Franklin Resources, Inc. (NYSE:BEN) Q2 2023 Earnings Conference Call May 1, 2023 10:00 AM ET
Company Participants
Selene Oh – Head of IR
Jenny Johnson – President and CEO
Matt Nicholls – CFO and COO
Adam Spector – Head of Global Distribution
Conference Call Participants
Bill Katz – Credit Suisse
Michael Cyprys – Morgan Stanley
Dan Fannon – Jefferies
Brennan Hawken – UBS
Craig Siegenthaler – Bank of America
Alex Blostein – Goldman Sachs
Ken Worthington – JPMorgan
Glenn Schorr – Evercore
Brian Bedell – Deutsche Bank
Finian O’Shea – Wells Fargo
Operator
Good morning. Welcome to Franklin Resources earnings conference call for the quarter ended March 31, 2023. Hello, my name is Lara, and I will be your call operator today. As a reminder, this conference is being recorded and at this time all participants are in a listen only mode. [Operator Instructions]
I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.
Selene Oh
Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts 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.
Jenny Johnson
Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton’s results for the second fiscal quarter of 2023. As usual, I’m joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution.
Despite a difficult market backdrop exacerbated by stress in the regional banking sector, we continue to see positive momentum across our business in terms of long-term flow trends, relative investment performance, diversification by product and vehicle and financial results. Market dislocations often result in investment opportunities for skilled active investors. And in this regard, our investment performance continued to improve across asset classes.
This quarter, three of our four asset classes: fixed income, multi-asset and alternatives, generated positive net flows. We also saw continued progress in ETFs and Canvas, our custom indexing solution platform. Flow trends improved across all geographies with our Asia Pacific region reporting positive long-term net flows in the quarter.
Furthermore, this prolonged period of heightened market volatility affirms the importance of the investments we’ve made to diversify our business and better serve our clients, all in an effort to offer more choice and help them achieve long-term financial goals no matter where we are in the economic cycle.
As to the specific numbers, starting first with flows, long-term net outflows improved from the prior quarter to $3.7 billion compared to net outflows of $10.9 billion in the prior quarter. Importantly, as mentioned, fixed income, multi-asset and alternatives all generated positive net flows. Fixed income generated net inflows of $1.8 billion. And as we’ve said on previous calls, we continue to benefit from our broad range of fixed income strategies with non-correlated investment philosophies and that trend continued this quarter.
Client interest continued in U.S. taxable corporate, municipal and global opportunistic strategies, which were all net flow positive. Multi-asset net inflows were $1.5 billion, driven by Franklin Income Fund, Fiduciary Trust International’s high net worth business and Canvas. Canvas has achieved net inflows each quarter since the platform launched in September 2019 and AUM increased over 13% in the quarter.
Alternative net inflows were $1.3 billion, driven by growth into private market strategies, which were partially offset by outflows in liquid alternative strategies. Benefit Street Partners, Clarion Partners and Lexington Partners each had net inflows with a combined total of $1.5 billion.
Equity net outflows were $8.3 billion, reflecting continued risk-off sentiment for many investors, but we did see positive net flows into ETFs, Global equity and Small Cap Growth equity strategies. ETFs had net inflows of $1 billion and now total approximately $15 billion in AUM. In this quarter, we launched a variant of our flagship Franklin Income Fund in a multi-asset active ETF vehicle.
Cash management, which is excluded from long-term AUM and flows had net outflows of $4.3 billion in the quarter and included episodic redemptions of approximately $7.5 billion from a sweep program associated with the regional bank. Our regionally focused sales model has continued to gain traction, and this quarter, we experienced improving flow trends across all geographies.
I already mentioned the positive long-term net flows in the Asia Pacific region, which were driven by Australia, Korea and Japan. Our one, but not funded, institutional pipeline was $15.4 billion and reflected the previously disclosed funding of a $7.5 billion institutional fixed income mandate. Given the uncertain market environment, institutional investors continue to be more defensive with a focus on diversification and liquidity. This resulted in less money in motion, particularly in March.
Turning now to investment performance. In this environment in particular, it’s encouraging to see that the sound long-term investment thesis of many of our largest strategies are playing out and performance generally improved across all time periods. This quarter, 64%, 63%, 61% and 66% of our strategy composite AUM outperformed their respective benchmarks on a one, three, five and 10-year basis. The one-year period improved primarily due to certain ClearBridge and Franklin Mutual Series equity strategies. Additionally, we’re seeing improvement in the longer-term performance of Western Asset’s U.S. taxable fixed income strategies.
On the mutual fund side, 67%, 53%, 63%, and 56% of our AUM outperformed their peers on a one, three, five and 10-year basis. Equity-related products are leading the increase in relative performance for the one-year period, specifically, ClearBridge, Templeton Global Equity Group and Franklin Equity Group outperformed in March. In addition, half of mutual fund AUM was in funds rated 4 or 5 star by Morningstar.
