富蘭克林資源 (BEN) 2022 Q1 法說會逐字稿

Welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31, 2021. Hello, my name is April, and I will be your operator today. As a reminder, this conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Good morning, and 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 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 can 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 President and Chief Executive Officer.

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for our first fiscal quarter. Matthew Nicholls, our CFO, and Adam Spector, our Head of Global Distribution, are on the call with me today. 2022 marks Franklin Templeton's 75th anniversary of the company, a proud milestone to be sure. And although much has changed in that time span, our commitment to progress for the benefits of our shareholders, clients and employees has not.

After enjoying a strong run since the pandemic lows, global equity markets in 2022 have had a volatile start to the year. Navigating this environment reminds us of the value of active management and the importance of a resilient organization. Throughout our history, we have worked to build a diversified business across asset classes, client types, regions and investment vehicles. In recent years, we further diversified our firm to be well-positioned to offer our clients a full range of investment solutions.

Over the course of the past quarter, we've continued to make acquisitions and add resources in key areas driving industry growth such as alternatives, SMAs and wealth management as well as ESG and sustainable investing. As we look to the future, our strong balance sheet provides us with financial flexibility and positions us well across market cycles. Importantly, despite current market conditions, we have the resources to remain focused on executing on our long-term strategic priorities.

Turning now to our first fiscal quarter results. Long-term net flows of $24.1 billion were the third highest in company history and marked the first positive quarter since December 2014. This compares to long-term net outflows of $9.9 billion in the prior quarter and $4.5 billion of outflows in the prior year quarter. All asset classes saw improved long-term net inflows for the quarter and alternatives posted a tenth consecutive quarter of net long-term inflows with $3 billion.

Reinvested distributions, which are typically higher in the first quarter were elevated at $23.5 billion compared to $12.6 billion in the first quarter of 2021. However, including or excluding reinvested dividends and the newly won mandates from a new investment team, we made progress in all asset classes. We remain focused on evolving our global distribution efforts and the improvements we have made are driving growth. We have prioritized our focus on our largest markets and clients, which has led to positive long-term net flows in the U.S. and our EMEA region. We are deepening relationships and are positioned for continued sales momentum as we focus on cross-selling across all regions.

Investment performance was strong across all periods with 61%, 70%, 71% and 77% of our strategy composites outperforming their respective benchmarks on a 1-, 3-, 5- and 10-year basis. For the quarter, 54% of our mutual fund AUM were in funds rated 4- or 5-star by Morningstar compared to 41% a year ago. Assets under management increased 3% during the quarter to $1.58 trillion, and that's an increase of 5% compared to the same quarter a year ago or 8% based upon average AUM. The financial results from our business continued to improve. Adjusted operating income increased by 6% to $686 million quarter-over-quarter and was 25% higher than last year at this time.

As mentioned earlier, we believe that we are well-positioned to capitalize on a number of important trends influencing our industry. Let's start with alternative asset management. Alternatives represent an increasing share of the asset management industry and a key strategic priority for Franklin Templeton. For the most recent quarter, our alternative assets under management grew 6% from the prior quarter to $154.3 billion, and by 21% from the prior year period. With our announcement to acquire Lexington Partners, we now have leading specialist investment managers in key alternative asset categories. When the transaction closes, our pro forma alternative assets under management are expected to be approximately $200 billion.

To further develop our alternative asset efforts, this quarter, we also made strategic investments in North Capital, an early-stage private securities market platform, and CAIS, a market leader in providing retail investors and their advisers access to alternative investments.

Another important area is SMAs, given their higher relative growth rates versus other retail products. Our SMA business grew 8% from the prior quarter to a record $135.7 billion in AUM and by 20% from the prior year quarter. As part of our strategic initiative to bring sophisticated customization to a larger segment of investors, our acquisition of O'Shaughnessy Asset Management, which closed on December 31, enhances our ability to deliver individualized SMA solutions as we continue to advance the broader evolution of managed accounts. Canvas, our custom indexing solution, has doubled its assets in the past year to over $2 billion. Additionally, a number of partner firms have increased threefold since the announcement. Investors are more focused on ESG and sustainable investing than ever, and we aim to provide a range of investment solutions to meet their highly personalized goals and objectives. We're committed to investing in the expertise, resources and tools to develop our leadership position in this critical area.

In this context, we are excited to recently announce Ann Simpson as our Global Head of Sustainability, a newly created role charged with driving Franklin Templeton's overall strategic direction of stewardship, sustainability and ESG investment strategy globally. Ann brings an extensive background with experience in public pension plans, academia, and the international regulatory and policy arena. We've made important strides in this area in recent years, and Ann's expertise and leadership will help take our firm-wide efforts to the next level.

