our objectives at an accelerated pace. In addition, as we begin in the fourth quarter, we plan to opportunistically repurchase shares above the employee-related equity issuances during fiscal year 2024. Turning to the Putnam transaction which, as Jenny mentioned, remains on track to close in the fourth quarter of calendar 2023. Among other factors, the transaction is structured to maintain Franklin Templeton's financial flexibility and promote our continuing investments in the business. It also protects our strong financial position in the context of challenging market conditions. At current market levels, the acquisition of Putnam is expected to add total run rate adjusted operating income of approximately $150 million after the first year post-closing. Consistent with an approximate 30% operating margin, inclusive of cost synergies and we are ahead of schedule in terms of when we are likely to realize operating income post-close. Assuming this operating income contribution the transaction is expected to be modestly accretive to adjusted EPS by the end of the first quarter after closing. And now, we would like to open the call up to your questions.

Your first question comes from Michael Cyprys from Morgan Stanley.

Could you start by discussing the private market space? You continue to raise capital there. Please update us on the progress of some of the key flagship funds and which strategies you see entering the market over the next 12 months. Additionally, regarding the private wealth channel, you mentioned expecting to raise 20%. Can you share some insights about the traction you're experiencing in the private wealth channel, including fund placements and any new products you may introduce?

Right? Adam? Adam is going to take this one.

Thank you, Jenny. We are experiencing strong performance across various sectors. A significant area of interest, similar to others, is in private debt, especially related to real estate. We are seeing solid growth and had a successful year with our CLO business. We have launched special situations and a new flagship fund, which is encouraging. Alcentra is increasingly being integrated into our distribution team, and we are optimistic about this progress. Lexington is actively fundraising for Fund 10 and we are starting additional initiatives there. As you mentioned, Michael, there is a 20% increase expected from wealth management for Lexington. We observe growing interest in wealth management alternatives overall. Throughout the year, we have focused on enhancing our capabilities for U.S. wealth management alternatives, and we are now applying that model in Europe. A positive trend in wealth management alternatives is that we are now being included in fundraising calendars six months to a year in advance. Once we are established in that rhythm, we believe the fundraising success will continue. That sums up the overview.

Great. And just a follow-up question, maybe for Matt. I think in the release, you mentioned the transfer agency functions globally have now been outsourced. You did that in the U.S., now you took that around the world. I think also you've outsourced fund administration in the U.S. So maybe you could just talk to what's next as you think about simplifying the business, enhancing efficiencies, what steps might be able to take over the next year or two? How meaningful might they be? And just curious, any sort of benefits or lessons learned and takeaways that you could speak to on the transfer agency outsourcing.

Yes. So you mentioned 3 key things there. One is the steps we've taken to outsource fund administration, transfer agency and aspects of our technology. What we've been working hard on over the last year or so is what next in terms of our investment management platform in terms of technology. That includes both middle office and back-office functions. And I'd say that we're pretty deep into it and you can expect more updates from us throughout 2024.

Well and I would just add, Mike, as you know, we've done a lot of acquisitions. And I think one of the reasons they work well is, we take our time on some of the integration. And so there's opportunity, obviously, we'll be integrating Putnam into our environment. And even some of the Legg Mason SIMs have an opportunity to integrate which we think will simplify the environment.

Yes. And in terms of the financial impact, Mike, I would just caution you on that. These things take time. As Jenny mentioned, there won't be any additional change in 2024. That's a step change in terms of our expense, in terms of our expenses around the operation. But I think going into '25, '26 or longer term, not only do we have the opportunity to be more efficient across the organization, bringing things closer together in an effective way but also, it's an opportunity to modernize, to reduce CapEx, to make sure that longer term, we're in a position where we can scale at lower expenses with the right partners.

Your next question comes from Craig Siegenthaler from Bank of America.

My question is about the SMA business. I would like to hear more about its components and growth trajectory. Now that the Franklin Income Fund, one of your flagship offerings, is in the SMA wrapper, are there other flagship products at Franklin and its affiliates that could also be launched in this format? Additionally, I’m curious about your current generation of approximately $700 million in flows per quarter within the SMA wrapper. Do you believe this figure could significantly increase moving forward?

