Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Franklin Resources Inc. (NYSE:BEN)
Q1 2021 Earnings Call
Feb 2, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended December 31, 2020. My name is Vishay [Phonetic] and I will be your operator — call operator today.

Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are described in more detail in Franklin’s recent filings with the Security and Exchange Commission, including the risk factors and MD&A section of Franklin’s most recent Form 10-K and 10-Q filings. [Operator Instructions]

At this time, I would like to turn your call over to Franklin Resources’ President and CEO, Jenny Johnson. Ms. Johnson, you may begin.

Jennifer M. JohnsonPresident and Chief Executive Officer

Hello and thank you for joining us to discuss Franklin Templeton’s results for our first fiscal quarter of 2021. Following the close of the Legg Mason transaction on July 31, the results we announced earlier this morning include the first full quarter of the combined organization.

On the call with me today is Greg Johnson, our Executive Chairman; and Matthew Nicholls, our CFO. And joining the call for the first time is Adam Spector. Adam joined our firm last July as Managing Partner of Brandywine Global and additionally became our Executive Vice President and Head of Global Distribution on October 1.

To start, we hope that everyone is staying healthy and safe. We’d also like to recognize our incredible employees who continued to work hard every day on behalf of our clients and firm. It has been six months, since we closed our acquisition of Legg Mason and its specialist investment managers. And over that time all while under a remote work environment, we’ve made significant progress in bringing our teams together to maximize our collective potential. We’re seeing a high degree of stability within the organization as well as a number of encouraging trends across the business.

First off, assets under management reached a record high of approximately $1.5 trillion this quarter, driven primarily by strong market performance. That’s an increase of $79 billion or 6% during the quarter. Turning next to operating and financial results. Adjusted revenues increased by 20% to $1.5 billion, primarily due to an additional month of Legg Mason results. Higher revenues and continued expense discipline resulted in a 28% increase in adjusted operating income to $550 million and an increase in operating margin to 37.2%.

On the performance front, our investment results improved this quarter with 61%, 66%, 68% and 75% of our strategy composites outperforming their respective benchmarks for the four key time periods. Looking deeper into those numbers, Western asset continues to have standout performance and reached $423 billion in long-term assets and $480 billion in total assets, its highest level on both fronts in over a decade. Brandywine performance rebounded strongly and saw net inflows into global multi-sector products in the latter part of the quarter. And as we saw improvement in performance at ClearBridge and across many Franklin Templeton strategies, ClearBridge is another example of one of our Specialized Investment Managers reaching a record in AUM, which was a $176 billion at quarter end.

Likewise our fiduciary trust net worth AUM is at an all time high of $32 billion while the business also generated positive net flows for the quarter. Record AUM levels were also reached for Clarion Partners at $58.1 billion. Long-term relative investment performance of our US and international mutual funds also improved this quarter. A significant driver of the improvement was our Franklin Income Fund and several of our value-oriented equity strategies also generated noteworthy results. We continue to see strong performance in US equities and US fixed income.

Our mutual funds that are rated 4 or 5 stars by Morningstar increased during the quarter and now number 140 funds. On the distribution front, long-term net outflows were $4.5 billion, which includes $12.6 billion of reinvested distributions, but notably momentum continued to build with positive flows into a number of our Specialized Investment Managers including Benefit Street Partners, Clarion Partners, ClearBridge, Fiduciary Trust, Franklin Equity Group, Franklin Templeton Fixed Income, Martin Currie, Royce and Western Asset Management. Franklin Equity Group saw strong inflows which were led by the Franklin DynaTech Fund which reached a record $22.5 billion in AUM. As of quarter end, we have a promising institutional pipeline of opportunities and a combined total of won but unfunded wins of $11 billion.

As we’ve noted on previous calls, a strategic focus for the firm has been to expand our alternatives platform to offer strategies that do not lend themselves to passive replication. With $127 billion in assets under management in alternatives and robust relationships across the retail channel, we’ve seen demand for our retail alternative offerings increase. Our EMEA region led the way with a focus on multi-strategy social infrastructure and real estate. Also importantly as we look to deliver investment expertise through our clients’ investment vehicle choice, we now have a top three market position in the retail SMA business which saw positive net flows this quarter and increased to $113 billion in assets.

In other news, we were excited to launch our new Franklin Templeton Investment Institute, an innovative hub for research and knowledge sharing. Stephen Dover will be leading that effort with the launch of the institute, we’re doubling down which sets our firm apart, unmatched insight and research from experts on the ground in over 70 locations around the world. At the same time tapping into the strength of our collective leadership talent, we’ve expanded Terrence Murphy’s role to become Head of Equities for Franklin Templeton while retaining his existing role as CEO of ClearBridge Investments. While our equity teams will continue to maintain their individual investment processes and autonomy, Terrence will facilitate collaboration across the groups to drive results and growth.

Looking at another key area, capital management remains an important focus. Our strong balance sheet continues to provide us with financial and strategic flexibility to evolve our business. Cash and investments totaled $6.3 billion following the public offering of $750 million aggregate principal senior notes due 2030 issued at a 1.6% coupon. As previously explained, it is our intention to pay down more expensive debt with the proceeds of the offering. Excluding net proceeds from the senior note offerings, we have $5.5 billion in cash and investments. We also continued our track record of dividend growth for the 40th consecutive year with a 4% increase to our regular dividend in December.

To wrap things up. Over the past six months, we’ve created a stronger firm that combines the best of both worlds, global strength and boutique specialization. Our global presence has expanded in key growth markets around the world with a greater range of specialized high quality investment capabilities and we think that all points to a positive future.

Now I’d like to open up the call to your questions. Operator?

