Welcome to Franklin Resources Earnings Conference Call for the Two Quarter and Fiscal Year 2022. Hello. My name is Grace and I'll be your call operator today. As a reminder this conference is being recorded. And at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

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 or 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 President and Chief Executive Officer.

Thank you Salene. Hello, everyone and thank you for joining us today to discuss Franklin Templeton's results for our second fiscal quarter. I'm joined by Matt Nicholls, our CFO, who recently expanded his responsibilities to include Chief Operating Officer; and Adam Spector, our Head of Global Distribution. This quarter global financial markets were impacted by a continuation of macroeconomic pressures due to increased inflation and related higher interest rates, both of which have been significantly exacerbated by geopolitical and economic shifts resulting from the Russia-Ukraine war. This quarter's volatile market environment challenged industry flows particularly in taxable fixed income strategies. We were impacted by these pressures and had $11.7 billion in long-term net outflows, although we continue to drive net inflows into key growth areas and our effective fee rate remains stable. The heightened market volatility and implications of a rapidly changing investment environment remind us of the importance of the investments we've made over the past several years to diversify our business to better serve our clients through all market conditions. Our investment teams each look at the market through a different lens to provide deep expertise and investment specialization. For instance, if you look at our fixed income franchise, Brandywine Global, Franklin Templeton Fixed Income, Templeton Global Macro and Western Asset each of these specialist investment managers has a different interest rate outlook, resulting in varying investment outcomes across our products. And although we saw net outflows in certain US and global taxable strategies those were partially offset by inflows into short duration bank loans and corporate strategies. Additionally, we've been able to benefit as investors look to reposition their portfolios in search for yield across asset classes. Our flagship income fund and alternative asset strategies of Benefit Street Partners and Clarion Partners, for example, represent important diversification…

Thank you. [Operator Instructions] Your first question comes from the line of Craig Siegenthaler from Bank of America. Your line is open.

Good morning, Jenny, Matt. Hope you both doing well. And Matt congrats on the CEO appointment.

Thank you.

So given your large fixed income franchise across Western Brandywine and Franklin, I wanted to get your perspective on how investors are reacting to rising rates. And my question really is, are you seeing a different flow pattern or behavior between the retail and institutional channel. And then when the money is leaving, do you see where it's going? Is it going into cash, private credit, equities? And are you able to recapture it?

I'm going to let Adam get into details, but I mean, we're definitely seeing good flows into like short-duration bank loans corporate strategies. I mean, so there – so it's not all – there's more of a kind of a shift in where it's going. But Adam, do you want to go into a little bit more detail?

Sure. Thanks, Jenny. First of all, I would say that the changes that, we've seen are not really all that different on the institutional and the retail side. We see pretty similar patterns going on right now. That's really a part I think driven by the fact of how professional the wealth channel is these days. I don't see it behaving that much differently than the institutional channel. What we've seen is that, core type strategies intermediate duration was hit the worst. I think, if you take a look at active flows for US mutual funds as an example for the month of March, the industry without something like $71 billion and 75% or so of that, was in core taxable fixed income. So that part of the market got hit really, really hard. Where is that money going? As Jenny see, we see short duration picking up a lot. Our short duration sales in some of our funds, was up over 80%. We see it going to some credit strategies floating rate and importantly also, to private credit, where we're a significant player. And that in part is propelling the growth in our alts business, where in our private markets businesses as Jenny said earlier, we had $2 billion worth of growth in the quarter. The other place especially in some of our wealth channels that we've seen a pivot to is alternative sources of yield to fixed income. And we're really pleased that we have the ability to offer our clients the income fund which is one of our largest funds at Franklin and one of our top really flow generators for the quarter where we saw an increase in our net of over $2 billion quarter-over-quarter. And I think we have to assume some of that money from fixed income is following to their. So we feel good Craig in general about being able to retain a portion of the outflows even though the segment where we're strongest had the worst outflows in the industry.

Thank you for that. And just as my follow-up on a similar topic, as we try to forecast the model bond flows, do you think it gets worse from here just because we've only had one rate hike and there could be eight or nine more? And I know that's more of a short duration front end of the curve sort of comment and the long end might matter more, but I would love your perspective on this topic given what you're seeing from clients?

