Welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31st, 2021. Hello, my name is April and I will be your operator today. As a reminder, this conference is being recorded and at this time all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.
Good morning and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual 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 Form 10-Q filings. Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.
Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for our first fiscal quarter. Matthew Nicholls, our CFO, and Adam Spector, our Head of Global Distribution, are on the call with me today. 2022 marks Franklin Templeton's 75th anniversary as a company, a proud milestone to be sure. Although much has changed in that time span, our commitment to progress for the benefits of our shareholders, clients and employees has not. After enjoying a strong run since the pandemic lows, global equity markets in 2022 have had a volatile start to the year. Navigating this environment reminds us of the value of active management and the importance of a resilient organization. Throughout our history, we have worked to build a diversified business across asset classes, client types, regions and investment vehicles.
In recent years, we further diversified our firm to be well positioned to offer our clients a full range of investment solutions. Over the course of the past quarter, we've continued to make acquisitions and add resources in key areas driving industry growth such as alternatives, SMAs, and wealth management, as well as ESG and sustainable investing. As we look to the future, our strong balance sheet provides us with financial flexibility and positions us well across market cycles. Importantly, despite current market conditions, we have the resources to remain focused on executing on our long-term strategic priorities. Turning now to our first fiscal quarter results. Long-term net flows of $24.1 billion were the third highest in company history and marked the first positive quarter since December 2014.
This compares to long-term net outflows of $9.9 billion in the prior quarter and $4.5 billion of outflows in the prior year quarter. All asset classes saw improved long-term net inflows for the quarter, and alternatives posted a tenth consecutive quarter of net long-term inflows with $3 billion. Reinvested distributions, which are typically higher in the first quarter, were elevated at $23.5 billion compared to $12.6 billion in asset classes. We remain focused on evolving our global distribution efforts and the improvements we have made are driving growth. We have prioritized our focus on our largest markets and clients, which has led to positive flows in the US and our EMEA region. We're deepening relationships and are positioned for continued sales momentum as we focus on cross-selling across all regions.
Investment performance was strong across all periods, with 61%, 70%, 71% and 77% of our strategy composites outperforming their respective benchmarks on a one-, three-, five- and 10-year basis. For the quarter, 54% of our mutual fund AUM were in funds rated four or five star by Morningstar, compared to 41% a year ago. Assets under management increased 3% during the quarter to $1.58 trillion, and that's an increase of 5% compared to the same quarter a year ago, or 8% based upon average AUM. The financial results from our business continued to improve. Adjusted operating income increased by 6% to $686 million quarter-over-quarter, and was 25% higher than last year at this time.
As mentioned earlier, we believe that we are well positioned to capitalize on a number of important trends influencing our industry. Let's start with alternative asset management. Alternatives represent an increasing share of the asset management industry and a key strategic priority for Franklin Templeton. For the most recent quarter, our alternative assets under management grew 6% from the prior quarter to $154.3 billion and by 21% from the prior year period. With our announcement to acquire Lexington Partners, we now have leading specialist investment managers in key alternative asset categories. When the transaction closes, our pro forma alternative assets under management are expected to be approximately $200 billion.
To further develop our alternative asset efforts, this quarter we also made strategic investments in North Capital, an early-stage private securities market platform, and CAIS, a market leader in providing retail investors and their advisors access to alternative investments. Another important area is SMAs, given their higher relative growth rates versus other retail products. Our SMA business grew 8% from the prior quarter to a record $135.7 billion in AUM and by 20% from the prior year quarter. As part of our strategic initiative to bring sophisticated customization to a larger segment of investors, our acquisition of O'Shaughnessy Asset Management, which closed on December 31st, enhances our ability to deliver individualized SMA solutions as we continue to advance the broader evolution of managed accounts. Canvas, our custom indexing solution, has doubled its assets in the past year to over $2 billion.
Additionally, the number of partner firms have increased threefold since the announcement. Investors are more focused on ESG and sustainable investing than ever, and we aim to provide a range of investment solutions to meet their highly personalized goals and objectives. We're committed to investing in the expertise, resources, and tools to develop our leadership position in this critical area. In this context, we are excited to recently announce Anne Simpson as our Global Head of Sustainability, a newly created role charged with driving Franklin Templeton's overall strategic direction on stewardship, sustainability, and ESG investment strategy globally. Anne brings an extensive background with experience in public pension plans, academia, and the international regulatory and policy arena. We've made important strides in this area in recent years, and Anne's expertise and leadership will help take our firm-wide efforts to the next level.
