富蘭克林資源 (BEN) 2020 Q1 法說會逐字稿

Good morning, and welcome to Franklin Resources Earnings Conference Call for the Quarter Ended December 31, 2019.

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 and MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

Good morning.

My name is Kevin, and I'll be your call operator today.

(Operator Instructions) As a reminder, this conference is being recorded.

At this time, I'd like to turn the call over to Franklin Resources' Chairman and CEO, Mr. Greg Johnson.

Mr. Johnson, you may begin.

Hello, and thank you for joining us today to discuss first quarter results.

With me is President and Chief Operating Officer, Jenny Johnson, who will be assuming the role of CEO next month; and Matthew Nicholls, our CFO.

Financial results improved this quarter, reflecting strong financial markets and our ongoing commitment to effective expense management, which drove improved profitability.

We continue to experience outflows this quarter for reasons discussed in the commentary we released earlier this morning, but we are encouraged to see traction in several important initiatives, including our efforts to expand our multi-asset solutions and ETF businesses.

We also believe that our balance sheet is one of our most underappreciated assets as we evaluate opportunities to accelerate growth.

Earlier this month, we announced plans to acquire 2 companies that will expand Fiduciary Trust assets under management by 50% and expand their physical presence in 2 important markets.

We also returned approximately $260 million to shareholders through share repurchases and our regular dividend this quarter, which the Board increased to $0.27 per share in December.

After more than 15 years, my role as CEO of the firm will come to an end after our annual meeting next month.

I'm very confident in Jenny's leadership and vision for the future of Franklin Templeton, and together, we are genuinely excited about the opportunities that lie ahead.

While this will be my last call with you as CEO, I will remain Executive Chairman of the Board and will continue to participate on our earnings calls going forward.

I'd now like to open the line for your questions.

Our first question today is coming from Ken Worthington from JPMorgan.

Great.

So you've done a couple of bolt-on acquisitions in wealth management, so a couple of questions around that.

So first, why are you thinking wealth management is a good place to invest here?

Maybe you can flesh out, are there synergies between wealth management and the rest of Franklin, and maybe any dis-synergies as well?

And then maybe cleaning up.

I think when you guys bought Fiduciary, I think it's like 20 years ago, I remember it had about maybe $15 billion or so of AUM.

I could be wrong but that's my recollection.

And I don't think it's all that much bigger today, maybe $15 billion to $20 billion these days for these deals.

So it hasn't really grown that much, if at all, over the last 20 years.

So given you're doing a bunch of bolt-ons, how do you expect to do a better job growing these wealth management assets today than at least my perception of what you've done over the last 20 years?

Well, I'll go ahead and take that.

Today, post acquisition, I think Fiduciary is about $29 billion.

And there's no question, wealth is hard to grow but it's incredibly sticky once you have it.

And we think that it's both important for us as a firm from a distribution, but also as you're seeing fee-based advisers trying to add more services to justify basically the fee that their clients pay every month.

They're trying to add on more than just investment management.

And so some of the capabilities that Fiduciary has, we think, can be packaged to be able to provide additional services to advisers.

For example, in these most recent acquisitions, we not only expanded into 2 geographies that are excellent geographies to be in for wealth management, but we added services.

So Athena Capital is incredibly well known for their impact investing in OCIO.

We think that Dr. Lisette Cooper can be helpful to us in more of the issue work that we're very focused on doing.

As well as Pennsylvania Trust has special needs trust capabilities, which is essentially helping families who have a child with special needs and are worried about how to care for them beyond the -- say, the parents surviving.

And that's an opportunity of growth, but that also can be something that we can work with our financial advisers as they have clients with those needs.

We can bifurcate both the trust administration as well as the investment adviser capability of it.

I think I'll just add something to that, it's Matthew.

The multiple that we pay for these businesses is reasonable, we think, and it helps us capitalize on some of the broader expenses that we have embedded within Fiduciary Trust.

So essentially, by having more assets and clients, it makes our overall wealth business more efficient.

This is probably the beginning of our strategy to grow Fiduciary Trust as a second leg, if you will.

You're right, Ken, it's been a number of years since we've had a growth strategy around it inorganically.

But it wouldn't surprise us if we doubled the size of Fiduciary Trust over the next year or 2 by using this strategy.

And I would just add, I think we've always had the -- as you know, being on these calls for years, it's always been a goal of ours within M&A to increase the size.

But I think there's just a few more opportunities today with some of the pressure on smaller firms, keeping up, keeping pace with technology spending and services that are required for their investors.

So we're just seeing a few more opportunities for roll-ups.

Okay, great.

