BEN - NYSE

Welcome to Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year ended September 30, 2025. Hello. My name is Sachi, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources. You may begin.

Good morning and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary. 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 results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. With that, I'll turn the call over to Jenny Johnson, Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us to discuss Franklin Templeton's Fourth Quarter and Fiscal Year 2025 results. I'm here with Matt Nicholls, our Co-President and CFO. Joining us is Adam Spector. This is Adam's final quarterly call as he has transitioned to a new role as CEO of Fiduciary Trust International. Adam has played a vital role in our success with clients over the past 5 years, and his expertise and leadership will be invaluable to Fiduciary. I'd like to also welcome Daniel Gamba to our earnings call for the first time. Daniel joined Franklin Templeton in mid-October as Chief Commercial Officer and also assumes the role of Co-President alongside Matt and Terrence Murphy, Head of Public Market Investments. A respected industry leader, Daniel brings extensive experience across public and private markets globally. On today's call, as outlined in our investor presentation, I'll share the progress we made in year 1 of our 5-year plan, which was marked by strong momentum and tangible results. I'll also touch on highlights from our fourth quarter and fiscal 2025. After that, Matt will review our financial results and quarterly guidance, then we'll be happy to answer your questions. In recent years, Franklin Templeton has continued to build on our strong foundation, advancing our mission to help clients achieve the most important milestones of their lives. As one of the world's most comprehensive asset managers, we combine deep expertise across public and private markets with a client reach spanning over 150 countries. Today, clients look to Franklin Templeton as their trusted partner for what's ahead, one firm offering the reach and resilience of a global platform together with the distinct expertise of our specialist investment teams. As more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles and regions, we believe our business is poised to meet that demand. In recognition, just last week, Money Management in Barron's named Franklin Templeton as its 2025 Asset Manager of the Year in the $500 billion plus AUM category. The award recognizes firms leading through innovation and excellence in investment advisory solutions. Our position today reflects years of deliberate strategic planning and the strength of a global brand that's earned the trust of investors around the world. This year was another important step forward as we continue to deepen client partnerships, broaden our investment capabilities and strengthen our diversified model. Fiscal 2025 marked the first year of our 5-year plan, and we've made great strides across a number of key focus areas for the company. We are ahead of our plan for alternatives, ETFs and Canvas and on track in the other areas. Let's now turn to the investor presentation beginning on Slide 8 to review our progress report. Starting with Investment Management, we continue to offer a broad spectrum of investment capabilities across public and private assets, helping clients achieve a wide range of financial goals. In public markets, focus remained on strengthening investment performance while optimizing our product lineup. Performance continues to improve with over 50% of our mutual funds, ETFs and composites outperforming peers and benchmarks across all standard time periods. This underscores our disciplined investment process and commitment to delivering consistent results for clients. This year, we also simplified our investment management structure to strengthen talent development and enhance the way we manage investments across public markets. These changes are fostering greater collaboration and alignment across teams, positioning us to operate with greater agility and scale. At the same time, we refined our investment offerings to focus on scalable, high-demand strategies where we can deliver the greatest value for clients. That involved thoughtfully retiring certain brands and integrating investment capabilities where it makes sense, steps that make our platform more efficient, scalable and strategically positioned for future growth. Turning to private markets. Franklin Templeton is a leading manager of alternative assets with $270 billion in alternative AUM with the closing of Apera. We have a broad range of strategies, including alternative credit, secondary private equity, real estate, hedge funds and venture capital. On October 1, we further strengthened our private debt platform through the acquisition of Apera Asset Management, bringing our private credit AUM to $95 billion and enhancing our reach across European markets. The acquisition complements Benefit Street Partners and Alcentra and expands our direct lending capabilities across Europe's growing lower middle market. This year, we fundraised $22.9 billion in private markets, keeping us ahead of pace toward our 5-year $100 billion fundraising goal. The strong momentum reflects both the depth of our alternative's platform and the growing demand for diversified outcome-oriented solutions. In fiscal 2026, we anticipate an increase to private market fundraising to between $25 billion and $30 billion. We remain committed to the democratization of private assets, bringing institutional quality opportunities to a broader range of investors. Franklin Templeton Private Markets, our wealth management offering, continues to gain traction, contributing more than 20% of