Welcome to the Franklin Resources Earnings Conference Call for the quarter ended December 31, 2022. Hello, my name is J.P. I will be your call operator today. As a reminder, this conference is being recorded and at this time all participants are in a listen only mode. 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, thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources. which are not historical facts or 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 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. Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the first fiscal quarter of 2023. I'm joined by Matthew Nicholls, our CFO and COO, and Adam Spector, our Head of Global Distribution. We're pleased to answer any questions you have. First I'd like to call out a few highlights from the quarter. Despite the challenging market backdrop in our first fiscal quarter, we saw a number of positive developments to further diversify our business. This quarter we continue to see net inflows into key growth areas such as into our three largest alternative managers Benefit Street Partners, Clarion Partners and Lexington Partners, as well as Multi-Asset Strategies, ETFs and our custom indexing solution platform, Canvas. We were also pleased to see additional positive indicators impacting our business, including an increase in our institutional won but unfunded pipeline and improving overall investment performance across our strategies. I'll cover all of this in more detail momentarily. While the industry landscape remained under pressure, we have continued to benefit from our diversified mix of asset classes, geographies, client types and investment vehicles. Turning now to flows. We generated total net inflows of $6.6 billion this quarter, inclusive of $17.5 billion of net inflows from cash management. Long term net outflows were $10.9 billion and included reinvested distributions of $12.1 billion. This quarter we saw net inflows into key growth areas of client demand. Starting with alternatives, as mentioned earlier, our three largest alternative managers, Benefit Street Partners, Clarion Partners and Lexington Partners each had net inflows for the quarter totaling $2.4 billion. Multi-asset net flows increased almost fivefold from the prior quarter to $2.4 billion. Driving the interest in the multi-asset category was our flagship Franklin Income Fund with its flexible approach to changing market conditions. The $70 billion U.S. fund is now rated four stars overall by Morningstar and continues to have strong performance. Our broader multi-asset solutions strategies were also in net inflows. Fixed income net outflows of $13.3 billion were primarily due to certain U.S. taxable and global opportunistic strategies. Client interest, however continued and we benefited from having a broad range of fixed income strategies with non-correlated investment philosophies, including net inflows into certain Core Bond U.S. income and tax efficient strategies. We are pleased to note that Western's performance reverted back to its leadership position during the quarter. At quarter end, 89% of the firm's strategies outperformed the benchmark on an AUM basis for the quarter, and Western's two primary Core Bond funds were ranked in the top decile on a quarter-to-date basis versus their respective peer groups. Equity net inflows were $300 million and included $9 billion in reinvested distributions. This quarter, the risk-off environment continued to impact investor sentiment on certain growth strategies which were offset by positive net flows into strategies such as large cap and all cap value, large cap core and emerging markets. Cash management generated the highest net inflows in over a decade with $17.5 billion of inflows were driven by institutional demand for low risk assets at a higher risk-free rate and diversified across client type. As a leading SMA provider, particularly in model delivery we ended the quarter at $105 billion in SMA AUM. Canvas has achieved net inflows every quarter since the platform launched in September 2019 and AUM increased over 25% in the quarter. ETFs had $1 billion in net inflows and reached $13.3 billion in AUM. We launched the ClearBridge Sustainable Infrastructure ETF during the quarter and added specialized sales resources to strengthen our ETF efforts. We were also pleased to see our institutional pipeline of won but not funded mandates increase by $8.8 billion to $23.8 billion and included a $7.5 billion fixed income institutional mandate. Turning now to performance. Our investment teams have remained true to their distinct disciplines and time-tested approaches, relentlessly searching for those long-term investment opportunities that market dislocations often present. We saw an uptick in relative investment performance in nearly all standard time periods this quarter. The majority of our strategy composite AUM and mutual funds AUM outperformed their benchmarks and peers respectively on a one, three, five, and 10-year basis. In addition, 51% of mutual fund AUM was in funds rated four or five stars by Morningstar. As I've said time and again, the next decade is not likely to look like the last, and we continue to invest strategically in areas that are shaping the future of our industry. Alternative investing is one of those areas. During the quarter, we closed the acquisition of Alcentra, a leading European alternative credit manager. This acquisition increased our alternative credit AUM to $78.5 billion. As for secondary private equity, as of November 30th, Lexington had raised $12.8 billion for its latest fund and continues its fundraising efforts. Alternative assets now account for $257 billion or 19% of our total AUM and a higher percentage of adjusted revenue. We are now one of the largest managers of alternative assets and are realizing our aspiration to be one of the few diversified firms globally that offers the major categories of alternative assets. One of the lessons that 2022 taught many investors is that diversifying beyond traditional asset classes to solve for their long-term goals is probably a good idea. We think this will drive increased adoption of alternative assets in the wealth channel where we've made progress. We continue to focus on product development and suitability, sales and marketing, and client education in the distribution of alternatives