Welcome to the Franklin Resources Earnings Conference Call for the quarter ended June 30, 2025. Hello. My name is Maria, 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 other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us today as we review Franklin Templeton's third fiscal quarter results. I'm here with Matt Nicholls, our CFO and COO, and Adam Spector, our Head of Global Distribution. We'll answer your questions momentarily, but before we do that, I'd like to highlight some key developments and themes from the quarter. Over the past few years, Franklin Templeton continues to evolve into one of the world's largest and most diversified investment managers with a full spectrum of capabilities across public and private markets. At the core of this evolution is our commitment to being a trusted partner for what's ahead, helping clients navigate the complexity of global markets with confidence and experience. From individual investors and financial professionals to institutions, we are focused on delivering customized solutions to achieve their long-term financial goals. We do this by leveraging the breadth and depth of our specialist investment teams who bring differentiated expertise. And we offer our strategies through a broad range of investment vehicles from mutual funds and ETFs to SMAs and private fund structures. As more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles, and regions, we believe our business is well-suited to meet that demand. In today's fast-moving and interconnected investment landscape, Franklin Templeton's global reach is increasingly important. Our capabilities span U.S. and international markets, including emerging markets, positioning us to meet evolving client needs as they allocate and reallocate across regions and through market cycles. Almost 40 years ago, we opened our first office outside of North America in Taiwan, and we are one of the first global firms to build local asset management capabilities. We currently operate in over 30 countries, and our clients are located in over 150 countries. Our goal is to manage each local business combined with global scale, focusing on local investing and client needs. And today, we have approximately $500 billion, or roughly 30% of our AUM, in countries outside the U.S. From our legacy as pioneers in international and income investing to leadership in emerging areas like AI, tokenization, and blockchain, we're committed to keeping our clients on the forefront of investment opportunities across markets and technologies globally. Innovation is, and has always been, central to who we are. Our investment teams around the world collaborate closely to provide forward-looking insights and identify new opportunities. A great example of this is the Franklin Templeton Institute which plays a central role in delivering timely research, thought leadership, and educational resources to help clients interpret and respond to fast-moving market developments. Turning to public equity markets. It's been a tale of two quarters to start calendar 2025. Despite a turbulent April, global equity markets rebounded sharply from Liberation Day setbacks, with the S&P 500 posting one of its fastest-ever post-war recoveries, rising 25% from its April lows and ending the quarter up nearly 11%. The sharp recovery was led by large-cap growth stocks, including most of the Magnificent Seven. The top-performing sectors were IT, communication services, industrials, and consumer discretionary along with the other major domestic indexes. The small-cap Russell 2000 Index rebounded in the second quarter, gaining 8.5%. International markets have shined so far in calendar 2025, but the outperformance versus the U.S. was largely in Q1. Through June, the MSCI EAFE is up 19%, helped by a weaker U.S. dollar and expectations that U.S. tariffs will not meaningfully alter the corporate earnings outlook. Emerging markets similarly outperformed. After holding up much better in the first quarter of the calendar year, value stocks lagged growth in this quarter. Large-cap growth outperformed large-cap value by 14% in Q2. Our investment teams remain cautiously constructive on the outlook for the U.S. equity market. While the market remains supported by solid fundamentals, caution stems from the market's already strong advance from its lows and ongoing geopolitical and policy uncertainty. Turning to public fixed income markets and rates. Following Liberation Day, the quarter opened with a higher-than-expected tariffs announcement, which sparked a temporary market sell-off and a spike in volatility. Subsequent data, however, suggested that the U.S. economy has remained resilient. Economic activity continued to unfold at a healthy pace, even though volatility in exports and imports makes headline GDP numbers less informative than usual. The labor market remains at or close to full employment. And while tariff hikes have fed through into the prices of specific goods, they have not had a broader impact on inflation. All this seems consistent with the fact that exports and imports play a relatively smaller role in the U.S. than in many other economies. Market conditions stabilized during the quarter as investors' worst fears proved unfounded. And risk assets recovered with global credit spreads spiking but then trending significantly lower. Lower-rated sectors outperformed, as did non-U.S. markets with the U.S. dollar seeing its largest quarterly decline since 2022. The Fed has maintained interest rates unchanged at its May, June, and July meetings, noting that while there are some downside risks to growth, labor markets remain robust and inflation is still above target. We continue to expect at most one more rate cut by the Fed this year, with additional monetary easing possible should growth begin to deteriorate. Tariff-driven price pressures and a still large fiscal deficit seem likely to exert some upward pressure on yields. Financial markets will likely continue to anticipate and push for more monetary easing than what we are forecasting, likely resulting in a prolonged roller coaster ride of market volatility. In private markets, quarterly volatility in global equity markets continued to act as a constraint on IPOs and M&A activity. As a result, continuation funds in secondary private equity were the primary sources for investor liquidity where Lexington Partners provide scaled solutions, expertise, and leadership. The trends shaping the private equity landscape, growing net asset values, significant dry powder, longer