our private market fundraising this year, underscoring the strength of our global distribution partnerships and client reach. We expect this to grow to between 25% to 30% in the next few years. Our perpetual secondary private equity funds, the Franklin Lexington Private Markets Funds have raised $2.7 billion since their launch in January. In addition, our 2 other primary alternative managers, Benefit Street Partners and Clarion Partners, each have perpetual funds with scale. These are semi-liquid perpetual vehicles open to ongoing subscriptions, giving investors efficient access to long-term private market exposure. This year, we announced an infrastructure partnership with 3 leading firms, Actis, DigitalBridge and Copenhagen Infrastructure Partners, expanding our expertise in one of the most dynamic areas of private investing. Infrastructure is a significant opportunity with an estimated $94 trillion in global funding need by 2040. We're excited to develop a diversified perpetual infrastructure solution for the wealth channel, investing across all subsectors and positioning Franklin Templeton to capture opportunities in this fast-growing market. In addition, we are in the process of launching new products to bring to market. Industry tailwinds for private markets remain strong. According to Boston Consulting Group, alternatives are projected to represent roughly half of industry revenues by 2029, driven largely by the democratization of alternatives. Goldman Sachs projects the retail alternatives market alone will expand from $1 trillion to $5 trillion over that same period. Franklin Templeton is well positioned to capture our share of this growth leveraging our scale, partnerships and innovation to lead in the next era of alternative investing. Alternatives and retirement represent one of the most exciting opportunities ahead. This year, we announced a partnership with Empower, one of the largest U.S. retirement service providers with over $1.8 trillion in assets under administration. Together, we're paving the way for private market investments to be included in defined contribution plans, an important step toward broadening access for millions of retirement savers. While still early days, the long-term opportunity is significant. In U.S. defined contribution plans alone, allocations to alternatives are projected to create a $3 trillion addressable market over the next decade. With $125 billion in defined contribution assets and $440 billion in total retirement assets and a compelling range of alternative strategies, Franklin Templeton is well positioned as demand continues to accelerate. Turning now to distribution. As one of the most comprehensive global investment managers with clients in over 150 countries, we offer our clients a full range of investment strategies in vehicles of their choice. We saw growth across vehicles, driven by record positive net flows in retail SMAs, ETFs and Canvas, contributing to AUM growth from the prior year of 13%, 56% and 71%, respectively. We are a leader in retail SMAs with AUM of $165 billion across more than 200 high-quality strategies. Our SMA business has grown at a 21% compound annual rate since 2023, reflecting the growing demand for personalized investment solutions. As the market continues to evolve, retail SMAs now about $4 trillion are expected to double by 2030 according to Cerulli. Against that backdrop, we're positioned to capture this growth supported by powerful trends driving investor behavior, greater customization, direct ownership and tax efficiency. Within the retail SMA segment, custom and direct indexing continue to be the fastest-growing areas. According to Cerulli, direct indexing assets have reached $1 trillion, growing more than 35% from the prior year. We're seeing that strong momentum in our own business. AUM on our Canvas platform has more than tripled since 2023, an 82% compound annual growth rate. Our partnership network is expanding quickly, growing from 67 partner firms in 2023 to more than 150 today. And over that time, our financial adviser base has increased fivefold from just over 200 to more than 1,100 advisers now using Canvas to deliver customized portfolios at scale. We're exceeding our growth goals driven by continued adoption of personalized investing and the expanding reach of our Canvas platform. Our ETF business also continues to scale rapidly and ahead of plan, driven by strong global demand across fundamental active, systematic active and thematic country strategies. Active ETFs are now mainstream, representing about 10% of industry AUM, yet capturing 37% of flows and probably nearing 25% of revenues in the first half of 2025 according to McKinsey. At Franklin Templeton, our ETF AUM has grown at a 75% compound annual rate since 2023, with 16 consecutive quarters of net inflows and 14 ETFs now exceeding $1 billion in AUM. Importantly, active ETFs account for 42% of our ETF assets, but more than 50% of flows in fiscal 2025, underscoring the strength of our active ETF positioning, and we're just getting started. In our first year with approximately $50 billion in ETF AUM, we're already halfway to achieving our 5-year goal, a clear sign of the strength, momentum and scalability of our platform. Franklin Templeton Investment Solutions is another key driver of our growth strategy, leveraging our capabilities across public and private asset classes to deliver customized solutions for clients. Investment Solutions AUM grew 11% to $98 billion, in line with industry growth, supported by a strong pipeline. In July, we welcomed Rich Nuzum, former Executive Director of Investments at Mercer, to lead the expansion of our OCIO business, a major priority for us as asset owners increasingly seek strategic advice on objectives, governance and