Q3 2024 Franklin Resources Inc Earnings Call
Participants
Selene Oh; Head of IR; Franklin Resources Inc
Jennifer Johnson; President, Chief Executive Officer, Director; Franklin Resources Inc
Matthew Nicholls; Chief Financial Officer, Chief Operating Officer, Executive Vice President; Franklin Resources Inc
Adam Spector; Executive Vice President and Head of Global Distribution; Franklin Resources Inc
Alex Blostein; Analyst; Goldman Sachs Group Inc
Brennan Hawken; Analyst; UBS
Craig Siegenthaler; Analyst; BofA Securities
Dan Fannon; Analyst; Jefferies LLC
Michael Cyprys; Analyst; Morgan Stanley
Brian Bedell; Analyst; Deutsche Bank
Ken Worthington; Analyst; JPMorgan Chase & Co
Bill Katz; Analyst; TD Cowen
Patrick Davitt; Analyst; Autonomous Research
Presentation
Operator
Welcome to Franklin Resources earnings conference call for the quarter ended June 30, 2024. Hello, my name is Sylvie, and I will be your call operator today. As a reminder, this conference is being recorded and at this time, all participants are in a listen-only mode.
And I would like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.
Selene Oh
Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources Inc, which are not historical fact 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 just described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.
Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.
Jennifer Johnson
Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for the third fiscal quarter of 2024. I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We'll answer your questions in a few minutes, but first, I'd like to review some highlights from the quarter.
During our third quarter, investors continued to be faced with a complex investment landscape due to dynamic financial markets amidst macroeconomic, geopolitical and election uncertainty. Starting with public equity markets, the S&P 500 reached an historic milestone earlier this month, closing above 5,500 for the first time and continuing its streak of strong performance in 2024.
Likewise, the NASDAQ 100 also hit record levels surpassing the 20,000 mark. However, we've seen a pullback in late July as big tech earnings have disappointed and value has outperformed growth stocks month to date. The two big themes of artificial intelligence and inflation drove growth stocks to outperform value stocks in the first half of the calendar year.
AI is impacting companies well beyond mega cap tech companies everyday companies and governments are examining how AI will improve or disrupt their respective operations and business models. Inflationary trends continued to moderate, which is supportive of markets. But because stock market returns have been so highly concentrated, equity allocations are poised to broaden as we've seen in the last few weeks, which could provide a sustained boost to sectors and regions that have been overlooked. This trend will likely create investment opportunities favoring active managers.
Meanwhile, on interest rates, consensus estimates currently expect to rate cuts by the Federal Reserve in the remainder of the year, which looks broadly at appropriate to us. Recent Fed speak signals greater comfort with the latest progress on disinflation and acknowledges some signs of weakening growth momentum.
As we get closer to the Fed's rate cutting cycle, we expect traditional fixed income sectors to regain their place as a primary source for yield as cash begins to look less attractive. While spreads are tight at their current levels, we are not anticipating a sharp deceleration in activity, and our fixed income managers continue to find opportunities at attractive yields.
Private markets continue to thrive, and our specialist investment managers are seeing very attractive yields in the private credit space and secondary private equity has seen near unprecedented levels of pricing power. As investors weigh the impact of these trends, we're seeing a pickup in money in motion and investors becoming more active with alternatives, fixed income and select equity sectors as top priorities.
We also continue to see the trend of clients wanting to work with fewer managers given the dynamic complex nature of current markets. In addition, we continue to have success engaging more and more in a consultative way with large clients leveraging the full strength of our firm.
One of the benefits of partnering with Franklin Templeton is the breadth of capabilities we offer through a single global platform, making us a true partner for clients around the world. We offer access to specialist investment managers across public and private markets and asset classes and continue to broaden our investment capabilities to help clients achieve better outcomes.
Now turning to the highlights from the quarter. Ending AUM was $1.65 trillion, flat from the prior quarter and an increase of 15% from the prior year quarter, primarily due to the addition of Putnam as well as positive markets. Average AUM increased by 3% from the prior quarter to $1.63 trillion and increased by 15% from the prior year quarter.
In terms of investment performance, our investment teams have remained true to their distinct disciplines and time-tested approaches. Investment performance remained consistent across the one, three, five and 10-year periods. This quarter 53%, 49%, 52% and 70% of our strategy composite AUM outperformed their respective benchmarks on a one, three, five and 10-year basis.
Turning to flows, long-term net outflows were $3.2 billion. Reinvested distributions were $3.6 billion compared to $3.1 billion in the prior quarter and $3.5 billion in the prior year quarter. $5.9 billion was funded out of the previously announced $25 billion allocation from Great-West Lifeco, bringing the total funded to $20.2 billion.
