Earnings Call Transcript
Franklin Resources Inc (BEN)
Earnings Call Transcript - BEN Q4 2020
Operator, Operator
Welcome to Franklin Resources' Earnings Conference Call for the Quarter and Fiscal Year Ended September 30, 2020. My name is Holly and I'll be your call operator today. Please note the information presented on this conference call is preliminary. Statements made on this conference call regarding Franklin Resources, Inc, which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks and uncertainties and important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including the risks, the risk factors and MD&A section of Franklin's most recent Form 10-K and 10-Q filings. As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to Franklin Resources' President and CEO, Jenny Johnson. Ms. Johnson, you may begin.
Jenny Johnson, CEO
Hello, and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2020 results. Today, I'm joined by Greg Johnson, our Executive Chairman and Matthew Nicholls, our CFO. We hope that everyone on this call and your loved ones are staying safe and healthy. This year, despite the challenges presented by COVID-19, we made significant progress in moving our business forward, including closing the Legg Mason acquisitions earlier than initially expected. We focused our efforts and investments in key areas that directly support the firm's multiyear strategic plan to maximize organic growth, execute on M&A opportunities, and position Franklin Templeton to capitalize on industry change. The results that we announced this morning reflect a full quarter and fiscal year of Franklin Templeton, but only include two months of the newly combined organization. In that short amount of time and under these extraordinary work-from-home conditions, we've made remarkable progress in becoming one company all ahead of schedule. And the strategic rationale for this powerful combination has only strengthened since we announced the acquisition back in February. We've been able to bring together two especially complementary platforms in a way that creates a more balanced organization. Our global presence has expanded in key growth markets around the world. We've created an all-weather product offering with a greater range of specialized high-quality investment capabilities, all with an eye toward delivering exceptional client outcomes. It's important to note that the company we have become could not have been realized alone. Together, we have significantly enhanced our ability to meet the needs of clients, advisors and shareholders for many years to come. And client reactions to the acquisition have been consistently positive. We're excited about this integration, not just the strategic benefits, but also for the impressive group of people and leaders it will bring on board. We were pleased to be joined by so many talented professionals from Legg Mason with a 97% acceptance rate of employment offers made to Legg Mason holding company employees. An integral part of our planning efforts has been the frequent and productive conversations we've had with the leaders of each of the specialist investment managers or SIM. We've appointed certain SIM leaders to global or regional leadership roles in different areas of the company to fully reinforce our strong alignment, our shared focus and commitment to each other. We're also pleased to report that our global distribution team is now in place and is already able to cross sell investment products from both organizations across retail and institutional channels globally. Our new more utilized client centric distribution structure is designed to increase end-to-end accountability for regional growth and ensure clients get the most out of their relationships with us. Our specialized investment managers also each retain their strong institutional distribution capabilities. We have focused on preserving the independent investment autonomy of the SIMs while providing them with the opportunity to benefit from Franklin Templeton global infrastructure and investments in technology. In one exception, Franklin Templeton multi-asset solutions and QS investors have combined to form Franklin Templeton investment solutions. This single best-in-class platform brings together the powerful combination of Franklin Templeton active, fundamental capabilities with QS quantitative skills to customize multi-asset portfolios for clients. The team now has more than 120 investment professionals overseeing more than $120 billion in multi-asset strategies, creating a sizable solutions business with scale to compete with the largest full-service providers. We're seeing the benefits of adding world-class franchises to an already strong set of investment capabilities. We continue to believe that active management will play an increasingly important role in client portfolios, and we're well positioned to capitalize on this. On the performance front, approximately half of mutual fund assets are outperforming their peers over the standard time periods, including over 100 funds rated four or five stars by Morningstar. We also have strong institutional performance, with 63%, 69%, 73%, and 84% of assets beating the applicable benchmarks for the 1, 3, 5, and 10 year periods respectively, most notably in fixed income