Franklin Templeton Inc. (BEN) Earnings Call Transcript & Summary

Welcome to the Franklin Templeton's Earnings Conference Call for the year ended September 30, 2026. Hello. My name is Shamali, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Templeton. You may begin.

Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Statements made on this conference call regarding Franklin Templeton, Inc., which are not historical facts, 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 can 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 described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in 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 Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us to discuss Franklin Templeton's Fourth Quarter and Fiscal Year 2026 results. I'm joined today by Matt Nicholls, our Co-President and CFO; and Daniel Gamba, our Co-President and Chief Commercial Officer. Today, as outlined in our investor presentation, I'll discuss our fourth quarter and full year results and then give an update on the progress we've made in the second year of our 5-year plan, highlighting key drivers of growth across our business. Matt will then review our financial performance and guidance, and we'll take your questions. Fiscal 2026 was a year of significant progress for Franklin Templeton. The investments we've made to diversify our business, strengthen our capabilities and better serve clients are translating into measurable results. We ended the fiscal year with $1.8 trillion in assets under management and generated $84.1 billion in long-term net inflows, representing an improvement of more than $181 billion from fiscal 2025 and an annual long-term organic growth rate of 5.3%. Importantly, we generated positive long-term net flows in every quarter across every region and in both retail and institutional channels. We also delivered meaningful improvement in profitability with adjusted operating income increasing 23% and our adjusted operating margin expanding 350 basis points to 28%. These results demonstrate the progress we're making in the second year of our 5-year strategic plan. We're generating broader organic growth, deepening client relationships and building a more diversified, efficient and scalable global business. Our diversification is an important competitive advantage with investment capabilities spanning public and private markets a balanced mix of retail and institutional clients and a global distribution platform, we have multiple sources of growth. As clients increasingly seek integrated solutions rather than [indiscernible] products, Our 1 Franklin Templeton approach allows us to bring together the expertise of our distinct investment groups across public and private markets, offer greater choice of investment vehicles and customized solutions and leverage our global distribution network to serve clients across regions and channels. This more integrated approach strengthens client relationships creates new opportunities for organic growth and improves operational efficiency, positioning us to build a more scalable and profitable business that delivers long-term value for clients and shareholders. Turning to AUM and flows on Slide 11. Long-term inflows increased 38% to $474 billion for the fiscal year, reflecting strong client demand across [indiscernible] private markets. We ended the year with continued momentum. Fourth quarter long-term net inflows were $20.8 billion, with positive contributions from equity alternatives and multi-asset. Our institutional pipeline of 1 but unfunded mandates remains strong at $22 billion at year-end, diversified across investment groups and asset assets. Turning to flows by asset class on Slides 12 and 13. Starting with equity. AUM reached a record $764 billion, with $21.1 billion in net inflows for the year. Demand spanned large-cap value, large-cap core international equity, ETFs, infrastructure and sector strategies. Fourth quarter equity net inflows doubled sequentially to $4 billion. Fixed income AUM reached $428 billion, while full year net outflows moderated to approximately $700 million. We continue to see demand for multisector, municipal and stable value strategies. Turning to Slide 13, alternatives and multi-asset led organic growth generating a combined $63.7 billion in net inflows for the year and $17.4 billion in the fourth quarter. This reflects sustained demand for private markets, diversified income strategies and integrated investment solutions. Earlier this week, we reported preliminary October AUM of $1.81 trillion with long-term net inflows of $3 billion and the benefit of markets. That's our 11th straight month of positive long-term net flows and with a $22 billion pipeline of won but unfunded mandates. We enter fiscal 2027 with good momentum. Our global reach continues to be an important competitive advantage, allowing us to connect investment capabilities from across Franklin and Templeton with client opportunities around the world. International AUM reached $523 billion with $29 billion in long-term net inflows during fiscal 2026. Flows were positive across the U.S., EMEA, APAC and the Americas, reflecting the strength of our global distribution and local relationships. The successful dual listing of the National Investment Fund of the Republic of Uzbekistan on the London and Tashkent Stock Exchanges highlights our leadership in emerging markets and our ability to partner with governments to develop capital markets and manage strategic mandates. Taken together, these results reflect broader, more consistent sources of organic growth across asset classes, client segments and geographies. Turning to Page 10. Investment performance remains fundamental to everything we do. In public markets, long-term performance remains competitive with 50% or more of our mutual funds and ETF AUM outperforming peer mediums across