Q3 2025 Earnings Call Transcript

Welcome to the Franklin Resources Earnings Conference Call for the quarter ended June 30, 2025. Hello. My name is Maria, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us today as we review Franklin Templeton's third fiscal quarter results. I'm here with Matt Nicholls, our CFO and COO and Adam Spector, our Head of Global Distribution. We'll answer your questions momentarily, but before we do that, I'd like to highlight some key developments and themes from the quarter.

Over the past few years, Franklin Templeton continues to evolve into one of the world's largest and most diversified investment managers with a full spectrum of capabilities across public and private markets. At the core of this evolution is our commitment to being a trusted partner for what's ahead, helping clients navigate the complexity of global markets with confidence and experience. from individual investors and financial professionals to institutions, we are focused on delivering customized solutions to achieve their long-term financial goals. We do this by leveraging the breadth and depth of our specialist investment teams who bring differentiated expertise.

And we offer our strategies through a broad range of investment vehicles from mutual funds and ETFs to SMAs and private fund structures. As more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles and regions. We believe our business is well suited to meet that demand. In today's fast-moving and interconnected investment landscape.

Franklin Templeton's global reach is increasingly important. Our capabilities span U.S. and international markets, including emerging markets, positioning us to meet evolving client needs as they allocate and reallocate across regions and through market cycles. Almost 40 years ago, we opened our first office outside of North America in Taiwan, and we are one of the first global firms to build local asset management capabilities. We currently operate in over 30 countries and our clients are located in over 150 countries.

Our goal is to manage each local business combined with global scale, focusing on local investing and client needs. And today, we have approximately $500 billion or roughly 30% of our AUM in countries outside the U.S. From our legacy as pioneers in International and income investing, to leadership in emerging areas like AI, tokenization and blockchain, we're committed to keeping our clients on the forefront of investment opportunity across markets and technologies globally. Innovation is and has always been central to who we are.

Our investment teams around the world collaborate closely to provide forward-looking insights and identify new opportunities. A great example of this is the Franklin Templeton Institute which plays a central role in delivering timely research, thought leadership and educational resources to help clients interpret and respond to fast-moving market developments. Turning to public equity markets. It's been a tale of 2 quarters to start calendar 2025. Despite a turbulent April global equity markets rebounded sharply from Liberation Day setbacks with the S&P 500 posting 1 of its fastest ever post-war recovery, rising 25% from its April lows and ending the quarter up nearly 11%.

The sharp recovery was led by large-cap growth stocks, including most of the Magnificent Seven. The top-performing sectors were IT, communication services, industrials and consumer discretionary along with the other major domestic indexes. The small-cap Russell 2000 Index rebounded in the second quarter, gaining 8.5%. International markets have shined so far in calendar 2025, but the outperformance versus U.S. was largely in Q1. Through June, the MSCI [ EAFE ] is up 19%, helped by a weaker U.S. dollar and expectations that U.S. tariffs will not meaningfully alter the corporate earnings outlook.

Emerging markets similarly outperformed. After holding up much better in the first quarter of the calendar year, value stocks lagged growth in this quarter. Large-cap growth outperformed large-cap value by 14% in Q2. Our investment teams remain cautiously constructive on the outlook for the U.S. equity market. While the market remains supported by solid fundamentals, caution stems from the market's already strong advance from its lows and ongoing geopolitical and policy uncertainty.

Turning to public fixed income markets and rates. Following Liberation Day, the quarter opened with a higher-than-expected tariffs announcements, which sparked a temporary market sell-off and a spike in volatility. Subsequent data, however, suggested that the U.S. economy has remained resilient. Economic activity continued to unfold at a healthy pace, even though volatility in exports and imports makes headline GDP numbers less informative than usual.

The labor market remains at or close to full employment. And while tariff hikes have fed through into the prices of specific goods, they have not had a broader impact on inflation. All this seems consistent with the fact that exports and imports play a relatively smaller role in the U.S. than in many other economies. Market conditions stabilized during the quarter as investors worst fears proved unfounded.

And risk assets recovered with global credit spreads spiking, but then trending significantly lower. Lower rated sectors outperformed, as did non-U.S. markets with the U.S. dollar seeing its largest quarterly decline since 2022. The Fed has maintained interest rates unchanged at its May, June and July meetings, noting that while there are some downside risks to growth, labor markets remain robust, inflation is still above target. We continue to expect at most 1 more rate cut by the Fed this year, with additional monetary easing, possible should growth begin to deteriorate. Tariff-driven price pressures and a still large fiscal deficit seem likely to exert some upward pressure on yields.

Financial markets will likely continue to anticipate and push for more monetary easing than what we are forecasting, likely resulting in a prolonged roller coaster ride of market volatility. In private markets, quarterly volatility in global equity markets continued to act as a constraint on IPOs and M&A activity. As a result, continuation funds in secondary private equity were the primary sources for investor liquidity where Lexington Partners provide scaled solutions, expertise and leadership. The trends shaping the private equity landscape, growing net asset values, significant dry powder, longer holding periods and shifting distribution patterns point to a secondary market opportunity that is poised to remain attractive for years to come.

