Franklin Resources, Inc. (BEN) Q4 2026 Earnings Report, Transcript and Summary

Welcome to the Franklin Templeton's Earnings Conference Call for the year ended September 30, 2026. Hello. My name is Shamali, 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 Templeton. You may begin.

Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Statements made on this conference call regarding Franklin Templeton, 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 can 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 Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us to discuss Franklin Templeton's Fourth Quarter and Fiscal Year 2026 results. I'm joined today by Matt Nicholls, our Co-President and CFO; and Daniel Gamba, our Co-President and Chief Commercial Officer. Today, as outlined in our investor presentation, I'll discuss our fourth quarter and full year results and then give an update on the progress we've made in the second year of our 5-year plan, highlighting key drivers of growth across our business. Matt will then review our financial performance and guidance, and we'll take your questions. Fiscal 2026 was a year of significant progress for Franklin Templeton. The investments we've made to diversify our business, strengthen our capabilities and better serve clients are translating into measurable results. We ended the fiscal year with $1.8 trillion in assets under management and generated $84.1 billion in long-term net inflows, representing an improvement of more than $181 billion from fiscal 2025 and an annual long-term organic growth rate of 5.3%. Importantly, we generated positive long-term net flows in every quarter across every region and in both retail and institutional channels. We also delivered meaningful improvement in profitability with adjusted operating income increasing 23% and our adjusted operating margin expanding 350 basis points to 28%. These results demonstrate the progress we're making in the second year of our 5-year strategic plan. We are generating broader organic growth, deepening client relationships and building a more diversified, efficient and scalable global business. Our diversification is an important competitive advantage. With investment capabilities spanning public and private markets, a balanced mix of retail and institutional clients and a global distribution platform, we have multiple sources of growth. As clients increasingly seek integrated solutions rather than individual products, our One Franklin Templeton approach allows us to bring together the expertise of our distinct investment groups across public and private markets, offer greater choice of investment vehicles and customized solutions and leverage our global distribution network to serve clients across regions and channels. This more integrated approach strengthens client relationships, creates new opportunities for organic growth and improves operational efficiency, positioning us to build a more scalable and profitable business that delivers long-term value for clients and shareholders. Turning to AUM and flows on Slide 11. Long-term inflows increased 38% to $474 billion for the fiscal year, reflecting strong client demand across public and private markets. We ended the year with continued momentum. Fourth quarter long-term net inflows were $20.8 billion with positive contributions from equity, alternatives and multi-asset. Our institutional pipeline of won-but-unfunded mandates remains strong at $22 billion at year-end, diversified across investment groups and asset classes. Turning to flows by asset class on Slides 12 and 13. Starting with equity, AUM reached a record $764 billion with $21.1 billion in net inflows for the year. Demand spanned large-cap value, large-cap core, international equity, ETFs, infrastructure and sector strategies. Fourth quarter equity net inflows doubled sequentially to $4 billion. Fixed income AUM reached $428 billion, while full year net outflows moderated to approximately $700 million. We continue to see demand for multi-sector, municipal and stable value strategies. Turning to Slide 13. Alternatives and multi-asset led organic growth generating a combined $63.7 billion in net inflows for the year and $17.4 billion in the fourth quarter. This reflects sustained demand for private markets, diversified income strategies and integrated investment solutions. Earlier this week, we reported preliminary October AUM of $1.81 trillion with long-term net inflows of $3 billion and the benefit of markets. That's our 11th straight month of positive long-term net flows and with a $22 billion pipeline of won but unfunded mandates. We enter fiscal 2027 with good momentum. Our global reach continues to be an important competitive advantage, allowing us to connect investment capabilities from across Franklin and Templeton with client opportunities around the world. International AUM reached $523 billion with $29 billion in long-term net inflows during fiscal 2026. Flows were positive across the U.S., EMEA, APAC and the Americas, reflecting the strength of our global distribution and local relationships. The successful dual listing of the National Investment Fund of the Republic of Uzbekistan on the London and Tashkent Stock Exchanges highlights our leadership in emerging markets and our ability to partner with governments to develop capital markets and manage strategic mandates. Taken together, these results reflect broader, more consistent sources of organic growth across asset classes, client segments and geographies. Turning to Page 10. Investment performance remains fundamental to everything we do. In public markets, long-term performance remains competitive with 50% or more of our mutual funds and ETF AUM outperforming peer medians across the 1-, 3-, 5- and 10-year periods. In our strategy composites, 55% or more of AUM outperformed benchmarks across the 3-, 5- and 10-year periods. These results reflect the strength of our investment capabilities and our continued focus on delivering strong outcomes for clients. An important part of our strategy is building platforms while preserving the distinct expertise of our investment groups. In public markets, we continued to simplify our investment management platform. This year, we combined Franklin Equity Group, Mutual Series and Brandywine Global's equity capabilities under Franklin Equity, establishing a platform with approximately $200 billion in AUM. Similarly, the alignment of our fixed income and cash management capabilities under Franklin Templeton Fixed Income, including Western Asset, creates a global platform with over $500 billion in AUM. These changes deepen our research and portfolio risk management resources, strengthen collaboration and broaden opportunities for talent development. Since fiscal 2024, we have also refined our product lineup to focus on scalable high-demand strategies, thoughtfully retiring certain brands and integrating investment capabilities where it made sense. Turning to our 5-year strategic plan. We completed year 2 on track or ahead of our original targets. With several key growth areas ahead of plan, we are raising our fiscal 2029 goals for private market fundraising, ETFs, Canvas and adjusted operating margin. Turning to Slide 20. Franklin Templeton has established a leading position in alternatives, one of our most important long-term growth opportunities. Alternatives are projected to represent approximately 54% of global asset management industry revenues by 2030, driven by growing institutional demand and the expansion of private markets into wealth management and retirement. Franklin Templeton is well positioned to capture this opportunity. Alternative AUM reached a record $305 billion at year-end, inclusive of $17 billion in realizations and distributions during the year. We fundraised $48.7 billion across alternatives in fiscal 2026, including $43.2 billion in private markets, diversified across secondary private equity, alternative credit, real estate and venture strategies. Since fiscal 2024, we have raised approximately $66 billion, achieving roughly 2/3 of our original 5-year goal in just 2 years. Given this momentum, we are increasing our fiscal 2029 private markets fundraising target to $150 billion from our original target of $100 billion established 2 years ago. Beyond the growth opportunity, private markets further diversifies our business, expands our capabilities and provides longer duration capital and recurring revenue streams that complement our public markets franchise and strengthen our earnings profile. This year, we have also continued to expand and globalize our alternatives businesses through targeted acquisitions and strategic investments, strengthening our capabilities in alternative credit and real