Welcome to Franklin Resources Earnings Conference Call for the quarter ended March 31, 2024. Hello, my name is Sylvie, 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, Chief Communications Officer and 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 other important factors are just 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 Jennifer 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 2024. I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We'll answer your questions in just a few minutes. But first, I'd like to review some highlights from the quarter. In terms of public equity markets, 2023 was, to some extent, a tale of two markets, the Magnificent Seven and the S&P 493 with the former contributing the lion's share of returns. So far in 2024, in the public equity markets, we've seen a significant dispersion emerge in performance among the Magnificent Seven, leading to a better environment for fundamental research to capture alpha and when augmented by robust risk management can deliver compelling portfolio results for clients. Given the current backdrop, we believe equity allocation should, in general, tilt towards sectors and regions that are being overlooked due to the heavy concentration in the largest companies. In addition, the theme of artificial intelligence will likely continue to be a significant stock driver, both positive and negative for the haves and have-nots over time. Meanwhile, on interest rates, consensus estimates currently indicate a notable decrease in the number of expected cuts for 2024 by the Federal Reserve from six to now two. Fed speak increasingly signals openness to delaying rate cuts to later in the second half of this year on the back of improving economic growth and slower disinflation. Against this background, while cash may continue to look attractive in the very near term, fixed income opportunities will likely provide a better total return option over high-yield and cash equivalents as the cutting cycle commences. Looking at private markets, secular trends and macro tailwinds continue to create opportunities in alternative credit, secondary private equity and select areas of real estate. In addition, investor demand for private market exposure is increasing given its diversification benefits, potential for higher risk-adjusted returns and as a hedge against inflation. Broadly speaking, these signals point to a complex market environment that creates opportunities for active managers. This quarter, my executive team and I had the opportunity to travel extensively outside the U.S. to meet with many of our key clients to hear firsthand what is top of mind and how Franklin Templeton can better serve them. As a global active manager with $1.6 trillion in assets under management and operating in 35 countries around the world, we believe that Franklin Templeton is positioned to take advantage of the money in motion by assisting our clients with a broad range of investment capabilities across public and private assets in vehicles of choice. We were also pleased to learn that our clients recognize the steps we have taken over the past few years to further diversify and strengthen our presence in important markets and distribution channels outside the U.S. We, again, saw aggregate positive net flows in non-U.S. regions, which now have approximately $490 billion in assets under management. Furthermore, a number of our clients continue to progress toward working with fewer asset managers and in this regard, expect not only a broad range of investment capabilities, but also other services, including technology, portfolio construction, customization and thought leadership. At Franklin Templeton, we leverage the skills of multiple specialist investment managers to deliver expertise across a wide range of investment styles and asset classes. Our investment teams benefit from Franklin Templeton's scale, with centralized investments in content, technology, data and most recently, artificial intelligence where we're excited about collaborating with leaders in technology on AI platforms. Moreover, the diversity of our model benefits our corporate shareholders, given that no single specialist investment manager at our firm represents more than 12% of adjusted operating revenue and most of our specialist investment managers are diversified within themselves as well. Turning to highlights from the quarter. Ending AUM increased by 13% to $1.64 trillion from the prior quarter and increased by 16% from the prior year quarter due to the addition of Putnam as well as positive markets and net inflows. Average AUM increased by 13% and 11% to $1.58 trillion from the prior quarter and the prior year quarter, respectively. Investment performance continues to be strong and resulted in 62%, 51%, 62% and 69% of our strategy composite AUM outperforming their respective benchmarks on a 1-, 3-, 5- and 10-year basis, benefiting from the addition of Putnam. In terms of mutual funds, investment performance resulted in 51%, 60%, 44% and 56% of mutual fund AUM outperforming their peers on a 1-, 3-, 5- and 10-year basis, and performance strengthened versus peers across the 3-, 5- and 10-year time periods quarter-over-quarter. Our long-term net flows were $6.9 billion in the quarter, including reinvested distributions of $3.1 billion and $13.7 billion was funded out of the $25 billion allocation from Great-West. Long-term net inflows were spread across asset classes, investment vehicles and geographies. Fixed income, multi-asset and alternative