As I mentioned earlier, over the past several years, we have further diversified our business, and we believe our broad range of investment philosophies and processes differentiate our specialist investment managers from each other and gives us an ability to build the best outcomes for our clients. In March, we proactively engaged with clients to help them navigate financial uncertainty created by stress in the regional banking sector.
The Franklin Templeton Institute provided timely updates to our clients through webinars, articles and video posts. Clients were particularly interested in the numerous panels comprised of our specialist investment managers who offered investment perspectives across asset classes, including venture capital, alternative credit and traditional fixed income.
We continue to see client demand in fixed income, income-oriented and dividend-yielding products. In addition, as a result of recent market dislocations, alternative capabilities such as secondary private equity, private credit and real estate continue to be of client interest.
Touching briefly on our financial results, ending AUM was $1.42 trillion, an increase of 2.5% from the prior quarter, primarily due to market appreciation and average AUM increased 5% to $1.4 trillion from the prior quarter. While this quarter’s adjusted effective fee rate was in line with prior quarter at 39 basis points, adjusted operating revenues of $1.5 billion increased 6% from the prior quarter driven by higher adjusted performance fees and average AUM, partially offset by two fewer calendar days.
Adjusted operating income was $440.2 million, an 11% increase from the prior quarter, and our adjusted operating margin increased to 28.9% compared to 27.5% in the prior quarter. We continue to maintain a strong balance sheet with total cash and investments of $6.8 billion.
Let me wrap up by summarizing that we continue to benefit from our diversified business, our flows and relative investment performance have been steadily improving, and our balance sheet affords us flexibility, including the ability to further expand our capabilities. Our focus remains on delivering better outcomes for our clients. And finally, my admiration and thanks go to the thousands of employees around the globe who represent Franklin Templeton so well.
Now let’s turn over to your questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Bill Katz from Credit Suisse. Please go ahead.
Bill Katz
Okay. Thank you very much. I appreciate all the extra color in the supplement. Maybe, Jenny, one for you. You sort of mentioned that in your prepared comments and also in the press release that you’re sort of positioned to take advantage of some structural growth. I was wondering if you could break that down between, maybe, organic opportunities where you sort of see the best incremental flows from here and maybe where things are on the inorganic side? Thank you.
Jenny Johnson
Yes. So I mean, I think that from the organic side, all flows aren’t created equal, right? So anything in the alternatives, which continues to be positive for us, tends to have much higher fee rate and margin. And we think we have absolutely outstanding managers in that space and have continued to see positive flows there. Fixed income today, six out of our 10 top growth strategies or fixed income, three of those are Western. So while Western had had some performance challenges, they’re — actually, their six-month numbers are top decile and they’re now very strong. I think one is in 3 and five and one is in three, five and 10 in Core Bond and Core Bond Plus.
We think there’s a secular trend with things like SMA and Canvas, we think, is the best technology out there. We’ve now launched not only are we consistently gaining flows on the direct indexing side, but we’ve actually launched some — or seeded some active strategies leveraging the Canvas platform. So you can imagine you take some of your traditional mutual fund type strategies and be able to launch them with tax efficiency, leveraging the campus technology.
And then I’d say on the ETFs, we – I’ve been waiting for the hockey stick. I’m hopeful that we’re getting there, the $1 billion inflows, it’s a strong organic growth rate. The largest percentage of our ETFs is actually active. I think that’s about 40% of our ETFs. The flows this quarter were primarily smart beta and passive, but almost 900 — or over $900 million of that came from the U.S. RIA channel, which is a pretty new channel for us. So we think we’re just starting to tap into that space.
And then I would say, multi-asset solutions. We’ve gained some big wins there that are coming in actually in this current quarter, and we think that there’s going to be continued opportunities. So I think that gives you kind of a picture on the organic side. What we’ve always said on the M&A side is, look, we’re going to focus on areas where we have product gaps from the alt space. The only place that we think we’d have a real big product gap is infrastructure, but they’re hard to buy and very expensive and that anything else on the traditional side would have to include strong distribution capabilities. We’re looking to continue to expand distribution.
Obviously, the place everybody loves is retirement because retirement is consistent flows. And honestly, it’s the best place for mutual funds today. So anything we do there would have to have some sort of distribution capability. And then finally, I mentioned that we’ve always been a buyer of local asset management because any country that you go into, 80% of flows tend to go to local assets. So we always keep our eyes open, particularly in fast-growing countries.
Matt Nicholls
And just to add, Bill, to what Jenny just mentioned, I think we should make clear that our number one priority is organic growth, as Jenny just mentioned, all those things. But in certain situations, it simply takes either too long or is frankly impossible, to become a leader in an investment category via organic growth. And that’s why we’ve done what we’ve done with Lexington, BSP, Alcentra, Clarion and Canvas, and there’s obviously others in there. But that’s the reason why we’ve done the M&A that we’ve done, we concluded it’s just too hard to get there maybe even impossible, frankly, on an organic level.
