Franklin Resources [BEN] Conference call transcript for 2022 q3
2022-11-01 12:35:30
Fiscal: 2022 q4
Operator: Welcome to the Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year ended September 30, 2022. My name is Candy, and I will be your operator for today's call. As a reminder, this conference call 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 of Franklin Resources, you may now begin.
Selene Oh: Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary. 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 Securities and Exchange Commission including in the Risk Factors and the MD&A section of Franklin's most recent Form 10-K and 10-Q filings. With that, I'll turn the call over to Jenny Johnson, our President and Chief Executive Officer.
Jenny Johnson : Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2022 results. As usual, Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution, are also joining me on the call. This month, we officially celebrate our 75th anniversary as a company. Our firm was founded on the values of advice, active investment management and helping people achieve the most important financial milestones of their lives. Since 1947, we have transformed from modest beginnings into one of the world's largest investment managers. And today, we partner with millions of clients in more than 155 countries. Although much has changed in 75 years, we are proud to say we have a history of innovation, and we have always maintained our commitment to evolve our organization to meet the needs of our clients and shareholders around the globe. Consistent with this, I'm pleased to say that we made good progress in fiscal 2022 on executing our long-term plan and further diversifying our business by expanding our investment capabilities and deepening our presence in key markets and channels. Since January, macroeconomic and geopolitical uncertainty have resulted in significant volatility and correlated declines in both global equity and fixed income markets. Our assets under management and flows were impacted by these unprecedented conditions and industry-wide pressures. However, as always, we have been actively engaging with our clients by providing insights and thought leadership to help them navigate the latest conditions, including drawing upon the expanded resources of our various specialist investment managers and the Franklin Templeton Institute. This fiscal year, notwithstanding flow pressures, investor interest continued in all asset classes. We benefited from having a diversified mix of assets and generated net inflows in the alternative and multi-asset categories and reduced net outflows in equities offset by increased outflows in fixed income and steep market declines. In terms of our progress, we are more diversified than at any point in our history across asset classes, client type, regions and investment vehicles. Starting with asset classes. We continue to thoughtfully expand our alternative investment capabilities, which are an increasing source of client demand and can offer superior returns. Just a few years ago, we managed about $15 billion in alternative assets. Pro forma for Alcentra, as of September 30, today, we managed $260 billion or approximately 20% of our AUM and alternatives, and these assets account for an even higher percentage of adjusted revenues. This makes Franklin Templeton one of the largest managers of alternative assets. Speaking of Alcentra, we were excited to announce today the completion of our acquisition ahead of schedule. Alcentra is one of the largest European credit and private debt managers. And with this closing, our alternative credit assets under management nearly doubled to $75 billion, and we expand our capabilities into Europe. We now have a meaningful portion of the key alternative categories, including secondary private equity with Lexington Partners, real estate with Clarion Partners, hedge funds with K2 Advisors, alternative credit with Benefit Street Partners and Alcentra and venture capital with Franklin Venture Partners. For the fiscal year, alternative net inflows were $6.3 billion, including outflows in liquid alternative strategies. Our three largest alternative managers, BSP, Clarion and Lexington each had positive net flows with a combined total of approximately $12 billion. There is tremendous opportunity in the democratization of private markets as individual investors are under allocated to the asset class, when compared to institutions. Over the past year, we have focused on product development and suitability, sales and marketing and client education in the distribution of alternatives in wealth management. On the product side, BSP recently launched its first multi-strategy interval fund. Additionally, Clarion Partners Real Estate Income Fund and Franklin BSP Capital Corporation, a private Business Development Corporation, were on-boarded on two alternative fintech platforms that offer direct access to financial advisers and individuals. Again, this is all part of our broader effort to enable more investors to benefit from diversification of private markets and other alternative strategies. In this regard, to complement institutional focused resources, within our specialist investment managers we have created a dedicated alternatives distribution team that covers wealth management channels. In addition to being diversified, within our alternative asset strategies, we also benefit from a broad range of fixed income, equity and multi-asset strategies. In the multi-asset category, our flagship Franklin