assets led the way from an asset class perspective and we continue to see growth in our separately managed account, ETF and Canvas offerings. Each has achieved at least four consecutive quarters of net inflows and all are at record high AUM. Long-term inflows of $85 billion increased by 23% from the prior quarter and 37% from the prior year quarter. Excluding reinvested distributions, which are seasonally elevated in the prior quarter and inflows from Great-West, long-term inflows increased by 17% from the prior quarter and 15% from the prior year quarter. In terms of flows by asset class, fixed income net inflows were $8.3 billion, we saw client interest reflected in positive net flows into core bond highly customized corporate bond, multi-sector municipal and high-yield strategies. Equity net outflows were $5.3 billion. We saw positive net flows into large-cap value and smart beta. Excluding reinvested distributions, which are seasonally elevated in the prior quarter, equity net outflows improved by 29% from the prior quarter. Multi-asset net inflows were $2.9 billion, driven by Franklin Templeton Investment Solutions, the Franklin Income Fund and Canvas, our custom indexing solution platform. Alternative net inflows were $1 billion, driven by growth in the 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 in the current quarter with a combined total of $1.4 billion. As we mentioned last quarter, in January, Lexington Partners closed its latest flagship global secondary fund with $22.7 billion of total capital commitments. Fund 10 ranks among the largest funds raised to date and significantly exceeded Lexington's private secondary fund, which closed with $14 billion in 2020, and we were delighted that approximately 20% of the capital raised in the fund came from the wealth management channel. Also in January, Benefit Street Partners closed its fifth flagship private credit fund with $4.7 billion of total capital commitments, reflecting the strong demand for the asset class, BSP exceeded its fundraising target. We believe the current market opportunity and backdrop for U.S. direct lending and alternative credit in general is attractive, and BSP has significant underwriting experience, loan structuring expertise and focus on deep due diligence, which provides us with a competitive advantage. In the wealth management channel, alternatives by Franklin Templeton has increased the number of product offerings and expanded platform placements, increasing market share and growing our client base. Our distribution force of more than 350 individual partners with our 50% group of alternative asset specialists to educate financial advisers and their clients on the potential benefits of private market investing. We expect a busy next 12 months across private markets. From an investment vehicle perspective, ETF AUM ended the quarter at $24 billion and generated net inflows of approximately $1.6 billion representing another quarter of net inflows exceeding $1 billion and the tenth consecutive quarter of positive net flows. SMA AUM ended the quarter at $138 billion and generated positive net flows of nearly $3 billion, representing the fourth consecutive quarter of net inflows. Canvas generated net inflows of over $750 million with a robust pipeline and AUM increasing by 23% from the prior quarter to over $7 billion. Investment Solutions leverage our capabilities across public and private asset classes to pursue strategic partnerships. This quarter, Investment Solutions generated positive net flows with assets under management of over $75 billion, including the addition of Putnam. This quarter, our institutional pipeline of one but unfunded mandates was $20 billion, a significant increase from the prior quarter and does not include the remaining allocation from Great-West Lifeco. The pipeline is one of the strongest it's been and remains diversified by asset class and across our specialist investment managers. With the close of our acquisition of Putnam on January 1, we are a $1.64 trillion investment manager. We've been pleased with the positive reaction from our clients and in the quarter, Putnam contributed positive net flows and its AUM increased by 8% to $160 billion or 18% since our announcement in May last year. With our expanded capabilities, our AUM in the insurance and retirement channels now exceeds $650 billion. Putnam's investment performance continued to be strong, with 89% or higher of mutual fund AUM outperforming peers in the 1-, 3-, 5- and 10-year periods and 91% of mutual fund AUM in funds that are rated 4 or 5 star by Morningstar. We were also thrilled to see that Barron's ranked Putnam the number one fund family for 1- and 5-year performance and number five for the 10-year period. Since the closing, we're also pleased to see that Putnam's average monthly gross sales have increased by approximately 30%, demonstrating the strength of Franklin Templeton's distribution. Turning briefly to financial results. Adjusted operating income was $419.6 million, an increase of 0.6% from the prior quarter and a decrease of 4.7% from the prior year quarter. As always, we continue to focus on disciplined expense management, while also continuing to invest in growth and innovation for the benefit of our clients and shareholders. Before I turn the call over to you for your questions, I would like to thank our employees for their many contributions and always staying laser-focused on our clients' financial future. Now let's open it up to your questions. Operator?