strategic asset allocation. With Rich's leadership and the strength of our investment platform, we are optimistic about this growing opportunity. This year, our focus on strategic partnerships delivered strong results, including $15.7 billion in multiple insurance sub-advisory fundings, a reflection of our growing position as a trusted partner to leading insurance companies. Beyond insurance, we also expanded multibillion-dollar relationships with clients in each of our regions. For example, the company was appointed trustee and manager of the $1.68 billion National Investment Fund of the Republic of Uzbekistan, further extending our strong track record in managing strategic investment mandates across emerging markets. These achievements reflect the strength of our partnerships and the trust we've built globally. In this context, we were delighted that the Central Banking named Franklin Templeton its 2025 Asset Manager of the Year, highlighting our expertise and enduring relationships with central banks around the world. Turning to Slide 9. Two additional important growth areas are private wealth management and digital and technology. Fiduciary Trust International, our Private Wealth Management business is positioned to benefit from major demographic trends, including the $84 trillion intergenerational wealth transfer expected through 2045. As a fully integrated wealth platform offering investment advisory, trust and state, tax and custody services, fiduciary continues to stand out with a client retention rate of about 98%. Global financial wealth is projected to grow at a 6% CAGR through 2029 according to the Boston Consulting Group. Non-depository trust companies like Fiduciary Trust International have historically grown at a faster rate. In fiscal year 2025, Fiduciary's AUM stood at $43 billion, supported by a strong pipeline of new business. As mentioned earlier, we also strengthened Fiduciary's leadership team with the appointment of Adam Spector as CEO of Fiduciary. Adam has been instrumental in the success of Franklin Templeton's global advisory services and his leadership will help accelerate Fiduciary's next phase of growth. Fiduciary is a leading independent wealth management business, and we will continue to invest both organically and through targeted acquisitions to position the business for sustained long-term growth. Our goal is to double Fiduciary's AUM by 2029. Turning to innovation. The pace of change in our industry continues to accelerate and Franklin Templeton is leading the way. According to Boston Consulting Group, the market for tokenized real-world assets is projected to grow from about $600 billion today to nearly $19 trillion by 2033, a transformative opportunity that we were early to recognize in the development of our digital assets group. Fiscal year 2025 was a defining year for our digital asset business. We expanded our product lineup, and our tokenized and digital AUM now stands at $1.7 billion, up 75% from the beginning of the year. As the only global asset manager offering digitally native on-chain mutual fund tokenization, we introduced first-of-the-kind features for registered money market funds using our proprietary blockchain-based tokenization and transfer agent platform, including intraday yield calculation and daily yield payouts, 365 days a year. During the year, we also completed launching new tokenized funds in UCITS, VCC and private fund wrapper to supplement our 40 Act offering, supporting a broader range of tokenized fund types across multiple jurisdictions and building a strong foundation for the next wave of innovation. And we deepened our global partnerships, embedded our tokenized money market funds into the crypto collateral process and partnering with Binance, the world's largest crypto exchange to develop new products for its global wallet platform. Today, Franklin Templeton stands as the only global asset manager delivering native on-chain mutual fund tokenization. We remain focused on investing in innovation and technology to harness blockchain's potential, redefining how investors access opportunities and shaping the future of asset management. Over the past year, we've taken a major step forward in our AI journey. What began as hundreds of isolated use cases has evolved into a large-scale end-to-end transformation across 4 core areas: investment management, operations, sales and marketing. This shift is accelerating our scale in agentic AI. Through strategic partnerships, including our collaboration with Microsoft announced last summer, we're building integrated scalable AI platforms that are already driving measurable results tied to clear business outcomes and commercial impact. As these initiatives deliver results, greater value will be unlocked across the firm. And importantly, I'm pleased to see that AI adoption continues to grow across our workforce. Today, the majority of employees are using approved AI tools to drive productivity, efficiency and better outcomes for our clients. We continue to advance our efforts in capital management, operational integration and expense discipline, strengthening the foundation for future growth. Matt will cover our progress and next steps in these areas in just a moment. Fiscal 2025 was a pivotal first year of our 5-year plan, one that set a strong foundation for growth, innovation and scale. We executed on our long-term priorities, delivering growth across both public and private markets as clients increasingly look to Franklin Templeton as a trusted partner for comprehensive investment solutions. With that strong foundation in place, we're entering fiscal 2026 with clear momentum and excitement about the opportunities ahead. Now turning to market performance. Fiscal 2025 brought strong public equity gains despite a complex