Questions and Answers:

Operator

Your first question is from the line of Glenn Schorr with Evercore.

Glenn SchorrEvercore ISI — Analyst

Hi, thanks very much. I’m curious you talked about cross-selling initiatives have started to yield positive results. You talked about Adam being new Head of Global Distribution. Could we drill down a little further, get some color on what Adam’s mandate is? What new initiatives are producing these cross-sells and what’s been cross-sold? Thank you.

Jennifer M. JohnsonPresident and Chief Executive Officer

Sure. I mean, there is nothing better than hearing it from the horse’s mouth. So fortunately we have Adam on the line. So Adam, take it away.

Adam B. SpectorExecutive Vice President, Global Advisory Services

I think I was just called the horse there. So if I think about what we’re trying to do, it’s really three priorities, grow [Technical Issues]

Jennifer M. JohnsonPresident and Chief Executive Officer

Not sure what happened there? Adam are you still?

Glenn SchorrEvercore ISI — Analyst

I guess so. Sorry, yes.

Adam B. SpectorExecutive Vice President, Global Advisory Services

Glenn, you’re still there?

Jennifer M. JohnsonPresident and Chief Executive Officer

Adam can you — are you, I think, Adam is dialling back in. So why don’t I start. I mean we are, for example, our largest distributor has just added 10 new funds, many of them are Legg Mason funds and we — so we are seeing good penetration that is really cross-selling. And again as we talked about Franklin was much stronger on the independent side, Legg Mason was much stronger on the wirehouse side. And so we’ve been able to do basically cross-sell platform listings and getting through the gatekeepers on those platforms. So that’s worked well.

Just to give you an idea from a diversification of flows. If you look at the Top nine, I don’t why I have the Top nine instead of the Top 10, but Top nine, it accounts for about 38% of our flows. Five of those are Legg Mason Funds, four are Franklin Funds, three of them are fixed income, five are equities and one is balanced. So we’re seeing both a diversification by getting products on the platforms, cross-selling platforms are getting through the gatekeepers and getting them listed. So we’ll continue to see more penetration as well as good diversification with the types of products, so that we don’t have kind of the risk of the single — a single large product that potentially gets out of favor. So it’s much more diversified.

I don’t know Greg if you want to add anything there?

Gregory E. JohnsonExecutive Chairman and Chairman of the Board

Adam’s on the line.

Jennifer M. JohnsonPresident and Chief Executive Officer

Adam, you’re back on. Great.

Adam B. SpectorExecutive Vice President, Global Advisory Services

Yes, I don’t know how I got cut off on a landline with the cellphone message, but that’s a new one in this day and age of working from home. So I did not have the ability to hear what Jenny said. So I’m going to maybe overlap a bit with her comments. But in terms of cross-selling, there are a couple of things I would point to. One, the firm’s legacy Franklin and legacy Legg Mason had different strength. Franklin was really strong for instance in the regional broker dealers and we’ve been able to get Western and ClearBridge products on the platform there. We’re seeing positive momentum there. At the same time, when we look at something like the wires where Legg Mason traditionally was a little stronger, we’ve been able to have some real success with BSP there through legacy Legg Mason.

The same thing is really true if we look outside of the United States, where Franklin for instance, was much stronger in Canada Legg Mason had a real strength in Japan. So we’ve been able to start some cross-selling initiatives there that are really quite positive. And even within countries where outside of the US where both firms were strong like Germany, we had a situation where Franklin was much stronger in the retail banking world, Legg Mason in the private banking world, and again that might just sell one set of product into the other legacy distribution system. Those were the type of cross-selling efforts that have been really strong. I would also say that cross-selling comes into play on defense as well, where we’ve had client for instance that are in particular strategies that might be higher alpha, higher tracking their strategies when they want to de-risk what we’ve seen is that that money instead of leaving our system can shift to another lower vol strategy that’s within the system. So we’re actually doing a better job retaining assets through cross-selling as well.

Glenn SchorrEvercore ISI — Analyst

I think that’s a lot of progress and a lot on the comment and you combined that with all your new product offerings. I hate to be too forward leading, but do you have shot at getting back toward flat flows like sometime toward the end of this year? Are we trending that much in that direction?

Adam B. SpectorExecutive Vice President, Global Advisory Services

I think we’re trending really well. We see momentum. We see it month over month. Sales are strong. Redemptions are getting better. And the other thing is we now have a combined sales force that’s been in place for its first full quarter and that space it takes people a little bit of time to hit their stride and they’re hitting it now. So I’m feeling very good about the future.

Glenn SchorrEvercore ISI — Analyst

Thanks for all that. I appreciate it.

Adam B. SpectorExecutive Vice President, Global Advisory Services

Thank you.

Operator

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Craig SiegenthalerCredit Suisse — Analyst

Thanks. Good morning everyone and hope you all doing well. I wanted to come back and dig a little bit deeper on your comments on rising demand for alternatives in the European retail channel. Can you talk about what markets and channels are driving the demand? And also what type of products or characteristics are they looking for things like yield or low correlation downside protection? Thank you.

Jennifer M. JohnsonPresident and Chief Executive Officer

Adam do you want to take that?

Adam B. SpectorExecutive Vice President, Global Advisory Services

Sure. I think we’re really seeing a push for alternatives in all regions in all countries and that’s one of our strengths. If we think about our core priorities of grow, defend and diversify. Diversify is all about moving more forcefully into alternatives. We have $120-some billion in our alternatives book, but probably the sleepiest, quietest alternatives firm you’ve never heard of. And we’re making progress. You mentioned Europe. I think there is strong demand there. The other thing we see in Europe is strong demand for ESG and we’ve got some alternative products that combine alternatives with ESG, that combination has been really strong for us.

