Franklin Resources, Inc. (BEN) Earnings Call Transcript & Summary

Welcome to Franklin Resources Earnings Conference Call for the quarter ending June 30, 2026. Hello. My name is Maria, and I'll be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are 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 Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us today to review Franklin Tepleton's third fiscal quarter results. I'm joined today by Matt Nicholls, our Co-President and CFO; and Daniel Gamba, our Co-President and Chief Commercial Officer. We'll answer your questions momentarily. But first, I'd like to highlight key results and themes shaping our business. This was another strong quarter for Franklin Tepleton that demonstrated our strategy is working. We delivered another quarter of positive long-term net inflows with positive flows across every asset class in every geography. We also reached new highs in assets under management across many of our key growth businesses including alternatives, ETFs, retail SMAs, canvas and our institutional pipeline. Together, these results reflect the strength of our global platform and the momentum we're building across the business. Today, we are ahead of our 5-year plan, a testament to disciplined execution. We have broadened our capabilities across public and private markets, deepen client relationships and expanded the ways clients access our investment expertise. These investments are creating multiple sources of organic growth and positioning us well for the future. At the center of our strategy is One Franklin Templeton. Increasingly, clients are turning to us not just as an asset manager, but as a trusted partner that combines investment expertise, innovation and global scale to help them navigate complex markets and achieve their long-term objectives. We continue to simplify our go-to-market approach to better serve clients and capture opportunities across the business. The results we reported today reflect strong execution in the quarter with $18.4 billion in long-term net inflows bringing fiscal year-to-date long-term net inflows to $63.3 billion. This was another consecutive quarter of positive net flows with positive net flows across every asset class and geography. Long-term inflows reached a record $122 billion, and assets under management grew to a record $1.8 trillion. Each of our key growth areas, including alternatives, and private markets, ETFs, including fundamental active ETFs, retail SMAs and canvas, multi-asset solutions and our international franchise contributed meaningfully to the quarter. That broad-based performance reflects the investments we've made over the past several years to build a more diversified business. The strength of our business today is translating into future opportunities. Our institutional pipeline of one but unfunded mandates reached a record $28.6 billion, increasing more than $8 billion from last quarter. Institutional clients continue to seek strategic partners that can deliver integrated solutions across public and private markets rather than individual products and that plays directly to the strengths of our platform. One of the most encouraging developments this quarter was the continued strengthening of our public markets franchise with growth broadening across asset classes and investment capabilities. Equity returned to positive net flows of $2 billion, reflecting strong demand across U.S. large-cap value, U.S. large cap core, international equity, infrastructure and systematic strategies. Our global fixed income platform generated $2.6 billion of net inflows supported by broad-based demand across enhanced liquidity, municipals, multisector, stable value as well as highly customized institutional mandates. Excluding Western Asset, Franklin Tepleton fixed income delivered its tenth consecutive quarter of positive net flows with $3.5 billion of net flows, while Western continued to stabilize. We're also seeing clients think differently about credit. Whether then reviewing public and private markets separately, they're looking for integrated solutions. Franklin Templeton fixed income $520 billion platform, together with our private credit capabilities of more than $100 billion gives us more than $620 billion in AUM across the full credit spectrum. That breadth positions us well as clients increasingly seek fewer partners that can provide solutions across public and private credit. We won a multi-asset credit mandate from a public plan and are participating in various RFPs. Multi-asset has consistently been an important contributor to growth and this quarter generated $4.7 billion of positive net flows led by Canvas, Franklin Income Fund and Franklin Templeton Investment Solutions. As mentioned earlier, these results reinforce that our public markets franchise is broadening the sources of our organic growth with clients increasingly relying on Franklin Templeton for active strategies, outcome-oriented solutions and customized portfolios. Private markets remain one of the industry's most compelling long-term growth opportunities. And we believe Franklin Templeton is uniquely positioned as a leading partner in this space. We've built one of the industry's largest and most diversified private market platforms spanning secondary private equity, private credit, real estate and venture capital. Alternative AUM reached a record $294 billion during the quarter after $3 billion of realizations and distributions. We raised $11.8 billion across our Alternatives platform during the quarter, including $10.3 billion in private markets, bringing fiscal year-to-date fundraising to $33 billion, already exceeding our original full year target with one quarter remaining. Fundraising remained diversified across strategies and client channels, reflecting the breadth of our platform and continued demand from both institutional and wealth clients. As