Yeah. I think the good news is one of the themes that we are really pleased to see across the business is the diversification. So if you ask about a number of rate hikes like that it's going to impact our various specialist investment managers in different ways because we have very different and differentiated positioning along the curve. So what I think that means is that regardless of the action the Fed takes, we're going to have products that are in the performance sweet spot where we'll be able to continue. One of the -- continue to grow. One of the things we're really pleased with is the fact that our sales is more diversified than it's ever been before, which means we think we have the ability to grow regardless of the macro environment.

Adam, thank you for the responses here.

Thank you.

Thank you. Next up, we have Bill Katz from Citi. Your line is open, sir.

Okay. Thank you so much for taking the questions. So maybe coming to expenses for a moment. I seem to be a few sort of ins and outs as I see it. Just wondering if you could unpack a little bit about what is the right start point for expenses into new quarter? And how should we be thinking about the expense outlook maybe with and without the impact of Lexington? And does the charge you took for TA, does that have any sort of incremental synergies or other impacts as we look out over the next several quarters? Thank you.

Okay, Bill. Thank you, good morning. Maybe it's best if I just update some guidance and I'll also give some breakdown inclusive of Lexington, so we can sort of reset where we're at, not give both annual guidance and some quarterly guidance for next quarter on the breakdowns. We expect full year 2022 adjusted operating expenses to be in the range of $3.9 billion to $3.95 billion excluding performance fees, but now including Lexington Partners. You may recall, last quarter I had said that our expense guide for 2022 on adjusted operating expenses would be $3.9 billion to $3.95 billion excluding both performance fees and excluding Lexington. But now, it's executing performance fees and including Lexington Partners, so that's one important change due to market conditions and revenues and assets under management and so forth. Given we've now closed Lexington, as I mentioned, I'll give a few line items which I hope will be useful for the third quarter. We expect G&A to be in the range of $140 million again inclusive of Lexington occupancy to be around $57 million and information services and technology to be – information systems, sorry and technology to be around $125 million and that's all inclusive of Lexington.

That's very helpful. Thank you very much. And maybe coming back to alternatives as my follow-up. Jenny I heard you talk about the sort of the good growth out of Clarion and Benefit Street sort of adding $2 billion but I also think you mentioned you had some outflows on the liquid side. So wondering if you could maybe unpack that a little bit more. And then as you think about Lexington, where are they in their flagship capital raising cycle? And how do you see the opportunity to sort of leverage it more broadly through the Franklin footprint? Thank you.

Yes. Look so some of the outflows were in some of our macro strategies on the alternative side. As far as Lexington and the capital raise I mean and we're not talking specifically about the fundraise. But if you look at – when we announced the deal I think they had $34 billion in fee generating revenue – or AUM and now they're up to $42 billion. And so you can look at comparable secondaries and see sort of how they've done on their rate versus others. And we're really excited about it but we're not giving any more specific details on this particular fund raise.

Jenny, the one thing I might add to that is that the distribution team has been working with Lexington. Obviously, they have a long history of accomplished fundraising on their own. The areas where we think we're going to be able to add the most at Franklin Templeton are in the retail distribution of their products as well as in select markets. We've had a number of examples already where they might be strong in a particular country or segment but they don't quite know everyone in the market or there's a country where they don't really have a presence. So just like we do with the rest of our specialist investment managers, it's really an opt-in model and we've had discussions with them about where they're strong and where they need some help and we're filling in the gaps which we think will help their already strong sales process get even better.

And I think actually Adam I think that's a great point. I mean you talk about sort of the big areas of growth. Alternatives is obviously our big area of focus. I mean BCG came out and said 2025, also represent 16% of AUM but 46% of global AUM revenue. So as we all know flows – all flows aren't created equal. And the big opportunity, we think is in the retail channel you just again take the $13 trillion in assets in the top four largest wirehouses. 1% move is $130 billion and they've all stated that they know that the democratization of alternatives is really important as we've seen the reduction of companies going public and more and more private credit. And so we think taking our vast retail distribution capabilities and marrying it with these alternatives, it's really complicated. There's a lot of training that goes on. It's not just getting it on the platform. There's a lot of material that has to be there but it's just a tremendous opportunity. And Lexington part of their fund raise has been successful in the retail channel. So we're excited about the opportunities. We actually think secondary private equity is a great way because you don't have the J curve issue for the retail or the wealth channel to actually access private equity.