Bill Katz
That’s helpful, Matt. And just maybe one for you as a follow-up. Last quarter, you kind of gave some guidance on both performance fees and expenses and a fair amount of variability on what actually layered through. So I was wondering if you could maybe unpack the big performance for this quarter and then how you sort of see some of the expense lines into the new quarter? Thank you.
Matt Nicholls
Yes.
Jenny Johnson
Matt, do you want to take that?
Matt Nicholls
Yes, I’ll take that, Jenny. So firstly, on the expenses relative to the guide that we gave last quarter, as hopefully you saw from a G&A occupancy in IST, we were very much in line also EFR slightly higher so that was in line. It really came down to comp and benefits being about $50 million higher than we had guided, and that’s driven by three key things. Fortunately, all of these were driven mostly by better performance. So one, was $30 million increase in performance fee compensation; two, about $10 million was higher resets to 401(k) plan, other sort of seasonal compensation related matters; and then another $10 million was just a formulaic approach we have to compensation of which performance of funds are a very important aspect of that formula.
So that increased by $10 million. That basically explains the difference between where we guided versus where we came out. In terms of where we expect next quarter, we continue to guide the effective fee rate around 39 basis points. So consistent with this quarter. Excluding performance fees, just to be clear, from a comp and benefits perspective, assuming we have a performance fee quarter of $50 million, which will continue to be our guide on performance fees, we’d expect comp benefits to be at 7.25 area and IS&T we’d expect to remain approximately flat at around $120 million, occupancy in the high 50s, again, approximately flat in G&A, probably in the mid-140s, down from the mid-high 40 guide that we gave last quarter and that does include an assumption of continued higher T&E and slightly higher placement fees.
In terms of just performance fees, I know we get this question and it’s very hard to guide on performance fees, as we’ve talked about in previous quarters. Given the strong performance in applicable funds, we expect to continue earning performance fees and that to be quite consistent, but we’re going to keep our guide of $50 million.
There are, obviously, episodic characteristics with performance fees related to both time of investment and redemption activity. In this quarter, for example, we just had another group of customers that hit the five-year performance threshold that triggered the performance fee — and increased performance fee out of Clarion for this quarter, which meant that we came in higher than we had anticipated, but that’s how we’ve guided on performance fees.
Bill Katz
Thank you, both.
Matt Nicholls
Thank you.
Operator
Thank you. Your next question comes from the line of Michael Cyprys from Morgan Stanley. Please go ahead.
Michael Cyprys
Hi, good morning. Thanks for taking the question. I wanted to just circle back to the OnChain money fund announcement that we saw recently. I was hoping you could talk a little bit about your vision there, the opportunity set that you see with this OnChain money fund product? And how you might think about broadening out distribution over time beyond the Benji app to distribute more broadly than that? And I guess, do you also view this as a replacement for stable clients? Just curious how you think about that.
Jenny Johnson
Okay. So a couple of things. So our OnChain money fund, we worked with the SEC — gosh, it’s been a few years now since we started — a couple of year process. Ultimately, we built a transfer agency system as well as hot and cold storage wallet to support the OnChain money market fund. We — with everything that happened in the regional banking sector, we actually have started to get some flows there as some of these Dow’s or platforms — the blockchain platforms, we’re interested in and needed to move money away from, say, Silicon Valley Bank and other places, and then felt that we sort of consistently philosophically, they like the idea of doing the blockchain money market fund.
Our big announcement this week is that we added what’s called cross chain. So for those who don’t know much about the crypto space. Think about your iPhone and your Android, iOS. They don’t — the applications don’t tend to talk to each other. You have the same problem in the blockchain space. And so when we added Polygon to it, that’s a layer two over Ethereum. So that meant businesses that built on the Polygon, which is a lot, now have access to our money market funds.
So we’re sort of initially positioning it in that space, although we think over time, there’s a lot of efficiencies in back office that will come out of blockchain. And we absolutely can see adding other products as well as a global Benji product.
Michael Cyprys
And just as a follow-up question. It sounds like the overall fee rate guidance, pretty stable, has been stable for a bit. But just big picture, maybe you could talk a little bit about your overall multiyear outlook for pricing across products on your platform. If you look back over the past couple of years, where would you say pricing has moved the most versus maybe what’s held in? What surprised you as you look back? And as you look forward, where do you anticipate the most stable versus more movement in pricing as you look out over the next couple of years?
JennyJohnson
Adam, do you want to take that because you’re seeing it on the distribution side?
Adam Spector
Sure. So I think where we’ve seen the pricing move the most is in the traditional large asset classes, fixed income, equity, especially U.S. and fixed income. Those have ground down to a point. But I think they’ve hopefully hit a bottom here. We also see mandates coming in generally at larger sizes, which has obviously a significant impact on fees. And as we see consolidation in the industry, among players, that’s impacting things. We think that when our fee rate moves, it tends to be a factor of asset mix as opposed to see degradation really because we’re really able to earn significantly more on our alternative assets. And when you see the rates move around, that’s less our rates degrading and more a shift in the mix.