And then just really broadly, Jenny, you're now officially or soon to be officially in the role of CEO.

Maybe just highlight your priorities for the next 2 or 3 years.

What are you hoping to accomplish?

Any directional changes that is worth highlighting to us?

I think we've -- it's continuing on a path that we've been focused on for the last couple of years, which is we bucket the business and growth opportunities kind of in 3 places: so one is just protecting the core, and that's making sure that the products and capabilities that we have are best-in-breed.

And as you think about on the investment management side, there's been a lot of focus and efforts around leveraging data science to enhance what we're doing on our core products.

And I think our fixed income team has done some really exciting new things, combining active and quant.

So again, it's just making sure that you have best-in-breed in your existing core.

And then from the second category is what we call growth accelerators, things like growing our high-net-worth business.

Things like expanding in geographies that maybe we're not as deep in as we'd like to be.

Adding product capability that maybe we're not as strong in or don't have as much coverage.

And then also distribution capabilities.

So for example, we've always been really underrepresented in U.S. institutional, that would be an area of interest for us to continue to grow.

And then finally, I think we would all be foolish not to believe that the technology, industrial revolution that's existing today is going to have disruption on our businesses.

So making sure that we're investing in things that maybe won't be meaningful or material in even the next 5 years but that we think could be very disruptive to the business over the long run.

And so that's -- you see some of the investments that we're doing in things like a token vault and also our innovation lab, which really just enables us to keep an eye on where the industry is evolving.

Our next question is coming from Brian Bedell from Deutsche Bank.

Maybe just start off with the -- obviously, the global fixed income franchise and the increase in outflows.

And maybe just if you can talk about what you're saying to the financial advisers.

We'd seen sales obviously come down there pretty sharply in the last 3 quarters and even also weighing a little bit on the global equity side.

So maybe the conversations with advisers, how that's going?

Maybe that sort of the tempo into January?

And with that Morningstar reclass, I guess, would you say there's a certain level of AUM that might be at risk just based on that reclass and the performance?

Or maybe just a little extra color around that.

Yes.

I think, first and foremost, I mean, the messaging is really that one, this -- it doesn't fit neatly into any category.

So I think the people that are familiar and have sold the fund, do it for defensive purposes.

They do it because it lowers the risk clearly against the big drivers of interest rates and market beta and it really complements portfolio as well.

So that's the messaging that we continue to drive through the retail side.

And I think some of the heightened redemptions that you saw towards the end of the quarter or the end of the year, I think some of that's always tax-driven in selling.

When you have a sector in a very strong bull market that had a tough period, that will be something that you'll just see heightened levels of redemptions, and we've seen that come off a bit.

It's hard to kind of gauge what the reclassification can do.

I can just say from experience with this asset class is how quickly it moves around.

And just with geopolitical events and movements within global macro, we can see quick rebounds in performance really within a week or two, so -- and I think that most of our advisers and shareholders understand that.

And that's just the messaging that we want to continue to drive, that this is a defensive way that's not correlated to many of the drivers in your market and continue to reinforce that message and how it's done in past down cycles.

But it's clearly defensively positioned, and that's the messaging that we continue to drive.

And I think they did a very good piece on the coronavirus and just reminding whether or not this one is going to be a very serious epidemic or not, that you always have tail risk in portfolios, and it's good to have that diverse portfolio.

And this is an insurance policy positioned very defensively, and that has been well received by clients.

So are you seeing improvement in the flow momentum in January versus what we saw late in the fourth quarter in this area?

Yes.

Yes, I would say, still pressure, but definitely better than what we saw in the prior quarter.

The redemption size is a lot better.

A lot better.

Great.

And then maybe just back to the M&A strategy.

Maybe as you think about sort of diversifying into different areas or expanding that Fiduciary high-net-worth strategy, is it -- and also in the commentary about the undervalued balance sheet and the $3.5 billion of excess cash, we -- we think of you guys as maybe becoming more of a roll-up of other private wealth managers over the long term.

And if so, is that more of a sort of a bolt-on strategy?

Or would you actually try to be more toward -- have a strategy of more like integrating those firms into Fiduciary and having it be a large integrated platform?

Yes, I think it's a combination of those two things in wealth.

It's both integration of certain aspects of the business, Brian, but it's also potential roll-ups.

I think we should make clear, this is more of a -- we don't expect to expand broadly across wealth management.

This is a specialized ultra-high-net-worth franchise, where we see significant opportunities in different states, with different client bases that, as I mentioned a second ago, capitalize on the foundation that we have with Fiduciary Trust.

So that's what this is all about.

But we shouldn't confuse that important aspect of our strategy with what we're doing overall as a company.