geopolitical and macro backdrop. After a long period of narrow mega cap leadership, market breadth returned, a welcome shift for active managers. Equities rose across regions, supported by easing monetary policy, steady growth and improved earnings. While markets briefly wavered early in the year amid China's DeepSeek AI debut and U.S. tariff proposals, they rebounded quickly with the S&P 500 and MSCI Emerging Markets both up over 30% from April lows. AI remains a key driver of market direction, fueling innovation and differentiation across industries. In fixed income, returns were positive even amid policy uncertainty, a government shutdown and shifting rate expectations. The Fed's 50 basis point rate cuts in September and October helped support growth, while inflation has held near 3%, yields remain attractive, though volatility is likely to persist. Our overall view of private markets remains constructive. Activity has been more selective, but we continue to see opportunities. Secondaries offer compelling risk-adjusted profiles and in private credit, areas such as asset-based finance and commercial real estate debt are benefiting from reduced bank lending. Real estate capital markets remain muted overall, but industrial, multifamily and self-storage sectors are leading performance due to strong and sustainable long-term fundamentals. This is an environment that rewards selectivity, discipline and active management. Market breadth, dispersion and dislocation are creating opportunities across public and private markets where active managers can add meaningful value for clients. These market dynamics set the stage for another strong year at Franklin Templeton. Let's now move to fourth quarter and fiscal 2025 results, beginning on Slide 15. In terms of investment performance, as mentioned earlier, over half of our mutual fund ETF AUM outperformed peers and over half of composite AUM outperformed their benchmarks in all periods. Turning to flows on Page 17. Long-term flows increased 7.8% to $343.9 billion from the prior year. Excluding Western Asset Management, we had $44.5 billion in long-term net inflows, marking our eighth consecutive quarter of positive flows, excluding Western and reflecting client demand in key strategic areas. Our institutional pipeline of won but unfunded mandates remain healthy at $20.4 billion following record fundings in the quarter. The pipeline remains diversified by asset class and across our specialist investment managers. Internationally, Franklin Templeton manages nearly $500 billion in assets. And excluding Western Asset Management, we achieved $10.7 billion in positive long-term net flows in markets outside the U.S. That momentum highlights the strength of our global platform and the diversity of our growth across vehicles, regions and client segments. From an asset class perspective, turning to Slide 18. Equity net outflows improved to approximately $400 million for fiscal year 2025. We saw positive net flows into large-cap value, smart beta, infrastructure, equity income, custom solutions and mid-cap growth strategies. Fixed income net outflows were $122.7 billion. Franklin Templeton Fixed Income more than doubled net inflows from the prior year. With approximately $240 billion in AUM, Franklin Templeton Fixed Income has expertise in every sector and is active in all corners of the global bond market. Excluding Western, fixed income net inflows were $17.3 billion for the year. We experienced positive net flows into Munis and Stable Value strategies. Excluding Western, fixed income generated positive net flows for 7 consecutive quarters. Let's move to Slide 19. Finally, as I mentioned before, broad-based client demand drove sustained organic growth in alternatives and multi-asset, which together generated $25.7 billion in net flows for the year. This week, we reported preliminary October AUM and flows. Western's long-term net outflows were $4 billion for the month of October and had ending AUM of $231 billion. Excluding Western, long-term net inflows continue to be positive and were $2 billion. We continue to see positive net flows in alternatives, ETFs, Canvas and digital assets. The past year has presented significant challenges for Western Asset, and we remain committed to supporting them. As part of that commitment, we integrated select corporate functions to drive efficiency and give access to broader resources. Western's client service team joined Franklin Templeton in order to better serve the needs of our clients. These enhancements have been seamless for clients. Western's leading investment team continues its investment autonomy and performance has rebounded strongly with 92%, 98%, 88% and 99% of Western's composite AUM outperforming the benchmark for the 1-, 3-, 5- and 10-year periods. To wrap up, we take great pride in the efforts we've made over the past year to further grow and diversify our business. As we enter fiscal year 2026, Franklin Templeton stands stronger than ever, anchored by broad investment expertise, global scale and reach and commitment to innovation. We have strengthened our competitive position across public and private markets, expanded our partnerships globally and continued to innovate in technology, AI and digital assets. These achievements reflect not only our ability to navigate dynamic markets, but also our long-term focus on creating sustainable value for our clients and shareholders. Before I close, I want to thank our employees around the world for all their efforts this past year. Their dedication, expertise and unwavering focus on our clients are the foundation of everything we accomplish. Now I'd like to turn the call over to our Co-President, CFO and COO, Matt Nicholls, who will review our financial results and quarterly guidance. Matt?

