富蘭克林資源 (BEN) 2020 Q2 法說會逐字稿

Welcome to the Franklin Resources earnings conference call for the quarter ended March 31, 2020. My name is Darryl, and I will 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, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk factors of MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. (Operator Instructions) As a reminder, this conference is being recorded. (Operator Instructions)

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 second quarter fiscal results.

Significant events have unfolded in our world and at our company since we held our first quarter earnings conference call back in January. To start, this is my first official earnings conference call as President and CEO. With each new day, I continue to be filled with excitement and gratitude for the opportunity and promise that the future holds for our industry and for our business.

Today, I'm joined by Greg Johnson, our Executive Chairman; and Matthew Nicholls, our CFO.

We hope that everyone on this call and your love ones are staying safe and healthy. As an organization, our top priority is on the health and well-being of our employees and their families. We're extremely proud of and grateful for how resilient they've been under these difficult conditions and their ongoing efforts to keep the business running efficiently while maintaining our strong focus on our clients.

With respect to business priorities, amidst the recent market volatility, security selection is more critical than ever. We like to say that today's market dislocations are tomorrow's alpha. And I've had a number of encouraging conversations with our investment teams, who are finding compelling opportunities that result from the sharply increased volatility. It's also encouraging to note that over the recent volatile period, our strategies are producing strong results.

For the period from February 20 through March 31, which is the timeframe which reflects the sharpest market volatility during the quarter, approximately 2/3 of our U.S.-listed mutual funds and ETFs were in the top 2 quartiles of their respective Morningstar categories, and more than half of those were in the first quartile. Performance across many of our investment strategies has been strong in such areas as U.S. equity, municipal bonds, global macro and global equity, among others.

Our funds continued to outperform through April. Our acquisition of Legg Mason remains on target to close in the third quarter -- third calendar quarter, and integration plans are well underway. We continue to see the long-term value of these combined franchises and that our strategy to diversify and create new opportunities is the right one. Additionally, our strong balance sheet continues to provide us with tremendous flexibility to evolve our business.

I remain more confident than ever that as an organization, we have the talent, discipline and foresight to continue our long-term success while helping our clients achieve their financial goals.

Now I'd like to open it up to your questions. Operator?

Our first questions come from the line of Craig Siegenthaler of Crédit Suisse.

Hope you're all staying healthy. In the merger agreement with Legg Mason, there's a criteria of 25% net outflows are client consent. I just wanted more color on this constraint. And can you confirm that net client outflows at Legg Mason would need to exceed this level before the transaction closes in order for Franklin to elect not to pursue the transaction?

Yes. I'm going to have Matt Nicholls answer that.

Yes. Craig, that's correct.

Got it. And is there any AUM level for Legg Mason where you would consider not to pursue the transaction just given that it's an all cash transaction?

No.

Our next questions come from the line of Glenn Schorr of Evercore ISI.

Okay. With those answers, that's a good lead into this question then. So let's talk about what you can do prior to closing and what you have to wait for after closing. And I'm specifically interested in things like fund consolidation opportunities across fixed income and how you lever their global distribution platform.

So our focus pre-close, as we've said, is really on integration of the holding companies and integration of distribution. So -- and really leaving the affiliates alone, which means that we're not focused on fund consolidation. Having said that, there's very little overlap in our products. As we said, this was really about filling in product gaps. And so there's very little overlap anyway. But that's where our area of focus is.

I think just to add to that, there's various countries that we have presence where Legg Mason does not have presence. So we're focused on those too, in terms of potential growth. Distribution, as we talked about extensively on various calls, is a key area. And obviously, the operational side of things at the holding company is a big focus in terms of the planning efforts.

Our next questions come from the line of Ken Worthington of JPMorgan.

Outflows continue to be quite high, almost interesting that even with the coronavirus impact on the market, they didn't get too much higher from where they were in the December quarter. But with market conditions recovering now off the bottom, can you just walk through what you see as the path back to net flows for Franklin? Clearly, with the Legg Mason acquisition, there's a lot that you're doing on the sales side, but maybe give us the path through, both on distribution and product, to get back to a positive sales position.

Yes. So a couple of things on there. The -- just within our own firm, you look -- our April numbers, we've been improving consistently until we sort of hit a bump here in March. And I would say that our April numbers are back to where that improvement was. So that was first thing. Second of all, of course, flows follow performance. And as we mentioned, we've had almost 70% of our assets or funds performing in the top [tier] quartiles in that -- this period of volatility. And that's carried through. So you take like the global bond. Global Bond Fund has outperformed its nontraditional bond peer category at Morningstar by 4.4% and its prior category of world bond by 3%. So it's markets like this with the volatility where active managers get to show outperformance. And as you have outperformance, the flows will follow.

