Franklin Resources Q2 2026 Earnings Call - Private Markets and Personalization Drive Record Inflows

Benjamin Budish, Analyst, Barclays2: Welcome to Franklin Resources Earnings Conference Call for the quarter ended March 31st, 2026. Hello, my name is Nicole and I will be your call operator today. As a reminder, this conference is being recorded, and at this time all participants are in a listen only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Benjamin Budish, Analyst, Barclays4: 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 and other risks, uncertainties and other important factors are just described in more detail in Franklin’s recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin’s most recent Form 10-K and 10-Q filings. Now I’d like to turn the call over to Jenny Johnson, our Chief Executive Officer.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Thank you, Selene Oh. Welcome, everyone, and thank you for joining us today to review Franklin Templeton’s second fiscal quarter results. I’m joined by Matthew Nicholls, Co-President and CFO, and Daniel Gamba, Co-President and Chief Commercial Officer. We’ll take your questions shortly, but first I’ll highlight key results and themes shaping our business. This was an excellent quarter for Franklin Templeton, with $16.9 billion in long-term net inflows across public and private markets, reflecting the strength and breadth of our diversified global platform. We delivered record gross sales and generated positive long-term net flows in every region, reflecting sustained client demand and strong local engagement. Importantly, each of our key growth drivers, private markets, retail SMAs, and Canvas is our customization platform, ETFs, and solutions contributed meaningfully to these results. This quarter is a clear example of the power of our multi-year strategy in action.

We are ahead of our five-year plan and remained focused on delivering strong investment outcomes, deepening client relationships, and continuing to evolve our capabilities to drive sustainable long-term growth for our clients and shareholders. In my travels meeting clients around the world, one message is consistent: Our clients look to Franklin Templeton as their trusted partner for what’s ahead. One firm offering the reach and resilience of a global platform, together with the distinct expertise of our investment groups. As client expectations continue to evolve and more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles and regions, we believe our business is well suited to meet that demand. We are seeing a clear structural shift in how clients allocate capital and choose partners, including increased demand for vehicles such as active ETFs, customization and tax managed solutions.

Clients are prioritizing firms that can deliver across public and private markets, offer global consistency in how they invest and operate, and bring together capabilities into comprehensive, outcome oriented solutions. This is not a short term reaction to market conditions. It reflects a more fundamental change in expectations where scale, breadth of capabilities and the ability to deliver them in an integrated way are increasingly defining competitive advantage. Against this backdrop, we remain focused on executing as one Franklin Templeton. This means bringing together our strengths as investment specialists, innovation drivers, thought leaders and strategic partners seamlessly in every client interaction. To that end, we continue to simplify our go to market approach to better serve clients and capture opportunities across the business. Ultimately, our strategy centered on helping clients achieve better outcomes by staying focused on performance, solutions and partnerships.

We are continuing to build a business that is more resilient, more relevant and positioned to deliver long term value for our clients and shareholders. Turning to our results. This quarter marks another step forward in the successful execution of our strategy and reflects the growth potential of our business. We delivered another consecutive quarter of positive long term net flows of $16.9 billion, driven by multiple diversified investment groups with continued progress across our key areas of investment and growth. This momentum is reflected in long term inflows of $118 billion, up 28% quarter-over-quarter and 38% over the prior year quarter, excluding reinvested distributions. Gross sales increased across all asset classes, highlighting the strength of our global distribution platform and the progress we are making across the business.

Looking ahead, our institutional pipeline of won but unfunded mandates remained strong at $20.2 billion, consistent with the prior quarter, supported by steady funding rates and ongoing replenishment from new wins. Our assets under management of $1.68 trillion remains well diversified across asset classes, client segments, regions and investment groups. Public markets continue to be a core strength and an important driver of growth. Multi-asset AUM stands at $207 billion and generated $9.5 billion in positive net flows, marking our 19th consecutive quarter of positive flows in that asset class. These results reflect growing client demand for outcome-oriented comprehensive solutions that span public and private markets. Across equities, net outflows were $4.7 billion. Investor activity remained selective, and we saw positive net flows across large-cap value and core systematic and single-country ETFs, infrastructure and sector strategies.

In fixed income, net outflows were approximately $300 million during the quarter. However, excluding Western Asset, fixed income flows were positive $3.6 billion, marking a ninth consecutive quarter of positive long-term net flows. Momentum continued in multi-sector munis, stable value, and global fixed income strategies. Turning to alternatives, Franklin Templeton is a leading manager of alternative assets with $283 billion in alternative AUM. Our breadth and scale continue to position us as a partner of choice for clients seeking differentiated sources of return and access to private markets. We fundraised $14.3 billion in alternatives this quarter, including $13.2 billion in private market assets, which was diversified across alternative credit, secondary private equity, real estate, and venture credits.

Fiscal year-to-date fundraising in private markets reached $22.7 billion already in line with full year 2025 levels, positioning us to exceed our $25 billion-$30 billion annual fundraising target, which was already adjusted upward at the start of our fiscal year. Within alternatives, private credit continues to be an area of focus. While market attention has increased, the opportunity remains highly differentiated across strategies and risk profiles. Our alternative credit capabilities in the U.S. and Europe are focused on public market with a disciplined approach to underwriting and credit selection and include diversified portfolios that have less than 10% exposure to software. Alternative credit represents $96 billion in AUM and was a significant contributor to fundraising this quarter.