Thank you, Jenny. I will briefly cover our fiscal fourth quarter and full year 2025 results, followed by fiscal first quarter 2026 guidance. So for the fiscal fourth quarter, ending AUM reached $1.66 trillion, reflecting an increase of 3.1% from the prior quarter, and average AUM was $1.63 trillion, a 4.4% increase from the prior quarter. Adjusted operating revenues increased by 13.9% to $1.82 billion from the prior quarter due to elevated performance fees and higher average AUM. Adjusted performance fees were $177.9 million compared to $58.5 million in the prior quarter. This quarter's adjusted effective fee rate, which excludes performance fees, stayed flat at 37.5 basis points compared to the same rate in the prior quarter. Our adjusted operating expenses were $1.34 billion, an increase of 10.5% from the prior quarter, primarily due to higher incentive compensation on higher revenues, higher performance fee incentive compensation and performance fee-related third-party expenses, higher professional fees, partially offset by higher realization of cost savings. As a result, adjusted operating income increased 25% from the prior quarter to $472.4 million, and adjusted operating margin increased to 26% from 23.7%. Fourth quarter adjusted net income and adjusted diluted earnings per share increased by 35.7% and 36.7% from the prior quarter to $357.5 million and $0.67, respectively, primarily due to higher adjusted operating income and adjusted other income and a lower tax rate. As of September 30, we impaired an indefinite-lived tangible (sic) [ intangible ] asset related to certain mutual fund contracts managed by Western Asset and recognized a $200 million noncash charge in our GAAP results. Turning to fiscal year 2025, ending AUM was $1.66 trillion, reflecting a decrease of 1% from the prior year, while average AUM increased 2.6% to $1.61 trillion. Adjusted operating revenues of $6.7 billion increased by 2.1% from the prior year, primarily due to an additional quarter of Putnam, higher average AUM and elevated performance fees, partially offset by the impact of Western outflows. Adjusted performance fees of $364.6 million increased from $293.4 million in the prior year. The adjusted effective fee rate, which excludes performance fees, was 37.5 basis points compared to 38.3 basis points in the prior year. The decline is primarily driven by strong growth into lower fee categories such as ETFs, Canvas and multi-asset solutions, mitigated by lower fee Western outflows and increasing flows into higher fee alternative asset strategies. Our adjusted operating expenses were $5.06 billion, an increase of 4.3% from the prior year, primarily due to an additional quarter of Putnam, higher incentive compensation on higher revenues and sales and higher spend on strategic initiatives, partially offset by the realization of cost-saving initiatives. Importantly, as previously guided, adjusted for an additional quarter of Putnam and excluding incentive fee compensation, our fiscal year expenses were substantially similar to fiscal year 2024, less than 1% difference. This led to fiscal year adjusted operating income of $1.64 billion, a decrease of 4.3% from the prior year. Adjusted operating margin was 24.5% compared to 26.1% in the prior year, reflecting our support of Western. Compared to prior year, fiscal year adjusted net income declined by 6.3% to $1.2 billion, and adjusted diluted earnings per share was $2.22, a decline of 7.5%. The decreases were primarily due to lower adjusted operating income and lower adjusted other income. On other topics, we continue to focus on capital management and operational integration to drive efficiency and long-term value. As stated on Slide 9 in the investor presentation, from a capital management perspective, we returned $930 million to shareholders through dividends and share repurchases, funded the majority of the remaining acquisition-related payments and repaid $400 million senior notes due March 2025 in the current year. Our dividend, which has increased every year since 1981, has grown at a compound annual growth rate of approximately 4%. Our balance sheet provides flexibility to invest in the business organically and inorganically. We have co-investments and seed capital of $2.8 billion, an increase from $2.4 billion from prior year to develop and scale new investment strategies. In addition, while continuing to invest in long-term growth initiatives, we also continue to strengthen the foundation of our business through disciplined expense management and operational efficiencies, especially given the ongoing evolution of our industry. Our plan to further simplify our firm-wide operations, including the unification of our investment management technology on a single platform across our public market specialist investment managers remains on track, both from a cost and implementation perspective. We have also integrated functions of certain specialist investment managers to simplify investment operations and increase collaboration across the firm. Before presenting our fiscal first quarter 2026 guidance, I just wanted to reiterate an important point on our fiscal year 2025 expenses. As mentioned earlier, when adjusting for an additional quarter of Putnam and excluding incentive fee compensation, our fiscal year expenses were substantially similar to fiscal year 2024, less than 1% difference. This is notwithstanding markets being significantly higher in the year and the relatively modest difference is fully attributed to higher sales commissions and higher valuation of mutual fund units linked to deferred compensation. All other investments across the company, including additional resources tied to alternative assets, ETFs, Canvas, multi-asset solutions, investment management technology and operations have been directly funded through savings initiatives. Turning to fiscal year 2026 first quarter guidance. As a reminder, guidance assumes flat markets and is based on our best estimates as of today. We expect our EFR to remain at mid-37 basis points for the quarter. We anticipate the EFR to be stable as higher growth in lower fee categories are partially offset by higher fee alternative asset flows. In future periods, episodic catch-up fees may move the EFR temporarily higher. We expect compensation and benefits to be approximately $880 million. This assumes $50 million of performance fees at a 55% payout and also includes approximately $45 million to $50 million of annual accelerated deferred compensation for retirement-eligible employees, flat from the first quarter of 2025. For IS&T, we're guiding to $155 million, consistent with the prior quarter. We also expect occupancy to be flat at approximately $70 million. G&A expense is expected to return to previous guide levels in the $190 million to $195 million range and includes elevated professional fees. In terms of our tax rate, we expect fiscal 2026 to be in the range of 26% to 28% due to a high proportion of U.S. income and the effect of increased tax rates globally. We're 1 month into the 2026 fiscal year, and it's obviously early, but consistent with our plans discussed earlier in fiscal 2025, we begin the year knowing that we have approximately $200 million of gross expense efficiencies for fiscal 2026, but the net amount of those efficiencies will ultimately depend on market and our performance during the year, both of which are up to start with as we go into the new fiscal year. Similar to fiscal 2025, these savings will also fund ongoing investments across the business, absorb increased fundraising expenses and $30 million of expenses added from the Apera acquisition. However, all else remaining equal from this point, we expect to end fiscal 2026 at or below adjusted expenses versus fiscal 2025 and at a higher operating margin. And now we would like to open the call for questions. Operator?