in wealth management. For example, Benefit Street Partners announced the launch of Franklin BSP Private Credit Fund, investing in U.S. middle market private credit, seeking to generate strong current income and superior risk-adjusted returns across market cycles. In November, the Franklin Templeton Academy announced the launch of its alternative education program as part of our ongoing effort to build knowledge and proficiency around the alternative investment landscape. The program offers a comprehensive curriculum on various types of alternatives, including courses on private equity, real estate, private credit, infrastructure, and hedge strategies. Touching briefly on our financial results, which reflect two months of Alcentra given its closing on November first. Ending AUM was $1.39 trillion, an increase of 7% from the prior quarter, primarily due to market appreciation and the addition of Alcentra. Average AUM decreased by 1.5% to $1.35 trillion. Adjusted revenues were $1.44 billion, a decrease of 6% from the prior quarter. The decrease was driven by lower adjusted performance fees and lower average AUM. The effective fee rate, which excludes performance fees, was 39 basis points a slight uptick compared to 38.8 basis points last quarter. Adjusted operating income was $395.1 million, a decline of 20% from the prior quarter, or 12% excluding annual deferred compensation acceleration for retirement-eligible employees of $37 million. We continue to benefit from a strong balance sheet with total cash and investments of $6.6 billion at quarter end after reflecting the purchase of Alcentra and payment of fiscal year-end cash bonuses. Let me wrap up by saying that over our 75-year history, our North Star has always been the clients we serve. We are committed to continuing to seek opportunities to expand our capabilities to provide investors with financial investments that are important in reaching their goals. Finally, I would like to thank our global employee without whom our progress would not be possible. Their work is greatly appreciated, and I thank them for their many contributions to our organization. Now let's turn it over to your questions. Operator? Thank you. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in question queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. We request that you limit to one initial question and one follow-up. Our first question comes from the line of Glenn Schorr from Evercore. Your line is now open. I guess, question on the fixed income side. We saw outflows in fourth quarter, the outlook for 23 should be a lot better for the industry. Just curious on that thought overall and how you think Western in particular is positioned in the year ahead. Thanks. Great. Thanks, Glenn. I mean, first of all, you know, as we mentioned in the quarter, you know, the Core Bond portfolio at Western Asset had net flows. We continue to see really strong sales, you know, in the growth sales for Western Asset products. 89% of the strategies outperformed. Actually, Core Plus and Core ranked second and eighth percentage against their peers for the quarter. Really good, I think, good recent performance. The pipeline over $10 billion of the pipeline is Western Asset. As we mentioned, the $7.5 billion mandate is part of Western Asset. Beyond that, they're just getting great support. You know, here's what makes us really excited. Many of the institutional players have been a little bit slow. That's why I think we've seen real strength in our institutional money funds and a lot of flows going there, both in the last quarter and continuing through January, as, you know, you see institutions waiting to figure out kind of when the rates peak. As they've, you know, ventured back into the space, we have three phenomenal brands between Franklin, Brandywine, and Western. To just, you know, punctuate that the Brandywine Global versus Western Core Plus and Franklin Core Plus, from their excess returns only correlate 0.12 and 0.17. Regardless of, you know, what type of view people have on fixed income. We've got, you know, really great brands in that area. Adam, you want to add anything to that? Yeah. I would just add, Jenny, that the performance turnaround is really across the board. If you look at where our Global Bond Fund is, that's now top decile as well. Really good performance everywhere. On top of that, I would say that one of the things that differentiates us is the breadth of fixed income we offer. We see a number of DB plans now more fully funded. We're able to offer them liability based fixed incomes. You can look at what we do in high yield in global bonds in munis. It's really a breadth of capability in fixed income and we're seeing demand grow in all of those sectors. I appreciate. Thanks. Jenny, maybe I keep it at the high level because look the margin compression is impossible to manage when the market drops as much as it did. Again, as you think rolling forward. We got the benefit of the market lift in the fourth quarter and early this year. Just curious on how you're thinking about what you do actively and proactively in 2023 and where you think we can get to in a quot normal backdrop if there's such a thing. Sorry. Are you asking in the sense of what? M&A, in the sense of expense? I apologize. Yeah. I'm really talking about the adjusted margin and expenses, just, you know, expenses up revenues down. It's hard to do in the short term when the markets drop. How you're approaching that margin or is that an outcome? In other words, do you manage towards it or is it an outcome of the environment? I don't think we manage towards margin. I'll let Matt jump in on this. You're absolutely right. I mean, this is one of those businesses where you get a disproportionate benefit to markets going on the upside because then your margins can expand, and then you're slammed on the downside because you can't possibly adjust your expenses quickly enough. I think the good news is the work we've been doing, part of it is just when you do the amount of M&A we do, you're naturally kind of reinventing how you work and figuring out where you can take out costs. You know, we've been able to absorb a lot of the expenses that we've had in the M&A. Matt, you wanna talk about kind of expectations on margins going forward based on where the market is? Yeah. I mean, just say a few things