Another strategic development that occurred during the quarter was our agreement with FIS to assume operation of our global transfer agent through a phased transition over the coming year. The combination of leading technology built by both companies will form a unique global TA offering that will deliver an enhanced service experience. Importantly, the move to a single transfer agent platform will allow fund shareholders and financial professionals the ability to purchase and exchange all of our funds with greater ease. This change is a natural evolution of our business and follows our successful efforts to strategically partner with industry-leading firms for functions including fund administration and application technology. Stepping back and reflecting on our overall efforts over the past several years as we've brought together world-class specialist investment managers, Franklin Templeton is a different business today.
We've made significant progress, and yet, as I said on the previous calls, in so many ways, we're just getting started. That's why in January, we announced the launch of our global advertising campaign, Hello Progress, which reintroduced the Franklin Templeton brand and embodies our relentless focus on innovation and the belief that every change creates an opportunity to better meet client needs. We have a new story to tell. We've built a stronger and more vibrant company. We now offer more boutique specialization on a global scale. Our clients have access to the specialist and expertise they need while enjoying the confidence that comes with working with a firm of our size. Let me wrap up by saying that none of our accomplishments would be possible if it weren't for our dedicated employees.
I'd like to thank them for their ongoing focus on the client, which has helped our business to thrive for the last 75 years and positions us well for the next 75. Now we'd like to open the call up to your questions. Operator?
Thank you. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. We request that you limit to one question and one follow-up question. Our first question is from Craig Siegenthaler with Bank of America.
Good morning, Jenny, Matt. Hope you're both doing well, and congrats on the positive net flow inflection.
Morning.
Thank you.
My question is on your strategic initiative in the SMA business. Now that you have O'Shaughnessy's direct indexing platform, Canvas, which really complements the leading business you got from Legg Mason on the SMA side, I wanted to get an update on your overall SMA strategy and specifically which client verticals do you see the biggest opportunities? Because I'm assuming RIA is probably a big one. Also, what Franklin SMA products specifically do you think are going to have the best net flow trajectory here?
Well, first I'll start out and then have Adam jump in. You know, I mean, I think we all feel like with what technology is enabling is just much greater customization. While something like, you know, Canvas is fantastic for direct indexing, we really do think that its capabilities merged with our SMA platform, you'll be able to take active strategies and make them more tax efficient. As a matter of fact, Canvas has been growing that platform well on a small base on the direct indexing side, has grown almost twice the industry, just since we even announced it.
You know, it's really driven because they have an outstanding technology platform that enables them to, you know, to take it really in what many of the platforms have with a lot of, you know, are handling manually. They've actually been able to program it. We think that the future SMAs just continue to grow, and honestly, it's across the board, I think, in all channels. Some are already more comfortable with it than others. Adam, do you wanna talk a little bit more about that?
Sure. Making sure I'm not on mute here. I would say that the growth is really differentiated depending on if we're talking about Canvas or our more traditional SMA business. The traditional SMA business was really strongest at the wires because that's where Legg Mason had its traditional strength. We've been really pleased over the last year at the significant cross-selling, such that we now see real growth in SMA in our regional partners, as well as with legacy FT products, FT fixed income units, some of the equity products there as well. We're getting more product breadth there, and we're also spreading out of the wires. In terms of Canvas, we've already essentially tripled the number of RIAs that are using that platform.
They are really focused on that platform, and we think for Canvas, we need to continue to grow the platform in that area. At the same time, we're working to expand into newer areas, like the traditional broker-dealer market for Canvas, where we think we can use it more to create investment products as opposed to it serving as an entire platform in the broker-dealer world. That cross-selling strategy is really what's key for us. We wanna move in both directions, and we're seeing that. There's not really one product or one asset class that I would say you'll see the most growth in. What we're actually pleased about is the breadth we've been able to achieve in the SMA growth over the last year.
Thank you, Jenny and Adam. I just have one follow-up from Matt, more of an accounting type question. You know, I know you guys include your realizations in the AUM roll forward in market appreciation or beta. At this point, you know, because you're much bigger and alts much bigger in private markets and you're just did the Lexington acquisition, you know, why not in the future break out realization separately? Because I think it would help us from a modeling side of things.
Yeah. Good morning, Craig. We may do that. I'd say in the next 12 months as we continue to assess the breadth of our alternative asset business. Out of the $140 million of performance fees that we just reported, $30 million was realizations. You know, I think the size of our performance fees reflects the potential of our larger alternatives business. Obviously, this excludes Lexington at this stage. The December quarter is probably the highest performance fee quarter that we'll have because it's the quarter where we have both realizations, quarterly performance fees, and annual performance fees. I'd also note that out of the $140, about 40 of that was specifically annual related.