Yes. It's important to note that SMAs are significant right now, especially since the retail channel has shifted to fee-based models. This makes it challenging for financial advisers, whose clients are paying monthly for advice, to opt for a buy-and-hold strategy with mutual funds. When you provide a similar product in an SMA, where the holdings are clear on the statement, it appears that the adviser is more actively managing investments. We consider ourselves flexible in how we present our investment expertise. For instance, the Franklin Income Fund is available in both ETF and SMA formats, and we're witnessing growth in both areas. Any of our products can be formatted for SMAs. Currently, our municipal bonds are performing well in the SMA space. Our business model can be described as a 3-legged stool, comprising product capability, global distribution, and various vehicles. These vehicles can include mutual funds, communal trusts, ETFs, and SMAs, among others. We need to be adaptable in how we offer these options within different markets. I believe our breadth of product capability and geographic distribution is unmatched, both in retail and institutional sectors. While we may have entered the passive ETF space a bit late, we were pioneers in active ETFs. Being flexible with the vehicles is crucial, but the challenge with SMAs is that they require approval at the gatekeeper level and training for individual advisers, which adds complexity similar to alternative investments. However, once that groundwork is laid, we can expect consistent flows. In summary, we believe that all of our flagship funds can be effectively delivered through the SMAs platform.

And I just might add that emerging markets is another area where we're seeing significant SMA growth in addition to the munis that Jenny answered. And while a lot of the growth is in SMAs, having a product available like the income fund in SMA, in ETF, a mutual fund across border fund being vehicle-agnostic, really, that just takes broader access to different platforms.

Your next question comes from Brennan Hawken from UBS.

Curious about the expectations for expense growth into next year, Matthew. Maybe if you could give us an update there.

Thank you, Brennan. I'll break this down into three parts. First, I'll discuss our guidance for the first quarter of the fiscal year. Second, I'll provide some preliminary insights for fiscal year 2024, acknowledging how early we are in the year. Lastly, I'll update you on Putnam, which we anticipate will play a significant role in our overall guidance. However, I want to mention this separately since we are uncertain about the closing date, making it speculative for now. Now, regarding our expenses, we expect our expense ratio to hold around 39 basis points, not including performance fees. For compensation and benefits in the first quarter of fiscal 2024, we anticipate those costs to reach $750 million, including $35 million for accelerated deferred compensation charges and $50 million in performance fees. For Information Services and Technology, we expect expenses to remain flat at $125 million compared to the previous quarter. With occupancy costs, we're estimating an increase to $65 million, up from the high 50s. This is due to a transition to a more efficient office space in New York City where we are consolidating from nine offices to one. For about a year, we will incur double rent during this transition, leading to an $8 million increase in the first quarter, which will further rise to a $12 million increase over the course of the year. After this year, we expect normalization back to the mid-50s for occupancy costs. General and Administrative expenses are projected to be around $140 million, reflecting slightly increased travel and entertainment costs while keeping placement fees steady. We are looking at a tax rate of 24% to 26% for the entire fiscal year. Notably, between fiscal years 2023 and 2022, our expenses, excluding performance fees and certain acquisitions, were about 1% lower. Excluding Putnam, performance fees, and the New York City real estate changes, we expect expenses for fiscal year 2024 to be roughly flat, possibly slightly lower, though I would model them as flat for now. Regarding Putnam, as mentioned, we expect the transaction to close in the calendar fourth quarter, aligning with our fiscal first quarter, hopefully by December 1. If this happens, we forecast adding approximately $50 million to our revenue, with around $42 million coming from investment management fees and about $8 million from services. For your modeling purposes, you can annualize that figure by multiplying by 12. The addition to operating income for Putnam in the first month is expected to be between $8 million and $10 million. In the second quarter, we anticipate an extra $25 million in operating income, and for both the third and fourth quarters, we expect to add $25 million to $30 million in operating income, assuming revenue and market conditions remain stable. By the end of fiscal year 2024, we aim for a total operating income from Putnam of around $150 million on a run rate basis, which is a 10-month period rather than the original 12 months we projected at the announcement. To clarify, while we maintain the $150 million target, the key change now is the timing of when we expect to see the operating income. Initially, we expected to achieve 25% of the targeted operating income at close. However, based on our current guidance of $8 million to $10 million for the first month, we’re indicating that we might achieve between 50% and 60% of our goal by the end of that first month. For the full year, we expect to realize between $85 million and $100 million in operating income and aim to reach at least a $150 million run rate by September 30, 2024, assuming all other factors remain constant. Regarding the impact on accretion and dilution, considering current market volatility, the transaction is projected to become accretive by the second quarter after closing. We expect this to happen a couple of months after closing, but conservatively, we see this taking effect by the end of the first four quarters post-transaction, which aligns with the end of our second fiscal quarter.