Income Fund which has an approach that is adjustable to changing market conditions generated net flows of $4.8 billion in the year due to increased interest from investors in Asia and Europe. Turning to fixed income. We benefited from a broad range of fixed income strategies with non-correlated investment philosophies, including positive net flows into US income, intermediate and highly customized. Notwithstanding the pressure in growth equity in particular, equity net outflows improved by 61% from the prior year, with positive net flows across a diverse array of strategies, including infrastructure, sector, emerging markets, all cap Core and equity income. From a client perspective, less than three years ago, retail investors represented 74% of our asset mix. Today, our business is balanced with approximately 50% individuals and 50% institutions. Furthermore, we continue to expand our private wealth management business and Fiduciary Trust International generated its eighth quarter of consecutive positive long-term net flows. Our firm is also diversified by geography and our efforts to implement a regionally focused distribution model that has shifted decision-making and resources closer to our clients is yielding results. For example, we have seen an improvement in our non-US business, including a 70% reduction in long-term net outflows from the prior year. EMEA long-term net flows turned positive, and there was a significant decrease in long-term net outflows in our APAC region. Turning to diversification by investment vehicle. We continue to build on our strengths in delivering investment expertise through our clients' investment vehicles of choice. Similar to the industry at large, we are seeing strong demand for SMAs and ETFs in particular. We are a leading franchise in SMAs with $100 billion in assets. And this year, we enhanced our position by acquiring O'Shaughnessy Asset Management and its custom indexing platform, Canvas, with positive net flows since acquisition. Today, our ETF AUM is in excess of $11 billion, and we continue to have positive net flows. Our ETF platform is differentiated with approximately 50% of our AUM in actively managed strategies. The evolution of technology in the industry continues to be another area of focus. This year, we made four minority investments in wealth distribution technology firms that expand access to private securities and/or digital assets to individuals. We launched the world's first tokenized US registered mutual fund as well as two digital asset SMA strategies. In June, we opened a second fintech incubator in Singapore and now have corporate investments in 14 early-stage companies, separate from our venture capital funds. In January, we successfully launched the Hello Progress campaign globally to introduce a refreshed view of Franklin Templeton. The campaign reinforced the trusted relationships we have built with clients for 75 years. Highlights the increased breadth of the firm and reflects our commitment to finding innovative ways to meet client needs. Looking forward, we will continue to purposely invest in key areas of growth across all geographies, including technology, alternative assets, customization, wealth management and distribution initiatives that benefit all our investment teams. Of course, none of our efforts this past fiscal year would be possible without the hard work and dedication of our employees, of which I and our leadership team very much appreciate. Now I'd like to turn the call over to our CFO and COO, Matt Nicholls, who will review our financial results from the fiscal quarter and year. Matt?
Matt Nicholls: Thanks, Jenny. Fourth quarter ending AUM was $1.3 trillion, reflecting a decline of 6% from the prior quarter due to market depreciation of $62 billion and long-term net outflows of $20.4 billion. Reinvested distributions were $2.5 billion this quarter. Adjusted revenues decreased by 4% to $1.53 billion, and investment management fees, excluding performance fees, declined 5% from the prior quarter, both primarily due to lower average AUM, which decreased 5% from the prior quarter. Adjusted performance fees increased slightly to $133.3 million, compared to $127.1 million in the prior quarter. This quarter's adjusted effective fee rate, which excludes performance fees, was 38.8 basis points compared to 39.5 basis points in the prior quarter. The prior quarter effective fee rate was slightly higher as a result of the shift in AUM mix and the timing of the closing of Lexington Partners. Adjusted operating expenses were in line with the prior quarter at $1.04 billion. Lower compensation and benefits was offset by an increase in G&A, which included $8 million of episodic expenses. Adjusted operating income declined 13% from the prior quarter to $494.1 million, and adjusted operating margin decreased to 32.2% from 35.3%. Fourth quarter adjusted net income and adjusted diluted earnings per share declined by 5% to $394.4 million and $0.78 per share, benefiting from a lower tax rate in the quarter. Turning to fiscal year 2022 results. Ending AUM declined by 15% from the prior year, primarily due to market depreciation of $269 billion and long-term net outflows of $27.8 billion, reflecting an increase of 10% from the prior year. Reinvested distributions were $32 billion. While long-term inflows have been challenged in this risk-off environment, long-term outflows improved 11% from the prior year. Adjusted revenues of $6.5 billion increased by 2% from the prior year benefiting from six months of Lexington and