Franklin Resources Aktie

Welcome to Franklin Resources Earnings Conference Call for the quarter ended March 31, 2026. Hello, my name is Nicole, 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 just 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 Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us today to review Franklin Templeton's second fiscal quarter results. I'm joined by Matt Nicholls, Co-President and CFO; and Daniel Gamba, Co-President and Chief Commercial Officer. We'll take your questions shortly, but first, I'll highlight key results and themes shaping our business.

This was an excellent quarter for Franklin Templeton, with $16.9 billion in long-term net inflows across public and private markets, reflecting the strength and breadth of our diversified global platform. We delivered record gross sales and generated positive long-term net flows in every region, reflecting sustained client demand and strong local engagement. Importantly, each of our key growth drivers, private markets, retail SMAs and Canvas is our customization platform. ETF and solutions contributed meaningfully to these results. This quarter is a clear example of the power of our multi-year strategy in action. We are ahead of our 5-year plan and remain focused on delivering strong investment outcomes, deepening client relationships and continuing to evolve our capabilities to drive sustainable, long-term growth for our clients and shareholders.

In my travels meeting clients around the world, one message is consistent. Our clients look to Franklin Templeton as their trusted partner for what's ahead. One firm offering the reach and resilience of a global platform together with the distinct expertise of our investment groups. As client expectations continue to evolve, the 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.

We are seeing a clear structural shift in how clients allocate capital and partners, including increased demand for vehicles such as active ETFs, customization and tax managed solutions. [indiscernible] prioritizing firms that can deliver across public and private markets, offer global consistency in how they invest and operate and bring together capabilities into comprehensive outcome-oriented solutions. This is not a short-term reaction to market conditions. It reflects a more fundamental change in expectations for scale, breadth of capabilities and the ability to deliver them in an integrated way are increasingly defining competitive advantage.

Against this backdrop, we remain focused on executing as one Franklin Templeton. This means bringing together our strength as investment specialists, innovation drivers thought leaders and strategic partners seamlessly in every client interaction. To that end, we continue to simplify our go-to-market approach to better serve clients and capture opportunities across the business. Ultimately, our strategy center in helping clients to see better outcomes by staying focused on performance, solutions and partnerships. We are continuing to build a business that is more resilient, more relevant and positioned to deliver long-term value for our clients and shareholders.

Now turning to our results. This quarter marks another step forward in the successful execution of our strategy and reflects the growth potential of our business. We delivered another consecutive quarter of positive long-term net flows of $16.9 billion, driven by multiple diversified investment groups with continued progress across our key areas of investment and growth. This momentum is reflected in long-term inflows of $118 billion, up 28% quarter-over-quarter and 38% over the prior year quarter, excluding reinvested distributions.

Gross sales increased across all asset classes, highlighting the strength of our global distribution platform and the progress we are making across the business. Looking ahead, our institutional pipeline of won but unfunded mandates remained strong at $20.2 billion, consistent with the prior quarter, supported by steady funding rates and ongoing replenishment from new wins. Our assets under management of $1.68 trillion remains well diversified across asset classes, client segments, regions and investment groups. Public markets continue to be a core strength and an important driver of growth. Multi-asset AUM stands at $207 billion and generated $9.5 billion in positive net flows, marking our 19th consecutive quarter of positive flows in that asset class. These results reflect growing client demand for outcome-oriented comprehensive solutions that span public and private markets.

Across equities, net outflows were $4.7 billion. Investor activity remained selective, and we saw positive net flows across large-cap value and core systematic and single-country ETFs infrastructure and sector strategies. In fixed income, net outflows were approximately $300 million during the quarter. However, excluding Western, fixed income flows were positive $3.6 billion, marking a ninth consecutive quarter of positive long-term net flows. Momentum continued in multi-sector, munis, stable value and global fixed income strategy.

Turning to alternatives. Franklin Templeton is a leading manager of alternative assets with $283 billion in alternative AUM. Our breadth and scale continue to position us as a partner of choice for clients seeking differentiated sources of return and access to private markets. We fundraised $14.3 billion in alternatives this quarter, including $13.2 billion in private market assets, which was diversified across alternative credit, secondary private equity, real estate and venture funds.

Fiscal year-to-date fundraising in private markets reached $22.7 billion, already in line with full year 2025 levels, positioning us to exceed our $25 billion to $30 billion annual fundraising target, which was already adjusted upward start of our fiscal year. Within alternatives, private credit continues to be an area of focus. While market attention has increased, the opportunity remains highly differentiated across strategies and risk profile. Our alternative credit capabilities in the U.S. and Europe are focused on the middle market with a disciplined approach to underwriting and credit selection and include diversified portfolios that have less than 10% exposure to software.

Alternative credit represents $96 billion in AUM and was a significant contributor to fundraising this quarter. Looking across our broader alternatives platform, we continue to see strong momentum in secondary private equity, where investors are increasingly focused on liquidity solutions, portfolio rebalancing and access to high-quality assets at more attractive entry points.

We are also seeing a pickup in demand for private real estate, including in the wealth channel as investors position opportunities emerging from the current market environment. Franklin Templeton's private markets $8 billion core evergreen products spanning secondary private equity, real estate equity and debt and private credit continue to gain traction. These products had positive net flows contributing approximately $1 billion to fund raising in aggregate in each of the last 2 quarters. Across the platform, clients are increasingly engaging with us for broad and differentiated investment vehicles, and we're seeing that demand translate into sustained diversified growth.

ETF AUM reached a new high of $61.6 billion, a 67% increase from last year with $4.5 billion of net inflows, our 18th consecutive quarter of positive flows. Active ETFs now represent 45% of ETF AUM, further extending our active management strategies into new vehicles. This is evident in areas such as the conversion of 10 of our muni funds into ETFs in Q1, which generated over $600 million in positive net flows this quarter or the success of our Putnam focused large-cap value ETF, which is close to $10 billion in AUM. Delivery and personalization at scale continues to represent a compelling long-term opportunity. Advancements in technology are enabling us to extend capabilities traditionally associated with separately managed accounts more efficiently and consistently across a broader client base.

A leader in retail SMAs, we managed $168.3 billion in AUM and generated $2.7 billion in net inflows during this quarter. With more than 40 years of experience we are well positioned to deliver at scale through our breadth of capabilities along with our custom indexing platform Canvas. Canvas continues to gain momentum and reached record AUM of $22.9 billion, a 27% increase from the prior quarter with positive net flows of $5.3 billion, reflecting strong client interest and personalization and tax efficiency. Since its acquisition in 2022, Canvas has been net flow positive in each quarter and continues to scale across all distribution channels, supported by our over 200 partners and expanding adoption across retail, our AA aggregators and traditional RIAs. This growth underscores a broader shift in the industry where tax efficiency is becoming increasingly central to portfolio construction and the adviser client relationship.

Including Canvas, our tax managed products now represents $110 billion in AUM. As the industry evolves, we continue to invest in areas of long-term innovation and digital assets remain a key focus. Earlier this month, we announced plans to acquire 250 Digital, an active cryptocurrency investment management firm and to launch Franklin Crypto. Alongside Franklin Templeton digital assets, we are bringing together crypto-native expertise with Franklin Templeton's global distribution to target institutional growth. Franklin Crypto will expand Franklin Templeton's existing crypto and blockchain venture capital investment offerings and will broaden the firm's digital assets investment management platform.

From a regional perspective, our growth remains globally diversified with positive net flows in all regions. Internationally, Franklin Templeton manages nearly $500 billion in assets with a positive long-term net flows of $5.5 billion in aggregate. Non-U.S. gross sales grew 29% quarter-over-quarter with particularly strong momentum in EMEA and APAC.

As a leader in emerging markets, Franklin Templeton was appointed trustee and manager of the National Investment Fund of Uzbekistan in January 2025, supporting the country's privatization agenda and governance reforms across state-owned enterprises. In April, UMF confirmed plans to proceed with a dual listing on the London and Tashkent Stock exchanges marking an important step in advancing Uzbekistan's capital markets and broader privatization strategy. This engagement reflects our role as a trusted partner to official institutions and continues to drive deeper relationships with central banks, sovereign wealth funds and government-related entities.

Now turning to investment performance. Investment performance remains competitive, supporting both client retention and organic growth. Over half of our mutual fund and ETF AUM is outperforming its peer medium over the 3- and 10-year periods and approximately 2/3 over the 1- and 5-year periods. This strength is further supported by our municipal strategies, where 95% of AUM is outperforming its peer group over a 3-year period. Similarly, over half of strategy composite AUM is outperforming -- over all time periods and 71% in the -- In fixed income, 83% and 82% of AUM is outperforming benchmark mark over the 1- and 5-year periods, respectively, reinforcing the depth and durability of our investment capabilities.

Turning briefly to our financial results. Adjusted operating income was $475 million, increasing 8.5% quarter-over-quarter and 25.8% from the prior year quarter. These results reflect the continued execution of our strategy with disciplined expense management alongside targeted investments in areas of growth and innovation, positioning the firm for sustained long-term performance. Taken together, our performance this quarter underscores the strength of our platform and the progress we are making against our multiyear strategic priorities. We are building a more diversified, higher growth business with multiple drivers of organic growth, and we're seeing that momentum continue to build, positioning us to deliver long-term value for our clients, shareholders and employees.

I want to thank our employees around the world for their continued dedication and focus on serving our clients. Their efforts are fundamental to the successful execution of our strategy and the progress we're delivering across the firm.

With that, I will open the call up to your questions. Operator?

[Operator Instructions] Our first question comes from Alex Blostein from Goldman Sachs.

I wanted to start with a question around private markets growth. So obviously, good momentum in the quarter to $13 billion. I was hoping you could break that down by sort of key strategies as well as whether Lexington, their flagship fund contributed to that at all? And as you look out for the rest of the year, what are likely going to be some of the bigger drivers for the rest of 2026 in private markets fundraising?

Sure. Great. Thanks for the question, Alex. So as you recall, last year, we had set a target out of $13 billion to $20 billion in the Alt space arrays, and we ended up raising $22.9 billion, I think. And this year, we raised that to $25 billion to $30 billion just we would expect to actually be above the $30 billion. And when you look at this quarter, the -- and I can't give you any details on Lexington's flagship funds, but I'll give you some insights in it. Our largest contributor was actually our private credit managers, but Lexington was meaningful. Lexington is in the market with their flagship fund, and it is -- they're finding -- they're right on track there's demand for secondaries, but they're also in the market with other products they're co-investor middle market, which all contributed as well. There are no catch-up fees in this quarter. you'll get a specific update on Lexington's flagship fund when they do a filing probably towards the end of '26. All of our alternative managers contributed to this quarter's momentum. There are over 30 vehicles that contributed. So it's a very diverse, what we think is a strong quarter and we felt very good about the flows across the board.

Great. You saved me a follow-up on the catch-up fees there. I did want to ask about the comment you have in the release around just the dry powder. You gave us the total AUM [ $263 ] billion in private markets. Some of it is feepaying, some of it is not feepaying. So is it possible to break down like the non-feepaying piece and help us think through the timing of when that's going to come in into the fee rate run rate?

So -- it obviously varies with each manager. Alex, let us get back to you with kind of what we're willing to sort of say publicly on that. So we'll have give us a little bit here.

But Alex, fee earning AUM out of balance is about 90%, 89% approximately. Do you want to...

I think [Technical Difficulty]

Our next question comes from Glenn Schorr with Evercore.

So question maybe on Canvas and tax optimization strategy. Seeing a lot of growth you commented on yours. I'm just curious with -- there's a lot of competition, but there's also really low penetration. So I wonder if you could talk to about what you see for further growth in terms of penetrating the current base of clients, any capacity issues you might see? And then very importantly, how would you differentiate in a crowded field, meaning leveraging that brand and distribution relationship that you have?

Yes. So what I would say is, first of all, I think one of the differentiators of Canvas versus the others, I was like I said, it was built by quant people as opposed to tax people. And so it's much more about the technology, which gives a lot more flexibility going forward. And so I think Canvas is being selected in many cases because people recognize that it has the really kind of impressive technology. When we added the managed option solution over it, it's giving us a lot more creativity around product development. So things like you have high basis concentration of stock and you can use to manage options, component of it to be able to make a more tax-efficient portfolio. So we're -- I think we're winning because of the actual vehicle -- or not the vehicle but the technology there.

What started out as a direct indexing opportunity has evolved into an ability to take that technology as an overlay and create tax-managed, tax-efficient over active strategies. And so our conversations are now not just do you want this as a platform to manage separately managed accounts or direct indexing, but we'd love to use it as a way to optimize the tax efficiency of our active strategies. And so they're open up to a lot of partner conversations. I don't know, Daniel, do you want to add something to that?

Yes. So I will add two aspects to the success we're having actually on the tax alpha and tax optimization space, which is one space that's really growing very, very fast for the industry. And we're absolutely capitalizing on that. I'll say, number one, clearly, our retail SMA presence being so big at close to $170 billion makes us very uniquely positioned, including, of course, the legacy business that we have on the SMA side. And on the Canvas side, there's two elements to highlight. One is the tax optimization that we do is quite unique and differentiated because we do receive in-kind positions from -- to do that. And we're very flexible in how we do the optimization and clients are absolutely looking at that. And the other part is -- we add a lot of simplicity and we're very innovating. Canvas includes, as Jenny mentioned, not only direct indexing, but we also have risk factor overlays. We have options for income within the same platform, and we have added now fundamental third-party manager tax optimization, including for our different fundamental -- we're adding that. On top of that, we're adding long short or long short has already been built into that. We have 130-30, 140-40, all in the same platform. And finally, we also are having -- and we actually added already municipal bond ladders in the same platform. So the simplicity is giving us substantial momentum to the degree that it's actually grown at 72% CAGR, and it's grown actually 10x since acquisition at $23 billion. So I think the momentum will continue. The AUM doubled over the past 12 months, and we expect that to continue given how differentiated the platform is.

Our next question comes from Craig Siegenthaler with Bank of America.

Maybe if we can just move to the next one. We'll get Craig back on. It seems like there's a technical problem with that line.

Our next question comes from Dan Fannon with Jefferies.