Got it. I got my money's worth on that question. Thank you, Matt.

That's pretty thorough.

I just have one clarifying question. You mentioned the incremental run rate of $150 million by September 30, which serves as a guiding metric. However, I recall the breakdown was around $8 million to $10 million in the first quarter, assuming it ends in December.

First month.

That's just 1 month, right?

Yes, just 1 month.

Next quarter, we will be adding $25 million to the $8 million to $10 million, bringing the total to $35 million. Just to clarify, are those figures for quarterly results and not a run rate?

Correct. They are actual additions. By the end of that period, we would have added $25 million in the third and fourth quarter, and another $25 million to $30 million. By the end of the fiscal year, we would have added up to about $100 million. This represents a real increase in operating income, not just a projected run rate. The reason I mention the $150 million run rate is that it could be achieved in an accelerated manner right at the end of the last fiscal quarter.

Okay, perfect. That's really, really helpful.

Yes. I would also like to mention that this is a very important factor in the model when considering overall assets under management and expected financial returns. The Putnam acquisition is anticipated to decrease our expected financial returns by 0.2 basis points, as they have a slightly lower expected financial return than we do.

Got it. When would the impact of the EFR occur? Would that happen pretty much right away?

It's been a gradual process over the years, but it should come in right away in December.

The run rate impact by the way, will be adjusted for the timing?

Yes. As you know, the assets under management are averaged over the period, so it may seem a bit skewed in the first quarter, but you will soon see the full effect of 0.2.

Got it. But the 0.2 is the way we can think about it and then we can adjust for timing accordingly.

Your next question comes from Alex Blostein from Goldman Sachs.

Great. Well, thanks for that. I think we could probably end the call right there. So I did want to ask you guys about fixed income, obviously. And look, Western had some nice stabilization in investment performance early in the year. But the latest moves in interest rates put incremental pressure on core and core plus both, absolute and relative to the benchmark. So how are the conversations with clients, I guess, evolving as you highlighted the opportunity to maybe rotate some of the cash on the sidelines to longer duration products. How big of a headwind do you think that is? And if more capital ultimately chooses to go back to passive vehicles within fixed income like we've seen this year, how is Franklin as a whole, positioned to maybe take advantage of that opportunity in some of the fixed income refers on the passive side?

Core is experiencing positive flows and has continued to do so, although core plus has faced more challenges. We recently held our international institutional client conference, where discussions revolved around the timing for moving cash into longer duration investments. While we await that moment, we believe we are getting close. There seems to be a consensus that the Federal Reserve might implement one more increase, though opinions vary on whether we will experience prolonged higher rates or a rapid decrease. We are fortunate to have four independent fixed income teams with slightly different perspectives, and our clients tend to align with one of these views. Managing our business effectively means ensuring we can cater to these differing perspectives, supported by training our sales team to understand these nuances. This enables them to offer suitable products that match client preferences. For instance, Western has shown strong sales as many clients resonate with its outlook. While some clients may prefer passive strategies, there is also a significant number who favor active fixed income. I remain cautious about making capital allocation decisions based solely on fixed income debt levels, and while passive strategies hold appeal for some clients, we believe our varied offerings position us well to capture investments transitioning from cash to longer durations. Adam, would you like to add anything?

Yes. I think you hit a lot of the key points, Jenny. Western is having very good conversations with its clients. It continues to be Franklin Templeton's top selling SIM in terms of our gross flows. And if you look at their performance, 88% of their marketed composites have outperformed over the 1-year period. And I think that number, the 10-year period is something like 97%. So yes, in core plus and some other strategies, they've had a tough go of it recently but we see that turning around and we see client interest still being very strong in Western products.

Great, that's helpful. And then, Matt, just one for you. Share repurchase is pretty strong in the quarter. I think in your prepared remarks, you alluded to the idea that you might be a little bit more opportunistic. So I was hoping you could maybe flesh that out a little bit more as we're thinking about capital return priorities for next year.

