富蘭克林資源 (BEN) 2020 Q3 法說會逐字稿

Welcome to Franklin Resources earnings conference call for quarter ended June 30, 2020. My name is Joanne, and I'll be your call operator today.

Statements made in 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 and uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risks and factors of the MD&A section of Franklin's most recent Form 10-K and 10-Q filings. (Operator Instructions) As a reminder, this conference is being recorded.

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

Hello, and thank you for joining us today to discuss Franklin Templeton's third fiscal quarter results. Today, I'm joined by Greg Johnson, our Executive Chairman; and Matthew Nicholls, our CFO.

We hope that everyone on this call and your loved ones are staying safe and healthy. We're pleased to announce that our landmark acquisition of Legg Mason is expected to close this Friday, ahead of our original schedule. The strategic rationale for this powerful combination has only strengthened since we announced the acquisition in February. It will unlock growth opportunities, driven by greater scale, diversification and balance across investment strategies, distribution channels and geographies.

Significant work has been completed as we near day 1, including having announced the leadership teams for our corporate functions and global distribution groups. Financial markets stabilized during the quarter, with growth stocks outperforming value stocks by the widest margin on record over the past 2 quarters, which impacted some of our flagship funds.

On the positive side, we have seen strong performance and momentum in several key asset classes, most notably in our municipal bond and U.S. equity strategies. Flow trends continued to improve across all investment objectives this quarter. Flows into U.S. equity and fixed income strategies turned positive, with 8 of our largest 20 funds generating positive net flows year-to-date.

We continue to believe that active management will play an increasingly important role in client portfolios, and we are well positioned to capitalize on this. Additionally, our strong balance sheet continues to provide us with tremendous flexibility to evolve our business.

Finally, I'd like to thank all of our employees for their significant effort to keep our business operating at the highest level to assist our clients and help them achieve their financial goals.

Now I'd like to open it up for all your questions.

(Operator Instructions) Your first question comes from the line of Dan Fannon from Jefferies.

My first question, I guess, is on the updated integration targets for BEN and Legg Mason. You talked about, I guess, 40% lower integration and execution costs. I'm curious as to what's driving that. And then also just in terms of faster-than-expected synergies, how do you ensure that it's not too disruptive to the business as you're combining these entities to impact flows kind of normal course of business?

Yes. Thanks, Dan. It's Matthew, I'll take that. So the latter part of the question, which is about the execution around the synergy realizations. As we outlined in the prepared remarks, we're talking about being able to realize 25% of these savings in the first 60 days, 50% by the end of the year and 85% by the end of -- within 12 months of closing the transaction.

We're quite confident that the 2 work streams that we've organized: one, around the holding company functions; the other around distribution, were organized in a way where, the first part, we think can execute pretty quickly. We think that about 65% to 70% of those savings can be achieved within 60 days on a run rate basis. And then the rest of it around distribution will be at a slower pace to manage exactly the risk that you talked about around client management, product and marketing coverage across all what we think of those as sort of being the front end of the business. So we're being very careful and methodical in how we execute upon that over the 12 months that we're talking about here.

The other thing to mention is that the reductions on that front-end side of things are quite modest, relative to the size of this transaction, I think we indicated between 10% and 15% reduction across our combined sales business or sales group. So that, I think, is an important indicator of being quite careful how we how we manage the execution.

What I'll just add to that. I mean, this is -- it's what makes it complicated and makes it simpler in some ways, which is the structure of Legg Mason with the independent investment teams. And so we, right out of the gate, said that we had no intention of disrupting any of that. So as long as the investment teams aren't disrupted and we're slow and methodical on the distribution, making sure that we're first and foremost focused on no impact on clients, we think that goes much smoother.

If you take a transaction where you're trying to combine investment teams, that's where I think you get into a lot of trouble.

Yes. So the structure, at the end, itself helps. And I think in terms of the execution costs, that, in other words, is how much we're having to pay things like extension payments, severance payments and other sort of structural arrangements around the execution of the transaction.

When we announced the transaction, we had estimated that to be about $350 million. We now think it's close to $200 million. And that's really no more complicated than based on a person-by-person, group-by-group analysis on all of the data that we now have that we didn't have at the time we made the announcement. And we're able to retain a lot more folks than we thought at lower cost than we anticipated. So that's the reason for the low execution costs.

Your next question comes from the line of Patrick Davitt from Autonomous Research.

First question on the kind of new guidance on the cash tax benefit and refinancing. First, are you planning to include the $500 million cash tax benefit in your reported adjusted EPS? And then does the combination of that tax benefit and the refinancing, had that already factored into your guidance of high 20s cash EPS accretion? Or should we consider it incremental?

It's incremental, and it's actually below the line. So in a way, it's just the equivalent of us having more cash on our balance sheet. The way we've modeled it is in the first 3 years. I would say we'd probably get half of the $500 million, and I'd say 25%, 25%, 50%. And the way to think of it is that we have that additional cash where we could invest in the business, buy back shares or pay down debt.