Thank you very much.

Thank you, Bill. And your next question comes from the line of Brennan Hawken from UBS. Your line is open, sir.

Good morning. Thank you for taking my questions. I just had a follow-up on the Matt the expense -- updated expense guide really helpful to hear. What for the full year, does that expectation include what we've seen so far quarter-to-date, or would that be as of 3/31 when you cut that? How should we think about that, when we watch the markets and calibrate for that?

It includes market to-date. But of course, we obviously, know how volatile the market is Brandon. And I think we've highlighted in the past that, approximately 35% to 40% of our adjusted expense base is variable, along with market and performance. And I think we've also added to that that the other piece of 60% to 65%, in terms of long-term effectiveness and efficiencies we continue to review. But -- so if the market gets tougher, we're equipped to make moves, further moves.

Great. That's helpful. Thanks for that. And then, -- how is it that you guys -- that way we hear a lot about some competitors continuing to make investments and whatnot. How are you balancing expense discipline and may kind of holding the line with continuing to make investments in the business that are so important to your competitive positioning and maintaining your strength in the marketplace?

I think...

Oh, go ahead Jenny.

Sorry, Matt, I was just going to answer …

Oh, go ahead.

…more details but I would say philosophically, you will always see us thinking in terms of what's the long-term right for the business versus any kind of short-term. So we're going to work hard to reduce costs, where we can reduce costs but never at the expense of strategically positioning us for the long-term. So we're making some significant investments in wealth technology for example. And even in the blockchain space and others, because we think they're going to be important over the long run. It will take a little time for us to pay off meaningfully. And hit the bottom-line, but they will be really important for us in the long-term positioning of the business. So go ahead Matt.

Yeah the only thing I'd add to that is, I think part of your question Brent is how are we doing that? Where are we finding the money from, when we are managing to reduce expenses and keep up with where the market is going in this volatility? It's basically because we've also been through a very significant merger remember, so when you go through significant mergers even at the holding company level where we focused most of the cost synergies yeah we had that created some flexibility for the company. And it continues to create flexibility for the company in terms of our operation and how we run the firm. And we have to focus on one thing at a time, but we certainly earmarked other areas where we can make moves when we have time to make the moves candidly. So that's where we get the additional flexibility from as we take in.

Excellent. Thanks for all that color.

Thank you.

Thank you. Next up we have Alex Blostein from Goldman Sachs. Your line is open sir.

Great. Thanks. Good morning, everybody. So Jenny maybe just to, build on, some of your comments around the alternatives and the wealth management and all kind of your aspirations there with Lexington especially coming into the fold now. We've seen a number of players both kind of traditional and the old trying to tackle the channel. But outside of Lexington most people have had a part of time really making a dent at least so far in a sizable way. So maybe help us frame, what the asset base is there today across all, of your kind of illiquid product on the wealth channel, warehouses and the like. And if you look out the next couple of years what would you consider to, be a success? What would you want that to look like?

I'm trying to think we publicly mentioned what percentage of our alternatives are in the retail channel. I don't think so. Here's what I would say, it is really complicated. We are digging in -- I think Franklin Templeton has one of the strongest wealth distribution capabilities in the industry. And so probably out of the gate the view was, oh this should be easy. We should be able to take our alternative products and be able to bring them right in that channel. The reality is, it requires -- the simplest thing is to actually get on the platforms. The much more difficult thing is the level of training and detail that's required at each of the financial advisers, their understanding how to sell alternatives into positioning in their products, the marketing material that goes in with that, the reporting, the follow-up reporting capabilities. And so, like our investment in Case right, that's one of the types of things that enables the streamlining of a wealth manager to be able to bring alternatives. You really have to -- it's if you walk into a kitchen today and we -- the good news is, we have all of the ingredients to be able to deliver really, really well. The difficulty is, it's all about bringing those things together and executing on it to be able to kind of make the best meal. And so, we are putting a lot of resources. I got to tell you this is one of my probably top two priorities in the firm and our top two priorities is to get this right. And so, we're making sure that we're scaling up our teams to be able to fill the alternatives making sure that we have the specialists within each of our alternatives to be able to address the wealth market, as well as supporting that with the material and the training. It took Blackstone from what I understand several years, before they were able to really make a dent in the wealth channel. The good news is, they paved the road a bit for the rest of us, but it is complicated. It's more complicated than I think we understood initially.