Looking across our broader alternatives platform, we continue to see strong momentum in secondary private equity, where investors are increasingly focused on liquidity solutions, portfolio rebalancing, and access to high-quality assets at more attractive entry points. We are also seeing a pickup in demand for private real estate, including in the wealth channel as investors position for opportunities emerging from the current market environment. Franklin Templeton’s private markets’ $8 billion core evergreen products spanning secondary private equity, real estate equity and debt, and private credit continue to gain traction. These products had positive net flows contributing approximately $1 billion to fundraising in aggregate in each of the last two quarters. Across the platform, clients are increasingly engaging with us for broad and differentiated investment vehicles, and we’re seeing that demand translate into sustained diversified growth.

ETF AUM reached a new high of $61.6 billion, a 67% increase from last year with $4.5 billion of net inflows, our 18th consecutive quarter of positive flows. Active ETFs now represent 45% of ETF AUM, further extending our active management strategies into new vehicles. This is evident in areas such as the conversion of 10 of our muni funds into ETFs in Q1, which generated over $600 million in positive net flows this quarter, or the success of our Putnam Focused Large Cap Value ETF, which is close to $10 billion in AUM. Delivering personalization at scale continues to represent a compelling long-term opportunity. Advancements in technology are enabling us to extend capabilities traditionally associated with separately managed accounts more efficiently and consistently across a broader client base.

A leader in retail SMAs, we manage $168.3 billion in AUM and generated $2.7 billion in net inflows during this quarter. With more than 40 years of experience, we are well-positioned to deliver at scale through our breadth of capabilities along with our custom indexing platform, Canvas. Canvas continues to gain momentum and reached record AUM of $22.9 billion, a 27% increase from the prior quarter with positive net flows of $5.3 billion, reflecting strong client interest in personalization and tax efficiency. Since its acquisition in 2022, Canvas has been net flow positive in each quarter and continues to scale across all distribution channels, supported by our over 200 partners and expanding adoption across retail, RIA aggregators, and traditional RIAs.

This growth underscores a broader shift in the industry where tax efficiency is becoming increasingly central to portfolio construction and the advisor-client relationship. Including Canvas, our tax-managed products now represent $110 billion in AUM. As the industry evolves, we continue to invest in areas of long-term innovation and digital assets remain a key focus. Earlier this month, we announced plans to acquire 250 Digital, an active cryptocurrency investment management firm, and to launch Franklin Crypto. Alongside Franklin Templeton Digital Assets, we’re bringing together crypto native expertise with Franklin Templeton’s global distribution to target institutional growth. Franklin Crypto will expand Franklin Templeton’s existing crypto and blockchain venture capital investment offerings and will broaden the firm’s digital assets investment management platform. From a regional perspective, our growth remains globally diversified with positive net flows in all regions.

Internationally, Franklin Templeton manages nearly $500 billion in assets with a positive long-term net flows of $5.5 billion in aggregate. Non-U.S. gross sales grew 29% quarter-over-quarter, with particularly strong momentum in EMEA and APAC. As a leader in emerging markets, Franklin Templeton was appointed trustee and manager of the National Investment Fund of Uzbekistan in January 2025, supporting the country’s privatization agenda and governance reforms across state-owned enterprises. In April, USNF confirmed plans to proceed with a dual listing on the London and Tashkent stock exchanges, marking an important step in advancing Uzbekistan’s capital markets and broader privatization strategy. This engagement reflects our role as a trusted partner to official institutions and continues to drive deeper relationships with central banks, sovereign wealth funds and government-related entities. Now turning to investment performance. Investment performance remains competitive, supporting both client retention and organic growth.

Over half of our mutual fund and ETF AUM is outperforming its peer medium over the three- and 10-year periods, and approximately two-thirds over the one- and five-year periods. This strength is further supported by our municipal strategies, where 95% of AUM is outperforming its peer group over the three-year period. Similarly, over half of strategy composite AUM is outperforming its benchmarks over all time periods and 71% in the 10. In fixed income, 83% and 82% of AUM is outperforming benchmarks over the one- and five-year periods, respectively, reinforcing the depth and durability of our investment capabilities. Turning briefly to our financial results, adjusted operating income was $475 million, increasing 8.5% quarter-over-quarter and 25.8% from the prior year quarter.

These results reflect the continued execution of our strategy with disciplined expense management alongside targeted investments in areas of growth and innovation, positioning the firm for sustained long-term performance. Taken together, our performance this quarter underscores the strength of our platform and the progress we are making against our multi-year strategic priorities. We are building a more diversified, higher growth business with multiple drivers of organic growth, and we’re seeing that momentum continue to build, positioning us to deliver long-term value for our clients, shareholders and employees. I want to thank our employees around the world for their continued dedication and focus on serving our clients. Their efforts are fundamental to the successful execution of our strategy and the progress we’re delivering across the firm. With that, I will open the call up to your questions. Operator.

Benjamin Budish, Analyst, Barclays2: Thank you. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in 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 yourself to one question to allow for additional participants on the call this morning. Our first question comes from Alexander Blostein from Goldman Sachs. Please go ahead.