Matt, I just wanted to follow up on the guidance that you gave. There's been some change from last quarter, but you also echoed reiterated the things you've been saying around flat with fiscal year '24 and '25. So wanted to just get us some clarification around the moving parts. And then also in the quarter, there was an announcement of some voluntary retirements across the equity portfolio or equity division. I assume that's incorporated in this guidance and maybe the outlook for next year, but just wondering if that's incremental or not?

Yes. The voluntary part is included in our full year projection. First of all, I don't go through the quarter guidance, and then I'll talk about the annual as part of that. So on the third quarter guide for our effective fee rate, we're guiding mid- to high 37s, so very consistent, stable with the second quarter. Compensation, we're guiding $830 million, assuming $50 million performance fee at a 55% payout. IS&T is $155 million, which is in line, maybe a little bit higher than last quarter based on AI investments specifically. Occupancy, we're at $70 million in the guide. And G&A, we expect to be a little bit higher at $210 million to $215 million, but this does include elevated fundraising related fees, but -- or expense of around $23 million, $25 million and an additional $9 million to $10 million for advertising and marketing.

In terms of the full year, as outlined on Page 14 that you referred to in the IR deck, this does assume flat markets from now and excludes performance fees. We continue to guide approximately in line or slightly above, slightly above fiscal year '25 expenses, excluding performance fees. This assumes current market levels, higher sales and fundraising that we've presented today and seen and stronger performance. Stronger performance, meaning we have some compensation-related expenses tied to better performance as formulaic driven. So that's going up a little bit. But for further perspective, we end up at the level illustrated on the page, which is about 1.5% higher versus 2025. We would expect investment management fee revenue to increase at 4x that rate at least. Meaning if the expenses increased by 1.5%, we would expect investment management fee revenue would be expected to increase by at least 6% year-over-year, all else remaining equal. And this is consistent with previous commentary on margin expansion going into our fiscal year end that would result in fiscal fourth quarter margin in the high-29s and for the year in the '27 for the full year, both representing meaningful margin expansion ahead of Plan and on our way to 30% plus margins later in 2027, all ahead of plan that presented last quarter.

Our next question is from Patrick Davitt with Autonomous Research.

There's been a lot of press focus on secondary PE strategies and the policy of marking up deals immediately upon close. Much of that has been focused on other companies, but could you give us more color on how much of Lexington's fund performance is driven by that initial markup versus natural appreciation? And then more broadly, do you see this increased attention or the increased attention on this practice impacting regulatory scrutiny or demand for the asset class?

The issue that happened there was actually because I think the manager kind of changed the policy and maybe was a little unclear in how that sort of went down. I think that created a huge amount of noise. Here's what. Traditionally the -- in secondaries, the markup, the discount markup is about 20% to 25% of total return over the life of a fund. So that gives you a sense for -- most of the appreciation really comes in the asset itself. And that's the beauty, I think, of somebody like Lexington, who's got -- is a premier buyer of these deals. They get to be pretty selective as far as what deals they choose and they have a ton of information. I mean they have information on 55,000 private companies. And so they're really tracking and getting to decide which underlying funds, they believe are going to have the best upside opportunity, and that's how they're really underwriting it, and then they obviously negotiated discounts. So that gives you kind of a sense.

And our next question comes from Michael Cyprys with Morgan Stanley.

I wanted to ask about AI. I was hoping you could update us on how you're using AI across the organization today. Some of the use cases that have been most impactful so far in some of the key learnings that you've had and if you're able to help quantify any of the benefits that you're seeing that would be interesting. And as you look out over the next couple of years, can you talk about some of the steps that you're taking to further embed AI throughout the organization. I know, Matt, you mentioned some uplift on expenses in part from AI investments, maybe you could elaborate on some of those investments and how you're thinking about longer-term benefits?

Yes. So we look at AI, look, having run technology. I don't think that there are many companies that they can sit there and say that the AI has yet to be material in their organization and everybody is doing a ton of stuff in it. So I'm proud of the work that we've done because we were early adopters in what is this multi-agent orchestration of AI, and that was the intelligent hub, what we call Intelligent Hub, which was our platform used for distribution.

The way if I were to bucket the AI efforts, I would say with respect to distribution and investments, it's all about growth opportunities with respect to operations and technology operations, it's about efficiencies and in technologies, it ultimately will be about getting more through the pipeline. So with this multi-agent intelligence sell start there, this is the one that we announced the partnership with Microsoft, and they came in and helped us build it. And I think it's a very simple problem with a complex technical solution. The simple problem is how do you ensure that your salespeople are seeing the right clients and having the best conversations. That goes in and it pulls data from your CRM system from your product system, external product systems, maybe social media. Those are multiple agents and LLM models tend not to be great with analytics, so you have to marry them with others. We are seeing early on uplift of our wholesalers our salespeople essentially seeing 10% more clients. I'm not going to share sort of the preliminary numbers, it's too early to sort of dictate whether that's translated directly into additional sales. But from just the efficiency of the administration, and it is looking like we are also getting an uplift in sales from those, and we're rolling that out more broadly.

Our investment teams are using it a little bit depending on the team, but we have hackathons done by our investment teams. They create agents. Those agents are put in the central library. We've been doing this for quite a while. I can't remember the number that we have. And so another investment team may decide, I'm going to pull this agent out. We also created a virtual research analyst that sits in one of our investment teams where they have fed in kind of the views of -- and the philosophy, and it will question it'll come up with sales or investment ideas and it will actually -- if you're thinking about making an idea, question like, have you thought about these things, you say these are important. And it's done a review of historical trades. And we have multiple different ways in which our investment teams are leveraging it and learning from it. The most important thing, I think, is we've created this centralized group to share expertise on AI so they get the learnings from each other. We have work -- this is something we're focused on to the extent that we've outsourced is looking at the length of our outsourced deals because we don't want just to have the AI efficiencies accrued to the outsourced still. So that's a part of our vendor management program. And then in places that we have the operations in-house, reconciliation, other things, RFPs, we are seeing some efficiencies. It's still very early and we're measuring in our technology group, for example, how much code is being written by AI. So that gives you kind of a feel for how we're using it across the firm.

Yes. In terms of how we're spending money, I mean, Jenny already touched on it, but to that question. We have a fully staffed dedicated team, as Jenny mentioned, that's centralized. But within that team, we have individuals focused on, as Jenny mentioned, investment sales functions, so that it becomes a fairly significant group internally. And then each of these groups is focused on both the effectiveness piece and the efficiency piece. So there's a revenue part of this, and then there's a cost part of this. And we're doing our best. It's very early days. We're doing our best to track the dollars we spend versus the dollars that we either save or that we gain through the process of using AIN adoption.

Our next question comes from Bill Katz with TD Cowen.

I just have a couple of nits added together, maybe equals one full question. On the tax minimization -- tax optimization side, there's been some discussion around potential adverse tax rule for Exchange 351. It seems a bit arcane to us, but it's been coming up a lot in investor dialogue. A, how real is that as a real change? Or is that more of a disclosure issue and would that have any kind of impact on the business?

My second question is just on Lexington 11. I think you previously raised $22 billion, and I know Matt just gave some guidance around some platform fees or placement fees into the new quarter or so. Is there any reason to think that, that next fund won't be equal of size? And then thirdly, just in terms of capital return, a little bit of fully question. Just wondering if you could talk a little bit about your priorities looking ahead?

I'll just quickly just jump on the Lexington and then I'll turn it over to Matt on the tax. So no reason to believe that, that is not at the size of the last fund. As I said, they are happy and on track, and there's good demand for secondaries. And we do not see any cannibalization with the evergreen funds that we've done in secondary. So I think that's going smoothly. Matt, do you want to cover the...

I think the everyone what was the tax -- 351, what was that...

Yes. It's a bit arcane, but apparently, in the index ETF world, there's some discussion between, I think, ICI and the IRS -- tech on this call. Just in terms of adverse ruling about tax optimization under the exchange. And would that limit maybe the use of options and so forth as a way to shield income but it's been coming up as a watch point given the really rapid growth in tax...

Here's what I would say, and I don't know specifically on that everything I am on the ICI Board, and we do talk a lot about -- The mutual funds have a sort of unequal tax treatment versus an ETF because you get to do the in-kind. I don't think -- there's always a worry that, that goes away. The reality is it's actually unfair. Why should your average person in a mutual fund who tends to be your smaller investor actually have to pay capital gains just because the fund experienced capital gains versus what their individual ownership is like they would if they owned a stock. So that has always been something that has been a disadvantage a bit on mutual funds. And I think that the ICI that that's one that's always discussed, I'm not aware of discussions about the ETF losing theirs as much as the hope with the ICI that you actually make the mutual fund more fair.

I will only add that none of our major ETFs use options overlays in the way in which they are constructed. So we haven't been hit with that question given the nature of our current ETFs that we have. We do have an excellent options capability within our SMA business, which we call most, and we've seen substantial demand on that. So on SMA is clearly on individual securities, there's no such discussion. But clearly on 351 Exchanges in ETFs, we are not part of those -- we don't have to products structured like that.

Yes. And actually, I just looked it up on perplexities and I have a better understanding what -- so there are people -- there are some strategies for high net worth where people will contribute and exchanges. And we have not really participated in that. That is one that you could and it could impact ETF share classes as part of a mutual fund. We'll see how that evolves.

Our next question comes from Brennan Hawken with BMO Capital Markets.

Two questions, just circling back on the alt fundraising. So thanks for providing the Evergreen AUM, which you've reached now. Maybe could you talk about what sort of flows you're seeing on a quarterly basis and how we should think about that? And then just a follow-up on Lexington. You referenced that you'd be giving an update at year-end. Can you help us understand why it would be year-end? Is that your updated expectations for the first close?

I think that the on Lexington, I think that they're -- like I said, they're actively fundraising. They'll decide kind of on the timing of their first filing. It hasn't been year-to-date, so it will be the second half or towards the end of the year.

Jenny, you made our fiscal year-end, now about fiscal year-end. Because -- that could be an update in July or something like that.

And then on the Evergreen, we have said that we're raising about $200 million a month across our 3 -- We have over $1 billion, we have 3 over $1 billion, and we're continuing to see that same kind of demand about $200 million a month into the 3 Evergreen strategies.

And that's remained consistent recently with some of the...

Yes, yes, yes.

I think important to say that we don't have a big BDC or large exposure to software within the platform. So we've continued to raise in line or even higher across all our evergreens. Secondary like real estate debt, real estate equity. So over the last 2 years, we continue to go in line with the penetration that we have on the wealth business. So substantial growth, and we haven't seen any slowdown from our end.

Our next question is with Ben Budish from Barclays.

Maybe just continuing to follow up on the alts fundraising. You mentioned, I think, earlier that most of it came from credit in the quarter, obviously, not from BDCs. Can you unpack a little bit what pockets of credit you're seeing the most demand? And then just a quick housekeeping one on the G&A. You mentioned there's some sort of onetime fundraising expenses associated with the larger flagships. Just curious if we should think about those as recurring or kind of near-term elevated, but maybe not in the run rate for next year or perhaps they come back with more flagship fundraising, any help there which would be great.

That's the expenses. I'll get that done quickly. That's really -- I wouldn't say it's onetime because you may have other quarters that also have elevated fundraising. But $23 million to $25 million is obviously a large number, and that would be onetime associated with good fund raise expectation with, let's call it, higher fee-type alternative asset funds.

So -- and on the alt fund raising, so we mentioned -- remember, on the credit side, we have both BSP as well as what was formerly Alcentra, but we're calling BSP Europe. So we had good strong fundraising for both of those. Part of it was CLOs, but honestly, there were probably -- remember, they have an opportunity fund. They have a real estate debt fund. They have special situation. So we got contributions from really across the board, and I think there's at least 15 different kind of funds that had some sort of contribution to the credit. It also -- I mean, interestingly, we're seeing clearing with real estate that's starting to pick up real estate and Clarion has tremendous performance there. But I think as people have been nervous and we're wondering, there's $20 billion in redemption requests on real estate managers out there. That money is probably going to go somewhere else. People like sorry, on the private credit managers out there, people like real estate because it not only gives a good source of income, it has a hedge, it's inflation hedge. And so I think that's why we're seeing this pickup in interest in real estate. And then our venture group has done well, too. So I think the key message here is this is a very diversified portfolio diversified -- rate as opposed to a real concentration. There are literally over 30 entities that raise money for -- in our alt space.

And I want to point one more point, Jenny, to what you're talking about, which I think this quarter, we've had positive contribution from every single region, which is very important. And in the old always, we have seen growing demand outside the U.S. with 40% coming from outside the U.S. sources, about 16% from EMEA and 23% for APAC. As an example, we successfully launched funds, new vehicles in Korea, Thailand, Taiwan, with a strong momentum in Japan, which is a key market for us given -- and we're putting increasing resources there. And in EMEA, we are now servicing 11 markets, which is like 5 more markets than a year prior given increasing demand for our LTEs across all 3 capabilities, including ventures.

And our last question comes from Ken Worthington with JPMorgan.

We're seeing ETF distribution fees being requested by intermediaries and being dismissed by some of the larger or largest ETF managers. How is Franklin thinking about ETFs and distribution fees? And do you see the potential for ETF access to drive market share shifts in ETFs potentially favoring Franklin?

Well, since Daniel's career started at the BGI at the early days of ETFs, so I'm going to let him answer this one.

Yes. So thank you for that question. I'll say that ETF is one of the most exciting developments that we have here in Franklin Templeton. Our platform reached $62 billion at the end of the quarter, and that's double what we have 18 months ago. Our flows, the organic growth of the flows just fiscal year-to-date, which is only two quarters, 49%, and we're growing really across the board. The three main drivers for ETFs, active ETF -- the industry is talking about it, 45% of what we have. It grew 70% relative to a year ago. We have reached our focused large-cap value ETF, is nearing $10 billion, and it's doubled in 6 months, and we have plans to launch every major fundamental PM with a large franchise will manage their own ETF.

The other part that I think is worth mentioning is we converted 10 muni mutual funds the last quarter. And now that's a full growth platform and is helping growth not only ETF, but also muni mutual funds, muni SMA, which is excellent. The other driver is single country and regional ETFs that represents 30% of the platform. They all had excellent inflows and we grow over 3 billion flows into these country ETFs, including Korea, Japan, Taiwan and keeping our heritage in managing local assets, we will continue to develop and launch more country and regional ETFs.