the 1-, 3-, 5- and 10-year periods. In our strategy composites, 55% or more of AUM outperformed benchmarks across the 3-, 5- and 10-year periods. These results reflect the strength of our investment capabilities and our continued focus on delivering strong outcomes for clients. An important part of our strategy is building platforms while preserving the distinct expertise of our investment groups. In public markets, we continued to simplify our investment management platform. This year, we combined Franklin Equity Group, Mutual Series and Brandywine Global's equity capabilities under Franklin Equity, establishing a platform with approximately $200 billion in AUM. Similarly, the alignment of our fixed income and cash management capabilities under Franklin Templeton Fixed Income, including Western Asset, creates a global platform with over $500 billion in AUM. These changes deepen our research and portfolio risk management resources, strengthen collaboration and broaden opportunities for talent development. Since fiscal 2024, we have also refined our product lineup to focus on scalable high-demand strategies, thoughtfully retiring certain brands and integrated investment capabilities where it made sense. Turning to our 5-year strategic plan. We completed year 2 on track or ahead of our original targets. With several key growth areas ahead of plan, we are raising our fiscal 2029 goals for private market fundraising, ETFs, Canvas and adjusted operating margin. Turning to Slide 20. Franklin Templeton has established a leading position in alternatives, one of our most important long-term growth opportunities. Alternatives are projected to represent approximately 54% of global asset management industry revenues by 2030, driven by growing institutional demand and the expansion of private markets into wealth management and retirement. Franklin Templeton is well positioned to capture this opportunity. Alternative AUM reached a record $305 billion at year-end, inclusive of $17 billion in realizations and distributions during the year. We fundraised $48.7 billion across alternatives in fiscal 2026, including $43.2 billion in private markets, diversified across secondary private equity, alternative credit, real estate and venture strategies. Since fiscal 2024, we have raised approximately $66 billion, achieving roughly 2/3 of our original 5-year goal in just 2 years. Given this momentum, we are increasing our fiscal 2029 private markets fundraising target to $150 billion from our original target of $100 billion established 2 years ago. Beyond the growth opportunity, private markets further diversifies our business, expands our capabilities and provides longer duration capital and recurring revenue streams that complement our public markets franchise and strengthen our earnings profile. This year, we have also continued to expand and globalize our alternatives businesses through targeted acquisitions and strategic investments, strengthening our capabilities in alternative credit and real estate. In alternative credit, we completed the acquisition of Apur Asset Management, expanding our European direct lending capabilities. Alternative credit AUM has now surpassed $100 billion. In October, we also broadened Benefit Street Partners asset-backed finance platform through our transaction with Ascena Lender Finance, and added its investment team and an initial seed portfolio of approximately $480 million in commitments. In real estate, through Clarion Partners, we announced the acquisition of a majority stake in Stone shield Capital, a European real assets manager, which is expected to triple Clarion's European AUM and to approximately $13 billion and bring pro forma real estate AUM to $90 billion. A further notable opportunity is democratizing private markets through the wealth management channel. Private wealth is projected to account for approximately 25% of alternative asset expansion over the next decade. Franklin Templeton is well positioned to capture our share of this growth by leveraging our scale, global distribution partnerships and product innovation to help lead the next era of alternative investing. Wealth clients contributed 22% of our private market fundraising in fiscal 2026 and our Franklin Templeton Private Markets Evergreen range reached $9.7 billion in AUM. We are also introducing new ways for clients to access our capabilities, including private markets, model portfolios with core stone and the launch of our inaugural $1.5 billion collateralized fund obligation. Retirement represents another significant long-term opportunity for private markets. Franklin Templeton enters this evolving market from a position of strength, managing approximately $460 billion in retirement assets, including $139 billion in defined contribution. Building on this foundation, we are expanding blended public and private market solutions across target date, multi-asset credit and infrastructure strategies. Turning to distribution on Slide 21. Our global reach and breadth of investment capabilities are important competitive advantages. With clients in over 150 countries, we delivered the expertise of our distinct investment teams through the investment vehicles and solutions of their choice. Vehicle diversification continues to be a key driver of organic growth with record net inflows across retail SMAs and Canvas and ETFs growing AUM from the prior year by 19%, 100% and 73%, respectively. These results reflect growing client demand for greater choice customization and tax-efficient investment solutions. Franklin Templeton is a leader in retail SMAs. Our retail SMA business offers more than 200 investment strategies and has grown at a compound annual rate since fiscal 2023. AUM reached a record $196 billion with $15.8 billion in net inflows this year. The demand for personalized, tax-efficient investment solutions continues to grow. Industry SMA assets have reached $5.4 trillion with unified managed accounts projected to grow 89% by 2030. Within this market, Canvas continues to exceed our growth expectations. Canvas AUM has grown nearly sevenfold since fiscal 2023 and doubled over the past year to $32.6 billion, generating $13.2 billion in net inflows. We have expanded Canvas across broker-dealers, RIAs and family offices to more than 235 distribution partners up from 67% in fiscal 2023. Financial advisers using Canvas grew by over 1,800 to more than 2,900 in the year. Our preferred partner program is also extending Canvas tax overlay capabilities to other asset managers, creating additional opportunities to scale the platform. 