Got you. Appreciate it.

Adam, you like to add?

Yes, I can add a couple of things to that. We don't break out specifically the illiquid alternatives, but alternatives in general in the retail channel for us are over $14 billion and our gross sales in that channel have been over $1 billion a quarter for the last few quarters. So, we see strong momentum there. And as Jenny said, excellence in that area requires really good product which we think we have, a significant distribution force which we have, good relationships with the home offices, which we have. But then that all need to be, knit together with really superior training, education, product, people, product structuring etcetera. And that's where a lot of our attention is at this point because we think we have all the pieces. It's bringing it together and bringing it into our partner firms.

Great. Thanks so much for that. And my follow-up is, back to Western for a second. Fully appreciate the industry dynamics and we've obviously seen the flows for longer duration, more maybe credit-sensitive funds face a lot of flow headwinds in the last couple of months and that may continue. But as I think about the relative position of Western against some of the other larger bond platforms. The relative investment performance has suffered quite a bit as well and that's not uncommon, I guess in times of more kind of credit or duration-related dislocation for Western, just given the nature of the way they invest. How well understood is that with clients? So in other words, do you guys think that the relative underperformance at Western could have a longer-lasting effect on their ability to recoup some of the outflows that they're seeing right now?

I would say a couple of things. So one is I mean you talk to Western and they feel they have a lot of conviction that the market is overestimating the Fed increase. Now we have different fixed income teams Brandywine, Franklin Templeton things to come that believe that that's not the case, right? That's the benefit that we have of diverse managers who are truly independent. And Western is really good at communicating with the clients about their positioning and why they're positioned the way they are. And the one thing is, we've gone back and looked at Western's performance over rising rate cycles and I have to tell you they bounce back very quickly. I mean in 100% of the cases, that we looked at back to 2000 and even before that, within the next six months they outperformed the benchmark. So are they right or wrong? There's strong conviction on their positioning. They have great relationships with clients and they are doing a great job of communicating their positioning. It remains to be seen, whether they're correct or not.

Yes. I'll add a couple of things to that. First of all Jenny said they have great relationships with clients. If you take a look at some of the industry metrics, they are literally off the chart in how they score in terms of their client engagement and client service. So very strong client relationships. And when you talk about performance look they had a one-year period that was really tough as the correlations broke down and their duration hedge didn't pay off against the credit. That's essentially what happened. But look at their long-term performance. 95% of their assets are outperforming on the three-year, 98% are outperforming on the five-year. That is not a manager, that's performance challenge. That's a manager that has soft performance in the short run and our confidence in our sales force still have the utmost confidence in them.

Excellent.

And it's -- Alex it's a different -- it's really addressing a slightly different question, but while we're on the topic, I think it's worth noting from a financial perspective, the operating income impact of the flows you're referencing, I'm not just referencing Western I'm referencing just the broader parts of fixed income are relatively low, compared to the positive operating income impact we're getting from the growth in alternatives and other growth areas that we've referenced.

Yes, for sure it’s coming through [indiscernible] Great. Thanks so much. Thank you.

Next we have Ken Worthington from JPMorgan. Your line is open

Hi. Thank you. I wanted to follow up on Alex's question and your response to Bill Katz. So from a higher level, can you talk about the integration of the various alternative platforms? So you now have Lexington in the mix like, how are you thinking about -- like where are you going to integrate them? And where are you going to not integrate them? And so maybe start out with distribution. In terms of integrating distribution, are you kind of combining the different alternative sales forces together? Are they being like cross-trained but being kept separate? And then how are you kind of folding their expertise into your broader sales focus? And then the other part of my question is really on product development. How aggressive do you want to be in terms of product development, new products for maybe other distribution channels where you have good relationships in Franklin? And how quickly, can you get those products out?