on that, and I'm happy to provide a guide. Maybe that would be another question that will come up. you know, generally speaking, you know, 35%-40% of our adjusted expense base as we communicated in the past is variable in nature with the market and performance. We're always very much looking at the other 60%-65% of our expense base to see if we can be more efficient and effective in particular in a difficult environment. Frankly, some of the transactions we've done on the M&A side have prompted further reviews of those sorts of activities. We're very active around that. you know, in the down market, as you alluded to Glenn, that we've experienced. It takes some time for carefully considered adjustments to keep up with revenue declines while making sure that we remain competitive in terms of compensation and investing in the business. We've done both of those things, competitive in comp, and we continue to invest in the business in a significant way in our opinion. We've also taken or in the process of taking, you know, significant action across the business to make sure that we're being disciplined and continue to be disciplined with our expenses. We paused, you know, non-essential hiring. We've just completed a voluntary buyout process, excluding our investment staff. We've got an execution plan in place to introduce additional operational efficiencies across the firm. You know, as you know, in the last three years. In addition to savings from a merger transaction, you know, we've already outsourced operational activity that's created efficiencies for our funds first and foremost, but have also lowered future CapEx expenditures for our firm, while frankly also simplifying our company operations. What this has enabled us to do is to continue to invest heavily in the business where we need to in the areas of growth that we've talked a lot about. At the same time, it's also enabled us to keep our expenses very much in check, including the margin. Okey,thank you for all that, Matt and Jenny. Thanks. Thank you. Your next question comes from the line of Kenneth Worthington from JP Morgan. Your line is now open. Hi. Good morning. Thanks for taking the question. Jenny Johnson, you mentioned fixed income performance has really improved. Is Q1 of great performance enough given the more positive backdrop for fixed income and credit? What is the risk that there's a lot of money movement in the industry in fixed income for 2023, and Franklin misses it due to weaker performance from last year? Well, again, I mean, you know, you have Core Bond, which was the net flows of, I think, of $1.5 billion this quarter. And, you know, Core Plus is one of our top-selling selling funds. Even though it's still in net outflows, it's dramatically improved in outflows. You know f, Templeton Global Bond I mean, it's amazing when you look at that. As Adam mentioned, it is beating, you know, It's benchmark and peers in all four time periods. It's a, you know, a pretty massive turnaround. I think it's outperforming its benchmark by 1,200 basis points for the quarter, which, you know, you carry that back. You always Performance is always going to predict the future. If you look at that 87 of 134 fixed income composites, this is, you know, across the firm, in the one, three, five, and 10-year periods is only underperforming in one period. We actually think we're incredibly well-positioned. Again, as I mentioned earlier, the diversification of the excess returns between Brandywine, Franklin and Western gives people, you know, a chance to frankly hedge themselves within our own enterprise. If they have a view, you know, can express it with one of our managers. You know, as we've said, that Western has been a little bit more, you know, viewing that I think that rates will probably decline maybe towards the end of year, which the Franklin side probably would say it's more like in 2024. The key is that I think we have great opportunities wherever you wanna be in the fixed income, and we think that people, now that you can get actual returns in fixed income, you're gonna see more allocations there. Great. Yeah. Sorry, that's not just the public markets, that's the private markets also. Benefit Street Partners, Alcentra. Right. Right. They've got some very strong performance and interesting funds and, both in demand. Great. Thank you. Sorry, Adam, I think you had something. Yeah. I was just gonna say, we've seen clients build multi-fixed income sleeves with different Franklin components. Oftentimes that's adding additional assets because they see how uncorrelated the various strategies are with each other. Thank you. Your next question comes from the line of Alexander Blostein from Goldman Sachs. Your line is now open. Hey, good morning, everybody. Thanks for the question. I was hoping we can dig into your alts franchise for a couple of minutes. If we look at the AUM excluding Alcentra this quarter, AUM seems to be kind of flat, actually down a little bit sequentially. You know, so I'm just curious what's upsetting sort of the good fundraising momentum that you mentioned. I know the convention over AUM is not the same as fee-paying AUM, so maybe it just kinda helps unpack what fee-paying AUM has done over the last couple of quarters, what it is now, and what are the drivers of fee-paying AUM in alts over the next several quarters. Matt, do you wanna take the fee-paying AUM. Yeah, I mean, the core of the question and then Jenny and Adam, you should add some more is the outflows and the softness that we've experienced in alternatives, Alex, is driven by the liquid alts area of the firm. It's not our primary kind of private market specialist investment managers in BSP, Clarion Partners, and Lexington Partners have all experienced positive flows and organic growth. I think what you're referring to is the overall number when you exclude Alcentra, where that is, it's slightly negative. That's driven by outflows and softness in both performance and flows on the liquid alts side. Yeah. That would be K2 and Western Macro Ops would be the two areas that you're seeing. Everything else has actually grown. The Lexington, Benefit Street Partners, and Clarion have all grown. Yep. And can you help us really just break down, you know, fee-paying AUM, kinda what's liquid versus what's illiquid, and as you sort of think about the pipeline of