Matt Nicholls
But Mike, just longer term, just to add to that, though, what we would expect, and this has been part of our strategy, as you know, is to try and mitigate the — any pressure we have in the traditional asset management space around fees and winning, hopefully, larger mandates that have lower fees in traditional asset management space to supplement that with a growing alternative asset base that tends to be characterized with higher performance fees.
So far, that strategy has been playing out quite well for us in the sense of our overall effective fee rates stayed relatively stable and even to the upside. And if we continue with the strategy that we have, adding where we expect winning certain mandates where we expect from the traditional side, we do have a chance over the next several years for the far to creep up. But again, as you know, it’s highly dependent on what happens in the equity markets, in particular, were as Adam just mentioned, it’s all about mix of the equity markets go higher and we continue on the path that we’re on around building our alternative asset business.
And if that’s higher and broader fixed income is a little bit lower, for example, it stays flat, then the fee rate will be higher. If it’s the other way around, the fee rate will likely be a little bit lower. But again, we’ve got good hedges in the system for that, that designed to keep the effective fee rate as stable as possible.
Jenny Johnson
I mean — and I would — there’s $16.5 trillion in the fixed income space. Finally, people can allocate to fixed income and actually get a return. You could have one-third of your pension fund in fixed income and still hit your 7% target. So honestly, we hope we see a lot more flows there. We’ve had some hiccups in performance, but that’s working its way out. And so we’d love to see a lot bigger flows in the fixed income, which could affect it. We just happen to have a great offset with both a strong active equity franchise and the alternatives that we’re doing.
Michael Cyprys
Super. Thank you very much.
Operator
Thank you. Your next question comes from the line of Dan Fannon from Jefferies. Please go ahead.
DanFannon
Thanks. Good morning. So wanted to follow up on just the alternatives outlook. Specifically, a clarification on Clarion. I think that you said the five-year lockup for performance fees. So wondering if that — so that was not a redemption, which we saw last year, which triggered a performance piece. I just want to clarify that. And then just talk about the ins and outs at Clarion today and how you see that prospectively looking and then also maybe more broadly within the context of BSP and Lexington, I know you can’t talk specifically about funds in the market, but generally just demand and the fundraising outlook.
Jenny Johnson
So I’ll start. And Adam, you and Matt can add. So with Clarion, the bulk of the performance fees were actually their normal process of when you — when clients hit a five-year window, you then monetize the performance fee. And so that — the bulk of that was that as opposed to just redemptions from clients. They have gone from an internal queue to now a redemption queue. Clarion is different in that they are not required to redeem like others, maybe required 5% a quarter, Clarion has a choice because there and the institutional clients prefer this, they weigh the client’s liquidity versus making sure that they’re preserving value in the fund.
And so they meet about 10% of the redemption queue, which I think is annually, it’s 5% to 6% of the NAV. It’s important to remember that Clarion has very little exposure to office, which has been the biggest area of pressure in the real estate space. And they have been big in industrial and residential. And so their performance is held up, so we think as interest rates come in the market, we probably — we feel like there’ll be one more raise and then probably sit there that folks will feel comfortable with the values in real estate and you’ll start to see that flip.
As far as all of the alts business, there’s a denominator effect with the LPs, right? They’ve had a reduction in all their liquid assets. And to the extent that they’d like to deploy them, they’re actually finding themselves over allocated in the alt space. So it’s been harder on the fundraising side. I mean take private credit.
Our BSP would tell you that they’re seeing the best deals they’ve seen since the global financial crisis. But there’s definitely some headwinds in raising money, just because of the fact that the LPs are fully an over allocation to it. Now we’ve been — Lexington set out to raise a $15 billion fund. They are — the LPs have allowed them to extend it, and they will raise above that. And actually, I’d love to just point out that in the case of Lexington, we believe 10% of that fund will come from the wealth channel.
We launched a product with a large partner, and they said you should be happy with the first fund at about $500 million, and we think that fund will cap out at the cap. We extended it to $1 billion. So kind of overall space is that the LPs are finding themselves overallocated because the markets — their liquid assets have been down. But as the equity markets improved, you’re actually starting to see them being able to deploy more capital.
The other thing that’s happened is normal cash flows that come out of things like private equity are down quite a bit, so they haven’t been able to fund from their existing alternatives. So it’s just put them in a tougher spot, but they also recognize it’s just a tremendous opportunity right now.
Matt, I can see you’d love to say something.
Matt Nicholls
Yes. I mean in terms of the performance fee composition, just to give you some idea and to address your question specifically around Clarion in a second. So out of the performance fee, about 60% of proceeds related to quarterly fees, about 10% realizations, about 20% annual. In terms of the five-year threshold point I know you know this, but just to be — just to state the obvious, that obviously, the whole client base isn’t on one, five year term. There’s hundreds of customers that have invested at different points of time. So there’s different five year thresholds that occur all the time.