The rest is actually pretty hard to quantify accurately in our view from a guidance perspective. We are gonna increase our guidance on performance fees from $10 million-$15 million, which is where we were on the guidance fronts, to $30 million-$40 million for the second quarter. I know that's a longer answer to your question, Craig, but we're going to study this further to see if we can provide more granular information to be useful to modeling. It's very difficult. The performance fees are very broad, and they're in different categories. We'll do our best to provide better guides where we can.
Thank you, Matt. Just to highlight, my question was a little more on the AUM realization side of things and the performance fee revenue side of things. I heard your response that you guys are looking into it. Thank you for taking my questions.
Got you. Okay, got you. Thank you very much.
Your next question is from Alex Blostein with Goldman Sachs.
Hey, good morning, everybody. Thanks for the question. I wanted to start with the alts business for a couple of minutes. I think on the last call you talked about, I think about $1 billion in management fees or maybe total revenues that the pro forma business would generate, I guess, pro forma for Lexington. I think that was the number. How are you guys thinking about the organic growth on that $1 billion or so in revenues? What sort of the, you know, organic basic growth do you expect the collection of these businesses could produce for Franklin over time?
Yeah.
Alex-
Yes. Thank you, Jenny. Good morning, Alex. You know, I think candidly that the $1 billion pro forma for Lexington is probably already fairly conservative. We would hope that that would be close to $1.2-$1.3 billion post-closing for 12 months thereafter, plus performance fees. You know, we've been growing the business over the last couple of years at a growth rate of about 20%. I think I've mentioned in the past that about half of that is organic, the other half is through market growth. So, I think we'd say, you know, minimum of 10%, but in our view, it should be between 10%-20% with respect to the growth rate for our combined alternatives business.
Great. That's helpful. Thank you. Just maybe in terms of guidance, I heard you talk about performance fees for the second quarter. If there's any other guidance things you want to flesh out, related to expenses, maybe that would be helpful as well. Just kinda how you're thinking about the, you know, standalone Franklin pre-Lexington expense base, for the rest of the fiscal year.
Yes. Okay. There's a few parts to this, to try and be as useful as possible. Obviously, it's not easy in the current volatile market to get this exactly right. I'm going to spend most of my time talking about the annual number, and then we can go from there. The first point I'd make is that the first quarter that we're just reporting today includes $15 million of one-time benefit to G&A. I think most of you have pointed that out already, so that's good. The second quarter includes a restart of calendar year comp costs such as annual merit increases, payroll taxes, 401(k) match, et cetera. However, we expect our comp ratio to remain in the 43%-44% area, inclusive of performance fee compensation.
I'd note that 35%-40% of our total expense base is variable with market and performance. As we've mentioned beforehand, we are consistently reviewing the other 60%-65% in terms of long-term potential operational efficiencies. What this all means at this point, inclusive of the market that we've experienced over the last few weeks, is that we still expect our full year 2022 operating expenses to be in the range of $3.9 billion-$3.95 billion, excluding performance fees and excluding Lexington.
Very helpful. Thanks so much.
Thank you, Alex.
Your next question is from Bill Katz with Citigroup.
Okay. Thank you very much for taking my questions as well. Jenny, maybe one for you. In your supplemental management commentary that came out also at the same time as the press release, you spoke to some pretty good breadth in the retail alternative space. I was wondering if you could talk a little bit more strategically how you sort of see the opportunity for, you know, so taking advantage of the democratization opportunity, maybe US, non-US Then the converse is a franchise like WAMCO disintermediated, just given its more traditional fixed income portfolio?
Yeah. Thanks, Bill. First of all, I can tell you this is a passion within Franklin because of the excess returns that you're seeing in the private markets. You know, if you think about a company with Franklin's history that started out because the average person couldn't access the equity markets, and you know, people came up with the idea, let's consolidate so that the masses can get access to the excess returns in equity markets. Well, that same thing exists today. There are half the number of public equities that there were in 2000, and there are 5x the number of private equity firms than there were in 2000. The differential, first of all, from an active management, the disparity in returns between good managers and bad managers is dramatic.
Number two, their returns over the public markets are significant, right? We've got to, as a society, we feel a calling to figure out how to bring these types of products responsibly to the mass market. When I say responsibly, you know, it's the running with scissors kind of scenario where the average investor needs access to their money and their savings because of a single event that happens in their life. If they're tied up in a long-term private assets, that can be a problem. We think there's interesting ways to do that. When you ask, well, what's the market opportunity, just take the four largest wirehouses in the US They're about $13 trillion in assets. They have somewhere, depending on the firm, an average 4%-5% in the alt space.
1% increase by just those four wirehouses, and we've talked to them, they'd like to increase their allocations somewhere between 10%-12%, is $130 billion added to the private markets. So, you know, we think that everybody feels, you know, the firms that we've talked to recognize the need to be able to do it, recognize the need to be able to come up with appropriate products, to bring it to that channel. The same phenomenon that exists in the US exists in other markets with those disparity of returns. We think that to answer your question, we think it's very, very big.