The other thing we’re working to do is given that we now can offer so many different vehicle types, we’re really trying to take alternatives that used to be predominantly sold in the institutional market in more of a separate account mandate and package them so that they are much more salable to the broad retail market.

Jennifer M. JohnsonPresident and Chief Executive Officer

And just to add to that, I mean obviously everybody in this low rate environment is looking for yield and so you see a lot more searches both on the institutional side and as Adam mentioned gaining traction on the retail side for private credit with BSP perfectly positioned, great performance, traditionally just the institutional managers, so being well received on the — and actually have gotten some traction in the retail side as well as Clarion. Clarion is coming out of this in the real estate space, there’s uncertainty in certain spaces for real estate, but they’ve been large industrial tech, they are one of the largest, I think they are the largest lessor to the cloud storage environment and so they performed very, very well. So in a low yield environment, people are looking for assets with yield and that has served both Clarion and BSP well.

Craig SiegenthalerCredit Suisse — Analyst

Got it. And then I just had a quick follow-up, coming back to Glenn’s question on net flows. You guys just did a big merger. You reduced the size of your sales force, not a lot, but a little bit. So I imagine, there could be some dis-synergies out there that you’re seeing. If there are any dis-synergies or any kind of redemptions driven by the merger and they are in the flow run rate today, do you see them dropping off in the future which should actually help your net flow trajectory?

Jennifer M. JohnsonPresident and Chief Executive Officer

Let me start and Adam will pick up. I would say a couple of things. One is we are only really aware of two, we’ll call them deal based redemptions. One in Korea, which we talked about on the last earnings call and the most recently Legg Mason’s 529 plan. And part of the issue there was, there was just an agreement that they would only have one 529 plan and Franklin obviously has — we’re not ready with the New Jersey 529 plan. Otherwise, we are not seeing any kind of deal issues. With respect to, you go from two sales forces to one, you’re talking about relationships. On the retail side, just to give you an example, of the say 150,000 financial advisors who were talking like less than 0.1% or so, I know it’s just teeny number of complaints with the change of advisor. We’ve been really surprised by how little complaints we’ve had in ultimately when you’re having to pick kind of who’s going to win out on the territory. And that’s really because of Legg Mason strikes again in the big wirehouses and Franklin’s in the independent. So there wasn’t kind of overlap you would have expected on many deals. So there is not really product overlap and not really distribution overlap. Adam do you want to…

Adam B. SpectorExecutive Vice President, Global Advisory Services

Yes. I think Jenny hit all the right points out of the tens of thousands of advisors we contacted. She’s right we had less than 10 basis points of negative reaction that we track. The other thing I would say is that ball [Phonetic] in the US, the sales force is essentially 50-50 legacy Franklin, legacy Legg, that’s not true by channel. Our regional channel is predominantly Franklin Templeton [Indecipherable], our wired channel is predominantly Legg Mason. So that really limited the disruption that we have because we kept the folks who were strongest in specific channel and moved to a channelized approach in sales which we did not have before Franklin Templeton.

Gregory E. JohnsonExecutive Chairman and Chairman of the Board

And just, it might help to just try and put a little bit of data around this. We — in the Executive Commentary, what we did is in a footnote in some of the charts, we did a little bit of pro forma assuming we closed the transaction a month earlier to include a full three months of Legg Mason. And when you look at that, you will notice that the sales are roughly the same and the redemptions are little bit lower. So obviously we want redemptions to come down further. We want sales to go up, but in terms of trying to understand and quantify attrition risk. When we look at the patent quarter-by-quarter, it’s looking quite encouraging so far.

Craig SiegenthalerCredit Suisse — Analyst

Great. Thank you guys.

Adam B. SpectorExecutive Vice President, Global Advisory Services

Thanks Craig.

Operator

Your next comes from the line of Dan Fannon with Jefferies.

Dan FannonJefferies — Analyst

Thanks, good morning. I guess one more question, just kind of on distribution and sales and you guys have been discussing the retail opportunity and the momentum you have. I guess, can you talk about the consultants and the institutional potential opportunity. Maybe also just get into the won but unfunded pipeline the diversity there, but also kind of those gatekeepers and how progress in terms of opening up those channels might be going?

Adam B. SpectorExecutive Vice President, Global Advisory Services

Sure. The way I look at won but unfunded is it’s good news, it’s essentially staying steady. I think the numbers around $11 billion and it’s staying steady not because we’re not adding but because we’re actually funding deals out of that. So that’s going strongly. What I would say in terms of consultants is that Franklin Templeton central distribution has historically distributed to the consultant community, institutional community for the Franklin Investment team, many of the Legg Mason investment affiliates in fact, I believe all of them did that on their own. Going forward, we’re having a differentiated approach where the Legg Mason syns [Phonetic] will continue to call on the consultant as they always have, that’s been a really successful channel for them. Remember Legg is much stronger in the institutional business historically. So we’re not changing that approach to the investment consultants.

Outside of the US, some of the smaller former Legg Mason syns are beginning to leverage Franklin Templeton’s resources, especially in the coverage of field consultant where those syns make covers research centers on their own, but we’ll have much more connectivity with the field consultant. I would say in general, what we’re trying to do with consultants is similar to what we’re trying to do with global financial institutions is recognizing that many of these large consultants are global firm and we have to face off them holistically as a global firm. So, that’s how we’ve organized ourselves, and we are really allowing each investment team to tap into our centralized coverage of consultant as they see fit.

In general the larger [Technical Issues] Western might not need help at all in that area for some of the smaller groups definitely rely on the central distribution team.