So every quarter, there can be another group of five year threshold to the net, which leads to the — which leads to the performance fee threshold being met. And of course, some of those are different than five years. Sometimes you can have different performance thresholds based on different time lines. We just called out the five year this time because it happens to be a larger portion of the performance we pay out.
Adam Spector
The final thing I would add on Clarion is that traditionally, they really have been focused on the institutional market, but we’re starting to see much better flows out of the wealth channel now. CP Reef is now up on 20 different platforms. We’re seeing good growth there. Their opportunity zone fund is doing well. BSP is doing well. Jenny spoke about Lexington, so the specialized unit we built in the alternative channel is finally coming online and producing really good results in the wealth channel.
DanFannon
Great. Thanks for answering my questions.
Operator
Thank you. Your next question comes from the line of Brennan Hawken from UBS. Please go ahead.
Brennan Hawken
Good morning. Thank you for taking my questions. Good to hear and see further commentary about the build-out of the wealth management alternatives distribution efforts. So curious and also, thanks, Jenny, for the color about the contributions to Fund 1 at Lexington. You’d flagged that in the write-up, so that makes a lot of sense. Have you — what’s the feedback that you’re getting on the team that you put out there? And then when you’re thinking about benchmarking that effort against competitors that have seen success, how has that process gone? And how much work is there continuing to add to those efforts? Thanks.
Jenny Johnson
I’ll let Adam take that since it’s his team.
Adam Spector
Yes. Well, then you know what the answer is going to be, Jenny. So we’re feeling really good about the results we’ve had out there. And all I would say is that when we’re in the system, we’re getting indications of where they think we should be, and we’re exceeding those expectations pretty handily.
So we’re feeling really good about the results. I think the results are driven by a few things. We have a great combination of a strong brand name of great investment capability and a specialized distribution force.
Those three things have come together in the wealth channel in a way that I don’t think other firms can act. We are seeing growth not only in the wires, but in a number of the independent and regionals as well. Our next effort here is to really take that alternative specialized approach and build out both the product set and the sales team outside of the U.S. to tap into wealth channels outside of the U.S., and that’s the process we’re in right now.
Brennan Hawken
Great. Thanks for that. And I know you touched on this a little bit before as far as the outlook for Western and flows. But when you look at the unfunded mandates and unfunded pipeline, would you say that there’s an orientation to fixed income there? How does the balance look? And then how active are the RFPs, however active are you on the RFP for bonds? Thanks.
Adam Spector
Very active on RFPs for bonds. The good news is where we’re seeing the activity is really across the board from high-grade credit mandates to high yield to private credit to core to global, global opportunistic. So in all the categories, we’re seeing really good growth. When it comes to fixed income, crazy that we have 127 composites, but 42 of those are outperforming on the one, three, five, and 10. And what that means is that we’re able to compete in most sectors of fixed income quite well. The pipeline is diversified by asset class at this point. It’s not really dominated by fixed income. And in fact, the most significant portion of it currently, I believe, is from our solutions business, which is really coming on quite nicely.
Brennan Hawken
Thanks for that color.
Operator
Thank you. Your next question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead.
Craig Siegenthaler
Good morning, Jenny and Matt, hope you’re both doing well. Sticking with the last topic of fixed in rebalancing, given your competitive and leading offerings in traditional fixed income, we wanted to get your perspective on the potential for large rebalancing into bonds, especially now that it looks like we’re nearing the end of the Fed’s rate hiking cycle. And also, do you have any perspective on the potential inflow mix between active work you’re more competitive and then pass it?
Jenny Johnson
Look, I would say — what we’ve seen on the institutional side is that the institutions have been staying conservative. We’re waiting for this last, probably, Fed rate increase staying short duration and pretty high quality, but we’re starting to see searches in more of a risk on. So that tells you that they’re one, getting more comfortable with would be the economic backdrop and two, that they’re starting to feel like we’re at the peak of the curve.
We’re — we think this is just going to be a massive opportunity on the fixed income side once people get comfortable that the Fed stops hiking. And I think my view is the Fed will raise and will sit through 2023, probably not have a decrease, but in that people will try to lock in those higher rates. I don’t — Adam, give a sense, passive versus active.
Adam Spector
Not necessarily a huge change in that mix. All I would say is that to the extent that we have continued volatility in rates for a little bit here, active management tends to do a little better in a situation where you have more movement. We certainly see that across the curve. And so we’re seeing really good flows into active.
Jenny Johnson
It’s an important time to be active in the fixed income space. This is not a great time to be passive in it. But that’s just my view.
Craig Siegenthaler
Thank you, Jenny. And then just as my follow-up, we saw positive net inflows into APAC. Can you comment on what products and which geographies are driving the inflows.
Adam Spector
Sure. Asia was really our strongest market in terms of net. What we’ve done there really is focused on a few themes. And I think — we were early in that region in aligning our marketing product and sales all around certain themes and income has been something that’s really been winning for us there.
Our oldest fund is the income fund coming up on its 75th anniversary at over $80 billion in its various forms, and that’s been doing particularly well in Asia. But we’ve also had big institutional wins in fixed income and equity and alternatives. So it’s really been all of the asset classes.
