Earnings Call Transcript - BEN Q1 2025

Operator, Operator

Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended December 31, 2024. Hello, my name is Matt, and I will be your call operator today. As a reminder, this conference is being recorded and at this time, all participants are in a listen-only mode. And, I would like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. Thank you. You may begin.

Selene Oh, Chief Communications Officer and Head of Investor Relations

Good morning and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc. that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties, and important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. Now, I would like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Jenny Johnson, President and Chief Executive Officer

Thank you, Selene. Welcome and thank you for joining us to discuss Franklin Templeton's 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 shortly, but first I will review the quarter's highlights. Over the past few months, I've traveled across Europe, the Middle East and Asia, and met with key clients ranging from wealth clients to institutions and sovereign wealth funds to other large asset owners. What's clear to me from these conversations is that clients want deeper relationships with fewer asset managers that can meet more of their needs. As one of the few global asset managers with extensive public and private market strategies, we believe we are well-positioned to be a trusted advisor to our clients around the world. In recent years, we have intentionally diversified our company across specialist investment managers, asset classes, vehicles, and geographies to benefit a broad range of clients through various market conditions and cycles. Ever since we opened our first offices outside of North America 40 years ago, our global presence and perspective has been a strategic advantage, enabling us to reach new investors. Today, our global footprint includes offices in over 30 countries, serving clients in over 150, and represents approximately $475 billion in assets under management. During our first fiscal quarter, market volatility increased with geopolitical uncertainty, the U.S. Presidential election, central bank actions, and inflation. Starting with public equity markets, global equities fell by about 1% during the quarter, while the S&P 500 posted a total return of 2.4%, and the NASDAQ 100 notched a 5% gain. The U.S. equity markets saw positive returns while other regions like Europe, the U.K., Japan, China, and emerging markets faced pressure, in part due to the U.S. Presidential election results, trade tariff concerns, and economic growth uncertainties. While equity markets' returns were a bit more modest than the three previous quarters, the major trends remained in place, with U.S. large caps outperforming U.S. small caps, driven by technology and communications services firms. Growth stocks in the U.S. outperformed value stocks for both the quarter and the year. The largest gains came from tech and consumer sectors, while materials and health care lagged. International equity markets stalled in Q4 but still delivered positive returns for the year. In the coming year, our investment management teams believe that earnings growth is likely to support higher valuations across global equity markets, with the U.S. continuing to lead the way. We also believe that dispersion within global equity markets will continue to increase, meaning that top performers should come from more than just mega cap tech companies. We've seen signs of this starting to play out in the December quarter and more pronounced this week as DeepSeek raised questions about the race to capture value from AI. This dispersion favors active management and the ability to move quickly in today's dynamic markets. Valuations are likely to come more into focus, and skilled active managers can identify mispriced securities to generate alpha. It's also a reminder that investors should focus on balance and diversification of their portfolios. Meanwhile, turning to the rate market, investor focus is centered on two issues: the inflation picture and uncertainty surrounding the policies of the new U.S. administration. Following robust U.S. growth numbers and relatively persistent inflation data, we expect the Fed to adopt a prudent pause in its easing over the next several months, something the markets may have overestimated. Early U.S. government economic policy moves, especially on regulations and tariffs, could solidify expectations of sustained robust growth, which in turn would point to some inflationary pressures. We see uncertainty remaining elevated for a while as markets try to anticipate U.S. fiscal policy and distinguish between rhetoric and reality regarding proposed tariffs. So what does this mean for fixed income markets? The yield curve continues to steepen, and over time, investors will benefit from moving up the curve. As the Fed's rate-cutting cycle seems close to an end, traditional fixed income sectors are regaining their role as a primary source for yield. Given the still robust pace of activity in spread sectors, our fixed income managers continue to find opportunities at attractive yields, even as spreads remain relatively tight. Turning to the private markets, as valuations have reset from their 2021 levels, we believe that allocating capital in the coming year looks attractive across much of the private market ecosystem. Specifically, we see opportunities in secondaries, real estate equity, and real estate debt. We believe funds that deploy capital in today's market environment can negotiate favorable pricing, terms, and covenants. With product evolution making these investments more accessible to a larger group of investors, and with more flexible features, financial professionals are increasingly allocating client assets in these versatile and valuable strategies. A tremendous opportunity exists with global money market assets at record highs of $8.9 trillion as of December 31, according to Morningstar. Investors who have sat on the sidelines have not been able to capture significant returns over the past couple of years. As one of the world's most comprehensive asset managers, our broad investment capabilities, extensive global distribution network, and local asset management expertise continue to differentiate us in an increasingly competitive industry and allow us to be well-positioned to capture money in motion. In fact, just this week, we were appointed as trustee and manager of the National Investment Fund of Uzbekistan. We are pleased to partner with the government of Uzbekistan in support of the development of their local capital markets. For over 15 years, we have actively managed similar specialized emerging markets mandates, including Fondul, a London and Bucharest listed Romanian closed-end fund. Turning now to our business, our first fiscal quarter results demonstrated progress across our key growth areas, enabling us to meet the needs of our clients amid heightened market volatility. Our AUM continues to be well diversified across asset classes, client types, and regions, and ended the quarter at $1.58 trillion, a decrease from the prior quarter due to negative markets and long-term net outflows from Western Asset. Excluding reinvested distributions, long-term inflows improved by 34% from the prior year's quarter. Long-term net outflows were $50 billion, including $20 billion of reinvested distributions. Excluding Western Asset Management, our long-term net inflows were approximately $18 billion and positive in every asset class. Three of our asset classes, Equity, Multi-Asset, and Alternatives, generated a combined $17 billion in positive net flows. Equity