We do have many other aspects of growth that we're focused on, as Jenny just pointed out, including across the traditional asset management business, distribution, various products, alternatives, institutional, for example.

And some of those ideas are much larger ideas that are in our pipeline.

And as we move quarter-to-quarter, where our list is getting shorter and shorter in terms of where we would actually take action, we hope, in the next year.

Okay.

So we should expect more utilization of the balance sheet for M&A over the next, say, couple of years or so?

Yes.

Our next question today is coming from Craig Siegenthaler from Credit Suisse.

Just looking at the decline in expenses and the guidance too, how are you able to invest in new technologies, distribution and also product while also able to reduce total cost?

Yes, I'll take that.

So I mean, one of the things that you -- over time, we've always had a global footprint and so there has been opportunity for us to shift positions to lower-cost regions as well as historically as a global provider, there were often not service providers who could really accommodate our global platform.

And so we always had to keep these things in-house.

And it's hard when you keep it in-house to always scale it.

And so most recently, we announced an outsourcing of some portion of our fund administration.

And then I would say just getting better at looking at massive amount of data, like market data research and finding opportunities there where historically, that was probably managed more by the investment team's needs as opposed to centrally and finding out where you have overlaps.

So it's just continuing to scour through and figuring out where those opportunities exist.

I think the other thing on that is we've candidly just become in fairly short order, I would say, much more disciplined about investing in projects that we see really moving the needle and moving away from sort of hobby-type, luxury-type investments that we were making in our business, for good reasons, candidly.

But given the shift in the environment, we've just gotten much more disciplined about that.

And frankly, we found other areas within the cost structure that provide more flexibility in the event that the market continues to be challenged.

So I think our guidance has moved a little bit, as we've noted in our prepared remarks, to the positive in terms of the costs that we can reduce, and we are very confident about the flexibility of our cost structure.

And just as my follow-up, I have one on U.S. distribution.

What is your business strategy for targeting U.S. RIAs?

And I'm talking outside of Fiduciary Trust and Athena and Penn Trust.

It's the fastest-growing segment of U.S. wealth.

And within that, what Franklin products are you finding the RIAs most interested in?

So the RIAs want more -- or the less kind of traditional.

And then to the extent it's traditional, ETFs are obviously very popular.

So SMAs are popular there.

And as we talked about, we hired somebody to run our SMA business, and that's starting to grow.

Our ETFs had its best quarter ever with $1.2 billion.

As a matter of fact, the launch of our FLCO, which is our core bond was, I think, the third fastest-growing ETF in 2019.

So those are interesting for that channel.

But how do you really get mindshare of the RIA, and that's what we're talking about those additional services.

As the RIAs had to grow their business into more of a wealth management business, finding ways that we can have tools and take some of the capabilities that Fiduciary Trust provides to its clients to provide value-added services that aren't particularly more costly for us to add to it, but can be leveraged more broadly there.

Our next question today is coming from Patrick Davitt from Autonomous Research.

First one, on these kind of bolt-on deals at Fiduciary Trust, how should we think about those running through the financials from a revenue and operating income standpoint?

And then maybe more broadly, through the lens of the comment about doubling it, how should we think about future AUM or each deal adding to results over the -- as they come through?

Yes, I think it -- Patrick, I think the way to think about the 2 transactions that we've announced, bearing in mind that Athena closes in February and Pennsylvania Trust closes in April, is that they'll add collectively about $0.015 to $0.02 a share to earnings.

The margin is roughly in line with our margin as a company, but we see expansion opportunities there.

And future transactions that we may be looking at are very similar to that in proportion to the size of these transactions, so I think that's the level of detail we're willing to give at this point.

Great.

That's helpful.

And then on the commentary, should we take that you're not calling out any specific redemptions to mean that there aren't any, as you have in the past couple of quarters?

There are some that we are aware of.

I think there's a $1.1 billion.

We just don't know when it comes in.

We don't have -- we don't -- we're not aware of any specific dates this quarter that any episodic redemption is coming in.

Yes, I think the way to see it is that we're early in the quarter, with a better net flow picture so far, and we have very little known large episodic outflows, so that's why you don't see it written into the commentary.

Yes.

And I would just add, I mean, it -- we just -- in the past, it's hard when you know one or two and you don't know the timing, and sometimes it's better not to say anything when we release our asset levels on a regular basis.

Of course, there's still going to be pressure from the VA business.

And it's just that trying to get the timing sometimes is very difficult, but there's still going to be larger redemptions coming on that side, as we've talked about in the past.

Our next question is coming from Dan Fannon from Jefferies.

I guess, just to follow-up on that.