Another strategic development that occurred during the quarter was our agreement with FIS to assume operation of our global transfer agent through a phased transition over the coming year. The combination of meeting technology built by both companies will form a unique global TA offering that will deliver an enhanced service experience. Importantly, the move to a single transfer agent platform will allow fund shareholders and financial professionals the ability to purchase and exchange all of our funds with greater ease. This change is a natural evolution of our business and follows our successful efforts to strategically partner with industry-leading firms for functions, including fund administration and application technology.

Stepping back and reflecting our overall efforts in the past several years as we brought together world-class specialist investment managers, Franklin Templeton is a different business today. We've made significant progress, and yet, as I've said on the previous calls, in so many ways we're just getting started. That's why in January, we announced the launch of our global advertising campaign, Hello Progress, which reintroduced the Franklin Templeton brand and embodies our relentless focus on innovation and the belief that every change creates an opportunity to better meet client needs.

We have a new story to tell. We built a stronger and more vibrant company. We now offer more boutique specialization on a global scale. Our clients have access to the specialists and expertise they need while enjoying the confidence that comes with working with a firm of our size.

Let me wrap up by saying that none of our accomplishments would be possible if it weren't for our dedicated employees. I'd like to thank them for their ongoing focus on the client, which has helped our business to thrive for the last 75 years and positions us well for the next 75.

And now, we'd like to open the call up to your questions. Operator?

(Operator Instructions) Our first question is from Craig Siegenthaler with Bank of America.

Jenny, Matt, hope you're both doing well, and congrats on the positive net flow inflection. So my question is on your strategic initiative in the SMA business. Now that you have O'Shaughnessy's direct-indexing platform, Canvas, which really complements the leading business you got from Legg Mason on the SMA side. I wanted to get an update on your overall SMA strategy. And specifically, which client verticals do you see as the biggest opportunities? Because I'm assuming RIA is probably a big one. And then also, what Franklin SMA products specifically do you think are going to have the best net flow trajectory here?

Well, I'll start out and then have Adam jump in. I mean I think we all feel like what technology is enabling is just much greater customization. And so while something like Canvas is fantastic for direct indexing, we really do think that its capabilities, merged with our SMA platform, we'll be able to take active strategies and make them more tax-efficient. As a matter of fact, Canvas has been growing that platform on a small base on the direct-indexing side, has grown almost twice the industry just since we even announced it. And it's really driven because they have an outstanding technology platform that enables them to take it really in what many of the platforms have with a lot of -- are handling manually, they've actually been able to program it.

So we think that the future SMAs just continue to grow, and honestly, that it's across the board, I think, in all channels. But some are already more comfortable with it than others. And Adam, do you want to talk a little bit more about that?

Sure. I'm making sure I'm not on mute here. I would say that the growth is really differentiated depending on if we're talking about Canvas or our more traditional SMA business. The traditional SMA business was really strongest at the wires because that's where Legg Mason had its traditional strength. Weve been really pleased over the last year at the significant cross-selling such that we now see real growth in SMA in our regional partners as well as with legacy FT products, FT fixed income, munis, some of the equity products there as well. So we're getting more product breadth there and we're also spreading out of the wires.

In terms of Canvas, we've already essentially tripled the number of RIAs that are using that platform. They are really focused on that platform, and we think for Canvas, we need to continue to grow the platform in that area. At the same time, we're working to expand into newer areas like the traditional broker-dealer market for Canvas where we think we can use it more to create investment products as opposed to it serving as an entire platform in the broker-dealer world.

So that cross-selling strategy is really what's key for us. We want to move in both directions, and we're seeing that. There's not really one product or one asset class that I would say, you'll see the most growth in -- what we're actually pleased about is the breadth we've been able to achieve in the SMA growth over the last year.

Jenny and Adam, I just have one follow-up for Matt, more of an accounting type question. But I know you guys include your realizations in the AUM roll forward in market appreciation or beta. At this point, because you're much bigger in alts, much bigger in private markets and you just did Lexington acquisition, why not in the future break out realization separately, because I think it would help us from our modeling side of things.

Yes. Craig, we may do that, I'd say, in the next 12 months as we continue to assess the breadth of our alternative asset business. Out of the $140 million of performance fees that we just reported, $30 million was realizations. I think the size of our performance fees reflects the potential of our larger alternatives business. Obviously, this excludes Lexington at this stage.