net inflows were $12.5 billion and included reinvested distributions of $16.5 billion. We saw positive net flows into large-cap value, smart beta quantitative, listed infrastructure, and all-cap core strategies. Investment performance continues to be strong across all periods as investors return to risk assets. Fixed income net outflows were $66.7 billion. Excluding Western, fixed income net inflows were positive into multi-sector, core bond, and high yield strategies. As highlighted on previous calls, we benefit from our broad range of fixed income strategies with non-correlated investment philosophies. Brandywine Global and FT fixed income both generated positive net flows, totaling a combined $1 billion in fixed income strategies in the quarter. This past year has presented significant challenges for Western Asset Management, and we're committed to supporting them. In the near term, we will integrate select corporate functions, creating efficiencies and giving access to broader resources, while ensuring Western's investment team autonomy. These enhancements will be seamless for clients. This quarter, fundraising and alternatives generated $6 billion, of which private market assets totaled $4.3 billion. Aggregate realizations and distributions were $3.8 billion. In January, we launched our first Evergreen Secondaries Private Equity Fund, the Franklin-Lexington Private Markets Fund, designed for the wealth channel. The fund achieved an initial fundraising cap of $900 million in assets under management. We have also launched a parallel product internationally. Today, our Evergreen funds are reaching an important milestone of nearly $1 billion in AUM for each of our alternative managers. Franklin Lexington Private Markets Fund in Secondary Private Equity, BSP Real Estate Debt, and Clarion Partners Real Estate Income Fund. These are semi-liquid perpetual vehicles, and we look forward to further capital subscriptions. These are great examples of how our wealth management alternatives business, Alternatives by Franklin Templeton, has all the essential elements to win in this space. Over the past few years, we have focused on designing innovative, suitable products, investing in client education, and supporting wealth advisors. Our large local distribution coverage model is comprised of a dedicated alternative specialist team that works with our overall sales force. The wealth channel is approximately 10% of our alternative AUM. Looking ahead, as allocation to alternatives increases and we launch products in the channel, we expect wealth clients to gradually grow to represent 20% to 30% of our alternative capital raises. Multi-Asset net inflows were $3.4 billion, led by Franklin Income Fund, our custom indexing platform Canvas, and Franklin Templeton Investment Solutions. Income and yield continue to be top of mind for investors. Franklin Income Fund's flexible approach enables it to invest in dividend-paying stocks, bonds, and convertible securities, and is a great example of a strategy in high demand across multiple geographies and in different vehicles. The Investment Solutions team leverages a global network of investment teams across our specialist investment managers to offer innovative and diversified strategies, including private strategies and ended the quarter with $88 billion in AUM. Turning to investment vehicles, clients showed interest in a diverse range of investment options, including ETFs, retail SMAs, and Canvas. Our ETF business saw its 13th consecutive quarter of positive net flows, attracting $2.7 billion during Q1. Nine of our ETFs now are over $1 billion in AUM. From an asset class perspective, eight of these nine funds are equity strategies, and the largest ETF being Franklin U.S. Core Bond with $2.3 billion in assets. Retail SMA AUM was $146 billion, and excluding Western had net inflows of $2.5 billion. Canvas, a web-based software platform, allows financial professionals to create personalized SMAs for their clients, including tax-managed, efficient products, and has enhanced our leadership in SMAs. Through the use of technology, we continue to partner closely with clients to develop personalized portfolio solutions. Canvas had record net flows of $900 million with AUM of $10.5 billion, a 10% increase from the prior quarter. At quarter-end, our institutional pipeline of one but unfunded mandates increased by $2.3 billion to $18.1 billion in AUM and remains diversified across asset classes and specialist investment managers. Despite the challenges with Western, fixed income mandates have grown and now represent 45% of the pipeline. Before I turn to investment performance, I wanted to provide a brief update on Western Asset Management. In the quarter, Western experienced significantly higher long-term net outflows of $68 billion, of which $38 billion of it occurred in the month of December. By December 31, Western Asset managed $272 billion in AUM across 88 marketed strategies. While it's preliminary, as we report January AUM inflows next week, Western's long-term net outflows are expected to be approximately $17 billion for the month of January and had AUM of approximately $260 billion. Excluding Western, we expect long-term net inflows of approximately $4.5 billion. Now, in terms of investment performance, our investment teams have remained true to their distinct disciplines and time-tested approaches and continue to produce competitive investment returns. Mutual fund investment performance improved in the 3 and 5-year periods from the prior quarter across all asset classes was unchanged for the 10-year period, and the modest decline in the 1-year period was primarily due to U.S. equity strategies. Two-thirds of mutual fund AUM outperformed their respective peers over the 3-year period. Compared to the prior quarter, composite investment performance improved in the 3-year period, stayed relatively flat in the 10-year period, and declined in the 1 and 5-year periods. More than half of the AUM in our strategy composites are beating their respective benchmarks for the 3 and 5-year periods, and 63% in the 10-year period. Turning briefly to financial results, adjusted operating income was $412.8 million, a decrease of 9% from the prior quarter, and a decrease of 1% from the prior year quarter. In connection with Western, and as a whole, we will be implementing additional cost savings initiatives during fiscal 2025, of which the benefits will be realized in fiscal 2026. We remain committed to our long-term vision of strategically investing in the business to best serve our clients while managing expenses and maintaining our focus on enhancing shareholder value. Looking ahead, I'm excited about the many opportunities we have to drive growth and innovation. With a clear vision and strong progress already underway, we're focused on elevating the performance of our investment strategies, outstanding client experience, and continued growth in our most critical areas. This month, we announced the launch of an exciting new U.S. advertising campaign, 'your trusted partner for what's ahead.' This campaign highlights Franklin Templeton's rich legacy of evolving with our clients' needs while showcasing the breadth of our capabilities for financial professionals. Some of the highlighted capabilities include our public and alternative investments, customized solutions, Canvas, ETFs, and SMAs. Finally, in December, Franklin Templeton was recognized again as one of the best places to work in money management by Pension and Investments. I'm proud to lead such talented and dedicated employees who work tirelessly on behalf of our clients. And I'd like to thank them for their hard work and dedication to our organization. Now let's open up the call to your questions.