2 years into our plan, Canvas AUM reached nearly $33 billion. or about 2/3 of our original $50 billion to 2029 target. Given this momentum, we are doubling our fiscal 2029 target to $100 billion in AUM. Turning to Slide 22. Our ETF franchise continues to scale rapidly and is ahead of plan, driven by strong demand across fundamental, active, systematic active and thematic country strategies. ETF AUM reached a record $84.6 billion with $27.5 billion in net inflows during fiscal 2026. For the first time in 2025, active ETF launches matched passive launches and industry forecasts expect active ETF AUM to more than double to approximately $4 trillion over the next 5 years. As an active investment manager, Franklin Templeton is particularly well positioned to capture our share of this growth. Our active ETF AUM reached $37.2 billion and was more than half of our ETF net inflows. Investment performance is strong with 78% or more of active ETF AUM outperforming peer mediums over the 1-, 3- and 5-year periods. Combined with our breadth of investment capabilities, and global distribution, this provides a strong foundation to continue expanding our active ETF franchise. In year of our plan, ETF AUM and has reached more than 90% of our original $93 billion fiscal 2021 target. Given this momentum, we are more than doubling our fiscal 2029 target to $200 billion. Beyond individual investment vehicles, Clients are seeking integrated solutions that address broader portfolio needs, particularly across public and private capabilities. Our solutions business has grown at a 29% compound annual rate since fiscal 2023, reaching approximately $120 billion in AUM compared with projected industry growth of approximately 12% annually from 2026 to 2030. And we remain on track against our 5-year plan. We have a strong pipeline of opportunities and our priorities include expanding OCIO, customized multi-asset portfolios and outcome-oriented strategies that bring together investment expertise from across Franklin Templeton. Turning to Slide 23. Fiduciary Trust International, our Private Wealth Management business remains an important long-term growth opportunity supported by favorable demographic trends including the estimated $84 trillion intergenerational wealth transfer through 2045 with a fully integrated platform spanning investment advisory, trust, estate, tax and custody services. Fiduciary Trust is well positioned to serve the increasingly complex needs of high net worth clients and families. AUM reached $45 billion, up 15% since fiscal 2024. The business serves more than 2,000 client relationships with an average tenure of 19 years and a 5-year asset retention rate of approximately 98%. We remain focused on expanding this business through organic investments and targeted acquisitions. Having invested in blockchain technology for nearly a decade, innovation remains an important part of our long-term strategy. Deal assets AUM more than doubled during the fiscal 2026 to $3.6 billion, including approximately $2.5 billion in tokenized money market funds, our [indiscernible] platform enables capabilities such as intraday yield calculations and more efficient asset transfers. With the acquisition of 250 Digital we launched Franklin crypto to expand our institutional digital asset capabilities. We've also established partnerships across tokenized products, global distribution, collateral and liquidity solutions to create new ways for clients to access and use our investment capabilities. In artificial intelligence, we are expanding adoption across sales, marketing, operations and investment management to improve productivity, strengthen decision-making and enhance the client experience. Beyond efficiency, we see significant potential to transform investment research and deliver more personalized solutions and insights at scale. We are building the technology and operating model to capture that opportunity responsibly with disciplined investment oversight risk management and human judgment at the center. Our focus on productivity and expense discipline will allow us to fund strategic investments in AI, our investment management platform and distribution while supporting further margin expansion. As we close fiscal 2026, I'm pleased with the progress we've made in executing our 5-year strategic plan. We return to broad-based organic growth, strengthened our investment capabilities and improved the efficiency and profitability of our business. as asset owners increasingly look to work with fewer, more strategic partners, Franklin Templeton is well positioned to meet their evolving needs. Our leadership across public and private markets, combined with our global reach, and ability to deliver integrated investment solutions allows us to deliver client relationships and capture new opportunities for growth. With several key growth areas ahead of plan, we're confident in our ability to build on this momentum. I also want to thank our employees around the world, their expertise, collaboration and commitments to our clients has been essential to our progress. With that, I'll turn the call over to Matt Nichols to review our financial results and guidance. Matt?