And we just-
I would just add. Sorry.
Sure.
I would just add one thing is that in terms of Western being disintermediated.
Oh, sorry.
Just remember that they've got really strong alternative product on their own, very strong in the CLO space. Their Global Macro Opportunities Fund is very strong. Not a concern there. That's the only thing I would add.
Okay. Thank you for that follow-up.
I'm gonna just add one other thing. This is actually where we think it could be interesting. You know, we're looking at product development where you provide, you know, say a BSP private credit, although WAMCO has some private credit, but private credit combined as an allocation within, say, a closed-end fund with Western.
I mean, this is where we think that having the breadth of capabilities really can bring some interesting products to the retail market.
Okay. Thank you. I'm sorry to cut you off both, twice there. Just a follow-up question maybe for Matt. Just thank you for the updated annual guidance on expenses. Can you sort of elaborate on what your market assumptions are? As you think about those performance fees, is that first, calendar quarter guidance now sort of a normal quarterly run rate? Thank you.
Yeah. The performance fee guidance there was really just for the second quarter, Bill. Again, we're gonna try our best to provide additional guidance as we roll through the year. As our alternative asset business continues to expand, we do expect our performance fee potential to continue to increase. That's that piece. In terms of the market assumption, the S&P 500, and certainly the Russell 2000, for example, and the fixed income indices down a little bit less. One of the things I'll note on the top line, while we don't provide revenue guidance, for the business, you know, when markets decline, I think you're very, obviously very aware of this, but when the markets decline, our revenue declines a lot less than the market.
That's because we've diversified the business so significantly over the past several years in particular. As our alts business becomes larger, and we've got other sticky businesses like Wealth and parts of the SMA franchise now, and some of the institutional business that is just much more sticky and less prone to sharp market declines on the revenue front. That's how I'd address that question without giving any more guidance on the revenue side, Bill.
Okay. Thank you for that color, and thank you for all the questions.
Thank you.
Your next question is from Brennan Hawken with UBS.
Hey, good morning. Thank you for taking my question. Just curious about the $7.4 billion inflows that was from a lift-out. Could you please. I'm sure there's sort of a definitional reason here, but normally when we think about lift-outs, we think of that as flowing through the acquisition line. What was the nuance around that, where it flowed through on the flow line rather than the acquisition line? Thanks.
Yeah. That's a really good question. Thank you. Because we do feel that this is a very specific circumstance. If you look at something like the O'Shaughnessy, that is much more of a typical purchase of a firm where the assets of the firm, including the actual assets under management, come with it. What we did with the former Aviva team was quite different. That was an investment team that was essentially going to move to a new home. We were really pleased that when they had a number of platforms that they were looking at, they chose the Franklin platform because they thought it would be best for their clients. They moved over as new employees to Franklin with absolutely zero assets and zero contractual relationships with any clients.
They then were able to reach out to those clients and contract with them to really essentially start a new business relationship with Franklin Templeton. That AUM was not purchased. We simply hired the people. We were thrilled that their clients and the consultants that backed those clients saw the strength in the platform such that we actually brought over more AUM than they had at the time of the announcement. I think that's a testament to the strength that others see in the Franklin platform. Because we didn't purchase any assets, that's why it came through the flow line.
Got it. Thanks for that clarification. When we think about Matt, I know it's challenging here and thanks for all the color in trying to think about the business ex performance fee and ex Lexington. Do you have any view on how to think about the fee, you know, core fee rate ex performance fees and ex Lexington from here? Should we think about just, you know, along with the industry, continued downward pressure, or do you have some visibility in any divergence from that overall path?
Yeah. Thanks, Brennan. Firstly, I think we feel pretty good about where our effective fee rate is excluding performance fees and excluding Lexington at this point. I think we were just very slightly down in the quarter versus last quarter based on a mix shift into institutional, which is slightly lower fee business from retail. And that's what's gonna really impact our fee rate versus you know, necessarily larger fee cuts, for example, because we think we're very much generally in line, maybe even a bit lower than the industry average in certain areas that have been under the most pressure there. I think we feel pretty good about where we're at.
Obviously, when we include Lexington into the mix, hopefully, well, I guess it'll be the third quarter when we report it. Obviously, that's gonna have an upward pressure on that fee rate because their fee rate's much higher on their AUM. In a way, it creates a little bit more of a cushion for potential to increase the EFR a little bit based on bringing
Lexington. In as we've said beforehand, with our strategy to continue to grow the alternatives business, if we continue to be successful in that regard, assuming that, you know, the equity market is relatively stable, let's say, and that we don't suddenly have, you know, tremendously stronger flows than expected into institutional fixed income business, which is lower fees or money markets, for example, you know, we feel pretty good about where the fee rate is and potentially with the growing alts business, even though a bit of an increase from where we're at today.