Matt Nicholls, CFO and COO

Yes, good morning, Alex. So, in terms of financial impact of Western, I'll mention a couple of things, then put it into context, talking about the annual impact through '25 and then into '26. I think that's probably the most useful way of looking at it. So, in terms of financial impact, if you run rate the current revenue impact of Western outflows of approximately $120 billion, this is from August through to the end of January. It equates to about 30% of Western's full year '24 adjusted revenue. That equates to about 3% of Franklin's full year '24 adjusted revenue. The run rate remaining revenue of Western equates to about 6% of Franklin's adjusted revenue. The impact on operating income will obviously be greater, as I mentioned in the last quarter, for a period of time since expenses need to catch up with revenue declines, and we're being, as Jenny mentioned, supportive, methodical, but that shouldn't be confused with not being disciplined. We're being super disciplined about how we tackle this. Top of mind, though, is to ensure continued excellence in terms of client experience with Western and obviously all of Franklin. So specifically, as Jenny mentioned, Franklin Resources is assisting significantly by accelerating the end of our 5-year autonomous agreement with Western, which expires in July this year. This will enable us to implement the integration of certain corporate functions that Jenny referenced that will result in Western being able to capture the benefits of a much larger scaled asset management operation, while again, as Jenny mentioned, retaining investment team autonomy. I think in terms of the sort of margin impact, it's important to look at the year. We do expect our expenses for the year to be, if you normalize for a full year of Putnam and then exclude performance fees, we expect them to be roughly even with last year. Very similar to last year's expenses, let's say adjusted expenses. We continue to make important strategic investments and funding, then with cost saved elsewhere in the business. We expect the impact of our support of Western and integration of certain functions of Western to reduce our margin by a little bit in the short-term, let's say over the next quarter also and then experience margin expansion again in fiscal 2026, remembering that starts for us in October, October 1. For further perspective, which is why normally we wouldn't talk about 2026, but in this context, I think it's important to explain it. For further perspective, we expect our expense initiatives that we're working on now in 2025 to position us to enter fiscal '26 with the equivalent of about $200 million to $250 million of expense run rate expense reductions. You asked about the effective fee rate of Western Asset. It's currently 16.5 basis points. In general, obviously, look, we don't give revenue guides. All of this assumes flat markets, but we do expect the lower fee revenue from Western to be replaced over time with other areas of growth, which Jenny referenced in her prepared remarks, Franklin Fixed Income, Alternatives, ETFs, Campus Solutions, and even other pockets of growth within Western itself. And that obviously will add to the margin recovery. So this is sort of a two-pronged thing. You have obviously expense discipline and expense reductions that will happen, start to begin in 2025, but the effect on our margin, the positive effects on our margin, margin expansion won't happen until you get into 2026. And then obviously another layer of margin expansion is on the revenue side that I just mentioned. And then, finally, we gave margin guidance or margin targets, let's say, at our year-end call, and we referenced a medium-term target of 30%. That remains exactly the same. We're not changing any of the targets that we talked about at year-end.