Thank you, Jenny. I'll briefly review our fiscal fourth quarter and full year 2026 results on Pages 6 and 7 of the investor presentation, then I'll walk through guidance for the first quarter of fiscal 2027. I'll then provide remarks on our full year 2027 expenses and updated 5-year plan targets. Starting with the fourth quarter on Page 6, ending AUM reached $1.8 trillion, essentially flat from the prior quarter, while average AUM increased to $1.8 trillion, a 3% increase from the prior quarter. Adjusted operating revenues increased 3.7% to $1.88 billion from the prior quarter due to higher average AUM, an additional calendar day and performance fees of $94 million compared with $74 million last quarter. This quarter's adjusted effective fee rate, which excludes performance fees, was 37.5 basis points compared to 37.9 basis points in the prior quarter and flat or 37.5 basis points in the prior year quarter. . Adjusted operating expenses were $1.29 billion, a decrease of 1.7% from the prior quarter, primarily due to lower variable compensation and benefits and other expenses, including seasonal benefits lower professional fees and realization of cost savings, partially offset by spend on strategic investments. As a result, adjusted operating income increased 17.6% from the prior quarter to $598.6 million, and adjusted operating margin expanded 380 basis points to 31.8%. Compared with the prior year quarter, adjusted operating income increased 26.7%, reflecting higher revenues and cost savings partially offset by strategic investments and expenses related to higher sales and fundraising. Our adjusted operating margin increased 580 basis points from the prior year quarter. Fourth quarter adjusted net income and adjusted diluted earnings per share increased 27.7% and 30.6% from the prior quarter to $493 million and $0.94, respectively, primarily due to higher adjusted operating income, a lower tax rate and a lower share count. Turning to fiscal year 2026 on Page 7. ending an average AUM each increased by 8% to $1.8 trillion and $1.74 trillion, respectively, compared with the prior year. Adjusted operating revenues increased 7.5% to $7.2 billion, primarily due to higher average AUM from market appreciation and net inflows. The adjusted effective fee rate, which excludes performance fees, was 37.6 basis points compared to 37.5 basis points in the prior year. Growth in lower fee investment capabilities, including ETFs, Canvas and multi-asset solutions was offset by lower fee Western outflows and increasing flows into higher fee alternative assets. Our adjusted operating expenses were $5.18 billion, an increase of 2.4% from the prior year, primarily due to higher sales and fundraising as well as higher formulaic incentive compensation driven by higher AUM, revenues and investment performance, partially offset by cost savings. On to Page 17 of the investor deck. Excluding performance fee compensation, adjusted operating expenses increased 2.9% from the prior year, reflecting continued expense discipline while investing for growth in our strategic initiatives. Our fiscal 2026 expenses included $210 million of cost savings. Fiscal 2026 demonstrated the operating leverage in our model. Adjusted operating revenues grew 7.5%, while adjusted operating expenses grew 2.4%. So revenue grew at roughly 3x the rate of expenses. As a result, adjusted operating income increased 23% to $2.02 billion and adjusted operating margin expanded 350 basis points to 28%, inclusive of our support of Western Asset. Compared to the prior year, fiscal adjusted net income increased by 37.4% to $1.64 billion and adjusted diluted earnings per share rose 38.3% to $3.07. The increases were due to higher adjusted operating income, higher adjusted other income, a lower tax rate and lower share count. On other topics, we continue to focus on capital management and operational integration to drive efficiency and long-term value. As stated on Slide 18 in the investor presentation, from a capital management perspective, we returned approximately $1.2 billion to shareholders in fiscal year 2026 through share repurchases and dividends, which have increased every year since 1981. This year, as mentioned by Jenny, we also closed our acquisition of Opera. And in October, we announced our acquisitions of Stone Shield further globalizing our real estate capabilities and Encino, lender finance, to expand our asset-backed financing capabilities. Beside from maintaining the trajectory of our dividend, as always, our plan is to repurchase at least the shares that we issue for employee compensation. We will also opportunistically repurchase shares from time to time as we consider the balance of other priorities to grow the business. In terms of M&A, acquisitions have already transformed our company over the past several years. and achieved important strategic objectives. We will continue to consider acquisitions in areas where we cannot grow fast enough organically to be relevant capabilities that are important to our clients. Our balance sheet provides flexibility to invest in the business organically and inorganically. To support future growth and develop and scale new investment strategies we have seed capital and strategic investments of $3.4 billion as of fiscal 2026 year-end, an increase from $2.8 billion from the prior year-end. Our debt-to-EBITDA is approximately 1.3x, and our balance sheet cash and investments covers our long-term senior debt