Great. Thanks for that color, Matthew. You didn't mention the closing date expectation changing. Should we still count on 3/31 generally?
Yes. Well, it'd probably be April 1st just for accounting reasons. It's so complicated trying to close something at the end of the quarter and having to include it all in that quarter when we report a couple few weeks later. We're more likely than not. We think we're on track, made very good progress to close around April 1st.
Excellent. Thanks very much.
Thank you.
Your next question is from Glenn Schorr with Evercore.
Hi there.
Hey, Glenn.
Hello there. The improvement year-over-year in flows ex-redemptions and distributions was significantly lower redemptions. I think gross sales were kind of flat year-over-year. You talked about the investments in alts, Lexington coming on board and all that. I want to talk about what you think specifically can drive better gross sales, you know, for, let's say, for the rest of this year. Then within there, maybe if you could touch on what to expect in fixed income. In other words, there's been downside pressure on fixed income allocations. Now we have an inflationary backdrop, rates are going to rise some version of a lot, according to many people. What do you think that's going to drive product-wise across your platform as the year progresses? Thank you.
First, thanks, Glenn, for the question, and you may recognize some of those stats on the growth of alts in the retail channel. Thank you for those. You know, you just take our US, obviously by far our biggest channel, on the retail side. We've grown that gross sales by about 13% in the last year versus the industry of 7%-10%, right? Obviously in a place where we're getting it right, we're seeing good growth, and much greater diversification of assets, and, you know, which has been the one challenge we had historically is you had a couple of products that accounted for an outsized portion. Now it's much more diverse.
We've had positive flows in US and EMEA, and then in places like Asia, we had some hiccups in some markets which have held us down, but actually seeing the same kind of positive in certain markets, same kind of positive growth that we see in the US and Europe. You know, we think we have some places where we had vulnerability and still some lumpy redemptions. But overall, what we have intended to do, which is diversify our business from a product standpoint, from a geographic standpoint, and from a client standpoint, that where we're doing that well, we're definitely seeing growth above the industry. So I'll put that there. Then, you know, on the fixed income side, look, a couple of things.
First of all, we have multiple franchises in the fixed income which have different views, honestly, on things like inflation and rates, and actually have low correlation of where their alpha comes from. That's good news, right? Again, that diversification is really important. Then, you know, if you think about fixed income, look, rising rate environments is actually good for active management on the fixed income side. That's because you get, you know, say, spread assets tend to outperform when rates go up. You have things like private credit, direct lending, leveraged loans. All of those things tend to be a place where you can get better returns. The story on fixed income is not just duration.
We think with the capabilities that we have, we're well-poised for where portfolios have to allocate to fixed income. Not to mention that there's a bunch of cash sitting on the sidelines that when rates go up, you think you'll be able to coax some of that back into the fixed income market. We don't think the story is just, oh, rates are going to go up and anybody who has a large fixed income franchise is going to be hurting from it. We actually think there's some real positive story there.
Glenn, I would add just a couple of things to that, in that sales are kind of modestly up, redemptions are significantly down. We're happy with both of those. The other thing that isn't as evident in the number is the significant cross-selling we've had in terms of platform access. Now that we are able to onboard, for instance, Italy is a great example where FT, legacy FT had, you know, a lot of the largest banks. All the largest banks, they had platform access there. Legacy Legg Mason had a lot of great investment product, but it wasn't on the platforms. We onboarded that product to the four largest bank platforms in Italy this quarter. We have exchangeability coming up at the end of this month in the US All of those things augur quite well for better future sales.
I appreciate all that. Thank you.
Your next question is from Robert Lee with KBW.
Great. Thanks for taking my questions, and good morning, everyone.
Morning.
Maybe as a follow-up to that, you know, Adam, you know, in talking about, you know, getting more cross-selling on platforms, you know, and I believe this was kind of a, you know, a key year, you know, post the merger to kind of start seeing that leverage. You know, what should we be looking for? Is it very simply just an acceleration in gross sales, you know, or is there some type of mix that we should be thinking about as you kind of try to leverage this enhanced platform placement? Just, you know, how from the outside looking in should we really kind of measure that, you know, or make it measurable?
Yeah.
the success?
I think there are a couple of things. You know, there's number of advisors who are using us. That's one of the most significant thing. Are they using just one half of the house or the entire product range? We've seen significant growth there. Two is, I think you'll see significantly lower redemption rates going forward to the extent that anyone is ever unsatisfied with a particular investment product. Now that we have double the products on the platform, essentially, there's an ability to switch from one to the other and still stay within the Franklin Templeton platform. More number of advisors buying our products and buying a larger breadth and greater retention.
