Earnings Call Transcript - BEN Q1 2024

Operator, Operator

Welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31, 2023. Hello, my name is Joanna, and I will be your call operator today. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.

Selene Oh, Chief Communications Officer

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

Jennifer Johnson, President and CEO

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the first fiscal quarter of 2024. I'm joined by Matthew Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We're happy to answer any questions you have in just a few minutes. But first, I'd like to call out some notable highlights from the quarter. Our first fiscal quarter results reflect ongoing momentum in a number of significant areas across asset classes, investment vehicles and geographies. Our efforts are always focused on meeting the varied investment needs of our diverse global client base across market cycles, while staying at the forefront of the asset management industry, driven by increased expectations of interest rate cuts by the Fed and other central banks amidst disinflation. The 2023 market rally was particularly concentrated in the last quarter of the calendar year, regardless of the market environment, investors remain cautious. According to Morningstar, global money market assets stood at $7.7 trillion as of December 31, 2023, the highest level since Morningstar started collecting the data in 2007. Broadly speaking, our specialist investment managers see recession risks moderating and expect the global economy to slow over the course of 2024. But even as the economy slows, there are many opportunities for investors to put that cash to work in risk assets. Specific to the equity markets, last year, we saw a small group of stocks dominate market returns with the top 5 stocks representing 23% of the S&P 500 total market cap. Compare that to the height of the dot-com bubble in March 2000 when that number was 18%. While our investment professionals regard companies like the Magnificent 7 as market leaders, the level of relative outperformance for these stocks is likely unsustainable. We believe that this backdrop has created an opportunity for active managers like Franklin Templeton that offer a full range of investment capabilities across public and private markets, spanning geographic boundaries in vehicles of our clients' choice. With greater clarity on interest rates in 2024, and as investors look to deploy cash on the sidelines, we believe Franklin Templeton is well positioned. In short, 2024 is likely to be a year in which balance and diversification are once again rewarded. During the most recent quarter, our clients gravitated towards alternatives, multi-asset equity, ETFs and SMAs, which all saw positive long-term net flows. Continued client interest in private market strategies led to net inflows for our three largest alternative managers. Additionally, we continue to see aggregate positive net flows in non-U.S. regions. We are pleased to announce that our acquisition of Putnam Investments closed on January 1, with $148 billion in assets under management. Putnam adds complementary investment capabilities and a track record of strong investment performance. In fact, 87% or higher of Putnam's mutual fund AUM outperformed peers over the 1, 3, 5, and 10-year periods. The transaction also enhances our presence in the attractive retirement and insurance markets. The addition of Putnam brings Franklin Templeton's AUM to approximately $1.6 trillion. Turning now to specific results for the quarter, starting with assets under management. Ending AUM increased by 6% to $1.46 trillion from the prior quarter and increased by 5% from the prior year quarter, primarily due to market appreciation. Average AUM declined by 2% from the prior quarter to $1.39 trillion and increased by 3% from the prior year quarter. Our specialist investment managers continue to produce competitive investment returns across a broad array of strategies. Investment performance this quarter resulted in 61%, 46%, 60%, and 61% of our strategy composite AUM outperforming their respective benchmarks on a 1, 3, 5, and 10-year period. Notably, investment performance for the 5-year period jumped from 47% in the prior quarter to 60% in the recent quarter, primarily due to certain taxable fixed income strategies. With interest rates at current levels, fixed income opportunities are considered more attractive now and going forward may provide a better total return option over high-yielding cash equivalents. On the mutual fund side, the majority of AUM beat their peer groups and improved percentile rankings quarter-over-quarter in the 1, 3, and 10-year periods. One of our largest funds managed for yield was the primary driver of the decline in 5-year performance. Turning to flows, long-term net outflows inclusive of reinvested distributions were $5 billion compared to net outflows of $7 billion in the prior quarter and net outflows of nearly $11 billion in the prior year quarter. Reinvested distributions were $11 billion compared to almost $3 billion in the prior quarter and $12 billion in the prior year quarter. Alternative net inflows were $2.7 billion, driven by growth in private market strategies, which were partially offset by outflows in liquid alternative strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners and Lexington Partners, each had net inflows in the current quarter with a combined total of $3.8 billion. Client interest was strong across a number of alternative strategies on wealth management platforms under the alternatives by Franklin Templeton brand in the U.S. Earlier this month, Lexington Partners