We continue to make progress executing on our long-term plan of diversification across asset classes, investment vehicles and geographies. Quite demand led to positive net flows in multi-asset and alternative strategies during the quarter. Multi-asset net inflows were $1.8 billion and driven by positive net flows into Cansas, Franklin Income Fund, Fiduciary Trust International and Franklin Templeton investment solutions. The Investment Solutions team takes Franklin Templeton's best thinking and leverages our firm-wide capabilities across public and private asset classes to help provide solutions tailored to our client’s needs.
Investment Solutions ended the quarter with AUM of nearly $80 billion across the firm. Alternative net inflows were $1.4 billion, driven by growth into private market strategies. Our three largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington partners, generated a combined total of $1.1 billion of net inflows, and Franklin Venture Partners generated net inflows of over $300 million.
Benefit Street Partners continued to raise funds and alternative credit. In May, we announced the final close of its BSP Special Situations Fund II with $850 million of total capital commitments exceeding its targets. Interest from clients to diversify private debt portfolios beyond direct lending into areas like real estate debt has attracted significant high-quality engagement with investors.
Traded secondary private equity, Lexington Partners announced a dedicated strategy and highly experienced team focused on leading single asset continuation vehicle transactions in response to increased investor demand. Lexington has invested approximately $6 billion in CV transactions to date, and the new team will be focused on increasing its participation in CV transactions with a differentiated approach.
In secondary private equity, the largest most established managers continue to see the most interest and flows, reflecting a clear bias toward them in the market. Lexington has been a beneficiary of this trend. Clarion Partners has three open-end funds that perpetually fundraise in the US, and this year launched a fourth open-end fund in Europe, focusing on the logistics sector.
Clarion continues to be well positioned with over half of AUM in the industrial and logistics sectors and less than 8% of AUM in the office sector. With regard to the wealth management channel, we continued to make strides and open new opportunities for investors given our strength in global retail distribution and dedicated specialist sales team with a focus on investor education.
This quarter, we announced the expansion of our retail alternatives initiatives with a dedicated team in the EMEA region. Looking ahead, we remain focused on product development, including new products in secondary private equity and real estate private debt. Just as a reminder, at the start of our fiscal year, we anticipated raising $10 billion to $15 billion in fund raising and alternatives.
And as of this quarter, we are well on our eight to reaching the top end of that range, having raised over $12 billion fiscal year to date. It's worth noting that since being part of Franklin Templeton's platform, each alternative asset manager has increased AUM and continued to grow and diversify across strategies, products vehicles, and client types.
Fixed income net outflows were $4.8 billion, excluding inflows from Great-West inflows improved approximately 5% from the prior quarter. As we said on previous calls, we benefit from our broad range of fixed income strategies with non-correlated investment philosophies. Despite mixed performance in certain US taxable strategies, we saw client interest reflected in positive net flows into highly customized, multi-sector and global sovereign strategies.
Additionally, we continue to benefit from vehicle diversification with cross-border funds, ETFs and SMAs and fixed income, all in positive net flows. Notably, we saw increasing interest from clients and multi-sector credit strategies, which capitalize on our team's ability to offer multiple credit sector exposure in one strategy in a highly dynamic environment.
Equity net outflows were $1.6 billion, significantly improving from outflows of $5.3 billion in the last quarter and gross sales improved by 16%. Equity net inflows were driven by large-cap value and All Cap Core strategies and our single country ETFs, or single country ETFs now totaled $10 billion in AUM. With a broad lineup of capabilities, we are able to deliver investment expertise across vehicle types.
We saw another strong quarter of positive net flows across our retail SMAs, Canvas and ETF offerings. We are a leading franchise in retail SMAs with $140 billion in assets under management. This quarter, we generated positive net flows of $500 million, the fifth consecutive quarter of net inflows. Through innovative technologies we are continuing to enable personalized portfolio solutions and improved outcomes for investors.
Is an example is Canvas, our custom indexing solution platform. Canvas generated net inflows of $800 million in the quarter. AUM increased by 13% from the prior quarter to $8.2 billion and continues to have a robust pipeline. Meanwhile, our ETF business continued to see strong growth and generated net inflows of approximately $3.3 billion, doubling the prior quarter's net flows and was the 11th consecutive quarter of positive net flows.
Our platform provides solutions for a range of market conditions and investment objectives through active smart beta and passively managed ETFs. Just five years ago, our ETF AUM was $4 billion. AUM stood at $27 billion at quarter end across more than 100 strategies. As a result of our regionally focused sales model, we continue to deepen our presence across the globe.