Alexander Blostein, Analyst, Goldman Sachs: Thank you. Hey, Jenny. Good morning, everybody. I wanted to start with a question around private markets growth. Obviously good momentum in the quarter to $13 billion. I was hoping you could break that down by sort of key strategies as well as whether Lexington, their flagship fund, contributed to that at all. As you look out for the rest of the year, what are likely going to be some of the bigger drivers for the rest of 2026 in private markets fundraising?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Sure. Great. Thanks for the question, Alex. As you recall, last year we had set a target out of $13 billion-$20 billion in the alt space to raise, and we ended up raising $22.9, I think. This year we raised that to $25 billion-$30 billion. Just we would expect to actually be above the $30 billion. When you look at this quarter, I can’t give you any details on Lexington’s flagship funds, but I’ll give you some insights in it. Our largest contributor was actually our private credit managers, but Lexington was meaningful. Lexington is in the market with their flagship fund, and it is they’re finding, you know, right on track.

There’s demand for secondaries, but they’re also in the market with other products, their co-invest, their middle market, which all contributed as well. There are no catch-up fees in this quarter. You’ll get a specific update on Lexington’s flagship fund when they, you know, do a filing probably towards the end of 2026. All of our alternative managers contributed to this quarter’s momentum. There are over 30 vehicles that contributed. It’s a very diverse, what we think is a strong quarter. You know, we felt very good about the flows across the board.

Alexander Blostein, Analyst, Goldman Sachs: Great. Thank you. You saved me a follow-up on the catch-up fees there. I did want to ask about the comment you have in the release around just the dry powder. You give us the total AUM $263 billion in private markets. Some of it is fee paying, some of it is not fee paying. Is it possible to break down like the non-fee paying piece and help us think through the timing of when that’s gonna come in into the fee rate and run rate?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: It obviously varies with each manager. Alex, let us get back to you with kind of what we’re willing to sort of say publicly on that. Give us a little bit here.

Benjamin Budish, Analyst, Barclays0: Alexander Blostein, fee earning AUM out of Alexander Blostein is about 90%, 89% approximately.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah. Yeah.

Benjamin Budish, Analyst, Barclays0: Do you want to.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah. Next question.

Benjamin Budish, Analyst, Barclays2: Our next question comes from Glenn Schorr with Evercore. Please go ahead.

Glenn Schorr, Analyst, Evercore: Hi. Thanks very much. Question, maybe on Canvas and tax optimization strategies. Seen a lot of growth, you commented on yours. There’s a lot of competition, but there’s also really low penetration. I wonder if you could talk about what you see for further growth in terms of penetrating the current base of clients, any capacity issues you might see, very importantly, how you differentiate in a crowded field, meaning leveraging that brand and distribution relationship that you have. Thanks.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah. What I would say is, first of all, I think one of the differentiators of Canvas versus the others, I always like to say it was built by quant people as opposed to tax people. It’s much more about the technology, which gives it a lot more flexibility going forward. I think Canvas is being selected in many cases because people recognize that it has the really kind of an impressive technology. When we added the managed option solution over it’s giving us a lot more creativity around product development. Things like, you know, you have high basis concentration of stock, and you can use the managed options component of it to be able to make a more tax efficient portfolio.

I think we’re winning because of the actual, you know, vehicle, or not the vehicle, but the technology there. What, you know, started out as a direct indexing opportunity has evolved into an ability to take that technology as an overlay and create tax-managed, tax-efficient over active strategies. Our conversations are now not just, do you want this as a platform to manage separately managed accounts or, you know, direct indexing, but we’d love to use it as a way to optimize the tax efficiency of our active strategies. They’re open up to a lot of partner conversations. I don’t know. Daniel, you want to add some things to that?

Daniel Gamba, Co-President and Chief Commercial Officer, Franklin Templeton: Yeah. I will add two aspects to the success we’re having actually on the tax alpha and tax optimization space, which is one space that really growing very, very fast for the industry, and we’re absolutely capitalizing on that. I’ll say number one, clearly, our retail SMA presence being so big at close to $170 billion makes us very uniquely positioned, including, of course, the legacy business that we have on the SMA side. On the Canvas side, there’s 2 elements to highlight. One is, the tax optimization that we do is quite unique and differentiated because we do receive in-kind positions from clients. We do that, and we’re very flexible in how we do the optimization, and clients are absolutely looking at that.

The other part is we add a lot of simplicity, we’re very innovating. Canvas includes, as Jenny mentioned, not only direct indexing, but we also have risk factor overlays. We have options for income within the same platform. We have added now fundamental third-party manager tax optimization, including for our different fundamental managers. We’re adding that. On top of that, we’re adding a long short. Long short has already been built into that. We have one thirty-thirty, one forty-forty, all in the same platform. Finally, we also are adding, and we actually added already municipal bond ladders in the same platform. The simplicity is giving us substantial momentum to the degree that it’s actually grown at 72% CAGR, and it’s grown actually 10 times since acquisition at $23 billion.

I think the momentum will continue. The AUM doubled over the past 12 months, and we expect that to continue given how differentiated the platform is.

Glenn Schorr, Analyst, Evercore: All right. Thanks for all that, Jenny and Daniel. Appreciate it.