announced the closing of its latest flagship global secondary fund with $22.7 billion of total capital commitments. Fund 10 ranks among the largest funds raised to date and significantly exceeded Lexington's prior secondary fund, which closed with $14 billion in 2020. Fund 10 attracted a diverse group of over 400 investors, including public and corporate pensions, sovereign wealth funds, insurance companies and wealth channel distribution partners globally. We are delighted that approximately 20% of the capital raised in the fund came from the wealth management channel, which demonstrates the power of our coordinated global distribution network. We successfully brought together the alternatives expertise of Lexington and our alternatives by Franklin Templeton specialist sales team and leveraged our generalist sales team who have deep relationships across the adviser market. Also this month, Benefit Street Partners closed its fifth flagship private credit fund with $4.7 billion of total capital commitments. Reflecting the strong demand for the asset class, BSP exceeded its fundraising target. We believe the current market opportunity and backdrop for U.S. direct lending is attractive and BSP has significant underwriting experience, loan structuring expertise and focus on deep due diligence, which provides us with a significant competitive advantage. BSP also announced the completion of the merger between Franklin BSP Lending Corporation and Franklin BSP Capital Corporation, business development companies. BSP believes this transaction will be immediately accretive to its shareholders and unlock nearly $700 million of capital that can be deployed into a very attractive origination environment. For further context, alternative assets now represent 18% of our AUM and comprise approximately 25% of our total adjusted investment management fees for the last 12 months. In terms of other areas of activity during the quarter, multi-asset net inflows were $500 million, driven by Canvas, our custom indexing solution platform and Franklin Templeton Investment Solutions. Canvas has achieved net inflows each quarter since the platform launched in September 2019, and AUM has more than doubled to approximately $6 billion since the close of the acquisition. This quarter, Canvas generated net inflows of approximately $400 million and continues to garner client interest across retail and institutional channels. Equity net inflows were $200 million, including reinvested distributions of $8 billion, while active equities continued to be impacted industry-wide by the risk-off environment. However, we saw positive net flows into all-cap growth, smart beta, all cap value, equity income, large-cap value and small-cap core strategies, among others. Although fixed income net outflows were $8.4 billion, client interest drove positive net flows into tax-efficient global opportunistic mortgage-backed securities and multisector strategies. From a regional perspective, we continue to benefit from a regionally focused distribution model, which resulted in aggregate positive net flows in non-U.S. regions for the third consecutive quarter. For context, we now manage approximately $450 billion in non-U.S. markets, including emerging markets that are poised to grow. Although the U.S. saw long-term net outflows, we are pleased to see our U.S. gross sales, excluding reinvested distributions, improved by approximately 15% from the prior quarter. We continue to see the benefit of offering investors strategies in a range of investment vehicles. ETFs, for instance, generated net inflows of approximately $1 billion, representing the fifth consecutive quarter with net flows of approximately $1 billion, resulting in over a 40% increase in ETF AUM from the prior year quarter. Including Putnam, ETF AUM is approximately $20 billion. Importantly, we now offer ETFs from a dozen different specialist investment managers, truly bringing the best Franklin Templeton has to offer to the market. Earlier this month, we launched one of the industry's first bitcoin ETFs, consistent with our emphasis on innovation and staying ahead of disruptive technologies. SMAs continue to grow in popularity industry-wide as individual investors look to customize their portfolios. According to Cirelli Associates, SMAs represent about $2 trillion in assets and are expected to reach $2.9 trillion by 2026. Our SMA AUM ended the quarter at $125 billion and generated positive net flows for a third consecutive quarter. We continue to make progress with SMA strategies across platforms with Canvas, muni ladder and Franklin Income strategies, each in positive flow territory for the quarter. Our institutional pipeline saw increased level of funding this quarter, bringing one but unfunded mandates to over $13 billion. The pipeline remains diversified by asset class and across our specialist investment managers. Turning briefly to financial results. Adjusted operating income declined by 18.5% to $417 million from the prior quarter, an increase of 5.5% from the prior year quarter. We continue to focus on strong expense discipline and our net cash and investments position allows us to continue to invest in growth and innovation for the benefit of clients, shareholders and employees. Finally, in December, Franklin Templeton was recognized as one of the best places to work in money management by Pension and Investments. This recognition is a source of pride for us and the credit goes to all of our employees around the world who worked tirelessly on behalf of our clients. I'd like to sincerely thank them for their hard work and dedication to our organization. Now let's open it up to your questions. Operator?