And the third driver is systematic and smart data that is 20% that is managed by our Franklin Templeton investment solutions. We have the Franklin international low volatility high dividend ETF approaching $5 billion. We will continue to do that. And clearly, we have a great track record on ETFs, and we are doubling down on that. Of course, a lot of our capabilities come from excellent relationships and partnerships with our clients. We have a U.S. wealth platform that is almost $800 billion and is one of the largest with hundreds of salespeople covering and educating our sales advisers. Of course, we review our business with all our platforms regularly. And as we evolve our platform and value to clients, we will prioritize our platforms that deliver the most value to us. So on the ETF discussions, we are clearly creating business plans with our partners. And those that have the most impact investing in education, sales and support and impact the business will continue to be major partners, and we will continue to discuss how can we grow our business together. So clearly, EPS is one of the areas where you're going to hear much more from us going forward.

And so just to the last point that Daniel is making. Look, platforms always want to have more revenue share, like that's just the reality. ETFs are not structured in the same way that mutual funds were and platforms, depending on the platform, they can influence growth and opportunity for ETFs or not. And so if the platform is actually going to be able to have some positive influence then that's a discussion we have to the extent that they can't influence ultimately in the end, then we wouldn't consider any of those fees.

Got it. And because some are not going to participate in or don't want to participate in the fees, do you think it drives share to shift from those that are willing to partner with distribution from those that are not?

Different platforms have different influence, right? And so if you can heavily influence? Yes. There'll potentially be some amount of shift on what you can influence. But the reality is the financial adviser is getting more and more independent. And to the extent that they're on one of these platforms and they're an RIA, they don't care what the platform is telling them. They're going to sell what they sell. And so it ends up being really kind of -- that's where having a huge work sales force is so important because it's hand-to-hand combat. If they choose the model from the platform, then the platform influences it. But most of the big RIAs who are big ETF users actually decide on their own.

Quick point of clarification from an earlier question that we wanted to just clarify. I think Alex asked the question around alternative asset versus nonfee generating. Just to be clear that 90% that we talked about approximately 90%, that's potential to earn fees on that. The fee generating -- current fee-generating AUM is about 80%, and that's on the full $283 million...

And it varies depending on bulk management so the blended.

Yes. I just wanted to make sure we clarify that.

Our next question comes from Brian Bedell with Deutsche Bank.

Great. Actually one on Franklin Crypto. Jenny, if you could just talk a little bit about what target market your -- what market are you targeting for that in the different product types as you evolve your Franklin digital assets? And then also on the tokenization of money funds to fund, your view on to what extent we'll see the development of tokenized money funds accelerate given obviously, the use cases in the yield cases, especially within the digital asset platforms?

Yes. Great. So first of all, why do I love blockchain because it's a really efficient technology that drives down cost. So that's a good thing for us as an industry and for our clients. But you have to have a wallet to actually hold a token, while it's just a cryptography that matches to that token, but you just have to have it. And all of our traditional distributors, very few of them actually have a wallet. So you have to go to the exchanges. So when you ask me where is the kind of immediate opportunity. It's an exchange -- a crypto exchange of cracking and a coin-based finance that have wallets there. And two things are happening. One is they're -- it's an obvious place to integrate Benji. So people want to put money into cash. If it's in their stable point, they don't earn any yield, so they can shifted into a money market fund and earn yield on that. So that's an obvious opportunity for us.

The second thing that's happening, and you just take the top 5 exchanges, they have 1 billion wallets there. So from a new client base, kind of interesting, and they're thinking about offering traditional products there. So we have launched, I think, 8 ETFs, tokenized ETFs on one of the exchanges and five on the other, and we're talking to other exchanges. So we've got 8 on Kraken and 5 on Onduo. And these are just in case those investors are interested in more traditional products. And so you couldn't hold an ETF or a mutual fund unless it was tokenized and because they have no other way of holding it. So we think that's an interesting new opportunity for us. And the other thing is you saw that we're bringing a small team, 250 Digital, and they actually are -- they kind of have institutional -- think of it as a crypto venture fund. And what we found is there are institutional investors who would like exposure to the space, but aren't comfortable with a small firm. And so now that they're -- we think that -- and they don't start until this fall. But when they start, we'll get some demand from institutional clients who are interested in investing in kind of a venture part of the crypto space.

And to the punchline, I guess, is that we should expect an acceleration of your tokenized products as you roll this out over the next few quarters, let's say?

Yes. I mean, look, these things are always a hockey stick, right? So right now -- it just depends on how much adoption, say, the tokenized ETFs get in the on those exchanges. We are seeing some traction where we are in programs where the Benjie product is an option, and we're starting to see some traction there. But I think it takes a little time to kind of sell people and educate on this space.

We think somebody was trying to get in earlier with a question on capital management. So why don't we just start to that we have time. So I think the question was on our capital management priorities. So I'll start and maybe, Jenny, then you can -- so the capital management priorities, we -- obviously, our dividend is always top of the list in that regard. We want to make sure the dividend is in place and continue to protect the increased dividend that we have each year.

Our organic growth is taking up more capital than it has done in the past. So I'll see capital and co-invest balance sheet allocation has increased again to $2.9 billion, up from $2.8 billion last quarter. As I mentioned in the previous quarter, we expect that to be close to $3 billion by the time we recent end of the year. We've always repurchased our employee-related stock grants to make sure we hedge our shares out to basically zero out for the year, to keep the same amount of shares outstanding. Then obviously, we have opportunistic share repurchases.

And then M&A is -- I think you all know, it's just very, very super active. There are some areas of focus here, mostly distribution related. I'd say, Jenny, may want to make some additional comments on this. But distribution related, a little bit bolt-ons related to alternative assets, in particular, overseas. We're quite involved in reviewing those things. But I'd say most of the M&A of inorganic activity is around partnership, strategic activity in connection with distribution.

Great. I think you covered it very well, Matt. Operator?

Okay. And this does conclude today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's CEO, for final comments.

Well, listen, everybody, thank you for participating in the call today. And once again, we are a people business, and I want to thank all our employees for their hard work and dedication to the company, and we look forward to speaking with all of you again next quarter. Thank you.

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

Welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31, 2025. Hello. My name is Rob, and I'll 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 just 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 Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us today as we review Franklin Templeton's first fiscal quarter results. I'm joined today by Matt Nicholls, our Co-President and CFO, and Daniel Gamba, our Co-President and Chief Commercial Officer. We'll answer your questions momentarily. But before we do that, I'd like to review some key themes.

We are operating in a period of continued transition for investors, marked by significant market turbulence globally resulting from heightened geopolitical trade policy and consequently, economic uncertainty. Markets are adjusting to a more persistently volatile environment, shifting capital flows and a growing need for resilience in portfolios.

Across regions and client segments, investors are focused on the same fundamental questions, how to generate durable returns, how to manage risk through uncertainty and how to position portfolios for long-term outcomes rather than short-term noise. That environment is reshaping what clients expect from asset managers. Over the past few months, I've traveled overseas across Europe, the Middle East and Asia.

And in my conversations with clients, it's clear they are no longer looking for individual products in isolation. They're looking for partners who can help them construct portfolios across public and private markets, deliver personalization at scale and navigate complexity with discipline and insight. Franklin Templeton is well positioned for this moment. Over years of deliberate planning, combined with the strength of a global brand, we have earned the trust of investors around the world.

At Franklin Templeton, we bring together specialized investment expertise across public markets, private markets and digital assets, supported by a global platform with reach in more than 150 countries. Clients are increasingly engaging with us across multiple asset classes, reflecting a shift toward integrated solutions and long-term strategic relationships. This alignment between client needs and our capabilities is driving growth.

Our diversified platform continued innovation and focus on scale and efficiency position us to capture opportunities across market cycles and deliver long-term value for our clients and shareholders. Now turning to our results for the quarter, which marked another important step forward with tangible progress across the firm. We continue to deepen client partnerships, broaden our investment and solutions capabilities and strengthen our global platform, key priorities that remain central to our strategy.

Our first fiscal quarter continued the momentum, we built last year with strong client activity across Franklin Templeton's diversified global platform with positive net flows in both public and private markets. We had record long-term inflows of $118.6 billion, up 40% from the prior quarter and 22% from the prior year quarter. Long-term net inflows were $28 billion with record AUM and positive net flows across equity, multi-asset and alternative strategies as well as ETFs, retail SMAs and Canvas.

Excluding Western Asset Management's long-term net inflows totaled $34.6 billion, nearly double the prior year quarter, extending our track record to a ninth consecutive quarter of positive flows on a comparable basis. Assets under management ended the quarter at $1.68 trillion. AUM increased from the prior quarter due to long-term net inflows and the acquisition of Apera, partially offset by the impact of net market change, distributions and other.

Excluding Western Asset, long-term net inflows were $34.6 billion compared to $17.9 billion in the prior year quarter with 9 consecutive quarters of positive net flows. We continue to see strong momentum across our platform with record AUM in 3 of our 4 asset classes. Public markets remain a key strength and an important source of growth. Equity, multi-asset and alternatives generated positive net flows totaling $30.4 billion for the quarter.

And excluding Western Asset, fixed income delivered its eighth consecutive quarter of positive net flows. Equity net inflows were $19.8 billion for the quarter, including reinvested distributions of $24.6 billion. We saw positive net flows across Large Cap Value and Core, all cap growth and value, sector, international equity, equity income and infrastructure strategies. Fixed income net outflows were $2.4 billion. Excluding Western Asset, fixed income net inflows were $2.6 billion driven by Franklin Templeton Fixed Income.

Positive momentum continued in multi-sector, municipal, highly customized, stable value government and emerging market strategies. Our institutional pipeline of won but unfunded mandates remain strong at $20.4 billion, underscoring sustained demand for our investment capabilities. The pipeline remains diversified by asset class and across our specialist investment teams. Turning to private markets. Franklin Templeton is a leading manager of alternative assets with $274 billion in alternative AUM.

Alternative fundraising has been a key contributor to our growth with $10.8 billion raised during the quarter, including $9.5 billion in private market assets. Fundraising was diversified across our alternative specialist investment managers and reflected client demand in secondary private equity, alternative credit, real estate and venture capital from institutions as well as from the wealth channel. Aggregate realizations and distributions were $4.8 billion.

Lexington Co-Investment Partners VI, one of the largest dedicated global co-investment funds closed in October with $4.6 billion in committed capital. Today, Lexington's AUM stands at $83 billion, up 46% since its acquisition in 2022. In addition, we continue to expand our private credit platform with the October 1 closing of the Apera Asset Management acquisition. This strategic acquisition enhances our direct lending capabilities in Europe, growing lower middle market.

In January, BSP Real Estate Opportunistic Debt Fund II closed with $10 billion of investable capital, including related vehicles and anticipated leverage across $3 billion of equity commitments. Franklin Templeton's U.S. and European alternative credit businesses are now aligned under an updated Benefit Street Partners brand with $95 billion in private credit AUM at quarter end. Clarion Partners continues to be well positioned with a large, diversified portfolio and positive returns despite a challenging capital raising environment.

Capital flows remain well below historic averages, largely due to clients seeking more liquidity in private equity overall. Recent M&A activity in the industry underscores the importance of alternative assets, reinforcing the strategic rationale behind our acquisitions and investments and further highlights our ability to grow our alternative asset platform at scale.

Franklin Templeton Private Markets, our alternatives wealth management offering continues to gain traction and generated over $1 billion in sales for the quarter, underscoring the strength of our global distribution partnerships and client reach. Lexington Partners, Benefit Street Partners and Clarion Partners each have scaled perpetual funds totaling $6.7 billion in AUM.

These are semi-liquid perpetual vehicles open to ongoing subscriptions, giving investors efficient access to long-term private market exposure. Taken together, these capabilities are driving increased client adoption and strengthening our position as demand for private market solutions continues to grow globally. As investors continue to seek enhanced diversification and differentiated sources of return, private assets have taken on a more prominent role within traditional mutual fund structures.

We've been incorporating private assets into traditional mutual funds for over a decade. Today, we manage approximately 60 products, representing about $160 billion in traditional mutual fund assets that have exposure to private markets. Liquidity is closely and continuously monitored to ensure these products remain aligned with our traditional fund objectives. Multi-asset AUM is nearly $200 billion and had net inflows of $4 billion during the quarter, the 18th consecutive quarter of positive net flows led by Franklin Income Investors, Franklin Templeton Investment Solutions and Canvas.

These flows underscore clients' increasing preference for outcome-oriented diversified solutions across public and private asset classes, an area that Franklin Templeton continues to focus on and evolve through innovation. Clients are increasingly turning to Franklin Templeton for a broad and differentiated set of investment vehicles, and we're seeing that demand translate into sustained growth across our platform with record AUM across ETFs, retail SMAs, Canvas and investment solutions.

Our ETF platform continues to grow at a faster rate than the industry and reached a new high with $58 billion in AUM and generated $7.5 billion in net flows, marking its 17th consecutive positive quarter. The net flows were inclusive of $3.5 billion in mutual fund conversions. Our focus on active ETFs produced strong results this quarter. Active ETF net flows were $5.5 billion or approximately 70% of total net flows. Today, we have 15 ETFs that exceed $1 billion in AUM.

The industry conversation continues to shift toward delivering personalization at scale, and we see this as a durable long-term opportunity. Advancements in technology are allowing features of separately managed accounts such as tax loss harvesting, which were historically underutilized to be implemented efficiently and consistently across a broad client base. We are well positioned in retail SMAs with our breadth of capabilities, along with our custom indexing technology, Canvas.

As a leader in retail SMAs, AUM increased to $171 billion with $2.4 billion in net inflows driven by Putnam, Franklin Fixed Income and Canvas. Canvas generated $1.4 billion in net flows and reached $18 billion in AUM, reflecting strong client interest in personalization and tax efficiency. Canvas has been net flow positive since its acquisition in 2022. We are also seeing increased demand for multi-asset model solutions, including portfolios that combine both public and private asset classes.