holding periods, and shifting distribution patterns point to a secondary market opportunity that is poised to remain attractive for years to come. Private credit remained an area of conviction. So even here, LPs are deploying more selectively the macro backdrop characterized by higher base rates, modest spread widening, and potential credit deterioration has made quality underwriting and structure more important than ever. Increased market volatility, while challenging, also creates an attractive backdrop for our alternative credit businesses like direct lending, real estate credit, and special situations. In these markets, where there is greater dispersion between the best and worst credits, Benefit Street Partners is well positioned given its conservative approach to underwriting and our deep portfolio management expertise. Real estate capital markets activity remains muted with greater volume and perceived stronger property types. Top-performing property sectors include industrial, multifamily, and self-storage which continue to have solid long-term underlying property fundamentals. For the fourth quarter in a row, overall property indices showed modestly positive performance signaling more evidence of reaching a bottom after two years of decline. As sentiment changes for real estate, Clarion continues to be well positioned, with over 60% of AUM in the industrial and logistics sectors and less than 6% in the office sector. Our overall view of private markets remains constructive, or there may be subtle shifts within private markets; the changing trade policies and elevated geopolitical risks haven't altered our long-term outlook. We continue to favor secondary private equity, real estate, and commercial real estate debt as key areas of opportunity. In today's environment of heightened volatility, shifting trade policies, and geopolitical uncertainty, diversification and active management are not just prudent but essential to mitigate potential risks and maximize returns. Diversification across various asset classes, regions, and sectors can, of course, help cushion the impact of market volatility. And as a diversified active manager, we have the capabilities across public and private assets to customize solutions to help investors to achieve their long-term financial goals. Turning now to our business results. Our third fiscal quarter saw progress across asset classes, investment vehicles, and geographies, highlighting the strength of our diversified global platform. Our assets under management ended the quarter at $1.61 trillion, AUM increased from the prior quarter due to the impact of positive markets and strengthening flows, partially offset by long-term outflows at Western Asset Management. Our institutional pipeline of one unfunded mandates rose by net $4 billion to a record $24.4 billion. It included $14.8 billion in new wins reflecting strong client demand across all asset classes and was diversified across specialist investment managers in multiple regions. This quarter, we saw notable mandates in fixed income from our partners in the insurance sector. We remain encouraged by increased client engagement on potential opportunities ahead. Long-term net outflows totaled $9.3 billion, representing a marked improvement from the prior quarter's outputs of $26.2 billion. Excluding Western Asset Management, long-term net inflows were $7.8 billion this quarter and $7.4 billion in the prior quarter. This quarter represents the seventh consecutive quarter of positive net flows excluding Western demonstrating growing momentum across our business. Multi-asset and alternatives continue to have strong, consistent performance and generated another quarter of positive net flows, resulting in a combined $4.3 billion for the quarter. Multi-asset flows have been positive for 16 consecutive quarters. In addition, we saw improving flow trends in fixed income and equities. Equity net outflows were $645 million as market volatility impacted growth strategies more than others. Given our diverse global equity capabilities, we benefited from the broadening of markets into both value and non-U.S. strategies, generating positive net flows into large-cap value international and emerging market strategies. Putnam continues to be a strong contributor with positive net flows since acquisition across mutual funds, SMAs, and ETFs. Fixed income net outflows improved to $13 billion this quarter. Excluding Western, fixed income net inflows were $3.5 billion, driven by Franklin Templeton Fixed Income and Brandywine Global. The flight to safety generated positive flows into munis, stable value, and short-duration strategies. Excluding Western, fixed income has generated positive net flows for six consecutive quarters. Western net outflows also moderated on a quarterly basis and are the lowest since the September quarter of 2024. In addition, money market balances have continued to grow as the Federal Reserve holds the target overnight rate at about 4%. We've had cash management net inflows for four out of the last five quarters, with $2.7 billion in each of the last two quarters, increasing our cash management AUM to $72 billion. This quarter, we continued to successfully execute our long-term corporate priorities, which reflect key areas of long-term growth. Fundraising and alternatives generated $6.2 billion for the quarter, of which private markets assets totaled $5.3 billion. This brings alternative asset fundraising to $19 billion fiscal year-to-date, including $15.7 billion in private markets, placing us at approximately the middle of our annual guidance range with one more quarter to go. Fundraising was diversified across alternative specialist investment managers and reflected client demand in secondary private equity, alternative credit, and real estate from institutions as well as from the wealth channel. In June, we announced an agreement to acquire a majority interest in Apera Asset Management, a pan-European private credit firm with approximately $5.7 billion in AUM. The transaction will expand our direct lending capabilities across Europe's lower middle market and reflects our continued commitment to growing our global alternatives platform, which had $258 billion in AUM at quarter end. Apera is complementary to our existing global alternative credit offerings. Alongside Benefit Street Partners in the U.S. and Alcentra in Europe, it further diversifies our firm's geographic exposure and capabilities within the private credit asset class. This acquisition brings our pro forma