Operator, Operator

First question comes from Alex Blostein from Goldman Sachs.

Alexander Blostein, Analyst

So maybe just to get some of the numbers questions out of the way, obviously, with Putnam closed, maybe, Matt, you can give us an update on couple of items, but maybe one, where do you see the management fee, excluding performance fees and kind of catch-up fees jumping off point for the first quarter, first calendar quarter of this year and just broader update, I guess, on accretion and contribution for Putnam for this year.

Matthew Nicholls, CFO and COO

Okay. Alex, I mean that should probably just give you the forward guide to put things into perspective, that will help get through the Putnam update also. So in terms of the effective fee rate, remember, last quarter, I mentioned we expect it to be around 39 basis points consistent with previous quarters. We actually ended up at 39.7 or a little bit higher. The reason for that is about 1 basis point or 0.9 basis points was to do with the Lexington catch up fees. So if you think about that for the second quarter, fiscal second quarter guide, we're expecting that to be consistent again excluding these episodic catch-up fee or any other episodic management fee events to about the high 38, so high 38 basis points, very consistent with the previous quarter and other quarters that we presented recently. So that's in terms of EFR. I'll give the annual EFR guide in the second, which includes Putnam. Of course, we closed Putnam on January 1. And so our first full quarter will actually be this guide I'm giving you now. I thought it would be useful to provide the guide for the fiscal second quarter, inclusive of Putnam, but I will call out the individual components. Putnam, you can see that we're being disciplined with our expenses around Franklin and being transparent about the difference between Franklin and expenses and Putnam additions. So I mentioned the EFR already being in the high 38s excluding any sort of one-off episodic revenue. In terms of compensation and benefits, assuming a $50 million performance fee quarter, including Putnam, we'd expect total comp and benefits to be approximately $815 million. This includes $65 million of comp and benefits for Putnam. Just for further perspective, we expect to be able to bring that down to about $50 million to $55 million by the end of the fiscal year. Again, this assumes $50 million of performance fees. We anticipate that Information Systems and Technology will reach $155 million for the quarter, which includes $25 million from Putnam. We plan to reduce that $25 million to between $15 million and $20 million by the end of our fiscal year. For occupancy, we expect costs to be around $80 million. In our previous call, I mentioned we would experience a period of double rent as we consolidate our New York City office space amounting to $12 million. Previously, I noted $8 million, but that was for only two months of the three months affected by the double rent. This time, it will be for the full three months, resulting in $12 million for double rent and $10 million for Putnam in this scenario. I am not comfortable guiding down the $10 million yet as we are still optimizing our real estate. For G&A, we expect the consolidated total to be $175 million, including $35 million for Putnam. By the end of the fiscal year, we aim to bring this down to around $30 million. In terms of what this means for annual guide, you'll recall that in the last guide we gave, I mentioned that our fiscal 2024 at then levels of markets and revenue expectations was expected to be about flat to 2023. Excluding Putnam, and excluding performance fees and excluding the double rent in New York City, I would now guide that amount, which excludes Putnam to about 1% to 2% higher, but that's because we now anticipate all else from any of that revenue would be 5% higher for the year, including Putnam and excluding performance fees, but including the $50 million of double rent. We currently expect total adjusted operating expenses for fiscal 2024 to be around $4.55 billion to $4.6 billion. This estimate includes additional expenses from Putnam, which we expect to be approximately $375 million to $380 million. Regarding the effective fee rate for the year, when including Putnam, which has a slightly lower effective fee rate, the overall amount decreases by about 0.2 basis points. Therefore, the forecast for the year is around the mid-38 range, slightly better than mid-38. This forecast does not account for any catch-up fees or episodic performance fees, as I mentioned earlier.

Alexander Blostein, Analyst

Great. Okay. I think I got all of that or most of it, and I'm sure folks will follow up as well. I guess my only other follow-up for you. I think we talked about Putnam being around $150 million contribution to operating income on exit run rate. Can we just get an update on where that stands now? Obviously, their asset base is a little bit higher as well, but just want to get a sense whether $150 million is still kind of the run rate number we should be thinking about by the end of your fiscal year.