Dan FannonJefferies — Analyst

Great. And then just as a follow-up, in terms of the expense outlook and understand the movement in assets and higher markets drove a bit of the increase, but just curious about your assumption for normalization of travel and marketing and spending that kind of went away this past year as you think about the progress for this year?

Matthew NichollsExecutive Vice President, Chief Financial Officer

Yes. So in our numbers and in the guidance that we’ve given, we’ve assumed that there will be a pickup in travel and some other G&A items like advertising, in terms of the combined company and what we need to do there in the third and fourth quarters in particular, we have moved that forward a bit, but we haven’t taken the money out of our assumptions. So we would expect G&A to creep up a little bit in the next — in the last two quarters in particular, I would say, but that’s included in the $3.75 billion of guidance.

I think the number that’s more likely to move a little bit, which is what caused the change a little bit in the guidance is the comp and benefits in line with revenue, and we expect we’re selling more. So that’s there some more commissions involved in that. It’s all linked with the growth of the business. So I think we could expect the compensation line on an adjusted basis to go up a couple or so percent maybe up 3% in the next quarter, but then because of the, because of the cost saves from the transaction, I would expect that to come down in the third quarter by about 1% or 2% and then down again in the fourth quarter by about 4% probably — maybe a little bit more than that, which then gets us to the $3.7 billion to $3.75 billion, maybe a little bit more if the markets stay stable.

Dan FannonJefferies — Analyst

Great, thank you.

Matthew NichollsExecutive Vice President, Chief Financial Officer

Thank you.

Operator

Next question is from the line of Mike Carrier with Bank of America.

Mike CarrierBank of America — Analyst

Good morning and thanks for taking the questions. First, just a follow-up on the distribution question. Can you provide maybe some context on the process and importantly, just the timing, getting the full line of products there is much you can throughout the distribution channels. And maybe for DynaTech what is happened maybe thus far and what do you expect in ’21 versus longer term?

Adam B. SpectorExecutive Vice President, Global Advisory Services

Yes. I think the way I think about this is, we had to go about this in several stages. So the first stage was really selecting the team, getting them settled into their territories and that happened. The next stage that we’re in the middle of right now is because they’re all trained — the sales teams are trained, but in order for them to really cross-sell effectively, we have to get all of our products cross-listed on the different platforms and research approved. That’s really what we’re doing now. We’ve started where you might expect that our largest distribution partners where we think we can get the most spending [Phonetic]. We’ve got two of them already where we’ve on-boarded a number of products, we are kind of marching through that and it’s going pretty well. So it’s really a question of getting the back offices set up correctly and getting things on the platform.

The distributors themselves are eager to have it. One of the things we’re seeing that across the board is that people want to do more business with fewer bigger players. So the fact that we’re able to bring such an array of investment styles and not only investment styles but different vehicles from funds to SMAs to ETFs to these partners that makes us much more attractive to them. So they’re really working as quickly as they can with us to get our products on-boarded. As we get them on-boarded what we’re seeing is that we’re able to start to sell more. So for instance, in some of the regional, we’ve seen a real uptick in December and January for some legacy Legg Mason product on the regional platforms, because those are just getting on-boarded now. It’s continuing work, but it’s going well and we’re a bit ahead of schedule.

Mike CarrierBank of America — Analyst

Okay, great. And then Matt just on expenses, you provided a helpful update, you also mentioned looking at additional ways to operate the business more efficiently. Maybe just what are some of these areas as well as areas that you’re looking at from an investment standpoint? Thanks.

Matthew NichollsExecutive Vice President, Chief Financial Officer

Yes. Thanks, Mike. So I think there’s two things there. First of all, as we spend more time together as a joint company, I think just naturally speaking we find interesting ways to improve how we work together. That’s not just operational things, it’s how we can share information and improve price of that information from various vendors. We spend a lot of money on data and information across the investment teams and across the specialized investment managers. There is a natural embedded leverage in that system in terms of being at a safe money and we’re just really frankly just scratching the surface on that. And that also benefits the teams away from just cost — away from just cost, but the cost is a good output from that work.

And then we have been working very hard on our operation side and technology side on the future and how to position the firm in terms of capital expenditures, understanding what that is, risk management and potential cost efficiencies with different partners externally and we’ve seen some very interesting things there. So nothing specific to report now, but I think over the next six months to a year, we’re going to see some very interesting opportunities for the firm and we are likely to take action.

Adding to that, if you — and to put some numbers around it we don’t have any specific guidance today. But we’re talking $20 million, $25 million per annum at least on some of the things we’re looking at. And we’ll provide more guidance to that in the next quarter.

Mike CarrierBank of America — Analyst

Great, thanks.

Matthew NichollsExecutive Vice President, Chief Financial Officer

Thank you.

Operator

Next question is from the on line of Alex Blostein with Goldman Sachs.

Alex BlosteinGoldman Sachs — Analyst

Hey, guys. Very good morning. Thanks for taking the question. I wanted to follow-up with respect to cross-selling opportunities and given the combined franchise you guys have a really robust set of products and capabilities and you named quite a bit in terms of where you are seeing cross-selling opportunities for the combined firm. I was wondering if you could just kind of maybe narrow this down a little bit and if we were to focused on three affiliates, where are you seeing sort of the most incremental dollars of net inflows from cross-selling? What are those affiliates?