private credit AUM to nearly $90 billion. On both a relative and absolute basis, alternatives by Franklin Templeton, our alternatives business in the wealth management channel has been a strong contributor over the course of this year. We have invested heavily in this business to meet the growing demand in this critical area. Over the past few years, we have focused on designing suitable products investing in client education and supporting wealth advisers. Our substantial distribution resources and coverage model include a dedicated alternative specialist team that we have significantly expanded over the past two years. Our perpetual secondary private equity funds, Franklin Lexington Private Market funds, are nearing $2.5 billion in gross sales fiscal year-to-date. And we are excited to expand into new markets in Europe and Asia, leveraging our global distribution footprint. Additionally, our two other primary alternative managers, Benefit Street Partners and Clarion Partners, each have perpetual funds with at least $1 billion in AUM. These are semi-liquid perpetual vehicles and are open to ongoing subscriptions. Over the long term, we believe there is a significant opportunity for alternatives in wealth management, especially given the average wealth management client has approximately 5% or less of their portfolio allocated to alternatives. Depending on the client's liquidity need, it could be much higher. Institutions, for example, have been allocating 30% or more. It is essential for us to provide opportunities for broader client participation in the investment returns generated in private markets. In addition, we're developing products with strategic partners in the retirement channel for private market investments to be included in defined contribution retirement plans. Client demand also continued across investment vehicles. Our ETF platform achieved its 15th consecutive quarter of positive net flows, attracting $4.3 billion and reached a new high of $44.1 billion in AUM, a 19% growth from the prior quarter. We have over 13 ETFs with over $1 billion in AUM across equities and fixed income. And since acquisition, Putnam's ETF lineup has more than tripled in AUM, reflecting the strength of our global distribution platform. Retail SMAs had another quarter of positive net flows, and AUM is up 8% to $156.3 billion, a new high watermark for our retail SMAs. Our leading SMA franchise saw continued progress driven by growth in Putnam, Franklin Templeton Fixed Income, Canvas, and Franklin Income. Canvas, our custom indexing platform, attracted notable inflows, with Canvas AUM of $13.7 billion increasing 20% from the prior quarter. The platform has been in positive inflows since acquisition. As I mentioned earlier, one of Franklin Templeton's strengths is our global presence in international markets which are an integral part of our growth strategy. Our international business continues to expand with positive net flows for the quarter. Speaking of international markets, in May, I joined senior leaders in the Middle East to engage directly with government officials, policy leaders, and some of the region's most influential institutional investors. The visit reinforced Franklin Templeton's long-term commitment to helping shape global capital markets in the region. This quarter, we worked with two of Saudi Arabia's leading institutions to invest in the country's financial markets, broadening investment offerings for both Saudi and international investors. We continue to be selected as a trusted partner to official institutions in emerging markets including central banks and sovereign wealth funds. This quarter, we became a trustee and manager of the $1.7 billion National Investment Fund of the Republic of Uzbekistan. This strategic mandate builds on our 15-year track record of managing mandates in frontier and emerging markets. We were also honored to be recognized as the Asset Manager of the Year by the publication Central Banking reflecting the progress we are making with this client base. This quarter, we launched an intraday yield feature on Benji, our tokenized money market fund, making investing faster, more transparent, and accessible 24/7. This is another example of how Franklin Templeton has always been at the forefront of change, whether it's providing investors with access to new investment opportunities, improving how they manage their money, or leveraging new technology to make it more efficient. Before I turn to investment performance, I wanted to provide a brief update on July flows. While it's early and we will formally report preliminary July AUM and flows next week, Western's long-term net outflows are expected to be approximately $3 billion for the month of July and had ending AUM of approximately $236 billion. Excluding Western, we expect long-term net inflows of approximately $3 billion. Now in terms of investment performance, over half of our mutual fund AUM is outperforming its peer median across the 3-, 5-, and 10-year periods. The one year would also be in the top half, excluding one of our largest funds managed for yield. Similarly, over half of the strategy composite AUM is outperforming its benchmarks over the same time periods. Compared to the prior quarter, mutual fund investment performance increased in the 3-, 5-year, and 10-year periods and declined in the one-year period, again, primarily due to the categorization of one of our largest funds managed for yield. Turning briefly to financial results. Adjusted operating income was $378 million, flat from the prior quarter, driven by lower compensation expenses, offset by the impact of Western outflows and lower average AUM. We continue to focus on expense discipline and operational efficiencies. Our balance sheet remains strong, providing flexibility to pursue strategic investments and return capital to shareholders. Finally, at Franklin Templeton, our collective purpose is clear: to help our clients all over the world achieve the most important financial milestones of their lives. Central to our approach is a deep understanding of each client's goals, allowing us to serve as a trusted partner through the complexities of the financial markets. We have built a resilient business that is diversified across investment teams, asset classes, vehicles, and regions, delivering value to all stakeholders. I'd like to express my thanks to our talented and dedicated employees around the world whose client-first mindset drives our continued success. Now let's open the call up to your questions.

