Franklin Resources (BEN) Q4 2023: Alternatives AUM Jumps 13%, Accelerating Diversification Strategy
Franklin Resources’ fourth quarter capped a year of strategic transformation, with alternative assets now 19% of long-term AUM and a 36% surge in alternative management fees. Despite persistent net outflows and market-driven headwinds, management’s focus on platform breadth, vehicle flexibility, and capital discipline positions BEN to capitalize on money-in-motion as clients shift from cash to higher-yielding strategies. The pending Putnam acquisition, expected to contribute $150 million in run-rate operating income, signals a pivot to scale in retirement and insurance channels.
Summary
- Alternative Expansion: Alternatives now drive a quarter of adjusted revenues, marking a strategic pivot in asset mix.
- Vehicle Agnosticism: Platform flexibility across ETFs, SMAs, and custom indexing unlocks new client segments.
- Putnam Integration: Pending acquisition accelerates scale in retirement and insurance channels, with immediate earnings accretion.
Business Overview
Franklin Resources (Franklin Templeton) is a global asset manager, generating revenue primarily through investment management fees on assets under management (AUM) across public and private markets. Its business spans active and passive funds, alternative assets, ETFs, separately managed accounts (SMAs), and custom indexing, serving institutional, wealth, and retail clients worldwide. Major segments include fixed income, equities, alternatives, multi-asset, and solutions, with a growing emphasis on alternatives and retirement channels.
Performance Analysis
BEN ended Q4 with $1.37 trillion in AUM, up 6% year-over-year, primarily driven by market appreciation and the Alcentra acquisition, though down 4% sequentially due to market volatility. Adjusted operating revenues increased 1% quarter-over-quarter, aided by transaction-related management fees and disciplined expense control, which also lifted adjusted operating margin to 32.4% from 30.5%. However, full-year adjusted revenues fell 6%, reflecting lower average AUM and weaker performance fee capture.
Long-term net outflows moderated to $21 billion for the year, a 23% improvement, with positive flows in alternatives, multi-asset, ETFs, and SMAs offsetting equity and fixed income outflows. Alternatives AUM climbed 13% to $255 billion, now representing 19% of long-term AUM and 25% of adjusted revenues (ex-performance fees). Multi-asset and ETF platforms showed resilience, while fixed income outflows halved, and SMAs posted steady growth, reflecting the platform’s diversification. Expense discipline was evident, with adjusted operating expenses flat excluding performance fees and acquisitions.
- Alternatives Fee Growth: Alternative assets management fee revenues rose 36% YoY, outpacing all other segments.
- SMAs and Custom Indexing: SMA AUM increased 13% to $113 billion, and Canvas, the custom indexing platform, doubled AUM since acquisition.
- Expense Control: Adjusted operating expenses were flat YoY (ex-acquisitions), supporting margin stability amid revenue pressure.
Despite net outflows and margin compression versus prior year, Franklin’s diversified product mix and platform expansion mitigated market headwinds, positioning the firm for improved asset capture as client risk appetite returns.
Executive Commentary
"Firm-wide, alternative AUM increased by over 13% to $255 billion from the prior year, making Franklin Templeton one of the largest managers of alternative assets. Alternative AUM represents approximately 19% of our long-term AUM, and approximately 25% of adjusted revenues, excluding performance fees in fiscal 2023."
Jenny Johnson, President and CEO
"At current market levels, the acquisition of Putnam is expected to add total run rate adjusted operating income of approximately $150 million after the first year post-closing, consistent with an approximate 30% operating margin, inclusive of cost synergies."
Matt Nichols, CFO and COO
Strategic Positioning
1. Alternative Assets as Core Growth Lever
Management’s rapid build-out in alternatives—now 19% of long-term AUM— is reshaping BEN’s revenue mix and margin profile. The Alcentra acquisition doubled alternative credit AUM, and specialist managers like Benefit Street, Clarion, and Lexington delivered nearly $11 billion in net inflows. Notably, alternatives now contribute a quarter of adjusted revenues, offering higher fee rates and greater stickiness compared to traditional strategies.
2. Vehicle Agnosticism and Customization
Franklin’s “vehicle agnostic” approach (offering strategies as mutual funds, ETFs, SMAs, and direct indexing) is unlocking new distribution channels and client types. SMAs and Canvas (custom indexing) saw robust growth, with Canvas AUM doubling since acquisition and 20 new partnerships in the year. The Franklin Income Fund’s expansion into ETF and SMA formats exemplifies this cross-vehicle strategy.