increased performance fees, offset by lower average AUM, which declined 2%. Adjusted operating expenses were $4.2 billion, an increase of 5% from the prior year including the impact of our acquisitions and increased performance fee compensation, partially offset by expense savings. Excluding performance fee compensation and the impact of six months of Lexington adjusted operating expenses decreased by 1%. This led to fiscal year adjusted operating income of $2.3 billion, a decrease of 2% from the prior year. Adjusted operating margin was 35.9%, 180 basis points lower from the prior year. Excluding performance fees, performance fee compensation and the impact of six months of Lexington adjusted operating income decreased by 11%. Compared to the prior year, fiscal year adjusted net income declined 3% to $1.9 billion, adjusted diluted earnings per share was $3.63, also a 3% decline. As a reminder, our fourth quarter last year included a one-time tax benefit of $155 million or $0.30 per share. Reflecting challenging market conditions, during the fiscal year, we strengthened the foundation of our business through prudent and disciplined expense management. Amongst other measures, we outsourced our global transfer agency function, simplifying our business while reducing future capital expenditures. This initiative follows the previously announced outsourcing of our fund administration and certain other technology functions. From a capital management perspective, we were able to close the acquisitions of both Lexington Partners and O'Shaughnessy Asset Management, make several minority investments and returned $773 million to shareholders in dividends and share repurchases and ended the year with $6.8 billion of cash and investments of approximately level with the year earlier. We will continue to prioritize our dividend, purchase shares to hedge our employee share grants and review targeted acquisitions to reach our objectives at an accelerated pace. As Jenny mentioned, our acquisitions have been driven by goals to deliver a diversified range of investment strategies to more clients in more geographies and in vehicles of choice. This diversification has also added significant cash flow and led to new sources of long-term growth and income potential for our corporate shareholders. In this context, with the closing of Alcentra we have further diversified our alternative asset capabilities, which are in aggregate anticipated to generate approximately $1.3 billion in annual management fee revenue, excluding performance fees. Given our global reach, financial flexibility, business model and experience in execution, we're able to attract highly talented teams and partnerships, looking for a combination of investment independence, support and collaboration on a global and local scale to create new growth opportunities. Looking ahead, these factors position us well to capitalize on potential strategic activity in the sector. And now we would like to open the call up for your questions. Operator?
Operator: Thank you. Our first question comes from the line of Craig Siegenthaler of Bank of America. Your line is now open. Please go ahead.
Craig Siegenthaler: Hey good morning, everyone. Hope you're all doing well.
Matt Nicholls: Good morning.
Craig Siegenthaler: So my question is on Alcentra's investment performance and organic growth. I know this deal just closed, but I was interested to see how the investment performance has trended this year and also how the fundraising and overall organic growth has also trended in 2022?
Matt Nicholls: Good morning. Craig. So I think, look, we just announced the closing today, as you mentioned, we're very glad to be closing ahead the schedule by at least, I think, a couple of months. We're very happy with the team. Performance is good. We're now turning to execution with an emphasis on business growth opportunity for the future. And I think the best way to describe it is that our teams together are going to be in marketing mode quite quickly from here on. So I think that's all we can comment so far.
Craig Siegenthaler: Great. And Matthew, do I get a follow-up? I forget if it's one or two here?
Matt Nicholls: Yeah. Please go ahead, Craig.
Craig Siegenthaler: All right. Perfect. My next one is on kind of future liabilities given a very active period of M&A. Just remind us what the next few years look like in terms of liability items like earn-outs from the acquisitions you've already announced?
Matt Nicholls: Yes. So we have about $1.3 billion of deferred payments that are due on previously announced acquisitions over the next four years. We also have $1.4 billion of debt due over the next five years.
Craig Siegenthaler: Great. Thank you, Matthew.
Matt Nicholls: Thank you.
Operator: Thank you. Our next question comes from the line of Bill Katz of Credit Suisse. Your line is now open. Please go ahead.
Bill Katz: I think diamonds for 75 years, Jenny, if I did the math correctly, so congrats on that.
Jenny Johnson: Thank you.
Bill Katz: So question just on expenses. Matt, normally in the press release or the supplement, you'll sort of put some information in there, sort of, how to think about expenses. Given the New Year, you got a lot going on. Revenues are down, you got some deals. Can you give us a sense how we should think about maybe the -- excuse me, the base expense outlook for fiscal 2023? And how to think about whether the fourth quarter -- fiscal fourth quarter as a jumping off point, or we need to normalize and just how to think that through, if you don't mind.