Jenny Johnson, President and Chief Executive Officer

I'm going to add one more point, Alex, since you inquired about strategy. Although it's unrelated to the current issues at Western, we should recognize how significantly the fixed income landscape has evolved, which may lead us to reconsider our structure over time. What do I mean by this? Banks no longer fulfill the same traditional roles; they aren't lending in the same manner as before. When speaking with private credit managers, you’ll find that their primary focus is often on sourcing deals rather than merely raising capital. Considering the growing importance of this function in private credit, as companies like BSP develop sourcing relationships with middle market and private equity firms, it’s easy to see how this will shape future discussions. It will become important to outline what the structure looks like for private investments versus traditional fixed income options. This is something we're contemplating. While it won't result in any immediate organizational changes in 2025 or even 2026, we are reflecting on what the right structure should be as a firm managing around $500 billion in fixed income with various divisions.

Alexander Blostein, Analyst

Hey, good morning, everybody. Thank you for taking the question. Since there is only one per person for now, maybe we will start with Western. Appreciate the update on AUM and obviously outflows in January continues to be obviously a pretty challenging picture, but can you help us frame the operating income and management fee contribution from Western, kind of where that stands today? And I guess more importantly, I know it is going to be hard to ring fence where this whole thing ultimately ends up in terms of size, but what is kind of the strategic vision for Western, however much smaller it gets from here? So I know you talked about integrating some of the selected corporate functions. What kind of savings do you anticipate from that and just maybe help us think about what Western could look like over the next couple of quarters as things settle down?

Jenny Johnson, President and Chief Executive Officer

Thanks, Alex. I'll address a little bit on the strategic side and then turn over to Matt on kind of the financial framing. Look, our model has always been that we support the independence of the investment teams and we integrate kind of the rest of the business at the center. And obviously, we've done a lot of acquisitions over the past 5 years, and it takes time to do that. As you know, Western was independent. But that's what the initiative is, is to basically maintain the independence of that investment team and things like fund accounting, even the technology and other areas. And we're looking at all this to integrate it into the broader firm so that we get greater scale, we can make investments in things like AI and data. And so it's really a natural evolution of that, and that work is underway. And, Matt, you want to talk about the impact?

