Good morning. Welcome to Franklin Resources Earnings Conference Call for the quarter ended March 31st, 2023. Hello, my name is Lara, and I will be your call operator today. As a reminder, this conference is being recorded, and at this time all participants are in 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, Inc., 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. 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 second fiscal quarter of 2023. As usual, I'm joined by Matthew Nicholls, our CFO and COO, and Adam Spector, our Head of Global Distribution. Despite a difficult market backdrop exacerbated by stress in the regional banking sector, we continue to see positive momentum across our business in terms of long-term flow trends, relative investment performance, diversification by product and vehicle and financial results. Market dislocations often result in investment opportunities for skilled active investors. In this regard, our investment performance continued to improve across asset classes. This quarter, three of our four asset classes, fixed income, multi-asset and alternatives, generated positive net flows. We also saw continued progress in ETFs and Canvas, our custom indexing solution platform. Flow trends improved across all geographies, with our Asia Pacific region reporting positive long-term net flows in the quarter. This prolonged period of heightened market volatility affirms the importance of the investments we've made to diversify our business and better serve our clients, all in an effort to offer more choice and help them achieve long-term financial goals, no matter where we are in the economic cycle. As to the specific numbers, starting first with flows. Long-term net outflows improved from the prior quarter to $3.7 billion, compared to net outflows of $10.9 billion in the prior quarter. Importantly, as mentioned, fixed income, multi-asset and alternatives all generated positive net flows. Fixed income generated net inflows of $1.8 billion. As we've said on previous calls, we continue to benefit from our broad range of fixed income strategies with non-correlated investment philosophies and that trend continued this quarter. Client interest continued in U.S. taxable corporate, municipal and global opportunistic strategies, which were all net flow positive. Multi-asset net inflows were $1.5 billion, driven by Franklin Income Fund, Fiduciary Trust International's high net worth business and Canvas. Canvas has achieved net inflows each quarter since the platform launched in September 2019, and AUM increased over 13% in the quarter. Alternative net inflows were $1.3 billion, driven by growth into private market strategies which were partially offset by outflows in liquid alternative strategies. Benefit Street Partners, Clarion Partners and Lexington Partners each had net inflows with a combined total of $1.5 billion. Equity net outflows were $8.3 billion, reflecting continued risk off sentiment for many investors. We did see positive net flows into ETFs, global equity and small cap growth equity strategies. ETFs had net inflows of $1 billion and now total approximately $15 billion in AUM. This quarter we launched a variant of our flagship Franklin Income Fund in a multi-asset active ETF vehicle. Cash management, which is excluded from long-term AUM and flows, had net outflows of $4.3 billion in the quarter and included episodic redemptions of approximately $7.5 billion from a sweep program associated with a regional bank. Our regionally focused sales model has continued to gain traction, and this quarter we experienced improving flow trends across all geographies. I already mentioned the positive long term net flows in the Asia-Pacific region, which were driven by Australia, Korea and Japan. Our won but not funded institutional pipeline was $15.4 billion and reflected the previously disclosed funding of a $7.5 billion institutional fixed income mandate. Given the uncertain market environment, institutional investors continue to be more defensive with a focus on diversification and liquidity. This resulted in less money in motion, particularly in March. Turning now to investment performance. In this environment, in particular, it's encouraging to see that the sound long-term investment thesis of many of our largest strategies are playing out and performance generally improved across all time periods. This quarter, 64%, 63%, 61%, and 66% of our strategy composite AUM outperformed their respective benchmarks on a one, three, five, and ten-year basis. The one-year period improved primarily due to certain ClearBridge and Franklin Mutual Series Equity strategies. We're seeing improvement in the longer-term performance of Western Asset, U.S. taxable fixed income strategies. On the mutual fund side, 67%, 53%, 63%, and 56% of our AUM outperformed their peers on a one, three, five, and 10-year basis. Equity-related products are leading the increase in relative performance. For the 1-year period, specifically, ClearBridge, Templeton Global Equity Group, and Franklin Equity Group outperformed in March. Half of mutual fund AUM was in funds rated four or five-star by Morningstar. As I mentioned earlier, over the past several years, we have further diversified our business, and we believe our broad range of investment philosophies and processes differentiate our specialist investment managers from each other and gives us an ability to build the best outcomes for our clients. In March, we proactively engaged with clients to help them navigate financial uncertainty created by stress in the regional banking sector. The Franklin Templeton Institute provided timely updates to our clients through webinars, articles, and video posts. Clients were particularly interested in the numerous panels comprised of our specialist investment managers who offered investment perspectives across asset classes, including venture capital, alternative credit, and traditional fixed income. We continue to see client demand in fixed income-oriented and dividend-yielding products. In addition, as a result of recent market