And then as we've talked about, we've invested a lot in distribution. We've seen good progress on things like SMA. Our ETFs have been in net inflows, and our U.S. equity is now just getting, honestly, the due that it's deserved as far as the recognition that it's deserved around its outperformance. And so we've seen good positive flows there. Greg, you want to add anything?

I would just add that I think Jenny mentioned some of the short-term numbers. And certainly, Templeton's one in that category as well that we're seeing some relative performance during the downturn. I think munis, we're seeing strength there. We've had very good performance on the muni side. And Benefit Street, which is ideally situated and has put a lot of capital to work in these down markets, we're seeing strong interest in the year ahead in flows there. I mean the big category killers for us are the global bond, as Jenny mentioned, and we're really out there telling everyone about the defensive nature with all the uncertainty in the market, how it can lower risk in a portfolio. And I think we're getting a reception of that as people's risk concerns and awareness is heightened. And the income fund, while it's lagging performance-wise, it's not unexpected. And as we've said before, it's 2x its industry as far as its dividend payout. So it's been under pressure more with high yield just generally to its counterpart. So if high yield holds in there in this market, that should continue. So I think the income fund and Global Bond Fund are the ones that we'd like to see a leveling off. And hopefully, we're starting to see that, but I think we've got some other areas that we are seeing strong interest and strong performance.

Sorry. Let me just add a couple other things. As Greg pointed out on munis, so I just want to say, you heard a lot of noise on munis because of the levered munis in the market. We didn't have levered munis. We had already moved to higher quality, which is actually, as there's been dislocations in the muni market, has enabled us to raise and really gain some opportunities there. And I think as you hear states talking about bankruptcy and others, there's been no time like the present for a true solid credit team on the municipal bond area, that will really differentiate. So we're excited about that. And then as Greg mentioned, BSP. BSP has raised $1.3 billion in this window, including just under $1 billion for their private debt and special situations fund.

Yes. And as we're quite far into -- well, we're basically at month end, just today there. We can say that we expect to end the month at just over $600 billion under management. And the flow picture will look quite similar to February, maybe a little bit more elevated than February, but very close to that.

Our next questions come from the line of Dan Fannon with Jefferies.

Matthew, maybe if you could talk about the expense outlook for the remainder of this year at your core -- within Franklin and some of the levers that you're looking to either address kind of the lower AUM levels, given what's happened, and how we should think about flexibility from here.

Yes. Thanks, Dan. I mean, hopefully, as you've seen in the quarter, we've continued to display quite disciplined expense management. It's really hard, as I think everybody can appreciate, to guide based on the current unique circumstances that we're all facing. But our previous guidance of 2% to 2.5% down for the year based -- using 2019 as a base of non-S&D expenses, I'd say that we can certainly double that, for sure. And we'll probably go a little bit deeper than that, is all we'd say for now. So it's probably between 5% and 7% down versus 2019.

Great. That's helpful. And just back to the kind of more recent trends on flows. Just curious about gross sales versus gross redemptions in terms of where that rate of change is coming. And also within U.S. equity, you did have a good gross sales period in the March quarter. Could you talk about which funds are seeing that success?

So we had a couple of large institutional wins in March, which accounted for, I think, about $2 billion of that. And it was in the multi-asset and advisory and K2's strategy. We're getting -- the inflows in the U.S. equity have been very strong. The fixed income has been -- Franklin fixed income is actually in the -- Tax-Free has been picking up. They had large redemptions as others, but their performance has been very, very good.

Yes. And I just -- I mean, I think particular funds in the U.S. equity side, our DynaTech Fund just has a lot of momentum. It's now about $10 billion in size from a relatively small base and had $775 million in net flows for the quarter, which was up from $400 million. We're excited about our new Innovation fund, which we just kicked off and has 5 stars, and kind of leveraging that style. And then in our SICAV base, the U.S. Opportunities Fund continues to have strong performance and strong flows as well. So that group has really done extremely well and, obviously, a market where technology, even in this downturn, has continued to do extremely well.

And that benefits (inaudible).

And BSP, yes.

Our next questions come from the line of Bill Katz with Citigroup.

I hope everyone's okay. Maybe just staying on the expense discussion for a moment, Matt. Of that 5% to 7% plus drop year-on-year, how much of that is permanent versus potentially some delay to the extent the revenue backdrop would improve that might sort of turn on some reinvestment perhaps?