The other thing that we've seen historically is that the larger number of products that one advisor buys from you, the stickier their assets are with you long term, because you tend to develop a better kind of holistic relationship with them, not just an asset management product sale relationship. As you see, more products per advisor, I think you see a stickier AUM base as well.
Great.
Sorry, just to add to that. You know, this TA conversion this month is really significant in the sense that for the first time, we're able to do exchanges. There are some big firms that have just said, "If you're unable to do exchanges, we can't add those other products in the platform." You know, while we've seen some improvement in cross-selling of advisors who used to be either just Legg Mason or Franklin, the real improvement should be happening now that Adam and team are doing their job.
Great. I guess it's more metrics for Matt to give us down the road.
I'll add it to the list, Rob.
Okay, great. You know, maybe as a follow-up, you know, for Jenny. So you did the North Capital transaction. You made the investment in CAIS, you know, which I know is, you know, did a big capital raise. Just, you know, within the alternative businesses, I mean, how do you see those or maybe other technology investments fitting in your strategy? Is it really just more, does it give you enhanced access, you know, having those, you know, those stakes? Is it? You know, I'm just trying to get a sense of, you know, what you feel like that brings to the table for you.
Yeah. You know, just take CAIS, right? What does CAIS do? CAIS offers to streamline for the retail. Anybody who's invested in private assets know what a nightmare it is to have to deal with all the forms and, you know, signing up for these things. CAIS tries to streamline that, making it much easier for an advisor to give his clients access to the alternative platform. You know, if you're an investor, you have the ability to have the conversation about where you are and, you know, what gets showcased and gives you more of a pole position to be able to showcase your products. It doesn't mean that they're gonna be closed architecture, but again, you know, shelf space and shelf positioning is always very important.
That's partly how we think about the fintech investments that we do.
It's also, Rob, frankly, it's a little bit of co-opetition, if you will, in the sense that.
Mm-hmm.
You know, this is such a giant space, and it's just gonna become larger and larger. Our view of it is, even though we're investing ourselves significantly, as Adam and Jenny mentioned, in the distribution of alternative assets under our roof directly, we think partnering with others that are focused specifically on different areas of alts from a distribution, servicing, technology perspective, it just further enhances our own investments internally and frankly, provides us with more opportunities across the business. That's what we're most focused on, and we've really enjoyed, you know, our time with these companies, learning from them and hopefully them learning from us and getting, you know, generally more access.
Great. If I could squeeze in one quick one on the sale of AdvisorEngine since we're on technology. Should we expect there's gonna be a noticeable kind of gain that flows through in the second quarter just for modeling purposes?
Yeah. The gain will probably, you know, it's approximately $50 million.
Great. That's helpful. Thanks, guys. Thanks for taking my questions.
Thank you.
Your next question is from Dan Fannon with Jefferies.
Thanks. Good morning. Kinda wanted to follow up just in terms of M&A and the go forward with Lexington, you know, closing here in the coming months, but, you know, still having plenty of liquidity, and you guys have been highly active over the last, you know, kind of year and a half, two years. How should we think about your appetite for more investments and/or M&A going forward?
Well, I think I'll start, Jenny, and then.
Yeah.
There you go. You know, I think as we've described, Dan, before, you know, per annum, after you take into consideration the dividend that's very important, and then the share repurchases, which we'll always do enough to at least hedge our employee grants.
To level out the share count. After that, if you roughly look at the net income that we add to the firm, it's, you know, over $1 billion. Every year, that $1 billion, we look at that and say, "Okay, in addition to what we've got on our balance sheet today and the financial flexibility that we have and now the new revolver that we have, it provides, you know, significant flexibility for us to continue to add to alternative assets, to wealth management, and to our distribution strategies that we've talked about. Until we run out of those things to do to enhance and further diversify our business for our company, our shareholders, and very importantly, our clients, obviously, because this is what they're demanding, we will continue down that path.
M&A opportunities to further diversify our business, expand what we have, invest importantly internally in our specialist investment managers, and then we get to share repurchases after that. Obviously the dividend is central to us. We do have the capacity to do something meaningful every year in theory. What we've also said, though, is that if at some point, we will run out of those things to do, and we'll be very comfortable with everything that we have from an overall business mix perspective. At that point, we will then think about accelerating share repurchases and increasing our dividend more significantly.
Great. Just to follow up, I appreciate the last remaining component of the Legg Mason synergies. As you think about the guidance for this year, does that contemplate it, you know, further potential optimization of any of those businesses? Or is it kind of just based, as you said, on AUM levels here and kind of your business planning, you know, as you see it?