Benjamin Budish, Analyst, Barclays2: Our next question comes from Craig Siegenthaler with Bank of America. Please go ahead.

Craig Siegenthaler, Analyst, Bank of America: Greg?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Operator, maybe, yeah.

Benjamin Budish, Analyst, Barclays4: Maybe we can just move to the next one. We’ll get Craig back on. Seems like there’s a technical problem with Craig’s line.

Benjamin Budish, Analyst, Barclays2: Okay. Our next question comes from Daniel Fannon with Jefferies. Please go ahead.

Daniel Fannon, Analyst, Jefferies: Thanks. Thanks. Good morning. Matt, just wanted to follow up on the guidance that you gave. There’s been some change from last quarter, but you also echoed, reiterated things you’ve been saying around flat with fiscal years 2024 and 2025. Wanted to just get some clarification around the moving parts. Also in the quarter, there was an announcement of some voluntary retirements across the equity portfolio or equity division. I assume that’s incorporated in this guidance and maybe the outlook for next year, but just wondering if that’s incremental or not.

Benjamin Budish, Analyst, Barclays0: Yes. The voluntary buyout is included in our full year projection. First of all, why don’t I go through the quarter guidance, and then I’ll talk about the annual as part of that. On the third quarter guide for our effective fee rate, we’re guiding mid-to-high 37s, very consistent, stable with the second quarter. Compensation, we’re guiding at $830 million, assuming a $50 million performance fee at a 55% payout. IS&T is $155 million, which is in line, maybe a little bit higher than last quarter based on AI investment specifically. Occupancy, we’re at $70 million in the guide.

G&A, we expect to be a little bit higher at $210 million-$215 million, but this does include elevated fundraising related fees or expenses around $23 million-$25 million and an additional $9 million-$10 million for advertising and marketing. In terms of the full year, as outlined on page 14 that you referred to in the IR deck, this does assume flat markets from now and excludes performance fees. We continue to guide approximately in line or slightly above fiscal year 2025 expenses, excluding performance fees. This assumes current market levels, higher sales and fundraising that we’ve presented today and seen, and stronger performance. Stronger performance meaning we have some compensation-related expenses tied to better performance that’s formulaic driven. That’s going up a little bit.

For further perspective, we end up at the level illustrated on the page, which is about 1.5% higher versus 2025. We would expect investment management fee revenue to increase at 4 times that rate at least. Meaning if the expenses increase by 1.5%, we would expect investment management fee revenue would be expected to increase by at least 6% year-over-year, all else remaining equal. This is consistent with previous commentary on margin expansion going into our fiscal year-end that would result in fiscal fourth quarter margin in the high 29s and for the year in the 27s for the full year, both representing meaningful margin expansion ahead of plan and on our way to 30%+ margins later in 2027, all ahead of plan and as presented last quarter.

Daniel Fannon, Analyst, Jefferies: Thank you.

Benjamin Budish, Analyst, Barclays0: Thank you.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Next question, operator.

Benjamin Budish, Analyst, Barclays2: Our next question is from Patrick Davitt with Autonomous Research. Please go ahead.

Benjamin Budish, Analyst, Barclays3: Hey, good morning, everyone. There’s been a lot of press focus on secondaries PE strategies and the policy of marking up deals immediately upon close. Much of that has been focused on other companies. Could you give us more color on how much of Lexington’s fund performance is driven by that initial markup versus natural appreciation? Then more broadly, do you see this increased attention or the increased attention on this practice impacting regulatory scrutiny or demand for the asset class? Thank you.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: The issue that happened there was actually because I think the manager kind of changed the policy and maybe was a little unclear in how that sort of went down. I think that created a huge amount of noise. In secondaries, the markup, the discount markup is about 20%-25% of total return over the life of a fund. That gives you a sense for, you know, most of the appreciation really comes in the asset itself, and that’s the beauty, I think, of somebody like a Lexington who’s got, you know, is a premier buyer of these deals. They get to be pretty selective as far as what deals they choose, and they have a ton of information.

I mean, they have information on 55,000 private companies. They’re really tracking and they’re getting to decide which, you know, which underlying funds they believe are gonna have the best upside opportunity. That’s how they’re really underwriting it. They obviously negotiate a discount. That gives you kind of a sense.

Benjamin Budish, Analyst, Barclays4: Okay. Next question.

Benjamin Budish, Analyst, Barclays2: Our next question comes from Michael Cyprys with Morgan Stanley. Please go ahead.

Benjamin Budish, Analyst, Barclays1: Hey, good morning. Thanks for taking the question. I wanted to ask about AI. I was hoping you could update us on how you’re using AI across the organization today and some of the use cases that have been most impactful so far and some of the key learnings that you’ve had. If you’re able to help quantify any of the benefits that you’re seeing, that would be interesting. As you look out over the next couple of years, can you talk about some of the steps that you’re taking to further embed AI throughout the organization. I know, Matt, you mentioned some uplifts on expenses in part from AI investments, and you can elaborate on some of those investments and how you’re thinking about the longer term benefits. Thank you.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah. We look at AI. Look, I don’t you know, having run technology, I don’t think that there are many companies that they can sit there and say that the AI has yet to be material in their organization, and everybody’s doing a ton of stuff in it. I’m proud of the work that we’ve done because we were early adopters in what is this multi-agent orchestration of AI, and that was the Intelligence Hub, what we call Intelligence Hub, which was our platform used for distribution. The way if I were to, to bucket the AI efforts, I would say with respect to distribution and investments, it’s all about growth opportunities with respect to operations and technology. Our operations, it’s about efficiencies, and in technologies, it ultimately will be about getting more through the pipeline.