Adam B. SpectorExecutive Vice President, Global Advisory Services

I guess I don’t really think about it in terms of the most dollars. I think about it as where is there a significant demand? So obviously given Western’s broad exposure to everything fixed income and their size and breadth we’re seeing a lot there. ClearBridge, I would say, has a very strong capability in ESG and that’s across the board. With that in favor ClearBridge has seen real growth. Brandywine has a few income oriented funds that are global, given the demand for income that strong. Royce, Martin Currie, we saw inflows for them that were more than 5% of the firm. So strong demand there. If you take a look at a group like Clarion, what’s more in demand than alternatives and they are at the top of their game in real estate. So really across the board we’re seeing demand for all of our firms.

Jennifer M. JohnsonPresident and Chief Executive Officer

Well, and I would just add that, that’s sort of giving the Legg Mason crossing into a lot of the traditional Franklin and the reverse of that is, some of the big wirehouses, we’re getting interest on BSP. DynaTech is getting phenomenal, so the Franklin Equity Group support and so it’s really about bringing the entire firm to where we have deep relationships. And again, I just wanted the overlap, so any of those key products across the board are making sense at any of the programs. It’s just filling in and complementary where say we didn’t have the representation.

Adam B. SpectorExecutive Vice President, Global Advisory Services

Yes, Jenny and I misunderstood the question. I thought it was a one-way question, you’re right. So there is equal strength going both directions and the other thing we’re seeing is that, for instance, there is some products that have been around for decades that we’re able to offer in new vehicle types and that’s another way to cross-sell, that’s really attractive and we’re seeing significant growth in our SMA business there.

Alex BlosteinGoldman Sachs — Analyst

Great, thanks for that. And I guess along similar lines of new business. Sorry if I missed this but $11 billion pipeline, can you specify which affiliates comprise the pipeline and what’s the fee rate associated with that AUM base?

Adam B. SpectorExecutive Vice President, Global Advisory Services

I do not have that data. We will have to get back to you from IR on that.

Matthew NichollsExecutive Vice President, Chief Financial Officer

I mean most of its fixed income with Western which you’d expect and some Franklin Templeton Fixed Income as well be the top two of the pipeline of funded wins.

Alex BlosteinGoldman Sachs — Analyst

Got it. Thanks very much.

Operator

Your next question is from the line of David Davitt with Autonomous Research.

Patrick DavittAutonomous Research — Analyst

Hey, good morning everyone, it’s Patrick Davitt. Thanks for the quarter call. First question, on the fee rate obviously already came in a little bit above what you guided to last quarter, probably I guess the market came in so much better than you expected. So is it — is it still fair to assume kind of 36 to 38 with a more normal market or do you think it could track even higher given you’re already above what you guided to last quarter.

Matthew NichollsExecutive Vice President, Chief Financial Officer

I think they look the way that we just sort of describe that. I mean, the reason why it was higher is because of the — mainly the increase in equities in the quarter because of the strength of the equity markets and then we grew in alternatives. Also, and I think the right way to answer the question is, when we think about the things that the push up the fee as if were higher and equities in alternatives and lower Global Bond outflows. In any of our outflowing areas that we’ve experienced over the last several quarters that you very familiar with, any of those turn in just a minute — just a little way that also helps with the fee rate, and we saw that in the last quarter also having less outflows in those areas.

What pushes the fee rate down is if we scale up much faster in institutional fixed income and/or if we see outflows in the higher areas that we just — that I just talked about. I think we model out and I think we’ve talked about this a fairly steady fee rate for the year. All else remaining equal. We don’t see any reason why we shouldn’t be in the 38 area, but there could be a continued significant momentum in institutional fixed-income, which could be a very positive reason for the fee rate going down and all else remaining equal. So that’s I think 36 is pretty very, very much on the low end of things and I think we wouldn’t say guide to higher, but I certainly say we would expect to be close to where we are today for the year.

Patrick DavittAutonomous Research — Analyst

Thanks, very helpful. My follow-up is on the India situation, which looks like it’s finally getting close to resolution. So could you update us on how much AUM we could see come out as those funds open up again that that’s already been turned off, so we can kind of adjust our estimates when you report AUM. And then I guess more broadly. The [Indecipherable] has been pretty negative. So, any update on the impact to the broader Indian franchise would be helpful?

Jennifer M. JohnsonPresident and Chief Executive Officer

Sure. I mean first of all, we were thankful that the shareholders voted overwhelmingly in support of winding up those funds and then most recently the Supreme Court came out and approved our being able to distribute the cash in which I think is maybe 42% if I’m remembering right percentage of assets. So that will go out pretty soon. We are taking a fee on those assets right now. So it’s already out from a fee standpoint and then we continue to see flows, decent flows but also redemptions in the remainder portion of our business, both the equity and the liquid assets. We’re very much committed to India and we continue to see support in that market.

Patrick DavittAutonomous Research — Analyst

Thanks.

Adam B. SpectorExecutive Vice President, Global Advisory Services

Thank you.

Operator

Your next comes from the line of Brian Bedell with Deutsche Bank.

Brian BedellDeutsche Bank — Analyst

Hey, thanks. Good morning, Can you hear me?

Gregory E. JohnsonExecutive Chairman and Chairman of the Board

Yes.

Brian BedellDeutsche Bank — Analyst

Okay, great. Great. Okay, thanks for taking my questions. Just one on the — just can you expand on the fee guidance of the approximately 38 basis points. What is the expectation from money market fund or money market cash management product fee waivers in that I guess coming into the year — coming into the new quarter?

Matthew NichollsExecutive Vice President, Chief Financial Officer

Again, that would be, yes, so it’s embedded in that already. We currently have about something like an $8 million fee waiver at the holding company level or the corporate level because of the revenue share with those involved principally with the money market fund business that’s moved the impact on the overall firm is $8 million. Now, we expect that to probably be close to $10 million by the end of the year, but that’s all embedded within the fee rate guidance we just gave.