No, I think it's based mostly on where we see the markets today at this point. I think I said before that we do have some additional levers to pull if we need to, given, for example, you know, wage inflation, competitive environment for talent. We're obviously extremely focused on that. Again, we think our compensation ratio is highly competitive. It shows that we're paying for what we need to pay for to get the best people at the firm and retain and attract and the rest of it. You know, very focused on that.
We're more likely to use those levers, at least in the next 12 months, to ensure that we can continue to manage our expenses at the guidance we've given versus trying to come in, you know, much lower than that. As we've said, we certainly do have those levers to pull. Jenny mentioned earlier on about the TA outsourcing. The TA outsourcing itself, per se, is mostly about savings to the funds, which is terrific. The service is gonna be tremendous, unique, as Jenny mentioned, as we've announced, but it also saves money for the funds. For us, it becomes about functions supporting the TA. At some point in the next year, we will get to dig into all those things and see if we can be more efficient in other places.
That's what I define as another lever internally.
Great. Thank you.
Thank you.
Your next question is from Patrick Davitt with Autonomous Research.
Hey, good morning, guys.
Morning.
Matthew, given your background in asset manager M&A, perhaps even more broadly, could you kind of frame your view through your experience of how 2022 could look from a pipeline standpoint, given the more volatile markets? Maybe any thoughts around your view of it potentially being different than your historical experience for any reason?
Okay, thank you. I think the first thing I'd say is that whatever the market conditions, there is no such thing, in our opinion, in buying something really good for a lower price just because the markets are lower. They're simply not for sale at that point in time. Just make that point clear. I think the pipeline, what we're seeing in terms of the pipeline across alternative assets and wealth management in particular is very significant. I don't think we've ever seen it as active. I don't really see that changing going into 2022. In wealth management, there is a fair amount of consolidation happening, and a lot of opportunity to offer increased services and support to ever-increasing demands from complex client needs. That's happening in wealth.
Fiduciary Trust is a tremendous business, a tremendous platform. It's got a storied history and brand that we can utilize to attract excellent businesses. As we've mentioned, the two acquisitions that we've made through Fiduciary Trust, which is Pennsylvania Trust and Athena Capital Advisors, have grown collectively by, I think, 40%-45%, since the acquisition announcement, you know, a little over 18 months or two years ago or so. That's one. In the alternative asset arena, it's incredibly busy on a global level, in particular in Europe and the United States, I'd say.
While we're very comfortable with what we've acquired and we're very excited, frankly, even if we did nothing else with what we have under the tent here, we do see a couple of other important sectors within alternative assets that we think we can help grow and would be an important offering for our clients and our shareholders at Franklin. Therefore we will benefit from that if we come to acquire those things. I see the pipeline as being very strong. Opportunities are meaningful. There's a lot of competition for these things both in wealth and alternative assets.
I think I've already referred to Fiduciary Trust, and I think we're really excited about our narrative, and how it has resonated with some of the leading companies out there. Most recently Lexington, for example, where, you know, I think we were an extremely good company around Lexington. You know, while it wasn't a wide process because it didn't need to be, there was some extremely credible parties involved in that, and we were excited that, you know, that company chose Franklin. That is sort of the update on the M&A front. Don't know whether Jenny or Adam you want to add anything.
Nope. You got it.
Thank you. That was very helpful. Yeah, go ahead.
Thanks, Patrick. Go ahead.
Oh, yeah, one quick one on, I think Matthew, you said, you expect the pro forma Lexington revenue to be more like $1.2 billion plus. Anything specific you can point to driving that, or is it just kind of better visibility on their fundraising pipeline at this point?
I think it's really across all of the alts business. I mean, Clarion and Benefit Street Partners have their own really meaningful opportunities. Clarion in the real estate arena it has very strong performance has really meaningful growth and an exciting pipeline. They fortunately are exposed to the areas that are experiencing the most significant growth. For us, that's tremendous. Same with Benefit Street Partners, you know, the whole alternative credit area. We think that the potential to globalize that business and be larger in another geography is exciting for us. I think it's those two things. You know, we unfortunately can't comment on Lexington's fundraising processes or anything like that.
We'll be able to comment on that in our May call after we've closed Lexington. I'll just say that everything is going very much to plan as it relates to Lexington, and we're really excited to be closing that, you know, in April. The guide that we gave on both revenue, which I think we said on an annualized basis, it would be $350 million for Lexington and on an EBITDA level, around $150 million. We would continue to stick with that guide.