dislocations, alternative capabilities such as secondary private equity, private credit, and real estate continue to be of client interest. Touching briefly on our financial results, ending AUM was $1.42 trillion, an increase of 2.5% from the prior quarter, primarily due to market appreciation and average AUM increased 5% to $1.4 trillion from the prior quarter. While this quarter's adjusted effective fee rate was in line with prior quarter at 39 basis points, adjusted operating revenues of $1.5 billion increased 6% from the prior quarter, driven by higher adjusted performance fees and average AUM, partially offset by two fewer calendar days. Adjusted operating income was $440.2 million, an 11% increase from the prior quarter, and our adjusted operating margin increased to 28.9% compared to 27.5% in the prior quarter. We continue to maintain a strong balance sheet with total cash and investments of $6.8 billion. Let me wrap up by summarizing that we continue to benefit from our diversified business. Our flows and relative investment performance have been steadily improving, and our balance sheet affords us flexibility, including the ability to further expand our capabilities. Our focus remains on delivering better outcomes for our clients. Finally, my admiration and thanks go to the thousands of employees around the globe who represent Franklin Templeton so well. Let's turn over to your questions. Operator. Thank you. If you would like to ask a question, please press star on your telephone keypad. The confirmation tone will indicate your line is in the 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. Your first question comes from the line of Bill Katz from Credit Suisse. Please go ahead. Thank you very much. I appreciate all the extra color in the supplement. Maybe, Jenny, one for you. You sort of mentioned that in your prepared comments and also in the press release that you're sort of positioned to take advantage of some structural growth. I was wondering if you could break that down between maybe organic opportunities where you sort of see the best incremental flows from here and maybe where things are on the inorganic side. Thank you. Yeah. I mean, I think that from the organic side, you know, all flows aren't created equal, right? Anything in the alternatives which continues to be positive for us tends to have much higher fee rate and margin and, we think we have absolutely outstanding managers in that space and have continued to see positive flows there. Fixed income today six out of our 10 top growth strategies are fixed income. three of those are Western. While Western had some performance challenges, actually their six-month numbers are top decile, and they're now very strong. I think one's in three and five and one is in three, five, and 10 in Core Bond and Core Bond Plus. you know, we think there's a secular trend with things like SMA, and Canvas, we think is the best technology out there. Not only are we, you know, consistently gaining flows on the direct indexing side, but we've actually launched some or seeded some active strategies leveraging the Canvas platform. You can imagine you take some of your traditional mutual fund type strategies and be able to launch them with tax efficiency, leveraging the Canvas technology. you know, I'd say on the ETFs, I've been waiting for the hockey stick. I'm hopeful that we're getting there. You know, the $1 billion in flows, it's a strong organic growth rate. You know, The largest percentage of our ETFs is actually active. I think that's about 40% of our ETFs. The flows this quarter were primarily smart beta and passive. You know, almost $900 million or over $900 million of that came from the U.S. RIA channel, which is a pretty new channel for us. We think we're just starting to tap into that space. I would say, you know, multi-asset solutions. We've gained some big wins there, that are coming in actually in this current quarter. We think that there's gonna be continued opportunities. You know, I think that that's, that gives you kind of a picture on the organic side. What we've always said on the M&A side is, look, you know, we're gonna focus on areas where we have product gaps, you know, from the alt space. The only place that we think we'd have a real big product gap is infrastructure. They're hard to buy and very expensive. That anything else on the traditional side would have to include strong distribution capabilities. We're looking to continue to expand distribution. Obviously, the place everybody loves is retirement because retirement is consistent flows. Honestly, it's the best place for mutual funds today. You know, anything we do there would have to have some sort of distribution capability. Finally, you know, I'd mentioned that we've always been a buyer of local asset management because any country that you go into, 80% of flows tend to go to local assets. We always keep our eyes open, particularly in fast-growing countries. Bill, just to add Bill to what Jenny just mentioned. I think we should make clear that our number one priority is organic growth, as Jenny just mentioned, all those things. In certain situations, it simply takes either too long or is frankly impossible to become a leader in an investment category via organic growth. That's why we've done what we've done with Lexington, BSP, Alcentra, Clarion, Canvas, and there's obviously others in there. That's the reason why we've done the M&A that we've done. We concluded it's just too hard to get there, maybe even impossible, frankly, on an organic level. That's helpful, Matt. Just maybe one for you as a follow-up. Last quarter, you kind of gave some guidance on both performance fees and expenses and a fair amount of variability on what actually layered through. I was wondering if you could maybe unpack the big performance fee this quarter, and then how you sort of see some of the expense lines into the new quarter. Thank you. Yeah. Thanks, Bill. Matt, you want to take that? Yeah, I'll take that Jenny, thanks. Firstly on the expenses relative to the guide that we gave last quarter, as