Business

Franklin Templeton CEO Jenny Johnson says aggressive management pays off in times of high volatility


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With $1.5 trillion in assets, Franklin Templeton among the top 10 US asset managers and growing. Over the past few years, the company has acquired asset manager Legg Mason, custom index provider O’Shaughnessy Asset Management and secondary private equity investor Lexington Partners, among others. President and CEO Jenny Johnson says it doesn’t end there. She focuses on rapid technology acquisitions and alternatives to fill product gaps in Franklin Templeton’s business.

Johnson sat down with CNBC’s Provide Alpha Newsletter in an exclusive interview where she also discusses the company’s active management strategy and makes the case for blockchain technology implementation.

(The section below has been edited for length and clarity. See the section above for the full video.)

The person who chose Leslie: I want to start things off on the macro side, because there are a lot of questions there. With such an inflection point for inflation and for monetary policy towards volatility, factor investing, what do you see in your vast, diversified portfolio right now?

Jenny Johnson: There’s no denying it, it’s been a tough time. And I can say that the good news is that, in times of turmoil, active management pays off. And we are really an active management – 1.5 trillion – really an active management. So it’s times like these that you see the value. I think the challenge is, there’s a lot of mixed signals. You can clearly see the opposite of inflation. The Fed’s 50 basis point increase is a 20-year high and we’re looking at a few more to come. I think they showed today that we can [looking at] increment by two, maybe even by three, and then pause. So you’re going to have this massive rate increase you have with the war in Ukraine. I attended the Milken conference last week and the scary part of it was the kind of best-case message that was almost a freeze war, meaning you’re going to have an impact on energy prices for a long time. . of time. Food supplies will be a headwind. And of course, we’ve locked down China and the zero COVID policy is affecting the supply chain. So those are your big troubles.

And then the tails are [the] of consumers is still quite a lot, perhaps more than it was before the use of COVID. So that’s good. You’ve got big demographic shifts in Asia, you’ve got technological innovation. And so, to be honest, what I tell people is it’s easier to swim with the tide, the way it flows. So, look for areas of opportunity, things like people doing a search of the near supply chain, trying to figure out where the opportunity is there. I think the technological innovation, I think the thing around genomics is really impressive. I think the things around precision farming, when people are trying to have more control over their food supply chain, as we see it. Now, those things are not immediate. It will take an investment, but I think you want to go after the opportunity. I think Web 3.0 is another big opportunity.

Selector: I’m curious what you’re seeing in terms of flow right now, with all the confounding factors affecting investment right now. Do you see more interest in active products, or do you see more interest in passive products, where people just want to go through the flow, pay a lower fee, and then return? back to the market maybe for a few years or so and see how it’s done?

Johnson: I think the flows are falling across the board. I think what we’ve seen is working much better. Part of that is that you just have to look at how it changes. I mean, the NASDAQ is down more than twice as much as the Dow, so your kind of value growth switch… but I think around the world, people are worried. And so you see people are holding back towards fixed income. You see people getting bank loans, floating rate, short term, because they know interest rates are going to go up and obviously it’s a really tough time for fixed income. So to the extent they can stay, stay flexible. Credit really matters now. Companies with good balance sheets, good cash flow. Again, that’s why I don’t think you see the Dow fall as much as they tend to be more valuable stocks.

Selector: Franklin is also quite buy-back, recently buying Legg Mason, a major asset manager buying alternative asset managers, a quant fund recently. How do you feel about doing deals in the current environment versus building certain capabilities? And do you plan to make more acquisitions in the future?

Johnson: We’ve been very clear about our acquisition strategy, which is really finding products that fill the specific product niches we need to have. Now, we are very focused on the alternatives markets. They predict that about 15% or 16% of assets over the next few years in the wealth management business will come from alternatives, but still 46% of revenue. So that’s an important place for us, and today we have $210 billion, we’re a top 10 manager of alternatives. But the challenge there is that you need global products. So if you have, for example, a real estate manager focused solely on the US, it’s going to be hard to sell it in Europe. So if there’s a product gap, we’ll fill it. We have been very clear that we want to continue to grow our rich business, trustee trust. And so when we have quick acquisitions, that makes sense there. And finally, Fintech is disrupting a lot of our business and so we make investments, sometimes just investments, sometimes acquisitions of technology products. O’Shaughnessy Asset Management has a product called Canvas which is really tax efficient, direct indexing. We think there’s a lot of development there. And so we actually acquired that technology platform.