In terms of $20 million to $25 million, just to be clear, that is not delevering the capital structure, that is lower interest payments on about $750 million of debt that is quite high cost on Legg Mason's balance sheet that we intend to refinance in the first quarter or the first half, let's call it, of 2021.

Great. And that's incremental as well to the high point?

Yes. Yes, incremental. We didn't have either of those in our accretion estimates. Correct.

Great. My follow up, the outflow trend for the income fund, looks like it's starting to accelerate a bit more after the recent underperformance. I know you've talked in the past about that being more sticky given the yield focus of the investors. But do you have any updated thoughts on that potential stickiness relative to the Global Bond Fund experienced wherever -- when they had similarly bad performance?

Yes. I mean, the income fund, again, is always rated lower in its category because it's managed for yield as opposed to the total return. And there is retirees that just love the nature of that product, and there's not as many competitors directly in that space. But it has had some underperformance here, and it is impacting it. But we still -- it's been here for 70 years because it does exactly what it's supposed to do, which is generate that stable income.

Your next question comes from the line of Mike Carrier from Bank of America.

Can you first, on the expenses. Matt, you mentioned similar guidance in the 5% to 7%. Because we've shifted a little bit in terms of the adjusted, I just want to make sure, from the comparable period of what that base is. And then as you're thinking through the year, whether that's exact range and then the longer term, you've mentioned some other sort of expense initiatives. The flip side is you're also probably looking at investments in your range just given the late transaction. Just wanted to get an update on your thoughts on some of those longer-term opportunities on the expense side.

Yes. Thanks, Mike. So I think the way to look at it is that the base is about $2.225 billion. So that's our non-GAAP 2019 base and 2019 full expenses. And we expect to reduce that by between $130 million and $150 million, which is between 5% and 7%. And that guidance remains exactly the same, notwithstanding the fact that we increased our comp accruals this quarter.

We adjusted our comp accruals upwards to reflect the momentum in our business this quarter, and it obviously reflects more of where we ended the quarter versus where we started the quarter. Last quarter, before that, the second quarter, we had been quite aggressive in our reductions in comp accruals, frankly, based on exactly where we were at, in very significant uncertainty across the market and in the industry. So we did what we thought was the appropriate thing to do there. And frankly, we've reversed that based on the momentum we have in the business this quarter.

All other aspects of expenses are absolutely in line or below where we expect it to be, so we haven't taken the foot off the gas in terms of pressurizing those areas we think we have leverage.

Of course, what's going to be a little bit complicated going into the fourth quarter is the addition of Legg Mason and you've noticed that Legg Mason has also reduced our expenses by $100 million. So Legg Mason is reduced by $100 million, we're reducing by between $130 million and $150 million. We're doing another $300 million around the deal, so we're talking upwards of $500 million to $550 million of cost reductions on a run rate basis. It's quite substantial.

However, the more we've looked at the combination, the company and what we can do without destabilizing things, we do see some additional potential saving opportunities across the operations area, finance area, all the support functions of the firm in addition to the cash tax benefit and the capital structure points that I've mentioned to you.

Okay. That's helpful. And then just a follow up on the flows. So you saw some good strength on the U.S. equity and in the meetings that you mentioned. International, both on the equity and fixed income side, still a bit challenged. Some of that looks like it's driven by performance. I just wanted to get your thoughts on, are you starting to see any like improving trends on that front? Or is it still going to be mostly dictated by performance improvement? And then we can see some of the trajectory chain?

Well, I'd say that the -- on the international side, our technology funds and just the Franklin Growth Funds are getting a lot more attention and traction. So we're seeing good uplift in sales on those strategies.

We -- we've seen reduced redemptions as you're seeing slightly less redemptions in things like the global macro strategies. And so overall, there's been a net sales improvement. I would say, July, we got hit with a large $1 billion redemption in institutional account and global equity. But otherwise, taking that out, you've sort of seen the same improvement in a trend in net sales.

Yes. I think, also, the point on the 8 of our 20 largest funds being positive inflows is a very important one. It's just the fact for us is that we have a couple of strategies that are so large, it tends to dominate the story. But the reality is that a lot of our funds are actually doing very well. They're just smaller, but they're getting bigger and bigger incrementally. So it's making a difference.

So for example, DynaTech where, only last year, we were talking about that fund. It was $7 billion -- $6 billion, $7 billion, $8 billion. Now it's $15 billion, so it's becoming a bigger part of the story that we can tell on the flow front. Gradually, as those things get larger, and then we add Legg Masons, much larger strategies, it helps manage the story a little bit around some of the larger things that have been -- they're not bad things. They're just out of favor things, which is where the performance reflects up that so -- and the flow. So -- but even on those larger things, the point we want -- that's really important for this quarter is that the redemptions have fallen quite significantly on those things.