Our first question comes from Glenn Schorr with Evercore.

I want to ask about private credit in general. I appreciate what you've done with Apera, as it appears to be focused on European direct lending. The broader question is how you plan to grow organically and integrate Apera into your overall private credit platform. Can these products and strategies operate independently, or must they be fully integrated across all asset classes and solutions in private credit? I'm trying to understand the direction you're moving towards.

Thank you, Glenn. First, it's important to note that we also acquired Alcentra, and that has been very successful. It falls under BSP's reporting structure with David Manalo and has significantly enhanced our CLO capabilities. We don't want to be seen as just an asset manager that makes acquisitions without integration. Our real growth story and opportunity lie in integrating these elements. While parts of Apera will function independently, they recently raised a $2.9 billion fund and will leverage the broader organization for sourcing and distribution. Our goal is to position Apera as part of a unified $90 billion private credit manager instead of treating BSP, Alcentra, and Apera as separate entities. They bring diverse capabilities, and it's crucial to recognize that core private credit is becoming somewhat commoditized. Expertise in areas like middle-market direct lending, asset-backed lending, or real estate debt is essential, and we aim to globalize this expertise. Ultimately, we view ourselves as one cohesive private credit group.

Our next question comes from Bill Katz with TD Cowen.

Maybe a sort of a big picture question for you. I think you've been at the sort of the vanguard of tokenization. I was sort of curious to think beyond maybe just the short-termism of whether or not it helps a specific asset class. How do you see this shifting the potential economic value proposition with the distribution partners?

We believe that it will fundamentally transform the financial system. For instance, our tokenized money market fund, which we launched in 2021, is still unique as we are the only asset manager providing digitally native exposure directly on the blockchain, rather than adapting older systems. This gives us significant advantages, enhancing our offerings for clients. Recently, we introduced intraday yield for our Benji money market fund, where investors can see their earnings posted the same day. If an investor uses the Benji fund as collateral for just four hours and 32 minutes, they will receive yield for that exact duration. The efficiency of blockchain enables these advanced services. When the SEC approved our product, they required us to conduct a parallel process while we managed the transfer agency in-house. We were surprised by how much cheaper it was to execute transactions on-chain compared to our previous agency system. This illustrates the numerous opportunities ahead. Blockchain provides a verifiable record of ownership, the execution of smart contracts, and a payment mechanism. This is significant because the current financial system often relies on intermediaries. For example, banks traditionally manage counterparty risk in foreign exchange contracts to ensure payment. Blockchain's ability to use smart contracts and embed ownership within tokens means we can guarantee payments without intermediaries, reducing reliance on them and lowering transaction costs. I believe mutual funds and ETFs will eventually adopt blockchain, as it offers a more cost-effective approach. While there are claims about democratizing alternatives, the necessary technology is in place, but the market infrastructure is lacking and slow to evolve. It will take time to implement these changes, but I am confident that the inherent qualities of blockchain will lead to the elimination of many existing systems and foster innovation.