Private credit remained an area of conviction. So even here, LPs are deploying more selectively the macro backdrop characterized by higher base rates, modest spread widening and potential credit deterioration has made quality underwriting and structure more important than ever. Increased market volatility while challenging, also creates an attractive backdrop for our alternative credit businesses like direct lending, real estate credit and special situations. In these markets where there is greater dispersion between the best and worst credits, Benefit Street Partners is well positioned given its conservative approach to underwriting and our deep portfolio management expertise.

Real estate capital markets activity remains muted with greater volume and perceived stronger property types. Top performing property sectors include industrial, multifamily and self-storage which continue to have solid long-term underlying property fundamentals. For the fourth quarter in a row, overall property indices showed modestly positive performance signaling more evidence of reaching a bottom after 2 years of decline. As sentiment changes for real estate, Clarion continues to be well positioned, with over 60% of AUM in the industrial and logistics sectors and less than 6% in the office sector.

Our overall view of private markets remains constructive, or there may be subtle shifts within private markets, the changing trade policies and elevated geopolitical risks haven't altered our long-term outlook. We continue to favor secondary private equity real estate and commercial real estate debt as key areas of opportunity. In today's environment of heightened volatility, shifting trade policies and geopolitical uncertainty, diversification and active management are not just prudent but essential to mitigate potential risks and maximize returns. Diversification across various asset classes, regions and sectors can, of course, help cushion the impact of market volatility.

And as a diversified active manager, we have the capabilities across public and private assets to customize solutions to help investors to achieve their long-term financial goals. Turning now to our business results. Our third fiscal quarter saw progress across asset classes, investment vehicles and geographies, highlighting the strength of our diversified global platform. Our assets under management ended the quarter at $1.61 trillion, AUM increased from the prior quarter due to the impact of positive markets and strengthening flows, partially offset by long-term outflows at Western Asset Management.

Our institutional pipeline of 1 but unfunded mandates rose by net $4 billion to a record $24.4 billion. It included $14.8 billion in new wins reflecting strong client demand across all asset classes and was diversified across specialist investment managers in multiple regions. This quarter, we saw notable mandates in fixed income from our partners in the insurance sector. We remain encouraged by increased client engagement on potential opportunities ahead.

Long-term net outflows totaled $9.3 billion, representing a marked improvement from the prior quarter's outputs of $26.2 billion. Excluding Western Asset Management, long-term net inflows were $7.8 billion this quarter and $7.4 billion in the prior quarter. This quarter represents the seventh consecutive quarter of positive net flows excluding Western demonstrating growing momentum across our business. Multi-asset and alternatives continue to have strong, consistent performance and generated another quarter of positive net flows, resulting in a combined $4.3 billion for the quarter.

Multi-asset flows have been positive for 16 consecutive quarters. In addition, we saw improving flow trends in fixed income and equities. Equity net outflows were $645 million as market volatility impacted growth strategies more than others. Given our diverse global equity capabilities, we benefited from the broadening of markets into both value and non-U.S. strategies, generating positive net flows into large cap value international and emerging market strategies.

Putnam continues to be a strong contributor with positive net flows since acquisition across mutual funds, SMAs and ETFs. Fixed income net outflows improved to $13 billion this quarter. Excluding Western, Fixed income net inflows were $3.5 billion, driven by Franklin Templeton Fixed Income and Brandywine Global. Flight to safety generated positive flows into munis stable value and short-duration strategies.

Excluding Western, fixed income has generated positive net flows for 6 consecutive quarters. Western net outflows also moderated on a quarterly basis and are the lowest since the September quarter of 2024. In addition, money market balances have continued to grow as the Federal Reserve holds the target overnight rate at about 4%. We've had cash management net inflows for 4 out of the 5 last quarters, with $2.7 billion in each of the last 2 quarters, increasing our cash management AUM to $72 billion. This quarter, we continued to successfully execute our long-term corporate priorities, which reflect key areas of long-term growth.

Fundraising and alternatives generated $6.2 billion for the quarter, of which private markets assets totaled $5.3 billion. This brings alternative asset fundraising to $19 billion fiscal year-to-date, including $15.7 billion in private markets placing us at approximately the middle of our annual guidance range with 1 more quarter to go. Fundraising was diversified across alternative specialist investment managers and reflected client demand in secondary private equity, alternative credit and real estate from institutions as well as from the wealth channel. In June, we announced an agreement to acquire a majority interest in Apera Asset Management a pan-European private credit firm with approximately $5.7 billion in AUM.