and alternatives. On the sales front, US fixed income attracted record net outflows of $5.7 billion in the quarter. We're pleased to see strong, long-term net flows from Western Assets, which reached $410 billion in long-term assets and $479 billion in total assets, its highest level on both fronts in over a decade. Additionally, as of quarter-end, Western's total assets under management were $12 billion higher than at the time the acquisition was announced. Western's investment performance has been outstanding, with a fixed income pipeline across the firm strong, with at least $6 billion of unfunded wins and a significant opportunity pipeline. We recently introduced a new portfolio management team structure for the Franklin municipal bond team to align portfolio managers with common strategies across the platform. We believe this will further enhance investment performance that rebounded this year, with 85% of assets ahead of peers for the one-year period, contributing to positive net flows for the year. On a combined basis across the firm, our tax-free fixed income AUM has increased to almost $85 billion. ClearBridge AUM is close to its all-time high, standing at $153 billion with strong investment performance and flows in several strategies. Royce and Martin Currie strategy also has strong investment performance, with essentially flat flows for the quarter. Franklin equity group continues to achieve strong performance and attract inflows. Franklin DynaTech funds generated $4.4 billion in net inflows for the year, more than doubling its assets under management to over $18 billion. Combined with Franklin growth and Franklin rising dividend funds, the Franklin equity group now has three funds near or above $20 billion of assets under management. In terms of global macro, our performance challenges an attrition from Franklin Templeton and Brandywine global macro strategy persist. These continue to be positioned for more challenging market conditions. These set strategies also made up some ground on peers and the benchmark in the quarter. It's undeniable that with Franklin Templeton, Western and Brandywine, we have a truly unique position and extensive capabilities across global macro strategies. Similarly, Templeton global equity and Franklin mutual security strategies continue to experience outflows, but are well positioned for periods that favor value investing. With the addition of Clarion Partners, along with Benefit Street Partners, and K2 Advisors, the alternative asset class recorded its fifth consecutive quarter of net inflows and now represents $124 billion in assets firm-wide. Clarion is experiencing strong investor interest with an inbound queue of over $1 billion. Benefit Street partner priced two new CLOs in the quarter totaling $800 million and received additional commitments of approximately $300 million. Momentum in our alternative business continues to build. As investors become more cognizant, we're well positioned in the retail SMA segment of the market, where we are now a leading franchise with $103 billion in assets compared to just $6 billion a year ago. And our expanded ETF offering doubled to over $10 billion in AUM this year. We are also planning to expand our closed-end fund capabilities. Turning to financial highlights, adjusted operating income increased to $429 million, a 58% increase versus last quarter, or 5% from the prior year, largely reflecting the addition of two months of Legg Mason. We are on track to realize $300 million of gross synergies with 85% of run rate savings expected to be realized by the end of fiscal year 2021. The cost to achieve these savings is expected to be approximately $200 million, which is $150 million less than originally anticipated. And we expect to realize approximately $600 million of cash tax benefits related to the various tax attributes and deductions, which carry forward in the transaction, a 20% increase from our initial estimate. Our strong balance sheet continues to provide us with tremendous flexibility to evolve our business. Earlier this month, we completed a public offering of $750 million aggregate principal senior notes due 2030, issued at a 1.6% coupon and pre-funding our intention to call higher coupon junior subordinated notes, which are callable at par in March and September 2021. And finally, I'd like to thank all of our employees for their significant efforts to keep our business operating smoothly during these extraordinary times and for maintaining their laser focus on our clients' needs. Now, I'd like to open it up to your questions.
Operator, Operator
Our first question is going to come from the line of Ken Worthington with J.P. Morgan.
Ken Worthington, Analyst
Hi, good morning. Thank you for taking my question. With the integration of Legg well underway, can you talk about the integration of the two distribution networks thus far? I think on the last call, you talked about building more agile regional distribution organization. So I wanted to hear any updates there. And then you gave a cross-selling anecdote in the commentary. I was hoping you could flesh out how you'd expect cross-selling to ramp given the integration, and maybe what products might be most successful, given what you've learned over the last couple of months. Thanks.