This trend is extending into retirement channels where investors are increasingly seeking diversification, income and risk management through more holistic portfolio construction. Investment Solutions leverage our capabilities across public and private asset classes to pursue strategic partnerships. This quarter, Investment Solutions enterprise AUM surpassed $100 billion. Digital assets also continue to play an important role in modernizing financial infrastructure, and Franklin Templeton remains at the forefront.

Earlier this month, the state of Wyoming debuted the nation's first state-issued stable token with Franklin Templeton managed reserves, further demonstrating our leadership in blockchain-enabled investment solutions. Our digital asset AUM is $1.8 billion, inclusive of approximately $900 million in tokenized funds and approximately $800 million in crypto ETFs. Turning to artificial intelligence. We've made significant progress in advancing our AI efforts.

Yesterday, we announced the launch of Intelligence Hub, a modular AI-driven distribution platform powered by Microsoft Azure, building on the advanced financial AI initiatives announced in April 2024. Intelligence Hub delivers our vision for U.S. distribution by modernizing core activities, improving sales effectiveness and enhancing the client experience.

One of Franklin Templeton's strengths is our global presence, and international markets are an integral part of our growth strategy. We currently operate in over 30 countries, and our international business continues to expand with positive net flows for the quarter with strength in EMEA.

Now, in terms of investment performance, over half of our mutual fund and ETF AUM is outperforming its peer medium across the 3-, 5- and 10-year periods. Similarly, over half of strategy composite AUM is outperforming its benchmarks over the same time periods. Compared to the prior quarter, mutual fund investment performance increased in the 5- and 10-year periods and declined modestly in the 1- and 3-year periods due to select U.S. equity strategies.

On the strategy composite side, investment performance improved in the 10-year period, was stable in the 3-year period and declined in the 1- and 5-year periods. The 1-year decline was primarily driven by the liquidity strategies. Overall, long-term performance remains competitive and continues to support both organic growth and client retention. Turning briefly to financial results.

Adjusted operating income was $437.3 million, reflecting lower performance fees and the annual deferred compensation acceleration for retirement-eligible employees, partially offset by the impact of higher average AUM and realization of cost savings initiatives. We remain disciplined in managing expenses while continuing to invest strategically in areas of growth and innovation for the benefit of all stakeholders.

We are confident that our diversified business model, global scale and client-first culture positions us well to capture the long-term trends reshaping our industry across public and private markets. Finally, in December, Franklin Templeton was once again recognized by Pensions & Investments as one of the best places to work in money management. I'm proud to lead such a talented and dedicated team, and I want to thank our employees for their continued hard work and commitment to serving our clients. Now let's open up the call to your questions. Operator?

[Operator Instructions] And the first question is coming from the line of Bill Katz with TD Cowen.

Thank you for the extra disclosure in the supplement around expenses. I think that was quite welcomed for sure. Maybe on that, just a 2-part question. To the extent that the markets were to be a bit under pressure as the year goes by, how much flex do you have to sort of bring that number down? And then secondarily, I think in there, you sort of affirmed you're going to get to $200 million of cost savings. Could you speak to maybe the residual amount yet to be realized and the time line against that?

Bill, it's Matt. So as outlined on that page, thanks for highlighting it in the investor deck, at flat markets, as we mentioned in the assumptions and excluding performance fee comp, we do expect expenses to be in line with 2025. This is inclusive, again, as we also outlined on that slide, of our key investments that are essentially offset by the expense savings.

From a modeling perspective, if you take the guidance, which I can give on the second quarter and then you add that to the first quarter, take those -- take that sort of combined number for expenses and then take the last 2 quarters and divide it roughly evenly between the last 2, that will get you where we believe we'll be at this point in time. It may be that the expense saves shift a little bit between the third and the fourth quarters, but that's how we expect things to play out in terms of our cost savings.

And that is, of course, as I've mentioned in the past, in conjunction with margin expansion, in particular, going into the third and fourth quarter. So I think for the second quarter, you won't see much of margin expansion. You'll see that going into the third and fourth quarters where we expect to be, again, given current markets, given current AUM levels, we expect our margin to be getting into the high 20s at that point from where we are today.

The next question is from the line of Craig Siegenthaler with Bank of America.

My first question is on the recent M&A activity. I know you've been very active. And I wanted to see if you had an update on potential contingent consideration liabilities because I see there's only about $20 million in the new 10-Q that you put out today, but I actually thought it was larger than that. So is that really it? And -- or could there be more especially with the deal you just closed last quarter?

No, that's the contingent consideration around specific transactions that we've done. So it's really virtually nothing at this stage. What that doesn't include is some compensation related to transactions, but that's all in the compensation line and all included in our guidance. So -- and some of that, you can see in the GAAP versus non-GAAP disclosures for specifics. But for transaction-related consideration, it's a very low number that's left, and that's probability weighted, Craig. So yes, nothing additional to report there.

Okay. And just one question, right?

Yes. Well, I think you had -- you want to ask something else about M&A? I think, Jenny, do you want to cover the M&A question?

Do you want to just -- sorry, Craig, are you asking about what kind of our view is on M&A? Or what's your question on that?

Actually, I did in the first part, but if you want to kind of update us on your M&A priorities, product gaps, kind of where you're looking, where you see kind of strategic benefits, that would be helpful, too.

Yes, sure. So it hasn't really changed. I mean what we've always said is we do M&A for strategic purposes, and they're usually around whether we need to fill out an obvious product gap. Today, honestly, we are pretty full. I mean the one area that we had said was infrastructure. You need a lot of scale for infrastructure. And we feel like we've filled that at least for now with the partnerships that we've done with the 3 infrastructure managers, and we're focused on the wealth channel there.

Any kind of M&A we do going forward is going to really be in 3 areas. It will be like what we did with Apera, which is to fill in a specific bolt-on area either geographically or capabilities to our alternatives manager. So in that case, they gave us European direct lending, which we were able to combine with Alcentra's direct lending group. And I think we're now at $10 billion in European direct lending there. So that's kind of a bolt-on, both geographically and capability.

And then the second area would be if it somehow furthers distribution. So we've done either investments or actual M&A that help us like a Putnam deal where we also brought with it some sort of distribution capability. And then the third area is really in high net worth. We've said we want to grow -- we want to double the size of fiduciary in our 5-year plan, and that can be both -- that will be both organic as well as inorganic. So those are the kind of 3 areas that we're focused on.

And I'll just add something to this, Craig, that it's almost reiterating what we said in the past. But look, what we've done in M&A as a company has transformed the business. It's almost 60% of our operating income that's been added over the last several years through M&A. And I think that we're a bit of a modest company at the end of the day, but the timing of our private markets acquisitions was quite good. And as you know, we've been growing the multiple down very substantially in terms of those transactions.

So we're very comfortable with M&A. And as Jenny mentioned, we've got some things that we're reviewing. We're kind of in the strategic flow would probably be an understatement. But right now, the return on M&A is very important to us. We have high bars. And obviously, given where our equity is trading, the bar is even higher for M&A. So the first thing we look at is what's the return on buying back our shares relative to what we could get from M&A or providing more seed capital and these other things around capital management.

The next question is from the line of Brennan Hawken with BMO Capital Markets.

Matt, I don't think I heard it in the prepared remarks. So I figured I'd drill in. Would you have any expectations for EFR either both in the coming quarter? And then if you have a view maybe for the balance of the year, I know you've got the Lexington flag-raise is expected to start. I'm guessing that will help.

Yes. I'd say that for the next quarter, we expect EFR to be stable where it is today. And then in the following 2 quarters, there could be some upside to that based on fundraising around alternative assets as you've just highlighted.

The next question is from the line of Alex Blostein with Goldman Sachs.

Matt, I was hoping you could expand the margin discussion a little bit longer term. Franklin has done a really nice job integrating a number of assets over the years. Good to see the expense flex come through. But when you think about the operating margins for the firm as a whole, kind of running in the mid-20s, to your point, maybe entering high 20s towards the end of the year, where do you see the profitability over time? Many of your peers are well in the 30s, kind of mid-30s percent range.

So knowing what you know about the business, knowing what else might be on the come with respect to integration of some of your managers. How should the Street think about profitability over kind of a multiyear basis? And what's kind of the goalpost there? And maybe just a clarification. I know you said high 20s margin exiting 2026. Is that with market? Or is that also assuming flat markets?

The latter one is flat markets. So it's part of our guidance from where we are today. In terms of the first question, we put out there a 5-year plan where -- and we've got 4 years, well, 3.75 years to go of that plan. And we said we'd be in excess of 30% by the time that's finished. The reality is we are well on our way to the 30% margin, all else remaining equal going into 2027, let's say, fiscal 2027. So sometime in 2027, we'll be there.

And then if all else remain equal around the market, as we've said, there isn't any other reason why we couldn't be somewhere between 30% and 35% if we achieve all the goals that we put into our strategic plan that we've highlighted to the -- to all of you and as we highlighted, where we're at against that at the end of last year. So yes, that's where we're at on the margin.

As I mentioned, where we should end this year, all else remaining equal, in the high 29s going into 2027 fiscal at some point would be 30%. And then if the market stays where it is today, we should go in excess of that in future years where we thought we'd be more like 30%. So we have some upside there.

Remember as well, we do have the highly episodic situation around Western, where we've been providing support to the Western expense structure since August 2024, which has had an impact on our overall margin as a firm, probably several points, so we'd already be in the high 20s or 30% now, excluding that. But we've done the right thing in our opinion, by providing that support. And by definition, also supports future growth opportunities that we've highlighted in our 5-year plan.

Our next question is from the line of Glenn Schorr with Evercore.

Jenny, I felt like you had strong conviction in how you talked about -- you said something like no longer -- people -- clients are no longer looking for products in isolation. Curious how much you were leaning towards the institutional versus the wealth side? And more importantly, how are you organizing around that? How do you deliver it? Is it your own model that is getting on other people's models? And is it also bigger strategic broader relationships with LPs? I'm just curious to flesh that out a little bit.

Yes. No, great question. So that comment is both a wealth comment as well as the institutional comment. So you talk to any of the big wealth platforms and what they're basically saying is we -- there's more demand from their clients to offer truly what used to be just available to high-net-worth people. So it's financial planning, tax efficiency, education, education of the heirs. And so what their message is, look, we're going to consolidate to fewer managers.

So we're going to look at the ones that have scale, that have breadth of capabilities and can offer these additional services to us. And part of that -- so I'm talking first on the wealth side. And part of that on the wealth side is if you have traditional and privates, show me that you can support us on the education of the sale of our private. That's why we have 100 people whose sole job is to support our market leaders out there as they meet financial adviser by financial adviser from an education standpoint.

And so really focusing on streamlining on the wealth channel. We're having the same discussions on the institutional side, where the conversations are around, okay, show me your broad breadth of capabilities. I want to be able to second some of my more junior folks, show me how you can build a program around that, that goes across market. So fixed income equity, secondaries, private credit, like we want that education across and that you will support those types of programs.

And again, they're consolidating the number of managers. And you have to remember, you have a blow up with one manager, it taints your firm's reputation. There's as much due diligence on a multitrillion dollar manager as there is on a single $20 billion manager. And so the amount of time that they have to do in doing due diligence on the managers, making them want to consolidate, just use larger managers and expect more from the manager. So that's both, like I said, institutional retail.

We've seen it on the insurance side, where as they're looking -- you have this trend towards leveraging sub-advisers. They want broad breadth of capabilities there. So we're seeing it on -- as you talk to retirement managers, show me the breadth of capabilities that you have and show me how you can help support the business. So I would say this trend has been going on for the last few years, and it continues. And we feel really well positioned for it.

I wanted to add a comment into Glenn's comment on actually our success, especially on the wealth space, which you mentioned, we have over 100 odd specialists that complement the field and the wealth people on the ground. And the success that we've seen actually over the past year alone, we've increased substantially the amount of AUM that we fundraise in the wealth space. And we expect that, that's going to be between 15% and 20% in 2026. But also importantly, 40% is coming outside the U.S.

So it's also growing outside the U.S., both in Europe and Asia. And we -- the other part that is important is over the past 2 years alone; we built 7 perpetual funds that are close to $5 billion in fundraising and the fundraising is just going up every quarter. So this quarter is 50% higher than the quarter before, and the momentum continues because we continue to sign up new wealth groups.

And to your question, Glenn, we're also starting to build those model portfolios of perpetual funds that will continue to accelerate the growth on the wealth. So that's an area of focus, and I think that's an area of a lot of success from, frankly. So I just wanted to add that to the conversation.

And you just remind me, Daniel, Glenn, you asked the question about do we also try to get in other people's models? Yes, the answer is we do. As other people have both CIO and their open architecture, and we are in that case, in other people's models. So our goal is to meet the client, however, we can meet the client, whether it's whatever vehicle, we're vehicle agnostic.

I think that you would see that all of our flagship products are being sold in multiple vehicles. So some form of ETF, mutual funds, CIT, SMA, we're adding tax efficiency to our active SMAs. And so having that flexibility is really important as they select you as one of their core providers.

Our next question comes from the line of Dan Fannon with Jefferies.

So Matt, I wanted to follow up on some of your comments around long-term margins and the expenses. So just thinking about expense growth beyond this year, are you -- can you give us a sense of how you're thinking about that? And do you anticipate in those longer-term targets for margins additional cost savings and/or cost programs that will help you get there?

I mean it's possible that we're deep in on AI. We're deep in on how to maximize our presence that we have in India and Poland, for example, where we've got very large operational capabilities and great talent in these places. We're working on meaningful integration across the firm to maximize and capitalize on what we've got here. Every time when we progress down one of those paths, we find other places that can, frankly, absorb areas that we need to invest, at least absorb.

What we're demonstrating this year is a meaningful increase in margin, all else remaining equal and an acceleration of our plan to get to 30% plus. And we're doing that through very disciplined expense management whilst continuing to invest in the business at the same time as the market going up. So we've got meaningful investments for growth. We've got the market that's meaningfully up, yet our expenses are staying flat to last year.

I think going into 2027, obviously, look, we're not -- we're only a quarter through 2026 fiscal. But I feel confident that going into 2027, that a lot of the other initiatives we have going on will help to continue to absorb the additional expenses that are required to grow and invest in our business. But obviously, we can't comment reliably on fiscal 2027 when we're not even through '26.