The transaction will expand our direct lending capabilities across Europe's lower middle market and reflects our continued commitment to growing our global alternatives platform, which had $258 billion in AUM at quarter end. Apera is complementary to our existing global alternative credit offerings. Alongside Benefit Street Partners in the U.S. and Alcentra in Europe appear further diversifies our firm's geographic exposure and capabilities within the private credit asset class. This acquisition brings our pro forma private credit AUM to nearly $90 billion.

On both a relative and absolute basis, alternatives by Franklin Templeton, our alternatives business in the wealth management channel has been a strong contributor over the course of this year. We have invested heavily in this business to meet the growing demand in this critical area. Over the past few years, we have focused on designing suitable products investing in client education and supporting wealth advisers. Our substantial distribution resources and coverage model includes a dedicated alternative specialist team that we have significantly expanded over the past 2 years.

Our perpetual secondary private equity funds, Franklin Lexington Private Market funds are nearing $2.5 billion in gross sales fiscal year-to-date. And we are excited to expand into new markets in Europe and Asia, leveraging our global distribution footprint. Additionally, our 2 other primary alternative managers, Benefit Street Partners and Clarion Partners each have perpetual funds with at least $1 billion in AUM. These are semiliquid perpetual vehicles and are open to ongoing subscriptions.

Over the long term, we believe there is a significant opportunity for alternatives in wealth management, especially given the average wealth management client has approximately 5% or less of their portfolio allocated to alternatives. And depending on the client's liquidity need, it could be much higher. Institutions, for example, have been allocating 30% or more. It is essential for us to provide opportunity for broader client participation in the investment returns generated in private markets.

In addition, we're developing products with strategic partners in the retirement channel for private market investments to be included in defined contribution retirement plans. Client demand also continued across investment vehicles. Our ETF platform achieved its 15th consecutive quarter of positive net flows, attracting $4.3 billion and reached a new high of $44.1 billion in AUM, 19% growth from the prior quarter. We have over 13 ETFs with over $1 billion in AUM across equities and fixed income.

And since acquisition, Putnam's ETF lineup has more than tripled in AUM, reflecting the strength of our global distribution platform. Retail SMAs had another quarter of positive net flows and AUM is up 8% to $156.3 billion, a new high watermark for our retail SMAs. Our leading SMA franchise saw continued progress driven by growth in Putnam, Franklin Templeton Fixed Income, Canvas and Franklin income. Canvas, our custom indexing platform attracted notable inflows, with Canvas AUM of $13.7 billion increasing 20% from the prior quarter.

The platform has been in positive inflows since acquisition. As I mentioned earlier, one of Franklin Templeton's strength is our global presence in international markets are an integral part of our growth strategy. Our international business continues to expand with positive net flows for the quarter. Speaking of international markets, in May, I joined senior leaders in the Middle East to engage directly with government officials, policy leaders and some of the region's most influential institutional investors.

The visit reinforced Franklin Templeton's long-term commitment to helping shape global capital markets in the region. This quarter, we worked with 2 of Saudi Arabia's leading institutions to invest in the country's financial markets, broadening investment offerings for both Saudi and international investors. We continue to be selected as a trusted partner to official institutions in emerging markets including central banks and sovereign wealth funds. This quarter, we became a trustee and manager of the $1.7 billion National Investment Fund of the Republic of Uzbekistan.

This strategic mandate builds on our 15-year track record of managing mandates in frontier and emerging markets. We were also honored to be recognized as the Asset Manager of the Year by the publication Central Banking reflecting the progress we are making with this client base. This quarter, we launched an intraday yield feature on Benji, our tokenized money market fund, making investing faster more transparent and accessible 24/7. This is another example of how Franklin Templeton has always been at the forefront of change, whether it's providing investors with access to new investment opportunities improving how they manage their money or leveraging new technology to make it more efficient.

Before I turn to investment performance, I wanted to provide a brief update on July flows. While it's early and we will formally report preliminary July AUM and flows next week, Western's long-term net outflows are expected to be approximately $3 billion for the month of July and had ending AUM of approximately $236 billion. Excluding Western, we expect long-term net inflows of approximately $3 billion. Now in terms of investment performance, over half of our mutual fund AUM is outperforming its peer median across the 3-, 5- and 10-year periods.

The 1 year would also be in the top half, excluding one of our largest funds managed for yield. Similarly, over half of the strategy composite AUM is outperforming its benchmarks over the same time periods. Compared to the prior quarter, mutual fund investment performance increased in the 3-, 5-year and 10-year periods and declined in the 1-year period, again, primarily due to the categorization of 1 of our largest funds managed for yield. Turning briefly to financial results.

Adjusted operating income was $378 million, flat from the prior quarter, driven by lower compensation expenses, offset by the impact of Western outflows and lower average AUM. We continue to focus on expense discipline and operational efficiencies. Our balance sheet remains strong, providing flexibility to pursue strategic investments and return capital to shareholders. Finally, at Franklin Templeton, our collective purpose is clear: to help our clients all over the world achieve the most important financial milestones of their lives.

