Operator: Welcome to Franklin Resources earnings Conference Call for the Quarter Ending 06/30/2026. Hello. My name is Maria, and I will be your call operator today. As a reminder, this conference is being recorded. And at this time, all participants are in a listen only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.
Selene Oh: Good morning, and thank you for joining us today to discuss your 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 2000. 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 just described in more detail in Franklin's recent filings with the Securities and Exchange Commission. Including in the risk factors and the MD and A sections of Franklin's most recent Form 10 k and 10 Q filings. Now I would like to turn the call over to Jenny Johnson, our Chief Executive Officer.
Jennifer Johnson: Thank you, Selene. Welcome, everyone, and thank you for joining us today to review Franklin Templeton's third fiscal quarter results. I am joined today by Matthew Nichols, our Co-President and CFO and Daniel Ernesto Gamba, our Co-President and Chief commercial officer. We will answer your questions momentarily. But first, I would like to highlight key results and themes shaping our business. This was another strong quarter for Franklin Templeton that demonstrated our strategy is working. We delivered another quarter of positive long term net inflows with positive flows across every asset class and every geography. We also reached new highs in assets under management across many of our key growth businesses, including alternatives, ETFs, retail SMAs, Canvas, and our institutional pipeline. Together, these results reflect the strength of our global platform and the momentum we are building across the business. Today, we are ahead of our 5-year plan. A testament to disciplined execution. We have broadened our capabilities across public and private markets. Deepened client relationships, and expanded the ways clients access our investment expertise. These investments are creating multiple sources of organic growth and positioning us well for the future. At the center of our strategy is 1 Franklin Templeton. Increasingly, clients are turning to us not just as an asset manager, but as a trusted partner that combines investment expertise innovation, and global scale to help them navigate complex markets and achieve their long term objectives. We continue to simplify our go to market approach to better serve clients and capture opportunities across the business. The results we reported today reflect strong execution in the quarter, with $18.4 billion in long term net inflows bringing fiscal year to date long term net inflows to $63.3 billion This was another consecutive quarter of positive net flows with positive net flows across every asset class and geography. Long term inflows reached a record $122 billion and assets under management grew to a record $1.8 trillion Each of our key growth areas, including alternatives and private markets, ETFs including fundamental active ETFs retail SMAs, and Canvas multi asset solutions and our international franchise contributed meaningfully to the quarter. That broad based performance reflects the investments we have made over the past several years to build a more diversified business. The strength of our business today is translating into future opportunities. Our institutional pipeline of won but unfunded mandates reached a record $28.6 billion, increasing more than $8 billion from last quarter. Institutional clients continue to seek strategic partners that can deliver integrated solutions across public and private markets rather than individual products, and that plays directly to the strengths of our platform. 1 of the most encouraging developments this quarter was the continued strengthening of our public markets franchise. With growth broadening across asset classes and investment capabilities. Equity returned to positive net flows of $2 billion reflecting strong demand across U. S. Large cap value, US large cap core, international equity, infrastructure, and systematic strategies. Our global fixed income platform generated $2.6 billion of net inflows supported by broad based demand across enhanced liquidity municipals, multisector, stable value, as well as highly customized institutional mandates. Excluding Western Asset, Franklin Templeton fixed income delivered its 10th consecutive quarter of positive net flows with $3.5 billion of net flows while Western continued to stabilize. We are also seeing clients think differently about credit. While they do view public and private markets separately they are looking for integrated solutions. Franklin Templeton's fixed income $520 billion platform together with our private credit capabilities of more than $100 billion gives us more than $620 billion in AUM across the full credit spectrum. That breadth positions us well as clients increasingly seek fewer partners that can provide solutions across public and private credit. We won a multi asset credit mandate from a public plan and are participating in various RFPs. Multi asset has consistently been an important contributor to growth, and this quarter generated $4.7 billion of positive net flows, led by Canvas, Franklin Income Fund, and Franklin Templeton Investment Solutions. As mentioned earlier, these results reinforce that our public markets franchise is broadening the sources of our organic growth, with clients increasingly relying on Franklin Templeton for active strategies outcome oriented solutions, and customized portfolios. Private markets remain 1 of the industry's most compelling long term growth opportunities, and we believe Franklin Templeton is uniquely positioned as a leading partner in this space. We built 1 of the industry's largest and most diversified private markets platforms spanning secondary private equity, private credit, real estate, and venture capital. Alternative AUM reached a record $294 billion during the quarter after $3 billion of realizations and distributions. We raised $11.8 billion across our alternatives platform during the quarter, including $10.3 billion in private markets, bringing fiscal year to date fundraising to $33 billion already exceeding our original full year target with 1 quarter remaining. Fundraising remained diversified across strategies and client channels, reflecting the breadth of our platform and continued demand from both institutional and wealth clients. As private markets become