With this multi-agent Intelligence Hub, we’ll start there. This is the one that we announced the partnership with Microsoft, and they came in and helped us build it. I’d say it’s a very simple problem with a complex technical solution. The simple problem is, how do you ensure that your salespeople are seeing the right clients and having the best conversations? That goes in, and it pulls data from your CRM system, from your product system, external product systems, maybe social media. Those are multiple agents, and LLM models tend not to be great with analytics, so you have to marry them with others. We are seeing early on uplift of our wholesalers or, you know, our salespeople essentially seeing 10% more clients. I’m not gonna share sort of the preliminary numbers.

It’s too early to sort of dictate whether that’s translated directly into additional sales, but from just the efficiency of the administration, it is looking like we are also getting an uplift in sales from those, we’re rolling that out more broadly. Our investment teams are using it a little bit, you know, depending on the team, but we have hackathons done by our investment teams. They create agents. Those agents are put in a central library. We’ve been doing this for quite a while. I can’t remember the number that we have. Another investment team may, you know, decide, oh, I’m gonna pull this agent out. We also created a virtual research analyst that sits in one of our investment teams where they have fed in kind of the views of and the philosophy, it will question.

It’ll come up with sales idea or investment ideas. It will actually sit. You know, if you’re thinking about making an idea, it will question like, "Have you thought about these things? You say these are important." It’s done a review of historical trades, and we have multiple different ways in which our investment teams are leveraging it and learning from it. The most important thing, I think, is we’ve created this centralized group to share expertise on AI so they get the learnings from each other. We have work. You know, this is something we’re focused on to the extent that we’ve outsourced, is looking at the length of our outsource deals because we don’t want just to have the AI efficiencies accrued to the outsource deals. That’s a part of our vendor management program.

In places that we have the operations in-house, reconciliation, other things, RFPs, we are seeing some efficiencies. It’s still very early, we’re measuring in our technology group, for example, you know, how much code is being written by AI. That gives you kind of a feel for how we’re using it across the firm.

Benjamin Budish, Analyst, Barclays0: Yeah. In terms of how we’re spending money, I mean, Jenny already touched on it, but to that question, you know, we have a fully staffed, dedicated team, as Jenny mentioned, that’s centralized. Within that team, we have, you know, individuals focused on, as Jenny mentioned, investment, sales functions. That means it becomes a fairly significant group internally. Each of these groups is focused on both the effectiveness piece and the efficiency piece. There’s a revenue part of this, and then there’s a cost part of this. We’re doing our best. It’s very early days. We’re doing our best to track the $ we spend versus the $ that we either save or that we gain through the process of using AI and adoption.

Benjamin Budish, Analyst, Barclays1: Great.

Benjamin Budish, Analyst, Barclays2: Our next question comes from William Katz with TD Cowen. Please go ahead.

Benjamin Budish, Analyst, Barclays5: Okay. Thank you very much. I just have a couple nits added together, maybe equals 1 full question. On the tax minimization, top tax optimization side, there’s been some discussion around potential adverse tax rule for exchange Section 351. It seems a bit arcane to us, but it’s been coming up a lot in investor dialogue. A, how real is that as a real change, or is that more of a disclosure issue? Would that have any kind of impact on the business? My second question is just on Lexington Eleven. I think you recently previously raised $22 billion, and I know Matt just gave some guidance around some platform fees or placement fees into the new quarter or so. Is there any reason to think that that next bond won’t be as equals of size?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Thirdly, just in terms of capital return, a little bit off late question. Just wondering if you could talk a little bit about your priorities looking ahead. Thank you. I’ll just quickly jump in on the Lexington, then I’ll turn it over to Matt on the tax stuff. No reason to believe that that is not at the size of the last fund. As I said, you know, they are happy and on track, and there’s good demand for secondaries, and we do not see any cannibalization with the evergreen funds that we’ve done in secondary. I think that, you know, that’s going smoothly. Matt, you wanna cover the?

Benjamin Budish, Analyst, Barclays0: Sure.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: I think the other one. What was the tax Section 351?

Benjamin Budish, Analyst, Barclays0: It’s, it’s a bit arcane, but apparently in the index ETF world, there’s some discussion between, I think, ICI and the IRS. Excuse me. Sorry to be so ticky-tacky on this call. Just in terms of adverse ruling about tax optimization under the exchange, would that limit maybe the use of options so forth as a way to shield income. Bit arcane, but been coming up as a watch point given the really rapid growth in tax population.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Here’s what I would say. I don’t, I don’t know specifically on that other than I am on the ICI board, and we do talk a lot about. You know, the mutual funds have a sort of unequal tax treatment versus an ETF because you get to do the in-kind. I don’t think. There’s always a worry that that goes away. The reality is it’s actually unfair. Why should your average person in a mutual fund, who tends to be your smaller investor, actually have to pay capital gains just ’cause the fund experienced capital gains versus what their individual ownership is like they would if they owned a stock. That has always been something that has been a disadvantage a bit on mutual funds.