estate. In alternative credit, we completed the acquisition of Apera Asset Management, expanding our European direct lending capabilities. Alternative credit AUM has now surpassed $100 billion. In October, we also broadened Benefit Street Partners' asset-backed finance platform through our transaction with Encina Lender Finance and added its investment team and an initial seed portfolio of approximately $480 million in commitments. In real estate, through Clarion Partners, we announced the acquisition of a majority stake in Stoneshield Capital, a European real assets manager, which is expected to triple Clarion's European AUM to approximately $13 billion and bring pro forma real estate AUM to $90 billion. A further notable opportunity is democratizing private markets through the wealth management channel. Private wealth is projected to account for approximately 25% of alternative asset expansion over the next decade. Franklin Templeton is well positioned to capture our share of this growth by leveraging our scale, global distribution partnerships and product innovation to help lead the next era of alternative investing. Wealth clients contributed 22% of our private markets fundraising in fiscal 2026, and our Franklin Templeton Private Markets Evergreen range reached $9.7 billion in AUM. We are also introducing new ways for clients to access our capabilities, including private markets model portfolios with Corastone and the launch of our inaugural $1.5 billion collateralized fund obligation. Retirement represents another significant long-term opportunity for private markets. Franklin Templeton enters this evolving market from a position of strength, managing approximately $460 billion in retirement assets, including $139 billion in defined contribution. Building on this foundation, we are expanding blended public and private market solutions across target date, multi-asset credit and infrastructure strategies. Turning to distribution on Slide 21. Our global reach and breadth of investment capabilities are important competitive advantages. With clients in over 150 countries, we deliver the expertise of our distinct investment teams through the investment vehicles and solutions of their choice. Vehicle diversification continues to be a key driver of organic growth with record net inflows across retail SMAs, Canvas and ETFs, growing AUM from the prior year by 19%, 100% and 73%, respectively. These results reflect growing client demand for greater choice, customization and tax-efficient investment solutions. Franklin Templeton is a leader in retail SMAs. Our retail SMA business offers more than 200 investment strategies and has grown at a 20% compound annual rate since fiscal 2023. AUM reached a record $196 billion with $15.8 billion in net inflows this year. The demand for personalized, tax-efficient investment solutions continues to grow. Industry SMA assets have reached $5.4 trillion with unified managed accounts projected to grow 89% by 2030. Within this market, Canvas continues to exceed our growth expectations. Canvas AUM has grown nearly sevenfold since fiscal 2023 and doubled over the past year to $32.6 billion, generating $13.2 billion in net inflows. We have expanded Canvas across broker-dealers, RIAs and family offices to more than 235 distribution partners, up from 67 in fiscal 2023. Financial advisers using Canvas grew by over 1,800 to more than 2,900 in the year. Our preferred partner program is also extending Canvas tax overlay capabilities to other asset managers, creating additional opportunities to scale the platform. Two years into our plan, Canvas AUM reached nearly $33 billion or about 2/3 of our original $50 billion fiscal 2029 target. Given this momentum, we are doubling our fiscal 2029 target to $100 billion in AUM. Turning to Slide 22. Our ETF franchise continues to scale rapidly and is ahead of plan, driven by strong demand across fundamental active, systematic active and thematic country strategies. ETF AUM reached a record $84.6 billion with $27.5 billion in net inflows during fiscal 2026. For the first time in 2025, active ETF launches matched passive launches and industry forecasts expect active ETF AUM to more than double to approximately $4 trillion over the next 5 years. As an active investment manager, Franklin Templeton is particularly well positioned to capture our share of this growth. Our active ETF AUM reached $37.2 billion and was more than half of our ETF net inflows. Investment performance is strong with 78% or more of active ETF AUM outperforming peer medians over the 1-, 3- and 5-year periods. Combined with our breadth of investment capabilities and global distribution, this provides a strong foundation to continue expanding our active ETF franchise. In year 2 of our plan, ETF AUM has reached more than 90% of our original $93 billion fiscal 2029 target. Given this momentum, we are more than doubling our fiscal 2029 target to $200 billion. Beyond individual investment vehicles, clients are seeking integrated solutions that address broader portfolio needs, particularly across public and private capabilities. Our solutions business has grown at a 29% compound annual rate since fiscal 2023, reaching approximately $120 billion in AUM compared with projected industry growth of approximately 12% annually from 2026 to 2030, and we remain on track against our 5-year plan. We have a strong pipeline of opportunities, and our priorities include expanding OCIO, customized multi-asset portfolios and outcome-oriented strategies that bring together investment expertise from across Franklin Templeton. Turning to Slide 23. Fiduciary Trust International, our private wealth management business remains an important long-term growth opportunity, supported by favorable demographic trends, including the estimated $84 trillion intergenerational wealth transfer through 2045. With a fully integrated platform spanning investment advisory, trust, estate, tax and custody services, Fiduciary Trust is well positioned to serve the increasingly complex needs of high-net-worth clients and families. AUM reached $45 billion, up 15% since fiscal 2024. The business serves more than 2,000 client relationships with an average tenure of 19 years and a 5-year asset retention rate of approximately 98%. We remain focused on expanding this business through organic investments and targeted acquisitions. Having invested in blockchain technology for nearly a decade, innovation remains an important part of our long-term strategy. Digital assets AUM more than doubled during the fiscal 2026 to $3.6 billion, including approximately $2.5 billion in tokenized money market funds. Our Benji platform enables capabilities such as intraday yield calculations and more efficient asset transfers. With the acquisition of 250 Digital, we launched Franklin Crypto to expand our institutional digital asset capabilities. We've also established partnerships across tokenized products, global distribution, collateral and liquidity solutions to create new ways for clients to access and use our investment capabilities. In artificial intelligence, we are expanding adoption across sales, marketing, operations and investment management to improve productivity, strengthen decision-making and enhance the client experience. Beyond efficiency, we see significant potential to transform investment research and deliver more personalized solutions and insights at scale. We are building the technology and operating model to capture that opportunity responsibly with disciplined investment oversight, risk management and human judgment at the center. Our focus on productivity and expense discipline will allow us to fund strategic investments in AI, our investment management platform and distribution while supporting further margin expansion. As we close fiscal 2026, I'm pleased with the progress we've made in executing our 5-year strategic plan. We returned to broad-based organic growth, strengthened our investment capabilities and improved the efficiency and profitability of our business. As asset owners increasingly look to work with fewer, more strategic partners, Franklin Templeton is well positioned to meet their evolving needs. Our leadership across public and private markets, combined with our global reach and ability to deliver integrated investment solutions allows us to [ deepen ] client relationships and capture new opportunities for growth. With several key growth areas ahead of plan, we're confident in our ability to build on this momentum. I also want to thank our employees around the world. Their expertise, collaboration and commitment to our clients has been essential to our progress. With that, I'll turn the call over to Matt Nicholls to review our financial results and guidance. Matt?