Matthew Nicholls, CFO and COO

Yes. So just to break that down further, so I'll start the call with all these numbers. But just to break this down a little bit further. So in terms of revenue, obviously, we don't normally guide revenue, but we want to be useful in terms of modeling purposes for the second quarter, again, fiscal second quarter, Putnam revenues stand-alone would be about $160 million. Of that, $135 million is management fee revenue and $25 million is in the other revenue item, that's for the TA basically. We would have said between $85 million and $100 million of expenses in the first 9 months, so through our fiscal year, $85 million to $100 million. And by the time we reach the end of 9, 30th, at the end of our fiscal, yes, our expense savings for the full 2025 would be at least $150 million. This translates to get specifically to your question around operating income addition, Alex. This translates into probably between $150 million and $170 million of operating income contribution from the transaction. In terms of how we think this translates into. Obviously, there's a lot of moving parts below the line, but how this translates into accretion dilution, it's probably just very slightly accretive, maybe one cents about that. In the second fiscal quarter, so the first fiscal quarter that we'd have on Putnam it's accretive right away. And by the time we reach the full year, it's probably near high single digit cents accretion and that translates into about a 3% accretive situation for full year '24. Remembering that's only 9 months of Putnam that's where we expect things to be.

Operator, Operator

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

Craig Siegenthaler, Analyst

My question is on the alternatives net flow trajectory. If we back out the 2 flagship fundraisers at Lexington and Benefit Street, there would have been a large swing in net flows over the last 12 to 18 months. So I wanted your perspective on the flow trajectory in terms of net flows from alts. And are you expecting other funds to kind of step up and fill in that gap?

Jennifer Johnson, President and CEO

Thanks, Craig. So in the last 2 years, we have had about $40 billion in fundraising for our private markets. That was offset a bit by $12 billion in net outflows in the liquid alternatives. That just gives you a little bit of perspective there. We anticipate this year of fundraising between $10 billion and $15 billion in the private markets. And I would expect in this environment to have that translate into alternative asset revenue growth that's at the mid-single digits. So far in Q1, we raised $5 billion in the private markets and during the same period, we experienced about $1.1 billion in net outflows in the liquid alternatives. Looking ahead for the rest of the year, we can't discuss specific funds, but we see strong interest in areas like alternative credit, particularly direct lending, in both the U.S. and Europe. There are opportunities in special situations, opportunistic real estate debt, and CLOs. With regional banks pulling back in the real estate debt space, we believe there's potential for significant success and strong client interest. Regarding the secondary market, it's worth noting that Lexington offers more than just their flagship product; they also have middle market and co-invest offerings. In 2023, the secondary industry achieved over $100 billion in fundraising for the third consecutive year, indicating continued strong demand. The supply-demand dynamic remains strong, with $6 trillion deployed in private equity compared to only about $150 billion in secondaries. There is noteworthy demand from limited partners and general partners due to decreased liquidations and distributions, prompting interest in acquiring secondary portfolios. With respect to real estate, our three largest funds at Clarion are perpetually fundraising. We see opportunities to continue to expand in Europe. And then we're incredibly excited about the success that we had in the wealth channel with Lexington, where 20% of the fund raise of Lex 10 fund came from the wealth channel. And this has been years of building up our capabilities with the FT alternatives where we built both a team of specialists, the 30-plus specialists to help assist our wholesaling team. We've leveraged our academy to not only educate our own force, but also to help our distribution partners educate their advisers on how to think about this. And so it's a lot of years in the making, and we're really excited to see it come together with this fundraise. But that same expertise is going to be very helpful in both private credit as well as real estate.

Adam Spector, Head of Global Distribution

And Jenny, I would add two things in terms of the momentum we've had in the wealth channel. One is the success we've had to date with things like Lexington mean that we're able to now have more meaningful conversations with our distribution partners about calendar placement many quarters into the future, which really helps us plan our product launches. At the same time, we're now in a position where our distribution partners want to work with us to co-create products. So we're working on doing that together so that the products we come to market with in the wealth management channel are meeting their needs. The final item is that a lot of our success to date has been in the U.S. market in terms of wealth management, and we're now building out our specialist capabilities, our education, our academy, etc., in markets outside of the U.S. where we hope to have a similar level of success in the wealth management channels there.

Operator, Operator

The next question comes from Bill Katz from TD Cowen.