Jenny Johnson, CEO
Yes, so thanks for the question, Ken. So the first thing was a decision to be more regionalized. So what does that mean? We wanted to push out more marketing and product and data analytics out to the region. So historically, that was done more centrally. And so now, there's a portion of it that is completely controlled by the head of that region. As you probably know, we talked about some of the SIM heads taking on leadership roles. Adam Spector, who is the CEO of Brandywine, is now Head of Global Distribution. And Julian Ide, who was the Head of Martin Currie, is now Head of Europe. So that's just helpful in ensuring that we understand both how to integrate the global distribution with how each of the SIM handles their distribution. It's helpful having people who come from that perspective. As you look at the US retail, which is a trillion dollars of our assets, Legg Mason came in with a much stronger footprint in the broker-dealer warehouse channel, and we were much stronger in the independent channel. We now have $103 billion in SMAs; they were a top three SMA provider. It was really about looking at the capabilities between the two organizations, and figuring out how to integrate. In some cases, you just have great people on the same covering channel, but one has greater penetration than the other. Our distribution team is really a mix of Legg Mason and historic Franklin Templeton people, and we were trying to recognize where those types were. They had strong penetration in the insurance channel; those are great Legg Mason folks. We have spent a lot of time getting everyone up to speed. You saw the anecdotes in the comments. We also had another example where an Israeli institution that never had any distribution in Israel, ended up getting a mandate for one of the SIMs. This takes a little bit of time, but I can tell you that we are feeling really good about how it's operating now, and we found less overlap than we thought we would find with distribution when you really got under the covers.
Matthew Nicholls, CFO
I think I would just add one thing to that, which is to say on the institutional side, recognizing how important the institutional distribution is, given the fact that a big portion of Legg Mason and the rationale for our transaction was to grow the institutional business. We are staying largely exactly as it's organized today at the specialized investment manager level, and that creates a high degree of confidence with clients, the stability and continuity in that area of the business.
Jenny Johnson, CEO
And actually, let me add one other thing you asked the question of how we get more positive flows. As you saw, we had things like alternatives, which were actually in positive flow. We think there is just a significant amount of opportunity for Clarion and BSP in the retail channels. BSP did a small acquisition of a REIT, and what they were doing was acquiring some wholesalers who have expertise in selling alternatives to the RIA channel. So we've invested tremendous opportunity for both Clarion and BSP, as well as feedback we've received from some warehouses who feel that they may have a heavy concentration in the real estate managers they have. And they'd like to diversify. Clarion is coming out of strong performances as they were overweight in certain sectors like industrials and underweight in retail. Western continues its cross-sell capabilities. What we have in the SMA side is that the Income Fund is able to penetrate more relationships than Legg Mason has with advisors and sell SMAs. We think that's a great opportunity for income funds. I do have to say that with the Templeton global bond, there is increasingly nervousness around whether they are well-suited for a risk-off environment as Brandywine. We've seen them perform very well recently. As investors may view them as somewhat of an insurance policy against any kind of big catalysts or surprises such as inflation issues or escalating US-China tensions. I think our story is that we're doing a better job of getting out there and telling it, and I think we can begin to see some reduction in redemptions. Again, it's about positioning that message as insurance.
Operator, Operator
And our next question will come from the line of Patrick Davitt of Autonomous Research.
Patrick Davitt, Analyst
Hey, good morning, all. Could you give us the amount of reinvested distributions in the long-term flow numbers so we can better compare it to your public comp?
Matthew Nicholls, CFO
Yes, we had $2.5 billion of reinvested distributions for the quarter. Those compare to $3.5 billion last quarter, and as you know, $3 billion a year ago. Our plan there, by the way, we seem to have caused some confusion here, was to call out anything that's unusual around those flows. We decided to have a simplified view of flows in terms of the presentation of it. So we have client-driven activity and client activity out. Given our size and breadth of our business, we thought that made the most sense, but we're not trying to avoid discussing reinvested distributions or anything unusual around it. We were planning to discuss it at the year-end, as you know that's often elevated. We planned to call it out at that time, but that's the number for the quarter: $2.5 billion, $3.5 billion last quarter, and $3 billion a year ago.
Patrick Davitt, Analyst
Perfect, thanks. And on the fee rate guide, is there any kind of money funds do you ever headwind built into that? And through that lens, how much have they started to hit in the most recent quarter? And maybe any view on how it's tracking into the December quarter?
Matthew Nicholls, CFO
Yes, it's fully included in the projection.
Patrick Davitt, Analyst
Great. And was it impactful in the last quarter?
Matthew Nicholls, CFO
Not relative to the size of our business, and also given the structure of our rate with Western that has the largest portion of our money market business. We have some protection there on the margin, so it's not big; it's absolutely not material to overall company operations.