So, why don't I start Adam and then I'll turn it over to you. Here's the good news. Each of those managers had their own -- in most cases, it was really institutional. And so they have institutional sales teams, institutional relationships, and we've left those alone so why mess with success. But on the retail side, there has to be a leveraging of the broader Franklin Templeton. And so -- and this goes for our 18 specialized investment managers where you have institutional capability, you have what we call IPMs, institutional portfolio managers, who are really product specialists who sit with the investment team can be called in by the distribution team to come in and talk about the specific products. And they reside with the investment team. So, they're really an extension of it. And so we can call on those to help support any of the distribution capabilities. So, you could say that line is broadly divided by institutional and wealth channel. But there's always a little bit of gray in there. And so if there are relationships that one has on an institutional that they don't have, our institutional centralized team will bring in and make an introduction into any of our specialized investment managers. And it's imperative for us to make sure that there's good collaboration there. So, our goal is to continue to have the great momentum. As you can see with Lexington, the fact that they've increased from $34 billion to $42 billion pre-close that, obviously, they have a tremendous distribution team. But we also feel strongly that -- as I mentioned, that secondary private equity is ideal in the wealth channel. As far as product capability, one of the ways in which we think that the wealth channel is going to be able to access the alternatives is things like 401(k) plans where you have a managed account that has an allocation to alternatives. And so we have a centralized product team that is going in and thinking about where they can pull in the capabilities to present a great combined solution. And we expect our teams to work together to help build those really solution-oriented type of products. Adam do you want to add anything to that?

Sure. I think the one thing Jenny I would put in at the top is that hopefully it goes without being said, but the one place where we're not going to integrate anything is on the investment teams or the investment process, right? These terms are absolutely distinct. Jenny is right that really our distribution model in general is a general specialist model where the folks who sit at the center are responsible for knowing their clients better than anyone else and then bringing in the right specialists from the various specialized investment managers. On the outside, institutionally, we're actually adding specialists alternative salespeople to introduce the various alternative SIMs to the relevant gatekeepers in the institutional markets. We also see an uptake in the use of our salespeople outside of the US where some of the alternative firms don't have as significant of a presence. Again, it's really an opt-in model and we help each firm as they need it. On the wealth platforms, branding is an important consideration. And I think how we're tackling that at this point is that each of our alternative SIMs are going to retain their own branding, but the distribution effort will be under FT alternatives. So, there's really a single point of contact in the wealth channel, but the individual brands remain. That also really enables us to do some interesting things in terms of multi-affiliate products in that channel. The product development is going well. We're focused both on onetime raise products, as well as evergreen products. And then another area of ours that you know we're focused on is ESG and the inclusion of ESG into alternative products is something we've focused on as well, which we think will yield significant results.

Okay. Great. And just a simple reporting question. There's a pretty big gap for Lexington between fee-paying AUM and AUM. How are you going to report it? Are you reporting the fee paying, or are you going to report the total AUM and we'll just sort of get the gap to close the fee rate or...?

Yes. I mean, yes, just to be just so we're consistent with how we report other things we're going to report all of the AUM. We're going to be very transparent about the fee rates. I mean, if you take the full AUM, the effective fee rate is probably something like low 60s. If you include just the fee-based AUM, it's going to be in the mid-80s to low 80s, plus performance fees. So that's the way we will do it.

Okay. Thank you.

Thank you.

Thank you. Next up, we have Robert Lee from KBW. Your line is open.

Great. Good morning. Thanks for taking my questions. Really two. First, maybe just, can you update us on the wealth management channel? I know you've talked a bit about it in a place we wanted to do some more acquisitions. But it's up to $35 billion had inflows. Can you maybe dig a little deeper in some of the -- your initiatives there on continuing to drive that kind of very sticky growth business? And then I'll have a follow-up on fintech.