[Operator Instructions] The first question is from Alex Blostein from Goldman Sachs.

Thanks for all the detail and some of the updated targets as you think about some of the growth areas for the firm. Super helpful. I wanted to start with a question around alts. When you talk about the fundraising target for 20 -- fiscal 2026, I think you said 25 to 30. Can you just unpack how much you assume for Lexington's flagship fund? And then within that, how you're expanding their retail alts lineup as well?

So as you said, we think the 2026 target is between $25 billion and $30 billion. And just, Alex, you remember, last year, we said $13 billion to $20 billion, and we thought the $20 billion would be contingent on the first close of Lexington. That didn't actually happen, and we still blew away that number at, I think, $22.7 billion. So this year, the $25 billion to $30 billion will be a mix of Lexington. There will be contributions from Clarion on the real estate, BSP and Alcentra as well as Venture. Lexington could be half of that, but the others are intended to contribute significantly. And we think 2026 is going to be a real well-routed year as far as all of the alts managers contributing.

Got you. And then, Matt, one for you on expenses. So I heard you kind of try to bridge exiting fiscal 2026 all-in expenses, same or better or lower, I should say, expense run rate. Can you just help us think maybe through the cadence of that over the course of the year or maybe asked another way, your just total expense guide for 2026 in totality?

Yes. As I said in the prepared remarks, we guided earlier on in the year when markets were a lot lower that we'd be targeting $200 million of cost savings for 2026, which will be spread out through the year, and we're confident that we've achieved that. It's now a matter of determining the net amount that we can achieve. And there's a lot going on, as mentioned by Jenny on this call and as I referenced. We're confident that we can self-fund many of these things from the $200 million. We can absorb the increased fundraising that I mentioned when I talked about the $200 million earlier in the year, I caveated that with the increased fundraising that we expect this year and the addition of Apera. And also, we've mentioned in the past, the absorption of the Aladdin project expenses. So all those things, taking all those into account and beginning the year with the market up 15%, 20%, depending on what market you're talking about, we're still confident that we end the year at least -- I want to say, at least in line with where we were in 2025 with the full expenses, excluding performance fees from both years. And what I mean by at least is there's a very good shot that we are below that amount. It's very early on, Alex, obviously, for the year. So that's all I can give right now. The second thing I'll say, though, is that we do expect the results as we move into the year, except the first quarter where the margin would be a little bit lower because the accelerated deferred comp probably represents about 2% of margin. But if you take that out every quarter as we model our way through the year, all else remaining equal, we'd expect the margin to tick up. Second, third, fourth quarter, we expect the margin to get increasingly higher towards our target of 30%, as we've also referenced in the past.

[Operator Instructions] The next question is from Ben Budish from Barclays.

Jenny, you talked about your ambitions on the infrastructure side in your prepared remarks. Curious if you can unpack that a little bit more. You mentioned some wealth products coming to market, a number of partnerships. What's sort of in the pipeline for the near term in terms of new funds? And maybe talk a little bit about what your current exposure is today?

So -- sorry, let me just get a clarification. Are you talking infrastructure, meaning like the stuff we're doing on tokenization and blockchain or infrastructure, meaning the alternative products infrastructure?

The latter.

Okay. So we announced like we think that the infrastructure category is just massive. There's -- as we all know, you guys have heard the statistics as far as the number of projects that are needed to be funded out there. And so the relationship that we created, the partnerships with DigitalBridge, which DigitalBridge is known for their sort of data centers, cell towers, fiber networks kind of thing. Copenhagen Infrastructure Partners are really greenfield energy manager and then Actis is sustainable kind of infrastructure. Infrastructure requires massive scale. And so none of these players play particularly -- have really any penetration in the wealth channel. And so we're able to -- what we're going to do is be able to build a fund around participating in their deals that will then distribute in the wealth channel. Now that doesn't prohibit us from being able to do some M&A if the appropriate opportunity comes. But infrastructure is an asset class that is particularly desired by people who are looking for income because these tend to be long-term PPA products and others that kick off a lot of income. So we felt that we needed that category to fill out our alternative's capability. We didn't find something that was of scale that we wanted to acquire at the time and this -- and they needed to get into the wealth channel, or they had a desire. So it's a good match.

The next question is from Bill Katz from TD Cowen.

I appreciate all the guidance and commentary. Jenny, I'm very interested in what you guys are doing on the AI and the tokenization side. You do seem to be way ahead of most of your peers as our conversations are going. Can you talk a little bit about how you sort of see maybe the opportunity in particular for tokenization, how that might impact the ability to drive performance, what it might mean for operating costs and ultimately, how it might redefine distribution opportunities?

Sure. So again, it's really important to just think about digital assets and tokenization is blockchain, it's just a programming language. It's a programming language that does certain things really efficiently and then it's going to open up new opportunities. So we are the only ones who have -- and we built a transfer agency system and a wallet-based system because they didn't exist in the market. Starting in 2018, we had approved -- I think it was in 2021, the SEC approved our tokenized money market fund. And to give you an idea of the opportunities, because it's significantly cheaper to run and there's -- we're able to offer our money market fund with an initial investment of $20. Our traditional money market fund is you have to have $500. And the second thing that technology enables us to do is we can -- with this money market fund, we actually calculate the yield every second, and we pay it in your account every day, 365 days a year. So this is important for people who are, say, a hedge fund who are wanting to leverage -- use the money market fund for collateral and they only own it for partial part of the day, they can get 4 hours, 32 minutes and 22 seconds worth of yield that is paid in their account even for a partial day ownership. So it's just going to create new capabilities, less expensive new capabilities. And then on distribution, you saw that we had an announcement with Binance. So Binance is a crypto exchange, 270 million wallets. They're interested in bringing traditional, we're actually talking to a lot of different exchanges. They're interested in bringing additional products to traditional products that are tokenized because we built this capability, and we're the only asset manager that has this capability that I'm aware of, we can take like ETF and other products and tokenize them and list them on some of these exchanges. So it opens up a new distribution capability. But I think the future, all mutual funds, all ETFs, all will be tokenized merely because the technology is tremendously efficient. And so we're excited to be leaders in this space.