I guess, could you give us the level of assets left in that VA business at this point?

I think it's like $35 billion.

But again, we'll -- if that's way off, we'll get back to you, but I think that's about somewhere around that number.

But not all of that, obviously, is at risk.

It's just some of the -- that business, as we've said before, has been under a transition from using funds to using different lower vol models and index-like products and lower-cost products, and we've been transitioning our business and part of our solutions, and we've actually been able to retain some of those accounts by switching them into the new model.

So I think that that -- we're hopeful that that can be a growth business instead of one that's been in constant decline as the traditional funds have been under pressure.

And I will confirm Greg's number.

Jenny looked it up, see?

It's good support.

All right.

And then just as a follow-up, in the commentary, you talked about the income fund, and you mentioned yield being a bigger factor for kind of investment decisions in over necessarily potentially performance.

But we've seen outflows increasing the last 3 quarters, redemption levels growing.

Performance there, obviously, has come in.

So can you talk about, again, just that fund and that category, and how we should think about it on a go-forward basis based on either platforms or kind of distribution partners?

And how they're thinking about that fund in the context of everything else?

Yes.

I mean, I'll start and just say that, first and foremost, I mean, the yield is 2.5x its category yield.

So it's a very different creature than what it's measured against.

And again, most advisers appreciate that fact.

So you're going to have more duration risk if rates go up like they did in that -- in the quarter and generally a little more credit risk than maybe the category.

The other big factor, as we talked about it before, is how this fund fits into the new landscape of fee-based versus the traditional brokerage model.

And it's less of an opportunity for sales in the fee-based world that's building models.

And we're building models as well and adapting our product lineup and solutions to meet that, but the traditional '40 Act Fund of the income fund is under that secular pressure.

So it's hard to gauge how much of it -- I don't think a lot of it's really performance-related.

I think you still are going to be under pressure as people transition to fee-based.

And we do our best.

And as that settles, it's still always going to be attractive in the brokerage world.

But there's other markets like we're just introduced in Europe in our CCAB lineup and hopefully, we could gain some of what we lose in those redemptions.

And I'll just add, the category has got a decline of about 2%, and we were up 4% in the income fund, specifically gross sales were up 28%.

So the strategy, to Greg's point, the category is much lower yielding.

And so it often gets dinged in its measurement there, but clients love the yield.

And we think there's huge opportunity for the SMA business on that product.

So it's been around 70-plus years for a reason.

Our next question is coming from Mike Carrier from Bank of America.

We've hit on M&A a little bit, and I guess, just one question on that or one follow-up.

Just when you look at the backdrop, obviously, you guys have been more active on the wealth side.

But you've mentioned some product areas, distribution areas that you're more interested in.

I guess, just curious, when you look at the competitive backdrop, whether it's pricing, how you're thinking about returns on investments, whether it's in wealth or asset management, just kind of an update on how you're thinking about it just given that you're spending more time on that area, and how you see that kind of playing out.

Yes.

So no market cycle is perfect in terms of when you should execute inorganic transactions and this is obviously no exception, given the fact that we're at the height of the asset class prices across nearly every asset class that we're in and that we're interested in growing.

So that part is a tough one to answer other than the fact that we think the areas that we're looking at, in particular, will make us as a firm, more efficient and be able to utilize expensive resources that we have that are very important for the future of our firm in a stand-alone basis and we think can make acquisition targets more efficient and more attractive for them.

And even more so, it's like a multiplier effect when you put the 2 things together.

That's point one.

In terms of what we look at around metrics and hurdles and such, I would just say that we look at a number of quantitative and qualitative metrics, including how the transaction could increase the return of our current assets, which I just referred to.

For example, distribution is a very important one.

Appropriate risk-rated -- sorry, risk-adjusted discount rates, precedents, comps, the basic principle of achieving a return in excess of our own cost of capital.

The things that you're very familiar with, we're very focused on.

Frankly, at a very, very simple level, you can see the size of our cash resources and turning that cash into a positive catalyst in terms of increasing our earnings and making our firm more efficient capitalizing what we see to be a pretty exciting future in many areas, notwithstanding the pressure on the industry, is what we're very focused on.

So it's really a combination of all those things, Mike.

And I would just add that, as we said before, I mean, looking at a Benefit Street type when you say what -- how do we look at the world and landscape, and that's a classic example of an emerging category that is passive-proof and one that we think is going to grow very well and one that we think we can add value to distribution.

And I would say, all of those are being validated to date as we've continued to bring new products out and are ready to benefit from some of those positionings in the next year or so.

And I think, again, when we look at the landscape, it would be more on lower cost institutional managers that we can then build into our retail relationships versus the older, higher cost '40 Act-type managers.