Matt Nicholls, CFO and COO

Yes, yes. Good morning, Alex. So, in terms of financial impact of Western, I'll mention a couple of things, then put it into context, talking about the annual impact through '25 and then into '26. I think that's probably the most useful way of looking at it. So, in terms of financial impact, if you run rate the current revenue impact of Western outflows of approximately $120 billion, this is from August through to the end of January. It equates to about 30% of Western's full year '24 adjusted revenue. That equates to about 3% of Franklin's full year '24 adjusted revenue. The run rate remaining revenue of Western equates to about a 6% of Franklin's adjusted revenue. The impact on operating income will obviously be greater, as I mentioned in the last quarter, for a period of time given that expenses need to catch up with revenue declines, and we're being, as Jenny mentioned, supportive, methodical, but that shouldn't be confused with not being disciplined. We're being super disciplined about how we tackle this. Top of mind, though, is to ensure continued excellence in terms of client experience with Western and obviously all of Franklin. So specifically, as Jenny mentioned, Franklin Resources is assisting significantly by accelerating the end of our 5-year autonomous agreement with Western, which expires in July this year. This will enable us to implement the integration of certain corporate functions that Jenny referenced that will result in Western being able to capture the benefits of a much larger scaled asset management operation, while again, as Jenny mentioned, retaining investment team autonomy. I think in terms of the sort of margin impact, it's important to look at the year. We do expect our expenses for the year to be, if you normalize for a full year of Putnam and then exclude performance fees, we expect it to be roughly even with last year's expenses, let's say adjusted expenses. We continue to make important strategic investments and funding, then with cost saved elsewhere in the business. We expect the impact of our support of Western and integration of certain functions of Western to reduce our margin by a little bit in the short-term, let's say over the next quarter also and then experience margin expansion again in fiscal 2026, remembering that starts for us in October, October 1. For further perspective, which is why normally we wouldn't talk about 2026, but in this context, I think it's important to explain it. For further perspective, we expect our expense initiatives that we're working on now in 2025 to position us to enter fiscal '26 with the equivalent of about $200 million to $250 million of expense run rate expense reductions. You asked about the effective fee rate of Western Asset. It's currently 16.5 basis points. In general, obviously, look, we don't give revenue guides. All of this assumes flat markets, but we do expect the lower fee revenue from Western to be replaced over time with other areas of growth, which Jenny referenced on her prepared remarks, Franklin Fixed Income, Alternatives, ETFs, Campus Solutions, and even other pockets of growth within Western itself. And that obviously will add to the margin recovery. So this is sort of a two-pronged thing. You have obviously expense discipline and expense reductions that will happen, start to begin in 2025, but the effect on our margin, the positive effects on our margin, margin expansion won't happen until you get into 2026. And then obviously another layer of margin expansion is on the revenue side that I just mentioned. And then, finally, we gave margin guidance or margin targets, let's say, at our year-end call, and we referenced a medium-term target of 30%. That remains exactly the same. We're not changing any of the targets that we talked about at year-end.

Jenny Johnson, President and Chief Executive Officer

I want to add one more point, Alex, regarding strategy. It's important to recognize how much the fixed income landscape has evolved, which might lead us to reconsider our structure over time. What do I mean by this? Banks no longer serve the traditional role they once did, and they aren't lending in the same manner as before. When speaking with private credit managers, you'll find that their primary focus is often on sourcing deals rather than just raising capital. As dealing with sourcing becomes increasingly vital in private credit, you can see how developing those relationships—like those that BSP has with middle market companies and private equity firms—will shift the conversation. It will evolve into discussions about the structure for private options versus traditional fixed income. This is certainly something on our mind. It doesn't imply any immediate organizational changes expected in 2025, possibly not even 2026, but as we assess our position as a roughly $500 billion fixed income manager across various groups, we are considering what the optimal structure should ultimately be.

Dan Fannon, Analyst

Thanks, good morning. So a lot there in the first response. So just to follow-up, just to make sure I understand, the 200 to 250 of additional savings, that is going to be beyond the flat, including Putnam for fiscal 2025. So as we think about 2026, you'll have natural growth plus that savings that should be for the full year.

Matt Nicholls, CFO and COO

It's correct that if we have flat markets from today, we won't increase our expenses for 2025. Expenses would remain flat or decrease slightly. The 250 we are discussing is additional for 2026, and we expect to realize the full 250 for that year. Essentially, we anticipate starting the work to achieve those cost savings in earnest on October 1.

Dan Fannon, Analyst

Great. That's helpful. And then just in a similar kind of vein, is there any other affiliate like Western that is not on a profit share as you go through this integration? Or are there other integrations of smaller affiliates or recent deals that could be part of that improvement in efficiency?

Jenny Johnson, President and Chief Executive Officer

The only one that Matt could discuss regarding the financial impact is the ALTs managers, which do not achieve the same scale through integration. The legal department within the ALTs manager functions as a deal team rather than a typical 40-act team, making them quite standalone. In terms of traditional managers, Royce remains quite independent and manages many of their own operations, but they are really the last one standing. All the others have different appearances and have either been integrated or are currently undergoing various levels of integration.