private markets become more accessible, we're also seeing continued growth in the wealth management channel. Our Evergreen platform across secondary private equity, private credit and real estate grew to $8.9 billion in AUM, reflecting increasing adoption by individual investors. Wealth Management accounts for approximately 20% of our private markets fundraising year-to-date across evergreen and drawdown vehicles, demonstrating the progress we're making in bringing institutional quality, private market capabilities to a broader range of investors. We believe expanding access to private markets will be one of the industry's most significant long-term growth opportunities and Franklin Templeton's long-standing adviser relationships position us well to capitalize on that trend. More broadly, clients increasingly want choice, not only in what they invest in, but how they access investment capabilities because preferences vary across client segments, distribution channels and geographies. We offer a broad range of investment vehicles to meet those evolving needs. That strategy continues to gain momentum with a record AUM across our ETF retail SMA and canvas businesses. Our ETF franchise reached a record $75.6 billion in AUM with $7.1 billion of net inflows during the quarter. ETF's have become an increasingly important way clients to access our investment capabilities, and we continue to expand our offering by bringing more of our highest conviction active strategies into the ETF wrapper. Active ETFs account for 61% of ETF net flows, reflecting both the strength of our investment platform and continued demand for differentiated active strategies. Demand for personalized investing continue to grow. Our retail SMA business reached a record $187.6 billion AUM with $4.4 billion of net inflows, while Canvas, our custom portfolio solutions platform grew to a record $30.3 billion in AUM with $3.7 billion of net inflows. During the quarter, we also launched our preferred partner program, extending Canvas' tax overlay capabilities to strategic partners. With clients in over 150 countries or about 80% of the world and on the ground presence in over 30 countries, our international business continues to be an important differentiator for Franklin Templeton. International AUM reached approximately $525 billion with positive long-term net flows in every region. Innovation also remains central to how we continue to evolve our business. We're investing in new capabilities, technologies and distribution channels that expand client access and strengthen our competitive position and digital assets are a good example. Digital asset AUM ended the quarter at $3.2 billion, including $2.4 billion in tokenized funds and approximately $600 million in crypto ETF. During the quarter, we completed our acquisition of 250 digital and launched Franklin Crypto, expanding capabilities across the digital asset ecosystem. We also announced a partnership with MoonPay and we'll collaborate with Payward, the parent of Kraken to expand access to tokenized investment products and bring traditional financial assets on chain. These initiatives reflect our belief that blockchain will become an increasingly important part of financial markets and Franklin Templeton attends to be at the forefront of the evolution. Strong investment performance remains fundamental to earning our clients' trust and supporting long-term growth. More than half of our mutual fund and ETF AUM outperformed peers over the 3-, 5- and 10-year periods, while nearly half is rated 4 or 5 stars by Morningstar. Our strategy composites also delivered strong long-term results with 55% or more of AUM outperforming benchmarks over the 3- and 5-year periods and 70% over 10 years. Consistent performance across market cycles continues to strengthen our ability to win and retain clients. Turning briefly to our financial results. Adjusted operating income increased to $508.9 million, up 7% from the prior quarter and 35% from a year ago. The improvement reflects higher average AUM, disciplined expense management and the continued execution of our efficiency initiatives, demonstrating the operating leverage of our diversified business model. As we look ahead, we're confident in the direction of the business. The investments we made over the past several years have created a broader, more diversified Franklin Templeton, and we believe that positions us well to continue serving clients and delivering long-term growth. We remain disciplined in managing expenses while continuing to invest strategically in the capabilities while maintaining financial flexibility to drive long-term growth and return capital to shareholders. This quarter, we returned $521.5 million to shareholders, including $348.1 million in share repurchases. In the spirit of One Franklin Templeton, as announced in our earnings press release, our parent company will officially change its corporate name from Franklin Resources, Inc. to Franklin Templeton, Inc. on August 17, 2026. This change reflects the continued evolution of our firm as a unified global organization and aligns our corporate name with the Franklin Templeton brand. This is a corporate name change only and will not affect the company's corporate or capital structure, domicile, outstanding shares, CUSIP number or the voting or other rights of its stockholders. The company's common stock will continue to be traded on the New York Stock Exchange under the ticker symbol BEN. Aligning our legal corporate name with our global brand reinforces our commitment to 1 Franklin Templeton, 1 organization, 1 brand and 1 consistent experience for clients, investors, partners and employees around the world. Finally, I'd like to thank our employees around the world. Their dedication and commitment to our clients are what make these results possible. Now I will open up the call for your questions. Operator?