Matt Nicholls: Yes. Thank you, Bill. So first of all, as you know, we don't usually give guidance on the revenue front because of -- yes, it's difficult to predict where markets are heading. And obviously, that's a large portion of where revenues go with respect to percentages up or down. But, obviously, we want to just make the point that we're adding Alcentra from today. So that's about $35 billion under management to add to our overall AUM as of today. I'd also increase our effective fee rate because of that and other mix shift that we expect to happen in the next quarter to back to roughly where it was in the last quarter. So let's say, the mid 39s. In terms of expenses, I'll go through the different line items, trying to be as helpful as possible in terms of the modeling. And this is for the first quarter, so first quarter guidance for 2023. And then I know it's very early, obviously, but I'll try and give an annual view also in terms of just our expenses, excluding performance fees. So starting with comp and benefits for the first quarter of 2023, this assumes performance fees of approximately $50 million for the quarter. And we would expect comp and benefits to be essentially flat to the quarter that we just reported, the fourth quarter of 2022. But note that, that does include two months of Alcentra, and it also includes $35 million accelerated deferred comp, which is an annual adjustment, let's say. Two, IS&T, again, first quarter 2023, we'd expect it to be flat to this quarter to the fourth quarter 2022 inclusive of Alcentra, so around $122 million. For occupancy, first quarter 2023. Again, we would increase that to about $60 million, inclusive of Alcentra, and this reflects also a more normalization of return to office. G&A, we expect this to be elevated for the first quarter to approximately $160 million. This includes a one-time TA international outsourcing fee and higher placement fees. Following this quarter, though, for the future quarters, we would expect G&A to go back to approximately where we are at in the fourth quarter 2022 in the mid- to high 140s, but this is inclusive of Alcentra and likely continued occurrence of higher placement fees. It's also worth noting, that G&A guidance also includes higher T&E, as activity returns to more normalized levels. So to give -- to put that into context, just in the second quarter of 2022, our T&E was around $7 million. It's now $15 million, it was $15 million in the fourth quarter, and we expect that to probably rise to around $20 million going forward. We expect the tax rate for the quarter, as we've outlined in the executive commentary to be 27%, which is usually elevated and then for the year for it to be 25% to 27%. In terms of the year, again, this is very early, obviously, but we thought this might be helpful that we would say, excluding performance fees, but including the full year of Lexington. Remember, last year, it was only six months of Lexington. So full year 2023 will be 12 months to Lexington, so adds another six months and 11 months of Alcentra as we closed today. So it's another 11 months. So that's an expense of an additional $225 million or something around that nature. Excluding performance fees, we expect expenses to be around $3.95 billion to $4 billion, so very flat to our expenses for 2022. But again, really absorbing all of the additional expenses that come with an additional six months of Lexington in the full -- almost a full year or 11 months of Alcentra.
Bill Katz: That's very helpful, thank you, Matthew. And then, Jenny, maybe one for you. Just in terms of -- you listed off a number of things you're doing on the retail democratization side. Can you just maybe level set where you are today in terms of maybe the more major wirehouses, both in the US and your distribution partners globally and where you might be able to sort of increase penetration or just see some market share opportunity?
Jenny Johnson: Yes. I mean I'd say, as we talked about, it's complicated as far as it's not just about getting on the platform. There's a lot of education. So we've done a couple of things. We have actually created a â a separate group that is completely focused on -- it's staffed with specialists, focused on the alternative channel to be able to support the wealth channel wholesaler, right? So they can be pulled in and they'll have a background in all the different areas. And then on the product front, BSP has launched our multi-strat interval fund. CP Reef has a -- has had actually good traction. And up until now, they sort of smaller distributors, and we're now in due diligence with several of the large platforms. You have to have a certain amount of size to be able to get on the larger platforms. And so they're in the process of doing their due diligence there. And then we partnered with both CAIS and iCapital were listed on both of those platforms, which are really important. I actually attended one of the conferences and the top comments from the financial advisers were â it's so complicated to do the paperwork and the capital calls. And so it's really important that, that is improved in both Case and iCapital are trying to tackle that. So, we are now -- have our products listed on both of those platforms. We feel very good with the progress that we're getting, and it's one of those where -- as the influence start, they -- you're able to then expand on to more and more platforms. So, we feel like we're at that inflection point where the big distributors are now doing their due diligence on them.
Bill Katz: Thank you.
Matt Nicholls: Thanks Bill.
Operator: Thank you. Our next question comes from the line of Brennan Hawken of UBS. Your line is now open, please go ahead.
Brennan Hawken: Good morning. Thanks for taking my questions. On Alcentra so you, in the past, have spoken to their distribution capabilities and strengths. Are those primarily on the institutional side? And where does the penetration of the retail channel in Europe stand compared to the US? What's that opportunity set like?
Adam Spector: Sure. I think what we're seeing globally is that the adoption of Alta, a more significant portion of the portfolio is occurring in every region we operate in. We see that in Latin America. We see it in Asia, the US, and EMEA. And to the extent that Alcentra runs a lot of European-based product, we think that they have the best shot of increasing their penetration there in the short run. We're going about it the same way we are everywhere in the world. We think we have world-class institutional brand; we've got a wealth management distribution presence. And then what we're doing to boost Alcentra in that market is really to add specialists so that there's a specialist team that works between the investment teams and the general salesforce to make sure that we're telling the story the right way. Because as Jenny said, we think that success in retail also is going to be largely based on ease of access as well as education and that's where we're putting a lot of our efforts now. Given that the transaction was just announced today, we're still early in executing on some of that, but we're working on it now.