Matt Nicholls, CFO and COO

Yes, look, when we acquired Legg Mason, we quite purposely agreed to various levels of autonomy over a set periods of time because it's not possible to integrate and consolidate operations in a quick, methodical way that we believe is safe and sound. So, essentially, we had a set timeline over a period of 5 years over which these various operational scale initiatives were planned. At the end of the day, Western was the last one on the list because they're so big and scaled themselves with their own autonomous, independent operation. That's the way it worked. However, looking forward, you could think of our company in a much more simplistic way. On the public market side, we're going to have one scaled operation supporting a series of investment teams, some of which have their own brands because they're synonymous with a certain style of investing and what our clients demand from us. And then the second part of the company is the alternative asset businesses that require very specialized operations to support them. And so that's basically the way to look at it. You have the liquid sort of public markets business on the one hand, enjoying the scaled operation on a global level, and then you have the alternative asset groups on the other.

Michael Cyprys, Analyst

Hey, good morning. Thanks for taking the question. I just wanted to ask about Putnam. I think it's been about a year since you guys have closed the transaction there. I was hoping maybe you could just update us on the progress, the synergies there, the flow picture seems to be perhaps a lot better than people may have thought. So just curious if you could update us on that as well as the strategic partnership that you have with Great-West and the scope for additional growth and flows there.

Matt Nicholls, CFO and COO

Yes, I'll start with the first part, and then Jenny and Adam will address the partnership with Great-West Life. It’s not common in asset management to see straightforward strategic transactions; they often come with complexities and human capital challenges. However, our partner acquisition has truly been a standout success in multiple ways, especially regarding inflows. Since closing the transaction, net new inflows, excluding reinvested dividends, have been around $12 billion to $15 billion, roughly averaging $1 billion a month. The performance has been outstanding, and culturally, the team has integrated very well with Franklin. They are a disciplined team that has worked closely together before, and their synergy with us has been excellent. This combination of strong performance and effective global distribution has yielded remarkable results. Financially, we initially projected moving from nearly zero margin to a 30% margin, equating to $150 million in operating income over a year. We're currently slightly ahead of that projection, estimating around $175 million to $180 million. While we aren’t reporting independent teams in this manner, it’s worth noting it’s only been 12 months, giving context to our progress. We are thrilled with the team's performance, the financial results, and how this has benefitted our customers from distribution and product perspectives. Adam and Jenny, do you want to provide your insights on the remaining aspects?

Adam Spector, Head of Global Distribution

Yes. Thank you. I would say that the great thing about Putnam is it shows really what can happen when we bring in a tremendous investment team that didn't necessarily have scaled distribution together with scaled distribution. And that's really what's happened. Their performance has remained really, really quite good. I think they have 89% outperforming in the 1-year, 91, 89, and 90, with 87% of their assets four stars or better. So, really strong performance. But with scaled distribution, if you take a look at this quarter versus a year ago, gross is up over 2x and their net is up over 7x, and they had $13.6 billion of flow in the first quarter. So just really strong results. The core sales there is also what's really important. If we take a look at how much the regular sales and mutual fund sales are growing, that's what's driving things significantly. You also asked, I think, about the partnership with the Power Group. That's going quite well. We have a deep, embedded relationship with Empower where we're building some new products together and seeing significant interest generated in some smaller plan retirement products. We are beginning to build out with them outside of the U.S. We have a good general account relationship. And then the other thing that Putnam really brought us was significant expertise in the retirement channel where we have a very scaled team who specialize in retirement, but importantly, also the right retirement products now with a target date suite that's about $18 billion, and a stable value product that's about $17 billion with really stellar performance.

Matt Nicholls, CFO and COO

I apologize for missing one point that I should have mentioned. Jenny will provide insights on the broader relationship with Great West Life, but it's important to note that while Putnam has been excellent, it has also improved our strategic efforts with other essential teams in equities such as Franklin Equity Group, Franklin Mutual Series, and ClearBridge. Each of these teams is outstanding on their own, and while they work independently to maintain their unique investment styles, there are advantages to sharing success stories and strategies internally. This collaboration helps us improve as a company, gain access to meetings with prominent firms, and ultimately benefits the organization as a whole.

Jenny Johnson, President and Chief Executive Officer

Yes, it's important to note that there is significantly more money being managed by active managers compared to passive strategies. If you are a top-performing active manager, you will attract investment flows, which has been clearly demonstrated. Additionally, events like DeepSeek highlight the importance of diversification, prompting more institutional investors to consider returning to active management. Furthermore, since the acquisition, Putnam's quarterly growth sales have increased by 68%, illustrating the advantages of true scale. This growth is not only seen in their open and mutual funds but is also evident across all investment vehicles, including their ETFs, which have experienced strong inflows.