Well, I hope the comp isn't permanent because we hope for improvement in comp as the firm continues to evolve and grow again. I think you could look at the IS&T part as being pretty permanent. We're being very disciplined around ensuring that comes in at -- in the high 50s, low 60s million per quarter. So that we're pretty confident. And that includes investing in certain areas of technology. So that 6% to 7% lower in IS&T for 2020 includes shifting of projects, reprioritization, being able to invest and lowering costs. I'd say parts of G&A, which we expect to be about 10% lower for the year, is also permanent. Obviously, going through this period, there's exceptionally low T&E by definition because nobody's traveling. So we could expect that to come back up. But still, for the year, we'd expect that to be down 10%. And excluding one-off items like impairments and things, of which some comes under G&A, we'd expect that to stay at that level in a disciplined way. And, again, this is just Franklin standalone. Of course, we can't talk about what this -- what it would look like with Legg Mason at this point in time.

And then the occupancy expense, I think I've talked about this before, it's gone up a little bit as we've repositioned parts of our real estate here and built more real estate. But then, at the same time, we're offsetting that by leasing parts of our owned real estate to tenants that are still paying us. So that's how I'd sort of present that, Bill. So comp or benefits, obviously, will remain variable. But the other expenses that we've -- other expense adjustments that we've made across IS&T and G&A are the more permanent ones.

Excellent. And then just 2 follow-ups. Just in terms of the deal, can you sort of walk us through where we are now in terms of incremental milestones between now and completion?

Yes. So we have -- I'd say we have 2 critical work streams going on where we [can] operate as one company, as you know, between signing and closing. But we have work streams around planning, so that we're ready for closing. And we're not closing until September 1. So we -- approximately September 1. So we have a good amount of time to get ready. The 2 major work streams is, one, the holding company functions. We obviously don't need 2 holding companies. We only need one. So we're working on what that would look like and planning for what that -- what the result of that will be. And then the second one is around the [LMGD] and what we -- which is Legg Mason Distribution Group, at the holding company level, which is really retail distribution for the most part.

As you know, with the affiliates, that's -- they have their own institutional distribution. And our global advisory services, which is our much larger distribution marketing product area. So there are strategic and planning streams going on in both of those. And I'd say that Jenny should talk more about the distribution side. But on the holding company function side, we feel quite organized. We'll probably be ready at least a month before closing in terms of how we're going to do things going forward.

Yes. And I would just add that the other piece of this is there's a lot of regulatory approvals that have to go in the process. And we are on path. Those are on schedule, and we're getting -- we've already gotten several approvals that have been required. As far as the distribution, the distribution world at Franklin Templeton is going to have to look different when you think about all the underlying brands that we will have. And so not only are we ensuring that we get the best of from both organizations, but that we structure it in a way that supports what will be this new organization.

Yes. And we're very focused, Bill. As I think we described very clearly in this business, we know the importance of stability and continuity and with the client distributors in particular. So we're extremely focused on that. But at the same time, we're extremely focused on the cost structure of the combined company and making sure that we delivered exactly what we said we were going to do.

And I would just make a general statement, I think, just observing through this COVID period, the amount of work that's been done, leveraging technology and really getting messaging out to clients and advisers in a very efficient way. And I think that, that behavior could change and lead to efficiencies and distribution as well, as advisers are really getting used to -- getting information quickly and leveraging technology from the portfolio managers directly.

That's right. I mean we've had over 20,000 clients attending webinars, I mean, virtual conferences. And just as Greg said, one, they're much more receptive to it. And they're actually starting to like it because they recognize the efficiency of being able to get the information quickly.

Great. And just one final question. Just in terms of qualifying, it looks like February, can you talk a little bit about maybe, at the product level, where you're seeing it? Because as I look back to some work we had done in February, it looked like it was pretty broad-based outflow. So just trying to get a sense of, is it just a slowing in redemptions? Because it sounds like the gross sales may peter off a little bit from some of the unique stuff in this particular quarter. Just trying to get my hands around the ins and outs a little bit better.

Yes. I would say that the gross sales are more like the February number and essentially March, too, if you took out the 2 big institutional wins. And then the -- what's happened is redemptions have reduced significantly.

And I just -- it's interesting. I mean what always happens in periods of volatility, too, you get spikes in sales and spikes in redemptions as people are trying to take advantage, and others are just saying, "I've got to get out." And that -- so you saw that kind of in March in a lot of categories. And now you're getting down to probably where it's settling. And people are kind of assessing what's going on. So you're seeing a slowdown in redemptions and a slowdown in sales, I would say, generally.