[Operator Instructions] Our first question is from Bill Katz with TD Cowen.

Jenny, you laid out very strong growth at the beginning of the year for private markets and that you've already exceeded your year-to-date target with one quarter to go. Can you unpack where you're seeing the strength and where you might be in terms of Lexington Eleven and the outlook for that as well?

Sure. Thanks for the question, Bill. So at the beginning of the year, we had a target of $25 billion to $30 billion as far as the raise in private markets. As you kind of pointed out, we're now at $33 billion, and we expect to end the year at about $40 billion. Lexington's flagship fund by September, they're very much on track with their fundraising expectations. By September, they should exceed $10 billion. Of the -- what we've raised so far, so let me talk about this quarter. So this quarter, we did $10.3 billion. Lexington is about 40% of that. However, that 40% is in 4 strategies. So their flagship fund, their middle market fund, their continuation vehicle and the perpetual all raised and contributed to that. In addition to that, the -- of the $10.3 billion, every single one of our private market managers contributed. So it's secondaries, it's real estate, it's private credit. All 3 of the kind of private credit managers that are under BSP contributed to that as well as venture. And actually, it's 30 different strategies that were all part of that $10.3 billion. So what makes us really excited about it is that this isn't a one-off kind of just the Lexington flagship. This is really a diverse fund raise, and we're continuing to see momentum across the board. And one area that has kind of come back a bit this year is real estate, which was really out of favor, and we're starting to see some good traction there.

Our next question comes from Alex Blostein with Goldman Sachs.

I wanted to ask you guys around fixed income strategy broadly. You've made some changes kind of trying to bring the liquid and private pieces together given the convergence in this kind of part of the market, can you just talk through your new go-to-market approach? How are you thinking about the opportunity in fixed income broadly and how much they could accelerate growth for Franklin as a whole between liquid and private side of the house?

Yes. Thanks for that question, Alex. So I'll start and then I'll have Daniel add on to it a bit. Look, we think that any fixed Income Manager of the future is going to have to have visibility both on the public and private side. Like if you -- you don't have some way to sort of have insights into the private markets and your traditional fixed income manager, we think you're managing money with pretty big blinders on. So we're doing a lot. We, as you know, have already integrated Brandywine and Putnam into the Franklin fixed income, great traction there. We've had 10 consecutive quarters of positive flows and have been working on bringing Western in. A lot of the work on Western was around kind of the back office and integration in areas like client service, institutional client service and on the institutional sales side. On the investment side, Mike Pecan and the CIO of Western is now reporting to [ Sonal ]. So the key is not to confuse the independence of an investment team with the ability to have greater access to resources. So for example, the work we're doing in AI, it opens up a lot more data available to the analysts to be able to leverage -- to be able to pick up the phone and talk to a sector analyst in another area, we have the private markets team today. They talk -- they'll work together, they'll talk about macro, but I think as we look forward, we think it's going to be more and more important that they continue to get closer and closer. So we're $620 billion fixed income manager of that $100 billion of it is private markets. But we really want to present to clients much more of a look of one big fixed income manager. And as you know, we hired an origination team. We think they're going to be important. Any fixed income manager of the future is going to have to be able to have some of their own sourcing. We think that's going to be an important part of the future of fixed income. And then obviously, the teams will be able to choose whether they want to opt in to certain deals or not. But as we look at product development in the future, and maybe I'll ask Daniel to talk about this a little bit, it is clear that you're going to see more and more fixed income that incorporates both public and private. And we think a much better way to manage that is kind of under one umbrella versus just independent sleeps. Daniel, do you want to add anything to that?