Michael Cyprys, Analyst

Great. Thanks so much for the color there and congrats on the success with Putnam.

Bill Katz, Analyst

Okay. Thank you very much. I just want to clarify the guidance on expenses. Just, Matt, if you could just reiterate the '26, what I think I heard was you'd be flat to '25 if you strip out market action, performance fees, and pre-synergies. And so that would be an incremental 2 to 2.50 down. A, is that correct? And then against that, what is the revenue contribution you're assuming for WAMCO? You mentioned, I think, about 6% residual exposure on the website. Are you assuming zero contribution or some component of that? Thank you.

Matt Nicholls, CFO and COO

No, certainly not zero. However, we are not going to estimate where we see the 6% going. We are working diligently with Western and its clients, who are also focusing on their current business across various fixed income strategies. As we have promised to you and our investors, we will ensure transparency regarding the progress we are making. Each month, when we highlight our Assets Under Management, we will include a summary and update on Western, allowing you to see the direction of that 6%. We have provided the effective fee rate, enabling you to calculate it on a month-to-month basis as we navigate this situation. You were correct about the expense guidance. Think of the guidance for 2025 as being roughly flat, excluding performance fees, since their future is uncertain for 2025. So, normalize for performance fees and the additional quarter of Putnam, then subtract $250 million from that to achieve the margin expansion we expect.

Brennan Hawken, Analyst

Good morning. Thanks for taking my question. Matthew, I'd just like to ask about that last point you just made, the $200 million to $250 million, is that coming out of the full year and will that ramp through the year? Yes, okay.

Matt Nicholls, CFO and COO

Yes, we expect that by the beginning of our fiscal 2026, we will be in a position to achieve the expense reductions for the entire year of 2026. By the end of 2026, we anticipate expenses will be reduced by $200 million to $250 million. As we progress through 2025, we will keep you updated on this. That is our expectation for 2026.

Brennan Hawken, Analyst

Okay. So, the $200 million to $250 million is the exit rate of the fiscal year '26, and we'll see the progress of that through the year of 2026.

Benjamin Budish, Analyst

Hi. Good morning. Thank you for taking the question. Maybe moving over to the Alternative side, during the prepared remarks, Jenny, you talked about wealth fundraising growing to 20% to 30% of total capital raises. I'm just curious, how do you see that unfolding? What's the sort of cadence? It sounds like you've obviously talked about investing a lot in distribution. There are new products in the market. Is this predicated on more sort of semi-liquid democratized vehicles or retail participation in drawdown funds? So just curious if you could provide some more color on those expectations.

Jenny Johnson, President and Chief Executive Officer

Sure, I'll start and then Adam can chime in. When Lexington raised Fund 10, it closed at approximately $22.7 billion, with 20% coming from the wealth channel. This shows that we have been successful in the wealth channel with traditional types of vehicles, thanks to years of building and learning. Fortunately, our core expertise lies in the wealth channel, enabling us to introduce alternative investments. Currently, we have 90 people dedicated to Alternatives in wealth globally to assist our distribution teams. Recently, I mentioned three cornerstone perpetual products we have—covering real estate debt, secondaries, and real estate equity—that amount to almost $1 billion. In January, we had a fundraising period during which we raised $900 million with a couple of partners for a secondary perpetual fund. Initially, we had to cap it at $900 million, though it could have been larger. The difference between the institutional and wealth channels is that, in the institutional space, you can call capital as needed, while in the wealth channel, investors make commitments, and we wanted to mitigate cash drag. This fund will continue to fundraise this quarter. We anticipate similar success in the international market as we've seen in the U.S., which underscores the strong interest in the wealth channel when we present the right products. Additionally, we have experts to support our distribution teams through thought leadership and our Franklin Templeton Academy, which trains advisors on incorporating alternatives into their portfolios. Looking ahead, there's potential in the retirement channel as well. We’ve launched a couple of products in this area, including one with Apollo that includes both real estate and private credit. Although the retirement channel may be slow to adopt these products due to its focus on fees and litigation, it presents a significant opportunity because it naturally generates cash flows, which can alleviate some of the illiquidity issues associated with these vehicles. However, the infrastructure for retirement platforms is not fully equipped to handle these investments yet. Overall, there is a strong desire to expand into the retirement channel over time.