more accessible, we are also seeing continued growth in the wealth management channel, Our evergreen platform across secondary private equity, private credit, and real estate grew to $8.9 billion in AUM, reflecting increasing adoption by individual investors. Wealth management accounted for approximately 20% of our private market fundraising year to date across evergreen and drawdown vehicles. Demonstrating the progress we are making in bringing institutional quality private market capabilities to a broader range of investors. We believe expanding access to private markets will be 1 of the industry's most significant long term growth opportunities, and Franklin Templeton's long standing adviser relationships position us well to capitalize on that trend. More broadly, clients increasingly want choice. Not only in what they invest in, but how they access investment capabilities. Because preferences vary across client segments, distribution channels, geographies. We offer a broad range of investment vehicles to meet those evolving needs. That strategy continues to gain momentum with record AUM across our ETF retail SMA, and Canvas businesses. Our ETF franchise reached a record $75.6 billion in AUM, with $7.1 billion of net inflows during the quarter ETFs have become an increasingly important way clients access our investment capabilities, and we continue to expand our offering by bringing more of our highest conviction active strategies into the ETF wrapper. Active ETFs account for 61% of ETF net flows. Reflecting both the strength of our investment platform and continued demand for differentiated active strategies. Demand for personalized investing continued to grow. Our retail SMA business reached a record $188 billion AUM, with $4.4 billion of net inflows while Canvas, our custom portfolio solutions platform, grew to a record $30.3 billion in AUM with $3.7 billion of net inflows. During the quarter, we also launched our preferred partner program extending Canvas' tax overlay capabilities to strategic partners. With clients in over 150 countries or about 80% of the world and on the ground presence in over 30 countries international business continues to be an important differentiator for Franklin Templeton. International AUM reached approximately $525 billion with positive long term net flows in every region. Innovation also remains central to how we continue to evolve our business. We are investing in new capabilities technologies, and distribution channels that expand client access and strengthen our competitive position and digital assets are a good example. Digital asset AUM ended the quarter at $3.2 billion including $2.4 billion in tokenized funds and approximately $600 million in crypto ETFs. During the quarter, we completed our acquisition of 250 Digital and launched Franklin Crypto, expanding capabilities across the digital asset ecosystem. Also announced a partnership with MoonPay, and we will collaborate with Payward, the parent of Kraken, to expand access to tokenized investment products and bring traditional financial assets on chain. These initiatives reflect our belief that blockchain will become an increasingly important part of financial markets and Franklin Templeton intends to be at the forefront of the evolution. Strong investment performance remains fundamental to earning our clients' trust and supporting long term growth. More than half of our mutual fund and ETF AUM outperformed peers over the 3, 5, and 10-year periods, nearly half is rated 4 or 5 stars by Morningstar. Our strategy composites also delivered strong long term results. with 55% or more of AUM outperforming benchmarks over the 3 and 5-year periods and 70% over 10 years. Consistent performance across market cycles continues to strengthen our ability to win and retain clients. Turning briefly to our financial results. Adjusted operating income increased to $508.9 million up 7% from the prior quarter and 35% from a year ago. The improvement reflects higher average AUM, disciplined expense management, and the continued execution of our efficiency initiatives demonstrating the operating leverage of our diversified business model. As we look ahead, we are confident in the direction of the business. The investments we have made over the past several years have created a broader, more diversified Franklin Templeton, and we believe that positions us well to continue serving clients and delivering long term growth. We remain disciplined in managing expenses while continuing to invest strategically in the capabilities while maintaining financial flexibility to drive long term growth and return capital to shareholders. This quarter, we returned $521.5 million to shareholders, including $348.1 million in share repurchases. In the spirit of 1 Franklin Templeton, as announced today in our earnings press release, our parent company will officially change its corporate name from Franklin Resources, Inc. to Franklin Templeton, Inc. on August 17, 2026. This change reflects the continued evolution of our firm as a unified global organization and aligns our corporate name with the Franklin Templeton brand. This is a corporate name change only and will not affect the company's corporate or capital structure, domicile, outstanding shares, CUSIP number, or the voting or other rights of its stockholders. The company's common stock will continue to be traded on the New York Stock Exchange under the ticker symbol BEN. Aligning our legal corporate name with our global brand reinforces our commitment to 1 Franklin Templeton. 1 organization 1 brand, and 1 consistent experience for clients investors, partners, and employees around the world. Finally, I would like to thank our employees around the world Their dedication and commitment to our clients are what make these results possible. I will open up the call for your questions. Operator?
Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. To allow for additional participants on the call this morning. Our first question is from Bill Katz with TD Cowen. Please proceed with your question.
Bill Katz: Great. Thank you very much for taking the questions or question, I should say. Jenny, you laid out very strong growth beginning of the year for private markets and that you have already exceeded your year-to-date target with 1 quarter to go. Can you unpack where you are seeing the strength and where you might be in terms of Lexington 11 and the and the outlook for that as well? Thank you.
