Franklin CEO says ETFs will probably cannibalise some mutual funds

Franklin Templeton’s exchange traded funds attracted about $1bn in net inflows in the three months to December 31, lifting total ETF assets to $20bn, 40 per cent higher than a year earlier.

“ETFs are incredibly important to us,” Franklin chief executive officer Jenny Johnson said during a call with analysts to discuss the firm’s earnings.

It was the fifth consecutive quarter in which flows to Franklin’s ETFs have totalled about $1bn.

The firm’s ETFs, the first of which launched in 2013, would “probably cannibalise some of the mutual funds”, Johnson said, but mutual funds would remain popular in the retirement channel, she added.

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“As we grow [retirement sales], we’re able to make up for any of that cannibalisation in that retirement channel while also growing our ETFs,” Johnson said.

Investors pulled $33bn from Franklin’s mutual funds in 2023, down from nearly $50bn in 2022, Morningstar Direct data shows.

The firm’s mutual funds have experienced net outflows totalling $278bn from 2015 to 2023. Despite market appreciation of the underlying holdings, assets declined by 24 per cent from year-end 2014, to $406bn as of the end of 2023, according to Morningstar Direct.

Franklin gained about $148bn in assets from its January 1 acquisition of Putnam, about 30 per cent of which was retirement related, Adam Spector, the firm’s head of global distribution, said during the call.

Putnam had about $18bn in stable value products, as well as target-date products, Spector noted.

“We can now play in that segment where we haven’t really been able to play effectively historically,” he said. “So, from a product standpoint, we’re in a much stronger position.”

Franklin had also added some retirement sales muscle from Putnam, he said. “[W]hen we took folks in from Putnam, one of the areas where we added most significantly . . . [was] retirement and somewhat in the insurance channel as well,” Spector said. “So, we just have a much, much larger field force.”

Franklin expected cost savings from the Putnam acquisition of $85mn to $100mn for the nine-month period ended September 30, according to chief financial officer Matthew Nicholls. The firm expected annual savings from the acquisition to reach $150mn in early 2025, he said.

Franklin reported $417mn in adjusted operating income for the last three months of 2023, down 18.5 per cent from the prior quarter and up 5.5 per cent from the year-earlier quarter.

The firm’s adjusted operating expenses were $1.1bn, up 4 per cent from the prior quarter and 6.5 per cent from the year-earlier quarter. The increase was mostly due to higher adjusted pay and benefits, according to the company’s earnings commentary.

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