The December quarter is probably the highest performance fee quarter that we'll have because it's the quarter where we have both realizations, quarterly performance fees and annual performance fees. I'd also note that out of the $140 million, about $40 million of that was specifically annual related. The rest is actually pretty hard to quantify accurately, in our view, from a guidance perspective. But we are going to increase our guidance on performance fees from $10 million to $15 million, which is where we were on the guidance front to $30 million to $40 million for the second quarter.

So I know that's a longer answer to your question, Craig, but we're going to study this further to see if we can provide more granular information to be useful to modeling. It's very difficult. The performance fees are very broad, and they're in different categories, but we will do our best to provide better guides where we can.

And just to highlight, my question was a little more on the AUM realization side of things and the performance fee revenue side of things. But I heard your response that you guys are looking into it.

Your next question is from Alex Blostein with Goldman Sachs.

I wanted to start with the alts business for a couple of minutes. I think on the last call, you talked about, I think, about $1 billion in management fees or maybe total revenues that the pro forma business would generate, I guess, pro forma for Lexington, I think that was the number. How are you guys thinking about the organic growth on that $1 billion or so in revenues? What's sort of the organic base growth you expect the collection of these businesses could produce for Franklin over time?

Yes. Thank you, Jenny. Alex, I think, candidly, the $1 billion pro forma for Lexington is probably already fairly conservative. We would hope that that would be close to $1.2 billion to $1.3 billion post-closing, the 12 months thereafter plus performance fees. So we've been growing the business over the last couple of years at a growth rate of about 20%. I think I've mentioned in the past that about half of that is organic, the other half is through market growth. So I think we'd say minimum of 10%, but in our view, it should be between 10% and 20% with respect to the growth rate for our combined alternatives business.

Great. That's helpful. And then just maybe in terms of guidance, I heard you talk about performance fees for the second quarter. If there's any other guidance things you want to flesh out related to expenses, maybe that would be helpful as well. Just kind of how you're thinking about the stand-alone Franklin pre-Lexington expense base for the rest of the fiscal year.

Yes. Okay. So there's a few parts to this to try and be as useful as possible. Obviously, it's not easy in the current volatile market to get this exactly right, but I'm going to spend most of my time talking about the annual number and then we can go from there.

So the first point I'd make is that the first quarter that we're just reporting today includes $15 million of onetime benefit to G&A. I think most of you have pointed that out already, so that's good. And the second quarter includes a restart of calendar year comp costs such as annual merit increases, payroll taxes, 401(k) match and et cetera. However, we expect our comp ratio to remain in the 43% to 44% area, inclusive of performance fee compensation.

And then I'd note that 35% to 40% of our total expense base is variable with market and performance. And as we've mentioned beforehand, we are consistently reviewing the other 60% to 65% in terms of long-term potential operational efficiencies. So what this all means at this point, inclusive of the market that we've experienced over the last few weeks, is that we still expect our full year '22 operating expenses to be in the range of $3.9 billion to $3.95 billion, excluding performance fees and excluding Lexington.

Your next question is from Bill Katz with Citi Group.

Jenny, maybe one for you in your supplemental management commentary that came out also at the same time as the press release. You spoke to some pretty good breadth in the retail alternative space. I was wondering if you could talk a little bit more strategically how you sort of see the opportunity for sort of taking advantage of the democratization opportunity, maybe U.S., non-U.S. And then the converse is a franchise like WAMCO disintermediated just given its more traditional fixed income portfolio?

Yes. Bill, so first of all, I can tell you, this is the passion within Franklin because of the excess returns that you're seeing in the private markets. If you think about a company with Franklin's history that started out because the average person couldn't access the equity markets, and people came up with the idea, let's consolidate so that the masses can get access to the excess returns in the equity markets. Well, that same thing exists today. There are half the number of public equities that there were in 2000, and there are 5x the number of backed private firms, equity firms than there were in 2000.

And the differential -- so first of all, from an active management, the disparity in returns between good managers and bad managers is dramatic. And number two, the returns over the public markets are significant, right? So we've got to figure out as a society, we feel a calling to figure out how to bring these types of products responsibly to the mass market.

And so when I say responsibly, it's the running with scissors kind of scenario where the average investor needs access to their money and their savings because of a single event that happens in their life. And so they're tied up in a long-term private assets, that can be a problem. So we think there's interesting ways to do that.