All right. Yes, that's great. That's great. A lot to think about with all this going on. Just stepping back now, I'm really encouraged to see the buyback step up a little bit this quarter. One of the pushbacks we're getting on the story is sort of some uncertainty around where you might stand in the conversation with the regulators on any potential financial settlement with WAM. It's certainly great to see clients stabilizing on the attrition side. How do we think about where you might be sitting in terms of those conversations with the regulators, how you might reserve if at all for a potential charge? And then how are you thinking about capital deployment on the other side of that?

I'll start and then Matt can add to anything I miss. First, I want to emphasize the strength of our fixed income franchise. Franklin's fixed income is likely the largest SIM in our institutional segment but has an unfunded pipeline, which would have been unimaginable five years ago due to a lack of institutional capabilities. We've experienced positive flows with Franklin Fixed Income and Brandywine for several quarters, which has helped offset some challenges from Western. It's significant that Western is also seeing positive gross sales, with both their gross sales and performance improving. As we've mentioned before, it's crucial for us to keep the investment team insulated from distractions so they can concentrate on clients. Their performance metrics over one, three, and five years are nearly in the 90th percentile, outperforming the composite benchmark. We've reduced net outflows from $37 billion in December to $4.1 billion in June, and $3 billion in July, indicating improvement and some stabilization. However, we don't control the pace of progress regarding the government, and we continue to cooperate with them. Just as a reminder, Western contributes just under 6% of our revenues. Now I'll let Matt discuss anything regarding reserves or additional comments he'd like to make.

There's nothing to report on reserves at this time. In response to Bill's question about capital management priorities in this situation and in general, our main priorities include the dividend and our organic growth strategy. Jenny has discussed various growing areas such as alternative assets, ETFs, Canvas, and multi-asset solutions. We have made significant investments in these areas, which are showing growth. We are also focused on repurchasing employee share grants, and we managed to do some of that last quarter. Additionally, we have been servicing our debt, having reduced it by another $100 million in the quarter. We made the final acquisition-related payment of $100 million for the Lexington acquisition. We are being cautious with our debt in case we decide to pay down the $450 million due next year, though it’s more likely we won't access the debt capital markets before then if the markets remain favorable. We are also considering opportunistic share repurchases and acquisitions, as the market is quite active.

Our next question comes from Alex Blostein with Goldman Sachs.

Great. I wanted to get your guys' thoughts on the outlook for private markets growth for Franklin over the next 12 months. And a bit of a two-parter, but I guess, one, I was hoping to get a more wholesome update, I guess, on the wealth channel, nice traction with Flex products, both U.S. and non-U.S. I think you guys have BSP as well with a real estate debt fund as well. But talk to us a little bit about how that's tracking? Where do you see that going and what else you're planning on launching that could be needle-moving there over the next kind of 12 months? And then similarly, maybe just update us on the institutional outlook with the Lexington flagship fund coming up here in the next few months.