And I would just add, the technology fund is the #3 cross-border fund. And that's really a new category for us that you can see how quickly it's accelerating in flows and could pretty quickly offset some of the headwinds you have on the global equity side with the deeper value fund as well as the global bond, which are very defensively positioned. And it's really going to take a downturn in the market for those to see any kind of swing from where they are today in flows.

And the next question comes from the line of Glenn Schorr from Evercore.

Maybe that's a good lead in. I want to do a little -- ask a little more on global international bond segment. Part of it is the product of the environment, where people's preferences away from that category. And then there's some performance issues there. So maybe if you could help us differentiate between what you think is the cyclical component of people avoiding the category. And then maybe, importantly, what's the ideal backdrop for that strategy that we can anticipate a turn in client preferences?

Yes. I mean -- this is Greg. And I think the backdrop, if you look at where that -- the global macro strategy is really accelerated in flows was after the last crisis and having a 10-year period against equities that was the flat decade versus that product, I think, was the #1 selling fund of its kind.

So the backdrop is more of a risk-off environment where you can lower the risk in a portfolio. That's really how we talk about it today. Non-correlated kind of asset class that doesn't have the same kind of risk that your equities and fixed income has, and that's really how it's positioned.

So I think today, when you have markets that continue to be extremely strong, and it's a risk-off environment, people really don't pay a lot of attention to the global fixed category. When things get a little shaky, you'll start to see renewed interest there. I think that's really the key.

And I think today, it's an asset class where people are allocating a percentage of it to, regardless where before, it was a relatively very small asset class.

But to Greg's point, if you just look at the full categories, global bond is -- that global fix is not a big flow category right now.

I think, Glenn, -- sorry, but Glenn. I think another part of your question is what portion of the flows surge or the client base of the global macro is attributed to just that risk management client base, and it's very hard to bifurcate that. But it's probably a decent foundation of the assets under management we now have in that category is because it's been so long, these are long relationships now is to do with exactly that fact. It's around risk management and having some downside protection in a market that's being quite lofty.

Great. Can I just one quickie on Benefit?

Yes.

Oh, sorry. I thought I was being cut. Benefit Street. Just curious on how they've performed in this crazy backdrop, where they're at in some of their capital raises, what opportunities you guys see on the private credit side?

Yes. So in the numbers for last quarter, they called about -- well, they called up $500 million in capital, deployed $400 million, the other $100 million there, they have coming in. So that was in there. Then they raised actually a CLO, which won't be reflected. It closed in June, but won't be reflected until July numbers of $400 million, and they have a second CLO that'll close in August, so also will show in this quarter. So that's $800 million in 2 CLOs.

They also raised, and they're about to have a first close of $400 million in a dislocation fund. And what was somewhat unique there is a lot of that was raised by our Australia institutional team. Benefit Street had been trying, Australia is a very sophisticated market, and have been trying for a long time to break into that market and just were not able to do it. So the combination of our team with Benefit Street was just a great opportunity.

In addition to that, they raised another $50 million into their senior opportunities fund, which they'll close with $700 million in commitments. Again, these are commitments. So it's dependent on the drawing of capital. But that was raised by our institutional team in Hong Kong and China, so a piece of that.

So I think they've had good opportunities as people see the importance of having the -- an active manager in this space and the experience they have around the distressed side. But they also had to have a write-down on some of their BDC, both because of having to take down some leverage as well as some distressed assets in it. They don't actually have an AUM write-down there. But so that was kind of their troubling part. But on the other hand, they've had really good traction on the sales and flows.

And I would just add that if we look at our pipeline, on the institutional side, it's our greatest opportunity, and we're still very optimistic on strong organic growth coming into the rest of the year.

Your next question comes from the line of Ken Worthington from JPMorgan.

You announced new leadership in distribution with the appointment of Adam Spector as Global Head. Maybe talk about what Adam's vision is for Franklin distribution for the combined companies, what his mandate may be in terms of deliverables and any changes or adjustments you envision that he'll make to comp or structure to kind of achieve his and management's longer term goals?

So -- well, first of all, we did -- really, a global search on this position and had unbelievable candidates as people in the industry were particularly attracted to understanding the opportunities of a $1.4 trillion manager with an emphasis on the active side, and ended up picking Adam for several reasons. One is we've just been very impressed as we've worked with him with his -- both his acumen on sort of business and practical business approach to things as well as his experience. And we talk to clients, and he's really been in a distribution role within Brandywine.

The way we're thinking about approaching distribution is much more regional and trying to build a more agile organization. So while, historically, Franklin Templeton had kept many functions, like product and marketing and even data analytics to be centralized, we are distributing that out more into the regions to provide a little bit more flexibility, and yet still have a central group for those things that'll be central. So that's kind of Adam's and our vision around how to do that.