Yes. So, it's -- we really like that business. We have said that we -- it's a strategic priority for us to grow it. As you mentioned, it had six consecutive quarters of positive net flows. It's one of those businesses. I think the average relationship is something like 16 years. It's a great sticky business, so we like it. We had done the two acquisitions and we're really pleased because the AUM of those specific entities is up like at 29%. So, we're continuing to look for more opportunities. Those opportunities will have to be additive, either geographically or bring some sort of capability and we're always looking. It is an area that you've seen private actually be buying up and consolidating. So, we don't want to chase assets. We usually like somebody who's looking for a long-term home to add capability to their -- to what they can offer to clients by having the broader fiduciary trust. And this is one of those businesses -- it's on the [indiscernible] it's probably close to 80 years now. And they really understand multigenerational wealth, which means education around errors and things. And so, it's the right home for people who have that type of client.

Okay. Great. And then maybe as a follow-up, you mentioned in the press release for example and I know it's been, I think an interest of yours for many years is financial technology and talk about history of innovation and embracing it. But can you maybe -- I don't know if there's specific examples that you could call out or point to besides maybe the Embark transaction that maybe beneath the surface you feel like have been helped you differentiate on distribution or performance front, or maybe they're just early investments, but you're particularly excited about the potential to help accelerate growth over the next several years?

Yeah. So I'll talk about -- actually at a wealth adviser fintech conference as we speak. The AdvisorEngine, which we acquired which has juncture, which is the CRM system, it's for RIAs and helps them build their business. It's a small acquisition but it's a great way to speak to -- I think there's something like 12,000 users on the CRM system. So it just gives us another way to talk to that channel. Go, which was developed in-house is our gold optimization engine. As that gets integrated, it's a cloud-based financial planning platform, it gets integrated with other platforms. It helps us to sell our models and deliver our models through those and clients could choose open architecture. They can choose our proprietary models. So any of these -- the adviser -- when it became fee-based, the client values the investment as a piece of it but they also expect the adviser to do a lot more things like tax efficiency, which is of course why Canvas is so significant. So financial planning, tax efficiency, education it really -- the fee-based adviser is now expected to deliver what the ultra-high net worth channel used to just deliver to clients even including estate planning and trust planning. So anything that we can do that helps that adviser build their business and create loyalty is how we think of that fintech ecosystem. So as I mentioned AdvisorEngine I think that the juncture platform has advisers and about $600 billion in assets, it just allows us to communicate and to share our capabilities. It's obviously their discretion. And so it helps us just build deeper relationships.

Jenny, I would also add that it really helps us talk to a wider group of people at an investment advisory firm. Instead of just talking to people who are in the CIO organization, you're now talking to the business management group and you're talking about how they want to run their business and you're talking to them about how to help grow their business, which in the end helps position you better when you're actually trying to sell an investment product.

Great. Thank you so much for the added color. Appreciate it.

Thank you. Next up we have Michael Cyprys from Morgan Stanley. Your line is open, sir.

Good afternoon. Thanks for taking the question. Just on the SMA front, I was hoping you could maybe elaborate a bit more on some of the initiatives there. I think you mentioned that the Franklin income strategy you're now offering that in SMA. Maybe you could talk a little bit about, how you navigated some of the challenges and complexity of offering such a strategy like that in SMA? And how you're thinking about offering other additional strategies in the SMA wrapper?

Yeah. The complexities largely come from a technological and operational standpoint. And that's where Legg Mason had a real lead on the industry, the number one provider of model-based SMAs, really strong technology and operational platform that we are now onboarding legacy Franklin strategies on to, which is accelerating their growth. So if you take a look recently of what we've been where we've been flattish in SMAs, it's really because we've seen some outflows on the legacy side with groups like Western and ClearBridge, but strong inflows onto newer SIMs that we've onboarded onto the platform like Martin Currie, Franklin Templeton, Fixed Income the Canvas platform. So again, we see diversification paying off well in the SMA space. We think that the other way that this could really go is adoption outside of the United States where we have some interest in some of our distribution partners to grow SMAs there as well.