Operator, Operator
Our next question will come from the line of Craig Siegenthaler with Credit Suisse.
Craig Siegenthaler, Analyst
Good morning, Jenny, Matthew, hope you're doing well. I wanted to start with M&A. And so just given the pickup in M&A speculation in US asset management, we want to see if Franklin would consider doing another large acquisition over the next 12 months, knowing that you're still in the process of digesting Legg Mason, which probably isn't easy on the organization.
Matthew Nicholls, CFO
Yes, I think the way that we felt is that we are absolutely in the flow of what's going on. You're right, there's a tremendous amount of activity in the industry with some interesting opportunities to consider. Broadly speaking, I think in many ways, the evolution of the industry, in terms of some of the more dramatic ideas, is just getting started. But we are, we're very, very focused on making sure that we maximize the output from the Legg Mason transaction. We literally doubled the size of our company from an assets under management perspective. Every time we have meetings internally, we peel the onion back, and we realize we've got another opportunity internally either to be more efficient or to work together to produce more revenue. So I think that's our primary focus, but we are in the flow on these things. We're not shut for M&A by any stretch; if there was something tremendously compelling. In particular, on the distribution side, if there's something that helps us with distribution further to what we already have, we're looking at it very carefully. We still have a very strong balance sheet. We're not going to compromise that. We have strong earnings potential; we're not going to compromise that, given the opportunities we've got to use our cash elsewhere internally. But it's fascinating times, and we are one of the companies that are quite actively pursuing ideas in the industry and making sure we keep up with the flow of change.
Jenny Johnson, CEO
Yes, and I'd just add that. Exact with Matt, it takes a lot for us to want to take on something else before we digest this one. But you never know. I mean, you're very intentional about keeping dry powder in case something else just came up with the bar probably a little bit higher on any big deal. We've also said that we continue to want to grow our high net worth business. And as Matt said, if there's something that is distribution-related, which tends to be more on the technology side, we're always looking at those, and we stay attuned to the industry because the industry is changing pretty dramatically.
Craig Siegenthaler, Analyst
Thank you. Just as my follow up on flows; we've seen this really strong migration into fixed income in the US. And then you have a much stronger bond business now with the addition of Brandywine and Western. But your flows were a little bit negative in the quarter due to the global bond. Do you expect the bond migration to continue for the industry even though yields are very low? And if you do think it'll continue, do you think Franklin as a company can start to participate, just as all the pieces start to work together?
Greg Johnson, Executive Chairman
Yes, I mean, this is Greg, I would say that you really have to separate out between what Western is doing on the US fixed income side. We've seen a lot of strength in areas like fixed income. We think that's going to continue as the Fed keeps rates low, and possibly federal rates go up. So I think that's very positive. Obviously, rates declined mostly over the period. Any duration and even credit worked well, and that's why Western stood out. It would be a very strong quarter for flows if you just looked at our US fixed income, $5.5 billion or so of inflows for the quarter; it just gets masked by what's happening on the global bond side, which really is a category that is very different from the traditional fixed income buyer. As Jenny said earlier, I look at the categories and any spike in rates or contraction in spreads and credit; we saw that a little bit in September, and we may see it continue a bit. I think that will help the global bond business. At the end of the day, any asset category, especially global bond, competes with everything else. The returns, when you compare US equities to just straight US fixed income, don't look very attractive. I think it looks pretty attractive fairly quickly if you have any kind of move up in rates. That's why we think this is a nice balance to the overall portfolio.
Operator, Operator
Our next question will come from the line of Robert Lee with KBW.
Robert Lee, Analyst
Thanks, and good morning, everyone. First question, could you comment on the tax filing in the 26% range, which, I know you mentioned as GAAP compared to kind of like, it was just around 22% as we were expecting initially. Should we still expect 22% on an adjusted basis or should we use 26% as the baseline?
Matthew Nicholls, CFO
I'd use 26% as the baseline. I mean, our business has changed in terms of, and we've got a greater portion of our business in the US with the higher tax rate. There are a couple of jurisdictions internationally, where the tax rates have gone up a little bit. So that impacts our overall tax view. So I think I would use 26% with a view that maybe it could be 25%, but only 26% is a good number to put in the model for now. The fourth quarter was confusing, as we had a spike in that rate because of the reasons we mentioned in the prepared remarks; it was just very unusual that spiked it up to 36%.
