Franklin Resources Earnings Call Highlights Growth Momentum

Franklin Resources ((BEN)) has held its Q1 earnings call. Read on for the main highlights of the call.

Franklin Resources Leans Into Growth as Strategic Wins Trump Western Asset Headwinds

Franklin Resources’ latest earnings call struck a decidedly upbeat tone, with management emphasizing record long‑term inflows, diversified growth across asset classes, and tangible progress on cost efficiency and technology initiatives. While fixed income outflows tied to Western Asset, some near-term performance softness, and performance‑fee volatility remain pressure points, executives argued that broad-based commercial momentum and a clear path to higher margins more than offset these localized challenges.

Record Inflows Mark Ninth Straight Quarter of Positive Momentum

Franklin reported a standout quarter for fundraising, posting record long-term inflows of $118.6 billion, up 40% sequentially and 22% year over year. Long-term net inflows were $28.0 billion, and an even more impressive $34.6 billion when excluding Western Asset, nearly double the prior-year period’s comparable figure and marking a ninth consecutive quarter of positive net flows on that basis. Management framed this as clear evidence that its multi-boutique and multi-asset strategy is resonating with clients globally, even as certain pockets of the franchise continue to face specific challenges.

Record AUM and Strength Across Asset Classes

Total assets under management climbed to $1.68 trillion, with record levels in three of the firm’s four major asset categories. Multi-asset strategies were a notable bright spot, reaching nearly $200 billion in AUM and generating $4.0 billion in net inflows, extending an 18-quarter streak of positive net flows. This breadth of asset-class strength positions Franklin as less dependent on any single product or style, providing a measure of resilience against market rotations and client rebalancing.

Equity and ETF Engines Drive Growth

Equity strategies delivered strong results, with net inflows of $19.8 billion, including $24.6 billion of reinvested distributions that underscore continued client engagement. The firm’s ETF platform hit a new high of $58 billion in AUM, supported by $7.5 billion in net flows and an impressive 17th consecutive quarter of positive ETF flows. Active ETFs were the main growth driver, accounting for roughly 70% of ETF net flows at $5.5 billion, and 15 ETFs have now passed the $1 billion AUM threshold—evidence that Franklin’s push into active, solutions-oriented ETF offerings is gaining scale.

Alternatives and Private Markets Extend Their Reach

Alternatives remained a key growth pillar, with AUM totaling $274 billion. The firm raised $10.8 billion in alternatives during the quarter, including $9.5 billion across private market strategies, while realizations and distributions reached $4.8 billion. Lexington Partners’ AUM has grown to $83 billion, up 46% since its 2022 acquisition, highlighting the success of that deal. Franklin also touted expanding private credit capabilities, citing closer alignment with Benefit Street Partners and the Apira acquisition to build out direct lending in Europe as it targets higher-margin, less commoditized segments of the market.

Retail and Wealth Solutions Gain Traction

Franklin continues to deepen its footprint in retail and wealth channels through customized and solutions-based offerings. Retail separately managed accounts grew to $171 billion in AUM, supported by $2.4 billion in net inflows. Canvas, the firm’s direct-indexing and customization platform, posted $1.4 billion in net flows and has reached $18 billion in AUM, remaining net-flow positive since its acquisition. Investment Solutions—Franklin’s enterprise-level, outcome-oriented platform—surpassed $100 billion in AUM, underscoring strong demand from advisors and institutions for integrated portfolios rather than standalone products.

Product Diversification and a Healthy Institutional Pipeline

Product diversification was a recurring theme, with positive net flows across equity, multi-asset, alternatives, and ETFs. Even fixed income, when excluding Western Asset, notched its eighth consecutive quarter of positive net flows, suggesting the broader fixed income franchise is performing well. On the institutional side, Franklin maintained a robust “won but unfunded” pipeline of $20.4 billion, with fundraising broadly spread across alternative specialist teams. This backlog provides visibility into future inflows and demonstrates ongoing institutional confidence in the firm’s capabilities.

Technology, Digital Assets, and AI as Strategic Differentiators

Management devoted meaningful time to technology and innovation, positioning these as long-term differentiators. Digital asset AUM has grown to $1.8 billion, split roughly between tokenized funds (about $900 million) and crypto ETFs (around $800 million). Franklin highlighted its blockchain tokenization work, including the Benji money market vehicle, where management cited demonstrable transaction-cost reductions versus legacy payment rails. The firm also launched Intelligence Hub, an AI-driven distribution platform built on Microsoft Azure, aimed at enhancing sales effectiveness and client targeting—part of a broader push to embed data and AI into its commercial engine.