hopefully you saw from a G&A occupancy in IS&T, we were very much in line, also EFR was slightly higher, so that was in line. It really came down to comp and benefits being about $50 million higher than we had guided. That was driven by three key things. Fortunately, all of these were driven mostly by better performance. One was $30 million increase in performance fee compensation. Two, about $10 million was higher resets to 401(k) plan, other sort of seasonal compensation related matters. Another $10 million was just the formulaic approach we have to compensation, of which performance of funds are a very important aspect of that formula. That increased by $10 million. That basically explains the difference between where we guided versus where we came out. In terms of where we expect next quarter, we continue to guide the effective fee rate around 39 basis points, so consistent with this quarter, excluding performance fees, just to be clear. From a comp and benefits perspective, assuming we have a performance fee quarter of $50 million, which will continue to be our guide on performance fees, we'd expect comp and benefits to be at $725 million area. IS&T, we'd expect to remain approximately flat at around $120 million. Occupancy in the high $50s, again, approximately flat. G&A, probably in the mid $140s, down from the mid-high $40 guide that we gave last quarter. That does include an assumption of continued higher T&E and slightly higher placement fees. In terms of just performance fees, you know, I know we get this question, and it's very hard to guide on performance fees as we've talked about in previous quarters. You know, given the strong performance in applicable funds, we expect to continue earning performance fees, and that to be quite consistent, but we're gonna keep our guide of $50 million. Obviously, episodic characteristics with performance fees related to both time of investment and redemption activity. In this quarter, for example, we just had another group of customers that hit the five-year performance threshold that triggered a performance fee, an increased performance fee out of Clarion for this quarter, which meant that we came in higher than we had anticipated. That's how we'd guide on performance fees. Thank you both. Thank you. Thank you. Your next question comes from the line of Michael Cyprys from Morgan Stanley. Please go ahead. Hey, good morning. Thanks for taking the question. Wanted to circle back to the OnChain Money Fund announcement that we saw recently. I was hoping you could talk a little about your vision there, the opportunity set that you see with this OnChain Money Fund product, and how you might think about broadening out distribution over time beyond the Benji app to distribute more broadly than that. I guess, do you also view this as a replacement for stable coins? Just curious how you think about that. Okay. Two things. Our On-Chain Money Fund, you know, we worked with the SEC, gosh, it's been a few years now since we started it. A two-year process, ultimately, we built a transfer agency system, as well as a hot and cold storage wallet, to support the On-Chain Money Market Fund. With everything that happened in the regional banking sector, we actually have started to get some flows there, as some of these DAOs or platforms, the blockchain platforms were interested in and needed to move money away from, say, Silicon Valley Bank and other places. Philosophically, they liked the idea of doing it in a blockchain money market fund. Our big announcement this week is that we added what's called cross-chain. For those who don't know much about the crypto space, think about your iPhone and your Android iOS. You know, the applications don't tend to talk to each other. You have the same problem in the blockchain space. When we added Polygon to it, that's a layer two over Ethereum, so that meant businesses that built on the Polygon, which is a lot, now have access to our money market fund. You know, we're sort of initially positioning it in that space, although we think over time, there's a lot of efficiencies in back office that will come out of blockchain, and, we absolutely can see adding other products as well as a global Benji product. Great. Thank you. Just as a follow-up question, it sounds like the overall fee rate guidance, pretty stable, has been stable for a bit, but just big picture, maybe you could talk a little bit about your overall multi-year outlook for pricing across products on your platform. If you look back over the past two years, you know, where would you say pricing has moved the most versus maybe what's held in? What surprised you as you look back? As you look forward, where do you anticipate the most stable versus more movement in pricing as you look out over the next two years? Adam, you wanna take that since you're seeing it on the distribution side? Sure. I think where we've seen the pricing move the most is in the traditional large asset classes, fixed income equity, especially U.S. and fixed income. Those have ground down to a point, but I think they've hopefully hit a bottom here. We also see mandates coming in generally at larger sizes, which has obviously a significant impact on fees. As we see consolidation in the industry, among players, that's impacting things. We think that when our fee rate moves, it tends to be a factor of asset mix as opposed to fee degradation, really, because we're really able to earn significantly more on our alternative assets. When you see the rate move around, that's less our rates degrading and more a shift in the mix. Mike, just longer term, just to add to that, though, what we would expect, and this has been part of our strategy, as you know, is to try and mitigate the any pressure we have in the traditional asset management space around fees and winning, hopefully, larger mandates that have lower fees in the traditional asset management space to supplement that with a growing alternative asset base that tends to be characterized with higher performance fees. So far, that strategy has been playing out quite well for us in