Robert Lee, Analyst
Great, and maybe just going back to the fee rate guidance. Do you think you've kind of reached the kind of 2020, fiscal 2021 or is there a long-term exit run rate basis to guess at 38?
Matthew Nicholls, CFO
Yes, the 36 to 38 is assuming a full year, so that's the full 12 months combination, if you will. We think that's a good guide based on the significant mix of business change. So with a much bigger fixed income business and a much bigger institutional business growth, that lowers the rates versus legacy Franklin Templeton, which brings that down. But at the same time, there is opportunity there in the alternatives where the fee rates are quite a bit higher. And we see some interesting growth opportunities there. So I hope we're on the higher end of it, but we think that's the natural range for the year.
Operator, Operator
Our next question will come from the line of Dan Fannon with Jefferies.
Dan Fannon, Analyst
Hi, thanks. Just follow up on one more question just in terms of the assumptions for your guidance. Do the theories assume any level of performance fees? And if so, what is the baseline you're thinking about?
Matthew Nicholls, CFO
So we assume flat. We don't assume any market growth in our projections, one. Two, the fees do not include performance; the average fee rate projection does not include performance fees. We expect our performance fees to actually go up. They were $10 million for this quarter from zero last quarter. We expect to start to enjoy a larger percentage of performance fees from Clarion after April next year. So that provides an opportunity. We share 50% of performance fees with them today, whereas today, we don't get any. It's 50% on our 83% ownership in Clarion. So that’s an opportunity to get more performance fees. In previous times last quarter was unusual; we had no performance fees in Benefit Street. But we expect that to pick up. For example, this quarter we went from zero to $4 million and received $6 million from the Legg Mason side. It wouldn't surprise us to see that go up quite a bit in 2021.
Dan Fannon, Analyst
Great, and then, in terms of the known redemptions, you called out $3 billion in the prepared comments that we also highlighted that it was not related to the transaction. What gives you confidence around that? Curious about other potential disruptions that might arise from either just the normal course of business or the acquisition.
Jenny Johnson, CEO
So just on the Legg Mason standpoint, they were in positive flows in September. They have a much bigger institutional business. You have lumpier redemptions, I think are going to be more characteristic than we've seen historically, but basically, haven't seen redemptions related to any of this transaction. The bigger redemption tended to be Franklin Templeton. As we said, that one we called out was a low-fee sub-advised relationship. There were some instances where you see sovereign wealth funds in the Middle East redeeming larger numbers, not for investment performance, not for transaction, just because of what's going on in the markets right now. So we are optimistic from the standpoint of integration and how things are going with clients. But you're always going to have, we still have issues on performance in a couple of areas like global macro. Obviously, with value, the value indices have performed 3,200 basis points year-to-date. So there are some people that are ready to throw in the towel on value; others may feel it's time to switch. To the extent there are on the institutional side, that may be a little bit more lumpy.
Matthew Nicholls, CFO
But as a general matter, obviously, we'd rather have no outflows. $12.6 billion is not ideal and it's not like we're pleased about those outflows. But when you think about it, the $12.6 billion is consistent with Franklin Templeton standalone outflows from the previous quarter. Both last quarter and the quarter before that. So the percentage attrition across the firm has come down considerably. It's driven by the same things that are market-driven, particularly the positioning of those strategies. The all-weather point that Jenny has made a few times is important in this regard because we do have some very important strategies under the hood here that will do well if the market starts to get more difficult again. I'd also add that out of our $11.5 billion of unfunded wins that we have, we would expect something like $5 billion to come in the December quarter.
Operator, Operator
Our next question will come from the line of Michael Cyprys with Morgan Stanley.
Michael Cyprys, Analyst
Good morning. Thanks for taking the question. Just on the multi-asset front, you guys have combined QS with the Franklin Templeton multi-asset Solutions Group to create the standalone multi-asset solution platform. Just hoping you could talk a little bit more about the strategy there. What you're most excited about? How you're thinking about the opportunity set? And then just the follow-up there would be just as you look across the organization, where else could it make sense to think about bringing together some of the investment teams from Franklin Templeton.