Great. And just a follow-up question for Matt. With the $6 billion of cash and investments on the balance sheet, maybe you could just help flesh out how much which you think is truly excess here that you're sitting with today? I think you had called out around $4 billion after regulatory capital and product development. Is that the right number we should be thinking about, that's truly excess or maybe you can help bridge the remaining gap there?

Yeah. I mean I think we would define pure excess as being a lot lower than that. You know how conservative we are Mike, so I think we put it around $1 billion. But as I've mentioned beforehand, if you're talking about M&A, for example, these transactions are structured in a way that is sensible in this market in particular, the capability to be able to do larger things with in a structured way so you need less upfront is something that means that that amount of excess cash, let's say, can be stretched to create a much larger opportunity if there is one out there for us.

Got it. And any help on bridging from the $4 billion down to the $1 billion that you referenced?

Well, we have -- there's a little bit of regulatory capital in there a few hundred million dollars. I think we put that on the chart. Then we have a -- we call it a supplemental liquidity provision internally where we like to have several months of operating expenses in the form of cash on our balance sheet. So that's the second thing. The third thing is we just spent $1 billion. We put that in the footnote in the commentary just to make sure this was clear that the cash and investments are as at 3/31 but we spent $1 billion of cash on the upfront consideration for Lexington. And that bridges the gap really, yes. And then, you got the $1 billion surplus that we just talked about.

Great, thanks so much.

Thank you.

Thank you. Next we have Dan Fannon from Jeffries. Your line is open.

Thanks. I wanted to just follow-up on, I guess that topic and your appetite here for M&A, given obviously you just closed on a large deal, and you've been acquisitive for some time. So as you think about this backdrop, is there certain property -- you've obviously been linked also in some of the news more recently with other larger properties. So can you talk about your appetite for larger M&A in the short-term? And longer term, where those kind of product gaps, I think are mostly in alts, but are you looking also in other kind of more traditional areas that you could also round out your product offering?

So, I would say, we haven't changed -- listen, any time there is -- we've obviously just done a big deal and the markets are choppy, so the bar gets raised, but we're always running the business for the long-term. So that's first. With respect to product gaps, I would say that in the alternative space, we actually feel really good about the breadth of capabilities that we have. Infrastructure is probably the one hole that's broadly left and then, it's more about geographic. If the Clarinet, for example, may not have a lot in Asia, so it's always hard to sell a real estate manager if there isn't some local product or Benefits Street safe thing more US-focused, so if there were capabilities. But bar is very high for us now. We've also said wealth management is important for us. And I would say, from traditional problem – I'm trying to think, but the only area would be if there was an ETF manager that made sense for us that could be an interesting sort of traditional. We have so far gone with the organic growth on that and really like the capabilities we have, but if there was the right opportunity maybe that would make sense for us. So till then, of course obviously wealth management.

Yeah. And there's some specialists in the alternative asset area, where we do have a couple of gaps and we've talked about those. I mean, I think just at a high level, it's worthwhile making the point that from zero pretty much zero three years ago, or so we about 15% of our AUM is now in alt. So I think that probably translates into something like 18-or-so-percent of revenue and probably more like 20% plus in operating income. And our objective overall is to Jenny mentioned earlier that half of revenues are going to eventually come from alts in some form or other private markets to broadly defined. And we intend to continue to increase that percentage contribution from alternative assets.

Got it. And then a follow-up on flows and just the institutional backlog. First off, if you could maybe talk about the makeup of that historically? When like Mason disclosed it, it was a lot of Western and I do want to follow-up on Western as well and talk about, if you could give us the numbers of kind of the makeup of what would be the core and core plus AUM, because those numbers are pretty stark in terms of the performance. And if I remember correctly, I think most of that is institutional. So in terms of the potential for redemptions as you think about that book maybe in the context of the institutional backlog as a whole for the firm and then kind of looking at the Western potential risk of some of the institutional AUM kind of some context around kind of the more near-term dynamics and conversations with clients and flow trends.