the sense that our, you know, overall effective fee rate stayed relatively stable and even to the upside. If we continue with the strategy that we have, adding where we expect winning certain mandates where we expect from the traditional side, we do have a chance over the next several years for the EFR to creep up. Again, as you know, it's highly dependent on what happens in the equity markets in particular. As Adam just mentioned, it's all about mix. If the equity markets go higher and we continue on the path that we're on around building our alternative asset business, and if that's higher and broader fixed income is a little bit lower, for example, or stays flat, then the fee rate will be higher. If it's the other way around, the fee rate will likely be a little bit lower. Again, we've got good hedges in the system for that, are designed to keep the effective fee rate as stable as possible. Yeah. I mean, you guys, and I would just add, you know, there's 16.5 trillion in the fixed income space. Finally, people can allocate to fixed income and actually get a return. You know, you could have a third of your pension fund in fixed income and still hit your 7% target. Honestly, we hope we see a lot more flows there. You know, we've had some hiccups in performance, but that's, you know, working its way out. We'd love to see a lot bigger flows in fixed income, which could affect it. We just happen to have a great, you know, offset with both a strong active equity franchise and the alternatives that we're doing. Super. Thank you very much. Thank you. Your next question comes from the line of Dan Fannon from Jefferies. Please go ahead. Thanks. Good morning. Wanted to follow up on just the alternatives outlook, specifically clarification on Clarion. I think you said the five-year lockup for performance fees. Wondering if that was not a redemption which we saw last year, which triggered a performance fee. Just wanna clarify that, then just talk about the ins and outs at Clarion today and how you see that prospectively looking. Then also maybe more broadly within the context of BSP and Lexington. I know you can't talk specifically about funds in the market, but generally just demand and the fundraising outlook. I'll start and Adam, you and Matt can add. You know, with Clarion, the bulk of the performance fees were actually their normal process of, you know, when clients hit a five-year window, you then, you know, monetize the performance fee. The bulk of that was that as opposed to just redemptions from clients. They have gone from an internal queue to now a, you know, a redemption queue. Clarion's different in that they are not required to redeem like others may be required 5% a quarter. Clarion has a choice because and the institutional clients prefer this. They weigh the client's liquidity versus making sure that they're preserving value in the fund. They meet about 10% of the redemption queue, which I think is annually it's 5%-6% of the NAV. It's important to remember that Clarion has very little exposure to office, which has been the biggest area of pressure in the real estate space. You know, they have been big in industrial and residential and, you know, so their performance is held up. We think, you know, as interest rates calm in the market, you know, we probably we feel like there'll be 1 more raise and then probably sit there, that folks will feel comfortable with the values in real estate and you'll start to see that flip. As far as, you know, all of the alts business, there's a denominator effect with the LPs, right? They've had a reduction in all their liquid assets, and to the extent that they'd like to deploy them, they're actually finding themselves over-allocated in the alt space. It's been harder on the fundraising side. I mean, take private credit, you know, our BSP would tell you that they're seeing the best deals they've seen since the global financial crisis. There's definitely some headwinds in raising money just because of the fact that the LPs are, you know, feel they have an over-allocation to it. Now, Lexington, you know, set out to raise a $15 billion fund. They are the LPs have allowed them to extend it, and they will raise above that. Actually, I'd love to just point out that in the case of Lexington, we believe 10% of that fund will come from the wealth channel. We launched a product with a large partner, and they, you know, said you should be happy with the first fund at about $500 million, and we think that fund will cap out at the cap. We extended it to $1 billion. You know, kinda overall space is that the LPs are finding themselves, you know, over-allocated because, you know, the markets had their liquid assets had been down. As the equity markets improved, you're actually starting to see them being able to deploy more capital. The other thing that's happened is normal, cash flows that come out of things like private equity are down quite a bit, so they haven't been able to fund from their existing alternatives. It's just put them in a tougher spot, but they also recognize it's just a tremendous opportunity right now. Matt, I can see you'd love to say something. Yeah. Thanks, Janet. I mean, in terms of, Dan, the performance fee composition, just to give you some idea and to address your question specifically around Clarion in a second. Out of the performance fees, about 60% of the performance fees are related to quarterly fees, about 10% realization, is about 20% annual. In terms of the five-year threshold point, I know you know this, but just to state the obvious, that obviously the whole client base isn't on one five-year term. You know, there's hundreds of customers that have invested at different points of time, so there's different five-year thresholds that occur all the time. Every quarter, there can be another group of five-year thresholds for the net, which leads to the performance fee threshold being met. Of course, some of those are different than five years. Sometimes you can have different performance thresholds based on different timelines. We just called out the five-year