We will evaluate it, as you can imagine, bringing the Legg Mason team together and the Franklin team together, really evaluate it, how we're looking at pay for distribution and trying to figure out what the optimal approach is. And so we've been in process -- and that may vary a little bit by region depending on what's appropriate. So all of that -- there's been tremendous amount of work in the process leading up to Adam's announcement in really restructuring this.

And of the, let's see, 5 real leadership positions reporting into Adam, actually, there'll be 6, there will be -- there are 2 that are Franklin Templeton, 2 that are Legg Mason, 1 that's undetermined whether it's coming from internal or external and 1 that will be an external hire. So we're also really excited that we've been able to bring together leadership from both organizations. And as we, over the next month or so, make announcements around that, you'll see that it's a real combination, the 2 organizations.

I think one other point to make on Adam, Ken is, Adam, in addition to being highly qualified for this position, he has existing relationships across very important parts of the combined organization, including all the investment organizations that are going to become part of Franklin Templeton. And that can be -- that can infuse additional efficiencies in and of itself. But relationship-wise, the fact they've worked strategically to together for so many years, and Adam's knowledge of our company has come up to speed so fast, his vision on combining these things and how we work together in a collaborative fashion across all the investment groups. It's very impressive and exciting for us to have that, being able to hit the ground running as opposed to have to worry about other integration of cultures and things. So very good.

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

It was nice to see the rebound in U.S. equity flows this quarter and also strong traction in your DynaTech and technology funds. Outside of these 2 funds, can you talk about if you're seeing stronger underlying demand across the industry for U.S. active equity or any green shoots relative to passive just as clients are looking to navigate a less certain future here?

Yes. It's interesting, we do have some sector funds or utility fund, our U.S. -- well, I guess that's fixed income, biotech. There's a couple of underlying sector funds that have performed well. And so as you're seeing kind of interest in thematic, we rolled out some thematic ETFs that are managed by Matt Moberg, who does the DynaTech fund and seeing a little bit of traction in those, although very, very early on.

So again, the emphasis has tended to be in -- within the Franklin group, and that group has always had a lot of strong sector funds. And so to the extent that there's been good performance there, you're seeing traction.

Yes. And I would just add, I mean, I think in this COVID world that the theme around technology and how many of these trends are accelerating as people work from home, use more technology that certainly from the adviser, they want to get more exposure to their clients to this sector. So you're really seeing, I think, tremendous growth on the back of, obviously, tremendous performance. And one that, as I said earlier, we're very optimistic on our positioning. And because Franklin has had such a long history in this area, right in the heart of Silicon Valley, that we think we're in a unique position to capitalize on that.

And just as my follow-up, how do you think investor allocations, and you can comment across institutional retail, which is bigger for you, will change your fixed income? Just given that we have a very low interest rate environment here, its reduced future return potential across the asset class, many of the segments are pretty close to 0.

And if bond allocations do change or reduce, do you expect to see stronger demand in other segments or maybe other segments of the high-yield credit segments? And I'm thinking also the privates like when you managed over at Benefit Street?

So funny, I'm just -- I'm looking at kind of a flow chart that -- it tracks Morningstar's categories. And I think out of the top 8 flow categories, it looks to me like 7 of them are bond categories, and one is a stock category.

And I -- the reason I actually have the report in front of me is just one interesting data point, which is that Legg Mason has 6 4- or 5-rated funds in the top 8 categories, and we have 0 rated in the 4 or 5 stars.

So just bringing that combination in, this is a retail focus. I want to emphasize the benefit of what we've always said is so important strategically, which is a broad product breadth so that you always have things that are in favor with a diversified distribution channel. And so that combination of bringing in the Legg Mason with our strong retail, we think will be a real benefit.

But to answer your original question about the bond flows, you definitely see, even in this low rate environment, it's an emphasis. Whether that stays there, how much was that moving when people just think that rates had come down remains to be seen.

I don't know, Greg, if you want to add anything?

I mean I think, one, if you look at the institutional world, it's very hard to get away from bonds and fixed income and a fiduciary that's running that. You can maybe put a little more risk on a portfolio, but you certainly can't walk away from bonds, even in a low rate environment. But I would say the bigger trend is the importance of alternatives like what BSP offers, like what Clariant has with real estate. I think all these alternative categories in a 0-rate environment become very important as supplemental kind of income providers to your traditional government type security.

So I think it just accelerates a lot of what's already happening on the alternative side, not being that much more important for both institutions and retail investors.

And I'll just add on munis. I mean in this COVID environment, where governments or states have had to increase their spend to support their economies internally, because that translate, I think many people think that's going to translate into higher taxes in states. And we think that, that -- one is that's going to bring -- continue to have demand in munis; and two is going to be all the more reason why you want an active muni manager who is selecting what those opportunities are.