Brennan Hawken: Thanks.
Matt Nicholls: And I'll just add a couple of points to Adam's remarks. Each of our specialist investment managers that we've acquired in the alternative asset space has had an attractive organic growth rate profile based on historical performance and activity in institutional client base. And so there's already that embedded growth rate as we acquire the firms. So, the future potential is on top of that that Adam talks about. So, we expect a natural organic growth rate tied to the institutional side of the business. And then that to be boosted, as Adam mentioned, more of the wealth management channels. The additional acquisition targets that we look at that will complete our sort of build out, if you will, of the alternative asset specialist investment managers are exactly the same. They're all institutionally-focused with embedded growth rates on the institutional side, of which we believe there are some very interesting opportunities in the broader channels where Franklin can leverage.
Jenny Johnson: And I'm just going to add one more thing on that. There's always a home country bias that people have when they're making investments. And I can tell you, we're in positive net flows in the EMEA region. And this -- the excitement by the distribution team of just having local credit -- private credit, it was really important to expand that capability. So we're optimistic there.
Adam Spector: Great.
Brennan Hawken: Thanks a lot.
Adam Spector: And the final thing is how excited we are about all.
Brennan Hawken: Yes, here we go. I hit a live wire with this one.
Adam Spector: Weâre going on alternative. Each of our alts firms is institutionally focused historically and has long-standing distribution, but we are supplementing that with FT relationships where we have particular strength and we're seeing that benefit each and every one of our firms.
Brennan Hawken: Got it. Sorry, ST.
Jenny Johnson: Franklin Templeton.
Adam Spector: Correct. Franklin Templeton.
Brennan Hawken: Yes, yes. Got it. Franklin Templeton. Sorry, that's -- yes, that's obvious. Okay. Thanks for all of that. Really appreciate the thorough color. I'd love to transit into maybe a more mundane topic on expenses. And so, Matthew, thinking about the -- I know you caveated it, right, early days and whatnot. You helped us sort of quantify the -- what your expectation is for an uplift to T&E. And obviously, it's an inflationary environment that you've got Alcentra. But how much is Alcentra adding into that 3.95 to 4 base? And how much do you have wiggle room in order to continue to grind that down through the year as we work through this very, very challenging environment.
Matt Nicholls: Yes. Thanks, Brennan. So on Alcentra, it's approximately $100 million. And as I mentioned, we expect to absorb all of that into our cost base. By absorb it, I don't mean cut it. And we're finding other places within Franklin Templeton to be more efficient so that we end up with an attractive expense base given the very difficult market conditions. So I want to make that clear. We're not cutting costs over in London in the company we just acquired. So this is how -- this is where scale can matter where we can find other places to be more efficient across the platform. I think what you're sort of getting at in a way is the margin. And I think we do expect the margin to go a little bit down before it comes back up. I'll just point to a couple of important things. 35% to 40% of our adjusted expense base is variable with the market, but we're also very focused, Jenny asked me to do this in sort of one of my new roles here, is to be very focused on the other 60% to 65%. So even though 35% to 40% is truly variable with the marketing performance, we do have other interesting areas to explore. In the down market of this magnitude, it takes time for, I would, sort of, call it, carefully considered adjustments to keep up with the sharp revenue declines that the industry is facing. But while making sure that we remain competitive in terms of compensation and investing in the business, investing in the business right now, given the evolution of change in our industry is probably more important than at any time. It is extremely important to keep up with where things are heading. However, we have already taken or are in the process of taking action, such as pausing nonessential hiring. We're -- and we've announced a voluntary buyout, which excludes investment staff. That's, in our view, a very effective and fair way to downsize our headcount and we have execution plans to introduce additional operational efficiencies across the firm, things like spanner control, layering. You call it mundane, but it's extremely important to get these things right. And in the firm of our size, we think we do have meaningful levels. And hopefully, we've demonstrated in the past few years even when the markets are going up, in addition to the savings from our merger transaction, we've already outsourced various activities, as I mentioned in my prepared remarks, that's created efficiencies for our funds, importantly, so our fund shareholders frankly, benefited the most from the decisions we've made to outsource. But importantly, it's lowered future capital expenditures from a corporate perspective. And this is all about lowering our future capital output in operational areas that are not core to our growth. And it also simplifies our company operations by doing -- by operating this way by having this discipline, not just as the market deteriorated, but frankly, over the last three years, it's enabled us to continue to invest in wealth tech alternatives, SMA customization, distribution, all the things that we spend quite a lot of time talking about. And I think you'll see us to continue to be very active strategically and investing in our business as a result of our ability to be able to reduce expenses even in this -- and keep up in this difficult environment.