Investment Performance Mixed but Long-Term Story Intact

On performance, Franklin presented a nuanced picture. More than half of its mutual fund and ETF AUM continues to outperform peer medians across 3-, 5-, and 10-year time frames, with long-term mutual fund performance metrics improving in the 5- and 10-year periods. However, short-term numbers softened: mutual fund performance declined modestly over 1- and 3-year horizons, driven by select U.S. equity strategies, while strategy composite performance weakened over 1- and 5-year spans, with the one-year period pressured by liquidity strategies. Management framed these as manageable and localized issues against an otherwise solid long-term track record.

Margin Improvement and Cost Discipline in Focus

Financially, adjusted operating income came in at $437.3 million as Franklin balanced growth investments with expense discipline. Management reiterated its $200 million cost-savings plan and emphasized a disciplined approach to spending, targeting flat expenses in fiscal 2026 versus fiscal 2025 on a markets-flat basis, excluding performance fees. The firm aims to exit fiscal 2026 with operating margins in the high-20% range and reach above 30% by 2027 if strategic targets are achieved, arguing that current support for Western Asset is depressing margins by several points and represents a future tailwind as conditions normalize.

Western Asset Outflows and Fixed Income Pressure

Fixed income remained the main area of weakness, with net outflows of $2.4 billion in the quarter largely tied to Western Asset. Management acknowledged that expense support for Western Asset has weighed on consolidated margins and that this business remains a key integration and turnaround focus. Despite some regulatory overhang easing, Western’s flows are still under pressure, and Franklin is working through both client perceptions and operational integration issues. While the broader fixed income platform is generating net inflows, Western continues to be a drag on segment flows and profitability.

Regulatory Overhang and Short-Term Volatility

Western Asset’s situation continues to introduce an element of volatility to the overall story. Although authorities indicated they would not pursue criminal charges in a previously disclosed matter, easing the worst regulatory risks, clients have continued to pull assets, and management flagged Western as a source of near-term flow instability. Combined with lower performance fees in the quarter and an annual acceleration of deferred compensation for retirement-eligible employees, reported results saw additional noise. Management noted that performance-fee timing and episodic compensation items create volatility in quarterly numbers and clarified that certain performance-fee-related items are excluded from their underlying expense guidance.

Pockets of Private Capital Fundraising Remain Challenged

Despite the overall strength in alternatives, Franklin noted that certain private capital segments remain below historical fundraising averages. Clients in parts of the private equity ecosystem are seeking more liquidity, slowing commitments to longer-dated vehicles. The firm highlighted that some areas, such as Clarion’s real estate-focused strategies, faced a difficult capital-raising environment despite delivering positive returns. This underscores a bifurcated picture in private markets: strong demand in select strategies, coupled with slower institutional appetite in more illiquid or cyclical segments.

Guidance Highlights: Cost Controls and Margin Ambitions

Looking ahead, Franklin guided to flat full‑year expenses versus fiscal 2025 in a flat market scenario, excluding performance-fee-related compensation, supported by a $200 million cost-savings program—about 20% of which was realized in the first quarter, with the bulk expected in the third and fourth quarters. The company aims to exit fiscal 2026 with operating margins in the high‑20% range and sees a path to exceeding 30% by 2027, with a possible 30–35% range if strategic growth goals are met and Western Asset headwinds subside. For the upcoming quarter, management outlined modeling assumptions including compensation and benefits of roughly $860 million (with about $30 million in calendar resets and $50 million of performance fees at a 55% comp ratio), IS&T around $155 million, occupancy near $70 million, and G&A of $190–195 million, while tax rates are expected in the lower half of the 26–28% range. The firm expects its effective fee rate to be stable next quarter, with potential upside later in the year from alternative fundraising.

In summary, Franklin Resources’ earnings call painted a picture of a firm increasingly driven by diversified growth engines—equities, ETFs, multi-asset, alternatives, and wealth solutions—backed by meaningful technology investments and a clear cost-reduction roadmap. While Western Asset, short-term performance variability, and fundraising pockets in certain private strategies continue to weigh on parts of the business, management’s confidence in achieving higher margins and sustaining strong net inflows suggests a constructive medium-term outlook for investors watching the stock and the broader active asset management sector.