Jenny Johnson, CEO
So on QS and SMA, the teams got together and really thought about it, talked about it and said we could be much stronger together. This is really coming from those teams. Today, that combined organization has 120 investment professionals and $120 billion in assets. What intrigued them is QS was an institutional quant; they had a strong track record in things like liabilities driven investments, active quants, risk mitigation and risk. On the Franklin side, while there was quant capability, it was much more of an active manager with active allocations. They have their own outside managers due diligence, so bringing them together really creates this hybrid of quants with active management. We think about where the world is going, whether it's in retail models focused on outcomes, or risk overlays of separately managed accounts. Clients are looking for conversations similar to an OCIO type of conversation, as they think through how to build their portfolios and position them. This gives us tremendous capability around that; we think that's the future.
Greg Johnson, Executive Chairman
I would just add, I mean, I think it also contributes from a client service and institutional accounts perspective. Having that capability, and just the value-added side of looking at risk overlays, and LDIs is opening up new channels, like insurance. For us, it just increases the toolbox that we can offer to clients and hopefully deepen the relationships. I also bring in examples, one example of scale, where you have a large organization, it's bringing all that expertise together into one. Then hopefully, we can leverage that with clients, we think that's very exciting.
Jenny Johnson, CEO
To answer the other part of the question about opportunities to bring other groups together, we're not focused on merging products together. It's not part of this deal. Just talk to our CIO of global fixed income and our CIO at Western. They have different views on the timing on whether or not we'll see inflation or interest rate rise in the long end. The all-weather product lineup allows for different products for different outcomes, and we think that's very healthy. Our distribution team has been selling equities where arguably two different managers are competing in the same category. They have to have the best distribution data; they need to discern what the clients are looking for and either deliver up one option, or decide that they're going to answer the RFP with two different options in the same category. We are very comfortable with that on the equity side, and now we've just added that capability on the fixed income side.
Operator, Operator
Our next question will come from the line of Bill Katz with Citigroup.
Bill Katz, Analyst
Okay, thanks very much for taking the question. Coming back to your fiscal 2021 expense guidance of $3.7 billion, what kind of G&A assumptions are you playing by plugging into that number? Just trying to get a sense of what you think about in terms of normal around travel, entertainment, and sort of things that are probably depressed given the COVID-19 backdrop?
Matthew Nicholls, CFO
Hey, Bill. I hope your son is doing well. I would say that we built in a sense of, again, maybe this is somewhat optimistic on my part, but we're building a sense of normalization in the beginning say in March next year. We've also built in more in terms of advertising and promotion, these sorts of things that you'd expect us to do as we've been working on distribution and our client franchise. So our G&A, we have forecasted for about $485 million for the year, which is a healthy number and allows us to continue to invest in important things and allows for travel to return to some form of normality after the first annualized quarter next year.
Bill Katz, Analyst
Great, that's helpful. And just as a follow-up, I noticed you started to repurchase some stock in the quarter. So how do you counterbalance reinvesting back into the business versus the return of cash to investors versus your commentary that it was just the beginning stages of an M&A evolution?
Matthew Nicholls, CFO
Yes, when you look at our balance sheet back in fact, last quarter, we ended at $8.2 billion cash and investments, and we now have $5.1 billion cash investments. It's still quite a healthy underpinning to give us confidence to use our income. Income, already with just two months of Legg Mason in there, is significantly enhanced. What we plan to do at a minimum with respect to share repurchases is to make sure that we offset all of our share grants. We're also very focused on the dividend, and you know our history there. You can expect that to continue, subject to our board approving in December the capital management policy. We have already multiple new requests internally, given the new breadth of our firm to consider co-investments and seek capital opportunities, other internal growth opportunities. As we reach the end of either a quarter or a year, we may do some top-ups in terms of additional share repurchases if we don't feel pressure elsewhere. We also have a higher debt load now, and we successfully accessed the market earlier this month as Jenny mentioned, and we intend to use the proceeds to refinance a lot of expensive notes, potentially saving about $30 million on that. If rates stay where they are, maybe we just refinance out our notes going forward, and we stay at the current debt load assuming that EBITDA stays the same because we want to keep our current credit profile intact. If rates stay where they are, if rates get more expensive for the debt, and the markets aren't as attractive, we might delever some as well without cash. So it's really a combination of those things. Ultimately, if we have the capacity to buy more shares, given our current valuation, we'll do it.