Brian BedellDeutsche Bank — Analyst

Got it. Perfect, thank you. And then follow-up for both Adam and Jenny on the ESG progress. Obviously, you said pretty strong demand in Europe and within alternative products as well. And it sounds like ESG is fairly well integrated in the research process based on how you’re describing it, but maybe if you could talk about whether you still think there is more integration to happen across the research investment — portfolio management research process and especially the plan for leveraging that and launching new ESG dedicated products. And if you can also comment on the AUM that you see right now in your ESG dedicated products?

Jennifer M. JohnsonPresident and Chief Executive Officer

So I always find it interesting. I was talking recently and somebody gave me affect, your staff that something like a third of asset managers assets are ESG. And the reality is that I think maybe we have an advantage as a global player anybody is a global player and is operating in markets in Europe or Australia has had to have this very focused and incorporate into their investment process. So it’s our belief that there’s going to be no credible manager out there certainly an institutional level without being able to clearly articulate how they’re considering ESG risks in their investment process. And we feel very good about all of our teams and they are having incorporated their consideration of those risks in their investment process.

As a matter of fact we’ve talked about our investment data like where we have unique sources of data that are contributed by various teams and available for any teams for their analysis. We’ve done the same thing on ESG. So we have a portion of our investment data like that is dedicated to ESG. So for example, our global macro team 14 different feeds it goes into the ESG data lake and that data is now cleansed and available for any of the teams to considered in their process and that’s important as we all know because ESG, The top 5 ESG providers correlate 57% of the time. So you can imagine that it really takes active management and engagement to get accurate ESG information.

So to answer your question, it is absolutely well incorporated in all of our processes. We also — Europe is coming out with something Article 6, Article 8 and Article 9, and we have been very focused on ensuring I think it’s the March date that the products that are selling there and the ones that are pipeline to sell there qualify for those. So Article 6 is, it is ESG evaluated and considered, Article 8 is over — overweight ESG considerations and my portfolio construction and Article 9 is really kind of impact investing. And so we have products like our [Indecipherable], our — we’re the first active Global Green Bond ETF. We have a social infrastructure and those are getting good flows there as well as they qualify for Article 9. So we think ESG remains to be seen. And I just anecdotally, prior to the lockdown, I had visited US institutions, a year before the lockdown and it was very mixed in the US, whether or not they were focused on ESG and right before the lockdown I visited institutional investors and every single one was talking about ESG. So that’s why we are focused and committed. Adam I don’t know if there is still [Technical Issues]

Adam B. SpectorExecutive Vice President, Global Advisory Services

You hit most of it. I would only say that one of the advantages here of being a global firm is that while, if this is kind of a trend that is strong and developed, but a little bit newer in the US, we’ve been active in France and Nordics and Australia for years. And it’s just part of what you do, it has to be a 100% integrated into your investment process. So all of our investment teams have ESG that’s integrated. What we’re moving to do is to create more impact funds kind of at the far extreme of the ESG as we expect [Phonetic]. But we’re completely integrated with ESG across all of our teams at this point.

Brian BedellDeutsche Bank — Analyst

That’s great color. Thank you.

Operator

Our next question is coming from Michael Cyprys with Morgan Stanley.

Jennifer M. JohnsonPresident and Chief Executive Officer

Hey, Michael.

Michael CyprysMorgan Stanley — Analyst

Hey, good morning. Thanks for taking the question. I just wanted to circle back on sales estimate which is [Indecipherable] you had about $113 billion of resale SMAs. I was just hoping you can kind of give us a sense of maybe how that breaks down by asset class and channel, if you could just talk about some of your initiatives to accelerate growth with the retail SMAs and which strategies are you most optimistic on growth in the SMA vehicle?

Gregory E. JohnsonExecutive Chairman and Chairman of the Board

I think the places where we’re most optimistic about SMAs as a vehicle are for those strategies that are most in demand. So Franklin Income Fund is still something we sell a lot of. DynaTech, Franklin technology, all of those products have very good flows, very good sale and I think we can move more from a fund sale to offering different vehicles. On the Legg Mason side, ClearBridge and Western have been leaders in that for years. From a channel perspective, we’ve had the most strength with the SMA business and the wires and we’re starting to expand more of our SMA business.

Michael CyprysMorgan Stanley — Analyst

Just maybe as a quick follow-up on the SMA side. I guess, just any color you could share around the fee rate and margin profile for your SMA business. Maybe how that compares versus, say, the 40 Act mutual fund vehicles and I imagine there is lower fee, maybe a little bit more possibly to serve but arguably probably the duration of the asset is probably a little bit longer, a little bit more stickier. So I was just curious, any color you could elaborate around that?

Matthew NichollsExecutive Vice President, Chief Financial Officer

We’ll come back to you on that with specifics, I just don’t…

Jennifer M. JohnsonPresident and Chief Executive Officer

Yea. And I — the thing I would just highlight there, I mean SMAs are gaining great traction because in a fee-based environment, it allows the financial advisor to appear to be much more active in their investment decisions. So we think that trend is really important. It’s also why direct indexing, we think it will be important in the future. Remember that there are not a lot of those kind of embedded fees that are arguably distribution or service fees in an estimate that you may have in a mutual fund. So that’s why it’s — you can’t look at the top line fee rate and compare it apples-to-apples, because it didn’t quite that, but we will come back with that with more details.

Michael CyprysMorgan Stanley — Analyst

Right. But is it fair to say that it is longer duration capital that the assets are stickier. Just any thoughts on that platform?