I think our Asian colleagues, if you take a look at Australia as an example, that was one of the first markets where we implemented this generalist specialist model where the local sales team is responsible for knowing the client really better than anyone else and then bringing in other members of the Franklin Templeton team. Given the geography there, that was one of the first places we started, and we’ve seen earlier results that have pronounced 30 months in a row positive net flow in Australia in retail. So Asia has been strong. If you see gross flows though, obviously, the U.S. is dominating there. That’s our biggest market by far at about 72%.
Craig Siegenthaler
Got it. Thank you, Adam.
Operator
Thank you. Your next question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead.
Alex Blostein
Hi, everybody. Good morning. Thanks for the question. So maybe just to stay on the fixed income topic for a second. I hear your point on active versus passive, but year-to-date, fixed income ETFs have overwhelmed the gain share versus active products. So is that largely a retail dynamic? Or what you’re referring to is largely on the institutional side? Or are you starting to see maybe some improvement in active appetite. And curious how your private credit offering fits in within all of that, right? Because on the one hand, if traditional fixed income strategies continue to get squeezed, you guys have an opportunity to cross-sell into some of the old managers. So how are those kind of separate managers working together to sort of tackle the client from both sides?
Jenny Johnson
So I’ll take the second part of that question, and Adam, I’ll leave the past of it active to you. Honestly, on the private credit side, as I mentioned, the BSP folks would say that they’re seeing the best deals since the global financial crisis, but this denominator effect is an issue with the LPs.
But the other side of this is — why are they seeing those deals? They’re seeing those deals because banks are just not wanting to lend. And while you can look at structured products and syndicated products and say, well, those are off the bank’s balance sheet. The bank still has to retain a portion of that equity. And so you’re just — traditionally, it was about 50-50 kind of syndicated in private credit. And I think our private credit team would say that they’re going to see more coming to private credit and less banks stepping in.
So I think that changes the dynamic a bit. Having said that, they’ll tell you one of the headwinds is you can get secondary, you could buy a bond out in the liquid market and get a 9% return in a high yield. And so that is a headwind for the private credit today because there isn’t as much differentiation between the returns on the private credit side on the existing portfolios as there is in the liquid market.
So I think that’s going to be a headwind for a little while. On the other hand, as you’re seeing banks lend less and these guys get to be more — as long as you have a good origination machine in your private credit manager you’re going to get the very good deals, and you’re not going to have as much competition. So that’s why we’re very bullish on it despite a little bit of headwinds today. Adam?
Adam Spector
I would also say that it’s tough to predict, active versus passive. I don’t know that we have special insight into that, but we do have insight into demand for active. And there’s a tremendous amount, and there’s plenty for us and that’s really across the different asset classes. High yield, we’ve seen turn around quite nicely. If you get a weakening dollar here, we think our global strategies can do well. We have pension plans that are better funded now and we have specific strategies designed to help to feed those liabilities. Those are all active.
So we’re seeing demand really across every single bit of our active portfolio. And if you look at traditional performance, Western had a rough go of it, they’re tough decile now over the last six months. And after a fall like this, that’s typically when they generate their greatest alpha given that they’re a slightly higher beta manager. So this is probably the best type of environment for them right now. So don’t know about passive, but feeling pretty good about the opportunities for active.
Alex Blostein
And for my follow-up, maybe asking a question on the Alt business. You guys have strategically tried to build that out over the last couple of years. If we look at AUM, it’s been sort of flattish over the last couple of quarters, and I know AUM doesn’t tell the full picture. So maybe help us break down what the management fee is associated with the private or the old book for you guys today. And how do you see that growing over the next, call it, 12 months based on things where you sort of see a line of sight, whether it’s deploying capital on things that have already been raised that will begin earning fees undeployed or sort of funds that you have coming online over the next couple of quarters?
Jenny Johnson
Matt, do you want to take that.
Matt Nicholls
Yes, sure. Thanks, Jenny. So maybe just to take a bit of a step back and review where we’ve come from to, Alex, to think that’s important. Our alternative asset management fee screen, let’s call it, increase from 2021 to 2022 by 50%. From 2022 to 2023, we expect it to increase by another 30%. Just over 80% of the AUM is the generating AUM and that creates sort of a mid- — sort of high 50s, mid-50s EFR. But obviously, the range is very significant. So we’ve got very different businesses within that 80% fee earning AUM.
That as a whole, means that our management fee revenue from alternative assets this quarter reached 25% of our overall business. Now obviously, that’s a function of the traditional business shrinking a little bit, the market is coming down there and the market is being more stable in alternative assets. But it’s getting very close to our one-third, let’s call it, target that we expected to have in terms of management fee revenue.
If you have performance fees to that, you go from $1.3 billion to $1.4 billion of management fee revenue and you know what our performance fees were last year, we had a few hundred million dollars of that this year. We’re getting to the high $1 billion in terms of contribution in revenues.