opportunities on the more private side of things. It would be helpful just to get a little more granularity. For instance, like the Lexington, you know, $12.5 billion or $12.8 billion fundraise, is it already all in the fee-paying AUM number, and is it a management fee, or is that gonna turn on once the fund is closing? Just a little more granularity there would be helpful. Yeah, the Lexington fund that's being... Oh, go ahead, Terry. Go ahead. Go ahead, Matt. Go. I was gonna say, the Lexington fund that's being raised so far, that's all fee paying, Alex. It's the future raise that they're continuing to work on that isn't yet included. The number that we put into the executive commentary is included. Basically, when you ask for liquid versus illiquid or tied up, I'm assuming you're talking about tied up assets. Essentially, most of BSP, Clarion Partners and Lexington Partners are all long-term tied up assets. Obviously, K2 Advisors has, you know, they're liquid alts, so those have more flexibility and you see that in redemption numbers, as well as Macro Ops. Got it. Thank you. Maybe just for a quick follow-up. I was hoping you guys could hit on the institutional pipeline. Very nice to see an improvement sequentially. Can you talk to the fee rate on the overall institutional pipeline and the timing of conversions as you expect it today? Yeah, I would say that the timing is gonna be typical of what we've seen in the past. I think it's usually about half of that pipeline or so converts in a quarter. I wouldn't see a real change in that. In terms of the fee rate, you know, we tend to have scaled fee schedules. When you have larger mandates, those price a little cheaper than smaller mandates. We have a big chunky one in there right now. In general, I don't see that the fees we've been charging on institutional asset management changing all that much quarter-over-quarter. Great. Thanks so much. Your next question comes from the line of William Katz from Credit Suisse. Your line is now open. Yeah, thanks so much. I was wondering if we could just talk a little bit about where you see the exit base fee rate at the end of the year versus what you sort of reported. As you think about your commentary about sort of money continuing to go into institutional cash management and some of these larger fixed income mandates, how does that sort of play off against what's happening on the alternative side? Yeah. Hey, Will. On the fee rate, we expect it to remain around 39 basis points, and it may be slightly higher than that for the year as a whole. That's where we expect it to be. As we've discussed in the past, and you know this well, that, you know, the upward pressure on the fee rate is if we are more successful in expanding our alternative asset business and if equities continue to come back, that pushes up. If we get this continued flow into money market funds and broader fixed income on the institutional side in particular, that could push the fee rate down. As we've modeled that and looked at the mix of our business, we think that 39 basis points excluding performance fees, is a very reasonable guide for the AFR. Okay. Thank you. As a follow-up, I was wondering, Matt, if you could talk a little bit about, maybe update us on expenses and how to think about maybe the run rate numbers. A couple variables looking at the quarter, sort of unpack the $37 million on the deferred comp side. Did that pull forward? Sure ... expenses? Your guidance last quarter was much more elevated to some of the non-comp versus what you reported. Could you talk a little bit about, you know, any timing issues there or how to think about the rest of the year? Thank you. Thanks. Thanks, Will. There was some movement with respect to some of the numbers in the different components from Q1 to another. What I'll do is I'll walk through where we see the Q2 2023 in terms of different components, and then I'll give you a high level of where we think we're gonna be for the entire year also, which hopefully will be helpful for modeling purposes. I already mentioned to you about the 39 basis points for the effective fee rate. That's where we see things remaining in the next quarter. All these numbers obviously are inclusive of continuing to invest in the franchise and a full quarter of Alcentra. Last quarter was just two months. This quarter, of course, it'll be the full three months. For comp and benefits, assuming $50 million of performance fees, and I'm happy to answer a separate performance fee question. Assuming $50 million per quarter for performance fees, the comp and benefits should be back down to between $700 million and $710 million. This is inclusive of salary increases and the 401(k) and health plan resets. Again, comp and benefits, $700 million-$710 million. We expect IS&T to be between $115 million and $120 million, so it's relatively flat. We expect occupancy to be around $60 million, relatively flat, and this is inclusive of continued normalization of return to office that we're seeing on a global level. G&A, we guide to a high $140 million, so $147 million, $148 million, something in that area. This is inclusive of our estimate of where we expect placement fees to be and also reflects continued normalization of T&E expenses, which we put in the $50 million-$20 million per quarter zone. We expect the tax rate to remain in the 25%-27% area. If you think about annual guidance, again, inclusive of continued important investments in our organic growth strategies. It's obviously still pretty early in the year and we're experiencing, you know, fighting market uncertainty as we've all been talking about. All else remaining equal, despite the improved market conditions in the quarter, which has been somewhat of a surprise, I think, to us all, we're gonna stay with the annual guidance that I provided last quarter, which is for the year adjusted operating expenses between $3.95 billion and $4 billion. We'll probably be on the higher end of that, frankly, because of where markets have gone to over the last month or so. We're keeping the guide between $3.95 billion and $4 billion, excluding performance fees, performance fee compensation. Just a reminder that this includes a full year of Lexington. Last year's numbers was only six months. It's an additional six months of Lexington Partners, plus an 11 month of Alcentra as we closed on November