Our non-US business saw its fifth consecutive quarter of positive net flows and finished the quarter with approximately $492 billion in assets under management. Our institutional pipeline of one but unfunded mandates was $17.8 billion, not including the remaining allocation from Great-West. We continue to expand our private wealth management business and Fiduciary Trust International AUM has more than doubled in the past five years from $17 billion to $38 billion.
Athena Capital and Pennsylvania Trust acquired in 2020 have grown almost 40% since acquisition. One of our priorities is to further accelerate the growth of our wealth management business through organic investments and acquisitions. Our commitment to innovation, artificial intelligence, blockchain and machine learning positions us to enhance client outcomes across the rapidly changing technology enabled investment landscape.
As various aspects of the asset management industry evolve, we continue to make investments in technology across distribution, investment management and operations. Earlier this quarter, we announced that we are working with Microsoft to build an advanced financial AI platform, which will help embed artificial intelligence into our sales and marketing processes to create more personalized support for clients.
We also announced plans to make a strategic minority investment in investment, a significant industry platform. And earlier this week, we announced the selection of a single platform to unify our investment management technologies across public market asset classes. This will support the simplification of our operation and reduced long-term capital expenditures.
Formed in 2018, our Franklin Templeton digital assets group has directly witness the revolutionary impact of blockchain technology. The digital asset space has experienced significant growth in recent years, much like the proliferation of new technology decades ago. Capitalizing on this trend, we launched our second digital asset backed ETFs earlier this week, the Franklin [Affinium] ETF to give our clients additional access to this emerging asset class.
Earlier today, we were pleased to announce our collaboration with SBI Holdings, a leading online financial conglomerate in Japan. The proposed joint venture will focus on ETFs and emerging asset classes, including digital assets and cryptocurrencies. The extensive reach of SPI branded Japan aligns well with our commitment to help new generations of investors achieve their financial goals through innovative strategies.
Turning briefly to financial results. Adjusted operating income was $424.9 million, an increase of 1.3% from the prior quarter and a decrease of 10.9% from the prior year quarter. Looking ahead, we will continue to invest in the business to support our strategic priorities and asset management and wealth management.
Finally, in June, investment news recognized Franklin Templeton as asset manager of the year. This is a true testament to all of our employees around the world and their commitment to being the ideal partner in helping both individuals and institutions achieve their key financial goals and objectives. I would like to thank our employees for always putting clients first.
Now let's open it up to your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions)
Alex Blostein, Goldman Sachs.
Alex Blostein
Hey, good morning. Thank you for taking the question. I was hoping we could start with the Aladdin announcement. I know it's been sort of speculated for the last couple of quarters and that's to get it out there. But can you talk about the operational benefits and both expense benefits and operating margins ultimately. Do you expect the platform to deliver how long it's going to take to get fully implemented, et cetera? And as part of that meeting that you can just hit on the expense items for the rest of the year as well? Thanks.
Matthew Nicholls
Yeah, thank you, Alex. Good morning. A couple of background first, why have we done this? What we expect to get out of it? And then I'll talk a little bit about the implementation costs and timeline and so on, as you've asked. So first of all, why have we done this? We've done this because it unifies our investment management technology across all of our public market businesses, which as you know, extensive amount of specialist investment managers.
This importantly was a decision that was made collectively across all of our specialist investment managers and has taken us no less than 18 months to two years to make this decision. In terms of the benefits, it brings several things, including most of what you'd expect, candidly, but most importantly, in the form of one platform versus multiple vendors.
I'll just go through a few that the work portfolio, construction and risk management tools, a single investment book of records, integrated order management systems and connectivity, importantly consistent reporting across the firm and this is good for both clients and for internal reporting purposes. And it assists in developing cross team, cross specialist investment manager, multi-asset solutions. And also, as you know, we've been active strategically in the business, adding companies over time. And with a single platform like this, it's easier to add new business. It's easier because it's faster and lower cost to integrate.
Thirdly, in terms of implementation costs, so implementation costs are expected to be approximately $100 million over the next three to five years. The peak of these costs would be fiscal '26 and '27, where we expect about 60% of these expenses to be assumed. Importantly, though, we expect to absorb between 50% and 100% of the implementation costs, meaning on a quarterly basis over the next several years, we expect this to be close to neutral from an operating income perspective.
That or around fiscal 2028, we expect to begin to realize savings of about $15 million per annum. And then in '29, we expect that to raise to $25 million at least. Next quarter, we will add approximately $3 million of additional cost to IST associated with the start of this implementation. But again, we've got several things going on. That should mean that we can absorb that based on other expense initiatives we have in the firm.