Thank you, Jenny. I'll briefly review our fiscal fourth quarter and full year 2026 results on Pages 6 and 7 of the investor presentation, then I'll walk through guidance for the first quarter of fiscal 2027. I'll then provide remarks on our full year 2027 expenses and updated 5-year plan targets. Starting with the fourth quarter on Page 6. Ending AUM reached $1.8 trillion, essentially flat from the prior quarter, while average AUM increased to $1.8 trillion, a 3% increase from the prior quarter. Adjusted operating revenues increased 3.7% to $1.88 billion from the prior quarter due to higher average AUM, an additional calendar day and performance fees of $94 million compared with $74 million last quarter. This quarter's adjusted effective fee rate, which excludes performance fees, was 37.5 basis points compared to 37.9 basis points in the prior quarter and flat or 37.5 basis points in the prior year quarter. Adjusted operating expenses were $1.29 billion, a decrease of 1.7% from the prior quarter, primarily due to lower variable compensation and benefits and other expenses, including seasonal benefits, lower professional fees and realization of cost savings, partially offset by spend on strategic investments. As a result, adjusted operating income increased 17.6% from the prior quarter to $598.6 million, and adjusted operating margin expanded 380 basis points to 31.8%. Compared with the prior year quarter, adjusted operating income increased 26.7%, reflecting higher revenues and cost savings, partially offset by strategic investments and expenses related to higher sales and fundraising. Our adjusted operating margin increased 580 basis points from the prior year quarter. Fourth quarter adjusted net income and adjusted diluted earnings per share increased 27.7% and 30.6% from the prior quarter to $493 million and $0.94, respectively, primarily due to higher adjusted operating income, a lower tax rate and a lower share count. Turning to fiscal year 2026 on Page 7. Ending and average AUM each increased by 8% to $1.8 trillion and $1.74 trillion, respectively, compared with the prior year. Adjusted operating revenues increased 7.5% to $7.2 billion, primarily due to higher average AUM from market appreciation and net inflows. The adjusted effective fee rate, which excludes performance fees, was 37.6 basis points compared to 37.5 basis points in the prior year. Growth in lower fee investment capabilities, including ETFs, Canvas and multi-asset solutions was offset by lower fee Western outflows and increasing flows into higher fee alternative assets. Our adjusted operating expenses were $5.18 billion, an increase of 2.4% from the prior year, primarily due to higher sales and fundraising as well as higher formulaic incentive compensation driven by higher AUM, revenues and investment performance, partially offset by cost savings. On to Page 17 of the investor deck. Excluding performance fee compensation, adjusted operating expenses increased 2.9% from the prior year, reflecting continued expense discipline while investing for growth in our strategic initiatives. Our fiscal 2026 expenses included $210 million of cost savings. Fiscal 2026 demonstrated the operating leverage in our model. Adjusted operating revenues grew 7.5%, while adjusted operating expenses grew 2.4%. So revenue grew at roughly 3x the rate of expenses. As a result, adjusted operating income increased 23% to $2.02 billion and adjusted operating margin expanded 350 basis points to 28%, inclusive of our support of Western Asset. Compared to the prior year, fiscal adjusted net income increased by 37.4% to $1.64 billion and adjusted diluted earnings per share rose 38.3% to $3.07. The increases were due to higher adjusted operating income, higher adjusted other income, a lower tax rate and lower share count. On other topics, we continue to focus on capital management and operational integration to drive efficiency and long-term value. As stated on Slide 18 in the investor presentation, from a capital management perspective, we returned approximately $1.2 billion to shareholders in fiscal year 2026 through share repurchases and dividends, which have increased every year since 1981. This year, as mentioned by Jenny, we also closed our acquisition of Apera. And in October, we announced our acquisitions of Stoneshield, further globalizing our real estate capabilities and Encina Lender Finance to expand our asset-backed financing capabilities. Aside from maintaining the trajectory of our dividend, as always, our plan is to repurchase at least the shares that we issue for employee compensation. We will also opportunistically repurchase shares from time to time as we consider the balance of other priorities to grow the business. In terms of M&A, acquisitions have already transformed our company over the past several years and achieved important strategic objectives. We will continue to consider acquisitions in areas where we cannot grow fast enough organically to be relevant in capabilities that are important to our clients. Our balance sheet provides flexibility to invest in the business organically and inorganically. To support future growth and develop and scale new investment strategies, we have seed capital and strategic investments of $3.4 billion as of fiscal 2026 year-end, an increase from $2.8 billion from the prior year-end. Our debt-to-EBITDA is approximately 1.3x, and our balance sheet cash and investments covers our long-term senior debt by more than 2x. Turning to fiscal year 2027 first quarter guidance. As a reminder, guidance assumes flat markets and is based on our best estimates as of today. For the fiscal first quarter 2027, we anticipate the EFR to be stable from this quarter in the mid-37 basis points as growth in lower fee key growth areas are partially offset by higher fee alternative fundraising. Importantly, our areas of growth in lower fee EFR are now adding to our corporate operating margin. We expect compensation and benefits to be approximately $975 million. This includes approximately $50 million of annual accelerated deferred compensation awards and assumes $125 million in performance fees at a 55% payout. For IS&T, which includes investments in AI, data and security, we're guiding to $165 million, consistent with the prior quarter. We also expect occupancy to be flat to the prior quarter at approximately $70 million, and G&A expense is also expected to be flat at approximately $185 million. In terms of our tax rate, we expect fiscal 2027 to be in the range of 24% to 26%, with the first fiscal quarter at the lower end of the range due to favorable discrete items. Referring to Page 17 of the investor presentation, while we're only 1 month into fiscal 2027, all else being equal, at the current level of AUM, which is 4% higher than the average AUM of fiscal year 2026, we expect adjusted operating expenses, excluding performance fee compensation, to be in line or slightly above fiscal 2026 levels at approximately $5.1 billion. We anticipate reaching an adjusted operating margin of approximately 30% in fiscal 2027. This would achieve our original 5-year margin goal 2 years ahead of plan. Moving on from guidance to goals. As outlined on Page 24, our multiyear investments have resulted in higher growth rates versus our original 5-year plan as set in October 2024. As such, as outlined by Jenny, we are raising our fiscal year-end 2029 targets for private markets fundraising to $150 billion, ETFs to $200 billion and Canvas to $100 billion, and we expect further margin expansion from these areas. We also see opportunities to improve efficiency and effectiveness in terms of both revenue and expenses by further simplifying the business. The unification of our public markets investment operations remains on track from a timing and funding perspective. And these efforts, amongst others, will help fund reinvestment in the business while improving profitability. Together, the scaling of our growth business and continued operational efficiencies support increasing our adjusted operating margin goal to 35% for the fourth fiscal quarter of 2029. And now we would like to open the call for questions. Operator?

