Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ending AUM was $1.65 trillion, flat from the prior quarter and an increase of 15% from the prior year quarter.
- Investment performance remained consistent across the one, three, five, and ten-year periods, with a significant portion of strategy composite AUM outperforming their respective benchmarks.
- Positive net flows in multi-asset and alternative strategies, with multi-asset net inflows of $1.8 billion and alternative net inflows of $1.4 billion.
- Strong growth in ETF business, generating net inflows of approximately $3.3 billion, doubling the prior quarter's net flows.
- Successful expansion of retail alternatives initiatives with a dedicated team in the EMEA region.
Negative Points
- Long-term net outflows were $3.2 billion for the quarter.
- Fixed income net outflows were $4.8 billion, excluding inflows from Great-West.
- Equity net outflows were $1.6 billion, although this was an improvement from the previous quarter.
- Implementation costs for the new Aladdin platform are expected to be approximately $100 million over the next three to five years.
- Adjusted operating income decreased by 10.9% from the prior year quarter.
Q & A Highlights
Q: Can you talk about the operational benefits and expense benefits of the Aladdin platform, and how long it will take to get fully implemented?
A: Matthew Nicholls, CFO and COO, explained that the Aladdin platform will unify investment management technology across all public market businesses, bringing several benefits such as consistent reporting, integrated order management, and easier integration of new businesses. Implementation costs are expected to be around $100 million over the next three to five years, with peak costs in fiscal '26 and '27. Savings of about $15 million per annum are expected to begin around fiscal 2028, increasing to $25 million in '29.
Q: How much of Lexington 10 has been deployed, and when will fundraising for the next flagship begin?
A: Jennifer Johnson, CEO, noted that Lexington has been deploying capital faster and at higher discounts than historical, which may lead to entering the market sooner than anticipated for the next flagship fund. Additionally, Lexington is exploring opportunities in continuation vehicles and perpetual vehicles in wealth management.
Q: Can you talk about the incremental upside to the $25 billion AUM allocation from Great-West Lifeco?
A: Adam Spector, Head of Global Distribution, mentioned that the initial $25 billion allocation was contractually oriented, but ongoing product development with Great-West Lifeco and related companies could lead to further allocations. Matthew Nicholls added that the relationship is still modest compared to other clients and investment management firms, indicating potential for growth.
Q: What initiatives are being undertaken to offset the implementation costs of the new tech projects?
A: Matthew Nicholls explained that the savings will come from moving to a single platform, reducing the number of vendors, and leveraging economies of scale. The implementation costs will be absorbed through other expense initiatives and efficiencies gained from the Aladdin platform.
Q: Can you provide more details on the JV with SBI Holdings in Japan?
A: Jennifer Johnson highlighted that the JV with SBI Holdings will focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies. The partnership will leverage SBI's extensive reach in Japan to penetrate the retail market, which has been challenging for foreign investment shops.
Q: What is the strategy for expanding the ETF franchise, and how does it connect with the new Aladdin platform?
A: Jennifer Johnson stated that Franklin Resources is vehicle agnostic and aims to deliver capabilities in whatever vehicle the market demands. The ETF business has seen strong growth, with a significant portion in active ETFs. The Aladdin platform will support the expansion by providing a unified technology infrastructure.
Q: Which fixed income products are best positioned to benefit if the Fed cuts rates later this year?
A: Jennifer Johnson mentioned that Franklin Resources' fixed income strategies, including Brandywine and Franklin, are well-positioned to benefit from rate cuts. The firm has seen positive flows in various fixed income vehicles, including cross-border funds, ETFs, and SMAs.
Q: How do you plan to drive both top-line and bottom-line growth given the current mix of inflows and outflows?
A: Jennifer Johnson emphasized the pivot to alternatives, which carry higher fees, and the potential for growth in real estate and secondary private equity. Matthew Nicholls added that the effective fee rate (EFR) has been fairly stable, and the firm expects to offset areas of shrinkage with growth in alternatives, ETFs, Canvas, and SMA solutions.
Q: How will the Aladdin expense absorption work, given that some savings will come after implementation?
A: Adam Spector clarified that the expense absorption plan includes periods where both Aladdin and other vendors are paid. The quarterly impact on operating income is expected to be modest, with significant savings realized in the outer years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