One moment for your first question which will be from Craig Siegenthaler at Bank of America.

First, we have a significant question regarding net flows. There have been many fluctuations in the $7 billion, particularly with the $14 billion from Great-West. How should we assess the core net flow run rate if we exclude the $14 billion from the $7 billion of long-term net flows?

Thank you for the question, Craig. Let me start by explaining how we're positioning the firm and then I’ll address your points, with Adam providing additional insights. We believe our strategy is driven by four key trends that will inform our acquisition strategy and future flows. First, there is a clear move towards alternatives. We believe this trend is here to stay, with private credit and private equity continuing to play significant roles. Our firms, including Lexington, Clarion, BSP, and Alcentra, offer extensive capabilities in alternatives, giving us a competitive edge among traditional asset managers. In the wealth management channel, there's an increasing desire to raise allocations from 5% to 15%. For context, this could mean around $130 billion with just a 1% increase from the largest wire houses. We're excited that Lexington's recent fundraising activity is aligned with this trend, which reflects years of learning, education, and preparation to be successful in this space. The second trend is customization, as clients express a desire for tailored investment vehicles. We’ve seen positive trends, particularly with our separately managed accounts (SMAs), where Legg Mason recognizes us as a top three provider. While we may have entered the passive ETF market later, we were early adopters in the active ETF space, currently managing $24 billion, where active ETFs are the largest category. We're experiencing success with our ESG ETFs, particularly in Europe, where there's a growing regulatory demand for these products. Additionally, our direct indexing platform, Canvas, continues to yield positive flows as we enhance our partnerships, growing from 77 to 88 partners. The third trend centers on global distribution, as 1 billion people enter the middle class, predominantly in Asia. We've established a presence in key markets, like Taiwan in 1985 and India as the first foreign manager. Our local asset management capabilities in emerging markets, including the Middle East, China, India, and Brazil, uniquely position us to capitalize on this global trend, which is reflected in positive non-U.S. flows this quarter. The fourth trend is the role of technology. Companies that successfully leverage AI and other technological advancements will gain a competitive edge. We are set to announce a strategic partnership involving AI work with a major player soon. Moreover, we're pioneering with blockchain technology, having established a tokenized money market fund in 2021 and acting as a node validator in the space. We've partnered with a UAE firm to enhance our blockchain capabilities by working on a stablecoin initiative. Now, addressing your question, executing these strategies effectively is crucial. Navigating through multiple acquisitions while selecting the best talent for our distribution team presents challenges, especially as new wholesalers seek to reunite with clients previously served by other wholesalers. However, we are already beginning to see the benefits this quarter. Our pipeline growth has increased from $13 billion to $20 billion through solid business wins, excluding Great-West Life. Our core sales, defined as sales below $100 million, excluding Putnam, are up 14%. Additionally, inflows, absent reincorporated distributions from Great-West Life, have risen by 17%. We are positive across all our vehicles and see strong pipeline strength outside the U.S. Looking at our firm Putnam, we've successfully grown its sales by 30% since the acquisition, benefiting from preferred partnerships with distributors that previously did not favor them. The collective strength of our 350 client-facing wholesalers has allowed us to effectively showcase Putnam's performance, leading to promising growth in just the first quarter. In summary, we feel that all the elements we've implemented are coalescing successfully in our distribution efforts.

We're looking forward to seeing your AI announcement later this week. We have a follow-up on outflows. Over the last eight quarters, we added it up, Franklin had a $13 billion of all inflows. And I know this excludes realizations too. If we add up Lexington $10 million and Benefit Street $5 million. Combined, they add a $27 billion. So all flows look to have been maybe negative $14 billion excess two flagship fundraises. So a similar question, but on the alts business, how should we think about the net flow trajectory just given that dynamic?

I believe there is some confusion in the alternative investment numbers. In 2022 and 2023, we mentioned previously that we raised $40 billion in the private markets, but in reality, we raised $55 billion in our alternatives business, with 80% of that being in private markets. The net change in assets under management shows an increase of $40 billion in private markets when accounting for realizations, distributions, and market influences. However, there was a $16 billion decrease in the liquid alternatives portfolio, which now makes up about 6% of our alternatives portfolio. While the good news is that higher-fee private markets attracted strong inflows during this period, the lower fee liquid alternatives somewhat overshadowed this growth. Looking ahead to the current fiscal year, our goal is to raise between $10 billion and $15 billion, and we are on track, having raised about $7.3 billion in private markets and nearly $2 billion in liquid alternatives. After considering distributions, realizations, and foreign exchange effects, we are effectively flat so far this fiscal year. The only notable decline in market value was in real estate, particularly with Clarion, while the rest showed positive performance. Overall, when adjusting for these factors, we are maintaining a stable position.