We'd be more focused on that.

And then technology, anything we can accelerate and look at platforms for distribution that could be helpful and build globally.

Those are the other areas that we think could be very important to us.

And then finally, I'd say, as we said before, alternatives, real estate.

Again, passive-proof categories, private equity, things like that, that really build out our alternatives group and then have the specialization of distribution in those categories and have the kind of breadth that allows us to have the specialization would be where we're heading.

Right.

That's helpful.

And then just a quick follow-up, maybe on the organic newer areas like the SMAs, models, multi-assets.

I guess, on one hand, you guys have the distribution and you have long track records in a lot of the products.

On the other hand, some of the performance challenges in the near term, a bit of a hurdle.

So just want to get an update on how much maybe traction you're seeing on that front.

And do you need some of the shorter-term performance to shift in order to see that pick up?

Yes.

I mean, I'll let Jenny follow me, but I don't think the challenges that we have because of our asset mix and styles of a Templeton with the value discipline and a mutual with the value discipline, doesn't mean that your solutions business and your SMA business can't be successful.

And they're not required to put those in the portfolios if they think that that style is not appropriate in this cycle.

So I don't think it's held it back at all.

We've been very successful getting our models into the larger distribution platforms and are seeing some growth there today.

So I don't think the performance issues are just style of value versus growth.

And again, if you look at our growth funds and how well they are doing across the board, they certainly are solutions benefits from that today as does our retail flows.

Jenny?

Yes.

And just the -- as Greg mentioned, the sort of newer categories for us, where we put more resources, SMAs are up.

As he mentioned, the model portfolios, and I think we talked on the prior call about a couple of wins we've had there.

Assets are up 45% from the same period a year ago, hitting $1 billion, and good traction.

Once you get in the model, you still have to go sell it through all the individual financial advisers in the firm and provide that kind of support.

But we've had good traction there.

And then having already mentioned ETFs.

We were actually the fastest-growing firm as far as the U.S. ETF issuer with assets above $1 billion last year.

So these are all where we think the vehicles in which investment management is getting delivered in this new kind of fee-based model.

And we've got good traction in those areas.

Our next question is coming from Brennan Hawken from UBS.

Just want to -- one on the SMA and you guys approach there considering the expansion of that offering into the broker sold channel.

Just curious about, when you think about it, what portion of your products do you think make sense in that wrapper?

And whether or not you need to make further investments as those assets ramp?

Because obviously, you've got the wholesalers into the sales effort, which is clear.

But it's my understanding that you need sort of trading pipes and other automated connectivity into each of those platforms.

Does that require any further investment?

Or are you guys already there?

So I would say that that is what we've been working on, as I mentioned, bringing in the new head of SMAs.

I think we've learned a bit more about what we needed to do, and I think we're in a good place today.

And it's not something -- we've been in that business for over 20 years.

And so we -- it hasn't been a big emphasis for us, but Templeton had a very focused group early on, and we've been in the muni business for a long time as well than SMAs.

And the part of the question about which portion of the lineup might make sense for that wrapper?

Because not all of it will, since you need to own the underlying securities.

Well, so the way the industry is -- take the income fund, right?

There are securities in there that the individual client can't own on the statement, and so you just do a completion mutual fund.

And so we have launched a few of those.

So for example, the underlying equities and bonds that are appropriate to be on the client statement will be there.

And then anything that the client can't own individually, the adviser would allocate that to the completion fund.

Got it.

Okay.

That helps.

And a follow-up on the trends you guys have seen here in January, certainly encouraging that the flow trends have moderated.

But can you help us understand why that is necessarily indicative of the best way to think about the path forward because it is just one month.

And when we look at the last 3 quarters, the redemptions seem to have accelerated each quarter, and that's coincided with the deterioration in performance.

So is there something specific about when the calendar flipped that should translate into that trend proving sustainable?

Or maybe a little more color on that would be great.

Yes.

I mean, I think it's hard.

I think January is generally a better month, number one.

December, you generally have higher redemptions in that quarter for tax selling and at year-end and slower sales because there's a lot going on in December.

And January, generally, is just a better month in terms of flows.

It's hard to gauge how much of that's tax selling and where -- obviously, for us, if you -- again, it's hard to say, take the global bond out of the equation because that's been a big driver of flows both ways.

But if you look at the last quarter, we had 3 major categories in inflows, which would have been a very positive story if we didn't have the acceleration of $6 billion of outflows within global bond.

So I think you're right in asking that question, where does it go?

I think there was more pressure for the quarter.

And as I said before, things move quickly in terms of relative short-term performance.