I think that the ICI, that’s one that’s always discussed. I’m not aware of discussions about the ETF losing theirs as much, as the hope with the ICI that you actually make the mutual fund more fair.

Daniel Gamba, Co-President and Chief Commercial Officer, Franklin Templeton: I will only add that none of our major ETFs use options overlays in the way in which they are constructed. We haven’t been hit with that question given the nature of our current ETFs that we have. We do have an excellent options capability within our SMA business, which we call MOST, and we’ve seen substantial demand on that. On SMAs, clearly on individual securities, there’s no such discussion. Clearly on Section 351 exchanges in ETFs, we are not part of those. We don’t have those products structured like that.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah. Actually, I just looked it up on Perplexity, and I have a better understanding of what you’re saying. There are people, there are some strategies for high net worth where people will contribute-

Daniel Gamba, Co-President and Chief Commercial Officer, Franklin Templeton: Yes.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah, in exchanges, we have not really participated in that. That is one that you could and it could impact ETF share classes as part of a mutual fund. We’ll see how that evolves.

Benjamin Budish, Analyst, Barclays2: Our next question comes from Brennan Hawken with BMO Capital Markets. Please go ahead.

Brennan Hawken, Analyst, BMO Capital Markets: Hey, good morning. Thanks for taking my question. Two questions just circling back on the alts fundraising. Thanks for providing the Evergreen AUM, what you’ve reached now. Maybe could you talk about what sort of flows you’re seeing on a quarterly basis and how we should think about that? Then just a follow-up on Lexington. You referenced that you’d be giving an update at year-end. Can you help us understand why it’d be year-end? Is that your updated expectations for the first close?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: I think that on Lexington, I think that, you know, like I said, they’re actively fundraising. You know, they’ll decide kind of on the timing of their first, you know, their first filing. It’s hasn’t been year to date, so it’ll be the second half or towards the end of the year.

Benjamin Budish, Analyst, Barclays0: Jenny meant our fiscal year-end. Our fiscal year-end.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: That’s September.

Benjamin Budish, Analyst, Barclays0: There could be an update in July or something like that, you know.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: On the Evergreen, we have said that we’re raising about $200 million a month across our 3. You know, we have over $1 billion. We have 3 over $1 billion, and we’re continuing to see that same kind of demand. About $200 million a month into the 3 Evergreen strategies.

Brennan Hawken, Analyst, BMO Capital Markets: That’s remained consistent recently with some of the, you know.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah.

Brennan Hawken, Analyst, BMO Capital Markets: Um-

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah.

Brennan Hawken, Analyst, BMO Capital Markets: Yeah. Great.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah.

Brennan Hawken, Analyst, BMO Capital Markets: Thank you.

Benjamin Budish, Analyst, Barclays0: Diversity helps.

Daniel Gamba, Co-President and Chief Commercial Officer, Franklin Templeton: I think important to say that we don’t have a big BDC or large exposure to software within the platform. We’ve continued to raise in line or even higher across all our Evergreens, secondary PE, like real estate debt, real estate equity. Over the last two years, we continued to go in line with the penetration that we have on the wealth business. Substantial growth, and we haven’t seen any slowdown from our end here.

Brennan Hawken, Analyst, BMO Capital Markets: Thank you.

Benjamin Budish, Analyst, Barclays2: Our next question is with Benjamin Budish from Barclays. Please go ahead.

Benjamin Budish, Analyst, Barclays: Hi, good morning, and thanks for taking the question. Maybe just continuing to follow up on the alts fundraising. You mentioned, I think earlier, that most of it came from credit in the quarter, obviously not from BDCs. Can you unpack a little bit, like, what pockets of credit you’re seeing the most demand? And then just a quick housekeeping one on the G&A. You mentioned there’s some sort of one-time fundraising expenses associated with, I think, the larger flagships. Just curious if we should think about those as recurring or kind of near-term elevated, but maybe not in the run rate for next year, or perhaps they come back with more flagship fundraising. Any help there would be great. Thank you.

Benjamin Budish, Analyst, Barclays0: That’s the expenses. I’ll get that done quickly. I wouldn’t say it’s one time because you may have other quarters that also have elevated fundraising, but $23 million-$25 million is obviously a large number, and that would be a one time associated with, you know, a good fund raise expectation, with, you know, let’s call it higher fee type, alternative asset funds.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: On the alt fundraising. We mentioned. Remember, on the credit side, we have both BSP as well as what was formerly Alcentra, but we’re calling BSP Europe. We had good, strong fundraising from both of those. You know, part of it was CLOs, but honestly, there were probably. Remember, they have an opportunity fund. They have a real estate debt fund. They have special situations. We got contributions from really across the board, and I think there’s at least 15 different kind of funds that had some sort of contribution to the credit. It also, I mean, interestingly, we’re seeing Clarion with real estate, that’s starting to pick up real estate, and Clarion has tremendous performance there.

