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With $1.5 trillion in assets, Franklin Templeton is among America’s top 10 asset managers, and growing. Over the last few years, the firm 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’s focused on bolt-on acquisitions in technology and alternatives to fill product gaps in Franklin Templeton’s business.
Johnson sat down with CNBC’s Delivering Alpha newsletter in an exclusive interview where she also discussed the firm’s active management strategy and made the case for implementing blockchain technology.
(The below has been edited for length and clarity. See above for full video.)
Leslie Picker: I want to kick things off on the macro front, because there are a lot of questions out there. With such an inflection point for inflation and for monetary policy for factor-based investing, volatility, what are you seeing within your vast, diverse portfolio right now?
Jenny Johnson: It’s no question, it’s a difficult time. And I would say the good news is, in times of great volatility, active management pays off. And we’re really an active management – 1.5 trillion – really an active management. So, it’s times like these that you find value. I think the challenge is, there is a lot of mixed signals. You have the obvious headwinds of inflation. The 50 basis points Fed raise has been the highest in 20 years and we’re looking at a couple of more coming up. I think they indicated today that we’re probably [looking at] two more increases, maybe even three, and then take a pause. So, you’re going to have this great rise in rates, you have with the war in Ukraine. I was at the Milken conference last week and sort of the scary part of that was kind of the message was the best-case scenario is almost a frozen war, which means you’re going to have an impact on energy prices for a long period of time. Food supply is going to be another headwind. And then of course, we have China’s lock down and the zero COVID policy which is affecting supply chain. So those are your big kind of headwinds.
And then the tailwinds is [the] consumer’s still pretty flush, probably more flushed than they were pre-COVID. So that’s good. You’ve got the big tailwinds of the demographics in Asia, you have technological innovation. And so, to be honest, what I say to people is it’s easier to swim with the tide, the way it’s flowing. So, find areas where there’s opportunity, things like as people are doing nearshoring of supply chain, trying to figure out where there’s opportunities there. I think that the technological innovation, I think things around genomics is really impressive. I think things around precision farming, as people are trying to take more control over their food supply chain, as we see it. Now, those are not in the immediate term. It’s going to take some investment, but I think you want to get behind where the opportunities are. I think Web 3.0 is another big opportunity.
Picker: I’m curious what you’re seeing with regard to flows right now, given all of those confounding factors affecting investing right now. Are you seeing greater interest in the active products or do you see more interest in passive where people just kind of want to ride out the tide, pay a lower fee and then kind of turn back to the market maybe in a couple years or so and see how it’s done?
Johnson: I think flows are down across the board. I think what we’ve seen is active outperforming more. Part of that is you just look at the shift to it. I mean, the NASDAQ is down more than twice as much as the Dow, so, sort of your value growth switch…but I think across the board, people are nervous. And so, you see people holding back on the fixed income side. You see people doing bank loans, floating rate, short duration, because they know rates are going to go up and obviously that’s a really difficult time for fixed income. So, to the extent they can stay, keep flexibility. Credit really matters now. Companies that have good balance sheets, good cash flow. Again, that’s why I think you don’t see the Dow down as much because they tend to be more value stocks.
Picker: Franklin has also been quite acquisitive, recently buying Legg Mason, a large asset manager buying other alternative asset managers, a quant fund recently. How do you think about deal making in the current environment versus building out certain capacities? And do you plan to do more acquisitions in the future?
Johnson: We’ve been very clear about our acquisition strategy, which is to really find products that fill in particular product niches that we needed to have. Now, we are very focused on the alternatives markets. They project that about 15% or 16% of the assets in the next couple of years in the asset management business will come from alternatives, but yet 46% of revenues. So, it’s an important place for us to be and today we have $210 billion, we’re a top 10 alternatives manager. But the challenge there is, you need global products. So, if you have, for example, a real estate manager that’s just focused on the U.S., it’s hard to sell that in Europe. So, if there’s product gaps we’ll fill in. We’ve already been very clear that we want to continue to grow our wealth business, fiduciary trust. And so, as we have bolt-on acquisitions, that’ll make sense there. And then finally, Fintech is very much disrupting our business and so we make investments, sometimes just investments, sometimes acquisitions in 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 growth there. And so, we really made that acquisition for that technology platform.