Operator, Operator
Our next question will come from the line of Alex Blostein with Goldman Sachs.
Alex Blostein, Analyst
Hey, thanks, guys. Just a couple of clarifications at this point. Matthew, on the expense guidance, can you help us with some sensitivity to revenue assumption? I know you said you guys are assuming generally flat markets in your expense guide for 2021. But if the markets were to be higher, can you help us understand the sensitivity to that $3.7 billion with kind of normalized market returns?
Matthew Nicholls, CFO
Yes, I think that $3.7 billion, given that that's an adjusted number, the GAAP number could be higher or lower, but I'd say as an adjusted number, that's a disciplined number that we have some comfort in. If the markets go up, it'll still be $3.7 billion. That’s how I would describe it. If the markets come down, it could come down. But I don't see us going up beyond $3.7 billion.
Alex Blostein, Analyst
Yes. And then another question around capital management; given the devaluation in the stock early in the free cash flow generation of the business, can you help us understand the framework around making another acquisition, whether it's something small on the distribution side, or continuously building out the RIA channel, to find out what channel versus buying back Franklin stock at this level?
Matthew Nicholls, CFO
Yes, it's a great question because the bar for us has to be quite high, given that every dollar we're buying back in our stock is likely equivalent to a 6% dividend yield. We're quite focused on that. We won't be doing large stock deals based on our current multiple dilution. In wealth management, we think it's a good use of our cash because we have done two small transactions, and they both ended up being accretive to us in terms of cost savings and revenue growth. So in wealth, there could be smaller transactions that we use to continue to grow fiduciary trust. On the alternative asset side, there are some interesting opportunities out there. That’s where we would use our cash and our stocks.
Operator, Operator
Our next question will come from the line of Chris Harris with Wells Fargo.
Chris Harris, Analyst
Thanks. You highlighted the momentum you've been seeing in alternatives. But there are some concerns about real estate as an asset class, particularly commercial real estate. How is Clarion positioned to deal with the downturn we're seeing in that particular area?
Jenny Johnson, CEO
So Clarion is overweight in industrial properties, which have performed very well. As e-commerce demand increases, companies like Amazon need more storage. This area has performed very well for us, and it's one that Clarion had focused on while being underweight in the commercial real estate, which has been struggling.
Chris Harris, Analyst
Okay, and then just one quick one on expenses. I know we’ve got some noise here, because Legg and its revenue and profit share, and Franklin's more of the traditional model. What is the addressable cost base, if you will? What are these synergies being net of? Because I know we probably shouldn't be looking at the entire expense base when we're considering that.
Matthew Nicholls, CFO
No, I think you should. You should look at it as against the $3.7 billion we've guided for 2021. It's very early guidance, but I think it's correct to think of that as being addressable.
Operator, Operator
Our next question will come from the line of Mike Carrier with Bank of America.
Mike Carrier, Analyst
Hi, good morning. Thanks for taking the question. Just two follow-ups. Given a lot of moving parts with expenses, could you give a fiscal 1Q starting point for the adjusted expense level given the 25% of synergies realized by the end of September, and any color on the timing of when we should expect the 85% during the year?
Matthew Nicholls, CFO
Yes, so on the 85%, I'd say we've made good progress thus far. I think we mentioned that we already achieved 25% of it by 9/30. We expect to achieve 50% by, yes, we said year-end, but that's probably going to be more like the end of January. The rest of it, or the 35% that's left, we hope to get most of it by June. There will be some carefully managed expense reductions on the front office side that we want to spend more time executing to ensure continuity and stability around the group that we've discussed. So again, we believe we have the 25% done, end of January to get to 50%, and we hope to get 75% by the end of June, paving the way to have the rest up to 85% by the end of the fiscal year. In terms of normalizing, it might be useful to walk through the revenue and expenses associated with what we bought from Legg Mason. Legg Mason's two months were about $475 million of revenue. If you include sales and distribution fees, we exclude those; it's about $415 million, which annualized comes to about $700 million to $720 million. The expenses, as you noted, it's a noisy quarter with all of the acquisition-related expenses. But if you exclude the non-recurring acquisition-related expenses, it was about $350 million inclusive of sales distribution; excluding that, it's about $280 million. So if you consider including sales and distribution, it's $475 million minus $350 million equals $125 million times six, which is about $750 million. One way of looking at it. If you exclude sales and distribution, it's $415 million minus $280 million equals $135 million times six, which is about $810 million. That being said, if you think about it as being an addition on top of our business.