But I hope through these comments, when you look at how we've performed from an expense perspective, '25 versus '24 and now what we're guiding in '26 versus '25 that we've mostly achieved what we said we're going to achieve even with upward momentum in the market. So I do think we've got some room in the numbers in terms of further cost saves going into fiscal '27 based on everything that we know. But right now, we're focused on delivering on fiscal '26 as we've highlighted.

Yes. And I'm just going to add, Matt, like when we think about where is there upside opportunity on margin, I'm going to throw it into kind of 3 categories in the shorter term, but sort of a '27 on. One is streamlining the products. We've done a lot around. I think almost 1/3 of our products we've looked at and either repositioned, merged, a few cases closed and in some -- when I think about repositioning, it's like turning them into ETFs. We did big ETFs conversion where we think they'll get more upside potential.

So as we determine that, there's opportunity there. The second is it always takes a lot longer. And you think about all the acquisitions that we've done, we kind of say, I think, 11 acquisitions in the last 5 or 6 years. But the reality of Legg Mason was like an acquisition of 5 companies or 6 companies, not 1 company because they were all on their own systems. They had their own versions of CRM, different CRM systems. That is still ongoing. And those -- and some of that's built into the projections that we have.

But some of it, you continue to uncover more opportunities there as you integrate. And it takes multiple years to do the full integration. And so that's still working. And then finally, like AI and technology, we think blockchain is going to be a great efficiency adder as it's adopted out there. But like AI, just you may have seen that we announced this intelligence hub. It's one area that we're working on AI to make our distribution people more effective.

What we saw is the time to finalize call lists dropped 90% when we rolled this out. Now what does that -- it went from 3 to 4 hours to 15 minutes and the prepping for meetings dropped from 6 hours to 2 hours or something per week. But those are small little incremental cost savings or hopefully, more importantly, what it's done is actually added 9% to 10% increase in the number of meetings that our distribution team has. So hopefully, that translates into more sales.

But think about that as you're rolling it out. We've already talked in the past about AI and the improvement in our RFPs. We're doing a lot of work on our investment side. It will either translate into growth opportunities or it will translate into cost savings. But honestly, it's a bit hard today to build that into direct cost savings opportunities that expand into the margin. But those are big opportunities, we think, going forward. And we are very focused, we think on the AI side, we're actually leaders in that space. So I just want to add that to kind of Matt's comments.

And then finally -- Jenny, thank you for that. And then finally, most of the stated growth areas that you can see as demonstrated by our positive flows in them are scaling. They're scaling up. And in particular, ETFs, Canvas and solutions, for example, each of those 3 areas for us. So obviously, they're lower fee and when they're smaller AUM when you're growing, overall as a business, you have a lower margin as a result of that investing to grow the business to a scaled position.

What's happening now in terms of ETFs, Canvas and solutions, in particular, notwithstanding the lower fee rate associated with those vehicles, those businesses, let's call it, they're getting to the point now where the size of them and certainly going into later into '26, '27, all else remaining equal, we expect the scaling of those businesses to create higher margins overall. So you have a lower fee rate. I know everybody is very focused on the fee rate.

But at a certain point when you get above a certain AUM, expenses are very managed and -- because you've done all the investments, you've got the team you need. And then you could be 2, 3x the size of AUM and therefore, have a much higher margin. Similarly, in our alts area, as we continue to grow significantly across all 3 of our -- 3, 4 of our primary alternative asset's businesses, we're getting more margin from that. I mean the $10 billion that Jenny talked about earlier on the $9.5 billion of fundraising doesn't include, for example, Lexington Fund XI. So it's important to note that.

Our next question comes from the line of Ken Worthington with JPMorgan.

I guess pressing AI further, Jenny, you've been in the press talking about the impact that AI has on asset management, suggesting that it could drive, if not accelerate more consolidation in the asset management industry. So maybe, one, how does AI drive consolidation? And then two, from Franklin's perspective, how would AI sort of alter your ability and willingness to do the M&A transactions and fill in the gaps that you mentioned sort of earlier in the call?

Yes. So a couple of things. So one, my comments on M&A consolidation has been really what I said is, look, if you haven't -- if you're a traditional manager and you haven't already purchased scale in alternative managers, it is going to be really difficult to compete going forward, especially because, one, that comment on distributors trying to consolidate, so they're demanding more from you.

Two is, as Matt pointed out, we were fortunate that we are very early in these acquisitions, traditional -- alternatives managers have gotten incredibly expensive since we did our acquisition of BSP and Clarion, and it will be very, very difficult to be able for a traditional manager to be able to go out and acquire. #2, this convergence particularly in fixed income, you're going to see, but across the board with products that are -- that have -- that contain both private and public in them.

If you don't have that under the same roof, roof, we don't think you're going to get the same kind of just synergies that you get from learning and managing and research. We have over 50 products between Western, ClearBridge and Franklin. Franklin has been doing private markets in their traditional mutual funds for over a decade. So over 50 products actually have privates in them today. So we already have that in our mutual funds. So one is in the alternative space. The second is AI.

AI, the amount of data required to truly train a model is really significant. And if you're a smaller manager, one is you won't be able to buy -- you won't be able to buy the kind of data. We spend hundreds of millions of dollars on data. And so to be able to scale that data plus the data you generate internally across all of your different capabilities is really important in training models. And it's just going to be hard to compete on training those models if you don't have a scale.

So that's where -- why my comment was, I think that's going to drive some consolidation because I think over time, we're already seeing it. Now look, any time you have technology breakthroughs, first thing people do is just make more efficient what they do today. That's why we give you quotes like, hey, we're more efficient on the call because it's hard to measure the actual value-added output because that doesn't happen right away.

It doesn't happen until you start to put in the hands of your people so that they can build those ideas. I love to say it's like when the iPhone came out, we all looked at it as this is a pretty cool camera and flashlight and whatever. It was unleashing the hands of the public that came up with all these creative applications. As you start to train your workforce on how to leverage agentic AI, which we were very early adopters of broadly rolling out ChatGPT, and we do trainings on how to create agentic AI.

We do hackathons with our investment teams, and it's a cross-functional hackathon. So we put people together that are across various teams to say, go build agentic AI. And they're doing things that are built one on top of the other. And then we take them, and we test them across others. So to me, the ability to do that and compete is going to be very difficult if you are small and in particular, if you are singly focused on kind of one area of the capital stack.

Our next question comes from the line of Michael Cyprys with Morgan Stanley.

I just wanted to come back to some of your commentary, Jenny, on blockchain and tokenization. Just curious if you could talk about your strategic objectives for that over the next couple of years. What steps are you looking to take here in '26 to enhance your positioning to help improve adoption, for example, of your existing tokenized funds? And then to your point on efficiency, I guess, how do you see blockchain contributing to improved efficiency at Franklin? How much lower cost is it to operate tokenized funds versus your traditional funds and rails?

Sure. So I'll tell you, like this is just an incredibly efficient technology. And my -- the best example to give you an idea of how it become -- how I think it's from a cost savings standpoint, how significant it is. I'll start there and then kind of what the opportunities and the hurdles are to more broad adoption. So the first thing is when the SEC approved our Money Market Fund, they had this parallel process.

It was something like we did over a 6-month period between our old transfer agency system and our blockchain system. And we were one of the few firms that were still running the transfer agency system in-house. So we got to see that comparison. And we did about 50,000 transactions. It cost us about $1.50 per transaction, cost us $1.13 to run it total to run those 50,000 transactions on the stellar blockchain. We picked the right chain. There's a lot that goes into that.

But it showed us the dramatic difference in cost. And today, if you open an old Money Market Fund, you need $500 to open up because below that, we probably lose money, and the other shareholders subsidize you. In the case of blockchain, you could open a Benji, you downloaded the Benji app and open a Money Market Fund, you would -- you only need $20, and we could probably go less than that. So it's cost savings.

The second thing is there's a huge amount of cost in financial services that's just reconciling data between your own systems and then reconciling with your counterparty. All that goes away when you have a single source of truth that is updated immediately. So those -- that's where you're going to have cost savings, which is why I believe it will fundamentally replace all of the rails.

There's a lot of toll takers in the system today that will slow that down as much as they can because it threatens their business model. But water runs downhill no matter how many obstacles you put in it; it will become very significant. So why the slow adoption? You cannot hold a tokenized product without having what's called a wallet, okay? Now it's a blockchain wallet.

It's merely an encryption key that's your own personal one, but you can't hold any of those -- in the U.S., in particular, where you had -- you didn't have regulatory clarity until the Genius Act came in, there was no point in any of these big wealth advisers on the traditional side to even think about it because it was kind of like the third rail from a regulatory. I can tell you this year, I feel like is completely changed.

You now have the large crypto exchanges interested in trying to offer traditional types of funds, ETFs and others that would be tokenized. And you have the big traditional managers who are saying, can you please educate us on how we access the space, how do we build a wallet, what's required there. And so I think you're going to start to see much greater convergence between TradFi and DeFi.

We -- our tokenized Money Market Fund, what we see is if anybody's been involved in securities lending, you know that people will move who they'll borrow where they can get the highest collateral return even if it's a basis point. Why would you keep there's $300 billion in stablecoins? Why would you park your money in a stablecoin that doesn't give you a yield when you could move into a Benji money market fund, earn that yield and when you want to do a payment transactions, convert into a stablecoin.

We think by the end of March, we will have the ability for somebody who has a stablecoin where Benji has been integrated with multiple different stablecoins, where on these crypto platforms, we announced a partnership with Binance, we have with OKX and Kraken and others, where you'll be able to convert from your stablecoin into our money market fund and on a Saturday, convert out if you want to leverage it for payment and earn that yield.

And again, because it's on blockchain, we actually pay you that yield in your account every day. If you're a corporate treasurer and you can get use of those funds every day versus accruing and waiting for that capital to be paid to you at the end of the month on a Money Market Fund, that's going to be a benefit. And so that's where we think there's an opportunity, but Benji is just the beginning of where we think this goes.

Our next question is from the line of Patrick Davitt with Autonomous Research.

Following up on the expense guide. I don't think you've ever talked about the scale of this third-party performance-related expenses you're excluding. So could you give how much that runs each year? And then I think, Matt, you hinted you have a detailed rundown of next quarter expenses you can give?

Thanks, Patrick. That should be -- the third-party piece should be relatively small. I'll check with the team quickly just in case. But that was -- that larger performance fee that we had to run through G&A last quarter was associated with a large performance fee we got from BSP, and it was for previous employees. So but I'll get what that number could be going forward. In terms of -- but it will definitely be smaller.

In terms of the third quarter -- sorry, second quarter guide, I already mentioned EFR, we expect it to be in line with this quarter. And as I mentioned, the last 2 quarters, we have some upside potential in EFR related to potential fundraisings in alternative assets. Comp and benefits, we expect to be around $860 million. This includes $30 million of calendar year resets for the 401(k) payroll, salary increases and so on.

It also assumes $50 million of performance fees and a 55% performance fee compensation ratio on that. IS&T, we expect to be $155 million, consistent with last quarter. Occupancy, $70 million, again, consistent with last quarter and as we've guided in the past. G&A, $190 million to $195 million, again, in line with the previous quarter. This assumes a little bit higher fundraising expenses and a little bit higher professional fee. And then the tax rate, we guided last time for the year, 26% to 28%.

We're keeping that guide, but we're now on the lower end of the guide or low to mid, let's say, in that guide. So we're bringing the guide down on taxes for the year from the higher end, which I think I said last quarter to the lower to mid part of that guide. And then really importantly, I just want to reiterate for '26 because I know you'll be calculating back what should -- how do we get to the flat expense guide, all remaining equal and excluding performance fees and the other assumptions we put in the deck, how do we get to that guide?

I would add the quarter I just gave you to the first quarter and then look at the last 2 quarters and just spread the expense savings over those 2 quarters. We recognized about 20% of the $200 million in the first quarter, and we expect to spread the rest of it out over the next 3, but there'd be larger amounts of it in the last 2 quarters. And again, we expect to end the year in a very similar expense position as we were to '25 notwithstanding all the investments that we've talked about making in the company and at a higher margin, as I mentioned when I answered Alex's question.

Our next question comes from the line of Ben Budish with Barclays.

I was wondering if you could maybe talk a little bit about the equity flows in the quarter. I know calendar Q4 is typically seasonally stronger. And obviously, there's been a trend of improvement over the last couple of years, but this quarter looked particularly strong. Anything unusual or onetime to call out? Or does it -- was it more broad-based? And I know it's still a bit earlier in the fiscal year, but any thoughts on how the rest of the year may shake out would be helpful.

I'll start, and then I know Daniel will want to jump in. I mean, obviously, it's a quarter that you have strong reinvested dividends. So that is part of the flows, which is important. But I have to tell you, I mean, Putnam continues to have excellent performance and continues to have very, very strong flows. And honestly, that has even continued into January.

I don't want to steal the thunder here and January hasn't closed yet, but we actually are looking like we will be positive net flows inclusive of Western, which has been a long time since that in January. Now again, I caveat that since it hasn't actually closed today. But part of that has just been the strength of Putnam. Daniel, do you want to add?

I think it's -- I think you got it. I will say it's a combination of Putnam, clearly on large cap value, on research, also on emerging markets, we got some institutional flows from our Templeton Emerging Markets capability, which is very, very encouraging. And I will also say our ETF franchise had excellent results, especially on the active ETFs, which is also a combination of the results from our Boston affiliate, but also a couple of ClearBridge funds did also very well on that.

And the momentum continues to be -- we -- on ETFs, we had a great quarter, 75% of the quarter was on active ETFs. So it's continued to actually show that, that's where the industry is going, and we have a very ambitious plan to continue that growth.

Our next question is from the line of Bill Katz with TD Cowen.

Just a couple of cleanups for me. One, can you just remind us of what the variable expense is against net asset value or how to think about the incremental margin on market action. #2, maybe just on the WAMCO side, I haven't asked about this in a while, but it seems like volumes there are stabilizing. How are conversations progressing with the investment community given that some but not all the overhang with the regulatory investigation is sort of winding down?