Yes, for the last quarter we're reporting on, realizations and distributions amounted to $2.6 billion, although we experienced a negative foreign exchange impact of $1 billion. We understand that there are questions about this, and we plan to enhance our disclosures to address them. We now have most of our alternative assets compiled. In the past, when we were smaller, we mentioned that realizations and distributions weren't significant enough to warrant detailed breakdowns of assets under management, but they have now reached a point where we will start providing that level of detail. To reiterate, in the last quarter, we reported nearly $2.6 billion in realizations and distributions alongside the $1 billion negative FX impact.

And Craig, the only thing I would add is that the other thing we've been able to do really is to work more closely with our distribution partners on the wealth management side over the last few quarters and we're able to secure calendar spots further into the future than we ever thought was possible. And I think that speaks well to our future fundraising as well.

I wanted to discuss fixed income for a moment. The pension-funded status has significantly improved, and interest rates are higher. I appreciate the $8.3 billion in flows during the quarter, but I'm unsure how much of that originated from Great-West or other sources. Could you provide some clarity on that? Additionally, looking at the larger picture, do you believe this marks the start of a broader trend in fixed income flows? It would be helpful to get some insights regarding RFPs, client combinations, or consultants to see if we are on the verge of substantial inflows into fixed income.

Thank you, Glenn. It's interesting to note that as long as people believe interest rates have peaked and might decline, they tend to favor longer-duration investments. However, we're starting to hear concerns that rates may remain high for an extended period, with discussions about possible rate increases, which could impact market behavior. Regarding our current situation, we have seen positive flows, but focusing on our pipeline—which does not include any Great-West Life contributions—about 70% of the growth comes from fixed income across Western, Franklin, and Brandywine. If we also include BSP, I believe private credit should be considered as part of fixed income since decisions about it often relate to fixed income portfolios. In fact, 97% of the growth in our pipeline is attributed to fixed income. In the last quarter, six of our top 10 funds for gross sales were in fixed income categories such as corporate bonds, core bonds, multi-sector, munis, and highly customized offerings. This indicates strong demand in the previous quarter, and looking ahead, we see significant demand in the institutional pipeline for fixed income.

And I would say that it's also pretty broad-based. If you take a look at that funding pipeline, it's really across all four of the fixed income firms we have, which all have very significant pipelines right now. And if you take a look at the products we're offering, we're positive in core in high yield and munis was our best-selling segment. So really broad-based fixed income appeal, not just one product.

Yes. They also have a different perspective on the direction of rates, which means that while we've encountered some performance weaknesses, these are being somewhat offset by strengths in other areas of the business.

And on the institutional business that you asked about is strong, we're also positive in ETF and SMAs, muni ladders, to lots of different fixed income vehicles doing well for us.

Just follow up on that same topic is have allocations changed a lot? In other words, I hear you on the flows. That's a very bullish commentary for the forward look. But if you took a snapshot of a year ago and two year ago allocations to where we are now and maybe two years forward, do you think we'll see a major equity fixed income shift? Or I know it's a lot broader than that. But like will fixed income allocations be a lot higher two years out?

It really depends on your perspective on interest rates. As Adam or Matt mentioned, our fixed income teams have varying opinions on the direction of rates. Some may expect rates to remain higher for longer, while others like Western are positioning more aggressively for potential rate cuts. So, it truly hinges on individual viewpoints. If rates do stay elevated for an extended period, it will affect equity market returns and expectations, as well as private markets. Glenn, it ultimately will rely on how people believe they should allocate our portfolio. Adam, would you like to add anything?

Yes. I think it depends on the client, right? You mentioned more fully funded pension plans, right? If we get a wave of more immunization going on, we're going to see that drive fixed income flows. At the same time, really in every channel around the world, what do we see is a move towards alternatives. That money is coming out of all of the other traditional buckets. So I think both of those are kind of competing with each other and pushing fixed income allocations in the opposite direction.

I guess, Matt, maybe we could start with some expense questions. So curious about what the delta was in comp versus your guidance and then as we think about the seasonal impacts of some of this quarter, how much do you expect to roll off as we go into 2Q? And then maybe update us on kind of the full year outlook for expenses.