So as mentioned, you know, given other initiatives, the impact per quarter should be quite modest, if any. But if anything is important to call out, we will obviously do that per quarter, Alex, and we're most likely going to be able to do that in advance in our quarterly guidance. But as I said, the most important message here is even though this is an expensive implementation, exercise, we're going to absorb most of those expenses due to the other efforts that we have going on across the company.
In terms of the guide for the next quarter, we expect our effective fee rate to remain stable at 37.5 basis points, and we expect comp and benefits to be $825 million very stable from where we were this quarter. This assumes $50 million of performance fees. We expect IST to be between $150 million and $155 million this includes the $3 million that I mentioned earlier, with respect to the beginning of our implementation around the investment management platform. Occupancy, we expect to be in the high 70s, around $77 million, $78 million. And G&A we expect to be between $175 million and $180 million.
Alex Blostein
Great. Thank you. For all that comprehensive as always.
Operator
Brennan Hawken, UBS.
Brennan Hawken
Good morning. Thanks for taking my question. The couple of questions on Lexington. So curious on an update about how much of Lexington 10 has been deployed. And then when we think about the threshold for deployment, where Lexington would start to look to kick off fundraising for the next flagship, where does that typically happen?
Jennifer Johnson
So in first of all, Lexington fundraising focuses this year just to cover a little bit of that has been middle market and co-investment, and that's gone well. Meanwhile, they've been obviously deploying front-end. And basically the message is that they have been deploying it faster and at higher discounts than historical. So it's looking very good.
We don't have a specific date, but it is quite possible that they will enter the market sooner than they anticipated just because of the ability to deploy capital faster. And I think we all see it right, the liquidity that's needed in this space.
They also interestingly, we mentioned in the opening remarks about their continuation vehicle today at about $6 billion. They've done where these GPs have particular holding that they want to retain, but some of the LPs want liquidity as they spin it out into a new vehicle, Lexington hired a market leader and that they actually think that there's opportunity to even create a fund in that instead of having it be part of their traditional funds. So I think that's going to be another opportunity for Lexington.
Matthew Nicholls
And Jenny, the only piece I would add to that is that while Lexington historically has been focused on the institutional market, there are significant efforts underway to ensure that they can better tap the wealth management channel by offering perpetual vehicles in wealth management in both the US and non-US markets, and that's something we're very actively engaged in developing.
Brennan Hawken
Thanks for that. And just, Jenny, the discounts that you referred to, we had heard that those discounts have actually begun to narrow. Are they still seeing those wide discounts in the marketplace or --
Jennifer Johnson
They are definitely starting to narrow, but they are still seeing robust discount versus historical discounts, it's still better than historical discounts.
Brennan Hawken
Yes. So still at attractive levels, I guess, even though that there?
Jennifer Johnson
Yeah
Brennan Hawken
Thanks.
Operator
Craig Siegenthaler, Bank of America.
Craig Siegenthaler
Good morning, everyone. So my question is on the $25 billion AUM allocation from Great-West. So you're about $5 billion away after this reach probably in a few months. Can you talk about the incremental upside to this relationship over time beyond the '25?
Jennifer Johnson
Adam, do you want to take that or --
Adam Spector
Yeah, sure. So you know, with any client, I think you see a relationship grows over time. So the first $25 billion was really something that was more contractually oriented. Throughout that process, we have been able to meet many Great-West Lifeco executives as well as the related power company. We are in the midst of product development with them.
So the initial allocation has really been based on the types of products that insurance companies generally are interested in. And I think if you look at most insurance companies, you'll see significant allocations to some core fixed income as well as a tail that goes to alternatives. That hasn't been the allocation we've received so far.
But what we've been able to do since acquisition is to work with greatness of Great-West Lifeco as well as other power companies to develop newer products, both for the retirement platform as well as doing things on JV venture on the insurance side. So we are not at a point yet where we can pinpoint what those will be. But there is significant product development going on with Great-West and we think that we will continue to see the allocations and broaden out from the core fixed income that has been the basis of things so far.
Matthew Nicholls
And the other thing I'd just add to that, Adam and Craig is just for context. Obviously, we're delighted with the $25 billion arrangement and the $20 billion we've got in so far, but relative to other clients and investment management firms that the power group of companies does business with, it's still fairly modest, candidly.
So we have a way to go with that relationship. And we think of this as a multiyear exercise of building the relationship further versus just something has happened as a consequence of a transaction. But I think it's important to note that obviously, we expect assuming the power group of companies have very significant relationships with other investments that's going to continue. What we're doing is pitching for our fair share of it.