Brennan Hawken: Thanks for all the color.
Matt Nicholls: Thanks Brennan.
Operator: Thank you. Our next question comes from the line of Dan Fannon of Jefferies. Your line is now open. Please go ahead.
Rick Roy: Yeah, hi good morning. This is actually Rick Roy on for Dan. So just thinking about the macro set for fixed income in the coming year, several of your peers have highlighted the potential for increased allocations to fixed income, just given the historically beneficial setup that we've seen. So with the performance of certain flagship Western products that at least the ones that are visible to us, do you see them as the Western franchise as a share winner or loser in this environment? And then maybe just adding on to that, any color on the Brandywine and legacy Franklin fixed income product set would also be helpful.
Jenny Johnson: Adam, do you want?
Adam Spector: Thanks for the question. Yeah, we're thrilled about the opportunity for fixed income to offer more value to investors. Right now, fixed income finally has yield embedded in across all the sectors. We have about 121 fixed income composites that we can offer investors and 45 of those are outperforming on the one, three, five and 10-year periods. So we have tremendously attractive fixed income in a range of categories. Core fixed income Core and Core Plus were obviously under pressure this year. But what we've seen is that we're able to compete really very effectively at the shorter end of the curve in credit products in multi-sector and global and we're seeing significant wins there. Despite the performance, Western Core and Core Plus are some of our absolute biggest growth sales products with healthy pipeline and we're excited for that to continue. So a tough year in performance in some spots, but a really good fixed income lineup across the board. The other thing that we've been able to do effectively this year is to pivot out of fixed income securities to equity income strategies, multi-asset class income with our income fund, how things like infrastructure income and able to produce income without duration. So to the extent that people are still worried about rising rates, we have other opportunities, but within traditional fixed income, a range of things that are exciting, and we are seeing increased demand from investors.
Rick Roy: Got it. Appreciate the extra context around that. And then if I may, just on the performance fees, obviously, has been somewhat elevated the last two quarters at least. So how might we think about performance fee eligible AUM and where that sits currently, obviously, with Alcentra now in the mix and what assets are below any high watermarks. Just to get an idea of going into next year?
Matt Nicholls: Yes. I don't think we changed our guidance on this. I realize that we have had another quarter of increasing or higher performance fees than we talked about on our previous call, the guidance we've given, which is around $50 million. But I'd just say that about $55 million or so, the performance fees from the fourth quarter was from clients rebalancing or taking strong returns off the table and this triggered an accelerated performance fee payout. So I don't think we were too far above what we suggested, we'd be at except for this acceleration through rebalancing. In terms of the performance, what assets under management or our performance fees linked to it's very much in line with the AUM that has been highlighted in our â in our remarks, which is the full $260 billion. Of course, some of that's quarterly, some of it is annual. But the potential for performance fees in the future in our business is very significant. The $55 million of rebalancing related performance fees, let's say, is not from a very large rebalancing. It has to be said, it's but they produced a very strong performance fee. And we're so far above the performance threshold in those assets under management that if there's other rebalancing, we will get higher performance fees. But again, I would just stay to the guidance that we provided, it's extremely hard for our guidance and performance fees, as you all know. Not that doesn't mean we're not confidence in our performance is very strong across all of our alternative asset specialist investment managers. But I think $50 million for â for modeling purposes is the right number.
Rick Roy: Appreciate it. Thanks so much.
Matt Nicholls: Thanks.
Operator: Thank you. Our next question comes from the line of Ken Worthington of JP Morgan. Please go ahead.
Michael Cho: Hi. Good morning, everyone. This is Michael Cho in for Ken. I just wanted to just go back, follow up on the 2023 framework that was provided. I guess Matt, you talked about investing in the business and it seems more important than ever. And I guess my question is, in terms of your intention to continue investing and diversify your business in terms of alts and wealth and fintech I guess, would your intention also would be to increase or decrease or even â even maintain the pace of investment when we think about the efforts to diversify the business as we look into 2023.
Matt Nicholls: In terms of -- if you define investing in the business in areas where basically we have very little operating income today that we expect to grow in the future, we're increasing that substantially in 2023 because we think there's very substantial opportunities in the future. So we intend to increase our investment in that area. I'll ask Jenny if you.
