Portfolio diversification is 'really important' for millennial investors: Franklin Templeton CEO

Franklin Templeton CEO Jenny Johnson sits down with Yahoo Finance's Brian Sozzi at the 2023 Milken Institute Global Conference to discuss market volatility and uncertainty, the Federal Reserve, the regional banking crisis, investing for retirement, and overall advice for clients.

Video transcript

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JENNY JOHNSON: The biggest issue you hear from clients is just their concern about, one, are we heading into a recession? Two, what does that mean to me? How much more rates can it be increased?

You know, volatility is difficult for your average, kind of, wealth or retail consumer. Institutions are a little more comfortable playing in that space. But we've been in really volatile markets, and that's probably what we're going to face going forward.

BRIAN SOZZI: Talk to us about market resilience. It's something that I've been spending a lot of time at this conference thinking about. We've had a series of rate hikes, we have banking failures, yet the market is hanging in there. Why do you see this?

JENNY JOHNSON: So I think you have to unpack those a little bit. So, you know, rate hikes, we've gone through one of the shortest period of times of the greatest rate increases. I think that's why you saw the stress in the regional banking sectors is really around the pace in which rates increase.

But we're getting to the end of it. But as you get towards the end of that cycle, then people have predictability. And I think there's more stability in that. So we've really gotten towards the end of that cycle. So I think that, you know, you've seen-- you've gone through that.

And then second thing is, in the regional banking sector, it was very much contained, right? And I think that the Fed did a great job and the FDIC, the regulators moved in quickly and backstopped the depositors. And that was really important.

Because in the end, banking is about confidence. And you've got to have confidence that your money is safe. And so by that backstop, they quickly gave depositors confidence.

Now, that didn't mean that they weren't going to move their money out of their checking account into say, a money market fund, right? Because the differential in returns are significant right now, which then continue to have stress on those regional banks. But I think you're really through that crisis.

BRIAN SOZZI: What are you telling clients right now that have lived through this the past month and a half, and clients, I imagine, that, in some respects, are nearing retirement?

JENNY JOHNSON: So listen, if you're nearing retirement, I think the good news is, for the first time in, you know a decade, you can actually get returns in fixed income.

BRIAN SOZZI: And go on vacation.

JENNY JOHNSON: And go on vacation. There you go. There you go. So, you know, I think what you're seeing clients want to do is still stay fairly short term, stay pretty conservative, you know, higher investment grade-type. You can get great returns in investment grade.

And, you know, and if you're near retirement, that's a good safe place to be. I think if you have more of a risk appetite, there's some interesting things that are starting to open up that I think, one, institutional investors have-- you know, we see a lot of demand in, like, secondary private equity. We own Lexington Partners. And you see a lot of interest there because they can kind of reset the private equity prices.

Private credit, our team, beneficiary partners would say, seeing the best deals they've seen since the global financial crisis. The challenges a lot of the institution to LPs have, they're overexposed to the alternative space, so it's hard for them to deploy capital. But it's actually a great time, if you have cash, to invest in some of those spaces.

And then I'd say, you know, emerging market. Emerging market debt, we're starting to see interest there.

BRIAN SOZZI: What about millennials? How are they interacting with you and your team, and what are they asking for, and how are you preparing them for retirement?

JENNY JOHNSON: So look, we really distribute through financial advisors. We're really big believers that you're going to be better served by having somebody who spends their entire career and day thinking about markets, right? And that the best lesson you learn in difficult times like this is diversification is really important. Because you don't know where that next crisis is going to be. And so be diversified.

If you're young, you also have to stay in the market. You know, from 2020 to 2022, there's 5,000 some-- 200 and something trading days. If you missed the best 10 trading days in that window, you missed something like 47% of the returns over that period of time, right? And there's nobody who can tell you when those best days exist.

And so I think, again, for the reasons we talked about, where you're at towards sort of the end of the rate cycle, you know, I think we may have a recession. We'll probably have a mild recession. But you've got to stay in the market in these times. And if you're young, you can withstand a bit of that volatility.

BRIAN SOZZI: Sure. Maybe. I mean, I think I'm still young. I mean, maybe I could. But talk to us about how you've, not rebuilt, but tried to bring Franklin Templeton into the next generation. The Legg Mason acquisition was huge. Where is that? And are you eyeing any other deals? Because this is a very competitive industry right now. It always has been, but especially right now.

JENNY JOHNSON: It's very competitive. Yeah, no, so we've done eight acquisitions in the last three years. And we set out in, like, 2017 to recognize that we needed to be more in the private markets just because of secular trends that are happening there. And so some of our acquisitions reflect that. We're now $260 billion in alternatives.

But for the younger generation, again, we sell through financial advisors. We don't do a lot direct. You know, we have some interesting sexy things that I think will be attractive to younger generations.

We're actually very big in tokenization. We're big believers in blockchain. We have the first tokenized money market fund that, you know, we've worked with the SEC to launch. That is attracting. You can download the Benjy app on your App Store.

BRIAN SOZZI: The Benjy app.

JENNY JOHNSON: The Benjy app.

BRIAN SOZZI: Is there AI behind all that?

JENNY JOHNSON: So it's-- right now, it's a traditional government money market fund, right, with a shareholder record built on the blockchain. But we just, for those who are, you know, big in this space, we just actually went cross-chain and connected to Polygon.

So any businesses that are built on the Polygon, which is built-- is layer 2 on Ethereum, we are-- now have a money market fund, you know, which is appealing. Money market funds are priced at 1. And you earn a 4.5% return.

So it's a nice way to kind of park money as you're figuring out. And we're trying to bridge the traditional markets with what we think is going to be the future of a lot of investing around-- built on blockchain as you think about ways to tokenize illiquid assets and bring them and democratize them for all investors.

SEANA SMITH: And our thanks to Brian Sozzi and Franklin Templeton CEO Jenny Johnson.