The next question is from Brennan Hawken from BMO Capital Markets.

Can we get an update on your expectations for the latest Lexington flagship? Maybe what caused the timing for the first close to slip? What are your updated expectations for size? And do you have any updated expectations for timing for any of the -- either the first or the final close?

The -- so first of all, just to be clear, it was always a stretch if there was a first close. We just felt like it was important to list it as a possibility. I do think that everybody would say that the fundraising environment is more difficult than it's been historically. But again, if you're in the secondary space, there's so much opportunity in the secondary space because the real issue is the clogging of so many of the LPs with private equity that is not moving. Private equity is distributing at about half the cash flow that they've done historically. And so as these guys are needing liquidity, whether it's because they just need it in their funds or because they want to participate in a new round of private equity, they're turning to firms like Lexington. And size really matters. Scale matters in the secondary space. And so there's only a few firms like Lexington that have that kind of scale that gives them a real advantage to play in the bigger deals. I think their target is -- I'm trying to find my notes; I think it's about $25 billion for this fund. And I think the first close, they expect in the first half of 2026, calendar 2026.

The next question is from Patrick Davitt from Autonomous Research.

Madam, you mentioned elevated distribution fees, and there's reporting this week that Schwab is planning to add a 15% platform fee on all of its third-party ETFs. ETFs obviously a big growth story for you this year. So curious if you can give us an idea of how much of your ETF growth has come from Schwab, if at all? And then more broadly, any thoughts on to what extent you're seeing a more pervasive push from all of your distribution partners to increase revenue shares like this?

Well, that is not a dynamic that has changed. It's probably just changed as ETFs have taken off. They're trying to -- more of them are trying to push for that. But as you know, that is something that we always deal with in this business, who's actually responsible for the distribution? Is it the platform? Is it the individual? And so there's probably capability in the active ETFs to be able to do some amount of that. There are already players that have it. We have not been particularly big on the ETF portion with Schwab. So it probably impacts us less immediately. But obviously, as we desire to grow there, it will be something that we will have to work with. I think that it's going to be difficult on these platform fees on passive ETFs because they're obviously cheaply priced. But as the world is moving to more active ETFs, 43% of our ETFs are in the active space above the industry. We'll have to deal with those kind of revenue share type programs.

And Patrick, just to tie your question back to that, I think you were tying it also to the G&A remark that I made on increased placement fees. That's really to do with alternative asset placement fees, not the ETFs and mutual fund type fees that you're referring to. So when I talked about G&A-related expense item around distribution, I meant placement fees related to alternative assets.

Next question is from Craig Siegenthaler from Bank of America.

My question is on your tax efficient suite. You have a pretty big offering here, and you're seeing good flows across munis, especially the SMA wrapper and also in Canvas with direct indexing. Do you think flows here could get even better given rising adoption and allocations among high net worth investors? And I don't think you have anything in the hedge fund space where you can generate even more tax alpha and flows there just started taking off this year. Is that a gap that you can fill in at some point?

We have a product called MOST. It's an options overlay product. So actually, we do have capabilities in that space. It's just now really starting to get traction. Look, we think that the direct indexing and the overlay space is going to just continue to grow. a lot of reason is the dynamics of fee-based advisory where they prefer that, and they can show the client that they've had tax efficiency. So we do have that capability with an acquisition we did, and we're really just growing it on the -- we continue to add more and more platforms. I think we have 175 sponsors now that we're now selling our SMAs to. Canvas continues to add more and more platforms every month. And once you get on a platform, the flows just continue to come on. And -- I don't know, Adam, you want to add anything else to that?

Yes. I would only say that a real power comes from being able to combine these different capabilities. So we're growing well in munis. We're growing well in ETFs, Canvas as well as 1/30/30 and option-based strategy. So to be able to do them all through a Canvas platform, which we're building towards is where the real power is. And I think we're one of the few firms that can offer all of those things in the combined suite.

The next question is from Brian Bedell from Deutsche Bank.

Thanks for all the great today on the outlook. Maybe my question is on the credit alternative business and the direct lending strategy, 2-part question. One is just on your views on credit quality in direct lending. If you can comment on whether you have any exposure to any of the problem, credits that have been out there and maybe just a view on whether you think that's -- do you think these are idiosyncratic? And then on the growth side of that, it sounds like you're increasing your traction in Europe with the most recent Apera acquisition, bolted on with Alcentra. So maybe your view on expanding direct lending and growth of this business in Europe over time? Is that an additional growth lever for you?