Your next question comes from the line of Chris Harris from Wells Fargo.

Coming back to the Legg Mason synergies. Are you guys now saying $270 million on a net basis, and that would be up from $200 million previously? Do I have that correct?

Yes. Yes, I mean, what we didn't want to move away from, Chris, was the notion that a portion of the savings that we create from this transaction are going to be earmarked for reinvesting in the company. That's a really important part of our statement.

But obviously, since we made the statement about reinvesting $100 million back into the business, the market's changed, and there's more stress in the industry, so we're appropriately adjusting that. I'm still convinced we're going to invest the amount -- that we'd invest the amount that we talked about, but we're just going to get it from other places across the organization.

But in terms of looking at the $300 million gross and what portion of that will be reallocated, if you will. We thought the $270 million net what's an appropriate guide. And we felt that is a minimum, so $270 million.

Yes, that was going to be my follow up. In an earlier question, you had mentioned the opportunity to maybe do more with the cost beyond what's already been identified. So maybe you can elaborate a bit on what you might have in mind.

Yes. I mean I don't think we want to get into the different components now because we're not even a single company yet, but it's just our feel of working through this that we'll have opportunities, both on the investment side. Obviously, there's going to be a demand for reinvesting capital into the company.

But on the cost front, we've been very conservative in this transaction. We are incredibly focused on client retention. And so far, in this deal, again, we've got -- we're closing on Friday, but so far, in the run-up to the transaction, we, virtually, have no redemptions as a consequence of the transaction. Maybe there's one in Asia, but it's very, very small. So we're very focused on that.

But there are various projects going on around the integration of the functions, for instance, that show that there are certain things we're doing in higher cost areas that could be moved to lower cost areas. As you know, we have a big business or a big center in India and Poland, so we have potential there. And there are certain things that we may choose to outsource down the line. We announced an outsourcing last year. As you know, we're executing that. We're going to save 100 million over 10 years in that regard. So I think there'll be more of these types of things to work through.

But to announce today, guidance on that, I think, wouldn't be a good idea. So -- but the point we're making is we got the minimum of $270 million net. We see a good opportunity in the future. We've got other synergies on the cost side that I've mentioned already around the capital structure, around cash tax. Execution costs are going to be lower. And we think those things add up to very substantial amounts of money that can be reinvested or used to buy back shares and so on.

Your next question comes from the line of Brennan Hawken from UBS.

I wanted to touch on the fee rate pressure this quarter. So curious about maybe some of the source. I think you touched on -- in your prepared remarks, there was some mix, but also some waivers, which included India. But you knew about India last quarter when you gave us the expectation. So was there some incremental or additional fee waivers that maybe you hadn't expected previously? Maybe Benefit Street, we hear about COOs deferring fees on OC tests failing. So was that a contributing factor as well? Maybe if you could break that down a bit, that would be helpful.

Yes, sure, Brennan. So of the 0.9 basis point reduction on a non-GAAP basis, that's going from -- that's going down to 49.7 basis points effective fee rate. About 0.24 basis points is attributed to India, about 0.21 basis points is attributed to fee waivers, to answer your question specifically, and about 0.23 basis points is because of regional shift between EMEA and the U.S.

We have some other moving -- movements within the fee rates around business mix more generally, which make up the other 20% of the 0.9 basis points. But that's the -- that sort of tries to break it down a little bit further for you. We don't see -- obviously, things will be different when we've merged with Legg Mason, but we don't see a further change in the 0.21 to 0.25 basis points for fee waivers. India is what it is, and that won't change until we build the credit business in India with fees that can be charged, so that's sort of a mainstay. But that really gives you a little bit more compartmentalization.

It wouldn't surprise us if we saw the fee rate staying where it is or even ticking up slightly in the next quarter, based on some movement around wealth management, some other things that we see coming on in the pipeline.

Okay. That's very helpful. And that fee waiver impact, was my supposition that it might be at the Benefit Street and some of the COO fee deferrals that we're hearing about from that market. Is that related there? And is that as bad as it can get? Or is it just as bad as you suspected might get?

I'm actually not aware of that, I will have to come back to you on that, right?

Yes, none of us are.

We'll come back to you on that.

I haven't heard anything.

But we haven't heard anything on that front.

Your next question comes from the line of Bill Katz from Citigroup.

Okay. So as you look at the core business ex Legg Mason, appreciate all the updated synergy expectations. How are you thinking about core expense growth year-on-year for 2021?

So for 2021, you're talking about just Franklin Templeton stand-alone?

Correct.

We expect expenses to be flat to our reduction, so no growth.

Okay. And then just going back to CLOs. You're one of the few managers who has actually offered up the ability to actually get some CLOs done in this kind of backdrop. What is it specifically that you're seeing the opportunity? Is it just the markets themselves firming? Is there some unique distribution opportunity that Benefit Street or Franklin offers? And maybe what location you're seeing those in?