William Katz, Analyst

So first question, maybe switch up the conversation a little bit, just talk about capital. You announced a pretty sizable repurchase authorization, have some equity that you have issued in consent with the transaction of Putnam. Looking at your balance sheet, it looks like you're saying about sort of net cash of 0 if you sort of adjust for the debt. How should we be thinking about maybe the tempo or pacing of capital deployment or buyback as we think through the year?

Matthew Nicholls, CFO and COO

Yes. Thanks, Bill. I'll take that. And then, Jenny, maybe you'd like to comment also. So as usual, Bill, we're focused on making sure that we maintain our dividend and the same trajectory that's been on since the 1980s. We are very focused on organic growth investments. There is a ton going on, as you all know, in the industry. And there's a lot of call on capital for internal growth and internal projects and investments. So those are our two most important things. Then we've got debt service coming up this year of $250 million. Obviously, if the market becomes more reasonably priced in terms of debt, perhaps we access the debt markets at the end of the year or stuff like that. But we want to position ourselves to be able to pay that debt down with our cash. We're absolutely going to hedge our employee grants as we always explain. I would say that there is an interplay between mergers and acquisitions and share repurchases. We have been very active in M&A to ensure we have the right strategies for both institutional and retail segments, as we have discussed extensively. When M&A activity slows down, which it has for us, we have a couple more payments scheduled over the next year or two. After that, the M&A opportunities we pursue will be much more strategic, involving larger shares like we've done with Putnam and Great-West Life, or smaller transactions to address specific gaps we have. This shift allows us to be more opportunistic with our share repurchases. As you've seen in the last couple of quarters, we've indeed increased our repurchase activity. However, the overall market backdrop is complicated, and there is considerable volatility and global factors influencing the market, prompting us to continuously evaluate the situation. We hope that, all else being equal, we can transition into a more capital return-oriented strategy, as we have shown with our dividends and share repurchases in recent quarters, rather than focusing primarily on M&A.

William Katz, Analyst

Okay, that's very helpful. As a follow-up, could you provide an update on how the insurance mandates are progressing? I believe there was around $20 billion expected to flow in once the deal is finalized. Additionally, how do you view the backlog related to that? A broader question is about the early discussions regarding the enhanced distribution opportunity now that the transaction is complete.

Jennifer Johnson, President and CEO

We have the $25 billion from Great-West Life, which will be allocated throughout the year. This will involve a mix of our strategic investment managers, primarily benefiting Western, but it also includes alternatives, fixed income, and equity. Additionally, we announced that we will be acting as a sub-adviser. This decision stems from the expertise we gained in the insurance sector when we acquired Western, allowing us to apply that knowledge more widely. Adam, would you like to share some of the additional insights you're seeing?

Adam Spector, Head of Global Distribution

I would say that our insurance business is currently around $170 billion, not counting the flows we've discussed from the power-related companies. This represents a significant operation. As Jenny mentioned, succeeding in many areas of the general account requires not only investment expertise but also specific knowledge of the insurance domain, as well as technology compliance. We believe we are one of the few firms that can integrate both aspects. Additionally, our partnership with Power Corp. has enabled us to co-create products that we expect will perform well in the marketplace, and we are already seeing some launches. The team at Putnam has been very successful in the DC channel and in insurance. We believe incorporating their salespeople into our team, now that they have a broader range of products to offer, will significantly enhance our efforts.

Matthew Nicholls, CFO and COO

To provide some additional context on the $25 billion, we currently do not have much of that included in our models; a small amount is present, but nothing has significantly impacted our revenue yet. We anticipate that about two-thirds of this amount will be investment grade, with some emerging market and other corporate credit across a variety of our specialized investment managers. As you consider how to model this, it would be reasonable to assume an effective fee rate in the mid-teens, as mentioned. We expect this to ramp up substantially later this quarter, around March or April. We will ensure to keep you informed about any large inflows linked to this and will be transparent with you regarding when those occur. Additionally, we foresee growth opportunities that extend beyond the $25 billion, as we are positioned alongside other asset managers that maintain significant relationships with Power group of companies. We are increasing our market share in alignment with our capabilities and the scale of our franchise.

Operator, Operator

The next question comes from Daniel Fannon from Jefferies.