I think as people have been nervous and we’re wondering, you know, there’s $20 billion in redemption requests on real estate managers out there. That money is probably gonna go somewhere else. On the private credit managers out there. People like real estate because it not only gives a good source of income, it has a hedge, you know, it’s an inflation hedge. I think that’s why we’re seeing this pickup in interest in real estate. Our venture group has done well too. You know, I think the key message here is this was a very diversified portfolio, diversified raise, as opposed to a real concentration. There are literally over 30 entities that raise money for in our alt space.

Daniel Gamba, Co-President and Chief Commercial Officer, Franklin Templeton: I want to point one more point, Jenny, to what you’re talking about, which I think this quarter we’ve had positive contribution from every single region, which is very important.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah.

Daniel Gamba, Co-President and Chief Commercial Officer, Franklin Templeton: In the alts fund raise, we have seen growing demand outside the U.S., with 40% coming from outside the U.S. sources, about 16% from EMEA and 23% for APAC. As an example, we successfully launch funds, new vehicles in Korea, Thailand, Taiwan, with a strong momentum in Japan, which is a key market for us. We’re putting increasing resources there. In EMEA, we’re now servicing 11 markets, which is like 5 more markets than a year prior, given increasing demand for our ELTIFs across all three capabilities, including ventures.

Benjamin Budish, Analyst, Barclays: Okay, great. Thank you all very much.

Benjamin Budish, Analyst, Barclays2: Our last question comes from Kenneth Worthington with JP Morgan. Please go ahead.

Kenneth Worthington, Analyst, JP Morgan: Hi. Good morning. Thanks for taking the question. We’re seeing ETF distribution fees being requested by intermediaries and being dismissed by some of the larger or largest ETF managers. How is Franklin thinking about ETFs and distribution fees, and do you see the potential for ETF access to drive market share shifts in ETFs potentially favoring Franklin?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Since Daniel’s career started at the at BGI at the early days of ETF, so I’m gonna let him answer this one.

Daniel Gamba, Co-President and Chief Commercial Officer, Franklin Templeton: Thank you for that question. I’ll say that the ETFs is one of the most exciting developments that we have here in Franklin Templeton. Our platform reached $62 billion at the end of the quarter, and that’s double what we have 18 months ago. Our flows, the organic growth of the flows, just the fiscal year to date, which is only two quarters, 49%, and we’re growing really across the board. The three main drivers for ETFs, active ETFs, the industry is talking about it, 45% of what we have, it grew 70% relative to a year ago. We just reached our Putnam Focused Large Cap Value ETF. PVAL is nearing $10 billion, and it’s double in six months. We have plans to launch every major fundamental PM with a large franchise will manage their own ETF.

The other part that I think is worth mentioning is we converted 10 muni mutual funds the last quarter, and now that’s a full growth platform, and it’s helping growth not only ETFs, but also muni mutual funds, muni SMAs, which is excellent. The other driver is single country and regional ETFs that represent 30% of the platform. They all had excellent inflows. We grow over $3 billion flows into these country ETFs, including Korea, Japan, Taiwan. Given our heritage in managing local assets, we will continue to develop and launch more country and regional ETFs. The third driver is systematic and smart beta. That is 20% that is managed by our Franklin Templeton Investment Solutions. We have the Franklin International Low Volatility High Dividend ETF approaching $5 billion. We will continue to do that.

Clearly, we have a great track record on ETFs, and we are doubling down on that. Of course, a lot of our capabilities come from excellent relationships and partnership with our clients. We have a U.S. wealth platform that is almost $800 billion and is one of the largest, with hundreds of salespeople covering and educating our sales advisors. Of course, we review our business with all our platforms regularly, and as we evolve our platform and value to clients, we will prioritize those platforms that deliver the most value to us. On the ETF discussions, we are clearly creating business plans with our partners.

Those that have the most impact investing in education, sales and support, and impact the business will continue to be major partners. We will continue to discuss how can we grow our business together. Clearly, ETFs is one of the areas where you’re gonna hear much more from us going forward.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Just to that last point that Daniel is making, look, platforms always want to have more revenue share. Like, that’s just the reality. ETFs are not structured in the same way that mutual funds were. Platforms, depending on the platform, they can influence growth and opportunity for ETFs or not. If the platform is actually going to be able to have some positive influence, then that’s a discussion we have. To the extent that they can’t influence ultimately in the end, then we wouldn’t, you know, we wouldn’t consider any of those fees.

Kenneth Worthington, Analyst, JP Morgan: Got it. Because some are not gonna participate in or don’t wanna participate in the fees, do you think it drives share to shift from those that are willing to partner with distribution from those that are not?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Different platforms have different influence, right? If you can heavily influence, yes, there’ll potentially be some amount of shift on what you can influence. The reality is the financial advisor is getting more and more independent. To the extent that they’re on one of these platforms and they’re an RIA, they don’t care what the platform is telling them. They’re gonna sell what they sell. It ends up being really kinda, you know. That’s where having a huge sales force is so important because it’s hand-to-hand combat. You know, if they choose the model from the platform, then the platform influences it. Most of the big RIAs who are big ETF users actually decide on their own.

Kenneth Worthington, Analyst, JP Morgan: Thank you.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Thank you.

Benjamin Budish, Analyst, Barclays0: Quick point of clarification from an earlier question that we wanted to just clarify. I think Alex asked the question around alternative asset fee versus non-fee generating. Just to be clear, the 90% that we talked about, approximately 90%, that’s potential to earn fees on that. The fee-generating, current fee-generating AUM is about 80%, and that’s on the full $283 billion.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: It varies depending on alt managers.