I think that we see a future where that outside of additional potential acquisitions, where that should grow at an organic growth rate of between 5% and 10%. And it would be great if it was 10% or higher, but we’re just being conservative in the 5% to 10% area. It has actually grown organically by 5% to 10% in terms of what we’ve acquired. The area of shrinkage that we’ve experienced in the alternative asset AUM, Alex, I think you’re referring to is all on the — all on the liquid side of the business.
We have a couple of fairly sizable strategies there that had some performance issues earlier on this year and late last year and that led to outflows there. But I’d just say, overall, we are very much on target in terms of what we expect, the alternative asset contribution to be against the overall business, number one. Number two, where we expect the EFR to be and how that helps us hedge the traditional asset management business, performance fees to be and where the overall business mix is and what’s fee generating what’s not fee generating.
Alex Blostein
Great. Very helpful. Thank you, guys.
Matt Nicholls
Thanks Alex.
Operator
Thank you. Your next question comes from the line of Ken Worthington from JPMorgan. Please go ahead.
KenWorthington
Hi, good morning. And thanks for taking the questions. First on gross inflows into equity funds or the equity business. The gross inflows were soft this quarter. You highlighted some of the areas that are working quite well, ETFs global small cap. What parts of the business are struggling most here? Where was sort of the delta that you saw this quarter versus last quarter. Like clearly, you mentioned the risk off environment, but where are you seeing the incremental pain today versus what you saw in prior quarters?
Adam Spector
Yes. So first thing, equities was our softest asset class, but I would note that if you take a look at our flows ex dividend, they were actually up quarter-over-quarter, and our redemptions were down. So some bright news behind the negative net. If you take a look at the numbers behind that, large-cap growth was the area of the equity market that was hit hardest with negative flows over the last several quarters, and it’s a large and it’s area where we have the most significant asset base.
So we are roughly balanced. We have slightly more AUM and growth versus value, but in large cap growth, we have a number of funds, that area with hit hard, where we see growth is actually in some of the smaller areas like international and small cap where we actually had some positive flows. The truth is that those positive flows are in asset classes that have a smaller slice of the pie, which helped lead to the negative flows overall.
KenWorthington
Okay. Thank you. And then it was a big quarter for money market funds helped by the stress in the banking sector in March. To what extent is Franklin and Western benefiting from this transition from banks to money funds. And how is Franklin’s cash management business broadly positioned if and as more money comes out of the banks in the future? And then I guess, lastly, you mentioned the one-off outflow as part of a sweep program. Are there more outflows to come from that program? Or is it sort of like one and done?
Jenny Johnson
There could be a couple of billion more potential outflows in that just because they’re still in that regional bank. But otherwise, the bulk of it has already passed through. So now it’s about positioning our money markets, and obviously, Western’s a behemoth in the space. So we are very well positioned for it.
KenWorthington
Okay. Great. Thank you.
Operator
Thank you. Your next question comes from the line of Glenn Schorr from Evercore. Please go ahead.
Glenn Schorr
Hi, there. So I guess you referred to the solutions orientation a few times. I just want to circle back. My feeling is Legg was a work in progress before Franklin — was a work in progress trying to deliver the franchise because of the multi-asset — multi-boutique nature of it. I think Franklin was better at it, and then you’re in the process of motioning them together. You add in a bunch of private markets. So my question is, where do you think you’re at in terms of being able to deliver large multi-asset mandates and is that something you’re working on? And should we expect to see in the future? Thanks Matt.
Jenny Johnson
So that is, as I mentioned, I think that’s one of our areas that we think is a big opportunity of growth. And again, our roots with the flagship Franklin Income Fund and being around for 75 years. We think we’re pretty good at it. So it’s been an area of big focus. And actually, in April, we have a couple of wins in the multi-asset space that came from our solutions group.
So right now, I don’t think we have consistent quarterly flows there, but we’re starting to get — there’s a strong pipeline and we’re starting to get more consistent flows in the space. And I would say that — and Adam could probably speak to it since he was CEO of Brandywine at the time. But the difference between what Legg was trying to pull together were that the sims didn’t even talk to each other, let alone the parent is much, whereas today, I think there’s just a much greater just the sims willing to work with each other and come up with ideas. I mean discussions between Western and benefits on Benefit Street Partners on joining private credit and liquid credit, our local asset management team that managed [indiscernible] fixed income reaching out to Benefit Street Partners and doing a [indiscernible] private credit product.
So I just think that there’s – one is they’re coming out of not only the multi-asset solutions group who’s working with them. But also we’re actually finding the investment teams, the various SIMs are coming up with ideas to work with each other.
Adam Spector
Absolutely. And I think the other nice thing about this solutions business is that we’re strong on the institutional side with large platforms, insurance companies, et cetera. But the other nice thing is that we’re using our technology space through our goals optimization engine. We’re actually able to take asset allocation solutions orientation to the wealth channel, and we’re seeing a pretty significant pickup there. So it’s really solutions across the board from wealth to institutional.