Central to our approach is a deep understanding of each client's goals, allowing us to serve as a trusted partner through the complexities of the financial markets. We have built a resilient business that is diversified across investment teams, asset classes, vehicles and regions, delivering value to all stakeholders. I'd like to express my thanks to our talented and dedicated employees around the world whose client-first mindset drives our continued success. Now let's open the call up to your questions.

Operator?

[Operator Instructions] Our first question comes from Glenn Schorr with Evercore.

Wants guess, private credit in general. I like what you've done with Apera, and it seems like dedicated for European direct lending. The bigger picture question is, how do you integrate -- have you grow organically? And then how do you integrate something like a pair into the broader private credit platform?

And can these products and strategy stand alone? Or do you need to have that fully integrated across all asset classes, solutions throughout private credit. I'm just trying to think about where you're building towards.

Yes. Thanks, Glenn. I mean, first of all, remember that we also acquired Alcentra, and I think that has gone very well. It reports up under BSP reporting into [ David Manalo ].

And they're big CLO managers, it's really grown our CLO capabilities. We don't want to be viewed as an asset manager that just acquires and has these things stand alone. If you look at what we think our real growth story and opportunity, it's the integration of these things. And so there will be parts of Apera that will be stand-alone.

They have -- they just raised a $2.9 billion fund. But they will also, through sourcing, leverage the broader part of the organization, leverage it for distribution. And so we really are looking when we close Apera as a single $90 billion private credit manager as opposed to BSP Alcentra and Apera. And they've got broad capabilities.

And honestly, what's happening in private credit is sort of your more core type private credits becoming a little bit more commoditized. And so having that expertise and say, like middle market direct lending, which Apera is, or asset-backed or real estate debt, those are really, really important, and you want to be able to globalize that kind of expertise. But the answer is we really think of it as 1 private credit group.

Our next question comes from Bill Katz with TD Cowen.

Maybe a sort of a big picture question for you. I think you've been at the sort of the vanguard of tokenization. I was sort of curious to think beyond maybe just the short-termism of whether or not it helps a specific asset class. How do you see this shifting the potential economic value proposition with the distribution partners?

Let me answer that in a -- we think that it will fundamentally change the rails of the financial system. So why do we think that? Let me just use our tokenized money market fund as an example. So we launched this in 2021. We are still the only asset manager in the world who provides digitally native exposure on-chain as opposed to shadowing on to -- from your old system shadowing onto the blockchain.

That gives us a lot of additional capability that enhances what we can do for clients with that single product. So I'm going to start kind of small and then go broader. So we just launched intraday yield. If you hold our Benji money market fund, you will see what you earned that day, and it will be posted to your account that same day. if you use the Benji product as collateral and you only hold it for 4 hours and 32 minutes, you're going to get 4 hours and 32 minutes of yield.

So it's really because blockchain is so efficient that it enables those enhanced services. When we say -- and when the SEC approved that product, they had us run, and we were still running the transfer agency in-house. They had us run a parallel process. And we were astonished even by the difference in cost to actually run transactions on chain versus on the old transfer agency system.

And so if you take that more broadly, there's going to be tremendous amount of opportunities. What does blockchain do? Does 3 things. It has a source of truth of ownership.

It has the ability to execute smart contracts, and it has a payment mechanism. So why is that important? If you think about the players in the financial system, there's all these toll takers that serve in those roles. So for example, a bank may stand between Franklin and a counterparty on an FX contract because we don't want to worry who the counterparty is, and we need to make sure we get paid.

But with blockchain, because the smart contract can execute it and because the entitlement of ownership is embedded in the token and there's a payment mechanism, we can be assured that we will get paid and that the counterparty will pay. And so you actually are going to [ disintermediate ] a lot of the toll takers on transactions. And that's going to open up opportunities and drive down cost of delivering. And that's why I say I think that ultimately, mutual funds and ETFs will be leveraging blockchain because it's just a less expensive way to do it.

Now you hear things like, hey, it's a great way to democratize alternatives. The reality is the technology exists today, but you still need market makers and others to be able to step in and allow the maturity of that. So it's not the technology that's holding expect. It's just that the infrastructure has been slow.

And it will be -- it will take some time to roll those things out. But I always say you can't stop water from rolling down the mountain that you can try to block it, but find its way down. The fundamental nature of blockchain is such that it will replace a lot of the existing rails and it will create opportunities for innovation.

All right. Yes, it's great. That's great. A lot to think about what all this going on.

Just stepping back now, I'm really encouraged to see the buyback step up a little bit this quarter. One of the pushbacks we're getting on the story is sort of some uncertainty around where you might stand in the conversation with the regulators on any potential financial settlement with WAM. It's certainly great to see clients stabilizing on the attrition side. How do we think about where you might be sitting in terms of those conversations with the regulators, how you might reserve if at all, for a potential charge?

And then how are you thinking about capital deployment on the other side of that?