So I think that these were relationships that Benefit Street had. The majority of the equity were purchased by U.S. investors and a well-known Japanese investor that purchased 100% of [Class A] notes. They had 2 new investors that came in on the CLO platform. So I'd say that this is as much about the deep relationships that Benefit Street has had. I mean it was really BSP who raised this through their team.

I know that on the second CLO, it included some ESG restrictions around like controversial weapons and tobacco and things. But these were well-known relationships that they've had, but also a couple of new ones that joined.

Okay. And then just one clarifying that you had mentioned about flows. I don't know if you're speaking specifically to the global equity footprint or overall. You had mentioned you had one sort of $1 billion mandate coming out in July. You said the rest of the business was sort of improving. Was that the global equity segment? Or was that overall to the firm?

That was -- the $1 billion mandate that came out was a global equity. What I was saying is that you take out that $1 billion and you kind of see our progressively improving. The income fund did have some increased redemptions in July. But otherwise, you see the trend of improving flows.

Your next question comes from the line of Robert Lee from KBW.

I guess, the first one is with Legg and the affiliate. Now understanding that focus is keeping all their investors, the affiliates independent, doing their thing. I'm just curious, as part of the transaction, is there any type of change in kind of the early revenue shares, particularly since we will be giving kind of retention to the bench of the affiliates and that's already changing kind of the contractual relationships at all?

No, Rob, we don't see any change in the structure of the arrangement that we have with the specialist investment managers, as we call them, which is consistent with what we call our investment teams internally at Franklin Templeton.

The revenue shares, as we described on different calls, are accretive to our company because we're eliminating the holding companies to take out those costs. It means the revenue shares make sense to us. Over time, there may be some things that are adapted based on need of these investment groups. Or a desire to uptick the collaboration across the group, but there's nothing that needs to be forced to make the coordination across the group work very effectively as we've described.

Great. And then as a follow-up, I'm just curious about AdvisorEngine. I know it's a tiny acquisition in the same, but you have had some of your peers also try to look and make investments in kind of financial adviser, a couple of processing platforms like the Midway affiliate. Can you maybe update us on kind of where you think you can have success there? Because I'd say my perspective tracker is kind of spotty. You have BlackRock on one end is riding it and others have taken a stand about it. And then it goes to really gain much momentum. So how do you feel like you can make this work and help drive kind of the flows?

Yes. I mean, we already, through fiduciary, have kind of a high-touch custody business for RIAs. And so part of fiduciary strategy is figuring out how to add additional tools just to that segment. And AdvisorEngine has the possibility of doing that.

But also as you're having these independent RIAs, they're being pushed, as the world's gone more and more towards fee-based, to be more wealth managers. So what does that mean? It means you're not just doing investment management, clients seeing every month that they're paying you a fee, and the clients are demanding more financial planning, education for errors, tax efficiency.

And so part of the other piece of AdvisorEngine actually was a CRM tool that has, I think 1,200, almost 10% of the RIA market, 1,200 RIA firms and I think 12,000 or 13,000 users that allow us to just communicate with those and build deeper relationships. Because, again, they're difficult to communicate with, in some ways, because it's a very fragmented market. So it's a tool that we can be able to support their business, gain mind share and build relationships with. And so that's how we see it. It's just one tool in the toolbox to build a deeper relationship with that growing channel.

I think the other thing, Rob, on AdvisorEngine is to say that we were already investing millions of dollars a year in this type of area. And now what we have is a terrific team completely focused on it almost like in an entrepreneurial type way, which is tremendous for our company, for our wealth business, for our asset management business and technology investment area. And all those things combined mean that, frankly, owning AdvisorEngine has increased efficiencies for us in terms of investing in some of the future of distribution.

Great. And I don't know if I can add maybe one other quick follow-up on distribution. So understanding that, combined, the distributions are realigning your distribution function, trying to minimize disruption that we have seen in other transactions where distribution forces get combined and the investment team of that fund, wholesalers, marketing people whose focus -- sales often fall off. One of your peers, I guess, had some technology issues around combining their distribution courses. So how do you minimize or avoid that? Or are you actually may be taking some short-term disruption in sales as to how you're thinking of that couple of quarters? Just kind of curious of your thinking.

Yes. I mean I think that's why, to Matt's point, when we were talking about capturing the synergies, the synergies much faster -- we caught a much faster on the holding company side because that doesn't have the client implication. And that we're a bit slower on the distribution side because we're being very, very careful on any client-facing individuals. So that's one piece of this. And just ensuring that there -- that would minimize any disruption there.

And then number two, what's a little bit unique in this transaction is, again, much of the institutional sales base sits in the affiliates, and they're not part of this integration. So nothing's changed there in our specialized investment management groups. And so that's a little different than I think you see in other transactions that's unique to this.