Yes. But one way of looking at it, Bill, is that the net flow picture for March is going to be 1/3 of the -- sorry, net flow picture for April is about 1/3 of March.

Our next questions come from the line of Brian Bedell of Deutsche Bank.

I hope everyone's safe and well also. Maybe just staying along the lines of the Legg deal. If you can talk a little bit about conversations that you're having with your institutional clients and gatekeepers and the distribution channels. And I'm not sure if you can talk about conversations that Legg is having with its distribution partners and affiliates yet, given you haven't closed the deal, but maybe just to get a sense of what your distribution partners are thinking about, the impact of the deal and whether there's any additional sort of handholding with the clients in regard to that. And then also along those lines, does the fact that just the market downturn with COVID-19, does that change your thoughts about product rationalization or reaching for more synergies? Or do you really just view it as this will sort of even out over the long term anyway?

So I'd say that the first conversations with institutional clients is that the institutions set up calls independently with Legg and Franklin to make sure we had the same story. So -- and the good news is the feedback was, wow. You guys are absolutely consistent in your story. Second point of feedback was that there was -- it was actually anywhere from neutral to positive because there was certainty around ownership for the affiliates at Legg Mason. And they saw the Franklin's kind of long-term approach to things as being positive, and that there would be certainty around that. And then the third, the fact that Franklin has a record of acquiring and leaving the independent investment teams in place really fit to how Legg Mason has approached things and how the affiliates wanted to work. And so it was a demonstrated record around that. So they had a lot of confidence in the -- that we wouldn't go in and muddle with the investment teams and the investment process. And so I would say that, overall, that it has been anywhere from neutral to positive. Matt, do you want to take those last...

Yes. In terms of the synergy part, Brian, I'd say that when we announced the transaction, we talked about a gross synergy number and a net synergy number. The net was following about $100 million investment. Of course, we don't need to make that $100 million of investment right away. We can do that over a longer period of time. And in these market conditions, you can expect that we will do that, and we will be extremely focused on the gross synergy number. So that's one -- point one, and that was $300 million. The 2 -- the second point I would make is that, I think, as we all know, there is a portion of an asset management company's expense base that is just fixed to make sure that you retain the right people and the team, to make sure you're investing in the business for the future and making sure you're positioned appropriately across the board in the various parts of the company, both operations and front-office and so on. When you go through a market like this, which is exceptional, the -- exceptionally bad, I would say, for the industry.

The -- it means when you look at our combined company, our ability to be able to control costs across a broader base is we have more leverage, basically. So there's a single -- 2 single companies, you have that fixed base. And there's only so much you can do together. We probably will have more levers to pull in the event that we have a sustained market downshift back to where we were in mid-March, for example. And that's how we think about it from a risk management perspective. We have to be prepared for -- obviously, we hope for good times, but we also want to be ready for very difficult times in our industry and our company.

Greg, did you want to add anything to that?

And I would just add from -- as Jenny said, the distribution platform is something we're looking at and working on. And we have engaged outside consultants and that are interacting with intermediaries, advisers, gatekeepers and trying to get their view of what the ideal servicing model is. And I think the beauty of this, putting these 2 together, is that we have that flexibility to go to what we think will be a better and more efficient distribution platform. But we want to do it through an unbiased eye, and that's really what the consultants are driving through our client size.

And so I'd just kind of summarize that. When we announced this deal, I think that the market was pleased with the strategic nature of it in filling in the product gaps, diversifying our client base, adding scale in major markets. And I think the concern was, will there be outflows as other deals have seen? And again, because there was very little product overlap, we felt that, that was less of a concern here. I think that the initial conversations with the institutions and the consultants has been positive. So again, while it's still early days, we actually feel like that concern is unwarranted.

That's very helpful. And then if I could just confirm on the base of expenses, Matt, that you've talked about for the down 5% to 7%. Is that $2.4 billion for fiscal '19? Is that the right number to be basing that off of?

Yes. Yes. I mean, it would be about the same on the adjusted as well. It's not too far off on that. It's maybe a little bit more on the adjusted. And as you know, on the adjusted number, that's what we have more control over versus what the business needs to do in terms of paying for third-party distribution services. Yes, we're going to have on this topic of non-GAAP financials, we're going to have separate calls with each of the analysts to make sure that we address all the questions for your models. So if that's what you're trying to get at as well, Brian.

Our next questions come from the line of Mike Carrier of Bank of America.

First, just on the performance. You mentioned some of the areas across equities and munis that improved, which is good to see. Just in some of the areas that are more macro exposed, whether it's through credit, currencies and energy, like global macro and Income series, I'm just curious on how they've been sort of thinking about the environment or repositioning. So the global macro, they've been using some of that higher level of cash to take advantage of opportunities, and then same thing with income series, just how they're thinking about energy ahead in this environment?