So I'll start and then Matt can jump in on anything I don't cover. Look, first of all, I want to reiterate the strength of our fixed income franchise. We -- the Franklin's fixed income is probably the largest SIM in our institutional one but unfunded pipeline. And that would have been unheard of 5 years ago.

They just didn't have the institutional capabilities. We've been in positive flows with the Franklin Fixed Income and Brandywine for multiple quarters now. So they've really been able to pick up a lot of the slack there from Western. And so that's obviously really important.

Western has -- is also still in positive gross sales. So they have -- and their gross sales have actually increased and their performance, and that's been something we've said all along that's been really important to us to try to insulate the investment team as much as we can from the distraction of everything going on to ensure they can focus on clients. And their 1-, 3- and 5-year numbers are in like the 90th -- close to the 90th or around the 90th percentile for 1, 3 and 5 years, beating the composite benchmark. So their performance is really good.

And then we've gone from what was $37 billion in outflows, net outflows, I think, in December to June was, I think, $4.1 billion and July is $3 billion. So the story there is improving and there's some amount of stabilization on some of that. But the reality is with the government, we don't control the pace of that. And so we are obviously continuing to cooperate with the government.

As a reminder, Western is about just under 6% of our revenues. And today, we have -- well, I'll let Matt address anything on reserves or anything else you want to add to that?

No, maybe I'll just say there's nothing to report on reserves at this time. And then to answer Bill's other question about capital management priorities in the context of this situation and just in general, I'll just reiterate, Bill, obviously, you're very familiar with this. Our priorities are obviously, the dividend, organic growth strategy as we -- Jenny's talked a lot about the various areas that are growing, alternative assets, ETFs, Canvas, multi-asset solutions. We've invested very heavily in each of those areas, and they're the areas that are growing.

We're focused on repurchasing employee share grants. As you just noted, that's what we managed to do some of that in the last quarter. We've also been servicing our debt. We delevered by another $100 million in the quarter.

We also made the last acquisition- related payment of $100 million related to the Lexington acquisition. We're being conservative about around debt. Just in case we want to pay down the $450 million of debt that comes due next year, but we're probably more likely not accessing the debt capital markets between now and then assuming the markets are in good shape. And then, of course, we look at opportunistic share repurchases and acquisitions.

The market is very, very active as we've talked openly about.

Our next question comes from Alex Blostein with Goldman Sachs.

Great. I wanted to get your guys' thoughts on the outlook for private markets growth for Franklin over the next 12 months. And a bit of a 2-parter, but I guess, one, I was hoping to get a more wholesome update, I guess, on the wealth channel, nice traction with Flex products, both U.S. and non-U.S. I think you guys have BSP as well with a real estate debt fund as well.

But talk to us a little bit about how that's tracking? Where do you see that going and what else you're planning on launching that could be needle moving there over the next kind of 12 months? And then similarly, maybe just update us on the institutional outlook with the Lexington flagship fund coming up here in the next few months.

Sure. So we said at the beginning of the year that we thought that our alts fundraising would be in the range of $13 billion to $20 billion, and the higher end of that range would be dependent on a first close of [ Lex ] flagship Fund XI if it happened in September. So that isn't going to happen. They are just now kicking off in the market.

And so there probably won't be a first close until either December or early 2026. But we're sitting here today after 3 quarters halfway right in the middle of that range of $15.7 billion. We think we'll end the year around $18.5 billion. Of that, so far, the $15.7 million 25% has been raised in the wealth channel. And if you look at our current assets, it's about 10% of the assets are in the wealth channel.

So that's a really good sign. Now we went out with a limited number of distributors when we first launched Flex. I think we've added something like 16 now internationally. -- we're -- the Flex and the Flex International, we're seeing about $150 million to $200 million a month coming in, in that particular perpetual product. And we're continuing to add distributors.

So there's a lot of opportunity as far as additional distributors to increase that number. We also launched a perpetual real estate debt fund with BSP. That one is really just with 1 wire house in the U.S. And it's got some traction.

We actually have seen a lot of good momentum in July on that, but we are launching internationally with -- relative with a global distributor that we think will also help that one tick up. But today, we've got 3 perpetual products for real estate, real estate and private credit and secondary PE that are $1 billion each. So we've got scale, we've got track record there. And so as the world -- and I think the thing that is often lost on people as far as ultimate wealth channel, is that there's a view that if you have a good product, that's going to be all you need.

The reality is that's just table stakes. It's the ability -- once you get on -- you have to get obviously on the platform, but it's the education and it's the relationships with the financial advisers, it's so significant. And where we think we stand out is -- the wealth channel is in our DNA. We have relationships with all these advisers.

And we have the Franklin Templeton Academy that can help in the education process. I can't remember, Adam, when we first launched -- when we raised 20% of Lexington Fund X with one of our warehouses, I think it was something like 44% of advisers had never sold an alt product before. And is that blocking and tackling of being able to do the education that's so important. It took us a few years, honestly, to figure this out.