Our first question comes from the line of Brennan Hawken with BMO Capital Markets.

Thanks for the update. Really, really encouraging to see all the targets moved higher, particularly on the increased pretax margin for the exit rate for fiscal year 2029 up 500 basis points. So suggests you're adding 150 to 200 bps a year ex markets. Is that a fair way to think about it? And obviously, your private market revenue CAGR will favorably shift your revenue mix. How big a driver is that versus efficiency efforts?

So a couple of things. I mean, and I'll let Matt add on. If you look at 2026, our base fee growth rate was about 3%. We expect that to continue. And frankly, that we've got a lot of initiatives going on. For example, this kind of initiative around One Franklin Templeton, which is to bring in a more solutions and consolidated approach to institutional business. Today, less than 10% of our institutional clients have more than one investment team serving them. So huge opportunity there. So we think those things can be the upside of -- on the revenue side. But we expect the continuation of the -- and remember, we don't include market in our margin. So we expect that 3% base fee growth rate to continue. As far as on the expense side, we've done 18 acquisitions in the last 6 years, and it takes years. That's true. We don't talk enough about it, but it takes years to really do the integration of the back office. The obvious one that's the most public is Aladdin, but there's a ton around like CRM, integration of office systems, consolidating vendor contracts. And so all of that has been ongoing, and that will continue to go, and that will continue to improve our margin and enable us to have good expense control. And then we have a bunch of AI initiatives where really from an expense standpoint, there, you should think about those as more in the operating side as opposed to just expense savings and things like the investment side. It's all about improving investment and performance. So I think that this is a path we've been on. We see it accelerating. We see some of the -- on the revenue side, some of the initiatives that we've had on really coordinating across our distribution, too, we think will pay dividends. I don't know, Matt, do you want to add anything to that?