And we already have seen some recapture in performance in the quarter-to-date with global bonds.

So that can move quickly.

And we've seen it in past cycles, how quickly it went from outflows to moving back to inflows.

Our next question is coming from Alex Blostein from Goldman Sachs.

Just wanted to follow-up on one of the things you guys mentioned earlier regarding acquisitions to build out a Fiduciary Trust.

Matthew, I think you said you expect to double that asset base over the next year or two.

So maybe could you spend a couple of minutes on the EBITDA multiples you're seeing in the space that you're comfortable paying; the competitive dynamics in that corner of the market because I think there's a lot of businesses that would like to add scale and presence in that corner of the wealth management industry.

And what are the key selling points at the end of the day?

Is it a one-off discussions?

Or they're more competitive?

Kind of why do people decide to sell to Franklin?

I'll take that part, and then why don't you talk about the multiples and EBITDA.

You're absolutely right.

When you talk to these financial advisers, they are usually at a point where, as Greg mentioned, they're feeling that they can't continue to invest in technology.

And when the regulation and the requirements around really adding all these wealth capabilities, they realize they're subscale, and there are a lot of buyers.

The 2 acquisitions that we did, chose us, and they chose us because Fiduciary Trust has been around since the 1930s.

It was set up by 5 high-net-worth families.

It is a really marquee ultra-high-net-worth business that understands multigenerational asset management and the issues that go much beyond just figuring out investment returns.

And so it will always be a competitive space, and it will be a space where they're looking at their clients who they know well and saying, "Who's going to be the best steward of these assets?" And so that's what we think is our big selling point.

Yes.

And I think in terms of the multiple and the price and the competition for these assets.

I think, Alex, what you may be referring to is the broader wealth management business.

Of course, we know that private equity and other wealth managers in the mass affluent wealth space are very, very active.

And some of the EBITDA multiples being discussed here in the 15x, 16x-plus area, even in businesses that don't actually have the acquisitions closed yet, for example.

So the -- it is a very highly competitive space from a rollout perspective because the economics just make so much sense.

In this area that we're focused on though, the multiples are a little bit lower, I'd say.

So -- say in the low double digits to -- 10x to low-double-digits area, and that becomes more efficient for us upon the connection, collaboration and to a certain degree, integration with Fiduciary Trust.

So it becomes very economically compelling to us.

And as Jenny mentioned, the reason for us versus others is there are really a very small handful of very focused pure ultra-high-net-worth wealth managers.

The services that you need to provide are very expensive to invest in and to retain and to have the right team to provide it.

And I'd say that very specialized across the whole sleuth of different advisory solutions, if you will, for sophisticated ultra-high-net-worth folks.

So that's why we think we're a good home.

This, as Jenny mentioned, we've become sort of a coming together of both sides, not us necessarily going out and scouring the ground.

We're also finding that upon the announcement of these transactions and news getting out of our interest through Fiduciary Trust that there are more than we actually thought in the marketplace.

And there are several very important states in the U.S. that contain other sorts of firms in the $3 billion to $6 billion, $7 billion AUM area, that would also be a very good fit for Fiduciary Trust and our strategy.

Got it.

That's very helpful.

My follow-up question was just a quick one around expenses.

I apologize if you mentioned it earlier, but if you look at the guidance, I think you're guiding to down 2.5% expense growth for fiscal 2020 versus '19.

I just want to confirm, that's off of the total expense base of about $2.4 billion last year.

And that's inclusive, obviously, of the deals that you've announced, so there's going to be a little bit of revenue that's going to come through with that as well.

So maybe just kind of confirm the expense number for this year.

And help us think about the revenue contribution for this year from the deals that you are planning to close.

So I'd confirm that on the expense side and I would also confirm that that guidance is inclusive of the transactions that we've just announced.

We're not going to separate out the revenue yet until that becomes a larger line item.

But our guidance, generally speaking, on the expense is consistent with where we expect revenue to be also.

So we -- as we have done this quarter and the same with last quarter, our objective is to do our very best, to have positive operating leverage in the business and I would say that would be our guidance for 2020.

So our guidance of 2% to 2.5%, perhaps even a little bit more expense reduction based off of the 2019 that you referred to, Alex, so I would say that on the revenue side, we'd hope that it would be better than that.

Our next question is coming from Robert Lee from KBW.

This may be more of a philosophical question.

But if I think of the -- growing the high net -- the ultra-high-net-worth business, if I think of some of the investments you're making in various platforms.

Is there a desire or need here to try to get closer to the end asset owner?

I mean, one of the challenges for the industry broadly has always been there's someone between you and the ultimate owner of the asset.