And so when you ask, well, what's the market opportunity? Just take the 4 largest wire houses in the U.S. There are about $13 trillion in assets. They have somewhere, depending on the firm, an average 4% to 5% in the alts space. 1% increase by just those 4 wire houses, and we've talked to them, they'd like to increase their allocations somewhere between 10% and 12%, is $130 billion added to the private markets.

So it's -- we think that everybody feels -- the firms that we've talked to recognize the need to be able to do it, recognize the need to be able to come up with appropriate products to bring it to that channel. And the same phenomenon that exists in the U.S. exists in other markets with those disparity of returns. So we think that the -- to answer your question, we think it's very, very big.

And I would just add one thing is that in terms of Western being disintermediated. Just remember that they've got really strong alternative product on their own, very strong in the CLO space, their global macro opportunities fund is very strong. So not a concern there. That's the only thing I would add.

I'm going to just add one other thing. This is actually where we think it could be interesting. We're looking at product development where you provide, say, a BSP private credit, although WAMCO has some private credit book, private credit, combined as an allocation within, say, closed-end fund with Western. So I mean this is where we think that having the breadth of capabilities really can bring some interesting products to the retail market.

Okay. I'm sorry I cut you up both twice there. Just a follow-up question maybe for Matt. Just thank you for the updated annual guidance on expenses. Can you just sort of elaborate on what your market assumptions are? And as you think about those performance fees, is that first calendar quarter guidance now a sort of a normal quarterly run rate?

Yes. The performance fee guidance there was really just for the second quarter, Bill. But again, we're going to try our best to provide additional guidance as we roll through the year. As our alternative asset business continues to expand, we do expect our performance fee potential to continue to increase. So that's that piece.

In terms of the market assumption, I took into account in the guidance there for the year, the market as of a few days ago when the market was down double digits for the NASDAQ and pretty close to that for the S&P 500 and certainly the Russell 2000, for example, and the fixed income indices down a little bit less. But one of the things I'll note on the top line, while we don't provide revenue guidance for the business, that when markets decline, I think you're obviously very aware of this, but when the markets decline, our revenue declines a lot less than the market. And that's because we've diversified the business so significantly over the past several years, in particular.

And as our alts business becomes larger and we've got other sticky businesses like wealth and parts of the SMA franchise now and some of the institutional business, that it's just much more sticky and less prone to sharp market declines on the revenue front. So that's how I'd address that question without giving any more guidance on the revenue side, Bill.

Your next question is from Brennan Hawken with UBS.

Just curious about the $7.4 billion inflows that was from a lift-out. Could you please -- I'm sure there's sort of a definitional reason here. But normally, when we think about lift-outs, we think of that is flowing through the acquisition line. So what was the nuance around that where it flowed through on the flow line rather than the acquisition line?

Yes. That's a really good question, thank you, because we do feel that this is a very specific circumstance. If you look at something like the O'Shaughnessy, that is much more of a typical purchase of a firm where the assets of the firm, including the actual assets under management, come with it.

What we did with the former Aviva team was quite different. That was an investment team that was essentially going to move to a new home. We were really pleased that when they had a number of platforms that they were looking at, they chose the Franklin platform because they thought it would be best for their clients. They moved over as new employees to Franklin with absolutely zero assets and zero contractual relationships with any client. They then were able to reach out to those clients and contract with them in to really essentially start a new business relationship with Franklin Templeton. So that AUM was not purchased. We simply hired the people.

We were thrilled that their clients and the consultants that back those clients saw the strength in the platform such that we actually brought over more AUM than they had at the time of the announcement. So I think that's a testament to the strength that others see in the Franklin platform. But because we didn't purchase any assets, that's why it came through in the flow line.

Got it. And then when we think about -- Matt, I know it's challenging here, and thanks for all the color in trying to think about the business ex performance fee and ex Lexington, do you have any view on how to think about the core fee rate ex performance fees and ex Lexington from here. Should we think about just along with the industry, continued downward pressure? Or do you have some visibility in any divergence from that overall path?

Yes. Thanks, Brennan. So firstly, I think we feel pretty good about where our effective fee rate is excluding performance fees and excluding Lexington at this point. I think we were just very slightly down in the quarter versus last quarter based on a mix shift into institutional, which is slightly lower fee business from retail. And that's what's going to really impact our fee rate versus necessarily larger fee cuts, for example, because we think we're very much generally in line, maybe even a bit lower, than industry average in certain areas that have been under the most pressure there.

So I think we feel pretty good about where we're at. Obviously, when we include Lexington into the mix, hopefully beginning into the second -- well, I guess, it will be the third quarter when we report it. But obviously, that's going to have an upward pressure on the -- on that fee rate because their fee rate is much higher on their AUM. So in a way, we have -- it creates a little bit more of a cushion for potential to increase the EFR a little bit based on bringing Lexington in.