No, I think Jenny covered it. And I think, Brennan, the way you described the sort of path to the 35% that we've outlined in the presentation to be the right way of looking at it. I'll just add, I mentioned this in my prepared remarks, but the other thing we're seeing is as the areas of investment that we've talked about, Canvas, multi-asset solutions, ETFs, private markets, as each of those areas gain scale, in particular, the lower fee areas, for example, even the lower fee areas, every dollar we're adding now is adding to the corporate margin. So margin uplift is occurring as a consequence of all of those things, even the lower effective fee rate.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

So as you guys think through the 2029 plan and you budget where you're growing, so there's a lot of emphasis on the alts. There's a lot of emphasis on Canvas, SMAs and ETFs. These are obviously kind of pulling your fee rate in 2 different directions. But curious how stable you think the fee rate could ultimately be? Obviously, you articulated the margin story really well, but curious whether that can still be achieved with relatively stable fee rates amid this kind of barbelling or how we should think about, I guess, the fee rate broadly over the next couple of years?

Yes. I mean you definitely you hit it exactly right, which is obviously alts are on the higher end and Canvas and ETFs are lower, although active ETFs are a bit higher than some of the big areas of flows. And as long as we maintain -- I think with everything that's happened in the last couple of days, we should not forget that this is great for active management. Volatility is great for active management. And our big equity sales, it's demonstrated with the success of Putnam Large Cap Value and their U.S. research and even the growth, but is that if you outperform on the equity side, you're going to get flows despite the headwinds there. And so some of it will depend on assuming that we continue to maintain that, and we think it's a good sign for active management. I would also say that we think there is opportunity on the fixed income side that probably a bit of the headwind on Western may be carried over a little bit even on the Franklin Templeton fixed income because we have outstanding performance across the board on our fixed income team. And we expect to see that increase as far as part of our distribution.

I'd just say 2 other things to that. Number one is if you look at the fundraising, as Jenny mentioned, possibilities that we have across both Lexington, remember, we've got another at least half of the Fund XI coming up in fiscal '27. And then other funds after that, plus Stoneshield, Clarion, Benefit Street funds, there's actually a lot of growth engines within that group that have the higher fee rate end of our business. So as Jenny mentioned, that's certainly a very important offset. If you exclude catch-up fees, for example, from both '26 and '25, the effective fee rate was 37.4 basis points in both years, so very stable. And when we look forward to 2027, it's almost the exact same story, as I mentioned in my prepared remarks, we expect it to be 37.5, 37.6 something like that. And then when we look a little bit more bravely forward to that, we don't really see anything that changes too much around that just because of the strength of the private market raise combined with a relatively stable mutual fund business at the fee rates you're familiar with there, plus the higher growth effective fee rates of the very high-growth areas that we talked about like Canvas, ETFs and multi-asset solutions and so on. So that's how we look at it. So yes, we do look at it as an effective fee rate that should, all else remaining equal, remain stable over the next several years.

One thing I will add, Alex, is that alternatives, within alternatives in wealth, which is also higher fee. This year, we've had about 22% of private fundraising coming from the wealth channel. But importantly, 34% of that is coming from non-U.S. parts of the world, which really adds to a lot of that. We added 62 new distribution outlets in fiscal year '26 only for alternatives in wealth and more than half came from EMEA, APAC, Latin America. So clearly, that's going to be another big area of growth that will help us balance the EFR.

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

Okay. Great. Just a clarification, then I'll ask my question. On your '29 margin target, your footnote says flat markets. What is your assumption for performance fees? And if we were to assume markets were to rise, should we assume the same kind of 3:1 leverage ratio between revenues and expenses? And then the broader question I have for you, as you think about the business model over the next 4, 5 years to sort of align further to where you sort of see the growth of the business, it seems like organic growth is the focal point here, but how should we be thinking about how your capital management strategy may be evolving? And if you were to look at something, it still sound like more targeted deals from your prepared commentary, but how would M&A fit in there as well?

So in the margin question, could you just read that one more time? I want to make sure I fully understood your question, Bill, the first part?

Sure. Your 35% margin assumes flat markets, it looks like from your disclosure. So I was just wondering, what are you assuming for performance fees? And then if markets were to rise, if -- I appreciate day-to-day here, we don't know. But if things were to rise, you mentioned in your comment that your revenues are running about 3x the pace of expenses. Could we assume a similar 60%, 70% incremental margin on market action as we look out over the next several years?

Yes, I think that's fair. I also think on the performance fees, we estimate -- we discounted it by about 25% or 30% based on the last couple of years of performance fees that we've achieved. So something around the high 200s, 300, something like that for the year. But even if we didn't have those, that obviously helps our margin a little bit, but there wouldn't be a dramatic difference if we had lower performance fees based on how we're modeling the rest of the business. So I would describe that. In terms of M&A, as I mentioned in prepared remarks, we're very focused on any area where we may have a gap. We don't have that many gaps now relative to where we were several years ago. So the bar is high in terms of where our current valuation is and buying back shares relative to M&A. But on the other side of that, M&A has been a big transformational moment for this company over the last several years, and it's worked for us for the most part. So if there's an area where we think we can't grow fast enough organically and our clients demand it from us, we're going to be very focused on other ways of getting there faster. And M&A is one of those things that we've managed to make work. International is a very interesting example. We're a lot small -- even though we're sizable internationally with $540 billion or whatever is overseas. We're a lot bigger in the United States, and we see lots of opportunities to grow internationally in major markets where there's interesting trends that require professional asset management. So we're -- there are a few of the areas and then some bolt-ons in.