Glenn Schorr
Thank you, all.
Operator
Thank you. Your next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.
Brian Bedell
Great. Thanks. Good morning, folks. I just — if I can ask a two-parter in fixed income. And that is maybe switching to the retail public side. If you can characterize how you’re seeing demand for in the classic Franklin taxable bond franchise, also the global franchise as well, considering, obviously, we have much higher rates and the comments you made earlier on the stability of rates.
And then the second part would be on the Western side, if — again, it’s good that we’re moving into a higher rate back drop that’s more sustained, that’s more sort of plateauing potentially, and you sound very excited about institutional mandates picking up. I guess, how would that fare or how do you see any kind of risk to future flows if we move into a credit cycle in the later part of the year in, say, a recession scenario? And that would be more for the Western set.
Jenny Johnson
Well, as I mentioned, six of our top 10 grossing strategies are all fixed income, and that’s a mix of both Franklin, Brandywine and Western. So — and as we’ve talked about in prior calls, there’s very little correlation between how Brandywine’s excess returns are to Western and frankly, it’s nice that we really come at it from a diversified portfolio of investment teams.
I’ll let Adam talk about kind of the flow thing. I would just comment on the credit cycle. That is where active management makes all the difference. And so honestly, as we — if we move into kind of a deeper recessionary environment as opposed to a lighter recessionary environment, it’s going to make all the difference that you had an active approach to your portfolio in fixed income. Adam, do you want to add to the flow.
Adam Spector
Yes. When we talk about the traditional Franklin side of things as well in addition to Western, our global macro performance has turned around. That’s an area where we’re seeing the story, which is positive. And let’s not forget our Munis business, which is something like $76 billion. We’re seeing strong growth there placement on more systems. So I think both of those as well as Western, Brandywine and then the private credit thing, all of those are going to go well. The truth is that you can now actually meet your return assumptions with the significant portion of your assets allocated to bonds. That is the strongest tailwind we could hope for share fixed-income.
Brian Bedell
And just, I guess where are you seeing the redemptions on the retail fixed income side coming from? Is there any areas that are still sort of pressure?
Adam Spector
Look, I would say that the two biggest fixed income are core and core plus, they tend to be the drivers of gross sales as well as the drivers of redemption just based on the share side.
Brian Bedell
Great. Thanks very much.
Operator
Thank you. We have a last question coming from the line of Finian O’Shea from Wells Fargo. Please go ahead.
Finian O’Shea
Hi, everyone. Good morning. A question on Alcentra. Can you talk about the progress on integration into Benefit Street, if that is complete in your mind? And then on the product and distribution side for that platform? Any color you can provide from early discussions with LPs on their receptivity to do more given its greater scale in capital and origination? Thank you.
Jenny Johnson
Yes. So the leadership that BSP is driving the really — to the extent that there’s integration, the integration with Alcentra. And we’ve now gone out and won. First thing you do is you make sure that you retain your key employees. And so we feel like we’ve stabilized the team there. We’ve met with all of their key clients. And so that’s both the BSP folks move on with the central folks and meeting with the key clients.
So we actually we feel really good about. That first step and making sort of stabilization. I can tell you that our distribution team in Europe is very excited to have a private credit manager to be able to distribute, that is local European private credit, but again, the private credit market faces a little bit of the headwinds that we talked about that BSP has faced.
So there’s — in April, we have good CLO progress. And I think Alcentra is 49% of our CLOs. So we’re still — we feel good about that. I think though that we — the fact that they’re stable and now moving forward is I think is where we hope they’d be at this point, and I think that’s where they are.
Operator
Thank you. This concludes today’s Q&A session. I would now like to hand the call back over to –
Matt Nicholls
I’m sorry. We have one other question that came through on the screen without answer. Can everybody hear me?
Jenny Johnson
Yes.
Matt Nicholls
Okay, great. So we had a question that was a follow-up on the guidance, quarterly guidance. And the question was, how does that impact our annual guidance. We gave an annual guidance range last quarter of $3.95 billion to $4 billion of adjusted expenses, annual adjusted expenses. And I’ll just say, obviously, we’re only halfway through the year, but all else remaining equal, despite improved market levels, improved flows, improved performance which push out formulary compensation, as I referenced on the question from Bill Katz. We’re only slightly increasing the upper end of our guidance range to $4.05 million billion. So the guide would be $3.95 billion to $4.05 billion for the year. And right now, we expect to be on the upper end of that range, excluding performance fees. Thanks for the question.
Operator
Thank you. I would now like to turn the call back over to Ms. Jenny Johnson, Franklin President and CEO, for final comments.
Jenny Johnson
Great. Well, everybody, thank you for participating in today’s call. And once again, we’d like to thank our employees for their hard work and dedication, and we look forward to speaking to you again next quarter. Thanks, everybody.
Operator
Thank you so much, presenters. And thank you, everyone. This concludes today’s conference call. You may now disconnect.
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