Daniel Fannon, Analyst

A couple of clarifications. Matt, I just want to confirm the 1Q guide for comp that was, I believe, $815 million around that included $50 million of performance fees. Did the full year guide of the $455 million to $466 million assume a $50 million a quarter performance fee contribution?

Matthew Nicholls, CFO and COO

Yes, plus the $93 million from the first quarter. So it's $93 million, $50 million, $50 million, $50 million.

Daniel Fannon, Analyst

Yes, understood. That's helpful. I would like to clarify the details regarding the Lexington numbers, specifically the assets under management and flows as of December 31. Additionally, regarding catch-up fees, we have the disclosure for this quarter and the previous one, but should we expect another round of catch-up fees for the March quarter following the final close in January?

Matthew Nicholls, CFO and COO

So there are no more catch-up fees to record at this time. The fund completed its last fundraising by the end of December, at which point they announced that we have $22.7 billion in additional assets under management, all of which is included in our reported figures.

Operator, Operator

The next question comes from Brennan Hawken from UBS.

Brennan Hawken, Analyst

So you spoke earlier about fixed income and the attractiveness and demand and a shift from cash and short duration investments. What are you specifically seeing as far as RFP activity? And could you talk about Western and their level of engagement with their client base?

Jennifer Johnson, President and CEO

Yes. So Brennan, maybe just a little bit of color kind of on the industry everybody talked about the $7.7 trillion in money market funds and what's going to be transferring from cash into other investments. And first of all, Western's money market fund is primarily institutional and institutions tend to build in the first 2 quarters and then spend in the second 2 quarters. Having said that, and we don't have a meaningful presence in the retail money market business. However, obviously, we have relationships with those distributors, which we do that's where you're going to capture the transition. So even if you don't have the money market plus, it doesn't mean you get the transition. So we've had actually good interest and positive flows in some categories in our fixed income. Unfortunately, it's masked. It's masked a bit by some performance challenges we've had in the core strategies. Over half of our top 10 gross selling funds are in the fixed income space. From a vehicle standpoint, we experienced positive flows in ETFs and muni ladder SMAs. It's essential to view this as vehicle-agnostic. Our fixed income gross sales have increased by 8%. The largest portion of our institutional pipeline is in fixed income, particularly in multisector credit, high-yield, global income, and Western, which is the largest contributor. Western has been engaged in productive discussions with clients and has several well-performing strategies, although they have faced challenges with their core strategy. Global fixed income has shown positive results in areas such as tax-efficient, global opportunistic, and mortgage-backed securities. Additionally, Putnam contributes strong fixed income performance along with other products, including stable value, ultrashort duration, intermediate core, and munis. We believe cash remains an attractive option. Some might argue that the risk-reward balance favors cash at 5% compared to high yield at 7.5%, indicating that a full rotation might not occur until we see rate cuts rather than just a peak. We feel exceptionally well positioned in both public fixed income, traditional fixed income, and private credit to seize these opportunities. Our observations confirm that we are well positioned. Adam, would you like to add anything?

Adam Spector, Head of Global Distribution

Yes. Jenny, I would just add that I think you're spot on that we've really seen strength in a number of areas of fixed income that was masked by some of the outflows in Core and Core Plus. But the performance in Core and Core Plus turned around. If you take a look at the end of the year, Core is up 37 basis points in the index, Core Plus 124. And traditionally, those products get very, very strong inflows after the Fed stops hiking. So we're in the position now from a performance standpoint as well as in the rate cycle, where those products are poised to do quite well.

Brennan Hawken, Analyst

Great. And then just, Matthew, I wanted to reconfirm because many times when you discuss expenses, you talk about it excluding certain items, but it sounds like the $4.55 billion and the $4.6 billion for the fiscal quarter would include the double rent as well as the expected actual performances from this past quarter plus the expected figures for the next few quarters and the nine months of Putnam. Do I have that correct?

Matthew Nicholls, CFO and COO

That's right. I want to make it clear that if we exclude Putnam, our expenses have only increased about 1% year-over-year. This is primarily because while we don't typically provide revenue guidance, this does assume a 5% increase in revenue. Many often ask about the connection between revenue and expenses and how that affects our operating leverage. From what we project, if revenue rises by 5%, we anticipate our expenses will only grow between 1% and 2% on a foundational level. Additionally, we're currently in the process of reducing expenses associated with the Putnam acquisition. When we combine all of this, it leads us to forecast expenses between $4.55 billion and $4.6 billion. For next year, we expect a further decrease in expenses. Regarding Putnam, we anticipate $375 million in expenses for nine months, and we expect this amount to decline on a dollar-for-dollar basis in 2025. We're looking at achieving $85 million to $100 million in expense savings from the Putnam transaction this year, which translates to at least $150 million in savings for a full year, and this will contribute about $150 million to $170 million in operating income.