Yes. I mean, I would say, just in general, global macro is still very defensively positioned for the market. And you're correct. I mean, they have a higher cash position. I think that the changes there, we continue to be underweighted towards emerging market currencies. We've taken off the kind of negative duration bet over the last quarter or so. Mutual series is really still a very -- a deep value group. We didn't talk about that much, but continues to lag certainly the S&P in line with other deep value managers. But as you know, that's been the sector that unlike most cycles, where you have these big downturns, and value outperforms growth, in this case, with the unusual nature of COVID and everything, the stocks -- the best-performing areas around technology have gotten stronger. And the more traditional cyclical value, energy, all these other financials with negative rates continue to be under pressure.

And that's really what has continued to be a drag on mutual and will continue to be difficult on the flow side. I would say, in general, we were reducing our energy exposure across the entire organization as the macro view had a negative view of prices. But with something like the income fund that has a heavy exposure to high yield, I think out of our income fund we have 3.5% exposure in the bond side to energy and probably 3% to equities. So that's still a 7% exposure, which had a negative impact. And I think it's hard to avoid any energy when you have an income orientation but I think overall our outlook was that we were reducing our exposure and that was true with the income fund as well.

Okay. That's helpful. And then, Matt, just a quick one on buybacks. So moderated, as expected, in your prior comments, you've pivoted more of a focus on investing in areas of growth ahead. But just given the market backdrop and impact on the stock price, has anything changed in the near term in terms of capital priorities?

No, I think you said it exactly right, Mike. I think we, as you know, we're a conservative company when it comes to capital management. And while we think our -- just to be very clear, we think our equity price is very, very attractive, it's just prudent for us to make sure that we face this market with -- in a way that's very balanced. And in our view, we've obviously just earmarked a big portion of our cash to acquire a company to position ourselves for the future. So we've got that. We have repurchased some shares, and we will repurchase shares to hedge our employee grants and other grants around our stock. But aside from that, our plan now is to sort of take a step back from it. And other than completely opportunistic repurchases, we don't intend to use our capital to repurchase shares until after the Legg Mason transaction closes.

And -- but the -- just to complete the capital management with dividends. We keep where they are, as you know we're pretty -- a sacrament to us. We want to continue to pay out dividend. Answered the question of share repurchase. In terms of the other capital management, we -- you can expect to see very little in terms of other strategic inorganic purchases from the company because we've got several transactions to digest. We have the wealth management deals, which are already going quite well. And obviously, we have Legg Mason, and we've got some distribution things that we've been doing. So we're really done for now in terms of inorganic use of capital.

Our next questions come from the line of Robert Lee of KBW.

Great. I hope everyone and their families are feeling well. Most of my questions were asked. Just 2 quick ones. Maybe on the sales front and the activity, maybe the improvement so far in Q2, could you maybe give us some regional perspective on that? I mean it'd be interesting to see kind of how you're seeing like APAC versus EMEA, maybe versus the U.S., or kind of the differences?

And that's -- our strongest area of improved performance has been around the U.S. retail side. But we do have some strength in some of the APAC regions. Australia was a big improvement. That's actually where that large institutional win. Malaysia, Korea. So we do have some strength in some of the APAC region as well.

Great. And Matt, just to make sure I heard it correctly, were you suggesting that between now and deal closing, that -- going to pretty much refrain from repurchases the next couple of quarters?

Yes, other than very modest repurchase to hedge employee grants and things. But yes, we expect to -- that's going to be very minimal.

Our next questions come from the line of Mike Cyprys of Morgan Stanley.

I was just hoping you could talk a little bit about how your sales and wholesaling teams are adapting to this current environment that we're in, work from home, wholesaling function arguably not quite set up for this sort of backdrop. Maybe just what are some of the techniques and changes you guys are putting forth? And how might the wholesaling function evolve and look on the other side of this crisis?

So first of all, as a firm, because we've been -- we operate in 35 countries. We have over 100 offices. We have broad global platforms. We adopted to video conferencing at the desktop. Years ago, there isn't a meeting internally that happens without somebody being on video. And so for us, one, it was an easy transition as a firm to shift to working from home. And that includes probably 98% of our employees in India, which is where a lot of people had trouble. And so we just built this into it. So it wasn't hard for us to make that adjustment. What was -- what has been actually positive is that now clients want to be interacting that way. And so the beauty is you can scale. You take a -- we have -- our CIOs are doing virtual conferences. I mean, they literally are doing virtual road shows, where they are scheduled one client meeting after another. They'll give up a day to a region, and the client will have a series of it -- or the distribution person will have a series of advisers on those client calls. And what you're just finding is that people are much more accepting of it.