Thank you, Dan. Regarding expenses in the second quarter, I'll discuss compensation and benefits shortly. Despite the higher compensation resets and significantly increased markets, if we exclude Putnam, which was the primary addition this quarter, our expenses would have remained flat. Even with the unexpected rise in performance fees and compensation calendar resets, along with stronger markets than anticipated, our expenses would have been stable without Putnam. This illustrates our discipline. To address your question about compensation and benefits for the second quarter, around half of the difference is due to performance fees, which increased more than we had projected. Additionally, while we had anticipated higher compensation resets in Canada, they ended up being greater than expected. Factors like the 401(k), mutual fund units in deferred compensation, and vacation accruals all contributed to an increase of about $30 million. Adding this $30 million to the previously mentioned $815 million brings us close to the $844 million where we ended up. Regarding our annual forecast, last quarter we estimated $4.6 billion, excluding performance fees but including the double rent from our consolidation in New York City. I would slightly adjust that to a range of $4 billion to $4.65 billion, driven by the higher markets we’ve seen. If markets decline again, as has happened recently at the beginning of this quarter, it wouldn’t be surprising if our annual guidance remains stable. As it stands, we expect it to be just a little higher for the annual forecast.

Great. That's helpful. And then maybe just a follow-up on that with regards to the effective fee rate I think you had talked about it coming into the mid-38s as the year progressed. So I guess, given where mix is AUM levels, all the dynamics that go into that, how do you see that trending?

Thank you for your question. The effective fee rate for the quarter decreased to 38.5, which aligns with our guidance for the quarter. This drop is influenced by our understanding of the mix of flows entering this period. Additionally, I noted that last quarter's effective fee rate was slightly elevated by one basis point due to catch-up fees associated with Lexington. Looking ahead, I anticipate our effective fee rate to stay in the mid-38s on an annual basis, slightly higher due to episodic fees from alternative assets, which we have seen over the past year and highlighted in our results. The increase can also be attributed to a larger share of alternative assets and a greater percentage of equities. With the public markets rising in the first quarter, our alternative assets proportionally decreased, putting slight pressure on the effective fee rate. Furthermore, as Jenny mentioned, we've experienced notable success in ETFs, Canvas, and separately managed accounts, all of which tend to have lower fee rates. It's less about fee erosion and more about the business mix. For the upcoming quarter, we expect the effective fee rate to fall in the high 37 range, possibly between high 37 and 38, primarily due to unexpectedly strong performance from Putnam, which generally operates with a lower effective fee rate in the mid-35s.

On the institutional pipeline, when you win an institutional fixed income mandate, are you getting a bunch of cash? Or are you getting a portfolio of securities that you transition and then remanage and do you get a sense of where the assets are coming from? If it's going into fixed income, is it investors going from rates to credit? Are they going from equities to fixed income? Are they going from cash to fixed income? Or are they just switching managers because of performance? So any view on what you've seen in this pipeline that's driving the fixed income success you're having?

You might not like the answer, but the answer is yes. I think we're seeing all of those things, right? So often, people will switch managers because of performance. We see people beginning to extend duration out. Those are usually funded by cash. We should see some of the plus sectors being added to those are funded in a mix of different ways. And then, of course, on the retail side, it's typically a sale of a fund, so you really don't know where that's coming from. In terms of how folks fund things, I would say that's a mix. We see three different ways. We see it being funded in cash. We see people using a transition manager and then sometimes we'll see folks fund to us with securities and ask us to get to the new point by a certain time. The other interesting thing we see in terms of how accounts are funded is actually outside of fixed income on the Canvas side, where we see significant use cases for Canvas as a tool to aid in the funding of accounts for taxable accounts we're able to do that in a much more tax-efficient way.

Okay. Great. And just on ETFs, how are you thinking about ETFs outside the U.S.? You're having nice success in your franchise within the States. How are you thinking about leveraging the brand? Or are you thinking about leveraging the brand you have and the ETF franchise that you've already built?

Yes. Our ETFs outside of the U.S. have grown in two important ways. One, I don't think this was the point of your question, but our single country ETFs, so ETFs that focus on the country, even if they're sold in the U.S., that's been a huge success for us. We were able to price those very competitively. But also in terms of ETFs that we're selling outside of the U.S. regardless of investment mandate, we've seen real growth there in Canada and in EMEA, in particular. Some of that is the single country flow. As Jenny mentioned in her remarks, we've seen some of the more sustainably oriented products go quite well. Green bonds, Paris-aligned, S&P 500 would be two that are examples of that. Outside of the U.S., we continue to see a mix of active, passive and smart beta. Passive is still the most significant portion of the market, but active has by far the highest growth rate. And just to put things into context, I believe that if you look at our flow for this quarter, about half of it or so was from outside the U.S. in terms of our ETF business. So really trying to expand that to the best we can and seeing very good results.