Adam Spector, Head of Global Distribution

Sure. I would add a few things. To your point about draw downs versus perpetual, we think they both play a place in the wealth management channel, and there's a difference between a regional broker-dealer and a large global private bank. So, we'll see different products play different roles. But the fact is, as Jenny said, we now have three scale, the perpetual vehicles that are each roughly about a $1 billion in the private debt space, in the real estate and in the secondary space. That allows us to constantly be in market, talking to our partners. That puts us in a very different position and allows us to be more effective when we do come to market with the drawdown fund. And as she said, we're doing that not just in the U.S., but in EMEA, in the Middle East, in Asia, and seeing success around the world. We've also invested significantly, not only in the 90 people in that team that's focused on selling but also in our educational resources. And we find that the more time we spend educating people on the benefits of Alternatives, the better off we are. We also think that as we grow in Alternatives, we want to make sure that we can service that business well. So again, one of the things we've been doing is cutting expenses where we can. We've reinvested in building out an investor services team so that we can make sure that we really service all the business as it's coming in. We're finally, I would say, working better with major distributors to co-develop products. So instead of launching a product on our own, we're bringing it with a major partner at scale at the right time on their calendar, and we're planning those launches a year in advance, and that's helped us tremendously as well.

Jenny Johnson, President and Chief Executive Officer

And you didn't ask the question, but I'll throw in just, we are reiterating we had given guidance last quarter that we thought we'd raise $13 billion to $20 billion in Alternatives this year, and that the higher end was dependent on Lexington's Fund 11 basically having its first close in September. So just to give an update on that, Lexington Fund 10 has committed 75% of their funds, and that's usually kind of a trigger when you start thinking about the next fund. They would anticipate a first close sometime in the fall. Again, if it happens in September, it happens in this year; if it happens October or November, it falls into next year. And so that's where it's dependent kind of on whether we hit that higher range of $20 billion. This quarter, we raised $6 billion Alternatives. Of that $6 billion, $4.3 billion was in private markets. So that's the part that is counted towards the $13 billion to $20 billion range. And again, that does not include that $900 million that was raised in Lexington because that will be counted this quarter, $900 million in the perpetual.

Patrick Davitt, Analyst

Hey, good morning, everyone.

Matt Nicholls, CFO and COO

Hi, Patrick.

Patrick Davitt, Analyst

If I remember correctly, I don't think you include VA wins, insurance VA wins in your unfunded balance. And there were a few very large reported VA wins that I think funded in the quarter. Could you give us an idea of how much that added to the quarterly flows? And secondly, if there's still more to come from those wins, and then higher level, it seems that most of the large active managers in our coverage have been losing large VA mandates. So, maybe give some high-level thoughts on why you think Franklin is bucking that trend.

Jenny Johnson, President and Chief Executive Officer

I think you were referring to that. Please continue, Adam.

Adam Spector, Head of Global Distribution

I was just saying, in general, one of the things we're trying to do is to become a more important partner to fewer players. And I think that's true, Patrick, in every segment we serve, whether it's DB, DC, insurance. And a number of the wins we've had have come from significantly expanded relationships with insurance companies who have multiple managers, and they might have several dozen managers, and they want to shrink that to maybe three, four, five or six managers, but they need to do that with a firm that can cover all of the major asset classes and support them in the field and sell. There are very few firms who can do that with the right expertise. We're one of them. So when we see that consolidation, we tend to be on the winning side of it. It was definitely true this quarter, and we've got a number of similar conversations in place right now, and that's very much part of our strategy is to win in those consolidation deals.

Jenny Johnson, President and Chief Executive Officer

And I think the big one, Adam, was Venerable, and I'm trying to remember, did it fund this quarter, or I think it was September or October, but yes, that has funded, but we continue to have more conversations with these partners. And there's a couple others that we haven't disclosed the details about potentially, as Adam said, doing more because they are trying to reduce the number of firms that they work with and requiring more of those firms. So they want a breadth of capability. They want education. So things like our academy become very important in this space. And they like the expertise, specific expertise on insurance. So we think there'll be more to come there.

Matt Nicholls, CFO and COO

Yes, certainly, we've started to see more and more wins on both the insurance and the retail front. So I think you're seeing a sort of repositioning of this asset class, not just in terms of the market but in terms of client needs, and obviously we're excited about it. So yes, you're seeing it across the different channels you mentioned.

Jenny Johnson, President and Chief Executive Officer

Well, I just want to thank everybody for attending the call. And, again, we're a people business. We're only as good as our folks at Franklin Templeton who work hard every day to serve our clients. And so I just want to thank them for all their hard work and dedication. And we look forward to speaking with all of you next quarter.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.