Jennifer Johnson: Sure. Thanks for the question, Bill. So, at the beginning of the year, we had a target of $25 billion to $30 billion as far as the raise in private markets, As you kind of pointed out, we are now at $33 billion, and we expect to end the year at about $40 billion Lexington's flagship fund by September They are very much on track with their fundraising expectations. By September, they should exceed $10 billion. Of the what we have raised so far so let me talk about this quarter. So this quarter, we did $10.3 billion. Lexington is about 40% of that. However, that 40% is in 4 strategies. So their flagship fund their middle market fund, their continuation vehicle, and the perpetual all raised and contributed to that. In addition to that, of the $10.3 billion, every single 1 of our private market managers contributed. So it is secondaries. it is real estate. it is private credit. All 3 of the kind of private credit managers, that are under BSP contribute to that as well as venture. Actually, it is 30 different strategies that were all part of that $10.3 billion. So what makes us really excited about it is that this is not a 1-off kind of a just the Lexington flagship. This is really a diverse fundraise, and we are continuing to see momentum across the board. And 1 area that has kind of come back a bit this year is real estate, which was really out of favor, and we are starting to see some, some good traction there.
Operator: Our next question comes from Alexander Blostein with Goldman Sachs. Please proceed with your question.
Alex Blostein: Hi. Good morning. Wanted to ask you guys around fixed income strategy broadly. You have made some changes kind of trying to bring the liquid and private pieces together. Given the convergence in this kind of part of the market, can you just talk through your new go to market approach? How are you thinking about the opportunity in fixed income broadly? And how much they could accelerate growth? For Franklin as a whole between liquid and private side of the house?
Jennifer Johnson: Yeah. Thanks for that question, Alexander. So I will start, and then I will have Daniel add on to it a bit. Look. We think that any fixed income manager of the future is going to have to have visibility both on the public and private side. Like, if you do not have some way to sort of have insights into the private markets in your traditional fixed income manager, we think you are managing money with pretty big blinders on. So we are doing a lot. We, as you know, have already integrated Brandywine and Putnam into the Franklin fixed income. Great traction there. We have had 10 consecutive quarters of positive flows. And have been working on bringing Western in. A lot of the work on Western was around kind of the back office and integration in areas like client service, institutional client service and on the institutional sales side. On the investment side, Mike Buchanan, the CIO of Western, is now reporting into Sonal. So the key is not to confuse the independence of an investment team with the ability to have greater access to resources. So for example, the work we are doing in AI it opens up a lot more data available to the analyst to be able to leverage to be able to pick up the phone and talk to a sector analyst in another area. We have the private markets team you know, today they talk they will work together. They will talk about they will talk about macro. But I think as we look forward, we think it is going to be more and more important that they continue to get closer and closer. So, we are 620 billion fixed income manager. About a 100 billion of it is private markets. But we really want to present to clients much more of a look of 1 big fixed income manager. And as you know, we hired an origination team. We think they are going to be important. Any fixed income manager of the future is going to have to be able to have some of their own sourcing. We think that is going to be an important part of the future of fixed income, and then, obviously, the teams will be able to choose whether they want to opt in to certain deals or not. But as we look at product development in the future, and maybe I will ask Daniel to talk about this a little bit. It is clear that you are going to see more and more fixed income that incorporates both public and private. And we think a much better way to manage that is kind of under 1 umbrella versus just independent sleeves. Daniel, you want to add anything to that?
Daniel Ernesto Gamba: Of course. Alexander. Thanks for the question. I will have 3 quick things. Number 1 is, the reaction to the Western settlement, if you want, has been positive from clients. And the client service teams have conducted outreach to the distribution partners and institutional clients And the main questions were stability of the investment team, no changes to the investment philosophy. So it is been quite positive and we are excited about the reengagement process that we are actually doing as we speak. Which I think it has upside, on the institutional side, given the strength of Western clients and relationships over the years. 2 other points, 1 area of focus as mentioned by Jenny is multi asset credit. And that is been where we develop solutions by not only combining SLIPS. Because I think a lot of what we have seen in the market is sleeves. People want co PMs to actually work together to bring the capabilities across the spectrum of credit. And we just won a multi asset credit mandate from a public pension in The US, but we are also actively in several conversations on RFPs and advanced conversations across multi asset credit. So we are very excited about what is happening in multi asset credit, Last point, new products. We just launched our target date. We repositioned 1 of them, which is called Retirement Advantage Plus, to include private markets between 2.8% private real estate and private credit, and is having initial good looks from clients. We are also in the process of launching an infrastructure product that also combines public and private. Private market partners, but also some peer reach and some other areas that we are also doing to combine. So this is an area that you are going to hear more from us because it is a key differentiator given that we have our capabilities inside and the investors are starting to gather insights among 1 another. So it is an area of future development, Alexander.