We think we actually are now demonstrating that we have figured it out, and we also have the luxury of the fact that we sell to 100% of a financial adviser's book, so we can cover with wholesalers or market leaders out there in a way that it is difficult for the alt managers who are now selling to what is 5% and hopes to be 10% of the book. And so we have 90 people who are just dedicated to supporting our market leaders who are out there talking to advisers with specialty expertise on how to think about alternatives in the wealth channel. So we continue to really optimistic. We've said we think over time that you get -- the wealth channel should represent certainly 20% of our alts AUM, potentially even over time to 30%.

And Jenny, I'll top that as we've invested in headcount, both in Europe and Asia, most recently, we're adding head count to the 90 that Jenny mentioned specialists.

Great. And then Matt, I was hoping you can update us also on the expense guidance just as you kind of progress here towards the end of the fiscal year? And any early thoughts for fiscal 2026 for you guys?

Sure. Thanks, Alex. I'll go through the fiscal fourth quarter and annual guide. Before I do that, though, I just want to reiterate Jenny's point on July monthly AUM as she had in her prepared remarks.

It's early, as Jenny mentioned, particularly given the fact that it was month end just yesterday, we have formally announced the preliminary July AUM and flows next week, but we expect Western Asset long-term net outflows to be approximately $3 billion for the month of July and an AUM for Western Asset to be approximately $236 billion. Excluding Western Asset, we expect long-term net inflows of approximately $3 billion for the month. So combined, we expect to be slightly flat to slightly positive, let's say, for the month, inclusive of Western Asset or EUR 3 billion positive, excluding Western Asset.

In terms of the quarter, the effective fee rate for the quarter -- for next quarter to about fourth quarter guidance, now we expect to be in the high 37s. To be clear, the reason why our effective fee rate was about 0.5 lower than where we guided, about 80% of that difference was attributed to the calculation of EFR, which was basically the daily average AUM is 1% lower than the simple monthly average AUM, so that impacted our EFR by about 0.4 basis points. And that explains the difference between the guide that we gave versus where we came out. But we expect that to snap back into the high 37s again in the fourth quarter.

The comp and benefits we expect to be $860 million to $870 million. That assumes though about $100 million of performance fees. This is elevated versus our usual guide of $50 million we expect an elevated performance fee quarter of around $100 million. Please note though that the payout ratio on that would be 60% versus the usual 55% due to the nature of part of that performance again, it's $100 million guide versus our usual $50 million.

This also -- the $860 million to $870 million also includes slightly higher incentives due to better performance and higher AUM. IS&T, we expect to be about $155 million. This includes just a couple of million dollars higher on our investment management platform, the integration on the Aladdin project but that's just because we're ahead of schedule. It's nothing to do with any changes in terms of where we expect that to come out in terms of expenses.

So $155 million via IS&T. Occupancy, we expect to be roughly flat, $69 million to $70 million, for the fourth quarter. G&A, we expect to be slightly higher at $190 million to $195 million. This is because of higher professional fees.

So overall, we expect the quarter to end up being about $1.285 billion -- $1.283 billion to $1.285 billion in terms of adjusted expenses. Taxes. We expect to be on the higher end of our 25% to 27% range for the quarter because of expected discrete tax items in the quarter, but for the year, we expect it to come into the middle of that range. In terms of fiscal '25, for the full year '25, as obviously, we can add the quarter guidance to the other quarters, and you'll see that adjusting for the additional quarter of Putnam and excluding performance fee compensation, we expect expenses to still be roughly flat to 2024, perhaps $20 million to $30 million higher, so a little bit higher.

This is notwithstanding markets being significantly higher since I last gave this guidance in the last quarter. Importantly, this includes all the strategic investments that we've been talking about. We've managed to find other ways internally to fund these via other cost saves in the business. And as I mentioned a moment ago, in each area -- in each of the areas that we've invested in, we're seeing meaningful growth now, both in alts, ETF, Canvas, multi-asset solutions in particular.

Alex, in terms of your question on fiscal '26, as referenced -- and obviously, we're very early in this, but as referenced in the past couple of quarters, we got expense initiatives underway. And Jenny referenced these at the beginning that are expected to position us to enter fiscal 2026 with at least $200 million of run rate cost savings relative to fiscal '25 and excluding performance fee compensation. The only offset to these savings, which could be a little bit uneven during the fiscal year, will be driven by higher growth areas such as distribution expenses in connection with potential faster growth if that indeed happens in alternative asset management and faster growth in AUM in addition to the Apera acquisition.

The Apera acquisition adds about $30 million of expenses. And of course, if we are -- if we have higher distribution-related expenses related to faster growth in alternative assets, as an example, we will make sure that we call that out as we go through our expenses so you can keep track of the expense saves that we've referenced on this call in previous quarters.

Our next question comes from Dan Fannon with Jefferies.

Great. I apologize, just to clarify, Matt, what you just kind of went through. So for fiscal '26, I understand you have $200 million of savings going into the year, but did you give a number for fiscal '26 expenses?