this time because it happens to be, you know, a large portion of the performance fee payout. The final thing I would add on Clarion is that traditionally they really have been focused on the institutional market, but we're starting to see much better flows out of the wealth channel now. CPREIF is now up on 20 different platforms. We're seeing good growth there. Their opportunity zone fund is doing well. BSP is doing well. Jenny spoke about Lexington. This specialized unit we built in the alternatives channel is finally coming online and producing really good results in the wealth channel. Great. Thanks for answering my questions. Thank you. Your next question comes from the line of Brennan Hawken from UBS. Please go ahead. Good morning. Thank you for taking my questions. Good to hear and see further commentary about the build-out of the wealth management alternatives distribution efforts. So curious and also, thanks Jenny for the color about contributions to ton ten at Lexington. You'd flag that in the, in the write-up, so that makes a lot of sense. What's the feedback that you're getting on the team that you've put out there? When you're thinking about benchmarking that effort against competitors that have seen success, you know, how has that process gone, and how much work is there continuing to add to those efforts? Thanks. I'll let Adam take that since it's his team. Yeah. Well, you know what the answer is going to be, Jenny. We're feeling really good about the results we've had out there. All I would say is that when we're in the system, we're getting indications of where they think we should be, and we're exceeding those expectations pretty handily. We're feeling really good about the results. I think the results are driven by a few things. We have a great combination of a strong brand name, a great investment capability, and a specialized distribution force. Those three things have come together in the wealth channel in a way that I don't think other firms can act. We are seeing growth, not only in the wires, but in a number of the independents and regionals as well. Our next effort here is to really take that alternative, specialized approach, and build out both the product set and the sales team outside of the U.S. to tap into wealth channels outside of the U.S. That's the process we're in right now. Great. Thanks for that. I know you touched on this a little bit before, as far as the outlook for Western and flows. You know, when you look at the unfunded mandates, the unfunded pipeline, you know, would you say that there's an orientation to fixed income there? You know, how's the balance look? Then, you know, how active are the RFPs? How active are you on the RFP front for bonds? Thanks. Very active on RFPs for bonds. The good news is where we're seeing the activity is really across the board from high grade credit mandates to high yield, to private credit, to core, to global opportunistic. In all the categories, we're seeing really good growth. When it comes to fixed income, it's crazy that we have 127 composites, but 42 of those are outperforming on the one, three, five and 10. What that means is that we're able to compete in most sectors of fixed income quite well. The pipeline is diversified by asset class at this point. It's not really dominated by fixed income, and in fact, the most significant portion of it currently, I believe, is from our solutions business, which is really coming on quite nicely. Thanks for that color. Thank you. Your next question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead. Good morning, Jenny, Matt. Hope you're both doing well. Morning. Sticking with the last topic of fixed income rebalancings. Given your competitive and leading offerings in traditional fixed income, we wanted to get your perspective on the potential for large rebalancings into bonds, especially now that it looks like we're nearing the end of the Fed's rate hiking cycle. Also, do you have any perspective on the potential inflow mix between active, where you're more competitive, and then passive? Look, I would say, what we've seen on the institutional side is that the institutions have been, you know, staying conservative and waiting for this last probably Fed rate increase, staying short duration and pretty high quality. We're starting to see searches in, you know, more of a risk on. That tells you that they're, one, getting more comfortable with the economic backdrop, and two, that they're starting to feel like we're at the peak of the curve. We think this is just gonna be a massive opportunity on the fixed income side, once people get comfortable that the Fed stops hiking. I think, you know, my view is the Fed will raise and will sit through 2023, probably not have a decrease, in that, people will try to lock in those higher rates. Adam, do you have a sense passive versus active? Not necessarily a huge change in that mix. All I would say is that to the extent that we have continued volatility in rates for a little bit here, active management tends to do a little better in a situation where you have more movement. We certainly see that across the curve. We're seeing really good flows into active. Firstly, I think it's an important time to be active in the fixed income space. This is not a great time to be passive in it, that's just my view. Thank you, Jenny. Just as my follow-up, you know, we saw positive net inflows into APAC. Can you comment on what products and which geographies were driving the net inflows? Sure. You know, Asia was really our strongest market in terms of net. What we've done there really is focus on a few themes. I think we were early in that region in aligning our marketing product and sales all around certain themes, and income has been something that's really been winning for us there. Our oldest fund is the Franklin Income Fund coming up on its 75th anniversary at over $80 billion in its various forms. That's been doing particularly well in Asia. We've also had big institutional wins in fixed income, in equity, and alternatives. It's really been all of the asset classes. I