Analyst: Alrighty. Thanks so much.
Operator: Our next question comes from Daniel Thomas Fannon with Jefferies. Please proceed with your question.
Dan Fannon: Great. Thanks. So wanted to expand on the $11.8 billion in fundraising. So much of that is actually in fee paying AUM? And then also kinda, like, what is the average fee rate of the kind of assets you are raising across? I think you said 30 different strategies. So some, I guess, just kind of blended averages that through rate would be helpful.
Jennifer Johnson: So the 30 plus strategies is a little over 30. You know, across our private markets platform, about 80% is feed generating. So that kinda gives you the number, and it varies a bit. I do not have the blended number. I do not know, Matthew. I do not know what we provide there on the blended number. Do you have that?
Matthew Nicholls: The blended number is about 65 basis points. Blended number. But it ranges between, you know, 40 basis points and over 100 basis points. Plus performance fees.
Analyst: Okay. Thank you.
Operator: Our next question comes from Glenn Paul Schorr with Evercore ISI. Please proceed with your question.
Glenn Schorr: Hi. Thanks very much. On Canvas, I am interested if you look at the, the flows in the quarter, relative to overall AUM, that is an enormous growth rate. You did have some white label wins I am curious if you can parse some of that out, but then more talk big picture of what kind of growth you are expecting. Are there other white label opportunities in the pipeline? And then maybe sidebar of in terms of strategies that you deploy how much of it touch on the area that seemed to draw some Treasury comments during the quarter? I appreciate it.
Jennifer Johnson: Thanks. So since we acquired Canvas, they have gone from $2 billion to $30 billion. So, you know, just a tremendous growth rate. And we think this is just still early. If you think about what is Canvas? So many of these tax optimized platforms were developed by tax people and so they have a fair bit of manual labor to them, and that limits some of the flexibility. Canvas was developed by quant managers, so they were very tech focused. And so there are some features in Canvas that other platforms cannot do. So for example, the managed options strategy allows them to, handle concentrated stock positions and help diversify the portfolios tax efficiently. They can take in kind in. So those are pretty unique, features about Canvas. And you know, the way we look at it is every time we sign up a new RIA, a new wirehouse platform, you know, any new platform, that just opens up and widens the funnel of what is gonna come in. Occasionally, you will have a 1-off that will be a switch in, but more importantly, it just opens up the funnel that people have selected that as their platform to, you know, to leverage, and you will just continue to see flows. Now the future of Canvas and what gets us really excited is being able to what started out as more of a direct indexing platform is really a tax overlay on active strategies. And so, you know, we think that as our SMA business so today, we are $187 billion in SMA. We are a large SMA provider. But what really gets exciting is when you can add the capabilities of Canvas as a tax overlay on SMA platforms on the active strategies. And in fact, our preferred partners program we have been selected by some firms who manage active strategies. They selected Canvas to be the overlay on their strategies. So that is kind of a white labeled version. And again, it is because it is just a really excellent technology. Daniel, you wanna add anything to that?
Daniel Ernesto Gamba: I would only add that this quarter, we continue to onboard new partners and that is a big driver of where we are. So we added 26 new partners which is still increased. And total number of partners that we have now is 220 partners. So that is a big driver of the growth. And I will also highlight the strength of the product is actually what is driving a lot of the success. We have more frequent rebalancings and also ability to receive in kind holdings And as you see, the driving of people moving money from commission based into fee based This is a big transition tool that some of our partners are starting to use. You saw it last quarter. Actually I will say in Q2 and we have we are excited about the pipeline. The pipeline is looking strong.
Jennifer Johnson: Thanks, Dan.
Operator: Our next question comes from Patrick Davitt with Autonomous Research. Please proceed with your question.
Patrick Davitt: Hey. Good morning, everyone. Couple of guidance cleanups. Sorry if I missed it in the release, but could you give the scale of the catch up fees and management fees? And then on the expense guide, just confirming that we should add some variable expense to that based on whatever, revenue growth we are assuming for 4Q? Thank you.