And then finally, I was wondering if you could talk a little bit about broadly, you mentioned that Lexington was not in this most recent quarter. How do we think about maybe the pace of opportunity in Lexington and maybe broadly where you see the big opportunities for growth in fiscal '26?

Great. So I'll take the Western and alts, and then I'll turn it back to Matt on the variable expense there. So just one on Western. I mean, it helped a lot. Obviously, the DOJ came out and said that they're not going to pursue criminal charges, and it will be resolved through a disposition and acknowledged, I think this was also important that the additional time needed was not due to Western. So I think that gave clients a little bit of a breather of an uncertainty.

And you have the benefit -- the investment team is incredibly stable. They have very, very good performance. We've been integrating the corporate functions. We've been integrating institutional sales and the client service that's going very well. And so I think that with clients that has essentially calmed them a bit. I mean we did -- while they're still in outflows, they did have -- I think it was $6.6 billion in gross sales in the last quarter. So there's obviously clients that are still allocating to Western.

With respect to alts, as Matt said, so we had a very strong quarter. Our target for the year is 25% to 30%. We're going to -- it's still early, so we're going to maintain that target. But obviously, at $9.5 billion coming into the private markets, and that is across all private credit secondaries, real estate and venture. So it's nice and diverse. A little over half of it is in the private credit area. None of it was Lexington's Flagship Fund XI. Lexington did have -- it was a combination of its co-invest, FLEX middle market.

There were over 33 vehicles that had inflows in our private markets this quarter. So it tells you it's really broadly distributed, which for us is exciting. Lex Flagship Fund X, they're active -- or XI, they're actively fundraising in the market right now. Their target is to be about where they were on their last fund. They would expect to first close this year, but it will depend. Secondaries continue to be just a great space to be. Last year was a record number in secondaries transactions.

Lexington is considered one of the trusted and long-term partners with experience, and they're not affiliated to any single PE firm. So that also gives them an advantage. So they're having very good strong conversations, but we're pleased to see the extent of inflows and growth even without the Lexington flagship fund. So Matt, and I'll turn it over to you to get to the last part of that.

Sure. Thanks, Jenny. So Bill, on the variable question, about between 35% and 40% of our expenses are variable. And I'm sorry, I didn't address the -- I remembered you asked this question at the end of your previous question where you said if the market goes down, do we have flexibility in our expense base? The answer is yes. We always have variability in our expense base in the event the market goes down.

So that's the answer to that. And then to answer another expense question that Patrick had, Patrick, just to make sure I fully answer your question. As it relates to the geography of performance fee-related compensation, first of all, we would always guide to apply 55% to the number of performance fee overall. So 55% is the correct application, whether it's in our compensation line or the G&A line.

And we do, as I mentioned in the answer to the question initially, we expect that number to be quite low in the G&A segment. The G&A segment is just literally for former employees that -- where we have -- where we're paying a portion of the compensation out that they own. But that's de minimis at this point. It was just larger that one quarter. I think it was $24 million to be specific last quarter, and that was because it was a large older fund that had a number of folks that are no longer -- they retired from the company that had interest in the performance fees.

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

Great. Well, I'd like to thank everybody for participating in today's call. And more importantly, once again, we'd like to thank our employees for their hard work and dedication to delivering this strong quarter. And we look forward to speaking with all of you again next quarter. Thanks, everybody.

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

Welcome to Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year ended September 30, 2025. Hello. My name is Sachi, 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 and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary. 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. With that, I'll turn the call over to Jenny Johnson, Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us to discuss Franklin Templeton's Fourth Quarter and Fiscal Year 2025 results. I'm here with Matt Nicholls, our Co-President and CFO. Joining us is Adam Spector. This is Adam's final quarterly call as he has transitioned to a new role as CEO of Fiduciary Trust International. Adam has played a vital role in our success with clients over the past 5 years, and his expertise and leadership will be invaluable to Fiduciary. I'd like to also welcome Daniel Gamba to our earnings call for the first time.

Daniel joined Franklin Templeton in mid-October as Chief Commercial Officer and also assumes the role of Co-President alongside Matt and Terrence Murphy, Head of Public Market Investments. A respected industry leader, Daniel brings extensive experience across public and private markets globally. On today's call, as outlined in our investor presentation, I'll share the progress we made in year 1 of our 5-year plan, which was marked by strong momentum and tangible results. I'll also touch on highlights from our fourth quarter and fiscal 2025.

After that, Matt will review our financial results and quarterly guidance, then we'll be happy to answer your questions. In recent years, Franklin Templeton has continued to build on our strong foundation, advancing our mission to help clients achieve the most important milestones of their lives. As one of the world's most comprehensive asset managers, we combine deep expertise across public and private markets with a client reach spanning over 150 countries. Today, clients look to Franklin Templeton as their trusted partner for what's ahead, one firm offering the reach and resilience of a global platform together with the distinct expertise of our specialist investment teams.

As more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles and regions, we believe our business is poised to meet that demand. In recognition, just last week, Money Management in Barron's named Franklin Templeton as its 2025 Asset Manager of the Year in the $500 billion plus AUM category. The award recognizes firms leading through innovation and excellence in investment advisory solutions. Our position today reflects years of deliberate strategic planning and the strength of a global brand that's earned the trust of investors around the world.

This year was another important step forward as we continue to deepen client partnerships, broaden our investment capabilities and strengthen our diversified model. Fiscal 2025 marked the first year of our 5-year plan, and we've made great strides across a number of key focus areas for the company. We are ahead of our plan for alternatives, ETFs and Canvas and on track in the other areas. Let's now turn to the investor presentation beginning on Slide 8 to review our progress report. Starting with Investment Management, we continue to offer a broad spectrum of investment capabilities across public and private assets, helping clients achieve a wide range of financial goals.

In public markets, focus remained on strengthening investment performance while optimizing our product lineup. Performance continues to improve with over 50% of our mutual funds, ETFs and composites outperforming peers and benchmarks across all standard time periods. This underscores our disciplined investment process and commitment to delivering consistent results for clients. This year, we also simplified our investment management structure to strengthen talent development and enhance the way we manage investments across public markets.

These changes are fostering greater collaboration and alignment across teams, positioning us to operate with greater agility and scale. At the same time, we refined our investment offerings to focus on scalable, high-demand strategies where we can deliver the greatest value for clients. That involved thoughtfully retiring certain brands and integrating investment capabilities where it makes sense, steps that make our platform more efficient, scalable and strategically positioned for future growth. Turning to private markets. Franklin Templeton is a leading manager of alternative assets with $270 billion in alternative AUM with the closing of Apera.

We have a broad range of strategies, including alternative credit, secondary private equity, real estate, hedge funds and venture capital. On October 1, we further strengthened our private debt platform through the acquisition of Apera Asset Management, bringing our private credit AUM to $95 billion and enhancing our reach across European markets. The acquisition complements Benefit Street Partners and Alcentra and expands our direct lending capabilities across Europe's growing lower middle market. This year, we fundraised $22.9 billion in private markets, keeping us ahead of pace toward our 5-year $100 billion fundraising goal.

The strong momentum reflects both the depth of our alternative's platform and the growing demand for diversified outcome-oriented solutions. In fiscal 2026, we anticipate an increase to private market fundraising to between $25 billion and $30 billion. We remain committed to the democratization of private assets, bringing institutional quality opportunities to a broader range of investors. Franklin Templeton Private Markets, our wealth management offering, continues to gain traction, contributing more than 20% of our private market fundraising this year, underscoring the strength of our global distribution partnerships and client reach.

We expect this to grow to between 25% to 30% in the next few years. Our perpetual secondary private equity funds, the Franklin Lexington Private Markets Funds have raised $2.7 billion since their launch in January. In addition, our 2 other primary alternative managers, Benefit Street Partners and Clarion Partners, each have perpetual funds with scale. These are semi-liquid perpetual vehicles open to ongoing subscriptions, giving investors efficient access to long-term private market exposure.

This year, we announced an infrastructure partnership with 3 leading firms, Actis, DigitalBridge and Copenhagen Infrastructure Partners, expanding our expertise in one of the most dynamic areas of private investing. Infrastructure is a significant opportunity with an estimated $94 trillion in global funding need by 2040. We're excited to develop a diversified perpetual infrastructure solution for the wealth channel, investing across all subsectors and positioning Franklin Templeton to capture opportunities in this fast-growing market. In addition, we are in the process of launching new products to bring to market. Industry tailwinds for private markets remain strong.

According to Boston Consulting Group, alternatives are projected to represent roughly half of industry revenues by 2029, driven largely by the democratization of alternatives. Goldman Sachs projects the retail alternatives market alone will expand from $1 trillion to $5 trillion over that same period. Franklin Templeton is well positioned to capture our share of this growth leveraging our scale, partnerships and innovation to lead in the next era of alternative investing. Alternatives and retirement represent one of the most exciting opportunities ahead.

This year, we announced a partnership with Empower, one of the largest U.S. retirement service providers with over $1.8 trillion in assets under administration. Together, we're paving the way for private market investments to be included in defined contribution plans, an important step toward broadening access for millions of retirement savers. While still early days, the long-term opportunity is significant. In U.S. defined contribution plans alone, allocations to alternatives are projected to create a $3 trillion addressable market over the next decade.

With $125 billion in defined contribution assets and $440 billion in total retirement assets and a compelling range of alternative strategies, Franklin Templeton is well positioned as demand continues to accelerate. Turning now to distribution. As one of the most comprehensive global investment managers with clients in over 150 countries, we offer our clients a full range of investment strategies in vehicles of their choice. We saw growth across vehicles, driven by record positive net flows in retail SMAs, ETFs and Canvas, contributing to AUM growth from the prior year of 13%, 56% and 71%, respectively.

We are a leader in retail SMAs with AUM of $165 billion across more than 200 high-quality strategies. Our SMA business has grown at a 21% compound annual rate since 2023, reflecting the growing demand for personalized investment solutions. As the market continues to evolve, retail SMAs now about $4 trillion are expected to double by 2030 according to Cerulli. Against that backdrop, we're positioned to capture this growth supported by powerful trends driving investor behavior, greater customization, direct ownership and tax efficiency.

Within the retail SMA segment, custom and direct indexing continue to be the fastest-growing areas. According to Cerulli, direct indexing assets have reached $1 trillion, growing more than 35% from the prior year. We're seeing that strong momentum in our own business. AUM on our Canvas platform has more than tripled since 2023, an 82% compound annual growth rate. Our partnership network is expanding quickly, growing from 67 partner firms in 2023 to more than 150 today. And over that time, our financial adviser base has increased fivefold from just over 200 to more than 1,100 advisers now using Canvas to deliver customized portfolios at scale.

We're exceeding our growth goals driven by continued adoption of personalized investing and the expanding reach of our Canvas platform. Our ETF business also continues to scale rapidly and ahead of plan, driven by strong global demand across fundamental active, systematic active and thematic country strategies. Active ETFs are now mainstream, representing about 10% of industry AUM, yet capturing 37% of flows and probably nearing 25% of revenues in the first half of 2025 according to McKinsey. At Franklin Templeton, our ETF AUM has grown at a 75% compound annual rate since 2023, with 16 consecutive quarters of net inflows and 14 ETFs now exceeding $1 billion in AUM.

Importantly, active ETFs account for 42% of our ETF assets, but more than 50% of flows in fiscal 2025, underscoring the strength of our active ETF positioning, and we're just getting started. In our first year with approximately $50 billion in ETF AUM, we're already halfway to achieving our 5-year goal, a clear sign of the strength, momentum and scalability of our platform. Franklin Templeton Investment Solutions is another key driver of our growth strategy, leveraging our capabilities across public and private asset classes to deliver customized solutions for clients. Investment Solutions AUM grew 11% to $98 billion, in line with industry growth, supported by a strong pipeline.

In July, we welcomed Rich Nuzum, former Executive Director of Investments at Mercer, to lead the expansion of our OCIO business, a major priority for us as asset owners increasingly seek strategic advice on objectives, governance and strategic asset allocation. With Rich's leadership and the strength of our investment platform, we are optimistic about this growing opportunity. This year, our focus on strategic partnerships delivered strong results, including $15.7 billion in multiple insurance sub-advisory fundings, a reflection of our growing position as a trusted partner to leading insurance companies.

Beyond insurance, we also expanded multibillion-dollar relationships with clients in each of our regions. For example, the company was appointed trustee and manager of the $1.68 billion National Investment Fund of the Republic of Uzbekistan, further extending our strong track record in managing strategic investment mandates across emerging markets. These achievements reflect the strength of our partnerships and the trust we've built globally. In this context, we were delighted that the Central Banking named Franklin Templeton its 2025 Asset Manager of the Year, highlighting our expertise and enduring relationships with central banks around the world.

Turning to Slide 9. Two additional important growth areas are private wealth management and digital and technology. Fiduciary Trust International, our Private Wealth Management business is positioned to benefit from major demographic trends, including the $84 trillion intergenerational wealth transfer expected through 2045. As a fully integrated wealth platform offering investment advisory, trust and state, tax and custody services, fiduciary continues to stand out with a client retention rate of about 98%. Global financial wealth is projected to grow at a 6% CAGR through 2029 according to the Boston Consulting Group.

Non-depository trust companies like Fiduciary Trust International have historically grown at a faster rate. In fiscal year 2025, Fiduciary's AUM stood at $43 billion, supported by a strong pipeline of new business. As mentioned earlier, we also strengthened Fiduciary's leadership team with the appointment of Adam Spector as CEO of Fiduciary. Adam has been instrumental in the success of Franklin Templeton's global advisory services and his leadership will help accelerate Fiduciary's next phase of growth.

Fiduciary is a leading independent wealth management business, and we will continue to invest both organically and through targeted acquisitions to position the business for sustained long-term growth. Our goal is to double Fiduciary's AUM by 2029. Turning to innovation. The pace of change in our industry continues to accelerate and Franklin Templeton is leading the way. According to Boston Consulting Group, the market for tokenized real-world assets is projected to grow from about $600 billion today to nearly $19 trillion by 2033, a transformative opportunity that we were early to recognize in the development of our digital assets group.