3. Retirement and Insurance Channel Scale via Putnam
The pending Putnam acquisition will strengthen BEN’s position in retirement and insurance, areas where mutual funds retain advantages and flows are more stable. The $136 billion AUM addition and Power/Great West partnership are expected to bring $25 billion in new insurance mandates, with immediate accretion to earnings and a broadened sales force. Management sees significant cross-sell and distribution synergy potential.
4. Expense Discipline and Operational Streamlining
Cost control remains central, with operating expenses flat YoY (excluding acquisitions and performance fees). Outsourcing of transfer agency and fund administration globally, along with real estate consolidation in New York, are expected to yield further efficiencies, though most benefits will materialize in 2025 and beyond.
5. Capital Allocation Shift to Buybacks
With major acquisitions largely complete, management signaled a shift toward opportunistic share repurchases, especially as shares trade at attractive levels and the Putnam deal was largely funded with equity. The dividend remains a priority, having increased annually since 1982.
Key Considerations
Franklin’s 2023 was defined by asset mix transformation, operational discipline, and a pivot toward scalable, higher-fee segments. The coming year will test whether these strategic moves can offset persistent industry headwinds and unlock new growth drivers.
Key Considerations:
- Alternatives as Margin Stabilizer: Higher-fee, less correlated alternatives are increasingly central to offsetting fee compression elsewhere.
- Distribution Complexity: Success in SMAs and alternatives requires deep advisor education and gatekeeper approvals, slowing ramp but building durable flows.
- Putnam Integration Risks: Realizing $150 million run-rate operating income depends on smooth integration and stable markets; execution risk remains.
- Expense Leverage Timing: Most efficiency gains from outsourcing and real estate moves will not be felt until 2025, delaying margin improvement.
Risks
Persistent net outflows in core equity and fixed income segments expose BEN to ongoing asset and fee pressure, especially if macro volatility persists. Integration of Putnam and realization of cost synergies carry execution risk, while a shift of client assets to passive vehicles could undermine fee rates. Regulatory changes, such as new fiduciary rules, may raise the bar for product suitability and compliance, particularly in alternatives and wealth channels.
Forward Outlook
For Q1 2024, Franklin guided to:
- Compensation and benefits of $750 million (including $35 million in accelerated deferred comp)
- IS&T expenses flat at $125 million; occupancy rising to $65 million due to NYC office consolidation
For full-year 2024 (excluding Putnam and real estate transition), management expects:
- Operating expenses approximately flat year-over-year (ex-performance fees and acquisitions)
Management highlighted:
- Putnam acquisition expected to close in Q4 calendar 2023, adding $150 million in run-rate operating income and immediate EPS accretion by Q2 post-close
- Expense benefits from outsourcing and integration to accrue primarily in 2025 and beyond
Takeaways
Franklin’s diversification into alternatives and vehicle flexibility is offsetting legacy outflows, but the firm remains exposed to market-driven AUM swings and integration risk. The Putnam deal is a pivotal bet on retirement and insurance channel growth, with near-term earnings accretion but longer-term execution challenges.
- Alternatives Now Anchor the Growth Narrative: With 13% AUM growth and 36% fee growth, alternatives are BEN’s best defense against secular fee pressure.
- Platform Breadth Enables Channel Penetration: Vehicle-agnostic delivery and specialist manager diversity position BEN for money-in-motion as rates stabilize.
- Watch for Integration and Flow Inflection: Successful Putnam integration and a turn in net flows are critical to sustaining margin and valuation upside.
Conclusion
Franklin Resources’ Q4 and FY23 results underscore a business in transition, leveraging alternatives, platform flexibility, and disciplined capital deployment to navigate industry consolidation and volatile markets. The Putnam acquisition marks a new phase, but execution and flow momentum will determine if BEN’s diversification pays off in 2024 and beyond.
Industry Read-Through
The quarter highlights how scale and product breadth are increasingly essential in asset management. BEN’s focus on alternatives, SMAs, and custom indexing mirrors broader trends as clients seek outcome-oriented and customizable solutions. The shift of assets from traditional fixed income and equities into private markets and ETFs is accelerating, with wealth and retirement channels emerging as key battlegrounds for flows. The industry’s consolidation wave, with large managers acquiring scale in alternatives and retirement, sets a template for peers—operational efficiency and multi-vehicle delivery are now table stakes for relevance and margin defense. Firms lacking platform breadth or lagging in alternatives risk further share loss as client preferences evolve.