Craig Siegenthaler
Thank you, Matthew.
Operator
Dan Fannon, Jefferies.
Dan Fannon
Thanks. Good morning, Matthew. I was hoping you could clarify or expand upon what you guys are doing to offset the implementation costs with the new tech projects. So curious what those initiatives are. Can you be more specific? And is there some phasing of that or are those ongoing now so we shouldn't think about any kind of catch-up period between the or missed timing of some of the implementation costs versus the ongoing savings?
Matthew Nicholls
Yeah. No, I don't think there should be any missed timings, but as I said, then if these things are quite complex, we're not underestimating at all the implementation complexity of a project like this with Aladdin. I should say, though, that we've -- this is an understatement to say we've done extensive planning around this, both the planning with our partners that serve both over the Aladdin and delight the consultant that we've hired to work with us on implementation.
We've done extensive due diligence, we've built in contingencies and we have very significant resources at both Aladdin and delight and of course, our own team. But I don't so I think we've done a ton of work to sort of determine and how the implementation expenditures will work extremely focused on this, if there is anything to call out as I said, I will do that. But we don't want to jinx ourselves, but we don't expect that to happen in terms of how we're able to absorb it.
One of the tangential benefits like referenced in previous calls of acquiring being so acquisitive over the last five years, notwithstanding all the additional work and complexity around acquisitions. And it does lead to future opportunities to integrate and to be more effective and efficient across the different platforms and providers we have and a large portion of the savings is going from multiple providers down to one.
Of course, we're going to have other relationships still on the technology side that complement our relationship with Aladdin, but we'll have less than that. We also have a much larger scaled relationships across the pricing benefits that we have are very meaningful in that regard. The amount of resources we have externally from the Aladdin platform and our partners there and Deloitte on more than we could afford ourselves and frankly absorb some of the costs that otherwise we would have we would have if we were modernizing our own platform, for example.
It's all of those things sort of combined we have we have multiple middle offices. We have multiple systems that are quite complex technologies, all good and it works fine, just to be clear, but this is coming boiling down into one platform this way, less vendors, more efficiency across our whole firm, which is needed anyway in terms of where the industry is heading. It's how we're able to afford to do this in an effective way, as I've described.
Dan Fannon
Thank you.
Operator
Michael Cyprys, Morgan Stanley.
Michael Cyprys
Great, thank you. I just wanted to circle back to the JV that you announced this morning in Japan with SBI. I was just hoping maybe you can remind us of your footprint in Japan today, certainly a lot of changes in that market. Just curious how you're seeing that opportunity set evolving. Where do you see some of the biggest opportunities there in Japan?
And how does this JV help in terms of tapping into the opportunity set in that market? And maybe you could touch upon what the economics will be and how you sort of envision this JV working overtime and what success might look like?
Jennifer Johnson
Yeah. So I mean, we've been in Japan for a long time. Fortunately, Putnam actually has great relationships and it depends it has more effect. And this quarter, I think we had $3.2 billion in net inflows in Japan. A big part of that was institutional business, some with Putnam. Japan on the retail side, it's been a little bit more difficult, and it is a market that is beginning to launch ETFs and starting to talk about digital assets.
And honestly the foreign investment shop that could be difficult to penetrate that. So here with SBI they have a tremendous reach. I mean, they're probably the largest digital financial conglomerate. And so it's up 51% owned SBI 49% of Franklin Templeton, and we'll be launching a joint ETFs. And as the digital market opens up, we'll be able to launch products there in the crypto space as well.
Matthew Nicholls
And our footprint now in Japan really is not that different than anywhere else in the marketplace. It's nice to be able to have a significant local base there because of that, we have a strong institutional business. We've seen the result of that of flows this quarter. We've been able to really accelerate some of the great performance that Putnam has and won some assets there in the retail space, we have a relationship with a number of different distributors.
We also have a very strong insurance business in Japan. The only other thing I would note about SBI is that Japan is not a market that is always recognized for its innovation and SBI is an exception to that. It's one of the first significant firms to really be breaking through on the digital side in terms of client engagement. And we think partnering with them will allow us to be one of the first asset managers to have more of that direct consumer digital engagement model in Japan. And the asset base in Japan now is close to $50 billion for us.
Michael Cyprys
Thank you.
Operator
Brian Bedell, Deutsche Bank.