Thank you, Alex. The market is complex and uncertain, so we want to be careful in how we express this. We have been actively acquiring companies to ensure we have the necessary investment management capabilities to remain relevant to our key clients globally across various asset classes and vehicles. We feel that we are almost finished with these acquisitions, with only a couple of areas still to address, such as infrastructure in the private markets and a few distribution and technology aspects. In terms of large-scale transactions requiring hundreds of millions or even billions of dollars, we believe we are done for the foreseeable future. While we never say never, we feel confident in our strategic planning being complete. As a result, you can expect us to shift towards capital return when opportunities arise. This means we will continue to protect our dividends, maintaining the same pattern we've observed since the 1980s. We will be disciplined in our share buybacks and in hedging our employee grants. Given that we have a substantial amount of cash remaining, both from earnings and our balance sheet, the current trading price of our shares presents a good opportunity for us. We financed 90% of the Putnam transaction with shares and aim to repurchase those shares as soon as possible. While we won't provide a specific schedule due to market uncertainties, we will take a conservative and methodical approach as expected from us. The share repurchase activity seen last quarter may not be identical moving forward, but we will focus on opportunistic share repurchases alongside employee grants for the reasons mentioned.

Your next question comes from Glenn Schorr from Evercore.

I'm not sure if it's for Adam, for anybody. But so the new DOL rule proposal just came out. And I think this is a long time coming. The focus is updating the definition of what is the fiduciary and investment advice. And given your distribution efforts and prowess in the channel, just curious how you think it may or may not impact Franklin in the various products, various channels.

This has been a topic of discussion for some time now, and we have all shared our opinions on it. Our perspective is centered on education, ensuring the suitability of products, and making certain that advisers are using the right product for each client. We believe it is our responsibility to keep our distribution partners well-informed and to provide transparency regarding these matters. Therefore, we think this development is not likely to have a significant impact.

Good news. Maybe one follow-up. I appreciate that we're not quite at the finish line yet on Putnam. But as you get to know each other, from my look, I think performance looks good and improving in their products. But as you've gotten closer together, I'm curious what things you're learning, what can you work on for their distribution reach and insurance and retirement?

I’ll start and then Adam can jump in. We are really excited about the Putnam deal because, for traditional asset managers with a large mutual fund portfolio, the retirement channel is an area where the tax disadvantages of mutual funds don't apply. This is an area where we've traditionally underperformed. As we move forward, we are thrilled about combining our internal focus on retirement with their distribution capabilities. We are aware of the challenges, especially since Empower was established from Putnam. Understanding the retirement channel and collaborating closely with these teams will significantly enhance our distribution partnership, not just with Empower but also with platforms like Principal, Nationwide, and Fidelity, allowing us to introduce our stable value and target date funds. We believe this presents an excellent growth opportunity in a channel where contributions to 401(k) plans continue even during volatile markets. Adam, would you like to add anything?

Yes. In some ways, this situation reminds me of the Legg Mason transaction where the two distribution forces complemented each other very well. Looking at how Franklin operates in the non-U.S. market, that scale really benefits Putnam. Franklin Templeton's strengths in SMA and ETF capabilities, combined with the core Putnam strategy, provide a significant advantage. Additionally, as Matthew mentioned regarding the financial aspects, we will have the opportunity to expand our sales force significantly. This larger sales team will enhance our effectiveness by merging the two firms. With a larger sales force, we will also offer a broader range of excellent Putnam products. Overall, we are very optimistic that this transaction will greatly enhance our growth.

I want to highlight that we have gained significant insurance expertise from our acquisition of Western, which has strong penetration in the insurance channel. What’s particularly exciting is that with the new alternative capabilities we are adding, we can leverage that expertise to become a much more relevant partner. When Great-West evaluated our capabilities and decided to commit $25 billion, it was the result of a thorough analysis of our various SIMs to see what would work for them. We wouldn't have been able to respond as effectively without the expertise from Western and the development we are fostering within Franklin. Additionally, the recent announcement regarding Venerable reflects the collaborative insurance ideas from both Franklin and Western. We believe there is more potential to explore in this area as well.

Your next question comes from Dan Fannon from Jefferies.

Another clarification on expenses here. Matt, can you clarify if your comments on fiscal '24 being flat, excluding performance fees, refer to the reported number in fiscal '23 or if those figures exclude performance fee compensation and other factors?

It's excluding performance fees and other comparisons. So you need to consider the two adjusted numbers in this context. For 2023, it would be around 4.07 or something like that, about 4.075. Looking ahead, the full year 2024 aligns closely with that figure, again omitting performance fees and the real estate transition issue I mentioned regarding New York, which is approximately $50 million or so.

Your next question comes from Ken Worthington from JPMorgan.