one, and our fiscal year end is 9/30. On a net basis our expenses whilst remaining equal, are projected to be lower than last year taking into account the Lexington and Alcentra additions. Lower by, you know, low single digits, 2%-3%, something in that area. Thank you. Your next question comes from the line of Brennan Hawken from UBS. Your line is now open. Thanks for taking my question. Thinking about what drove the variance, Matthew, to the fee rate last quarter, you know, what do you think caused that to work out to be different than you had expected and a little bit lower? How should we think about potentially those factors playing into the outlook for the fee rate to be stable at 39? We decided to, or that our partners at Lexington Partners decided to hold off on a closing, from what they were expecting to do a little bit more in December, and they decided to hold off until this quarter that we're in now. That was probably something like a 0.4 basis point difference. Product mix was something like a 0.3 difference from where we were thinking that we could be on the high end of the 39. I think I'd said we expect to be more in the mid thirty-nines. It could have been as high as 39.7 or eight or something like that. Could have been as low as 39, and I sort of guided in the middle of that. We ended up being a bit low because of those two things. The reason for the increase in the FR from 38.8 to 39 was because of we increased alternatives. We added Alcentra. That probably added something like 0.3 basis points. As we've mentioned, we added quite significant money market assets, which is not a really low fee by the way, but it's obviously a lower fee than alternative assets is probably something like 0.1 or 0.05 of the difference. The reason why we feel comfortable with 39 is when we roll the business forward and we look at the projections for our alternative asset business, reasonable market assumptions around equity and even with the significant opportunities in fixed income, one is neatly sort of offsetting the other and we come out to around 39 basis points. We think that's a reasonable guide. Okay. Thank you. Appreciate that, you know, forward-looking comments on fee rates challenging. Thanks for that additional color. That's helpful. No problem. When we think about You guys have spoken a lot about the bond outlook and the increased interest. That's, it's all very, very helpful context. One of the components of concern that I hear from investors is the deterioration that we saw last year in Western's performance track record. Can you speak to whether or not this interest is pertaining to some of those strategies that do tend to be larger that has fallen on to tougher times on the performance end of things? Is it into other products or is the interest happening despite that setback in performance because there's a focus on different, you know, sort of time frames or whatnot? Any additional color would be great. Yeah, I mean, I think the message that we're given is, there's a lot of interest in Western. I mean, their Core Bond and Core Bond Plus are some of our biggest grossing, sales funds. Core Bond, you know, netted $1.5 billion this quarter. Brennan, I think we feel really good about Western, and the flows there. Excellent. Yeah, I would say that also Core Plus is still our biggest selling fund, right? Right. They had some performance challenges, but clients stuck with them. They've been doing this for a long time. Again, 89% of their AUM outperformed for the quarter. Sorry, I was on mute. The other thing I was gonna add to that is, again, maybe it's an obvious statement, but on the institutional side in particular, you know, investors expect to have a consistent process, and a view from a portfolio management perspective. Western is stuck to, you know, what they said they were gonna do. This is the outcome from that. But we have a very broad range, as Jenny mentioned, of other views internally. We have a lot of fixed income opportunities. Whether one works well or not, then there's others that will offset that. You know, a lot of opportunities across the franchise, both public and private markets. Western Asset is building significantly as we speak. Right. Thanks for that. Your next question comes from the line of Craig Siegenthaler from Bank of America. Your line is now open. Good morning, Jenny, Matt. Hope you're both doing well. Good morning. Yep. My question is on retail alts. Many pure alt firms have been building out their retail distribution efforts pretty aggressively since 2020. Franklin has always had a very strong retail effort going back kinda more than 20 years. I wanted to hear you articulate how you're using your global retail distribution really as an advantage for your alt affiliates like Clarion, Lexington, Benefit Street, and also how the affiliates are also leveraging their own local sales teams versus Franklin at the center. I'll start. Adam, why don't you jump in. I think, you know, look, retail alts is really complicated. It's really complicated because you have to start by, one, you have to have the right products that fit in the right vehicles, which is tougher in, you know, these illiquid asset classes. You have to educate and convince the, you know, the gatekeepers essentially at the distributors. You have to educate your entire sales force to be able to understand it. It is a different sale than let's say a traditional mutual fund. You have to be part of educating financial advisors on why this particular product with its characteristics makes sense in a portfolio. Unlike an institution, I always say that one of the things I think many of the alts providers who sold historically into institutional channels is you just have to, you know, convince an institution why this fits in. A financial advisor has to understand every end client's liquidity needs, which makes it really tough at the tip of the spear. The good news for us is we have very good product offerings now with all of our managers between, you know, BSP has multiple products with their BDCs and their interval funds, you know, Clarion with their CP Reef and their opportunity zone. We already You know, K2 has quite a few products in the liquid alt space. We actually also, you know, have. Then Lexington is now just getting launched on iCapital. We've been able to get quite a few products now on