think our Asian colleagues, if you take a look at Australia as an example, that was one of the first markets where we implemented this generalist specialist model, where the local sales team is responsible for knowing the clients really better than anyone else, and then bringing in other members of the Franklin Templeton team. Given the geography there, that was one of the first places we started, and we've seen earlier results there that are pronounced 30 months in a row, positive net flow in Australian retail. Asia has been strong. If you see gross flows, though, obviously the US is dominating there. That's our biggest market by far at about 72%. Got it. Thank you, Adam. Thank you. Your next question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead. Hey, everybody. Good morning. Thanks for the question. Maybe just to stay on the fixed income topic for a second. I hear your point on active versus passive, year-to-date, fixed income ETFs have overwhelmingly gained share versus active products. Is that largely a retail dynamic or were you referring to as largely on the institutional side, where you're starting to see maybe some improvement in active appetite? Curious how your private credit offering fits in within all of that, right? On the one hand, if traditional fixed income strategies continue to get squeezed, you guys have an opportunity to cross-sell into some of the alt managers. How are those kind of separate managers working together to sort of tackle the client from both sides? I'll take the second part of that question. Adam, I'll leave the passive and active to you. You know, honestly, on the private credit side, as I mentioned, you know, the BSP folks would say that they're seeing the best deals since the global financial crisis. This denominator effect is an issue with the LPs. The other side of this is, why are they seeing those deals? They're seeing those deals because banks are just not wanting to lend. While you can look at structured products and syndicated products and say, "Well, you know, those are off the bank's balance sheet," the bank still has to retain a portion of that equity. You're just... Traditionally, it was about 50/50 kind of syndicated and private credit. I think our private credit team would say that they're going to see more coming to private credit and less banks stepping in. I think that changes the dynamic a bit. Having said that, they'll tell you one of the headwinds is you can get secondary You know, you could buy a bond out in the liquid market and get, you know, a 9% return and a high yield. That is a headwind for the private credit today because there isn't as much differentiation between the returns in the private credit side on the existing portfolios as there is in the liquid market. You know, I think that's going to be a headwind for a little while. On the other hand, as you're seeing banks lend less and these guys get to be more, you know, as long as you have a good origination machine in your private credit manager, you're going to get the very good deals, and you're not going to have as much competition. That's why we're very bullish on it, despite a little bit of headwinds today. Adam, I would also say that, you know, it's tough to predict active versus passive. I don't know that we have special insight into that, but we do have insight into demand for active. There's a tremendous amount, and there's plenty for us. That's really across the different asset classes. High yield, we've seen turn around quite nicely. If you get a weakening dollar here, we think our global strategies can do well. We have pension plans that are better funded now, and we have specific strategies designed to help decease those liabilities. Those are all active. We're seeing demand really across every single bit of our active portfolios. If you look at traditionally performant, you know, Western had a rough go of it. They're top decile now over the last six months. After a fall like this, that's typically when they generate their greatest alpha, given that they're a slightly higher data manager. This is probably the best type of environment for them right now. Don't know about passive, but feeling pretty good about the opportunities for active. I got you. Thanks for that. For my follow-up, maybe asking question on the alts business. You guys have strategically tried to build that out over the last couple of years. If we look at AUM, it's been sort of flattish over the last couple of quarters. I know AUM doesn't tell the full picture. Maybe help us break down what the management fee is associated with the private or the alts book for you guys today. How do you see that growing over the next, call it, 12 months based on things where you sort of see a line of sight, whether it's deploying capital on things that have already been raised that will begin earning fees undeployed, or sort of funds that you have coming online over the next couple of quarters? Yeah. Matt, you want to take that? Yeah, sure. Thank, thanks, Jenny. Like maybe just take a bit of a step back and review where we've come from too, Alex, because I think that's important. You know, our alternative asset management fee stream, let's call it, increased from 2021- 2022 by 50%. From 2022- 2023, we expect it to increase by another 30%. Just over 80% of the AUM is fee generating AUM. That creates a sort of a high 50s, mid-50s EFR, obviously the range is very significant. You've got very different businesses within that 80% fee-earning AUM. That as a whole means that our management fee revenue from alternative assets this quarter reached 25% of our overall business. Now obviously that's a function of the traditional business shrinking a little bit, and the market's coming down there and the market's being more stable in alternative assets. It's getting very close to our, you know, one-third, let's call it target that we expect it to have in terms of management fee revenue. If you add performance fees to that, you know, you go from $1.3 -$1.4 billion of management fee revenue, and you know what our performance fees were last