Jenny, I was hoping to dig into your comments from the prepared remarks when you talked about being quite busy over the next 12 months with respect to private markets. Could you, I guess, expand on that a little bit? And I'm assuming wealth is going to be part of the answer. So when you think about the opportunity set in the wealth channel and lots of other folks coming in, with offerings already and it seems like that part of the market is getting a little bit busier. What are you guys doing to make sure you don't miss the window and opportunity there?

Yes, we are actively engaged in various initiatives. As Adam pointed out, we are aligning with schedules, which has been quite revealing for us, at times even two years ahead. In terms of Lexington, they have expanded capabilities beyond their usual Fund 10, including middle market and co-invest offerings. For real estate, Clarion's three largest funds are perpetual, consistently fundraising, although we're observing somewhat subdued demand in that sector. However, they have excellent performance and should thrive once the market shifts, especially since they have minimal exposure to office space. The private credit real estate debt sector is proving to be quite intriguing, and we're in discussions with multiple clients about that, along with CLOs, structured credit, and special situations. We've also seen good progress in our Venture Group, which is currently in the wealth channel raising funds for their first offering, and it's going very well. Both BSP and Lexington have recently closed their flagship funds, and they are now focusing on investing in those cycles while exploring niche strategies in the market. Once those are fully deployed—Lexington has already allocated around 60% of their LEX 10—they'll return for another flagship offering, meanwhile continuing with their middle market and co-invest strategies. It's crucial to highlight that in the wealth channel, success relies on both the right product and strong distribution capabilities. Our team of over 350 client-facing wholesalers, including internal and external specialists, can effectively market to an adviser's entire client base. Without the extensive capabilities we possess, it can be prohibitively expensive to build a similar breadth. Our years of investment in the Academy have also enabled us to provide alternatives via FT, an online resource offering extensive training for advisers on incorporating alternatives into their portfolios. This support complements the in-field work of our wholesalers and has proven vital. We are very focused on the wealth channel and are optimistic about our diverse product offerings and distribution expertise to succeed in that market.

I understand. That makes sense. Could you provide clarification on the pipeline? It seems there are many items in the institutional pipeline, as you mentioned earlier. Can you help us estimate the fee rate of the institutional pipeline, excluding Great-West as you described? Additionally, can we assume that the remaining portion of Great-West will be coming in at a significantly higher fee rate, probably above that teenage basis points, given that what has come through previously had a relatively low fee rate?

The pipeline fee rate has increased slightly from last quarter. However, since it’s institutional, the fees are lower compared to traditional EFRs. Additionally, the new projects are mainly in fixed income, and overall, I would estimate that over 60 percent of the pipeline is probably fixed income. I'm unsure if we've provided guidance on the actual numbers in the pipeline. Matt, have we issued any guidance on that?

I would say it's consistent with our institutional fee rate.

It's in the mid- to high 20s, Alex, and it can vary from mid- to high 20s for our overall effective fee rate, depending on the quarter and the nature of the pipeline at that time. To answer your second question, yes, we expect the additional flows coming in to be higher on average for the rest of the Great-West Life flow over the next 12 months. As we've indicated, we'll include that detail in our monthly flow so you can see it, and we'll provide information on the effective fee rate during these calls with updated details.

Okay. I apologize on London weather. So in terms of if I start with your reported net flows of 6.7 and I back out the 3.1 of dividends reinvested, which the industry doesn't include, I get down about 3.5. If I back out the initial capital from Great-West, that's minus $10 billion. If I then back out the 1.4 billion from the 3 alt managers you highlighted, I get to about $11 billion. And then if I back out the Canvas, ETF and the SMA, I think that gets about minus $18 billion for what I would consider to be a long-holding business. A, is that math correct? And B, if it is, what's the go-to plan here to sort of stabilize that part of the business?