And then as we've said beforehand, with our strategy to continue to grow the alternatives business, if we continue to be successful in that regard, assuming that the equity market is relatively stable, let's say, and that we don't suddenly have tremendously stronger flows than expected into institutional fixed income business, which is lower fees or money markets, for example, we feel pretty good about where the fee rate is. And potentially with the growing alts business, even a little bit of an increase from where we're at today.

Great. And you didn't mention the closing date expectation changing. Should we still count on 3/31 generally?

Yes, it'd probably be April 1, just for accounting reasons. It's so complicated to try to close something at the end of the -- directly at the end of the quarter, having to include it all in that quarter when we report a couple a few weeks later. So we're more likely than not -- we think we're on track, made very good progress to close around April 1.

Next question is from Glenn Schorr with Evercore.

So the improvement year-on-year in flows ex distributions was significantly lower redemptions. I think gross sales were kind of flat year-on-year. And you talked about the investments in all Lexington coming onboard and all that. I want to talk about what you think specifically can drive better gross sales for, let's say, for the rest of this year?

And then within there, maybe if you could touch on what to expect in fixed income. In other words, there's been downside pressure on fixed income allocations. Now we have an inflationary backdrop, rates are going to rise some version of a lot, according to many people. What do you think that's going to drive, product-wise, across your platform as the year progresses?

So first, thanks, Glenn, for your question. And you may recognize some of those stats on the growth of alts in the retail channel. So thank you for those. The -- our -- you just take our U.S. obviously, by far, our biggest channel. On the retail side, we've grown that gross sales by about 13% in the last year versus the industry of 7% to 10%, right? So obviously, in a place where we're getting it right, we're seeing good growth and much greater diversification of assets and -- which has been -- the one challenge we had historically is you had a couple of products that accounted for an outsized portion. Now it's much more diverse.

We've had positive flows in U.S. and EMEA. And then in places like Asia, we had some hiccups in some markets, which have held us down, but actually seeing the same kind of positive -- in certain markets, same kind of positive growth that we see in the U.S. and Europe.

So we think we have some places where we had vulnerability and still some lumpy redemptions. But overall, what we have intended to do, which is diversify our business from a product standpoint, from a geographic standpoint and from a client standpoint, that we're doing that well. We're definitely seeing growth above the industry. So I'll put that there.

And then on the fixed income side, look, a couple of things. So first of all, we have multiple franchises into fixed income, which have different views, honestly, on things like inflation and rates, and actually had low correlation of where their alpha comes from. So that's the good news, right? Again, that diversification is really important.

And then if you think about fixed income, look, rising rate environment is actually good for active management on the fixed income side, and that's because you get, say, spread assets tend to outperform when rates go up. You have things like private credit, direct lending, leveraged loans. All of those things tend to be a place where you can get better returns.

So the story on fixed income is not just duration. And we think with the capabilities that we have, we're well-poised for where portfolios have to allocate to fixed income. Not to mention that there's a bunch of cash sitting on the sidelines that when rates go up, you think you'll be able to coax some of that back into the fixed income market. So we don't think the story is just rates are going to go up and anybody who has a large fixed income franchise is going to be hurting from it. We actually think there's a real positive story there.

Glenn, and I would add just a couple of things to that, in that sales are kind of modestly up, redemptions are significantly down. We're happy with both of those. But the other thing that isn't as evident in the number is the significant cross-selling we've had in terms of platform access. And now that we are now able to onboard, for instance, Italy is a great example where Legacy FT had a lot of the largest banks, all the largest banks, they have platform access there. Legacy Legg had a lot of great investment products, but it wasn't on the platforms. We onboarded that product to the 4 largest bank platforms in Italy this quarter. We have exchangeability coming up at the end of this month in the U.S. So all of those things augur quite well for better future sales.

Your next question is from Robert Lee with KBW.

Maybe as a follow-up to that, Adam, talking about getting more cross-selling on platforms. I believe this was kind of a key year post the merger to kind of start seeing that leverage. So what should we be looking for? Is it very simply just an acceleration in gross sales? Or is there some type of mix that we should be thinking about as you kind of try to leverage this enhanced platform placement? Just how, from the outside looking in, should we really kind of measure that or make it measurable, the success?

I think there are a couple of things. There's a number of advisers who are using us. That's one of the most significant thing. And are they using just 1/2 of the house or the entire product range? We've seen significant growth there.