Picker: I want to home in on what you’re doing in the alternative space right now because much of Franklin Templeton’s, 75 or so year history has been in the mutual fund space, serving the retail investor. And now you have over $200 billion in alternatives, which is just broadly looking to penetrate the retail space but hasn’t quite done so on a large scale yet. Do you see that as the future? Is that something that you’re looking to do with alternatives, as you as you look to grow out that part of your business?
Johnson: I say that my grandfather got in the business of mutual funds because the average person couldn’t participate in the equity markets. You’re talking in the 20s. And they couldn’t participate in the equity markets, so people got this idea of pooling money and allowing them to invest. Well, today, we have half the number of public equities that we did from 2000 and there are five times the number of private equity-backed companies. So, that number has gone from about 1,700 to 8,500 and the public equities has gone from about 6,500 to 3,300. So, just from an investable universe, it’s really, really important to be able to have access to alternatives and I don’t think that trend changes. And then I – if you actually look at it, companies are waiting much longer to go public, which means much of that growth opportunity in those early years is only captured in the private markets.
We actually got in the venture capital business because our Franklin growth equity team was looking at deals and watching as companies waited so much longer to go public, that they can allocate up to 15% of a mutual fund in illiquid assets. So, they started to get into late-stage venture and then ultimately said, well, actually, we’re located in the heart of Silicon Valley, we should actually launch 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 there’s been more and more regulation around capital that is tied to their loan portfolio. So, you see this great proliferation, not only of kind of commercial and corporate loans that are done on the private credit markets, but you’re actually seeing on the direct lending consumer loans. So, you have to be able – we have to think of ourselves as finding all investment opportunities and bringing those responsibly to our clients. The fact is, alternative products have a great – they’re very illiquid, so you have to responsibly figure out how you’re going to deliver those to the alternatives channel.
Picker: In a recent interview, you said that if you were 20, and could start fresh in any business, you would build something that leverages the blockchain ecosystem. I found this fascinating, and I just want to ask you why that is. And given that you’ve already kind of made it to the pinnacle of one of the world’s largest asset managers, how you kind of see blockchain working its way and functioning within the traditional asset management space.
Johnson: I like to say that Bitcoin is the greatest distraction from the greatest disruption that’s happening to financial services and other industries. Because it’s – so many of the conversations go down [is this] currency like Bitcoin, going to have a place or not? And that’s – there’s great discussion to be had there but actually, the much more interesting [question] is, what can this technology do? And if you think about what blockchain is doing is, it is creating trust. If you think about what financial services is, transactions between people are transactions that require intermediaries to prove trust, a title company that, say, you actually have ownership of this. Well, blockchain can eliminate a lot of those intermediaries, and bring buyers and sellers together, and reduce the cost of a transaction. As soon as you can reduce the cost of transaction, you can fractionalize assets at a much greater level. So, for example, you can imagine taking the Empire State Building, selling it to a million people, everybody has a token. And if I want to sell to you, Leslie, I don’t have to go to the title company. It’s all built into that smart contract. So, I think blockchain will unleash a lot of the kind of locked up illiquidity in different types of assets.
Secondly, I think that this kind of ownership – there are people who are using it – once you have the token, you actually can create a loyalty program. So, you already see sports teams, where they’re selling off, say, a piece of the team and really what it’s doing is it’s creating a loyalty. Imagine, you could have special coaches’ meetings, or in the NFT market, artists leveraging the token to one, validate that this piece of art is actually original and authentic, but they’re also leveraging it where only those who own the token can then have these individual meetings with artists. So, it really is an interesting way. I think it dramatically reduces some of the costs in the business, but it also unlocks this desire for kind of a social connection.