Brian Bedell
Great, thanks. Good morning, folks. Can you just circle back on the ETF strategy, basically $27 billion, like you said, but given a very wide range of products, you have any strategies you have across the entire complex. What's the desire to your more substantially expand that ETF franchise. Is there an ability to clone at more a more active product or is it more of a two-pronged strategy of doing that and rolling out passive product. And then if you could just talk about connecting that would be how easy it is to do that with the new Aladdin, our platform, realizing it will take some time, of course.
Jennifer Johnson
So from an EPS standpoint, I mean, actually our largest category of ETFs over 40% is active. And then the next category is passive and smart beta and then digital. So our focus on ETFs is as a firm we view ourselves as vehicle agnostic. So whatever the market is interested in having us deliver our capabilities we'll deliver whatever vehicle they like.
And there is a strong demand of advisors, particularly in the US who are interested in ETFs. And I think it's driven a lot by the shift to fee based. And so it's been important for us to be able to launch products. I think we have over 100 ETFs today and to be able to launch products that are appropriate.
There has been some feedback about a concern of launching close between a traditional mutual fund and ETF because it can bring suitability issues to the distribution platforms themselves. We like to either look at existing, say, mutual funds and potentially convert them if an ETF is a better way to deliver it or launch some sort of ETF. It is a slightly different approach.
Now, interestingly, we're getting a lot of demand from Latin America pensions that are interested in our single country ETFs, which are, I believe the lowest price in the market. And so we've been getting good strong flows there. We're getting flows from Europe as well as Japan. And so it's really global. Our view is in a lot of these markets, ETFs are becoming the vehicle choice and so we need to be able to support that. I don't know, Adam, you want to add anything to that.
Adam Spector
Yes, I'd add a few things, Jenny. The flow there has been quite strong for us at 3.3 in net flow this quarter, and that's seven quarters in a row where we've had about $1 billion or more in flow, as Jenny said, that flow is coming from a geographically diverse base where we saw about $900 million coming in from EMEA and about $0.5 billion coming in from the Americas region.
I'd also just follow up with Jenny's point on being agnostic in terms of vehicles. Our most significant and longest tenured mutual fund -- US mutual fund at the income fund. But if we look at the income fund for this quarter, just as an example, we saw very slight outflows in the mutual fund, but positive flows in the related SMA, positive flows in the cross-border funds, positive flows in the ETF.
So by offering for different vehicle types there category for the income strategies in general, with net flow positive and as investor demand becomes more global and shifts away from mutual funds, having multiple vehicles allows us to capture that flow.
Jennifer Johnson
And actually, I'm just going to say one thing on that. It's often viewed that ETFs are a potentially lower margin, and I think that comes out of the history, but being sort of early on passive. Honestly, it depends on kind of the strategy in the case of the income fund where we're having so much success in those other vehicles the pricing is actually very much in line with what the mutual fund is.
And arguably, over time, the cost to us will be less with the ETF and the SMA because you don't have the transfer agency and the fund administration costs in the same way that you do with the mutual fund. That actually was one of the drivers in our decisions to outsource those things because it allows us as the business shifts to have greater flexibility in the expense supporting the business.
Brian Bedell
That's great color. Thank you for all that detail.
Operator
Ken Worthington, JPMorgan.
Ken Worthington
Hi. Thanks for taking the question. As we think about possible extension of duration by investors, if the Fed acts later this year, what's your fixed income products you think are best positioned to benefit with better sales? And then along the same lines, some of the big flagship Western funds are still struggling with performance in outflows picked up this quarter, both gross and net. What are the issues sort of weighing on those funds?
Jennifer Johnson
So first of all, you know, add if rates go down, I think we probably are guessing to cut this year, obviously cash becomes less interesting as your fixed income allocation and you're going to probably see people move into other fixed income. We've had two of our three seems in positive net flows in fixed income. As matter of fact, you know, frankly, the performance is excellent, with 71% of AUM outperforming peers in the one three and five years.
Brandywine at 92% of their AUM outperforming peers in the five-year category and in five out of our top 10 gross selling strategies are in fixed income. And that actually includes several Western strategies, either we have positive flows in, a lot of different vehicles. So our cross border are your short duration is in positive flows are ETFs and fixed income are positive flows.
Our retail SMAs are in positive flows, and we had positive flows in our closed-end funds. Interest and actually the largest portion of our institutional pipeline is fixed income. And again, that does not include Great-West Lifeco. Interestingly, if you think about passive and how it potentially impacts fixed income.
It's been the area that passive does actually cannibalize to some extent has really been in that core and core plus space. And so in multi-sector, the highly customized muni's, Adam help me out on the other strategies. You're not seeing that kind of cannibalization from the passive. And then Western, as we've talked about their positioning has been longer duration. So right about that actually, you know, is potentially a benefit as far as the positioning and we've seen it in kind of one month's performance has improved a lot.