Well, I would summarize it that if you say what are the priorities, it would be the bolt-ons. The only gap we really have is infrastructure. We have it on the public infrastructure. We have small private infrastructure. But from a scaled infrastructure, that's the only really big gap. And then as Matt said, if you look at what we did with Encina and Stoneshield, they're bolt-ons of capabilities to the big category. So if you're looking in fixed income, when you took -- when you talk -- sorry, private credit, you talk about fixed income, you would say, "Oh, I have high yield. I have investment grade. I have munis, I have asset-backed." But people talk about private credit, like it's one big category. But the reality is it has as many categories as traditional fixed income. And so those types of capabilities, and fortunately, Benefit Street Partners is very broad in its fixed income capabilities, but we do look at bolt-ons like Encina, which gave us that asset-backed and then in Stoneshield. So it's bolt-ons to those types of things, particularly in private credit. High-net-worth, if we find these types of Penn Trust or Athena deals, we are always interested in those, although there's a lot of private equity money there. And then as that's really kind of local asset management, right? 80% of flows in markets tend to go to local products. We're the one big multinational that plays a lot in local markets. And so that's an area that can be interesting for us.

And to be clear on Stoneshield, it was a really, really interesting opportunity for us because on the face of that, it looks like it is just globalizing real estate, but it's actually a very interesting entree into more real assets and infrastructure in Europe. So it includes digital infrastructure, industrial storage, innovation. There's a few very key areas that we have no presence in today that Stoneshield is going to give us.

And I think it's increased Clarion's exposure in Europe by 3x. So...

Exactly, yes. So we're now 13% or 14% or something in Europe.

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

So I wanted to follow-up on your outlook for the alternatives growth. I mean you've obviously had very strong growth recently, but can you maybe unpack what you expect to be the biggest contributors to growth going forward? And also just clarify in those targets does not include any inorganic contribution that may come going forward?

Yes, that's great. So a couple of things. So this year, the $43.2 billion is across real estate, secondaries, private credit, venture and even some of the Franklin Templeton had done some CLOs and infrastructure themselves on the fixed income side. So everybody has contributed. Of that, about $11 billion is Lexington's flagship fund, which is flagship XI. That is right on track from where they would expect to be. It's a little over half, and they expect that fund to be about the size of Fund X. And so they'll be continuing to fundraise into 2028. The [ 37 ] -- we expect year '27 to be -- 2027 to be about mid-30s. And the fluctuation there of going higher is really around what the CLO market looks like. This year, the CLO market had quite a few re-ups and resets that are sort of unique at times. It was a really good year for CLOs. There was a lot of demand. So it will just depend about whether the market will have demand there, and that may swing a bit higher. And then -- so we expect '27 to be around mid-30s. We expect that because obviously, if you do the math, you'll see '28 and '29 are a bit lower, and that's really because you're not -- we're not assuming that we're in the market with any particular flagship fund like Lexington. Now if real estate turns around and there becomes a great demand, there could be something interesting there. I will point out that the $100 billion we have in private credit, 95% of it is floating rate. So for institutions that are -- that want exposure to fixed income are worried about rising rates, private credit with what Benefit Street Partners. And again, they're focused on middle market. So they're not funding the hyperscalers. They're focused on middle market, that's a great place to be. So those are kind of the swings. So the answer is no organic -- no inorganic. It's all organic in those numbers.

Yes. If we ever have anything inorganic, we'll just update the presentation.

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

So I hope you're doing well. Congrats on raising the fundraising targets. I had a question on the momentum at Canvas. I was curious, which products have been the biggest drivers recently between direct indexing, long/short tax aware, tax overlays. And I know you launched that new preferred partner program, too. And then also, in the last week, a member of the U.S. Senate Finance Committee actually wrote a letter to the U.S. Treasury, urging them to take a look at long-short tax-aware products. I'm wondering how you think about the risk of tax law changes to Canvas, especially in light of the Blue Sweep this week.

So I'm going to have Daniel answer on this. I would just say that we've avoided strategies that the Treasury is scrutinizing the 351 exchanges, the box spread, the ETFs that the dividends are avoiding. And so we don't see that as an issue. But actually, the Blue Sweep to the extent that taxes go up, there's going to be continuing more demand for tax loss harvesting and the efficiency at Canvas, but I'll let Daniel talk about the strategies.

So I'll say 2 things. One is our Canvas solution is very differentiated in the marketplace for 2 reasons. One, we are among the few ones that can do much more frequent tax loss harvesting rebalancing. So most of the competitors actually do once a month or once a quarter. We do it intraday. So that leads to better performance. And that's a big differentiating factor of Canvas. The other one that is very differentiating is we are creating Canvas as a platform for advisers. So we combine Canvas. So that goes to your question, it has direct indexing. It also have income through options adjusted, our capabilities that we can give more income through options adjusted. We also have municipal bonds in the platform. So we can offer also municipal bonds in the platform. We also offer as you referred to the P3 model, which is basically third-party fundamental equity tax optimization as well as our own fundamental managed tax optimization within the same platform. So that's a very differentiating feature. We have started to do a long/short as well. So long/short for us is really still very, I will say, very early stage. So the majority has been direct indexing as well as third-party and our own fundamental equities tax optimization. We expect that to continue to be a big driving force as well as, of course, our strength on distribution that we have, which we added this year alone 118 new partners and RIA teams -- so now the total number of teams is 336. So the momentum is very high because as we build all these new teams, each of them have a lot of more tax loss harvesting that they want. And that's actually what gives us a lot of conviction that the platform will continue to grow Canvas.