So do you think that that's an important part of kind of your strategy, you're trying to get closer to who actually owns the asset and pulls the trigger?

Yes.

So I mean, we are still big believers in end financial adviser providing advice.

We are not believers that the robo-advisor is going to -- and the machine is going to, in the end, intermediate that financial adviser.

These things like robo-advisors, we think, is more akin to a TurboTax, which was going to put all CPAs out of business.

And now the CPAs are the big users of TurboTax.

So the key for us is, what kind of -- as the adviser adds more wealth management capabilities, what platforms can we invest in to get closer to that end adviser to be able to influence and help them be better at their business.

And so as we think about our investments on the technology side, it can be things like financial planning or other kind of tools that the adviser is expanding beyond just investment capabilities.

Great.

And maybe just a quick follow-up.

I mean, clearly, a lot of discussion of M&A on the call.

But maybe this is a question just to confirm what you're not interested.

And I assume you're continuing to not be interested in any kind of scale-driven merger.

I don't think that's accurate, to be frank.

Yes, we don't want to make it seem like we're looking at every single thing on the planet there.

As I've said in -- or as we've said on previous calls, Rob, there are very few transactions that contain an element of scale in it that would make sense for us.

But there certainly are those that contain that, and that is on our short list.

Yes.

I think the point is that we would never be first on the list of combining something for the sake of cost-cutting and scale.

We may get that secondarily as a benefit out of it, but it's really about bringing in areas that complement the firm and areas that we believe are going to be strong areas of growth in the future.

But that certainly doesn't eliminate the benefit of certainly, distribution and scale and things you can get out of that.

Yes.

I mean, we could, for example, consolidate an operation in the U.S., but remembering that what that business may contain will be applicable to many countries overseas that we're in that perhaps that party is not in.

Our next question today is coming from Michael Cyprys from Morgan Stanley.

Maybe just following on the Fiduciary Trust build out, hoping you could elaborate a little bit more on the strategy there and talk about what you're looking for in firms that you might acquire.

And maybe you could talk a little bit about your process there, how you sift through and identify and prioritize and what your ultimate vision here is.

So I'll let Matt handle the "how do we sift through." Again, there are financial advisers that are almost family offices or really wealth managers that have done very, very well up until now in the regulatory environment and the demands on services have increased.

And they're looking at their business and they're thinking, "I want to add more things, but it's just difficult to scale this." And so they're looking for a home with a firm that understands the wealth business.

And the ultra-high-net-worth business is about investment returns.

It's about trust and estate planning.

It's about tax efficiency.

And it's about education of the next-generation of wealth.

And the wealthier and the older you get, the next-generation education becomes the most important part of that.

And so as they're looking at their clients, they want to make sure that they're connecting with a firm that can provide longevity and also has that same core culture of understanding what it takes to really manage for a high-net-worth family.

And not all the roll-ups that are happening out there, they're meshing both the ultra-high-net-worth with mass affluent.

And that becomes a danger of diluting kind of the capability that you provide for the ultra-high-net-worth.

Matt, I don't know if you want to talk about...

Yes.

I mean, look, we have, as I mentioned a moment ago to Alex's question, we have financial discipline around these things.

So obviously, we want to make sure that it's going to work financially for us upfront in terms of the multiple.

And then there's various earn-out structures and performance targets that we have against the business.

I think that where their base location is very important in terms of limiting disruption, obviously, is always very important.

The point Jenny made around diluting.

The last thing we want to do is dilute the specialized nature of what Fiduciary Trust does.

And frankly, the targets that we -- or the partners of future companies that we could own, that's exactly how they feel as well.

They don't want what they do to be diluted in any way by what we do.

So when we're having these discussions, it's really coming to a mutual understanding very rapidly that what we're trying to achieve is the same goal ultimately.

So the summary is financially disciplined.

Obviously, it needs to make sense for us, very good use of our cash, and it's a very good use of an asset that's sort of pretty frankly, being a little bit underappreciated in the overall scheme of things for Fiduciary Trust, so.

Great.

And just as a follow-up, maybe on the ETF side.

I was hoping you could elaborate on the ETF strategy.

I think about $7 billion in AUM is where you are today.

Just curious as well around that, what the interest or appetite there is to scale that maybe in a more quickly, more material way through inorganic means.

And what scenario could that make sense or maybe you add some other geographic regions and more strategies around that.

So we're -- we launched in U.S., Canada and Europe and are looking at Asia.

We're quite happy with our growth.

We were one of the first multifactor smart beta issuers.

And actually, that's the biggest group of assets; the second is our active ETFs; and the third is our passive, which are the cheapest actually passive in the category that they're in.