Yes. I also think, Rob, in certain cases, we're actually adding -- we're adding greater emphasis on client coverage and how we monitor that and manage it. And I think our focus on making sure that client service remains top-notch, and that the intensity of coverage and calling remains exactly where it should be. I mean the fact that we've worked through this transaction and we haven't had one in-person meeting between announcing the transaction and closing it sort of tells you what you can get done remotely. And I think our collective sales groups and sales teams incredibly energized as a function of this transaction by having more things to talk about, more connections across different relationships, it's a really powerful thing. And of course, you have distractions, but the management team was put in place really quickly, very -- decisions were made quickly in that regard. And that right away helps retain the most talented people across the organization. So we hope that we're taking the right steps to minimize any disruption you're talking about.

Your next question comes from the line of Alex Blostein from Goldman Sachs.

Great. Just a quick follow-up on expenses. So I guess, based on the revenue run rate for Franklin, stand-alone and averaging effect of the timing of the market, et cetera, and the flow trends. I mean it looks like the 2021 revenues could decline still relative to 2020. So Matthew, maybe a little more color of why would core BEN expenses be flat in that scenario or we should really take that in conjunction with opportunities on net cost savings from the transaction, potentially being above the $270 million number.

Yes. In our modeling, we have -- when we look at the momentum we have across half of our large -- it's almost half, not exactly half but almost half of our strategies, of which a number have grown really quite significantly over the past 18 months alone.

We think that some of these things can start better offsetting the outflows we have from our largest strategies. And then when you combine that with the fact redemptions have fallen really, frankly, quite significantly, in particular, internationally, I think, in certain places, the lowest in a decade, for example. We feel that it's appropriate that our expense -- providing expense guidance for '21 is very tough right now because of what we're going through in terms of the transaction. But to us, right now, based on what we see across the firm and the opportunities and where we think we need to pay, we think it's appropriate to say that we won't be anything worse than flat.

It doesn't mean that we won't be better than that. But I think right now, we're not really in the business of giving guidance 18 months ahead or 12 months ahead, whatever, as a business.

And then the $270 million, I think, as I've alluded to already, we're going to be a much larger company with a much larger cost base. But our #1 focus is -- sorry to keep repeating it, but it's continuity and stability of the franchise and making sure we retain as much of the business we can and then focus on the growth engines.

That doesn't mean we won't be more efficient in all the functions. We're going to -- we'll work very hard on that. But you have to sort of bend down a bit and see what other opportunities may exist to improve upon the $270 million.

Our feeling is there's a good shot, there will be, but we're not in a position to talk about that right now so...

Got it. Got it. Okay. All makes sense. So essentially predicated on maybe a little bit better revenue outlook than what maybe consensus is baking in for you guys. Okay.

Correct.

My second question, back to some of the dynamics in fixed income markets. And just building on the earlier discussion around the impact of lower interest rates. So I guess, wouldn't the low rate environment just essentially increase client sensitivity to fees, especially given the passive fixed income products out there, a fraction of what active is charging today? Are you seeing some of these pressures already showing up in client conversations today? And more importantly, I guess, how are you positioning both the legacy Franklin lineup and Legg Mason lineup to more effectively compete with lower cost options as that potentially becomes more pronounced?

So I mean one of the things I would say now and Greg, jump in here too. To think that passive is necessarily a good way to do fixed income management, it's just -- the concept of let me increase my investments to the company that's taken on more debt, that's a challenge. And so as I mentioned on the munis, to think that all states are going to be equal in their creditworthiness and that you should just apply a passive approach to that, I think, is a dangerous thing.

And we see it -- you look at what the COVID environment is, one of the reasons that we had shifted a bit in some of our multi-asset solutions to some of the more conservative companies is just how long does this thing go on? And who's going to be able to sustain themselves through it? And so I think probably no more -- no time greater than now for an active approach to thinking about fixed income.

And you're right, we're in an environment where scale's going to matter because there's going to be pressure on fees. It's going to continue to be that case. And so scale is going to be important, and you're going to have to adjust the fees. But I think there's a danger to just assuming that a passive approach to fixed income is a good thing.

And Greg, do you want to...

Yes. I mean, I think it's really -- when we look at the logic of the Legg deal and Western standing out as, obviously, the largest and really a leader in fixed income amongst a very small peer group. And I would say the pressure on fees has been there. It's real. It will continue to be. But I think the net result, when we look out x number of years, is going to be 2 or 3 large fixed income players that may be at a lower fee rate, but a lot of the smaller ones are not going to survive under that. And what we would lose in fees, hopefully, you'd pick up in market share. And I think the flexibility we have with the broad array of capabilities between Benefit Street and others is that we have the full fixed income spectrum available. And I think you'll see more tactical allocations and flexibility to move across different categories to gain alpha in fixed income and we think we're extremely well positioned to benefit from that trend, along with unconstrained portfolios and just giving a broader mandate for the active managers. And I look at our lineup, and I think it's probably the best in the industry for that.