Mike Carrier, Analyst
Yes, that's helpful. And then one clarification on the fee rate. When I look at the quarter, the 38 seems a little lower than expected from the pro forma. If I think about the algorithm of 36 to 38, it seems that's not much of an impact. Was there something else either resulting in this quarter or affecting the run rate?
Matthew Nicholls, CFO
No, nothing in particular, we've modeled it out, and we think they're a good guide.
Operator, Operator
Our next question will come from the line of Brian Bedell.
Brian Bedell, Analyst
Great, thanks very much. Good morning, guys. Most of my questions have been asked and answered. Just one follow up on the capacity for deals if you're doing them in cash, Matt, like you said, the $5.1 billion in cash and investments, what do you view as cash available for acquisitions within that? And also additional debt capacity if you think about what type of cash level you'd be able to bring in?
Matthew Nicholls, CFO
Yes, it's probably, out of the cash you see, it's probably $1 billion that because we're, again, quite conservative. We like to maintain supplemental liquidity. And we intend to keep that in place. So that's how we define excess cash. In terms of other people, that might double that number to define it as excess, but we wouldn't. In terms of debt capacity, our absolute intention and focus is to make sure that we maintain our current credit profile, which is an A2 rating. We just accessed the debt markets and we're really pleased with that transaction. We intend to retain that profile and run our capital structure in a way that's consistent with that. Our debt capacity at that level has substantial room to grow in terms of debt, but we don't mean to push our limits whatsoever with the rating agencies or our debt investors, given what we described to them. We want to remain tactful around that.
Brian Bedell, Analyst
Okay. That's helpful. And then Jenny, just if you could talk a little bit about ESG. Obviously, Legg Mason had good traction, especially at ClearBridge and Western, and a few other affiliates. How are you thinking about integrating that through Franklin? Are you considering centralizing that ESG process and leveraging that across the totality of platforms, or leaving the ESG capabilities within the individual managers?
Jenny Johnson, CEO
With respect to ESG, we believe that the framework in which you apply ESG is specific to the investment team. However, we are members of industry initiatives attempting to standardize around ESG data. We've created a centralized database for ESG information. For instance, our global macro team gets 14 different data feeds to build their ESG framework; this data then gets submitted into this centralized ESG database, and any of the investment teams are welcome to use it as they develop their frameworks and models. We are committed to working hard with the industry on ESG standardization, and Greg participates in ESG initiatives. We view it as an integral part of the investment process.
Brian Bedell, Analyst
Yes, that makes sense. May I ask one more real quick one?
Jenny Johnson, CEO
I'll make this little pitch; our Franklin municipal green bond fund is up 9% year-to-date. This is our ESG area, and there's significant demand, great demand pretty nice and grand.
Brian Bedell, Analyst
That's great. On that 97% employment acceptance, was that in line with what you were thinking? Were there any significant non-acceptances from either PM or key leaders in that 3%?
Jenny Johnson, CEO
So again, that was focused on holding company and distribution. I think we set out, we weren't sure what percentage of that to expect, and I think we ended up with both groups making much more like those accepting offers than we anticipated. There was no specific one that we felt we really missed; and we're not talking about investment people.
Operator, Operator
Our last question for today will come from the line of Patrick Davitt with Autonomous Research.
Patrick Davitt, Analyst
Hey, yes. Brian has asked my question. So thanks.
Jenny Johnson, CEO
Okay, great. Well, listen, I want to thank everybody for participating in today's call. I just wanted to leave you with one thought. What we knew from the beginning has only been further crystallized: our two organizations are really incredibly aligned in terms of strategic fit, culture, and our shared focus on delivering strong investment results for our clients. We look forward to continuing to stay at the forefront of our industry and, again, keeping that balance sheet flexibility as things evolve, while really providing unparalleled investment choice and service for our clients. Thank you, everyone, for participating and be safe out there.
Operator, Operator
Thank you for participating in today's conference call. Once again, we appreciate your participation, and you may now disconnect.