Jenny Johnson: Maybe I misunderstood the question. But here's -- we've, I think, been pretty clear on how we think about acquisitions from that investment standpoint. And our view is, I think we have the broadest lineup of alternative managers of any traditional asset manager. And I think if you just compare our performance fees, to other traditional managers, you'll see the impact of that. Yes, we still have some areas of gaps, things like infrastructure and then we've talked about globalizing the various types of capabilities we have. And so if those opportunities came up, we'd be interested. The other areas that we've talked about is increasing distribution. So, any kind of investments that help us increase our distribution capability as well as the wealth channel. So, those are the three that we look at. We would say that right now the bar is higher because we're digesting some big acquisitions. But on the other hand -- and I think this is a product of a company that still has founder involvement and has been around for 75 years. We always keep cash available because we want to be opportunistic if something comes up, and we feel that we have that flexibility. But we're also going to be very picky because we're really happy with the lineup that we have currently.
Matt Nicholls: Yes. I just emphasize that our number one priority, and I think Jenny just mentioned this clearly is organic growth strategy internally. So, the question you had around have -- are we increasing the dollar investments organically? The answer is yes. We are increasing those. In terms of the other activity around M&A, as Jenny mentioned, I think we mentioned in our prepared remarks, we have $6.8 billion of cash and investments. That's roughly level with last year, exactly this time last year after two important acquisitions and four minority investments and other investments we've made in the business, of course, a lot of that is made possible through operating income, cash flow and so on. But when we look forward and when you think about the guidance I just provided, to you. We still have the room to make the organic investments, which are very important. But also we have to -- our balance sheet to continue to make targeted acquisitions, which, as Jenny mentioned, the bar is higher now, but the level of interest in some of these things is certainly not waned in any way.
Jenny Johnson: And just to give you some color on kind of the organic investments, I mean -- and these are all incorporated into Matt's guidance. But the Franklin Templeton Alternatives Group that we've set up is really newly staffed with expertise in distributing to the wealth channel alternatives, and that's a pretty substantial investment there as well as we continue to invest in FinTech and have investments in tools that can be leveraged by financial advisers, those are not profitable on their own, they're profitable when you add the models and other capabilities to them, but you have to constantly invest. All of that is incorporated in our earnings guidance.
Michael Cho: Okay, great. Thank you.
Operator: Thank you. Our next question comes from the line of Michael Cyprys of Morgan Stanley. Your line is now open, please go ahead.
Michael Cyprys: Great. Thanks. Good morning. Maybe just coming back to Alcentra, can you talk about where you see the most compelling opportunity set to accelerate the growth at Alcentra. Is that from retail distribution in Europe? And maybe you could talk about what actions you might take there with Alcentra to help them accelerate growth?
Adam Spector: Yeah, absolutely. I think the first thing we want to state is that they've got a really high quality team on their own. We've met with them recently, and we think standalone, they can do quite well. That being said, we have a huge footprint in the EMEA region. As Jenny said, we find there's a significant home bias, home market bias to all investors, retail and institutional. And what we've seen with some of our other alternative capabilities that we try to distribute in EMEA is that there can be a desire for more European based private credit. So we think that is one of the areas where we can take our significant footprint in the region and added to their institutional capabilities. I would say that in the wealth management channel, that is more greenfield. That's going to be where there's fewer assets at play where allocations are rising significantly. There, I think being an earlier player focusing on education, focusing on making the placement easier will give us a leg up there. The final thing I would note is that while I think most of our Alt managers are strong in the major markets, it really helps at FT where we have a presence on the ground in over 30 markets. So in some of those smaller markets where our alternative firms might not get to on their own, and we have significant relationships. That's the place where we can really boost distribution.
Matt Nicholls: I think the additional thing I would add to Adam's comments is I think it's important to note the fact that this transaction is one that we described as globalizing a specialist investment manager we already have in DSP. So we're globalizing the business. And Alcentra and BSP becoming part of a global team as opposed to a largely US and a large European business. That helps with fundraising, it helps with strategy formation. It helps with talent retention and origination. We just become a more interesting place for both investors, ideas, and talent. And that was one of the reasons why we thought this was very compelling and why we acquired Alcentra is something that another -- the point that Jenny mentioned a second go around the bar being high. Obviously, the first thing we always ask ourselves is can we do this ourselves? Can we build this business organically? And there are some things that just frankly take too long to get to a leadership position or even frankly gain credibility in a particular strategic area. And in our view, it would have taken us too long to do these ourselves. So we're delighted to acquire Alcentra for that to help globalize also outstanding PSP team and leadership.
Michael Cyprys: Great. And just a follow-up question. Maybe more for Jenny, I wanted to come back to the money fund that you guys cited as registered to use the blockchain. I was hoping you could elaborate on that. What's the timing and process look like to bring that to the marketplace? How an individual or institution may be able to access that fund and the benefits that you see there?