Sure. At the start of the year, we estimated our alternative fundraising would be between $13 billion to $20 billion, with the higher end relying on the first close of the Lexington flagship Fund XI happening in September. That’s no longer the case as they are just beginning their market launch, so a first close is unlikely until December or early 2026. Currently, we are positioned in the middle of that range at $15.7 billion after three quarters and project to finish the year around $18.5 billion. So far, 25% of the $15.7 billion has been raised through the wealth channel, which is a positive indicator as current assets show around 10% in that channel. Initially, we launched Flex with a limited number of distributors, and we have since increased that to around 16 internationally. In terms of the Flex and Flex International products, we are seeing monthly inflows of about $150 million to $200 million. We are still bringing on new distributors, highlighting significant growth potential. Additionally, we introduced a perpetual real estate debt fund with BSP, which is seeing positive traction with one wirehouse in the U.S. We are also planning an international launch with a global distributor that should help increase its performance. Currently, we have three perpetual products in real estate, real estate and private credit, and secondary private equity, each with $1 billion in assets. We have a solid track record and scale in these areas. It’s crucial to understand that merely having a good product is not enough in the wealth channel; education and relationships with financial advisers are key factors. Our strength lies in our long-standing relationships within the wealth channel and the support provided by Franklin Templeton Academy to assist in the educational process. In the past, when we raised 20% of Lexington Fund X, many advisers had never sold an alternative product before, illustrating the importance of education. It took us time to refine our approach, but we’re now confident in our strategies. We also have the advantage of catering to 100% of a financial adviser’s portfolio, unlike alternative managers who target a smaller percentage. Our team of 90 individuals is dedicated to supporting our market leaders with specialized knowledge on alternatives within the wealth channel. We remain optimistic about our growth, believing that over time, the wealth channel could represent at least 20% of our alternative assets under management, and potentially up to 30% in the future.

And Jenny, I'll top that as we've invested in headcount, both in Europe and Asia, most recently, we're adding headcount to the 90 that Jenny mentioned specialists.

Great. And then Matt, I was hoping you can update us also on the expense guidance just as you kind of progress here towards the end of the fiscal year? And any early thoughts for fiscal 2026 for you guys?

Sure. Thanks, Alex. I'll discuss the fiscal fourth quarter and the annual guidance. Before diving into that, I want to emphasize Jenny's point about the July monthly assets under management. As she mentioned, it's still early, especially since the month ended just yesterday. We will officially announce the preliminary July AUM and flows next week, but we anticipate Western Asset long-term net outflows to be around $3 billion for July, with an AUM for Western Asset at approximately $236 billion. Excluding Western Asset, we are expecting long-term net inflows of about $3 billion for the month. So in total, we foresee being slightly flat to slightly positive, which would mean $3 billion positive when excluding Western Asset. Regarding the quarter, we expect the effective fee rate for next quarter guidance to be in the high 37s. To clarify, the reason our effective fee rate was about 0.5 lower than our previous guidance is that around 80% of that difference comes from the calculation of effective fee rate, where the daily average AUM was 1% lower than the simple monthly average AUM, impacting our effective fee rate by approximately 0.4 basis points. We expect that to rebound back to the high 37s in the fourth quarter. The compensation and benefits we anticipate will be between $860 million and $870 million, which includes about $100 million in performance fees, elevated compared to our usual guidance of $50 million. The payout ratio on that will be 60% instead of the usual 55% due to part of that performance fee increase. The $860 million to $870 million estimate also incorporates slightly higher incentives related to better performance and increased AUM. For information systems and technology, we expect around $155 million, which includes a couple of million dollars higher on our investment management platform due to progress on the Aladdin project. This is ahead of schedule and does not affect our expense expectations. We project occupancy costs to remain stable at around $69 million to $70 million for the fourth quarter. General and administrative expenses are expected to be slightly higher at $190 million to $195 million owing to increased professional fees. Overall, we estimate the quarter’s adjusted expenses to be around $1.283 billion to $1.285 billion. Regarding taxes, we expect to be on the higher end of our 25% to 27% range for this quarter because of anticipated discrete tax items, but for the year, we expect to land in the middle of that range. Looking ahead to fiscal '25, after including our quarter guidance with the other quarters, while adjusting for the addition of Putnam and excluding compensation for performance fees, we expect expenses to remain roughly flat compared to 2024, possibly increasing by $20 million to $30 million. This anticipates a little rise despite the markets being noticeably higher since I provided this guidance last quarter. Importantly, we are able to fund our strategic investments through other cost savings within the business. As I mentioned earlier, in the areas we have invested, we are witnessing significant growth, especially in alternatives, ETFs, Canvas, and multi-asset solutions. Regarding your question on fiscal '26, we are in the early stages, but as noted in past quarters, we are implementing expense initiatives that aim to enable us to enter fiscal 2026 with at least $200 million in run rate cost savings compared to fiscal '25, excluding performance fee compensation. The only factors that may offset these savings, which might fluctuate throughout the fiscal year, are increased growth areas like distribution expenses linked to faster growth in alternative asset management and increased AUM, in addition to the Apera acquisition, which adds about $30 million in expenses. If we face higher distribution-related costs because of rapid growth in alternative assets, we will ensure to highlight that in our expense discussions so you can keep track of the mentioned savings.