Adam Spector
Yeah, I would add a few things. We didn't really talk about the muni franchise and that Jenny, the muni performance is really strong. We have about 90% of assets outperforming on the one year period and about 75% outperforming on the three and five, we think we'll see significant growth in muni's and the fact that we had a strong SMA franchise there as well as mutual funds it's really helping us. In terms of the shift in rates with a steeper yield curve, we think we will see money coming out of cash into longer-term fixed income, which should benefit us.
The other thing we've seen is that in a market with fairly tight credit spreads, we see allocations going more and more to managers who have the ability to be multi sector or multi credit exposures and to have the ability to allocate across those different sleeves. And that bodes well for us as well as we are very strong in those areas.
The final thing I would note is that our insurance capabilities are highly specialized, and we've seen real growth in fixed income coming from insurance specific mandates where the regulatory reporting compliance aspect of managing those accounts is as or more important than the alpha generation.
Jennifer Johnson
And just to add on one thing on cash management, because a lot of people are looking at all the dollars in money market funds and think that that's going to move out. But the our money market funds Westerns tens at sovereign wealth and corporate treasurers who are allocating the temporary in-between may affect Western had $2 billion in net flows, which really came from a product that was very competitively priced and attracted money from corporate treasurers.
And then actually Franklin product, which was is a Luxembourg product had $800 million in flows. I think that was the fastest growing money market fund from some lists that I saw, which was really offshore clients who wanted to take advantage of the yields in the US. And I think that product now is a Luxembourg US dollar short term money market fund, and it's now $1.1 billion in AUM.
Ken Worthington
Great. Thank you.
Operator
Bill Katz, TD Cowen.
Bill Katz
Great. Thank you very much taking the question. So there's a lot of ins and outs to the franchise right now. And just maybe stepping back for a moment, I guess where I'm struggling a little bit on the storyline is how do you drive both top line and bottom line growth here? Because when I adjust for where your flows are coming in versus where they're going out, it would seem to me that the fee rate may go lower. So I'm curious your thoughts on that.
And then given now the any incremental savings that you think you can do with sort of supplement the growth for the Aladdin platform, it would seem that you more of a top-line story than a top line plus expense leverage, but then I worry the fee rate, Michael, lower because of the mix. So how do we think about how do you get revenue growth from here and then how you turn that into operating leverage? Thank you.
Jennifer Johnson
So I'd start and then Matt, have you kind of jump onto some of the EFR and some of the other things. Look, I think that one of the things that the either the pivot into adding alternatives. Obviously, one of the benefits of that is that's just a much higher fee, even excluding performance fees as a baseline investment management fee.
And this year, if you -- we guided to $10 billion to $15 billion. We're going to end out up close to $15 billion and yet the AUM is pretty flat. And that's really because of inflows plus market is sort of offset by some outflows and really realizations and distributions, but it was a year where we weren't in the market with a flagship secondary PE fund from Lexington and frankly, real estate's been really soft.
So while Clarion Partners has three of the largest funds are open-ended and there is perpetual fund raising, you know, there just hasn't been huge allocations to real estate. So we had a couple of those because I do think there's opportunity for that pipeline to expand.
Let me start with real estate. I think there's a feeling that this market has really bottomed, and that's driven by two things. One is more clarity on where rates are as well as probably more realistic marks that the bid-ask spreads are coming closer. And in talking to folks at Clarion, you don't think about it often used to be 35% of the index it's now down to 17.
So finally, maybe there's more to go on offices dropping in the marks and Clarion only as 8% allocated to office, but you've had a huge adjustment in pricing as mayor affect period, seeing RFP volumes go up a little bit you're starting to see rescissions in redemption queues. And more importantly, some of the properties that they sold in like logistics have sold for above the appraised value and on some of the multifamily above where the marks were.
So that's kind of a sign that the real estate markets getting healthy again and I think the feeling is by the end of '24, we're going to start to see managers allocating back to real estate. And I already mentioned about Lexington where they've been deploying fund 10 faster. And so hopefully we'll be in the market sooner for their next fund.
And again, this is just a supply and demand issue, which is so much has been deployed in the alternative space and there's a need for liquidity for a variety of reasons. And we do see M&A starting to pick up on their needs for that liquidity and there's only a handful of large secondary managers. They can buy big LP positions when needed.