Matthew Nicholls: Yes. Good morning, Patrick. First of so for the quarter that we are reporting here, the catch up fees were $14 million. We expect it to probably be about the same in Q4. In terms of a guide, I will quickly run through it. We expect the effective fee rate to be roughly the same as what it was this quarter that we are reporting today in the mid to high 30-sevens, again, very similar to the quarter we are reporting today. Compensation, we expect to be $850 million. This is at a $50 million performance fee level at a 55% payout. IS and T, we expect to be at $165 million. This includes investments in AI, data and security. Occupancy, we expect to be $70 million consistent with the previous quarters. G and A, we expect to be $400 million, includes elevated fundraising and advertising that we also talked about last quarter. And we expect the tax rate to be between 25% to 27%. Both for the fourth quarter and for the fiscal year as a whole. In terms of the full guidance for 2026 of course, you can add the numbers I just went through to the 3 quarters. That we reported already. But as outlined on page 14 of the IR deck, this assumes flat markets from now and excludes performance fees. it is inclusive of our savings that we have also presented in previous quarters. We expect expenses to be about 3% to 3.5% above full year 2025 This modest increase is driven by increased markets to date, higher sales higher fundraising to date, and strong performance. Inclusive of the performance fee guide I just mentioned, total expenses would be about 2% to 2.5% higher versus 2025. Importantly, though, as it relates to the margin, taken in conjunction with, revenue increase to date and revenue as expected for the rest of the year. We again have moved further ahead on our margin expansion targets. Specifically, we expect to reach very close to 30% if not at 30% for our fiscal Q4. And at least in the mid 20 sevens, maybe a little bit better than the mid 20 sevens, for the full year 2020. Along with a declining compensation ratio in 2020. This, as you know, is ahead of plan. And we expect to reach at least 30%, probably 30%+ margin later in 2027. Specifically in 2027, we would expect the full year margin to be between something like 29-30%. In terms of the EFR for the full year, we expect it to remain stable. at 37.7 to 37.8, something like that in the high 30-sevens.
Operator: As a reminder, if you would like to ask a question, please press 1 on your telephone keypad.
Ben Budish: Our next question comes from Benjamin Budish with Barclays. Please proceed. With your question. Hi. Good morning. Maybe going to follow on Patrick's question there. I think you kind of answered some of the questions around what spending might look like in fiscal 27. So maybe on the fundraising side for the alts, which is probably the most controllable or at least where you kind of have the most visibility into your plans, maybe give us a little bit of a sense for what you would expect to have in the market. I do not know if it is too early to kind of give your full year fundraising expectation but what does the product pipeline look like? And are there any implications for the EFR? I think the forward commentary was quite helpful, but it seems like if you keep at this level, I guess, on what happens with markets, that could continue to be constructive for that as well. So any additional color there would be very helpful. Thank you.
Jennifer Johnson: Yes. We will give you really at the next quarter kind of the projections for 2027 as far as the 20% in the wealth channel. And I think we have a real advantage in alternatives in the wealth channel because alternatives sold in the wealth channel, I describe it as hand to hand combat. You not only have to get on the platform, but you have to educate adviser by adviser, and our coverage gives us an advantage there. So you know, we have always said that our goal is to be 20% to 30% of it in the wealth channel. We are at 20% now and so we hope to continue to grow that as well. But, you know, we are we will provide a 2027 guidance at the end of next quarter. As I said, for this coming quarter, we expect to end the year at about $40 billion Okay.
Matthew Nicholls: Same thing and same thing on expense guidance. I already mentioned that a little bit. From where we expect margin to be because we are very focused on margin and making sure that we get the margin uplift that we presented. So for 2027, I just touched on that slightly, but we will give more details, as Jenny mentioned, in the next quarter as we talk about the fourth quarter and or as we present the fourth quarter and then going into 2027. In terms of the EFR though, as we run our analysis on our expectations, we do expect that to remain stable in the mid-37s. Alright. Thank you.
Daniel Ernesto Gamba: Welcome I was going to just add some color on the alternatives in wealth. Because I think it is worthwhile this quarter. We had $3 billion fund raise in the wealth channel for the quarter. Across really evergreen and drawdown strategies which fiscal year to date is $6.6 billion. Which, you know, that is the 20% that Jenny was talking about. But also, the part that is worthwhile mentioning is international. We continue to have international growth, 29% of the sales are coming internationally. From Europe and the Middle East, about 18%, and APAC, about 11%, driven by new markets signing up to our evergreen program as well as, in some cases, some institutional sales in Asia, especially, I will say, a lot of the institutional sales coming from Asia. And we are also starting to broaden across different structures So we have a great diversified platform that is helping with the real estate debt is starting to have some good momentum. CPREC having good momentum, beyond, of course, flex. And we are also, going forward, we are driving some innovation in the space. So we announced a model portfolios with CoraStone, which is also helping us to deliver SMA style model portfolios with a single ticker. And we are also looking at demand from clients on the infrastructure and venture and growth. So those are also areas where we see demand going forward, is going to continue to strengthen our presence in wealth on alternatives.
Analyst: Okay. Great. Thanks for all the extra color.
Operator: Our next question comes from Michael Cyprys. Morgan Stanley. Please proceed with your question.
Michael Cyprys: Good morning. Thanks for taking the question. So over the last year, you have rolled out a number of AI initiatives across investments, distribution operations, including a partnership with Microsoft. So just hoping we could follow-up on that. And as you look across your efforts today, where are you seeing some of the highest return on investment? Where is adoption or maybe been a little slower than you initially thought? As you look out over the next couple of years, which workflows or functions do you think could be most likely fundamentally redesigned that could have the most meaningful impact on your business from AI? Thank you.