Of course. Alex, thanks for the question. I'll have 3 quick things. Number one is the reaction to the Western settlement, if you want, has been positive from clients. And the client service teams have conducted outreach to the distribution partners and institutional clients. And the main questions were stability of the investment team, no changes to the investment philosophy. So it's been quite positive, and we're excited about the reengagement process that we're actually doing as we speak, which I think it has upside, especially on the institutional side, given the strength of Western clients and relationships over the years. Two other points. One area of focus, as mentioned by Jenny is multi-asset credit, and that's been where we develop solutions by not only combining leaves, because I think a lot of what we've seen in the market is leaves. People want CPMs to actually work together to bring the capabilities across the spectrum of credit. And we just won a multi-asset credit mandate from a public pension in the U.S., but we are also actively in several conversations on RFPs and advanced conversations across multi-asset credit. So we're very excited about what's happening in multi-asset credit. Last point, new products. We just launched our target date, we repositioned one of them, which is called Retirement Advantage to include private markets between 2% and 8%, private real estate and private credit and is having initial good looks from clients, and we're also in the process of launching an infrastructure product that also combines public and private -- private market partners, but also can clear bridge and some other areas that we are also doing to combine. So this is an area that you're going to hear more from us because it's a key differentiator given that we have our capabilities insight and the investors are starting to gather insights among one another. So it's an area of future development, Alex.

Our next question comes from Dan Fannon with Jefferies.

So I wanted to expand on the $11.8 billion in fundraising. So how much of that is actually in fee paying AUM. And then also kind of like what's the average fee rate of the kind of assets you're raising across, I think you said 40 different strategies. So some great -- just kind of blended averages that fee rate would be helpful?

So the 30-plus strategies is a little over 30%. Across our private markets platform, about 80% is fee direct generating. So that kind of gives you the number and it varies a bit. I don't have the blended number. I don't know, Matt, I don't know what we provide there on the blended number. Do you have that?

The blended number is about 65 basis points, blended number. But it ranges between 40 basis points and over 100 basis points, plus performance base.

Our next question comes from Glenn Schorr with Evercore ISI.

On canvas, I'm interested if you look at the flows in the quarter relative to overall AUM, that's an enormous growth rate. You did have some white label wins. I'm curious if you can parse some of that out. But then more a big picture of what kind of growth you're expecting? Are there other white label opportunities in the pipeline? And then maybe sidebar of -- in terms of strategies that you deploy, how much of it touched on the area that seems to draw some treasury comments during the quarter? I appreciate it.

So since we acquired Canvas, they've gone from $2 billion to $30 billion. So just a tremendous growth rate. And we think this is just still early. If you think about what is Canvas. So many of these tax optimized platforms were developed by tax people, and so they have a fair bit of manual labor to them and that limits some of the flexibility. Canvas was developed by Claude managers, so they were very tech focused. And so there are some features in Canvas that other platforms can't do. So for example, the managed option strategy allows them to handle concentrated stock positions and help diversify the portfolios, tax efficiently. They can take in-kind transfers in. So those are pretty unique features about Canvas. And the way we look at it is every time we sign up a new RIA, new wirehouse platform, any new platform that just opens up and widens the funnel of what's going to come in. Occasionally, you'll have a one-off that will be a switch in, but more importantly, it just opens up the funnel that people have selected that as their platform to leverage and you'll just continue to see flows. Now the future of campus and what gets us really exciting is being able to -- what started out as more of a direct indexing platform is really attacks overlay on active strategies. And so we think that as our SMA business -- so today, we're $187 billion in SMA, we're a large SMA provider. But what really gets exciting is when you can add the capabilities of Canvas' tax overlay on SMA platforms on the active strategies. And in fact, our preferred partners program, we've been selected by some firms who manage active strategies. They selected Canvas to be the overlay on their strategy. So that's kind of a white labeled version. And again, it's because it's just -- it's a really excellent technology. Daniel, do you want to add anything to that?

I would only add that this quarter, we continue to onboard new partners, and that's a big driver of where we are. So we added 26 new partners, which is still increased and total number of partners that we have now is 220 partners. So that's a big driver of the growth. And I will also highlight the strength of the product is actually what's driving a lot of the success. We have more frequent rebalancings and also ability to receive in-kind holdings. And as you see the driving of people moving money from a commission base into fee-based, this is a big transition tool that some of our partners are setting to use. You saw it last quarter. Actually, I will say in Q2, and we have -- we're excited about the pipeline. The pipeline is looking strong.