Two is, I think you'll see significantly lower redemption rates going forward, to the extent that anyone is ever unsatisfied with the particular investment product,Now that we have double the products on the platform, essentially, there's an ability today to switch from one to the other and still stay within the Franklin Templeton platform. So more number of advisers buying our products and buying a larger breadth and greater retention.

The other thing that we've seen historically is that the larger number of products that one adviser buys from you, the stickier their assets are with you long term because you tend to develop a better kind of holistic relationship with them, not just in asset management product sale relationship. So as you see more products per adviser, I think you see a stickier AUM base as well.

Sorry, just to add to that. This TA conversion this month is really significant in the sense that for the first time, we're able to do exchanges. And there are some big firms that have just said, if you're unable to do exchanges, we can't add those other products on the platform. So while we've seen some improvement in cross-selling of advisers who used to be either just Legg Mason or Franklin, we should -- the real improvement should be happening now as Adam and the team are doing their job.

Great. And I guess it's more metrics for Matt to give us down the road.

I'll add it to the list, Rob.

Okay, great. Maybe as a follow-up for Jenny. So you did the North Capital transaction, you made the investment in CAIS, which I know is a big capital raise. Within the alternative businesses, I mean, how do you see those or maybe other technology investments fitting in your strategy? Is it really just more -- does it give you enhanced access having those stakes? Is it -- I'm just trying to get a sense of what you feel like that brings to the table for you.

Yes. You just take CAIS, right? So what does case do? CAIS offers to streamline for the retail -- anybody who's invested in private assets know what a nightmare it is to have to deal with all the forms and signing up for these things -- and so CAIS tried to streamline that, making it much easier for an adviser to give his clients access to the alternatives platform.

If you're an investor, you have the ability to have the conversation about where you are and what gets showcased and gives you more of a pull position to be able to showcase your products. It doesn't mean that they're going to be closed architecture. But again, shelf space and shelf positioning is always very important. So that's partly how we think about the fintech investments that we do.

It's also, Rob, frankly, it's a little bit of coopetition, if you will, in the sense that this is such a giant space and it's just going to become larger and larger. So our view of it is, even though we're investing ourselves significantly, as Adam and Jenny mentioned, in the distribution of alternative assets under out directly. We think partnering with others that are focused specifically on different areas of alts from a distribution, servicing technology perspective, it just further enhances our own investments internally and, frankly, provides us with more opportunities across the business. So that's what we're most focused on, and we've really enjoyed our time with these companies, learning from them and hopefully then learning from us and then they're getting generally more access.

Great. And if I could squeeze in one quick one on the sale of Embark since it's on technology. Should we expect there's going to be a noticeable kind of gain that flows through in the second quarter, just for modeling purposes?

Yes. The gain will probably -- is approximately $50 million.

Your next question is from Dan Fannon with Jefferies.

So I kind of wanted to follow up just in terms of M&A and the go-forward with Lexington closing here in the coming months. But still having plenty of liquidity, and you guys have been highly active over the last kind of 1.5 years, 2 years. How should we think about your appetite for more investments and/or M&A going forward?

Well, I think I'll start, Jenny, and then -- there you go. I think as we've described, Dan, before, per annum after you take into consideration the dividend that's very important and then the share repurchases, which would always do enough to at least hedge our employee grants to level out the share count. After that, if you roughly look at the net income that we add to the firm, it's over $1 billion.

So every year, that $1 billion -- we look at that and say, okay, in addition to what we've got in our balance sheet today and the financial flexibility that we have, and now, the new revolver that we have, it provides significant flexibility for us to continue to add to alternative assets to wealth management and to our distribution strategies that we've talked about. And until we run out of those things to do to enhance and further diversify our business for our company, our shareholders and, very importantly, our clients, obviously, because this is what they're demanding, we will continue to go -- down that path.

So M&A opportunities to further diversify our business, expand what we have, invest, importantly, internally in our specialist investment managers, and then we get to share repurchase after that. And obviously, the dividend is central to us. But we do have the capacity to do something meaningful every year in theory.

What we've also said though is that if we -- at some point, we will run out of those things to do, and we'll be very comfortable with everything that we have from a business -- overall business mix perspective. At that point, we will then think about accelerating share repurchases and increasing our dividend more significantly.

Great. And then just a follow-up, and I appreciate the guidance that's already been given around expenses. But you did realize the last remaining component of the Legg Mason synergies. And so as you think about the guidance for this year, does that contemplate further potential optimization of any of those businesses? Or is it kind of just based, as you said, on AUM levels here and kind of what your business planning as you see it?