We didn't give a notional number, but you can basically -- if you take fiscal '25 guidance that I just gave, and you could take $200 million of that. That's where we'd expect to be, except for the information I just provided on Apera. And if we grow faster in alternative asset management, in particular, because the placement fees and distribution expenses can add up in the short term. which will, of course, be offset by higher revenues in the longer term. And we'll obviously highlight those if and when they happen.

Understood. And that includes -- that's assuming flat AUM from now and no performance fees. Is that correct, right?

Yes. Yes. It excludes performance recently from both sides. So it excludes performance fees from 2025, and it excludes it from the '26 sort of summary that we gave.

Great. Okay. And then just on the fee rates, and I understand there were a lot of moving parts in terms of this quarter. But if I look just over the last year and your asset mix, you have equities up substantially in terms of its AUM, fixed income down.

So that mix shift is more positive, but your fee rate is essentially flat year-over-year. So can you talk about -- obviously, alternative is also a source of growth, but that AUM in general, is flat. So as we think about the underlying trends beyond that, like are there other things that are putting pressure on the fee rate that would otherwise make it so that number isn't higher as the mix continues to move towards higher fee assets because I'm just surprised in aggregate, if you were to tell me AUM mix today versus where it was a year ago that the fee rate isn't higher.

Yes. I mean it's a really interesting question because when we look at our fee rate, just being stable, because if you exclude some of the episodic events that create upside to the EFR during various quarters, like, for example, if we have catch-up fees related to Lexington fund, that can spike the EFR up to 39 basis points, something like that or even higher that happened in different quarters. If you take that out of the equation and you normalize it over a period of time, we've been relatively stable. The reason why we're stable is because we've had offsets to the lower fee businesses or where we've had to lower fees to be competitive in certain -- in particular, certain large institutional opportunities for the firm.

So we often think to ourselves that it's a fairly reasonably decent position to be in to keep it relatively stable versus going down. The product mix, if you will, quarter-over-quarter, for example, in this quarter that we're reporting now, only about 20% or 25% of the fee difference is attributed to the product mix. But we'll say the same thing. We've had higher growth areas across Canvas, ETFs, some of the larger institutional mandates that have lower fees.

That's where we've been growing to offset the pressure on those lower fees we've had inflows into alternative assets. But then on the alternative asset side, we've had higher distributions and realizations that have offset some of that. But gradually, we're seeing some more momentum across all the areas that Jenny referenced in her remarks, that is certainly seeing a tick up in AUM on the alternative asset side. But when we look at the overall picture, we see a situation where we just have relative stability in EFR versus any big increases or any -- certainly any pressure on the downside.

And we do our best, obviously, to give you the breakdown and be as transparent as we can as we go through quarter-over-quarter. This quarter, by the way, another point to mention is that something like 0.2 of the difference was just the weakening dollar, so it was an FX-related matter. It's not even anything to do with the fundamental product shift or fee pressures or anything like that. It was just FX.

Our next question comes from Ken Worthington, JPMorgan Chase & Co.

Jenny, I wanted to dig deeper, maybe follow up on Bill's question earlier on digital blockchain technology, really permeating the traditional asset management business. So you were early, you're innovative, you're a leader, but it doesn't always seem to translate into obvious economic success. And I recognize it's early, but if we step back and look forward where do you see the likely opportunities for Franklin to translate your early insights and investments in digital blockchain technology into economic success that maybe we as outsiders can see?

Yes. So we've built an ecosystem in there. As I mentioned on the Benji platform, we actually got a patent on our wallet. Right now, you download it from the Apple Store, but we really have designed it because we think it could be white labeled by others.

And right now, that wallet can -- and the Benji app or the Benji token can operate actually across chain on 8 different blockchains. So as the traditional distributors, start to think about how they have to deal with the crypto world and the tokenization world. They're going to look for partners, we think, that will help them to navigate it, and we've built this infrastructure to do it. So that's how we're thinking about translate.

Now today, we actually manage reserves for 4 stablecoin providers. Everybody is aware of Circle in USDC because it's the big elephant in the room, but there's actually other ones. We were just selected by the first state who is issuing their own stablecoin to manage that stablecoin. So today, there's been kind of a parallel world between the crypto world and the traditional finance world.

And now as you get clarity around regulation like the Genius Act, you're starting to see firms be more comfortable being able to dip their toe into it. And that's where we think we can be a really important partner because, again, this -- the infrastructure that we've built, we've been building since, I think, 2018 is -- it's not going to be an easy one for people to catch up quickly. And so our ability to really private label that and have it integrated in others -- in their client platforms. Just imagine if you're a distributor, you've got your clients who are holding their crypto assets, some portion of them, probably the younger ones, are holding their assets over at Coinbase.

Wouldn't you like to be able to move that over into a wallet that's integrated on your system so you can provide an entire view of the clients' investment opportunities, and that's the kind of infrastructure that we've built.