Jennifer Johnson: Yeah. Thanks for the question, Michael. So you know, I am gonna start with the Intelligence Hub which was the partnership we did with Microsoft because it was very early on. And we have now, after a couple of years, are actually starting to get real metrics. Around it. So, again, this was, you know, a simple problem. How do you, ensure that your salespeople are seeing the right clients and having the right conversations? Being as efficient as they can. And it is actually quite a complicated technical solution because it requires you to have agents that talk to each other, and that is why Microsoft was excited about it. So We have rolled it out. We have seen that in the territories where it is pretty broadly rolled out now, a 25% increase in the number of clients that they are able to visit or contact, and about a little over 11% uplift in sales. And we would expect that to continue. So that is a fairly mature AI project, which, as you know, we think that the sales lift will continue to increase. In the investment side, our approach has been very much like, let's let our teams build. We have got over 1 thousand agents working in on different investment teams. We have multiple partners not only Microsoft and Amazon, but, like, Wand and OpenAI, Fluent Grommet. They approach it in different things. And we have been really trying to encourage our investment people to you know, just go out and build agents, get comfortable with it. Over time, I think what will happen is you will start to look at it. Because any time you build an agent and it runs, it costs you money. So you will start to look at it and say, okay. How effective are these things? But today, it is all about efficiencies in the research analyst models so that, therefore, they get more time and hopefully gain more insights. We have a couple of our PMs and research folks who are particularly focused on AI. We have built we have we have funded 3 strategies, and I will describe it in a very high level, which is essentially to say, 1 of the strategies uses AI for the research function. the second strategy, think of it as using AI for the portfolio construction function, and you are trying to get learnings from those And then the third is a kind of fully on AI investment strategy. Our goal we do not care whether these are ever commercial or not. Our goal is what will we learn in the process there. So we think of that as like an R&D sandbox, kind of, from our investment teams.
Matthew Nicholls: And then with respect to operations and technology, we track how much code is written by AI.
Jennifer Johnson: So that is 1 measurement that can be good or bad. And then within our operations group, we have multiple different ways in which we are you know, whether it is RFP processing, where we are trying to create efficiencies, in our marketing group. You know, you are you are doing, due diligence and our there that you that you are trying to make more efficient. So we kinda put that bucket in cost savings. We are still building those out, and, we have multiple every department has we have a measurement of okay. What are the initiatives that you are doing, and what are you putting as a target? For cost savings or increased productivity volume increase, you know, across the company, and we are tracking those.
Matthew Nicholls: Yeah. We have Great. I would say we have, Michael, we have a lot of T-tables. On the left side, it is how much we are spending on AI and why we are doing it. On the right side, it is gonna say what we are gonna get out of it in the long term, both production and efficiency. So far, you know, we are focused on production and effectiveness. But longer term, we certainly expect to get meaningful efficiencies. And that including the functions. So Jenny mentioned a lot of the front office and how we are utilizing it to be more effective there. it is also across HR, finance, tech and op itself, you know, risk management. Is another very important area internally where AI is being used very effectively already. So we got a number of terrific opportunities and it is costing a lot, but I think we are gonna get our money back and then some, in the months and years.
Jennifer Johnson: I mean, the honest-- yeah. The honest challenge with AI is you wanna get your work to be comfortable using it. So you have to be careful about being too constricted on their use of it. On the other hand, it can get really expensive if people just start to write agents that are gonna run. And so we are trying to balance that right now. Great.
Michael Cyprys: Thanks so much for all the color on If I could just ask a follow-up question. Just on tokenization, you have been an early mover with tokenized money funds, and you are having some early success there. And you have described wallets as becoming perhaps the next distribution channel for investment products. How do you think about the economics of that channel versus traditional wealth platforms? And does it ultimately expand the addressable market or maybe just shift where assets are held? And more broadly, if you could talk about your wallet strategy, how that might evolve over the coming years.