Our next question comes from the line of Alex Bond with KBW.

Just quickly, I wanted to ask around the magnitude of catch-up fees in the quarter and also the margin guide for fiscal '27 incorporates any assumptions around further catch-up fees? And then also on the expense side, I think you mentioned $210 million of cost saves in the trailing year. Can you just speak to the scale of the expected savings in fiscal '27 relative to that $210 million? Just trying to think about how the savings and the ultimate level of reinvestments in the business might compare on a year-over-year basis.

Yes. So the catch-up fees for the quarter were $18 million, approximately $18 million. For the year, it's $44 million. So on the EFR, the $18 million represents something like $0.3 million, something like that. But as I said, if you look at it over the year, if you take into account retro fees, take those out, PFR year-over-year was 37.4 in both years, and we expect that to be similar in 2027, as I've explained. In terms of the savings, 2027, right now, we're estimating that to be around $75 million, something like that. But it's a little bit of a target that goes up and down depending on the metric. Jenny always says, what's the net amount? What's the net amount? It's not just about the gross savings. But right now, we've earmarked around that level. And the reinvestment is at least that significant, I would say. So yes, we're very optimistic of areas as we talked about at the beginning, where we can lever that saving amount where we need to in order to reinvest more and save more as needed. So we are confident in our target that we gave you for the year.

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

I wanted to ask about private markets in the wealth channel. You've seen success with your platform of evergreen strategies, nearly $10 billion. I was hoping you could speak to the steps that you're taking to accelerate growth from there into fiscal '27, where you're most optimistic on seeing meaningful growth from here? Maybe speak to some of the opportunities around models. And just more broadly, how are you thinking about evolving cost of distribution into the wealth channel for private market strategies?

Yes. So I mean, I think Daniel covered some of this in there. But today, I think we've added 62 -- in 2026, we added 62 distributors to being able to distribute our wealth products and a lot of interest in Asia. That has probably been a big surprise for us is how much interest in Asia. And we have -- I just came back from Hong Kong, where in 2027, we will celebrate 40 years in Hong Kong. I was in the UAE. We're celebrating 30 years in the UAE. These are markets that the retail wealth channel knows our brand really, really well. And so we have built out a huge force already in our expense numbers with 100 people who are just there supporting distribution with expertise on the wealth channel. In the wealth channel, sales is hand-to-hand combat. It's each adviser. It's not only getting on the platform, it's each adviser. So we've already experienced a lot of that expense. Now it's about getting on those platforms. And as I mentioned, we've added 62 of them, and we have great vehicles to be sold there. We have at least 6-plus evergreen products, of which I think 3 are over $1 billion. I don't know, Daniel, what else you want to add?

I'll add that innovation is a big driver on this space, Michael. We have new evergreens also coming in infrastructure, multi-asset evergreens. So that's clearly an area that is growing. The other one is we just had the closing of our first CFO collateralized fund obligation this past quarter, $1.5 billion that actually covered retail, VA and insurance companies. And also, as you mentioned, the partnership with Corastone on model portfolios, we are in advanced conversations to try to have it up and running and having this in model portfolios. And finally, I will say also on the target date, we added privates into our target dates between 3% and 8% across different evergreens, and that's already having like early results in terms of momentum. So I think on the product side, a lot of momentum. I did mention also the success of 34% fundraising coming from outside the U.S. And I will also double down. Europe was also good and Latin America had like great success for us. And a lot of this is just newly appointed or new distribution outlets that will start to pay off in '27.

Our next question comes from the line of Brian Bedell with Deutsche Bank.

Maybe just in context of the 5-year plan, but also more just futuristic thinking, you guys have been so forward thinking on tokenization and digital assets. Jenny, how does the sort of long term or your long-term view on tokenization in asset classes outside of money market funds? How does that influence or I guess, what part of the 5-year growth plan would be considered attributable to that? Or would that be upside to the plan? And then just also your house views on equity tokenization with the SEC innovation exemption how the fundamental teams are thinking about that? And if I could throw one more product in there, and that would be a company KPI event contracts. That's obviously a new emerging asset class that has good potential within institutional investment. Maybe any early thoughts on if you would adopt those in the fundamental strategy?