Our next question comes from Dan Fannon with Jefferies.

Great. I apologize, just to clarify, Matt, what you just kind of went through. So for fiscal '26, I understand you have $200 million of savings going into the year, but did you give a number for fiscal '26 expenses?

We didn't specify an exact figure, but based on the fiscal '25 guidance I just provided, you can estimate around $200 million. That's our expectation, barring the information I shared about Apera. If we experience faster growth in alternative asset management, particularly because placement fees and distribution expenses can accumulate in the short term, this will ultimately be counterbalanced by higher revenues in the long term. We will certainly highlight those developments as they arise.

Understood. And that includes assuming flat AUM from now and no performance fees. Is that correct?

Yes. Yes. It excludes performance fees from both sides. So it excludes performance fees from 2025, and it excludes it from the '26 sort of summary that we gave.

Great. Okay. Regarding the fee rates, I recognize there were many variables this quarter. However, when I examine the past year alongside your asset mix, I see that equities have significantly increased in terms of assets under management, while fixed income has decreased. This shift in mix is more favorable, yet your fee rate has remained virtually unchanged compared to last year. Could you elaborate on this? Alternative investments are indeed a growth area, but their assets under management are stagnant overall. As we consider the trends beyond this, are there other factors pressuring the fee rate that could explain why it hasn't increased, despite the mix leaning towards higher-fee assets? I'm surprised that, overall, the fee rate isn't higher when I compare the current AUM mix to where it was a year ago.

Yes, it's an interesting question. When we assess our fee rate, we find it to be stable. Excluding certain occasional events that can elevate the effective fee rate, such as catch-up fees from the Lexington fund, we observe that our rate has remained relatively steady over time. This stability is largely due to our ability to offset lower fees in certain competitive large institutional opportunities. We believe it's advantageous to maintain this stability rather than experiencing a decline. In this reporting quarter, only about 20% to 25% of the fee variance is linked to product mix. We've noted significant growth in areas such as Canvas, ETFs, and larger institutional mandates, which typically have lower fees. This growth has helped counterbalance the pressures from lower fees and has been supported by inflows into alternative assets. Additionally, we've seen higher distributions and realizations in alternative assets, contributing to our overall stability. While we are observing some positive momentum in the areas Jenny mentioned, our effective fee rate remains stable without any significant increases or declines. As we strive to be transparent, I want to point out that about 0.2 of the difference in this quarter was simply due to the weakening dollar, which was an FX-related issue and not connected to fundamental product shifts or pricing pressures.

Our next question comes from Ken Worthington, JPMorgan Chase & Co.

Jenny, I wanted to dig deeper, maybe follow up on Bill's question earlier on digital blockchain technology, really permeating the traditional asset management business. So you were early; you're innovative; you're a leader, but it doesn't always seem to translate into obvious economic success. And I recognize it's early, but if we step back and look forward where do you see the likely opportunities for Franklin to translate your early insights and investments in digital blockchain technology into economic success that maybe we as outsiders can see?

We have established a comprehensive ecosystem. On the Benji platform, we hold a patent for our wallet, which is currently available for download from the Apple Store. We designed it with the idea that it could be white labeled by other companies. This wallet, along with the Benji app and token, can operate across eight different blockchains. As traditional distributors start to engage with the crypto and tokenization landscape, we believe they will seek partners to help them navigate this space. We have created the necessary infrastructure for that purpose. Currently, we manage reserves for four stablecoin providers. Many are aware of Circle and USDC, but there are also other providers. Recently, we were chosen by a state that is launching its own stablecoin to manage it. There has been a parallel existence between the crypto and traditional finance worlds, but with increasing clarity on regulations like the Genius Act, firms are becoming more comfortable entering this realm. We see ourselves as a crucial partner in this process because the infrastructure we've developed since 2018 will be challenging for others to replicate quickly. Our ability to private label this and integrate it into clients' platforms is significant. For instance, if you're a distributor, and your clients are holding their crypto assets—especially the younger demographic possibly using Coinbase—wouldn't you want to enable a transition to a wallet integrated into your system? This would allow you to provide a complete view of clients' investment opportunities, and that's precisely the infrastructure we've created.