Jennifer Johnson: Sure. So, I mean, you know, the reality is this is just a programming language that has some real efficiencies in it. And we happen to know because when the SEC approved 5 years ago our tokenized money market fund, they required us to parallel process. And so we were astonished by how much more cost-effective it was, and I will not go through all that detail here. But so you know, in an industry where there is constantly pressure to reduce cost and products, we think that ultimately, honestly, financial services will be run on the rails of blockchain. However, it threatens a lot of business models, so that is gonna be slower to roll out. And, you know, you cannot sell a tokenized product unless somebody has a wallet. A wallet is simply a crypto kind of receiver of the token. And so when we look at the distribution, our focus is sort of 3 areas in digital: 1 is distribution, second is product capabilities and the third is how should we think about the underlying infrastructure that we built to support things like the Ben money market fund? And so on the distribution side, honestly, we are focused much more today on the entities that already have a wallet infrastructure. So those are you just take the top 5 crypto exchanges, they have a billion wallets out there. So, you know, the partnerships that we have done with MoonPay and Payward, which is the parent to Kraken, you know, they wanna take Ben and integrate it because if you have a stable coin, you do not earn anything. People wanna flip their money into earning yield. And so the only way they could do that if they are in the wallet infrastructure is to have a money market fund. So we are focused on that, but they also want to offer their clients traditional investment products. So we now have tokenized money market fund to-- sorry. Tokenized ETFs, our traditional ETFs, So we look at it as just another distribution channel. But we are also having conversations with a lot of traditional distributors whose clients are saying, yeah. I wanna be able to hold some of my crypto assets in with my traditional products. And so they are looking at building the wallet infrastructure. But nothing that you build in the tokenization world can be sold unless you have a wallet infrastructure, and the traditional players just do not have a lot of that today. With respect to product capabilities, the I mentioned the tokenized ETF, but, like, we closed on Digital or 52 Digital, which is really think of it as like a venture firm for digital assets. And you know, we have now had conversations with a lot of institutions that want to invest, want exposure to that space, were not comfortable with a small shop. And now that they are with Franklin Templeton, that they are now talking to us about much more meaningful investments there. And then we have this underlying infrastructure that we built, both the wallet as well as the shareholder record keeping system, we are trying to think through that. Is that something that we should commercialize, or how should we think through it? So those are the types of things we are thinking about today in the digital asset space.
Analyst: Great. Thanks for all the color.
Operator: Our next question comes from Alexander Blostein with Goldman Sachs. Please proceed with your question.
Alex Blostein: Oh, hi. Thank you for taking the follow-up. Couple of things I was hoping to just clean up. 1, Matthew, on the margins, when you talk about 2027, I believe you are standard methodology, you do not assume market returns. So when you talk about 29% to 30% for 2027 exiting kinda north of 2030. I just wanna assume that I just wanna make sure that it assumes flat markets from here and then yes. Yep. Okay. it is great. And then the second, I do not think anybody asked about the capital return and the buyback, but pretty clearly a meaningful step up in share repurchases this quarter. So maybe it is worthwhile just kind of flushing out how you are thinking about buybacks from here and the capital management approach.
Matthew Nicholls: Yeah. Thanks, Alexander, for the question. So make a couple of comments, and maybe Jenny may want to add in some things on some of the strategic work. But look, number 1, we are capital management as a whole we are very focused on organic growth. As you know, as you grow the private markets business in particular, but it is the same with the public markets just on a lesser scale. But in the private markets, you need to use your balance sheet to co invest alongside your strategy. So Number 1, we have $3 billion now of our own balance sheet invested in funds. About $1.75 billion of that is private markets, $1.25 billion is public markets, we see that growing, you know, into 2020. Number 2, you know, we are always focused on making sure that we are in a position where we can continue to increase our dividend. that is always a high priority, and we are going continue to do that. 3 is we will always repurchase our employee grants, make sure that our share count remains at least even. And then 4, as you alluded to, opportunistic share repurchases, In previous calls, particular, over the last couple of years, whether it is been being strategically active or working through the Western matter that is now behind us in negotiating a resolution Those things take quite a long time, and they can black you out of the market. Away from usual blackout periods. So now we have a lot more clear air, let's call it, intra quarter where we are not naturally blacked out around earnings. So we are able to be more opportunistic in repurchasing our shares. And that includes you know, the past quarter is a very good example where we repurchased $350 million of shares. Now this did include an opportunistic or episodic, let's call it, repurchase from Great West Life. When Great West Life and Franklin announced the transaction where we acquired Putnam Investments and entered interest strategic dialogue, relationship with them. They announced a 4.9% long-term lockup strategic investment in Franklin in exchange for the Putnam acquisition. And they made very clear to their investors their intention to sell the amount above the 4.9% and that is what we did in the quarter. They sold over 1% of our outstanding shares, and we repurchased that from them. So that is 1 of the examples of why we were so high this particular quarter. Fifth is acquisitions. We talked a lot about this. Frankly, it is a high bar because notwithstanding our improved share price, we still believe there is a lot a lot of opportunity in buying back our shares. But, you know, it is strategically very active in the sector. We will only pursue areas where we are convinced that we cannot grow fast enough organically ourselves. And there are areas where we need to be relevant and to be relevant if it if it involves acquiring something to accelerate our growth in that area. You know, we look very closely at it. We have already announced, you know, we are very interested in globalizing real estate. We are interested in areas involving distribution and partnerships. And all those sorts of things either involve acquisitions or investments in different companies, that offer, distribution opportunities for us. And then lastly is debt service. We have not we spent quite a bit of time over the last 2 years, in particular, delevering our balance sheet. You know, we have we have got some outstanding on our revolver. You know, we are we are thinking about accessing the long term debt markets We may do that in the next you know, in the short term, let's say, here, and refinance the revolver and then reload some cash on the balance sheet that we paid down. You know, so we can, you know, accelerate various things in our in our strategy in our strategic plan. So that is really the overview on capital management. Alexander, do not know whether Jenny wants to add anything to that.