And so we have, as I mentioned, we've had over 20,000 clients attending just the webinars. We have podcasts out there that have been picked up. We have a volatility center where -- which actually is -- our distributors have found it so good that they're highlighting it within their own virtual conferences and pushing their advisers towards it. So I think where does this go in the future? I think that you're going to see many -- it's much more effective and both cost-effective, and in some ways, just from a time standpoint, it's absolutely better to do these types of calls if your clients want them that way. So I think the hybrid wholesaler is going to be much more the model of the future. It's not going to completely replace visiting people. You're just going to have a lot less in-person visits.

Great. And just as a follow-up question. I was hoping you could talk a little bit about the high net worth buildout. Maybe just an update there. You've done some acquisitions. How is that progressing? And just maybe an update on the overall strategy and buildout would be helpful.

Yes. So our high net worth business has been about $20 billion. And we think it's a great business for a lot of reasons. One is it's a great business in itself. It's a very sticky business, but it needs more scale. Fiduciary Trust is older than Franklin Templeton. This is a business that really is one of those core, just premier high net worth. And so we wanted to get more scale. So we -- in that, when we acquired Athena and Penn Trust, it gave us 2 capabilities to add not just scale to the business, but specific capabilities. Athena is renowned in the U.S. for endowments and foundations for its ESG. And Penn Trust has specialty on -- in -- for people who have special needs children in managing those trusts for those. So not only do we get capability, but we're adding scale of adding with -- that increased by 50%, the size of Fiduciary Trust's assets under management.

In addition to that, as the world is moving to more fee based, advisers are getting pressured by clients to provide more of a wealth management. What was historically preserved to just really ultra-high net worth people are now being requested of financial advisers. So things like financial planning, tax efficiency, even estate planning. So having this resource within the firm allows us to be able to take some of that and be able to offer it to advisers. And just as an education, we have our -- one of our heads of trust council doing a webinar for financial advisers to just talk about educating them, so they can talk to their clients about estate planning. And so these types of capabilities, we think, will build greater loyalty and, with that adviser, that growing fee-based adviser network.

We also -- we've also been very focused on the profitability of this business. That was an important prerequisite to agreeing to help build out the business through some acquisitions. And the acquisitions are certainly helping solidify the profitability story around this -- around Fiduciary Trust. And even though we don't report it externally this way, we were really pleased with the last quarter of results from Fiduciary Trust, which was, I think, represented almost a record for that business. So we're quite pleased with...

Well, actually, we've had referrals. We actually have [won a] client that was a referral from Athena. And again, we haven't closed Penn Trust yet, and we actually have about $825 million in the pipeline that are just referrals from Athena that Athena would not have been positioned to be able to take on but the broader Fiduciary Trust can.

Our next questions come from the line of [Travis Edwards] of Goldman Sachs.

I'm not sure who Travis is, but it's Alex Blostein. Hello?

We said the same thing. We said, "Who's Travis?"

Who's Travis?

I've been called lots of things. Travis is a new one. So just another one for you guys around capital management thoughts. Understanding the approach here until the Legg deal closes, but I'm curious to get your thoughts on priorities for capital returns between buybacks and maybe deleveraging once we're through the closing of that deal. I think you're going to have a little bit of a net debt position. So just curious how quickly you are looking to kind of build that down. And then, Matthew, on your point around M&A and sort of saying you're kind of down with M&A for the foreseeable future, I think you guys talked about doubling the size of Fiduciary Trust through deals. So should we consider that that's kind of part of the deal-making is also off the table?

Yes. So a couple of things there. First of all, on the Fiduciary Trust front. We do still intend to grow Fiduciary Trust. We already increased it by more than 50% through the actions we've taken this year. We could do a couple of smaller transactions, but that would be sort of really not material to anything we're talking about around capital management. So I don't want to completely say we're closed up. The point I was making is there won't be anything material that we're going to do around capital management involving M&A. But with Fiduciary Trust, just some smaller bolt-on type transactions in particular states, for example, that don't, frankly, move -- they don't have any impact on our capital management strategy can make a real difference to how we continue to reposition and grow that business. So I wouldn't say that my comment on shutting M&A down for the foreseeable future impacts our strategy on the smaller bolt-on type transactions.