CAIS and iCapital, which is really important for the RIA channel so that they can handle the paperwork and the follow-up, capital calls, which is one of the great pain points for advisors. When we looked internally, it was clear to us that you couldn't have a wholesaler necessarily take it all the way to the end sale. We've created, we've talked about it's been, you know, it's probably been six months. It's kind of joint venture between our alternatives teams and our distribution team, where we are hiring specialists to support the traditional distribution on the retail channel or the wealth channel to be able to, you know, drive that very end sale. You know, we've been in a phase of doing a lot of hiring there. I can tell you that we feel good about the traction we're getting. You know, Adam, you wanna add anything more to that? Well, you took most of it, Jenny. What I would say is that on top of that, this is a great example of where we're able to use our unique structure in terms of brand. Our alternative firms have great brands in the institutional are less known in the wealth channel. We're still really putting the brands forward, the BSP, the Lexingtons, the Clarions in the institutional channel. When we go to market in the wealth channels, we're going to market as alternatives by Franklin Templeton. That is really playing off of the brand name that resonates so well in those channels. Again, it's another place where we're using our generalist specialist model, so that where our salespeople who have long-standing relationships and significant AUM in the wealth channel, they're going in as the lead, but they're introducing our alternative specialists, which we've built out. It's over 35 people now. And those people are just focused on the wealth channel. The other thing, I would add to that is that we've invested really heavily in education because we think that the first way to get growth in the channel is product development, having the right products and the right wrappers. Soon after that, it's building education so advisors understand how to use these products. After that, it's sales, and that's where we have the alternative specialists working with our field force in concert with each other. I'll just add one other thing from a finance perspective, for what it's worth, is this is not a short-term project or something like that internally. This is a very long-term, very strategic decision that we've made to invest in this separate group, basically, that's between two other major areas of the firm that requires its own separate marketing, sales, product strategy, education, as Jenny mentioned. This is a very expensive endeavor that we've thought through very carefully, and we justified it by the fact that we have acquired leading businesses in the alternative markets, alternative asset markets that we think long term. Are highly interesting and applicable to the broader markets. Just as a reminder, we acquired these businesses because they had their own institutional growth. What we're talking about here on top of that is additional growth in the long term that we think we can capitalize upon. As a mark of progress, we are currently in market with Clarion, with BSP, with Lexington, and our venture capital group. All of them in the wealth channel are actively raising assets. Great, guys. Thank you for the very comprehensive response there. I have a follow-up, and it's more of a CFO type question for Matt. But I wanted to get a little more color on your alt net flow definition in the $2.4 billion that you highlighted in the quarter. Is the inflow the initial sale, or is it when the Cs actually turn on with the product? Then also, do you include realizations in the outflow, or are they included in the market appreciation other line of the AUM roll-forward? No. The realizations are included in other market, and they're not particularly material for us, which is why we, why we do it that way. As we continue to expand our alternative asset business, we continue to review that. I don't actually know off the top of my head on the $2.4 billion of positive net inflow, what is fee paying. It's probably 80% of it, but we'll come back to you on that specifically. I'm pretty sure it's like 80%, something like that. Excellent. Thank you, Matthew. Thanks, Greg. Your next question comes from the line of Daniel Fannon from Jefferies. Your line is now open. Thanks. Good morning. Wanted to have another question on fixed income and understanding or acknowledging your comments on Western and those funds still being on the gross sales side, quite strong. If I look at gross sales since you've owned Legg Mason, this was the second lowest quarter for gross sales. Maybe talk about where you're seeing a detraction in gross sales outside of maybe the Core and Core Plus. Are you speaking specifically just fixed income or equities as well? Just fixed income. Fixed income, this was the second lowest gross sales number since you've owned Legg Mason. We've already talked about Western, so I assume there's something else. Yeah. That's maybe having some slowdown. Well, what I would say is that if you take a look at the, where the yield curve is right now and look at the shape of it and look how much you can make on the short end, and it's a record quarter for us in cash management. A lot of that really is just, I think a temporary phenomenon where fixed income investors are able to park money on the short end, get a pretty attractive yield and wait for the right entry point. Munis, we're getting a good traction in munis. In the SMA channel, we have some muni ladders that are very successful for us. I mean, actually from a diversification, 11 of our top 20 net inflows are outside our largest 20 funds. You know, it's actually pretty broad diversification. U.S. income, you know, some of the multi-assets have components in them. Obviously, they're fixed income that are getting flows, too. Okay. Then just thinking about performance fees, I know obviously very hard to predict, but it seems like you are seeing redemptions in your liquid strategies. Maybe get a sense of, you know, kind of where performance sits broadly within the alternative universe and how we should, you know, I guess maybe performance fee eligible AUM today versus a year ago, high water marks, other kind of maybe numbers or things you can put around to give