Jennifer Johnson: Nope. I think you did a great job. Thanks.
Analyst: Thanks, Alexander. Alright. Thanks, Matthew.
Operator: Our next question comes from Bill Katz with TD Cowen. Please proceed with your question.
Bill Katz: Okay, great. Thank you. I was very keen on that margin update as well. But the broader question on that is you do seem to be running ahead of your 5-year plan. And 2 things. 1 is you have mentioned possibly doing an investment More scalable, lucrative businesses is 30%+ the endpoint or is that just a stop along the route? Thank you.
Jennifer Johnson: I would say 30% is a stop along the route. The question is how quickly can you get there? And, you know, this is always a business where there is pressure for, you know, what do you pay in distribution fees and others. So those are the realities of the business. But you know, I think our view is that we should be able to expand the margin over time above 30%. And, you know, honestly, Bill, I do not think any of us fully know what the AI impact is in. Anytime there is new technology, the first thing everybody does is they make more efficient what you do today And it is only when you get it in the hands of your teams over a period of a couple of years do people start to see sort of the new opportunities. And so I do not know that any of us fully know the end state of what that looks like, but we are very optimistic where we are seeing it and using it and excited about its ability to be able to expand the margin. Matthew, I am sure you wanna add some things.
Matthew Nicholls: Yeah. The only thing I will add is always a good opportunity to remind everybody just how much we have invested in our business. You know, we often say that you know, investment management it is a capital light business. In terms of regulatory capital. But it is no longer really a capital light business in terms of what you need to invest to be a winner and relevant in the most important things for our clients. So I would I would say that where we have invested heavily in the last several years around ETFs, Canvas, alternative assets, the wealth channel, These are quite significant numbers, and we are just getting to the point where we are realizing the potential of those things and getting margin uplift from those things. So I think I think as Jenny mentioned you know, 30% to 35%, I think, is the industry zone. And that-- but that importantly, that includes where we have invested in the business, and there is some upside in that based on scaling what we have invested in. The scaling is really important. And as you know, some of those things have lower effective fee rates, but once they scale, they have really positive impact to the operating margin of the corporate. So we have been we have been very focused on that. In terms of the in terms of the, Investor Day, yeah, I think we feel like we are getting ready for an Investor Day. It will likely be sometime either late this calendar year or early next calendar year as we get ourselves organized around it. But I think we have enough key areas to talk about in terms of our progress as a company, there is been a lot of transformational work that is happened. Now we have the outputs from those things and proof points and things like that we would like to demonstrate more holistically. So, yeah, I think we are planning to do 1. We do not know exactly when it is going to be later this year, kind of, wise, or early next year?
Analyst: Thank you for taking the extra questions. Thanks, Bill.
Operator: Our next question comes from Patrick Davitt with Autonomous Research. Please proceed with your question.
Patrick Davitt: Hey. Thanks for the follow-up. Jenny, you mentioned the distribution expense pressure. there is news this month that Merrill Lynch is planning to make some fairly dramatic increases in revenue sharing, platform fees, it seems to be across a lot of product wrappers. And that came after the Schwab news earlier this year on ETFs. Just wanted to get your updated thoughts on the risk that, that is becoming a bigger trend and that you could see incremental net revenue or expense headwinds from that shift?
Jennifer Johnson: Yeah. I mean, look, rev share type programs have been around for a very, very long time. It is the nature of the business. What has changed a bit is the vehicles, and what has changed is that honestly, the influence of the end adviser. You even have large RIAs starting to talk about wanting to have some sort of share. And so I think it is a natural evolution of the business, and where a firm can influence distribution, then there is, you know, usually conversations kind of around it. And where they cannot, you will push back. And so, you know, I do not really look at it as obviously, if you are these platforms and there is more growth in SMAs and ETFs. They are going to look for some amount of platform fee but the realities of the products is that cannot possibly be as high as it had been in some of the traditional just because the distribution fees have adjusted. So, look, I we just kind of look at it as business as usual, honestly. Thank you.
Operator: This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's CEO, for final comments.
Jennifer Johnson: Well, thank you, everybody, for participating in today's call. And we remain deeply grateful to our employees around the world for their ongoing dedication and commitment to serving our clients. And we look forward to speaking with all of you again next quarter. Thanks, everybody.
Operator: Thank you. This concludes today's conference call. You may now disconnect.