And also we have, obviously, added substantially -- it doesn't completely hedge out the pressure on fees, of course, but we do have a much larger portion of higher fee, harder to commoditize assets under management now as a combined company. I think we have $125 billion roughly of alternative assets, of which are in higher fee categories. And it's important not to just think of Weston as being all low fee fixed income. Weston has some very important alternative credit businesses alongside Benefit Street and like Clarion on the real estate side. And for us, we have K2, a few other things.

When you combine that group together and you think of how significant we are from an alternative asset perspective, we're getting ourselves on the map in that regard.

And actually, while expanding your question, but as Matt touched on it. I mean I think that the opportunity on Clarion in the retail channel is massive, because we've talked to some distributors. They feel that they are highly concentrated with a couple of managers. And it happens to be that Clarion also has very, very good performance because they were overweight industrials and underweight retail coming -- we think, coming out of this thing. But again, that's where this combination of having a broader lineup with a real diverse distribution base is going to bring a lot of strength. And so we think that that's -- that higher fee product has just tremendous opportunity, taking it through our retail channel.

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

I just wanted to clarify a couple of things that I might have missed some of the detail on this. First of all, on the core expenses, I think that's implying $2.1 billion for Franklin stand-alone in 2020. If you can just -- if you can tell me if that's right or not. And then I think, Matt, you said earlier, you talked about the retention packages being much less expensive than initially. So just, can you clarify if that was -- I think you said from $350 million expectations down to around $200 million and if those are now concluded? And is that so as -- I think initially, you thought it was a 4- to 7-year vesting schedule. Can you just clarify those please?

Okay. That's a different matter you were talking about there, Brian. So the retention mechanisms in place are not connected with the $200 million that I mentioned a moment ago. The $200 million I mentioned a moment ago is the cost of achieving the $300 million in savings. So that's the cost of the -- basically, the cost of the headcount reductions, the termination payments, severance payments and other costs related to the downsizing of the company. That's what that is.

The piece you're talking about, the share grants that were awarded at the time of the transaction, they remained the same number of shares. The only thing that's changed is the share price has come down a bit since we announced the transaction. We will very likely hedge that position when we have the discussion with our Board later on this year, and we talk about capital management.

So that's -- they are 2 different things, to be clear about that. In terms of the 2020 cost base, yes, that's exactly right. It may be a little bit lower than $2.1 billion.

$2.1 billion, yes, based on the $130 million or $150 million. And then I guess just in terms of both the cost saves and then the attrition expectation. So far, attrition has been great, like you said, very little attrition. Maybe if you could just give us some perspective on your updated thoughts on what attrition levels might be from the deal for the first year or 2. And then on the cost save side, it sounds like, obviously, most of it's coming from the holding company and other overlapping operations. But are you doing anything structurally within the affiliates on the cost side? I know that was hard to do when Legg did their cost-saving program. Or is that more of a longer-term upside to the extent the affiliates want to rationalize their own internal costs?

Yes. So sorry, there's quite a lot of questions there. I apologize if I don't get them all, but let's go through. So starting the last one first. My memory works that way. So the last one first. The -- as I mentioned a moment ago, to get the efficiencies, we need to get out of this transaction, we don't need the affiliates to change anything that they're doing or the investment organization. So that's somewhat -- but having said that, given Franklin Templeton's capacity to provide various functions to different parts of the organization is candidly, with all respect to our friends at Legg Mason, is quite a bit larger and greater than Legg Mason's. It means that the investment groups of our overall company has quite a bit of confidence in our ability to help.

So down the line, we probably will do more with the investment organizations when they're ready and when we're ready. Right now, we've got too many other things going on to worry about that, but -- and there probably will be some efficiencies in there. So that is a little bit of a synergy tail, if you will.

What -- that's the last question. What was your other question? The other one?

It was on the -- your conversations with gatekeepers and your decisions have been better so far. You have updated thoughts on deal-related attrition on that Legg Mason from assets prospective?

Yes. I mean the deal, I think, as Jenny mentioned earlier, due to the structure of the transaction, the fact that we -- there's 0 changes in terms of client coverage at the at the investment organization or affiliate level, it means we have sort of a much more embedded stability in terms of client coverage and client support. So, so far, the client retention has been very high, and we're very, very focused on that.

We like to believe we can continue along that -- those lines. So right now, the client attrition that we've had has been very minimal in one country in Asia, with one of the investment organizations. And we hope that remains that way. So we're more focused on revenue synergies there going forward.

There are no further questions. I will turn the call back over to the presenters.

Well, I just want to, again, thank everybody for joining the call today. And again, in this time, just hope everybody is staying healthy and safe. So thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.