In terms of the pro forma capital management view, I think it's a little bit tough one, Alex, to answer because the market's been evolving so much. As we all know, between signing and closing of this transaction that, beforehand, we announced that we were going to have a very balanced approach across M&A, share repurchase, debt servicing and internal C capital allocation, for example, that type of thing. I think, obviously, if we become more leveraged than we anticipated, longer term, we will want to reduce our debt a little bit. We want to remain a high investment-grade company. I'd say our goal would be always to be less than 2x debt-to-EBITDA out of the gate. We would be in the 1x to 1.25x debt to EBITDA. That's gross debt to EBITDA. As you know, there's a portion of Legg Mason's capital structure, debt capital structure, that sort of has equity content tied to it. But we look at that as just gross debt, frankly, in the company.

And our intention is to make sure we have a conservative debt capital structure. We also have some levers to pull in that debt stack pretty soon after closing in 2021, where we can save $18 million to $20 million, in our view, from repositioning it, providing a situation where within probably 3 years, we'll have $300 million or $400 million less debt, is one way to sort of look at it. But we really have to assess our pro forma free cash flow, which should be very substantial, in particular, on a post-synergy basis. And that will open up the opportunity to repurchase more shares, invest more in terms of C capital investing, that type of thing. But I'd still stand by the M&A comment. I think our modus operandi here is to have absolute success in execution of what we've got on our plate. And, frankly, bandwidth is at the max right now. And it doesn't make any sense to be looking at other larger scale transactions.

But down the line, we've made it very clear, we'd like to be bigger in wealth, and we'd like to be bigger in the alternative asset area. And that stays the same. It's just a timing matter of making sure that we're being incredibly prudent with our cash flow and our capital structure. We do not want to be net debt heavy. So as you know, at close, even with the impact on the capital structure through this crisis, on a global scale, we will be about net debt flat, maybe a little bit positive, but that's where we'd be at.

Yes. Got you. My second question was around some of the recent dynamics in your emerging market distribution. There's been a couple of headlines, I think, with you guys shutting down a couple of funds in India, I think that had about $3 billion to $4 billion. But curious sort of what happened there, and maybe speak to a little bit your kind of any risk that, that sort of creates for your footprint in markets like India and maybe some of the other emerging market geographies?

Yes. So we entered India 20-plus years ago. And we were a fixed income manager there, and the -- or portfolio manager. In India, anything below AAA is -- AAA-rated is considered non-investment grade. And the high-yield market is still very immature there. So we've had a large fund -- it's actually 6 funds that were invested with a lot of this kind of private debt. And in October of 2019, unfortunately, SEBI came out with new guidelines saying that any investments in unlisted instruments in funds could neither be -- you can't have more than 10% in a fund, and you can't trade them. So that orphaned about 1/3 of our fund there. Now, in the meantime, we managed -- we had worked hard to managing laddering maturities, diversifying sectors, diversifying ownership and had been able to manage really a decline from about $7 billion to just under $4 billion. Fine.

But unfortunately, with this 33%, including actually not increasing -- as we've had that decline in AUM, not increasing the percentage of unlisted instruments. But it just got to the point with the pandemic, where essentially the market froze up and you had increasing redemptions. There were a couple of defaults there in India. And things like Vodafone ended up in default because the Supreme Court ruled against them. And so that created a bit of a run on the funds. And we looked at it and just decided the only way to really preserve the value for our investors was to halt any kind of subscriptions and redemptions and really go into wind-down mode. The underlying holdings, this is not a solvency issue. It's very good credits in the underlying holdings. It was really just a timing of the redemptions versus our ability to create liquidity to meet them. We were worried about the impact on our equity business there, in our high credit business. There was initial redemptions in the high credit.

We have about $2 billion in high credit and I think about $6 billion in equity. And that seems to have stabilized there. It's just very unfortunate because, obviously, as you can imagine, with India being locked down, there are people who need that liquidity. But it really was about selling those assets at a fire sale and very little buyers because of this regulation not permitting trading. Having said that, as of last night, SEBI just reversed that and is actually allowing some trading and allowing banks to hold that. So it remains to be seen how well that opens up the market so that we can return that capital to the clients.

And maybe I'll just add that -- I mean one of the steps we took in that fund, and liquidity is something that we were watching carefully for a long time, was to ladder the maturities, where -- so it's not -- it isn't locked up, illiquid. A lot of this is in short-term debt that creates immediate liquidity for at least some redemptions as we move forward. But I think your question on the impact on the business, obviously, not good. And that's something you do as your last resort to take steps like that. And we hope to minimize the -- what it will do to the brand and the equity side, which is a healthy business for us as well. But it will have an impact.