Great. And maybe just a follow-up there because that's pretty interesting. Any conversations with these other companies to white label your technology and what you're doing? Or is it just basically the Genius Act and some of the other regulations are so real-time that we haven't gotten there yet?

We are having conversations. A lot of the early conversations actually were on the international side and have been on the international side, partly because they had more clarity on regulation. But now with the Genius Act, we're actually having conversations with distributors in the U.S. as well.

Our next question comes from Brian Bedell with Deutsche Bank.

Most have been asked and answered, and thanks for all the commentary on the tokenization, Jenny. It was really, really good color. Maybe switching topics to the 401(k) theme and the private markets and 401(k) theme. Obviously, you guys have a really well-rounded private lineup. What is your, I guess, desire or your plans to potentially integrate private and public products? You could most likely do this yourself and then go after the 401(k) market. And if you could just remind us again your presence in defined contribution and in target date products? And how do you see that? Or do you think you need to partner?

Yes. Currently, we manage approximately $428 billion in retirement assets, of which around $120 billion is in defined contribution. The acquisition of Putnam has significantly increased our scale in target date and stable value investments, positioning us as a major player in this space. In response to your question about partnerships versus independent efforts, we are open to both avenues and actually entered into a partnership with Apollo last year, where we manage the real estate component while they focus on private credit. This initiative has gained traction with smaller plans, but the defined contribution sector is particularly litigious. Without clear legislative guidance, progress may be slow. However, Empower is actively pursuing this area, offering an adviser-managed account solution through Morningstar, in which we participate. There's potential for growth here, especially considering that half of our $160 billion in defined benefit assets is allocated to alternatives, highlighting a significant missed opportunity. The defined contribution market tends to be the most contentious regarding fees, which causes fiduciaries to hold back until they have a DOL safe harbor or similar assurance. While the opportunity is promising, the uptake may be gradual. We're well-positioned, and our target date products will incorporate private markets, with models being developed for launch in the first half of 2026. The key now is the level of uptake. Adam, is there anything else you’d like to add?

Yes, just to provide some context, the target date fund has reached approximately $19 billion, which is quite significant. A substantial portion of this growth came from the Putnam acquisition. This is particularly important because one-third of defined contribution assets under management are flowing into the QDII space, and having that target date fund has greatly benefited us in that regard. Currently, we have about $2 billion in the sales pipeline that we expect to close shortly in that area. I'm referring specifically to the sales pipeline, excluding our institutional wins but including the unfunded pipeline, which has also increased significantly to around $24 billion, marking a $4 billion rise from the previous quarter. There has been strong growth on the institutional side, while core sales are also improving, with an increase of about 22% compared to the average of the last eight quarters and a 10% rise over the same year-to-date period last year. This indicates robust growth in both the core market, which includes defined contribution retirement, as well as the institutional markets.

Our next question comes from Michael Cyprys with Morgan Stanley.

Just a question on non-U.S. allocations, just given the shifting trade policy, geopolitical uncertainty, and heightened volatility. Just curious what you're seeing from your U.S. clients and non-U.S. clients in terms of potential and evolving interest for non-U.S. strategies and scope for potentially shifting allocations away from the U.S.

Sure. I'll take that. Yes. We have absolutely seen that over the last quarter, but I want to distinguish between what was driving those changes. From a client perspective, we don't see that as kind of a political statement, but rather an investment opportunity statement as there just seems to be growing interest and growing upside in markets outside of the U.S. So particularly, we've seen growth in our emerging markets equity strategies, international and global equity, as well as value as opposed to growth as people tend to, in times like this, like to rebalance their portfolios and a lot of people are overallocated in large-cap growth. On the fixed income side, what we've seen is movements into areas like short-term, of course, but also global bond, EM, high yield, and some multi-sector products as well. In the U.S. there was a general flow out of equities for both us and the industry, but outside of the U.S., there's an attractiveness to equity, especially in domestic markets in Europe and Asia. They're seeing more upside in their markets domestically versus the U.S., especially if there's going to be a weaker dollar, which I think is a call many are making. So we're seeing a lot of growth in non-U.S. equity and fixed income in both niche and kind of more broad global products.

This concludes today's question-and-answer session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments.

Okay. Well, thank you, everybody, for joining us today. And once again, we're a people business, and I want to thank our employees for their continued hard work and dedication. We look forward to speaking with you again next quarter. Thanks, everybody. Enjoy the rest of your summer.

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