Sure. First of all, have we had challenges in core and core plus? Absolutely. But they're still very, very significant asset gatherers and among our top funds for gross sales. So while the net hasn't been strong, we still see a real commitment of clients there. And I think that, shows in the funding pipeline, where we still have a significant chunk of Western product in there. But if you take a look at that, and we don't really break it down by SIM, but I don't believe there's any one SIM that accounts for more than 25% of that funding pipeline. So again, as we continue to diversify our business, we're seeing diversification on the wealth front, as well as on the institutional front. The other thing about Western is, they manage a lot more than core and core plus. And as sales have slowed down in those areas we've seen a pickup in some of the other areas. And again, Western is more active than some of their other funds. And you don't get to a point where you have 95% of your assets outperforming over the three year, without taking some risk in the shorter term. And right now that risk hasn't paid off. But I think the market understands well, the way that Western manages money, and it will pay off over time. As Jenny said, every time they've had a dip like this before, they've come roaring back.

Okay. Thank you.

Thank you. And we have a follow-up question from Bill Katz from Citi. Your line is open.

Okay. Thanks so much taking my question. Maybe two-part. Jenny, you mentioned that getting the ultra into the retail wealth management is sort of one or two of your key priorities. Can you maybe expand on what your top priority is? And then for Matt, I'm sorry to belabor the question here. Can you just come back and unpack the expense numbers a little bit more and pretty substantial improvement in efficiency so I appreciate revenues are down. How much of the incremental savings is coming from the legacy business versus maybe more synergized opportunity with Lexington? Thank you.

Yes. So I mean, I would say our priorities one is to making sure that we have the right product capabilities for the future. And so that's why we keep our eye open on M&A opportunities; two, is making sure that we're able to distribute them in all the channels where appropriate. And so bringing that -- we recognize as I said not all flows are equal that alternatives accounted for 15% of AUM and 46% of revenues is a really important area of growth. So we've got to figure out how to get that done right. And then I think from a disruption, we think about making sure that right now that we're not just focused on what has to be done now but we're focused on looking around the corners. And so that's why we keep our eye on FinTech investments things we think blockchain could be very disruptive. So those are kind of the high-level strategic initiatives that we think about. And then it's about operating this business as effectively inefficiently as we can. There's fees only go one way in this business and so you have to be constantly pushing yourself to make sure you're as efficient as possible. We made the decision to outsource a lot of our back office and that was a recognition that the -- honestly the service providers had become more efficient than we could be. Initially, we were the largest global manager and there wasn't any service provider that could cover us completely. Now there is and so those are all ways to continue to reinvent the way we operate our company to make sure that we always have efficiencies to deal with the fee pressure as well as the capability to invest in new opportunities.

And in terms of the cost question -- expenses question Bill, there is zero -- I mean it might be a tiny amount but there are zero cost synergies associated with the Lexington transaction. It's all about revenue synergies there for us as it is by the way across all of the alternative asset firms that we -- or SIMs that we've acquired. There may be -- these things like workday financial and implementing that across the firm and modest expense savings around that but that doesn't really -- frankly it doesn't move the needle. So there are zero of the expense reductions I've referred to from the Lexington transactions or from legacy in response to the market dynamics.

Actually, I just want to add one more on a priority because I genuinely believe -- bear if I missed it. Look sustainable finance is here to stay and we made the hire of – sense so that we can have a voice at the top of the table. We think ESG is probably the wrong term. It's really about long-term impact the companies as well as to the community and environment. And you look at Europe where ESG, we recognized with the current conflict and prices of oil that people may change their priorities of how they think about it. But the reality is in our own world we see 40% of the pipeline coming from really Article 8 and 9 type products and we think that's here to stay. So making sure that we're on product development. And as Adam mentioned, including in the alternative space, making sure that we have top sustainable finance type of products is really important to us.

Thank you, again.

Thanks, Bill.

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

Well, once, again, I would just like to really thank our employees for their hard work and remaining focused on our clients and each other. And particularly this time. This has been a quarter of really massive outreach to clients. And thank you all for participating in this call and we look forward to speaking to you again next quarter. Thank you, operator.

Thank you, presenters. This concludes today's conference call. Thank you all for joining. You may now all disconnect.