a sense of this year's outlook for performance fees maybe versus last year or other time periods. Thanks, Dan. Performance fees, as you know, as you just said, you know, difficult to predict. Given the strong performance in related funds, and we do have strong performance, I think literally, I mean, I think it's in 90% of our alternative asset funds are in the area where they're outperforming or in strong performance territory, let's say, in the performance fee zone. You know, we expect to continue earning performance fees on a fairly consistent basis at this point. That's why we've guided to $50 million per quarter up from, you may remember, you know, several quarters ago, we used to guide to $10 million-$25 million or something like that's now up to $50 million per quarter. We think that we can achieve that on a fairly consistent level. There are, however, as you allude to, there's some episodic characteristics within performance fees related to time and redemption type activities. For example, in the last quarter that we reported, I highlighted, I believe, on the call that we had a redemption that led to a $55 million additional performance fee for the quarter out of the Clarion. You know, our guide is gonna remain at $50 million. All I'd say is that we have based on our performance and our mix of assets and the time horizon with the funds, you know, we have potential to exceed that as we continue to grow our alternative asset business. I'd certainly say forward-looking performance is looking strong, both an absolute and relative basis. Now we've expanded our alternatives significantly. It's the reason why we've guided higher to $50 million per quarter. As you know, last year we had $500 million in performance fees. Yeah, it shows what the potential is. Again, we think $50 is the right guide for that per quarter. Thank you. Thanks, Dan. Your next question comes from the line of Patrick Davitt from Autonomous Research. Your line is now open. Hey, good morning, everyone. I just have one kind of broader philosophical question. You're obviously getting really good traction with your ETF suite, news flow kind of suggests that you've been more active converting mutual funds to ETFs than some others. Obviously bond ETFs appear to be getting a lot more traction over the last year or so. Could you speak to your willingness to get more aggressive with ETF conversions for some of your more larger strategies? What is the debate kind of for and against going down that road? First of all, you know, we, we're really proud of our ETF franchise and, you know, the, the team that we have, you know, they're all very experienced. They were, you know, originally with BGI back then and, you know, we've launched a suite. Today, I think at the end of the quarter, we announced it was about $13.3 billion in ETFs. We had 44% were active, 30% passive, and 26% smart beta. We were really one of the first multi-factor smart beta managers. In this quarter, even though, you know, on $13.3 billion in AUM, we had $1 billion in net sales. Clearly one of the fastest-growing. Of that, $200 million was essentially a conversion from mutual funds. The other $800 million came from actual sales globally, so U.S., Europe, Canada, Australia. What we do is we'll look at a strategy and, you know, we consistently hear that distributors don't particularly want an ETF and a mutual fund to be exactly the same because that can cause suitability issues. You know, you have to be really careful about differentiating the ETF and the mutual fund. In the case of the two that we converted, we thought they were really well-positioned funds, but probably in the not getting traction in that channel. Many advisors sell just ETFs, so they won't sell a mutual fund. In order to get traction with those advisors, you actually have to have ETFs. You know, we're always looking at our lineup and deciding whether or not it makes sense to do a conversion. You know, there's a little bit of complexities in doing a conversion, because sometimes the existing fund holders may not be able to, you know, wanna hold a ETF. You have to go through that process. Anywhere where we think there's, a well-performing but not getting traction mutual fund, we will consider whether it should be converted into an ETF. The only add I would have to that is we have to look at who holds the mutual fund to the extent, for instance, that it has a large retirement or 401(k) holding. That can sometimes make the conversion a little more complicated. As Jenny said, our ETF strategy, I think, is pretty differentiated with the 44% in active. It's also global. That's the other thing I would add. When we look at that billion-dollar flow, about half of that came from outside of the U.S. We're also willing to put differentiated asset classes like our Infrastructure Income into an ETF. I think that's a little different. The final piece, I would add is that even when we're in passive, which is the minority of our ETFs, they're in niches where we think we can be highly cost competitive and differentiated, like single country ETFs. I think the other thing I'd add, I think we put this into the prepared remarks, but it's not insignificant point that we've reorganized this group in ETFs to be more focused with their own sales effort embedded within the team. It's similar, frankly, to what Jenny has reorganized around our multi-asset solutions area. These are the areas where we are heavily investing with resources and focus, as opposed to them being part of a very large group that's attempting to do lots of different things. We're seeing some green shoots from that from that reorganization work and focus across the franchise. I point out, you know, both multi-asset solutions and the ETFs in that regard. Thank you. Thank you. Your next question comes from the line of Michael Brown from KBW. Your line is now open. Great. Hi, good morning. Good morning. I wanted to ask on. Good morning. I wanted to ask on real estate. With Clarion's, just over $80 billion or $83 billion or so, you know, there's clearly some challenges facing the industry. Can you just provide us with an update on what you're seeing from this asset class and how you think investor sentiment could progress from here? If, if possible, could you just touch on how much that contributes to performance fees and other revenue? Yeah. I'll take