No, I think it's based mostly on where we see the markets today at this point. And I think I've said before that we do have some additional levers to pull if we need to, given that, for example, wage inflation, competitive environment for talent, we're obviously extremely focused on that.

Again, we think our compensation ratio is highly competitive. It shows that we're paying for what we need to pay for to get the best people at the firm and retain and attract and the rest of it. So we're very focused on that, but we're more likely to use those levers, at least in the next 12 months, to ensure that we can continue to manage our expenses at the guidance we've given versus trying to come in much lower than that. But as we said, we certainly do have those levers to pull.

Jenny mentioned earlier on about the TA outsourcing. The TA outsourcing itself, per se, is mostly about savings to the funds, which is terrific. The service is going to be tremendous, unique, as Jenny mentioned, as we've announced, but it also saves money for the funds. For us, it becomes about functions supporting the TA. And at some point in the next year, we will get to dig into all those things and see if we can be more efficient in other places. And that's what I define as another lever internally.

Your next question is from Patrick Davitt with Autonomous Research.

Matthew, given your background in asset manager M&A, perhaps more broadly, could you kind of frame your views through your experience of how '22 could look from a pipeline standpoint given the more volatile markets? And maybe any thoughts around your view of it potentially being different than your historical experience for any reason?

Okay. Thank you. I think the first thing I'd say is that whatever the market conditions, there is no such thing, in our opinion, in buying something really good for a lower price just because the markets are lower. They're simply not for sale at that point in time. So just make that point clear.

I think the pipeline, what we're seeing in terms of the pipeline across alternative assets and wealth management, in particular, is very significant. I don't think we've ever seen it as active. And I don't really see that changing going into 2022.

In wealth management, there is a fair amount of consolidation happening and a lot of opportunity to offer increased services and support to ever-increasing demands from complex client needs. So that's happening in wealth. And Fiduciary Trust is a tremendous business, a tremendous platform. It's got its story, its history and brand that we can utilize to attract excellent businesses.

As we've mentioned, the 2 acquisitions that we've made through Fiduciary Trust, which is Penn Trust and Athena, have grown collectively by, I think, 40% to 45% since the acquisition announcements a little over 18 months or 2 years ago or so. So that's one.

And then in the alternative asset arena, it's incredibly busy on a global level, in particular, in Europe, in the United States, I'd say. And while we're very comfortable with what we've acquired and we're very excited, frankly, even if we did nothing else with what we have under the tent here, we do see a couple of other important sectors within alternative assets that we think we can help grow and would be an important offering for our clients and our shareholders at Franklin. Therefore, we'll benefit from that when we -- if we come to acquire those things.

But -- so I see the pipeline as being very strong. Opportunities are meaningful. There's a lot of competition for these things, both in wealth and alternative assets. But I think we have -- I've already referred to Fiduciary Trust. I think we're really excited about our narrative and how it has resonated with some of the leading companies out there, most recently, Lexington, for example, where I think we were in extremely good company around Lexington. And while it wasn't a wide process because it didn't need to be, there were some extremely credible parties involved in that. And we're excited that, that company chose Franklin. So that is sort of the update on the M&A front. I don't know if Jenny or Adam, you want to add anything?

No. You got it.

Thanks, Patrick.

Yes. One quick one on -- I think, Matthew, you said you expect the pro forma Lexington revenue to be more like $1.2 billion-plus. Anything specific you can point to driving that? Or is it just kind of better visibility on their fundraising pipeline at this point?

I think it's really across all of the alts because I mean, Clarion is -- and Benefits Street Partners have their own really meaningful opportunities. Clarion, in the real estate arena, has very strong performance, has really meaningful growth and an exciting pipeline, and they fortunately are exposed to the areas that are experiencing the most significant growth. So for us, that's tremendous.

And same with Benefit Street Partners, the whole alternative credit area. We think that the potential to globalize that business and be larger in another geography is exciting for us. So I think it's those 2 things. And then we, unfortunately, can't comment on Lexington's fundraising processes or anything like that. We'll be able to comment on that in our May call after we've closed Lexington. But I'll just say that everything is going very much to plan as it relates to Lexington, and we're really excited to be closing that in April. And the guide that we gave on both revenue, which I think we said for -- on an annualized basis, it would be $350 million for Lexington, and on an EBITDA level, around $150 million, we would continue to stick with that guide.