Fiscal year 2025 was a defining year for our digital asset business. We expanded our product lineup, and our tokenized and digital AUM now stands at $1.7 billion, up 75% from the beginning of the year. As the only global asset manager offering digitally native on-chain mutual fund tokenization, we introduced first-of-the-kind features for registered money market funds using our proprietary blockchain-based tokenization and transfer agent platform, including intraday yield calculation and daily yield payouts, 365 days a year.

During the year, we also completed launching new tokenized funds in UCITS, VCC and private fund wrapper to supplement our 40 Act offering, supporting a broader range of tokenized fund types across multiple jurisdictions and building a strong foundation for the next wave of innovation. And we deepened our global partnerships, embedded our tokenized money market funds into the crypto collateral process and partnering with Binance, the world's largest crypto exchange to develop new products for its global wallet platform. Today, Franklin Templeton stands as the only global asset manager delivering native on-chain mutual fund tokenization.

We remain focused on investing in innovation and technology to harness blockchain's potential, redefining how investors access opportunities and shaping the future of asset management. Over the past year, we've taken a major step forward in our AI journey. What began as hundreds of isolated use cases has evolved into a large-scale end-to-end transformation across 4 core areas: investment management, operations, sales and marketing. This shift is accelerating our scale in agentic AI.

Through strategic partnerships, including our collaboration with Microsoft announced last summer, we're building integrated scalable AI platforms that are already driving measurable results tied to clear business outcomes and commercial impact. As these initiatives deliver results, greater value will be unlocked across the firm. And importantly, I'm pleased to see that AI adoption continues to grow across our workforce. Today, the majority of employees are using approved AI tools to drive productivity, efficiency and better outcomes for our clients.

We continue to advance our efforts in capital management, operational integration and expense discipline, strengthening the foundation for future growth. Matt will cover our progress and next steps in these areas in just a moment. Fiscal 2025 was a pivotal first year of our 5-year plan, one that set a strong foundation for growth, innovation and scale. We executed on our long-term priorities, delivering growth across both public and private markets as clients increasingly look to Franklin Templeton as a trusted partner for comprehensive investment solutions. With that strong foundation in place, we're entering fiscal 2026 with clear momentum and excitement about the opportunities ahead.

Now turning to market performance. Fiscal 2025 brought strong public equity gains despite a complex geopolitical and macro backdrop. After a long period of narrow mega cap leadership, market breadth returned, a welcome shift for active managers. Equities rose across regions, supported by easing monetary policy, steady growth and improved earnings. While markets briefly wavered early in the year amid China's DeepSeek AI debut and U.S. tariff proposals, they rebounded quickly with the S&P 500 and MSCI Emerging Markets both up over 30% from April lows. AI remains a key driver of market direction, fueling innovation and differentiation across industries.

In fixed income, returns were positive even amid policy uncertainty, a government shutdown and shifting rate expectations. The Fed's 50 basis point rate cuts in September and October helped support growth, while inflation has held near 3%, yields remain attractive, though volatility is likely to persist. Our overall view of private markets remains constructive. Activity has been more selective, but we continue to see opportunities. Secondaries offer compelling risk-adjusted profiles and in private credit, areas such as asset-based finance and commercial real estate debt are benefiting from reduced bank lending.

Real estate capital markets remain muted overall, but industrial, multifamily and self-storage sectors are leading performance due to strong and sustainable long-term fundamentals. This is an environment that rewards selectivity, discipline and active management. Market breadth, dispersion and dislocation are creating opportunities across public and private markets where active managers can add meaningful value for clients. These market dynamics set the stage for another strong year at Franklin Templeton. Let's now move to fourth quarter and fiscal 2025 results, beginning on Slide 15.

In terms of investment performance, as mentioned earlier, over half of our mutual fund ETF AUM outperformed peers and over half of composite AUM outperformed their benchmarks in all periods. Turning to flows on Page 17. Long-term flows increased 7.8% to $343.9 billion from the prior year. Excluding Western Asset Management, we had $44.5 billion in long-term net inflows, marking our eighth consecutive quarter of positive flows, excluding Western and reflecting client demand in key strategic areas. Our institutional pipeline of won but unfunded mandates remain healthy at $20.4 billion following record fundings in the quarter.

The pipeline remains diversified by asset class and across our specialist investment managers. Internationally, Franklin Templeton manages nearly $500 billion in assets. And excluding Western Asset Management, we achieved $10.7 billion in positive long-term net flows in markets outside the U.S. That momentum highlights the strength of our global platform and the diversity of our growth across vehicles, regions and client segments. From an asset class perspective, turning to Slide 18. Equity net outflows improved to approximately $400 million for fiscal year 2025.

We saw positive net flows into large-cap value, smart beta, infrastructure, equity income, custom solutions and mid-cap growth strategies. Fixed income net outflows were $122.7 billion. Franklin Templeton Fixed Income more than doubled net inflows from the prior year. With approximately $240 billion in AUM, Franklin Templeton Fixed Income has expertise in every sector and is active in all corners of the global bond market. Excluding Western, fixed income net inflows were $17.3 billion for the year. We experienced positive net flows into Munis and Stable Value strategies. Excluding Western, fixed income generated positive net flows for 7 consecutive quarters.

Let's move to Slide 19. Finally, as I mentioned before, broad-based client demand drove sustained organic growth in alternatives and multi-asset, which together generated $25.7 billion in net flows for the year. This week, we reported preliminary October AUM and flows. Western's long-term net outflows were $4 billion for the month of October and had ending AUM of $231 billion. Excluding Western, long-term net inflows continue to be positive and were $2 billion. We continue to see positive net flows in alternatives, ETFs, Canvas and digital assets. The past year has presented significant challenges for Western Asset, and we remain committed to supporting them.

As part of that commitment, we integrated select corporate functions to drive efficiency and give access to broader resources. Western's client service team joined Franklin Templeton in order to better serve the needs of our clients. These enhancements have been seamless for clients. Western's leading investment team continues its investment autonomy and performance has rebounded strongly with 92%, 98%, 88% and 99% of Western's composite AUM outperforming the benchmark for the 1-, 3-, 5- and 10-year periods.

To wrap up, we take great pride in the efforts we've made over the past year to further grow and diversify our business. As we enter fiscal year 2026, Franklin Templeton stands stronger than ever, anchored by broad investment expertise, global scale and reach and commitment to innovation. We have strengthened our competitive position across public and private markets, expanded our partnerships globally and continued to innovate in technology, AI and digital assets.

These achievements reflect not only our ability to navigate dynamic markets, but also our long-term focus on creating sustainable value for our clients and shareholders. Before I close, I want to thank our employees around the world for all their efforts this past year. Their dedication, expertise and unwavering focus on our clients are the foundation of everything we accomplish. Now I'd like to turn the call over to our Co-President, CFO and COO, Matt Nicholls, who will review our financial results and quarterly guidance. Matt?

Thank you, Jenny. I will briefly cover our fiscal fourth quarter and full year 2025 results, followed by fiscal first quarter 2026 guidance. So for the fiscal fourth quarter, ending AUM reached $1.66 trillion, reflecting an increase of 3.1% from the prior quarter, and average AUM was $1.63 trillion, a 4.4% increase from the prior quarter. Adjusted operating revenues increased by 13.9% to $1.82 billion from the prior quarter due to elevated performance fees and higher average AUM. Adjusted performance fees were $177.9 million compared to $58.5 million in the prior quarter.

This quarter's adjusted effective fee rate, which excludes performance fees, stayed flat at 37.5 basis points compared to the same rate in the prior quarter. Our adjusted operating expenses were $1.34 billion, an increase of 10.5% from the prior quarter, primarily due to higher incentive compensation on higher revenues, higher performance fee incentive compensation and performance fee-related third-party expenses, higher professional fees, partially offset by higher realization of cost savings. As a result, adjusted operating income increased 25% from the prior quarter to $472.4 million, and adjusted operating margin increased to 26% from 23.7%.

Fourth quarter adjusted net income and adjusted diluted earnings per share increased by 35.7% and 36.7% from the prior quarter to $357.5 million and $0.67, respectively, primarily due to higher adjusted operating income and adjusted other income and a lower tax rate. As of September 30, we impaired an indefinite-lived tangible (sic) [ intangible ] asset related to certain mutual fund contracts managed by Western Asset and recognized a $200 million noncash charge in our GAAP results. Turning to fiscal year 2025, ending AUM was $1.66 trillion, reflecting a decrease of 1% from the prior year, while average AUM increased 2.6% to $1.61 trillion.

Adjusted operating revenues of $6.7 billion increased by 2.1% from the prior year, primarily due to an additional quarter of Putnam, higher average AUM and elevated performance fees, partially offset by the impact of Western outflows. Adjusted performance fees of $364.6 million increased from $293.4 million in the prior year. The adjusted effective fee rate, which excludes performance fees, was 37.5 basis points compared to 38.3 basis points in the prior year.

The decline is primarily driven by strong growth into lower fee categories such as ETFs, Canvas and multi-asset solutions, mitigated by lower fee Western outflows and increasing flows into higher fee alternative asset strategies. Our adjusted operating expenses were $5.06 billion, an increase of 4.3% from the prior year, primarily due to an additional quarter of Putnam, higher incentive compensation on higher revenues and sales and higher spend on strategic initiatives, partially offset by the realization of cost-saving initiatives.

Importantly, as previously guided, adjusted for an additional quarter of Putnam and excluding incentive fee compensation, our fiscal year expenses were substantially similar to fiscal year 2024, less than 1% difference. This led to fiscal year adjusted operating income of $1.64 billion, a decrease of 4.3% from the prior year. Adjusted operating margin was 24.5% compared to 26.1% in the prior year, reflecting our support of Western. Compared to prior year, fiscal year adjusted net income declined by 6.3% to $1.2 billion, and adjusted diluted earnings per share was $2.22, a decline of 7.5%.

The decreases were primarily due to lower adjusted operating income and lower adjusted other income. On other topics, we continue to focus on capital management and operational integration to drive efficiency and long-term value. As stated on Slide 9 in the investor presentation, from a capital management perspective, we returned $930 million to shareholders through dividends and share repurchases, funded the majority of the remaining acquisition-related payments and repaid $400 million senior notes due March 2025 in the current year.

Our dividend, which has increased every year since 1981, has grown at a compound annual growth rate of approximately 4%. Our balance sheet provides flexibility to invest in the business organically and inorganically. We have co-investments and seed capital of $2.8 billion, an increase from $2.4 billion from prior year to develop and scale new investment strategies. In addition, while continuing to invest in long-term growth initiatives, we also continue to strengthen the foundation of our business through disciplined expense management and operational efficiencies, especially given the ongoing evolution of our industry.

Our plan to further simplify our firm-wide operations, including the unification of our investment management technology on a single platform across our public market specialist investment managers remains on track, both from a cost and implementation perspective. We have also integrated functions of certain specialist investment managers to simplify investment operations and increase collaboration across the firm. Before presenting our fiscal first quarter 2026 guidance, I just wanted to reiterate an important point on our fiscal year 2025 expenses.

As mentioned earlier, when adjusting for an additional quarter of Putnam and excluding incentive fee compensation, our fiscal year expenses were substantially similar to fiscal year 2024, less than 1% difference. This is notwithstanding markets being significantly higher in the year and the relatively modest difference is fully attributed to higher sales commissions and higher valuation of mutual fund units linked to deferred compensation. All other investments across the company, including additional resources tied to alternative assets, ETFs, Canvas, multi-asset solutions, investment management technology and operations have been directly funded through savings initiatives.

Turning to fiscal year 2026 first quarter guidance. As a reminder, guidance assumes flat markets and is based on our best estimates as of today. We expect our EFR to remain at mid-37 basis points for the quarter. We anticipate the EFR to be stable as higher growth in lower fee categories are partially offset by higher fee alternative asset flows. In future periods, episodic catch-up fees may move the EFR temporarily higher. We expect compensation and benefits to be approximately $880 million.

This assumes $50 million of performance fees at a 55% payout and also includes approximately $45 million to $50 million of annual accelerated deferred compensation for retirement-eligible employees, flat from the first quarter of 2025. For IS&T, we're guiding to $155 million, consistent with the prior quarter. We also expect occupancy to be flat at approximately $70 million. G&A expense is expected to return to previous guide levels in the $190 million to $195 million range and includes elevated professional fees.

In terms of our tax rate, we expect fiscal 2026 to be in the range of 26% to 28% due to a high proportion of U.S. income and the effect of increased tax rates globally. We're 1 month into the 2026 fiscal year, and it's obviously early, but consistent with our plans discussed earlier in fiscal 2025, we begin the year knowing that we have approximately $200 million of gross expense efficiencies for fiscal 2026, but the net amount of those efficiencies will ultimately depend on market and our performance during the year, both of which are up to start with as we go into the new fiscal year.

Similar to fiscal 2025, these savings will also fund ongoing investments across the business, absorb increased fundraising expenses and $30 million of expenses added from the Apera acquisition. However, all else remaining equal from this point, we expect to end fiscal 2026 at or below adjusted expenses versus fiscal 2025 and at a higher operating margin. And now we would like to open the call for questions. Operator?

[Operator Instructions] The first question is from Alex Blostein from Goldman Sachs.

Thanks for all the detail and some of the updated targets as you think about some of the growth areas for the firm. Super helpful. I wanted to start with a question around alts. When you talk about the fundraising target for 20 -- fiscal 2026, I think you said 25 to 30. Can you just unpack how much you assume for Lexington's flagship fund? And then within that, how you're expanding their retail alts lineup as well?

So as you said, we think the 2026 target is between $25 billion and $30 billion. And just, Alex, you remember, last year, we said $13 billion to $20 billion, and we thought the $20 billion would be contingent on the first close of Lexington. That didn't actually happen, and we still blew away that number at, I think, $22.7 billion. So this year, the $25 billion to $30 billion will be a mix of Lexington. There will be contributions from Clarion on the real estate, BSP and Alcentra as well as Venture. Lexington could be half of that, but the others are intended to contribute significantly. And we think 2026 is going to be a real well-routed year as far as all of the alts managers contributing.