year. If we add $few hundred million to that this year, you're getting to the high $1 billions in terms of contribution in revenues. I think that we see a future where that, outside of, you know, additional potential acquisitions where that should grow at an organic growth rate of between 5% and 10%. It would be great if it was 10% or higher, but we're just being conservative in the 5%-10% area. It has actually grown organically by 5%-10% in terms of what we've acquired. The area of shrinkage that we've experienced in the alternative asset AUM, Alex, I think you're referring to, is all on the liquid side of the business. We have a couple of, you know, fairly sizable strategies there that had some performance issues earlier on this year and late last year, and that led to outflows there. Just say overall, we are very much on target in terms of what we expect the alternative asset contribution to be against the overall business, one. two, where we expect the EFR to be and how that helps us hedge the traditional asset management business, where we expect performance fees to be, and where the overall business mix is and what's fee generating and what's not fee generating. Great. Very helpful. Thank you, guys. Thanks, Alex. Thank you. Your next question comes from the line of Ken Worthington from J.P. Morgan. Please go ahead. Hi, good morning, thanks for taking the questions. First on gross inflows into equity funds or the equity business. The gross inflows were soft this quarter. You highlighted some of the areas that are working quite well, ETFs, Global Smart Cap, Small Cap. I mean, what parts of the big business are struggling most here? Where was sort of the delta that you saw this quarter versus last quarter? Like, clearly you mentioned the risk off environment, but where are you seeing the incremental pain today versus what you saw in prior quarters? Yeah. First thing, equities was our softest asset class. I would note that if you take a look at our flows ex-dividends, they were actually up quarter-over-quarter, and our redemptions were down. Some bright news behind the negative net. If you take a look at the numbers behind that, large-cap growth was the area of the equity market that was hit hardest with negative flows over the last several quarters. It's the area where we have the most significant asset base. We're roughly balanced. We have slightly more AUM in growth versus value, but in large-cap growth we have a number of funds. That area was hit hard. Where we see growth is actually, in some of the smaller areas like international and small cap, where we actually had some positive flows. The truth is, though, that those positive flows are in asset classes that have a smaller slice of the pie, which help lead to the negative flows overall. Okay. Thank you. It was a big quarter for money market funds helped by the stress in the banking sector in March. To what extent is Franklin and Western benefiting from this transition from banks to money funds? How is Franklin's cash management business broadly positioned if and as more money comes out of the banks in the future? I guess lastly, you mentioned a one-off outflow as part of a sweep program. Are there more outflows to come from that program or is it sort of like one and done? There could be $2 billion more, you know, potential outflows in that, just because they're still in that regional bank. Otherwise the bulk of it has already, you know, passed through. Now it's about positioning our money markets and, you know, obviously, you know, Western Asset's a behemoth in the space. We are very well positioned for it. Okay, great. Thank you. Thank you. Your next question comes from the line of Glenn Schorr from Evercore. Please go ahead. Hi there. Matt. Hello. I guess you referred to the solutions orientation a few times. I just want to circle back. You know, my feeling is Legg was a work in progress before Franklin, was a work in progress trying to deliver the franchise because of the multi-asset, multi-boutique nature of it. I think Franklin was better at it, you were in the process of smushing them together. You add in a bunch of private markets. My question is, where do you think you're at in terms of being able to deliver large multi-asset mandates? Is that something you're working on, and should we expect to see in the future? Thanks, Matt. That is, as I mentioned, I think that's one of our areas that we think is a big opportunity of growth, and again, you know, our roots with the flagship Franklin Income Fund and being around for 75 years, we think we're pretty good at it. It's been a area of big focus, and actually in April we have a couple of wins in the multi-asset space that came from our solutions group. Right now I don't think we have consistent quarterly flows there, but there's a strong pipeline, and we're starting to get more consistent flows in the space. I would say that, you know, and Adam could probably speak to it since he was CEO at Brandywine at the time. You know, the difference between what Legg was trying to pull together were that those SIMs didn't even talk to each other, let alone, you know, the parent as much. Whereas today, I think there's just a much greater, you know, just the SIMs willing to work with each other and come up with ideas. I mean, discussions between Western and Benefit Street Partners on, you know, joining private credit and liquid credit. You know, our local asset management team that managed Sharia fixed income, reaching out to Benefit Street Partners and doing a Sharia private credit product. I just think that there's... One is they're coming out of not only the multi-asset solutions group who's working with them, but also we're actually finding the investment teams, the very SIMs, are coming up with ideas to work with each other. Absolutely. I think the other nice thing about the solutions business is that we're strong on the institutional side, with large platforms, insurance companies, et cetera. The other nice thing is that through using our technology base through, our Goals Optimization Engine, we're actually