And let me just add one thing on that. Again, we've talked about the opportunity in the retail space for alternatives. I mean we feel incredibly fortunate to have the properties that we have with the outstanding performance that they have. You just look at Clarion and you look at some of the competitors in the retail space and the assets coming in, and Clarion's performance competes head-to-head, no problem in that space. We have a tremendous reputation in the retail space.

The challenge there is it's actually really hard because there's a whole education process that happens with any kind of manager. So that takes some time to be able to bring an alternatives capability in the retail. But to have the types of products that we have and the distribution capability, we're focused on solving kind of that education component of it.

And then I would just say that if you're going to bring private equity to the retail space, secondaries, we think, is a better way to do it because you don't have the J curve issue that you have in the institutional space there. And so Lexington, we think, is just a great opportunity.

So you have the products, you have the reputation and now it's just figuring out how to sell it. So that's kind of the final component.

Your next question is from Michael Cyprys with Morgan Stanley.

This is Stephanie filling in for Mike. I just have a quick follow-up on the performance fees. Matt, can you just remind us of the arrangement with Clarion and when those legacy pass-through performance fees, when that starts coming on, if not already? And how meaningful could that be to the performance to the outlook?

That's actually -- thank you for the question. That's actually already happened. So our performance fee arrangement with Clarion with respect to pass-through fees, the pass-throughs are almost zero now.

Great. And then maybe just lastly on the pipeline, the $13 billion this quarter, wondering if you can give us some color on how the asset cost mix has evolved or some of the different types of mandates or fee rates sitting in the pipeline now, how that's trended versus last quarter?

Yes. There's not really a significant change there. I would say, from an asset class perspective. Fixed income is the largest percentage of that, but we also have a very, very healthy dose of alternatives and equities in there as well. There was really a slight change in the overall level, but that does not at all reflect the strength of the institutional business.

In fact, I would tell you, we're doing better and better in the institutional space. The truth is what that's really measuring is business that you've won, but hasn't actually funded yet. So to the extent that you fund the business more quickly, that number will actually come down a bit. So the institutional business is really quite strong. Fixed income is the biggest asset class, but a big chunk of other fixed income's roughly half of it. In terms of fee rates, really, I would say we haven't seen a change in the fees that we're doing in institutional business over the last few quarters.

And just back to performance fees a second. I think maybe one guide that could be helpful because I think in the past, we said 50-50, just a rough guide on comp to revenue, performance fee revenue. I would just update modeling to make that 55%. Because when we look at the mix of performance fees now and we calculate where we think that's heading, and we think assuming 55% performance fees become compensation, I think, is a better model than 50%.

Your next question is from Robert Lee with KBW.

Great. I was just curious maybe just going back to expenses. When you did the Legg transaction, one of the things that you made points that you weren't going to touch, at least initially, was any kind of relationships with the investment affiliates, in Western and whatnot. So that was maybe left for a later date. And then maybe this is -- I don't know if this is touching a third rail or not, but 18 months in, things are starting to click. Is there an opportunity to revisit any of those that may help efficiency or costs overall for the company?

Yes. I mean, we -- firstly, we don't -- we certainly don't think of that as a third rail, Rob. We have very open, great dialogue with all of our company. And in fact, most of the leadership of the largest specialist investment managers are on our management committee or executive committee. So we have very open discussions about these things, and we're all in this together to be as efficient as we can.

I would just -- I would say that in terms of our focus internally, we have a long list of things and potential that we're working through. We've got enough potential from a cost synergy perspective outside of some of those larger specialist investment management components of the fund that you're talking about. Our focus with those aspects of the company is all about revenue and growth opportunities.

And we do talk about expenses and we talk about -- so for example, when we talked about the transformation, we talk about fund administration, we talk about other technology services across the company -- it's not just sort of a holding company FT discussion. It's a discussion involving all the specialist investment managers. And we can see in future years, there will be absolutely obvious areas where we will collectively bring expenses down as the company.

But we also are a conservative company. We're very methodical. It has to be one thing at a time. And frankly, we've got enough to get on with outside of what you're specifically referring to, and therefore, we're able to focus more on growth opportunities and revenue with the specialist investment managers, the legacy Legg Mason.

This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments.

Great. Well, thank you, everybody, for participating in today's call. We've made a lot of exciting progress. And in so many ways, I can tell you, we just feel like we're getting started. So once again, we'd like to thank our employees for their hard work and remaining absolutely focused on our clients and on each other. And we look forward to speaking to all of you again next quarter. So thank you, everybody, and stay healthy.

Thank you. This concludes today's conference call. You may now disconnect.