Let me just add one thing on that. You know, again, we talked about the opportunity in the retail space for alternatives. I mean, we feel incredibly fortunate to have the properties that we have with the outstanding performance that they have. You just look at Clarion, and you look at some of the competitors in the retail space and the assets coming in, and Clarion's performance competes, you know, head-to-head, no problem in that space. We have a tremendous reputation in the retail space. The challenge there is it's actually really hard because there's a whole education process that happens with any kind of manager. That takes some time to be able to bring an alternatives capability in the retail.
To have the types of products that we have and the distribution capability, you know, we're focused on solving kind of that education component of it. I would just say that if you're going to bring private equity to the retail space, secondaries, we think is a better way to do it because you don't have the J-curve issue that you have in the institutional space there. Lexington, we think, is just a great opportunity. You have the products, you have the reputation, and now it's just figuring out how to sell it. That's kind of the final component.
Helpful. Thanks.
Your next question is from Michael Cyprys with Morgan Stanley.
Good morning. This is Stephanie filling in for Mike. I just have a quick follow-up on the performance fees. Matt, can you just remind us of the arrangement with Clarion and when those legacy pass-through performance fees, when that starts coming on, if not already, and how meaningful could that be to the performance fee outlook?
Thank you for the question. That's actually already happened. Our performance fee arrangement with Clarion with respect to pass-through fees, the pass-throughs are almost zero now.
Great. Thanks. Maybe just lastly on the pipeline, the $13 billion this quarter, wondering if you can give us some color on how the asset class mix has evolved or some of the different types of mandates or fee rates sitting in the pipeline now, how that's trended versus last quarter?
There's not really a significant change there. I would say from an asset class perspective, fixed income is the largest percentage of that. We also have a very healthy dose of alternatives and equities in there as well. There was really a slight change in the overall level, but that does not at all reflect the strength of the institutional business. In fact, I would tell you we're doing better and better in the institutional space. The truth is, what that's really measuring is business that you've won, but hasn't actually funded yet. To the extent that you
Fund the business more quickly, that number will actually come down a bit. The institutional business is really quite strong. Fixed income is the biggest asset class, but a big chunk of other fixed income is roughly half of it. In terms of fee rates, really, I would say we haven't seen a change in the fees that we're doing institutional business at over the last few quarters.
Just back to performance fees a second. I think maybe one guide that could be helpful, because I think in the past we've said 50/50, just as a rough guide on comp to revenue, performance fee revenue. I would just update modeling to make that 55%. Because when we look at the mix of performance fees now, and we calculate where we think that's heading, and we think, you know, assuming 55% of performance fees become compensation, I think is a better model than 50%.
Great. Thank you.
Thank you.
Your next question is from Robert Lee with KBW.
Great. Thanks for taking my follow-up. I was just curious, maybe just going back to expenses. When you did the Legg transaction, you know, one of the things, you know, that you made, you know, points that you weren't going to touch, at least initially, was any of the kind of, you know, relationships with the investment affiliates, you know, Western and whatnot.
Yep.
You know, that was, you know, maybe left for a later date. Maybe this is, I don't know if this is touching a third rail or not, but 18 months in, you know, things, you know, are starting to click, you know. Is there an opportunity to revisit any of those that may help, you know, efficiency or costs, you know, overall for the company?
Yeah. Yeah, I mean, we certainly don't think of that as a third rail, Rob. We have very open, great dialogue with all of our companies. In fact, most of the leadership of the largest specialist investment managers are on our management committee or executive committee. We have very open discussions about these things, and we're all in this together to be as efficient as we can. I would say that in terms of our focus internally, you know, we have a long list of things and potential that we're working through. We've got enough potential from a cost synergy perspective, outside of some of those larger specialist investment managers, components of the firm that you're talking about.
Our focus with those aspects of the company is all about revenue and growth opportunities. We do talk about expenses, and we talk about. For example, when we talk about the transformation, we talk about fund administration, we talk about other technology services across the company. It's not just sort of a holding company FT discussion. It's a discussion involving all the specialist investment managers. We can see in future years, there will be absolutely obvious areas where we will collectively bring expenses down as the company. We also are a conservative company. We're very methodical. It has to be one thing at a time.
Frankly, we've got enough to get on with outside of what you're specifically referring to, and therefore we're able to focus more on growth opportunities and revenue with the specialist investment managers, legacy Legg Mason.
Great. Thanks for the added color. Appreciate it.
Thank you, Rob.
This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments.
Great. Well, thank you everybody for participating in today's call. You know, we've made a lot of exciting progress, and in so many ways, like I tell you, we just feel like we're getting started. Once again, we'd like to thank our employees for their hard work and remaining absolutely focused on our clients and on each other. We look forward to speaking to all of you again next quarter. Thank you, everybody, and stay healthy.
Thank you. This concludes today's conference call. You may now disconnect.