Jenny Johnson: Yeah. So it's a tokenized money market fund, technically, you could go on at the Apple Store and download the Benji app and have a wallet that accesses that money market fund. We built a transfer agency system on the blockchain. So all the shareholders' books and records are there. That I'm a believer that you will see 40 Act funds expressed over time in tokenized records. And that will have an impact on things like ETFs and traditional mutual funds. If you think about a token, it can have a smart contract that prices all the underlying investments immediately, so you can always have an NAV that's dynamic, even ETFs are only priced a couple of times a day. So we did it, because we think that this is an important space that's going to happen over time, and we wanted to understand the marketplace there. And we are talking to firms about how to leverage it. You have to hold those tokens in a crypto wallet, so if that isn't part of your infrastructure as a distributor, it's not that valuable to you today, but it will be over time. We also did an investment in a company called Eaglebrook, and we have several strategies there. Where they are fundamental research on some of the coins in the marketplace, we think these two things ultimately converge. Where you'll have traditional sort of investment capabilities that are held in a token or coin and you will have companies that will be reflected by a coin and investors will have both on their platform. But, I think, it's really early stages in this.
Michael Cyprys: Great. Thank you.
Operator: Thank you. So our next question comes from the line of Brian Bedell of Deutsche Bank. Your line is now open. Please, go ahead.
Brian Bedell: Thanks very much. Good morning, folks. First one for Matthew, just a clarification on the 2022 adjusted expenses excluding performance fees. I know we've used the formula for that typically, but do you have a precise amount -- dollar amount for this fiscal year?
Matt Nicholls: You mean 2023, Brian?
Brian Bedell: No, no. 2022, the actual -- so the adjusted expenses, excluding performance fee compensation.
Matt Nicholls: All right. For the end of the year, yes, it's around $3.87 billion so --
Brian Bedell: 3.78.
Matt Nicholls: That, as you -- we guided -- as you may remember, in the last call, we guided to 3.9% to 3.95% and then I said we'd be on the lower end of that -- so we're actually about $35 million inside of our guidance.
Brian Bedell: Okay. Perfect. Great. And then, Jenny, if I can ask you or Adam, if you can give us an update on your view on sustainable or dedicated sustainable products at Franklin. Maybe just sort of an update on the AUM you have in those products. I realize, of course, ESG is utilized throughout the investment process across the firm. But what I'm trying to sort of get out of the actual dedicated products that have that as the primary investment objective. And Jenny, maybe just your view on what's happening in Europe with Article 8 and Article 9 reclassifications, if you think that's going to accelerate or they're going to get may be more disciplined and not raise the bar a little bit more to clear those hurdles.
Jenny Johnson: So, I actually think the way to describe kind of the ESG is actually looking at the European framework with Article 8, 9 and Article 6, because it -- I actually think they do a pretty good job of defining it. You see Asia following it, and I think the US will probably model the concepts around it. So we have about $35 billion in 48 strategies and Article 8 and 9 and positive flows there. We were very conservative, I think, in our initial evaluation. Our compliance group was quite active in determining what would be categorized in those 6, 8, 9. So we feel very good about that. I think you're only going to see more requirement around transparency and to document how your process is, whatever you say show us that you're doing it and most regulators you see it in the US, you see it in Europe are saying, if you don't document and show us that you're actually doing what you say you're doing, we're not going to give you credit for it. You see it was like the UK 2022 stewardship code. Again, it's all about kind of documentation there. I do think that there is a recognition a couple of things. One is that you should measure ESG considerations with risk to the underlying company and then portfolios to the risk of externalities. And that often these get blended, I think you're going to start my just gut feel is, over time, there will almost be two different measurements for that. So I think that's a natural progression. And then I think that there's a recognition that, oh, by the way, we're fiduciaries. And so you need to consider returns in all of this, and that has to be part of the measurement as well. And I think you capture that in the Stewardship Code, the UK Stewardship Code 2. So I think it's here to stay. I think it's just a natural evolution of transparency and over time better and better data and remembering that we're all fiduciaries and then I will again remind that we are asset managers, not asset owners. So we are at the discretion of our clients as far as their desires, and we talk and educate them on things, but in the end, it's their money.
Q âBrian Bedell: Great. Thank you.
Operator: Thank you. This concludes todayâs Q&A session. I would now like to hand the call to Jenny Johnson, Franklin's President and CEO for final comments.
End of Q&A:Jenny Johnson: Great. Well, I just want to thank everybody for participating in todayâs call. And once again, I would like to thank our dedicated employees for their hard work this past fiscal year and they are laser focused on our clients, and we look forward to speaking to all of you again next quarter. Thank you.
Operator: Thank you. This concludes today's conference. You may now disconnect your lines.