Yes. So first on kind of the opportunity in private, we're not seeing a deterioration in credit. And we tend to -- our view on the economy is that its still very strong, consumer is strong and you're just not -- while you'll hear about the banks talking about a slight uptick in subprime, it's really coming back to kind of more normal levels. As you could see, the fixed income market is really priced for perfection. Nobody is expecting great deterioration. We had very, very teeny exposure at ESP to one of those 2. And the truth is that was really looking like fraud. So it's not something that's systemic from a credit standpoint. So we still remain very optimistic in the credit market, again, especially because of the strength of the economy, which we still think is very strong. And then, yes, we're excited about direct lending. We think you -- if you're in the private credit space, the ability to move between different types of credit is important because sometimes something gets squeezed and it's trading very tightly, and you want to be able to pivot. But the Apera acquisition brought direct lending capabilities, particularly in the lower middle market, which is -- it's not a particularly crowded space there. So we're very optimistic about it, and we think it rounds out the private credit capabilities that we have.

The next question is from Dan Fannon from Jefferies.

Matt, I wanted to follow up on your comments around the fee rate and the outlook for next quarter as well as the year, given continued growth within alternatives, obviously, beta has been quite strong, and you've had declining fixed income. So trying to understand the mix a little bit better. And I believe there is a fund that's going to start kicking in from Lexington for fees starting, I believe, October 1. So curious as to why you're not seeing a bit more of a step-up in that fee rate sequentially.

Yes. I think when you factor in a Lexington fundraise over the year, as I mentioned in my prepared remarks, we will see an increase or we are very likely to see an increase in the EFR to -- into the higher 37s, 38s, even something like this. But I'm trying to make sure we communicate that, we expect that to be a temporary increase and then for it to come back down to reflect the very strong growth we have in ETFs, Canvas, multi-asset solutions. And remembering as well, Putnam has been very, very strong in terms of flows and Putnam's effective fee rate is 34 basis points in average across the franchise. That's getting offset. Those lower fees are getting offset by a steady and becoming more predictable alternative asset set of strategies and flows at much higher EFRs. So that positions the company to have a very stable EFR with upside as and when we raise larger flagship funds, so that's the way I would sort of describe it. Stable EFR with upside during different periods based on flagship fundraisings. And the reason why we're stable is because you've got the offset of the higher fee, more predictable alternative asset raises away from the flagship funds combined with strong, larger flows on average into the lower fee categories of ETFs, campus and multi-asset solutions.

The next question is from Ken Worthington from JPMorgan Chase & Company.

A little one for me. Shareholder servicing fees really jumped sequentially, about a $20 million pop. So anything unusual here? Or is it just sort of some mix changes, maybe some seasonality? It just seems like the jump is much bigger than we typically see in the fiscal fourth quarter.

Matt, do you want to take that?

Yes, that's to do with our -- it's a little bit seasonal, but also to do with the arrangements we have with our outsourcing providers around the TA. So you'll see that normalize.

Yes, higher transaction fees. There's also a little bit of trust and estate planning fees in there, but it's seasonal.

The next question is from Michael Cyprys from Morgan Stanley.

I wanted to ask about agentic AI and the Wand AI partnership. I was hoping you could elaborate a bit on the partnership, your goals, ambitions there, why partner with Wand versus other vendors. It sounds like you've been running a pilot program with them for the past year. I was hoping you could speak to some of the learnings from that, how it's informed your approach? And how might you quantify the sort of savings or reduced expense growth over time?

Yes. So we've announced a couple of different partnerships in the AI space, Microsoft, AWS, Writer AI. In each of these cases, I think we've done a good job that has excited the AI providers that we're not just going in and fixing one little thing. We're going in it from a platform approach. And so for example, Microsoft has helped us on distribution, which uses multiple agents and then integrates them. And so what Wand has been working on, for example, is an ESG agent with the Franklin Equity team and our solutions team where it goes out and gets internal data and external data, brings it back and runs it through their kind of a scoring on ESG. What's interesting with Wand is they really enable us to -- and by the way, these partnerships mean they're co-developing. They're going to provide resources because they want the learnings of what's happening in your environment so they can take the domain knowledge and be able to go, extend it to other people and build their business that way. So they provide us free resources. What's interesting with Wand is we're able to connect these multiple agents in our investment groups. And then we can actually take those agents and go across other investment teams and be able to customize them to say, just take the ESG example to specifically however that team uses their ESG screen. And just a little bit on Wand. I mean, they are backed by leading AI venture firms. So Thiel Capital, Peter Thiel's Fund, Fusion Fund, [indiscernible]. These are all big AI firms or AI venture capital firms, and they're terrific, and they've been a great partner with us. And like I said, we have multiple partnerships with different AI development companies.

This concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's Chief Executive Officer, for final comments.

I'd just like to thank everybody for joining us on today's call. And once again, I want to thank our employees for their continued hard work and dedication, and we look forward to speaking with you again next quarter. Thanks, everybody.