Yes. So here's what I'd say, Brian. Why is tokenization? Why are we bullish on it? It is a really good programming language that does create huge efficiencies in our business and will enable innovation. And so again -- and I've talked about this before, when we did the -- when the SEC approved our tokenized money market fund, we had to parallel process our old recordkeeping transfer agency system with the blockchain system, and we were astonished by the difference in cost savings. And so that's why we're really bullish that the rails of financial services will ultimately be on chain. We actually -- we don't differentiate it out in our 5-year plan as far as tokenization as a category. So for example, today, we have tokenized ETFs on the crypto exchanges. If you just take the top 5 crypto exchanges, they have 1 billion wallets. It's slow adoption there. Most people are there, they're buying crypto products, but we are getting some adoption there. As other mainstream players add wallets, then these types of products can go. I think it depends on how important the 24/7 trading is. I do think we'll get to a world where that will be more and more important. Both of the exchanges are struggling because you have this reality of 2 different rails, the old rails, which are based on batch systems, people have to upload and reconciliation and the new rails. And then can you -- let me just ask clarity on the KPI company. Are you talking prediction markets? Is that where you're going? And if yes, then let me just say, look, we actually think the prediction markets information is interesting. And we have a partnership with Kalshi. We talked to Kalshi and get some of that data. We're not investors in the prediction markets, meaning we don't invest in whatever the bet is on that particular thing. But we leverage that data, particularly into our systematic models just because it gives you a view of what the kind of individual consumer is thinking. And so tokenization probably will be -- again, the technology is such with the smart contracts that it can be a really efficient way to use it, but they -- it will evolve over time. So long answer to that, we don't have any particular numbers broken out in the 5-year plan on digital assets.

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

There continues to be a lot of announced revenue sharing changes at the largest wealth platforms. Could you update us on to what extent you expect those changes to impact you? Why or why not? Secondly, remind us how you report those revenue sharing expenses? Is it net of fee rate or in the expenses? And finally, to what extent are those changes baked into your fee rate and/or expense growth guidance?

Yes. I mean, look, rev share is the nature of our business. It's something we've negotiated and navigated for 50 years. So we will continue to do so, and it's no surprise that as the world has been shifting from mutual funds to ETFs, since the platforms are interested in having some sort of revenue share because they do a certain amount of servicing of those clients. Matt, on the -- what I would say is we've been in these discussions for several years now. So there's nothing -- I mean, maybe it's something that's become more aware with you guys, but it's baked into our numbers. So the way we are today is how you would see it.

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

I wanted to just ask about the performance fee expectation for next quarter. I think typically, you guide -- when you talk about your cost to $50 million per quarter sort of as a baseline, it sounds like you're expecting that to be a little bit better. Anything kind of different going on crystallization from any of your alt products? Is there anything else we should read too for the rest of fiscal '27? Or is that commentary really just specific to the next quarter?

I'd just say there's more activity around our venture capital group that's invested in some of the...

You may have noted some high profile...

Some prominent investment that everyone is aware of. So we're invested in a number of those companies. So yes, you'll see some higher performance fees in the next several quarters, and we'll obviously call those out as we get our guidance.

Our next question comes from the line of Mike Brown with UBS.

You guys have talked a little bit about the alternatives platform here. And the fundraising backdrop for the industry still remains a bit tight, but clearly, you've been outpacing your growth. So your products are really resonating in the market here. But you did raise your target by 50%. And so I just wanted to maybe hear a little bit more about some of the building blocks beyond 2027 that kind of support the confidence to raise that target here? And maybe just give a little bit of color on what you're seeing in that pipeline and some of the underlying demand there.

Yes. So I mean, again, we probably have the broadest breadth of capability in the private markets of any asset manager out there. And so when you just look at the fundraising that we've done so far, not only I already mentioned, it's real estate, it's secondaries, it's private credit, it's venture. But probably more interesting is it's 30 different strategies, right? So this is a very diverse capability that has distribution coming globally. And so that's what's given us more confidence the stuff is resonating. Secondaries, I do think that probably rising rates are going to have an impact on the private equity market. But actually, secondaries can go in and buy based on today's rates. And so a lot of people who want exposure to private equity are actually preferring secondaries. You get -- you have no J curve, you get a much more diverse portfolio. It's getting repriced right now essentially as no buying books. And so that's been a really strong area in what has been a little bit more anemic fundraising on the private equity side. As I mentioned on private credit, 95% is floating rate. If you're worried about where rates are, it's a great place to be. And the economy still remains very strong. And so if you've got a fixed income allocation and you can withstand the illiquidity, you're getting a premium in the private credit market and you're getting protection against rising rates. The one area -- and Ventures venture, we've seen that there's -- and so much time is spent on the AI infrastructure and not enough time is spent on all the other incredible innovation that is happening between material science, biologics, new drug pipelines, 3D printing, there's a ton of technology out there that makes the venture really, really interesting. And so again, as an active manager looking in that space, you may say these things are overpriced. I like some of this other stuff. And so we think venture will continue to have good demand. And then real estate, it kind of depends on where you are. You can see it being slower if you're doing development because people worry about the higher rates. But if you are a landlord, which Clarion is in places, rates often rise with inflation. So it could be a really good income source as well as inflation hedge. So that's what's given us confidence that we'll hit those new numbers.

I will add that the One Franklin Templeton approach to selling, especially institutionally, is also giving us much more white space. Jenny mentioned the 10% of institutions just having one capability from Franklin. So clearly, there's a lot of opportunity. The teams are coming together. So they're offering that across the organization. And results are starting to show like our fundraising like quarter-over-quarter went doubled actually over the past 2 quarters on the institutional space across -- in this case, across all products. But there's a lot of opportunity on the private side to continue to do that. And we've added also resources in Asia Pacific with other resources in Asia Pacific, with other resources in insurance and in other segments that we were not covering before as proactively. So clearly, that will add more to the confidence on the fundraising that we put in front of you.

And we have reached the end -- concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's CEO, for final comments.

Well, thank you, everybody, for joining the call today. And once again, I want to thank our employees around the world for their continued dedication and service to our clients, and we look forward to speaking to you next quarter. Thank you.

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