Okay. Fair enough. I'm going to take a flyer in Precidian. Your ETF business is doing well. You have additional fund launches. We're seeing more active ETFs industry-wide. Can you talk about Precidian, to what extent is active ETF proliferation utilizing the Precidian structure?

Look, I think the market has kind of spoken on this topic which is they want transparent active ETFs. And so that's been our area of focus. And so we haven't really pursued anything there and I don't think there's a lot of growth there.

Your next question comes from Patrick Davitt from Autonomous Research.

Just one, I've been asked. One quick follow-up on Putnam. Could you give us an update on, obviously, we can see the mutual funds but could you give us an update on how the flows have tracked in the September quarter versus the last quarter and maybe last year in this quarter.

Yes, Patrick, I don't want to be difficult, but we do not own Putnam today, so we can't report their flows to you. I can say that their assets under management are roughly where we announced the transaction, which was around $136 billion. During this time, their performance has remained strong. The market has fluctuated since late May, going up for a month or so and then declining quite significantly. Their position is roughly the same, and we expected their flows to be stable due to their strong performance, which aligns with our expectations. I apologize for not being able to provide more specific details.

And one quick follow-up. I know it's early days but could you frame the opportunity with the Venerable partnership you just announced. Any kind of details you can give around the pool of AUM you'll be open to the time line for transitioning that AAM to the Venerable branded funds, et cetera?

Yes. I think we're not going to give, again, sorry to not give too much detail on that but it's a multi-stage project with them, where we're going to be managing assets that we take on over a period of quarters. There's something that we've announced that came out quite recently and I think it's indicative of the way that we are able to work with insurance companies in general, to build things where they are able to more actively and efficiently hedge what's in their portfolio. So it was a customized solution that we built with them. And it's the type of approach we're talking to some other insurance companies about right now.

And your next question comes from Brian Bedell from Deutsche Bank.

Great. Just one clarification on the Putnam operating income guidance. Does that include the $25 million investment from Great-West in that guidance? I guess, is that investment unclear?

The answer is no. The $25 billion is additional. We projected the $25 billion in terms of fee rate in the mid-teens because a significant part of that is related to the insurance general account. We anticipate that to increase by about 50%.

And then, I can follow-up. Can you hear me better now?

Yes, it may be our audio that's having an issue. Brian, did you hear the response?

Let's try again. This is better?

Much better. Yes.

The guidance did not include the fees related to the $25 billion allocation, which primarily comes from Great-West Life. The fee rate is roughly in the mid-teens for the $25 billion when you calculate the revenue. We anticipate that about half of this will be generated in the first calendar quarter of next year, or the first quarter after we close, with the remainder expected to come in over the course of a year. We will keep you informed on this, Brian.

Yes, that's great. Regarding private credit and public credit, you have a wide range of solutions through your specialist managers, including alternatives. Focusing on the wealth channel, what are your thoughts on the timing for reallocating towards fixed income when that begins to happen? Additionally, considering your private credit offerings compared to public options, do you foresee one becoming larger than the other? If you look at the next two to three quarters, do you think the flow will be relatively equal, or do you anticipate a significant shift towards public fixed income funds given your scale?

I think it's important to note that when we speak with our large distribution partners, there's a significant trend. One of them mentioned that their most profitable area at the moment is the money market fund due to the substantial amounts of cash sitting on the sidelines. The wealth channel is similar to the institutional channel in this regard. The institutional channel is likely to move first, followed by the wealth channel. However, the challenge between traditional fixed income and private credit is that banks are not lending as they once did, which results in a reduced amount of traditional fixed income available. Consequently, we may see the wealth channel gravitating more towards private credit. That said, private credit is inherently illiquid. We are currently focusing on product development to create solutions that integrate private credit with traditional fixed income, providing liquidity alongside the excess returns from private markets due to their illiquidity premium. Navigating this as an alternative investment in the wealth channel is complex, primarily due to suitability standards and the Department of Labor rules, which raise the stakes significantly. Ensuring sound decisions is crucial, and as a responsible asset manager, we are dedicated to finding ways to deliver those excess returns. Given the current capital requirements, banks are finding it increasingly difficult to lend as they did before, which is reflected in the numbers, and we anticipate continued growth in private credit.

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

I want to thank everyone for participating in today's call. We also want to express our gratitude to our employees for their hard work and dedication. Additionally, we are excited to welcome the impressive team at Putnam to Franklin Templeton when the transaction closes. We look forward to speaking with you all again next quarter. Thank you.

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