And the challenge with ETFs is you always have to get scale to be able to attract the institutions.

And so we're starting to see more and more flows there every day.

And I think that -- it probably -- if the right opportunity came up, we'd certainly entertain it.

But at this point, we're focused on just we have a great team and the growth there.

And I would just add.

I mean, as you know, I mean, like any time you get in a new business, it takes few years, the big distributors wait.

And I think we're at that critical point where we've been out good performance in many of the ETFs and getting on all of -- pretty much all of the platforms now.

So I think that's the big change of where we are in the cycle, so we're optimistic that that can -- that will really accelerate growth.

And from a scale -- for example, we are -- I think it's launching this month, 3 thematic ETFs that are the Franklin genomic, the disruptive commerce and intelligent machines, and we're basically leveraging the team that runs our DynaTech Fund to be able to provide those because that was feedback from clients in that they wanted some specialized-type products, the thematic products.

So you're able to scale existing teams that are historically have been doing traditional mutual funds.

Our next question is coming from Glenn Schorr from Evercore.

Just one follow-up to your comments earlier on Benefit Street and it's one micro, one macro.

At the micro level, I'm just curious if you could update us on anything related to performance, new products and distribution penetration that you've seen now that they're part of the family.

And then at the higher level, I'm curious how you're thinking about addressing other private asset classes across PE, real estate infrastructure, things like that.

Yes.

I mean, I'll just start with BSP.

And I think as we said before, it's not something you just plug and expect to see flows on the retail side.

It's a complex -- more complex product set up, and we've set up interval funds for the retail.

The retail distribution in both the U.S. and in Europe.

And we've also, this year, are planning on having a BDC offering with one of the major distributors here in the summer.

And all of these are going to be meaningful in terms of flows this year.

So I think we're very pleased with performance, with the pace and how we've gotten our distribution kind of lined up behind it.

And it is a more complex sale, not that we've learned, but we've done a lot of training and continue to be very optimistic there.

I think the difficulty when you say the tactics around the other asset classes, it's very hard to go out and just buy -- as you know, buy real estate or buy private equity.

It's performance fee-driven, it's partnership-driven, and you've got to find the right combination of incentives to make that work.

So it's not always easy to do that.

And I'll have Matthew -- if you want to add anything there.

Yes, just a couple of other points on Benefit Street.

First of all, in terms of their revenue contribution for the quarter, it was up 8% from last quarter to $53 million.

That was largely due to performance fees, but still it's increased contribution.

I think the second thing is the team at Benefit Street is providing tremendous leverage for us at Franklin in terms of our overall strategy for alternative asset managers.

They're all very experienced spending time with the other asset classes with a new alternative arena, including, frankly, spending time considering smaller, specialized acquisition targets in that area, both domestically in the U.S. and internationally.

So we get -- there's multiple other benefits to owning Benefit Street away from just the organic sort of activity that we have going on, which we're enthusiastic about for the future.

Our final question today is coming from Brian Bedell from Deutsche Bank.

Great.

My question on the ETF inorganic trade was already answered.

But maybe if I could just add a couple of things.

Maybe your view on the active semi-transparent ETF.

Is that something that you think you would like to develop and leverage some of your better-performing track records?

And then also, I think, Matt, you mentioned geographies you'd like to expand in, in terms of an M&A strategy.

Is that more distribution-oriented or is it more product-oriented?

On the latter one, I'll start and then Jenny will go to the ETF one.

On the latter one, it's a combination of both.

It depends on what market, if it's more the emerging markets, it's really distribution-driven in certain other local markets.

As you know, we have a local asset management business in several markets.

It sometimes can be beyond distribution.

And in certain cases, it's just -- we have a very good operational group, if you will, based in certain of these countries, and we can be much more scaled with the same amount of head count.

So we're very focused on certain key countries and growing those countries.

That's what we mean by that.

And the nontransparent ETF vehicles that have been approved, they're really U.S. equity.

So EUR-limited.

And we certainly talk about it.

And at the point where we feel that a particular product requires nontransparent, we will absolutely entertain it.

As I mentioned, in rolling out these 3 thematic funds, we felt comfortable that we didn't need nontransparent on those.

And the fixed income ones that we've rolled out.

So, so far, we haven't felt the need for it, but it is not something that we are adverse to if it makes sense for a particular product.

That concludes our question-and-answer session.

I'd like to turn the floor back over for any further or closing comments.

Well, thank you, everyone, for attending our call, and we look forward to speaking next quarter.

Thank you.

Thank you.

That does conclude today's teleconference.

You may disconnect your line at this time, and have a wonderful day.

We thank you for your participation today.