So I'm not Matt Nicholls, I can't do the math that quickly. He probably could. So I couldn't quite follow all of that. But I will tell you that the growth areas where some of the things you wanted to pull out alternatives, ETFs, Canvas. I think we said consistently that those are our growth focuses and that they're growing a little faster than the rest of the business. If you take a look at the more traditional business and you look at our outflow rate our decay rate, it's really been stable to improving. So I think over the last few years, we've been able to do a very good job at protecting ourselves on the downside. And as we said earlier, I think Jenny pointed to a notion that we talk about in terms of core sales, which is our smaller sales, which are up pretty consistently at about 14% on average. So stable outflows, increasing quarter sales, we're feeling pretty good about the traditional part of the business.

We've been candid about our underrepresentation in the retirement channel. As I mentioned during the last quarter's call, we ranked 14th on Empower's platform, and it's a similar situation with others. With the acquisition of Putnam and the integration of their retirement team and target date products, a significant portion of retirement flows is directed to qualified investment plans. Their target date products and stable value offerings have shown excellent performance, positioning us well for growth. If we capture even a portion of our market share, it would represent a substantial increase. The retirement channel remains quite traditional, primarily centered on mutual funds, equities, and fixed income. We believe our distribution capabilities will allow us to not only benefit from Empower but also to expand our presence across various retirement platforms and increase our market share.

And then the last thing I'd add, Bill, is that the area you're focusing on has some characteristics that we associate with different metrics. We feel it's closer to 10 than 18. However, as we reach those figures, it's evident that they're concentrated in areas where performance is especially crucial. In those sectors, we've started to see improvements, particularly on the equity front, where the changes have been quite substantial. Consequently, we've noticed a significant reduction in outflows. While there have been some weaknesses in fixed income in a few areas, improvements are also being observed there. Therefore, what you're mentioning is a concentrated situation, and as performance enhances, there's a noticeable correlation with the slowdown in outflows.

And Bill, I would add that it's sometimes difficult to separate investment product from the vehicle itself. We have a number of businesses where an investment team is positive, but they're positive because their SMA, their usage, their ETFs are all positive, and the mutual fund might be negative. So is that the core business, they're not, right? At the traditional asset class, they're gaining flow, but they're gaining it because of the vehicle choice, not necessarily because the mutual fund is positive.

That makes some sense. And just a follow-up on all of that, Matt, maybe for yourself, just your base fee rate, it just seems like it's bouncing around a little more than I would envision just given the sheer sizing of the platform today. So can you help me understand if you're going to be sort of in that 37% range plus for the next quarter. And then you sort of bounce back into the fourth? Is that input to a very high level of flow in the alts managers? And if that's the case, is that just vehicles that are just turning on from capital to raise? Or is that from new money coming in the door? And if so, where might that be?

The annual guidance I provided included the first quarter, which had an elevated EFR due to the catch-up fees I mentioned earlier. At one point, we were close to 40 basis points. We have been transparent about that. When you normalize for that factor, it comes down to 38. The primary reason it fluctuates from quarter to quarter is due to areas of growth. As you noted in your analysis comparing the traditional side of the business with other growth areas, when you consider ETFs, Canvas, SMAs, and the flows from Putnam, it’s crucial to remember that Putnam encompasses more than just the inflows from Great-West Life; it includes $160 billion in AUM, which is 17% higher than when we announced the transaction and at a significantly lower EFR than Franklin. Our success in these areas has contributed to a slight decrease in the EFR. Looking ahead to fiscal 2025, what we experienced at the beginning of fiscal 2024 may repeat, depending on the products we have available, as Jenny described. There is a possibility that it could increase again into the higher 38, influenced by episodic alternative asset fees. These are simply factors that contribute to increases and decreases beyond what we might typically expect. It's a blend of business mix and episodic activities from alternatives. In response to your question regarding a more detailed breakdown of our third quarter, I've discussed EFR at length. For compensation and benefits in Q3, we expect that to be around $820 million, incorporating $40 million in performance fees. This is a decrease from earlier quarters, linked to lower performance fees from our real estate business. While Clarion's relative performance remains strong, the overall valuation of real estate has declined, affecting the performance fee calculation. Hence, we are adjusting our projection from $50 million to $40 million.

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

Great. Well, everybody, thank you for participating in today's call. And once again, we would like to thank our employees for their hard work and dedication delivering this quarter. And we look forward to speaking to all of you again next quarter, and everybody stay healthy.

Thank you. Ladies and gentlemen, this does indeed conclude today's conference call. You may now disconnect your lines.