Our next question comes from Patrick Davitt with Autonomous Research.

A couple of guidance cleanup. Sorry if I missed it in the rest, but could you give the scale of the catch-up fees in management fees. And then on the expense guide, just confirming that we should add some variable expense to that based on whatever revenue growth we are assuming for 4Q?

Yes. Patrick. First of all, so for the quarter that we're reporting here, the catch-up fees were $14 million, and we expect it to probably be about the same in the fourth quarter. In terms of the guide, I'll quickly run through it. We expect the effective fee rate to be roughly the same as what it was this quarter that we're reporting today in the mid- to high [ 37 ], again, very similar to the quarter we're reporting today. Compensation, we expect to be $850 million. This is at a $50 million performance fee level at a 55% payout. IS&T, we expect to be at $165 million. This includes investments in AI, data and security. Occupancy, we expect to be $70 million consistent with the previous quarters. G&A, we expect to be $200 million. The $200 million includes elevated fundraising and advertising that we also talked about last quarter. And we expect the tax rate to be between 25% and 27%, both for the fourth quarter and for the fiscal year as a whole. In terms of the full guidance for 2026, of course, you can add the numbers I just went through to the 3 quarters that we reported already. But as outlined on Page 14 of the IR deck, this assumes flat markets from now and excludes performance fees. It's inclusive of our savings that we've also presented in previous quarters, we expect expenses to be about 3% to 3.5% above full year '25. This modest increase is driven by increased markets to date, higher sales, higher fundraising to date and strong performance. Inclusive of the performance fee guide, I just mentioned, total expenses would be about 2% to 2.5% higher versus 2025. Importantly, though, as it relates to the margin taken in conjunction with revenue increase to date in revenue as expected for the rest of the year. We again have moved further ahead on our margin expansion. Targets, specifically we expect to reach very close to 30%, if not at 30% for our fiscal fourth quarter. And at least in the mid-27s, maybe a little bit better than the mid-27s, for the full year 2026, along with a declining compensation ratio in 2026. This, as you know, is ahead of plan, and we expect to reach at least 30% -- probably 30% plus margin later in 2027. And specifically in 2027, we would expect the full year margin to be between something like 29% and 30%. In terms of the EFR for the full year, we expect it to remain stable at 37.7% to 37.8%, something like that in the high 37s.

[Operator Instructions] Our next question comes from Ben Budish with Barclays.

I was maybe going to follow on Patrick's question there. I think you kind of answered some of the questions around what spending might look like in fiscal '27. So maybe on the fundraising side, for the [indiscernible] which is probably the most control at least where you kind of have the most visibility into your plans, maybe give us a little bit of a sense for what you expect to have in the market. I don't know if it's too early to kind of give your full year fundraising expectations, but what does the product pipeline look like? And are there any implications for the EFR, I think the forward commentary was quite helpful, but it seems like if you keep fundraising at this level, I guess, depending on what happens with markets that could continue to be constructive for that as well. So any additional color there would be very helpful.

Yes. We'll give you really at the next quarter kind of the projections for '27 as far as the [indiscernible] fundraising. But the -- just kind of looking at the list of things that we're fundraising, I think we'll have most of the same things in the market next year that we have in the market right now. So we certainly hope to continue to keep the momentum. And I would say that this -- so far, we're at 20% in the wealth channel. And I think we have a real advantage in alternatives in the wealth channel because alternatives sold in the wealth channel, I described it as hand-to-hand combat. You not only have to get on the platform, but you have to educate adviser. And our coverage gives us an advantage there. So we've always said that our goal is to be 20% to 30% of it in the wealth channel. We're at 20% now. And so we hope to continue to grow that as well. But we're going to -- we will provide '27 guidance at the end of next quarter. As I said, for this coming quarter, we expect to end the year at about $40 billion.

And same thing on expense guidance. I already mentioned a little bit from where we expect margin to be because we're very focused on margin and making sure that we get the margin uplift that we presented. So for '27, I just touched on that slightly, but we'll give more details, as Jenny mentioned in the next quarter as we talk about the fourth quarter or as we present the fourth quarter and then going into 2027. In terms of the EFR though, as we run our analysis on our expectations, we do expect that to remain stable in the mid-37s.