Brennan Hawken, Analyst

Yes, that $150 million is the run rate when you exit your fiscal year, right?

Matthew Nicholls, CFO and COO

That's correct. By the end of the year, we expect to achieve at least $150 million in savings when you annualize that amount.

Operator, Operator

The next question comes from Michael Cyprys from Morgan Stanley.

Michael Cyprys, Analyst

I wanted to ask about retirement with Putnam and the Great-West strategic relationship, this accelerates your push into the retirement channel. I hope you could talk about some of the steps you're taking and may take over the next 12 months to capture the growth opportunity that you see. Maybe you could elaborate on that as well as which products you think might resonate the most.

Jennifer Johnson, President and CEO

Adam, you want to take that?

Adam Spector, Head of Global Distribution

Yes. So first of all, the Putnam acquisition gave us capabilities. And I think those capabilities are really important in terms of things like stable value where there's $18 billion in assets, ultrashort and target date. If you take a look at target date, it's a third of industry DC AUM right now, had $150 billion in net flow last year. We can now play in that segment where we haven't really been able to play effectively historically. So from a product standpoint, we're in a much stronger position. I would also say that from a sales force position, when we took folks in from Putnam, one of the areas where we added most significantly within that retirement and somewhat in the insurance channel as well. So we just have a much, much larger field force. So that lets us be better partners both of those things, both the expanded field force, the expanded products. We're better partners with the Power-related companies, but with all of our insurance partners. And I think that's what's really important to mention is this is not just about being stronger with one partner, it's about being stronger in insurance and retirement across the board. Putnam's DC assets are about 30% of overall AUM. It's just a real strength in bringing that DNA into Franklin will be a real benefit in the relationship with Empower allows us to build some custom products together that we can go to market with that we think will really help us win because we can have multiple sales forces now selling the same products, which just gives us leverage.

Operator, Operator

The next question comes from Patrick Davitt from Autonomous.

Patrick Davitt, Analyst

First, on Putnam, as we try to kind of level set our model expectations. Could you give an update on how the net flow picture tracked from announcement through the December quarter with and without reinvested dividends?

Matthew Nicholls, CFO and COO

Yes. Excluding reinvested dividends, it's slightly positive. No, obviously, we closed the transaction, as you know, Patrick, on January 1, I'd say, in the quarter before that and the period we're in now, it's kind of flattish, excluding reinvested dividends. So slightly positive.

Jennifer Johnson, President and CEO

Putnam has 85% of their assets under management outperforming their peers across all time periods. Additionally, 91% of their mutual funds have a rating of 4 or 5 stars. This demonstrates exceptional performance in both equity and fixed income.

Patrick Davitt, Analyst

Great. And then one housekeeping item. It wasn't clear to me earlier when you were talking about this, but the $5.5 billion-ish win from Great-West announced last week, is that a part of the $25 billion? Or should we consider it incremental?

Unknown Executive, Unknown

Incremental.

Jennifer Johnson, President and CEO

Yes, I believe that's from the retirement channel.

Operator, Operator

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

Brian Bedell, Analyst

Just one clarification also. I think I'm not sure you mentioned this, but the alternative was I think the $5 billion of private markets to play with them correctly, $5 billion of private markets, less about $1 billion of liquid also is that for the quarter just reported or for the current month quarter.

Jennifer Johnson, President and CEO

Well, so BSP closed their fund this quarter. That's why you didn't see those flows last quarter. Matt, what was the date they closed the 4.7?

Matthew Nicholls, CFO and COO

Like a week ago...

Jennifer Johnson, President and CEO

This quarter, the different BSP charges when they call capital do not include catch-up fees like those associated with Lexington.

Operator, Operator

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

Jennifer Johnson, President and CEO

Great. Well, thank you, everybody, for participating in today's call. And once again, I just want to thank our employees for their hard work and dedication to be able to deliver this quarter. And we look forward to speaking to you all again next quarter. Thanks, everybody.

Operator, Operator

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