Matthew NichollsExecutive Vice President, Chief Financial Officer

Yes. Yes. Yes, I mean, I think we think of it as being a minimum of — it’s an average I can’t remember the exact, I think it’s like five years or something like that as you think about the average across the industry. But we’ll come back to you on the details around that specific.

Michael CyprysMorgan Stanley — Analyst

Thanks very much.

Matthew NichollsExecutive Vice President, Chief Financial Officer

Thank you.

Operator

Next question is from the line of Robert Lee with KBW. Mr Lee, your line is open.

Robert LeeKBW — Analyst

Sorry about that. Thanks for taking my question. Maybe Jenny, could you possibly draw in a little bit more into this GOE, Goals Optimization Engine. Just trying to get a sense of what that is precisely because it seems like there’s different aspects to it and while still at early days, how you’re thinking about that is helping in drive demand? What should we be looking forward to see if that’s working as this phase?

Jennifer M. JohnsonPresident and Chief Executive Officer

Sure, sure let me — so first of all, think of it as a really good financial planning tool that’s cloud-based. So it can be tied into any platform out there. But we think if you loosen that’s why we filed a patent on it because — so let’s say, Rob, you have three goals and your goals are. I want to retire. I want to put some money aside for my kids and I want to — if there is enough left over and I’m doing really well. I’d like to buy that second home on the beach. I must have enough money to retire. It’d be nice if I can help my kid and what the heck I’ve role the die on that that second home.

If you think about traditional kind of financial planning models they — in a view, you come up with a portfolio of based on your risk and it would be a single portfolio what go does is it follows your guide path trajectory to your likelihood of achieving that goal. If you’re doing really well and ahead, it rolls the money down its own — think of it as a waterfall into your next goal, when you achieve that, it was it down into your final goal over, however may you have. And if you think about how you structure those portfolios are very different. You’re not going to get the second home unless you stay high octane all out, but you’re glide path on retirement is you’re getting older closer, you’re going to want to be more conservative. So, add that dimension. We work with universities on doing it.

I have to tell you we are data analytics team came up with their turn, AI team came up with it. We pitched the idea, they were a little skeptical they looked at the data, they said that was really works, and so, as it has resonated very well, as we’ve shown because it’s a very simple sort of way to think about and it resonates with clients well, because you’re not talking about benchmarks and things you’re talking about things that absolutely knew something to them. And we’ve built it with easy APIs to connect into various platforms and we find global demand where we are talking to a firm in China, who are interested in it. So we see it. Asia, Europe, it’s just really resonated well with platforms.

Gregory E. JohnsonExecutive Chairman and Chairman of the Board

And would I, be greatly some of this is less about it being a source of incremental revenue and it’s all of those come in driving the assumed private to make your own products strengthening this relationship, right.

Jennifer M. JohnsonPresident and Chief Executive Officer

Right. We do have the choice of either closed architecture all our products or an open architecture and I think there is some fee if we for the assets that are open architecture. But it just depends and we can be flexible with that, but yes, it’s a way to create a solution based sale of our investment.

And as Adam — we really view ourselves as a — we’re an investment manager were fundamental across all different types of investment capabilities. You want to deliver it in whatever way in which our clients want to receive it. So vehicle agnostic, whether it’s traditional mutual fund CIT, SMA, ETF or in a solutions based kind of model portfolio like go provides or we’ll build them individually for our distribution — our distributors.

Robert LeeKBW — Analyst

Maybe a follow up. This kind of connecting the EPS and ESG. I mean, I think you’ve talked to ways about, ESG capabilities and in the marketplace certainly in the US and It seems like it’s through the ETFs product that a lot of investors have initially reached and kind of get trying to capture their exposure. So can you kind of talk about how well your own plans are for $12 billion is AUM, but how you’re thinking of trying to drive ETF growth through ESG or is there like this and it’s product launch ahead of us, just trying to get a feel for how those to connect for you?

Jennifer M. JohnsonPresident and Chief Executive Officer

Yeah, I think it’s fair to say that there are a set of financial advisors that just like to sell ETFs and we don’t have product in that category, you are not going to resonate with those financial advisors. And so we are focused on being able to provide kind of flexibility or whatever the vehicles are in our $12 billion, our largest category is active. Second, I think its smart beta and the third is passive, although our country ETFs are starting to get [Technical Issues] and they are low price, but they’re significantly — they are somewhere between 40 basis points and 60 basis points than their competitive country. They’ve been small but as we get more traction we think we’ll even pick up more on the institutional side. Matt, did you want to add anything to that. I don’t if you are…

Matthew NichollsExecutive Vice President, Chief Financial Officer

I think, I had one thing to that Jen.

Jennifer M. JohnsonPresident and Chief Executive Officer

Okay.

Matthew NichollsExecutive Vice President, Chief Financial Officer

And that said, we think of ETFs and I think this is different than some as a way to offer a different vehicle to clients, not a specific investment strategy. So just to put a little more data behind what Jenny said, of our $12 billion, roughly $6 billion of it is active, $3 billion of it is smart beta and only $3 billion of it is market at weighted asset. That’s a little different than some of others and I think that’s guide our growth for the future.

Robert LeeKBW — Analyst

Okay. And maybe one last quick one for Matt. Performance fees is $25 million and changed this quarter. Of course it is very difficult to predict any guidance you can give on how we should think of where you sit now, how we should think of that kind of rolling them in the next couple of quarters?

Matthew NichollsExecutive Vice President, Chief Financial Officer

Yeah, I do think it was seasonably quite high for us in this quarter. So I think you could expect it to be a bit lower next quarter, maybe $10 million is a good estimate and then rising again at the end of the year back to say $20 million. And then because of the arrangement with Clarion, our performance fees in 2022 will become larger again, because we end up getting a larger share of those performance fees.