Great. And maybe just a follow-up there because that's pretty interesting. Any conversations with these other companies to white label your technology and what you're doing? Or is it just basically the Genius Act and some of the other regulation is so real time that we haven't gotten there yet?

We are having conversations. A lot of the early conversations actually were on the international side and have been on the international side, partly because they had more clarity on regulation. But now with the Genius Act, we're actually having conversations with distributors in the U.S. as well.

Our next question comes from Brian Bedell with Deutsche Bank.

Most have been asked and answered, and thanks for all the commentary on the tokenization Jenny. It was really, really good color. Maybe switching topics to the 401(k) theme and the private markets and 401(k) theme. Obviously, you guys have a really well- rounded private lineup.

What is your, I guess, desire or your plans to potentially integrate private and public products? You could most likely do this yourself and then go after the 401(k) market. And if you could just remind us again your presence in defined contribution and in target date products? And how do you see that?

Or do you think you need to partner?

Yes. So today, we have about $428 billion in retirement. About $120 billion of that is in defined contribution. As a reminder, just when the acquisition of Putnam gave us much more scale in target date and stable value.

So that's enabling us to be a bigger player there. We have -- we launched a partnership. So to answer your question about partnership versus doing it our own, we're open to both. We want to do both.

And so we actually, last year, did a partnership with Apollo and launched a -- we were handling the real estate portion. I think they're doing the private credit on a platform. Look, it's gotten traction with some of the smaller plans, but the reality of the DC space is an incredibly litigious space. And in the absence of clarity around legislation, you're probably going to be -- it's going to be a slower uptake.

Having said that, we announced Empower is very focused on this. They're doing an adviser managed account solutions through Morningstar, and we're a participant in that program. So they know that there's opportunity. And just to put this in scale, like DB plans, half of the assets that we have about $160 billion in defined benefit, half of that's in alternatives.

So it's a real missed opportunity. But unfortunately, the DC space of probably all areas of asset management is the most litigious when it comes to fees. And so it makes the fiduciaries really hesitate until they get like a DOL safe harbor or something. So good opportunity, but there is just kind of the realities of it.

I think it's going to be slower uptake. But we're really well positioned. They're actually already there. And we will have -- our target dates will have private markets.

We're building those models now probably by the first half of 2026, we will launch those. And it's just a matter of what's the uptake. And I don't know, Adam, is there anything else, sorry.

Yes. I mean just to put a little context on that, the target date fund is now about $19 billion. So it's pretty substantial. A lot of that came through the Putnam acquisition.

And we think that's really important because 1/3 of DC AUM is going into the QDII space -- or QDII -- and having that target date has really helped us there. We've got about $2 billion now in the sales pipeline that we think will close shortly in that space. I'm talking there about the sales pipeline, not our institutional won but unfunded pipeline, but that's up quite substantially as well to about $24 billion, which is a $4 billion increase quarter-over-quarter. So strong growth on that institutional side, but core sales is also accelerating quite nicely, up about 22% over the average of the last 8 quarters and up 10% over the same period year-to-date last year.

So strong growth both in the core market, of course, where the DC retirement would fall as well as in the institutional markets.

Our next question comes from Michael Cyprys with Morgan Stanley.

Just a question on non-U.S. allocations, just given the shifting trade policy, geopolitical uncertainty and heightened volatility. Just curious what you're seeing from your U.S. clients and non-U.S. clients in terms of potential and evolving interest for non-U.S. strategies and scope for potentially shifting allocations away from the U.S. Curious what you're hearing to what extent do you think this might play out? And maybe you could speak to some of your non-U.S. strategies that might be best placed to capture what could be potentially money in motion.

Sure. I'll take that. Yes. We have absolutely seen that over the last quarter, but I want to distinguish between what was driving those changes.

From a client perspective, we don't see that as kind of a political statement, but rather an investment opportunity statement as there just seems to be growing interest and growing upside in markets outside of the U.S. So particularly, we've seen growth in our emerging markets equity strategies, international and global equity as well as value as opposed to growth as people tend to, in times like this, like to rebalance their portfolios and a lot of people are overallocated in large cap growth. On the fixed income side, what we've seen is movements into areas like short term, of course, but also global bond, EM, high yield and some multi-sector products as well.

In the U.S. there was a general flow out of equities for both us and the industry. But outside of the U.S., there's an attractiveness to equity, especially in domestic markets in Europe and Asia. They're seeing more upside in their markets domestically versus the U.S., especially if there's going to be a weaker dollar, which I think is a call many are making. So we're seeing a lot of growth in non-U.S. equity and fixed income in both niche and kind of more broad global products.

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

Okay. Well, thank you, everybody, for joining us today. And once again, we're a people business, and I want to thank our employees for their continued hard work and dedication. And we look forward to speaking with you again next quarter. Thanks, everybody. Enjoy the rest of your summer.

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