Selector: I want to redefine what you’re doing in the alternative space right now because most of Franklin Templeton’s, 75 or so year history is in the mutual fund space, serving the retail investor. And now you have over $200 billion of alternatives, just looking to penetrate the retail space widely but are yet to complete on a massive scale. Do you see it as the future? Is that what you’re looking to do with alternatives, when you want to grow that part of your business?

Johnson: I said that my grandfather was in the mutual fund business because the average person couldn’t participate in the stock market. You are talking about the 20s. And they can’t participate in the stock market, so people have the idea of ​​pooling money and allowing them to invest. Today, we have half the amount of public equity that we have since 2000 and five times the number of companies backed by private equity. So that number went from about 1,700 to 8,500, and the public stock went from 6,500 to 3,300. So just from an investable universe, it’s really important to have access to alternatives, and I don’t think that trend is changing. And I – if you really look at it, companies wait much longer to get listed, which means that most of the growth opportunities in the early years are captured only in the private markets.

We’re actually in the venture capital business because our Franklin equity growth team is reviewing deals and watching companies wait longer to go public, to the point where they can allocate up to 15% of mutual funds in illiquid assets. So they started getting into the late stages and eventually said, actually, we’re in the heart of Silicon Valley, we should really start our own venture funds. So we’re in this space, because we think – and by the way, credit is the same. You don’t see banks lending in the same way as more and more capital regulations are attached to their loan portfolios. So you’re seeing this dramatic increase, not just commercial and business lending being done in the private credit market, but you’re actually seeing consumer loans lending directly. So you have to be able – we have to think of ourselves as finding all the investment opportunities and responsibly bringing them to our clients. The fact is, there is one great thing about substitutes – they are very illiquid, so you have to calculate responsibly how you will deliver those products to the alternative channel.

Selector: In a recent interview, you said that if you were 20 years old and could start fresh in any business, you would build something that leverages the blockchain ecosystem. I find this fascinating and I just wanted to ask you why. And given that you’ve reached the top of one of the world’s biggest wealth managers, you’ll see how blockchain works and how it works in the traditional wealth management space.

Johnson: I would say Bitcoin is the biggest distraction from the biggest disruption that is happening to financial services and other industries. Because of it – a lot of conversation goes down [is this] Will currencies like Bitcoin have a place? And that’s it – there’s a great discussion there but really, much more interesting [question] is, what can this technology do? And if you think about what blockchain is doing, it’s creating trust. If you think about financial services, people-to-people transactions are transactions that require a middleman to prove trustworthiness, then a company has ownership, such as you actually owning the thing. this. Well, blockchain can eliminate a lot of those middlemen and bring buyers and sellers together, while reducing transaction costs. As soon as you can reduce transaction costs, you can split assets to a much larger scale. So, for example, you can imagine taking the Empire State Building, selling it to a million people, everyone has a token. And if I want to sell you, Leslie, I don’t have to go to the agency. It’s all integrated in that smart contract. So I think blockchain will release a lot of liquidity locked in different asset classes.

Second, I think this kind of ownership – there are people using it – once you have the token you can really create a loyalty program. So you’ve seen sports teams where they’re selling off, for example, as part of a team, and really what they’re doing is creating loyalty. Imagine, you could have meetings of special trainers or in the NFT marketplace, artists leverage tokens to confirm that this artwork is indeed original and authentic, but they also take advantage of it as only token holders can then have personal encounters with the artists. So it’s really an interesting way. I think it greatly reduces some of the costs in doing business, but it also opens up the desire for some kind of social connection.



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