And I would just say that the press has been very fair on this. They've actually really dug into the -- and understanding the issue. I'm not sure that all of the press around the world would be as fair as India's been around the issue of the underlying credit still being good. And we have not seen a broader contagion in our emerging market business in other markets. It's really been within India. And even within India, it hasn't seemed to impact our equity business very much.

Got it. So it's the $3 billion to $4 billion essentially in AUM that will go through a wind-down over the next couple of months and quarters?

Right.

Yes.

Right. I mean it could be over a longer period than that. But we're waiving fees anywhere over that period of time, Alex. So you can consider it to be -- from a P&L perspective, it's basically gone. We're doing everything we can for those shareholders, a, to make sure they get all their money back. That's what the strategy is. It's all about maximizing proceeds to the investors in the fund. And this is the strategy that made the most sense to do that. And as part of that, we've -- we're not charging any fees on those funds anymore. And that's about -- if you look at the amount that we're closing, it's about $20 million of revenue.

Revenue, yes.

Revenue. So that -- obviously, there's expenses that will come down as a function of this.

Our next questions come from the line of Brennan Hawken of UBS.

I just wanted to follow up on the question there from the infamous Travis on the Indian credit fund. Is that going to stay in AUM? Or will you guys wind it down? Are you guys going to move it to discontinued? Just a little bit of a more of a housekeeping question.

You're going to stay in AUM?

You mean just on those credit funds? Are you talking about...

Yes, just the $4 billion.

Yes. That will be wound down. It doesn't mean that we don't have a credit business in India.

Yes. But the question is, how are we treating it from an AUM perspective?

Yes, just about the reporting, whether or not it's a...

Yes, how do we report that amount?

I mean it will be on there. Maybe what we'll have to do is to footnote put back the...

$4 billion is...

Because we do have the assets. So I'm not sure how you take it out only. But we'll just footnote it and say that on $3.4 billion of assets in India, we're not charging any fees.

Great. Great. Yes. Travis had that one covered like a blanket. I just wanted to -- and then for my second question, given the plans that you guys have to consolidate distribution teams, how are you guys ensuring that the distribution teams -- each distribution team remains engaged during this transition period? In prior deals, we've seen some distraction there. It's not surprising really. And particularly given we're going through this really extraordinary period of distraction already, how might you be adapting those communication efforts and coordination efforts?

So I would say, first, one of the good news, and again, as we talked about, the strategic benefit of this deal, was this diversification of a client base. And so there isn't necessarily direct overlap between coverage. So that's one. And two, when we got under in things like U.S. retail, they're strong where we're weak and vice versa. So our goal is to have as little disruption on the distribution side with the frontline people, who are engaged with clients. And so that's the area that we are least looking for those kind of synergies. Having said that, the distribution leadership from both sides are very engaged in designing this and figuring out what the best approach is going forward. And so it's really trying to get the best of both.

It's also one of those things where, I think, in any market, a great salesperson always has value. But this is probably a tougher market than other times to be able to walk out the door. Now we don't rely on that. There are retention mechanisms in place. And we're focused on exactly making sure that we get the message out as quickly as how we're structuring this and who will be there. But we're trying to -- I think the key message is we're trying to have as little disruption on the frontline, client air facing people as we possibly can have.

Yes. I mean there's a fair amount that won't change at all.

Yes.

I mean the institutional piece will not change very much at all and just be better coordination across the firm. And from a retail distribution perspective, it's just total focus on making sure the client has input in this and we have continuity. I mean that's a key point of the stability.

We only have time for one more questioner. Our next questions come from the line of Patrick Davitt of Autonomous Research.

One quick one on the India. So it sounds like away from the $4 billion, there's another $8 billion. Is that correct, Jenny, in terms of the...

Yes, I think that's right. Yes.

Yes? Okay. Cool. And then on the fee rate, given all the moving parts towards the end of the quarter, could you kind of frame the exit fee rate into 2Q versus what you reported for 1Q?

The exit fee rate on...

So, like what's the kind of weighted average fee rate kind of as we start 2Q relative to what it was in the first quarter?

It's very, very consistent. So it's $55.3 million.

Exactly.

Exactly, exactly.

And on a non-GAAP basis, it's $50.6 million. And I think that the change versus the previous quarter was literally like 0.1 basis point going into this quarter. We don't expect -- based on the changes with India and things, we don't -- it doesn't have any impact on that average.

We have no further questions at this time. I will now hand the call back over to management for any closing remarks.

Well, I just want to thank everybody for taking the time to do this call, and wish everybody to remain healthy and safe in their shelter in place and not go too crazy in your shelter in place. Take care, everybody.

Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. And have a great day.