Benjamin Budish, Analyst, Barclays0: Yeah.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: That’s the blended. Yeah.

Benjamin Budish, Analyst, Barclays0: Exactly. Just wanted to make sure we clarified that.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah.

Benjamin Budish, Analyst, Barclays2: Our next question comes from Brian Bedell with Deutsche Bank. Please go ahead.

Brian Bedell, Analyst, Deutsche Bank: Great. Great. Thanks for squeezing me in here. Actually one on Franklin Crypto. Jenny, if you could just talk a little bit about, you know, what market are you targeting for that and the different products types as you evolve, you know, Franklin Templeton Digital Assets? Also on the tokenization of money funds, the Benji Fund, and your view on, you know, to what extent we’ll see the development of tokenized money funds accelerate, you know, given obviously the use cases and the yield cases, especially within the digital asset platforms.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah. Great. First of all, why do I love blockchain? Because it’s a really efficient technology that drives down costs. That’s a good thing for us as an industry and for our clients. You have to have a wallet to actually hold a token. A wallet is just a cryptography that matches to that token, but you just have to have it. All of our traditional distributors, very few of them actually have a wallet. You have to go to the exchanges. When you ask me where the kinda immediate opportunity, it’s an exchange, a crypto exchange, a Kraken, an Ondo, a Coinbase, Binance that have wallets there. Two things are happening. One is, they’re, you know, it’s an obvious place to integrate Benji, so people wanna put money into cash.

If it’s in their stable coin, they don’t earn any yield, so they can shift it into a money market fund and earn yield on that. That’s an obvious opportunity for us. The second thing that’s happening, and you just take the top five exchanges, they have 1 billion wallets there. From a new client base, kind of interesting, and they’re thinking about offering traditional products there. We have launched, I think, eight ETFs, tokenized ETFs on one of the exchanges and five on the other, and we’re talking to other exchanges. You know, we’ve got eight on Kraken and five on Ondo. These are just in case those investors are interested in more traditional products. You couldn’t hold an ETF or a mutual fund unless it was tokenized, and because they have no other way of holding it.

We think that’s an interesting new opportunity for us. The other thing is you saw that we’re bringing in a small team, 250 Digital, and they actually are. They, they kinda have an institutional, think of it as a crypto venture fund. What we found is there are institutional investors who would like exposure to the space, but aren’t comfortable with a small firm. Now that they’re part, we think that. They don’t start until this fall, but when they start, we’ll get some demand from institutional clients who are interested in investing in kind of a venture part of the crypto space.

Brian Bedell, Analyst, Deutsche Bank: Okay. The punchline, I guess, is that we should expect an acceleration of your tokenized products as you roll this out over the next few quarters, let’s say?

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Yeah. I mean, look, these things are always a hockey stick, right? Right now, it just depends on how much adoption, say, the tokenized ETFs get on those exchanges. We are seeing some traction where we are in programs where the Benji product is an option, and we’re starting to see some traction there. I think it takes a little time to kinda sell people and educate on this space.

Brian Bedell, Analyst, Deutsche Bank: Yep. Yep, definitely. Yep. Great. Thank you so much.

Benjamin Budish, Analyst, Barclays0: We think somebody was trying to get in earlier with a question on capital management. Why don’t we just answer that.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Should do it, yep.

Benjamin Budish, Analyst, Barclays0: If we have time. I think the question was on our capital management priorities. I’ll start and maybe Jenny then you.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: You go ahead.

Benjamin Budish, Analyst, Barclays0: In capital management priorities, Obviously our dividend is always, you know, top of the list in that regard, so we wanna make sure the dividend is in place and continue to protect the increased dividend that we have each year. Our organic growth is taking up more capital than it has done in the past. Our C capital and co-invest balance sheet allocation has increased again to $2.9 billion, up from $2.8 billion last quarter. As I mentioned in the previous quarter, we expect that to be closer to $3 billion by the time we reach the end of the year.

We’ve always repurchased our employee-related stock grants to make sure we hedge our share, our shares out to basically zero out for the year, keep the same amount of shares outstanding. Obviously we have opportunistic share repurchases. M&A is, I think you all know it’s just very super active. There are some areas of focus here, mostly distribution-related. I’d say Jenny may wanna make some additional comments on this, but distribution-related, a little bit bolt-ons related to alternative assets, in particular overseas. We’re quite involved in reviewing those things. I’d say most of the M&A/sort of inorganic activity is around partnership strategic activity in connection with distribution.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Great. I think you covered it very well, Max.

Benjamin Budish, Analyst, Barclays0: Okay.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Operator,

Benjamin Budish, Analyst, Barclays2: Okay. This does conclude today’s Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin’s CEO, for final comments.

Jenny Johnson, Chief Executive Officer, Franklin Templeton: Great. Well, listen, everybody, thank you for participating in the call today. You know, once again, we are a people business, and I wanna thank all our employees for their hard work and dedication to the company, and we look forward to speaking with all of you again next quarter. Thank you.

Benjamin Budish, Analyst, Barclays2: Thank you. This concludes today’s conference call. You may now disconnect.