Robert LeeKBW — Analyst

Great, that’s helpful, thanks. Thanks for taking my questions.

Matthew NichollsExecutive Vice President, Chief Financial Officer

Sure.

Operator

Your final question will come from the line of…

Matthew NichollsExecutive Vice President, Chief Financial Officer

Sorry, just before we start the next question, I just wanted to address the SMA question. We have got the answer to that. So I think it was Mike, so I appreciate the question. So the average fee is in the mid 30s for the SMAs and the life that you were asking about is between six and eight years. So it’s lower fee but we generally hold them for longer period. So that’s why it is a very good business for us. Wanted to make sure we answer that question.

Operator

And your final question comes from the line of Bill Katz with Citigroup.

Bill KatzCitigroup — Analyst

Thank you very much. Good morning. Thank you for taking my questions today. So, Matt, just one for you. Just going back to the fiscal ’21 expense guide. I think last quarter you sort of felt that, that $3.7 billion was a pretty firm number regardless of market action, I may be paraphrasing. Is that still the case because I heard $3.7 billion to $3.75 billion and I appreciate some moving parts on the comp in the G&A line, but is $3.7 billion still the anchor number or is there some no upside to that?

Matthew NichollsExecutive Vice President, Chief Financial Officer

Yeah, so Bill, thank you for the question. I said $3.7 billion as long as the market increase was within the sort of the low-single — low to mid single digit. Obviously we’ve gone quite considerably above that, which does put some pressure on the increase in compensation as I mentioned for the second quarter, we can expect compensation line to go up by 2% to 3%. But then that should come down again based on the expense discipline that we’ve communicated. So 1% to 2% down in the third quarter, another 4% down in the fourth quarter. All else remaining equal if that’s if the assets under management stay at that sort of roughly just levels they are at today. And so I’d say that the — on all the other line items, very little change. I think if anything, we’re finding ways to create more expense opportunities to bring expenses down as I communicated a moment ago. But I think that the $3.7 billion mostly is a function of the markets being up in the high single digits to double digits is — low double-digit is leading us to guide a little bit higher than the $3.7 billion to $3.75 billion. If it comes back down again, it would be $3.7 billion. But that’s the range we’re trying to keep that as tight as possible as also communicated.

Bill KatzCitigroup — Analyst

Okay, perfect. Thank you for the clarification. And then Jenny just one for you, just as sort of been talking through with a lot of the cross-sell momentum. Do you think at the big picture level now Franklin is where they need to be in terms of its footprint? I guess more specifically, is there any sort of appetite for M&A and if so what or where you might be thinking about filling any residual gaps?

Jennifer M. JohnsonPresident and Chief Executive Officer

So I would say that, look first and foremost we are going to touch this fall, we are going to make sure that the four deals that we did last year are well integrated and that is absolutely are focused and we’re laser focused on that. Now having said that, we feel really good with where they are that the two acquisite the fiduciary trust have already are getting flows that you have surprised us how quickly they worked out. We feel very good where with Legg Mason, AdvisorEngine technology when they are pretty independent. So the first focus is just making sure those continue to do well. Having said that, we’ve said that we will continue to grow, we want to double our size of fiduciary trust. So as opportunities come up, I think we do some smaller bolt-on acquisitions there. We’d love to continue to expand in the alternative space if something made sense there, that’s just the hard space to acquire, and we think that FinTech is disrupting traditional distribution. So you’ll see us continuing to make investments, whether there are acquisitions, just has to be the right one. But we’ll certainly make investments in places where we think there is greater distribution opportunity with some FinTech investments.

Matthew NichollsExecutive Vice President, Chief Financial Officer

Yes, it’s a — I would just add to Jenny’s point about alternatives. It’s difficult to find the exact right one for us given the breadth of the alternatives we have, but they’re all quite a few out there that we’ve met that we think it will be a great fit for our firm and a great fit for our alternative asset strategy. We have revenues in the alternative asset space of over $550 million or something like that for the year and we would absolutely like to grow that and we see plenty of opportunities out there, it’s a matter of timing and finding the right one that fits with the rest of the pieces we’ve already got.

Bill KatzCitigroup — Analyst

Thank you very much.

Matthew NichollsExecutive Vice President, Chief Financial Officer

Thank you.

Operator

And I would like to turn — hand the call back over to CEO, Jenny Johnson for final comments.

Jennifer M. JohnsonPresident and Chief Executive Officer

Great. Well thank you everyone for participating in today’s call. We’re really proud of what we’ve been able to achieve in this truly unique environment and we are excited to see the opportunities that lie ahead. Once again, I’d like to thank all our employees for their significant efforts, dedication and client focus. We look forward to speaking to you all again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Jennifer M. JohnsonPresident and Chief Executive Officer

Adam B. SpectorExecutive Vice President, Global Advisory Services

Gregory E. JohnsonExecutive Chairman and Chairman of the Board

Matthew NichollsExecutive Vice President, Chief Financial Officer

Glenn SchorrEvercore ISI — Analyst

Craig SiegenthalerCredit Suisse — Analyst

Dan FannonJefferies — Analyst

Mike CarrierBank of America — Analyst

Alex BlosteinGoldman Sachs — Analyst

Patrick DavittAutonomous Research — Analyst

Brian BedellDeutsche Bank — Analyst

Michael CyprysMorgan Stanley — Analyst

Robert LeeKBW — Analyst

Bill KatzCitigroup — Analyst

More BEN analysis

All earnings call transcripts

AlphaStreet Logo

Source News