the first part of that question. Matt, I'll have you touch the performance fees. Remember Clarion has primarily been an institutional manager, so it's only been recently that we've brought them into the wealth and retail channel. You know, with respect to that, it's a very small CP reef. It's a small fund that is growing quickly, and there's been minimal redemption requests there. From the institutional side, first of all, Clarion's, you know, real estate portfolios have focused on industrial, multifamily, life sciences. You know, self-storage, that's 85% of their portfolios, and those have held up incredibly well. As a matter of fact, I think their performance has only dropped about 1.5%. With respect to redemption queues, you have seen them move from, you know, positive queues to now negative requests. In those, you know, they're not as easy for institutional clients, there's a real recognition that you don't wanna hurt the value of the portfolio by creating, you know, false liquidity. They actually can choose whether or not they wanna meet any of those redemption requests. On average, you know, they target to try to meet about, you know, 10% of the redemption queue, and that's often about 5%-6% of a NAV per quarter. So it's very different than the issues that you have in the wealth channel. Again, they're really new to that wealth channel. You know, the CP Reef, I think is structured very similar to BREIT as far as the, you know, kind of, interval nature of those redemptions. We think that's the right way to do it for that channel. Again, their clients today are really primarily institutional clients. Sorry, the redemption queues mostly have been. It had not been performance issues because they've done very, very well in performance. It's been the fact that other parts of the institutional clients' portfolios haven't performed well, and they've needed to rebalance because now they're over weighted on real estate. Matt, you wanna touch on the performance piece? Yeah, will do. Thanks, Jenny. One very important correction, Jenny. Sorry to correct you, but one very important correction is that when Jenny mentioned about, you know, basically, the 10% of the queue being paid out, that doesn't translate into 5%-6% of NAV per quarter. It's 5%-6% of NAV per annum. That's for the year. Just wanna make sure that's very clear. Okay, that's of their choice. Just to be clear, as Jenny also mentioned, there isn't any forced liquidation in an industry like this where, you know, wouldn't necessarily be the most productive for the portfolios or for the investors. In terms of performance fees, yeah, frankly, you know, Clarion is quite significantly above the threshold. we would be surprised if we didn't see continued performance fees being paid on, you know, a meaningful portion of Clarion funds over the next, you know, year or plus. Your next question comes from the line of Michael Cyprys from Morgan Stanley. Your line is now open. Hey, good morning. Thanks for squeezing me in. Matt, question for you. Wanted to come back to expenses. Hear you on a net basis that it's about 2%-3% lower. I was hoping you might be able to elaborate on how you're able to achieve that. What would you say are the top 3-5 areas that are most meaningful in driving that decline? Do you view this as a one year efficiency drive, or would you envision limited to declining expenses as you look out beyond this year? I think, yeah, we certainly look at it, these expenses being structural expenses beyond the year. Obviously, there's always a portion of variable expenses you expect to come down as a function of the market, and we're very disciplined around that. Almost a mix of those two things. Because we've been through, you know, a meaningful merger involving hundreds of millions of dollars of expense reductions and efficiencies, it basically forces you to look very carefully at all of the operation. Look, we've doubled the size of our company from an assets under management perspective. We're much more diversified across the franchise. Our operation is therefore quite a bit more complicated. At the same time, there's some interesting synergistic work that can be done to gain leverage from having that type of operational expertise across the franchise. We also are very fortunate to have centers of excellence in Hyderabad and in Poznań, in Poland, and we intend to further capitalize on the fact that we've been in those places for many, many years. It's not a new thing for us to have those centers of excellence, so we're very focused on that. It's really a combination of being obviously in a difficult market, being more disciplined around who do we really need to hire, who do we really need to replace when we have departures. It's executing upon the voluntary buyout and reducing layers in the organization and expanding and analyzing, you know, span and layers of control. It's the execution plan around our transactions where we've really been able to take more costs out than we anticipated, and a lot of that's gone to the margin and given us margin expansion opportunities on the upside, but also reasonable amounts gone into investing in the business. We're always careful to balance getting the margin right and managing to keep investing in the business. We've also got While we've done the largest outsourcing already on the operational side with Fund Administration and Transfer Agency, the other big project, for example, we're looking at across the firm now is our investment technology operation. That's a really major one, multi-year project. All of our specialist investment managers are on board with this. We believe that having a consistent system and vendor across the firm makes a ton of sense. We can have specializations still in the individual groups, but it's things like this that makes a material difference in how efficient we are, how effective we are, and candidly, how we work together across the company. This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin Resources' President and CEO, for final comments. Okay, well, I just, you know, wanna thank everybody for participating in today's call and, once again would like to thank our employees for their hard work and dedication, and we look forward to speaking to all of you again next quarter. Thank you. This concludes today's conference call. You may now disconnect. Bye, guys.