Got you. And then, Matt, one for you on expenses. So I heard you kind of try to bridge exiting fiscal 2026 all-in expenses, same or better or lower, I should say, expense run rate. Can you just help us think maybe through the cadence of that over the course of the year or maybe asked another way, your just total expense guide for 2026 in totality?

Yes. As I said in the prepared remarks, we guided earlier on in the year when markets were a lot lower that we'd be targeting $200 million of cost savings for 2026, which will be spread out through the year, and we're confident that we've achieved that. It's now a matter of determining the net amount that we can achieve. And there's a lot going on, as mentioned by Jenny on this call and as I referenced. We're confident that we can self-fund many of these things from the $200 million. We can absorb the increased fundraising that I mentioned when I talked about the $200 million earlier in the year, I caveated that with the increased fundraising that we expect this year and the addition of Apera.

And also, we've mentioned in the past, the absorption of the Aladdin project expenses. So all those things, taking all those into account and beginning the year with the market up 15%, 20%, depending on what market you're talking about, we're still confident that we end the year at least -- I want to say, at least in line with where we were in 2025 with the full expenses, excluding performance fees from both years. And what I mean by at least is there's a very good shot that we are below that amount.

It's very early on, Alex, obviously, for the year. So that's all I can give right now. The second thing I'll say, though, is that we do expect the results as we move into the year, except the first quarter where the margin would be a little bit lower because the accelerated deferred comp probably represents about 2% of margin. But if you take that out every quarter as we model our way through the year, all else remaining equal, we'd expect the margin to tick up. Second, third, fourth quarter, we expect the margin to get increasingly higher towards our target of 30%, as we've also referenced in the past.

[Operator Instructions] The next question is from Ben Budish from Barclays.

Jenny, you talked about your ambitions on the infrastructure side in your prepared remarks. Curious if you can unpack that a little bit more. You mentioned some wealth products coming to market, a number of partnerships. What's sort of in the pipeline for the near term in terms of new funds? And maybe talk a little bit about what your current exposure is today?

So -- sorry, let me just get a clarification. Are you talking infrastructure, meaning like the stuff we're doing on tokenization and blockchain or infrastructure, meaning the alternative products infrastructure?

The latter.

Okay. So we announced like we think that the infrastructure category is just massive. There's -- as we all know, you guys have heard the statistics as far as the number of projects that are needed to be funded out there. And so the relationship that we created, the partnerships with DigitalBridge, which DigitalBridge is known for their sort of data centers, cell towers, fiber networks kind of thing. Copenhagen Infrastructure Partners are really greenfield energy manager and then Actis is sustainable kind of infrastructure. Infrastructure requires massive scale. And so none of these players play particularly -- have really any penetration in the wealth channel.

And so we're able to -- what we're going to do is be able to build a fund around participating in their deals that will then distribute in the wealth channel. Now that doesn't prohibit us from being able to do some M&A if the appropriate opportunity comes. But infrastructure is an asset class that is particularly desired by people who are looking for income because these tend to be long-term PPA products and others that kick off a lot of income. So we felt that we needed that category to fill out our alternative's capability. We didn't find something that was of scale that we wanted to acquire at the time and this -- and they needed to get into the wealth channel, or they had a desire. So it's a good match.

The next question is from Bill Katz from TD Cowen.

I appreciate all the guidance and commentary. Jenny, I'm very interested in what you guys are doing on the AI and the tokenization side. You do seem to be way ahead of most of your peers as our conversations are going. Can you talk a little bit about how you sort of see maybe the opportunity in particular for tokenization, how that might impact the ability to drive performance, what it might mean for operating costs and ultimately, how it might redefine distribution opportunities?

Sure. So again, it's really important to just think about digital assets and tokenization is blockchain, it's just a programming language. It's a programming language that does certain things really efficiently and then it's going to open up new opportunities. So we are the only ones who have -- and we built a transfer agency system and a wallet-based system because they didn't exist in the market. Starting in 2018, we had approved -- I think it was in 2021, the SEC approved our tokenized money market fund. And to give you an idea of the opportunities, because it's significantly cheaper to run and there's -- we're able to offer our money market fund with an initial investment of $20.

Our traditional money market fund is you have to have $500. And the second thing that technology enables us to do is we can -- with this money market fund, we actually calculate the yield every second, and we pay it in your account every day, 365 days a year. So this is important for people who are, say, a hedge fund who are wanting to leverage -- use the money market fund for collateral and they only own it for partial part of the day, they can get 4 hours, 32 minutes and 22 seconds worth of yield that is paid in their account even for a partial day ownership. So it's just going to create new capabilities, less expensive new capabilities.

And then on distribution, you saw that we had an announcement with Binance. So Binance is a crypto exchange, 270 million wallets. They're interested in bringing traditional, we're actually talking to a lot of different exchanges. They're interested in bringing additional products to traditional products that are tokenized because we built this capability, and we're the only asset manager that has this capability that I'm aware of, we can take like ETF and other products and tokenize them and list them on some of these exchanges. So it opens up a new distribution capability. But I think the future, all mutual funds, all ETFs, all will be tokenized merely because the technology is tremendously efficient. And so we're excited to be leaders in this space.

The next question is from Brennan Hawken from BMO Capital Markets.

Can we get an update on your expectations for the latest Lexington flagship? Maybe what caused the timing for the first close to slip? What are your updated expectations for size? And do you have any updated expectations for timing for any of the -- either the first or the final close?

The -- so first of all, just to be clear, it was always a stretch if there was a first close. We just felt like it was important to list it as a possibility. I do think that everybody would say that the fundraising environment is more difficult than it's been historically. But again, if you're in the secondary space, there's so much opportunity in the secondary space because the real issue is the clogging of so many of the LPs with private equity that is not moving. Private equity is distributing at about half the cash flow that they've done historically.

And so as these guys are needing liquidity, whether it's because they just need it in their funds or because they want to participate in a new round of private equity, they're turning to firms like Lexington. And size really matters. Scale matters in the secondary space. And so there's only a few firms like Lexington that have that kind of scale that gives them a real advantage to play in the bigger deals. I think their target is -- I'm trying to find my notes; I think it's about $25 billion for this fund. And I think the first close, they expect in the first half of 2026, calendar 2026.

The next question is from Patrick Davitt from Autonomous Research.

Madam, you mentioned elevated distribution fees, and there's reporting this week that Schwab is planning to add a 15% platform fee on all of its third-party ETFs. ETFs obviously a big growth story for you this year. So curious if you can give us an idea of how much of your ETF growth has come from Schwab, if at all? And then more broadly, any thoughts on to what extent you're seeing a more pervasive push from all of your distribution partners to increase revenue shares like this?

Well, that is not a dynamic that has changed. It's probably just changed as ETFs have taken off. They're trying to -- more of them are trying to push for that. But as you know, that is something that we always deal with in this business, who's actually responsible for the distribution? Is it the platform? Is it the individual? And so there's probably capability in the active ETFs to be able to do some amount of that. There are already players that have it.

We have not been particularly big on the ETF portion with Schwab. So it probably impacts us less immediately. But obviously, as we desire to grow there, it will be something that we will have to work with. I think that it's going to be difficult on these platform fees on passive ETFs because they're obviously cheaply priced. But as the world is moving to more active ETFs, 43% of our ETFs are in the active space above the industry. We'll have to deal with those kind of revenue share type programs.

And Patrick, just to tie your question back to that, I think you were tying it also to the G&A remark that I made on increased placement fees. That's really to do with alternative asset placement fees, not the ETFs and mutual fund type fees that you're referring to. So when I talked about G&A-related expense item around distribution, I meant placement fees related to alternative assets.

Next question is from Craig Siegenthaler from Bank of America.

My question is on your tax efficient suite. You have a pretty big offering here, and you're seeing good flows across munis, especially the SMA wrapper and also in Canvas with direct indexing. Do you think flows here could get even better given rising adoption and allocations among high net worth investors? And I don't think you have anything in the hedge fund space where you can generate even more tax alpha and flows there just started taking off this year. Is that a gap that you can fill in at some point?

We have a product called MOST. It's an options overlay product. So actually, we do have capabilities in that space. It's just now really starting to get traction. Look, we think that the direct indexing and the overlay space is going to just continue to grow. a lot of reason is the dynamics of fee-based advisory where they prefer that, and they can show the client that they've had tax efficiency.

So we do have that capability with an acquisition we did, and we're really just growing it on the -- we continue to add more and more platforms. I think we have 175 sponsors now that we're now selling our SMAs to. Canvas continues to add more and more platforms every month. And once you get on a platform, the flows just continue to come on. And -- I don't know, Adam, you want to add anything else to that?

Yes. I would only say that a real power comes from being able to combine these different capabilities. So we're growing well in munis. We're growing well in ETFs, Canvas as well as 1/30/30 and option-based strategy. So to be able to do them all through a Canvas platform, which we're building towards is where the real power is. And I think we're one of the few firms that can offer all of those things in the combined suite.

The next question is from Brian Bedell from Deutsche Bank.

Thanks for all the great today on the outlook. Maybe my question is on the credit alternative business and the direct lending strategy, 2-part question. One is just on your views on credit quality in direct lending. If you can comment on whether you have any exposure to any of the problem, credits that have been out there and maybe just a view on whether you think that's -- do you think these are idiosyncratic? And then on the growth side of that, it sounds like you're increasing your traction in Europe with the most recent Apera acquisition, bolted on with Alcentra. So maybe your view on expanding direct lending and growth of this business in Europe over time? Is that an additional growth lever for you?

Yes. So first on kind of the opportunity in private, we're not seeing a deterioration in credit. And we tend to -- our view on the economy is that its still very strong, consumer is strong and you're just not -- while you'll hear about the banks talking about a slight uptick in subprime, it's really coming back to kind of more normal levels. As you could see, the fixed income market is really priced for perfection. Nobody is expecting great deterioration. We had very, very teeny exposure at ESP to one of those 2. And the truth is that was really looking like fraud. So it's not something that's systemic from a credit standpoint.

So we still remain very optimistic in the credit market, again, especially because of the strength of the economy, which we still think is very strong. And then, yes, we're excited about direct lending. We think you -- if you're in the private credit space, the ability to move between different types of credit is important because sometimes something gets squeezed and it's trading very tightly, and you want to be able to pivot. But the Apera acquisition brought direct lending capabilities, particularly in the lower middle market, which is -- it's not a particularly crowded space there. So we're very optimistic about it, and we think it rounds out the private credit capabilities that we have.

The next question is from Dan Fannon from Jefferies.

Matt, I wanted to follow up on your comments around the fee rate and the outlook for next quarter as well as the year, given continued growth within alternatives, obviously, beta has been quite strong, and you've had declining fixed income. So trying to understand the mix a little bit better. And I believe there is a fund that's going to start kicking in from Lexington for fees starting, I believe, October 1. So curious as to why you're not seeing a bit more of a step-up in that fee rate sequentially.

Yes. I think when you factor in a Lexington fundraise over the year, as I mentioned in my prepared remarks, we will see an increase or we are very likely to see an increase in the EFR to -- into the higher 37s, 38s, even something like this. But I'm trying to make sure we communicate that, we expect that to be a temporary increase and then for it to come back down to reflect the very strong growth we have in ETFs, Canvas, multi-asset solutions. And remembering as well, Putnam has been very, very strong in terms of flows and Putnam's effective fee rate is 34 basis points in average across the franchise. That's getting offset.

Those lower fees are getting offset by a steady and becoming more predictable alternative asset set of strategies and flows at much higher EFRs. So that positions the company to have a very stable EFR with upside as and when we raise larger flagship funds, so that's the way I would sort of describe it. Stable EFR with upside during different periods based on flagship fundraisings. And the reason why we're stable is because you've got the offset of the higher fee, more predictable alternative asset raises away from the flagship funds combined with strong, larger flows on average into the lower fee categories of ETFs, campus and multi-asset solutions.

The next question is from Ken Worthington from JPMorgan Chase & Company.

A little one for me. Shareholder servicing fees really jumped sequentially, about a $20 million pop. So anything unusual here? Or is it just sort of some mix changes, maybe some seasonality? It just seems like the jump is much bigger than we typically see in the fiscal fourth quarter.

Matt, do you want to take that?

Yes, that's to do with our -- it's a little bit seasonal, but also to do with the arrangements we have with our outsourcing providers around the TA. So you'll see that normalize.

Yes, higher transaction fees. There's also a little bit of trust and estate planning fees in there, but it's seasonal.

The next question is from Michael Cyprys from Morgan Stanley.

I wanted to ask about agentic AI and the Wand AI partnership. I was hoping you could elaborate a bit on the partnership, your goals, ambitions there, why partner with Wand versus other vendors. It sounds like you've been running a pilot program with them for the past year. I was hoping you could speak to some of the learnings from that, how it's informed your approach? And how might you quantify the sort of savings or reduced expense growth over time?

Yes. So we've announced a couple of different partnerships in the AI space, Microsoft, AWS, Writer AI. In each of these cases, I think we've done a good job that has excited the AI providers that we're not just going in and fixing one little thing. We're going in it from a platform approach. And so for example, Microsoft has helped us on distribution, which uses multiple agents and then integrates them. And so what Wand has been working on, for example, is an ESG agent with the Franklin Equity team and our solutions team where it goes out and gets internal data and external data, brings it back and runs it through their kind of a scoring on ESG.

What's interesting with Wand is they really enable us to -- and by the way, these partnerships mean they're co-developing. They're going to provide resources because they want the learnings of what's happening in your environment so they can take the domain knowledge and be able to go, extend it to other people and build their business that way. So they provide us free resources. What's interesting with Wand is we're able to connect these multiple agents in our investment groups.

And then we can actually take those agents and go across other investment teams and be able to customize them to say, just take the ESG example to specifically however that team uses their ESG screen. And just a little bit on Wand. I mean, they are backed by leading AI venture firms. So Thiel Capital, Peter Thiel's Fund, Fusion Fund, [indiscernible]. These are all big AI firms or AI venture capital firms, and they're terrific, and they've been a great partner with us. And like I said, we have multiple partnerships with different AI development companies.

This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's Chief Executive Officer, for final comments.

I'd just like to thank everybody for joining us on today's call. And once again, 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.

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

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.