able to take asset allocation solutions orientations to the wealth channel, we're seeing a pretty significant pickup there. It's really solutions across the board from wealth to institutional. Thank you all. Thank you. Your next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead. Great, thanks. Good morning, folks. I'll just if I can ask a two-parter in fixed income. You know, maybe switching to the retail public side, if you can characterize, you know, how you're seeing demand form in, you know, the classic Franklin taxable bond franchise, also the global franchise as well, considering, you know, obviously we have much higher rates and the comments you made earlier on the stability of rates. The second part would be on the Western side, if, you know, it's, again, it's good that we're moving into a higher rate backdrop that's more sort of plateauing potentially, and you sound very excited about institutional mandates picking up. I guess how would that fare or, how do you see any kind of risk to future flows if we move into a credit cycle in the later, you know, part of the year, in, say, a recession scenario? That would be more for the Western side. Well, I, as I mentioned, six of our top 10 grossing strategies are all fixed income, and that's a mix of both Franklin, Brandywine and Western. As we've talked about in prior calls, there's very little correlation between how Brandywine's excess returns are as to Western and Franklin. It's nice that we really come at it from a diversified portfolio of investment teams. I'll let Adam talk about kind of the flow thing. I would just comment on the credit cycle. That is where active management makes all the difference. you know, honestly, as we... If we move into kind of a deeper recessionary environment as opposed to a lighter recessionary environment, it's gonna make all the difference that, you know, you had an active approach to your portfolio in fixed income. Adam, you wanna add to the flow? Yeah. When we talk about the traditional Franklin side of things as well, in addition to Western, our global macro performance has turned around. That's an area where we're seeing the story really change, which is very positive. Let's not forget our muni business, which is something like $76 billion. We're seeing strong growth there, and we're seeing placement on more systems. I think both of those as well as Western, Brandywine, and then the private credit thing, all of those are gonna work well. The truth is that you can now actually meet your return assumptions with a significant portion of your assets allocated to bonds. That is the strongest tell we could hope for fixed income. Right. Then just, I guess, where are you seeing the redemptions on the retail fixed income side coming from? Is there any areas that are still sort of pressured? Look, I would say that the two biggest fixed income products are Core and Core Plus. They tend to be the drivers of gross sales as well as the drivers of redemptions, just based on the sheer size. Right. Great. Great. Thanks very much. Thank you. We have a last question coming from the line of Finian O'Shea from Wells Fargo. Please go ahead. Hi, everyone. Good morning. A question on Alcentra. Can you talk about the progress on integration into Benefit Street, if that is complete in your mind? On the product and distribution side for that platform, any color you can provide from early discussions with LPs on their receptivity to do more given its greater scale in capital and origination. Thank you. Yeah. You know, the leadership at BSP is driving, really the, to the extent that there's integration, the integration with Alcentra. We've now gone out and won. First thing you do is you make sure that you retain your key employees. We feel like we've stabilized the team there. We've met with all of their key clients. That's both, the BSP folks going out with the Alcentra folks and meeting with the key clients. We actually. We feel really good about, you know, that first step in making sure there's stabilization. I can tell you that our distribution team in Europe is very excited to have a private credit manager to be able to distribute that, you know, is local European private credit. Again, the private credit market faces a little bit of the headwinds that, you know, we talked about that BSP has faced. There's, you know, in April, we have good CLO progress. I think Alcentra is 49% of our CLO. We, you know, feel good about that. I think, though, that the fact that they're stable and now moving forward is, you know, I think is where we hope they'd be at this point, and I think that's where they are. Thank you. This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson. Sorry. We have one other question that came through on the screen that I have to answer. Can everybody hear me? Selene, can you hear me? Yes. Okay, great. We had a question that was a follow-up on the guidance. I gave quarterly guidance. The question was, how does that impact our annual guidance? We gave an annual guidance range last quarter of $3.95 -$4 billion of adjusted expenses, annual adjusted expenses. I'll just say, obviously, we're only halfway through the year, but all else remaining equal, despite improved market levels, improved flows, improved performance, which push up formulaic compensation, as I referenced on the question from Bill Katz. We're only slightly increasing the upper end of our guidance range to $4.05 billion. The guide would be $3.95 -$4.05 billion for the year. Right now we expect to be on the upper end of that range, excluding performance fees. Thank you for the question. Thank you. Okay. I would now like to turn the call back over to Ms. Jenny Johnson, Franklin's President and CEO, for final comments. Great. Well, everybody, thank you for participating in today's call. Once again, you know, we'd like to thank our employees for their hard work and dedication, and we look forward to speaking to you again next quarter. Thanks, everybody. Thank you so much, presenters. Thank you, everyone. This concludes today's conference call. You may now disconnect.