And so that's been where we've been able to have true pricing power in the secondaries. And then you had mentioned on BSP we think that's real estate debt. There's some parts of private credit that have been pretty tight, but real estate debt, because of the retrenchment of regional banks, has made this just a fertile ground for a real opportunity, both from institutional clients interested in and really great conversations were happening with distributors who are interested in the wealth channel and offering products they're. So we think that we've been kind of if you just look at this year for alternatives, you're kind of at a baseline.
And I think there's a lot more opportunity. We've looked at some of this gets healthy and that right there carries some of the fees up. I didn't mention the reduction in our fees. A lot of the EFR was adjustment because we added Putnam. And so it's not just the asset mix of fixed income takes a much bigger percentage than equity. Of course, you're going to have it, but you're not seeing the degradation because of vehicles as much as I think people are thinking that's happening we're not seeing that same level.
Matt you want to cover anything?
Matthew Nicholls
Yeah, I think, Jenny, you cover most, that I mean, there's differences from last quarter, Bill, on the EFR, for example, the business mix was probably a little bit under 0.1 basis points. Putnam was 0.9. Now a lot of that's to do with the calculation of the EFR itself. But we thought the 0.9 would be a little bit less than that. Hence, the slight difference from the guide that I gave the reason why it ended up being as much as 0.9 is because, frankly, partly this has grown faster than we anticipated is grow faster.
Now projections every month. It's growing faster than we thought from perspective partners AUM is 23% higher than when we announced the transaction and 13% higher than when we close the transaction, and they've been in positive flows every month since for both quarters since then. So what that's meant is because they're at a lower effective fee rate and the averaging in the calculation, everything it means that the files come down a bit.
If you take that into account and then you take into account previous quarters where we've had episodic boosts to EFR of such as Lexington's catch-up fees. Our EFR has actually been fairly stable. I mean it has come down a little bit, but it's normally by 0.1 here and there. And that's that, as Jenny mentioned, is largely due to a little bit of a mix and frankly, the growth in ETFs, a Canvas SMA solutions.
And we expect that, that group of things to be growing. It's very hard when it to have all of the things flowing that we've invested in one quarter. One day, we will actually get, yes, alternatives, ETFs, Canvas, SMA solutions all coming together at once we get the fund raising in ops lined up with all those other more organic more ongoing growth there as those vehicles. When we do that, we've got a good shot at offsetting the areas of shrinkage that you referenced.
I'll also point out that if you take out some of the larger sort of taxable fixed income areas that you've pointed to and others have pointed to, we've seen positive flows in the business right now.
So anyway, just to give you a little bit more information on EFR.
Adam Spector
And Bill, the final thing I would add is Jenny talked a lot about alternatives and wealth management. It's something obviously we're focusing on that, I think is very positive from an EFR perspective. And the final thing I would note is that our core sales and we think about that as sales that are less than $100 million are up at about 14% of that tends to often be higher fee business. And we see very significant continued growth in core sales.
Bill Katz
Thank you for the very comprehensive answer.
Operator
Patrick Davitt, Autonomous Research.
Patrick Davitt
Good morning, everyone. I have a follow up on your answer on the Aladdin expense absorption, a lot of what you described sounds like you would have to come through after implementations. So just to clarify, you're expecting that absorption to be in lockstep with the implementation expense? And if so, how do you turn off all of those extra vendor costs, if Aladdin isn't live yet to fill in that capability? Thank you.
Adam Spector
It's inclusive of that. So there will be periods of time where we're paying for both Aladdin and we're paying for other vendors. But the quarterly kind of view or vision that I provided to you includes that assumption. So we still think that would be very modest adjustments to or impact to operating income per quarter based on our plan over the next five years. Remembering, of course, that a portion of the $100 million is capitalized. So that gets spread out over more years, probably something like 50% of it gets capitalized over more years, three to five.
Jennifer Johnson
And I could add that were not on a uniformed platform technology platform. So as you migrate certain cities over you retire their systems. And so it is a little bit lockstep you go along.
Adam Spector
Yeah, and we have and the other thing is that we can at the time that we're implementing Aladdin, we are also implementing other important opportunities across the company that again offset, as I mentioned earlier, offset those the sort of double pay you have to pay across different vendors. And that's why when you get to the outer years like '28, '29 and so on when that gets eliminated. You're starting talking about $25 million plus of savings.
Patrick Davitt
Thank you.
Operator
Thank you. 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 comment.
Jennifer Johnson
Well, I just want to thank everybody for participating in today's call, and once again would like to thank our employees for their hard work and dedication, and we look forward to speaking with all of you again next quarter. Take care everybody.
Operator
Thank you, ladies and gentlemen that does conclude the conference call for today. You may now disconnect.