by more than 2x. Turning to fiscal year 2027 1st quarter guidance. As a reminder, guidance assumes flat markets and is based on our best estimates as of today. For the fiscal first quarter 2027, we anticipate the EFR to be stable from this quarter, in the mid 37 basis points, as growth in lower fee key growth areas are partially offset by higher fee alternative fundraising. Importantly, our areas of growth in lower fee EFR are now adding to our corporate operating margin. We expect compensation and benefits to be approximately $975 million. This includes approximately $50 million of annual accelerated deferred compensation awards and assumes $125 million in performance fees at a 55% payout. For IS&T, which includes investments in AI, data and security, we're guiding to $165 million, consistent with the prior quarter. We also expect occupancy be flat to the prior quarter at approximately $70 million, and G&A expense is also expected to be flat at approximately $185 million. In terms of our tax rate, we expect fiscal 2027 to be in the range of 24% to 26%, with the first fiscal quarter at the lower end of the range due to favorable discrete items. Referring to Page 17 of the investor presentation. While we are only 1 month into fiscal 2027, all else being equal, at the current level of AUM which is 4% higher than the average AUM of fiscal year 2026, we expect adjusted operating expenses, excluding performance fee compensation to be in line or slightly above fiscal 2026 levels, at approximately $5.1 billion. We anticipate reaching an adjusted operating margin of approximately 30% in fiscal 2027. This would achieve our original 5-year margin goal 2 years ahead of plan. Moving on from guidance to goals. As outlined on Page 24, our multiyear investments have resulted in higher growth rates versus our original 5-year plan as set in October 2024. As such, as outlined by Jenny, we are raising our fiscal year and 2029 targets for private markets fundraising to $150 billion, ETFs to $200 billion and Canvas to $100 billion, and we expect further margin expansion from these areas. We also see opportunities to improve efficiency and effectiveness in terms of both revenue and expenses by further simplifying the business. The unification of our public markets investment operations remains on track from a timing and funding perspective. And these efforts, amongst others, will help fund reinvestment in the business while improving profitability. Together, the scaling of our growth business and continued operational efficiencies support increasing our adjusted operating margin goal to 35% for the fourth fiscal quarter of 2029. And now we would like to open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Brennan Hawken with BMO Capital Markets.

Thanks for the update, really, really encouraging to see all the targets moved higher, particularly on the increased pretax margin for the [indiscernible] rate for fiscal year 2029 up 500 basis points. So suggests you're adding 150 to 200 bps a year ex markets. Is that a fair way to think about it? And obviously, your private market revenue CAGR will favorably shift your revenue mix? How big a driver is that versus efficiency efforts?

Well, So a couple of things. I mean -- and I'll let Matt add on. If you look at 2026, our base fee growth rate was about 3%. We expect that to continue. And frankly that -- we've got a lot of initiatives going on, for example, this kind of initiative around Franklin Templeton, which is to bring in more solutions and consolidated approach to institutional business. today, less than 10% of our institutional clients have more than 1 investment team, serving them. So huge opportunity there. So we think those things could be the upside of -- on the revenue side. But we expect the continuation of the -- and remember, we don't include market in our margin. So we expect that 3% based fee growth rate to continue. . As far as on the expense side, we've done 18 acquisitions in the last 6 years, and it takes years [indiscernible]. We don't talk enough about it, but it takes years to really do the integration of the back office. The obvious 1 that's the most public is Aladdin, but there's a ton around like CRM integration of office systems, consolidating vendor contracts. And so all of that has been ongoing, and that will continue to go, and that will continue to improve our margins and enable us to have good expense control. And then we have a bunch of AI initiatives where really from an expense standpoint, there, you should think about those as more in the operating side. as opposed to just expense savings and things like the investment side. It's all about improving investment and performance. So I think that this is a path we've been on. We see it accelerating. We see some of the -- on the revenue side, some of the initiatives that we've had on really coordinating across our distribution to we think we'll pay dividends. I don't know, Matt, do you want to add anything to that?

No. I think, Jenny, you covered it. And I think, Brennan, the way you described the sort of path to the $35 million that we've outlined in the presentation to see the right way of looking at it. I'll just add, I mentioned this in my prepared remarks, but the other thing we're seeing is as the areas of investment that we talked about, Canvas, multi-asset solutions, ETFs, private markets as each of those areas gain scale, in particular, the lower fee areas, for example, even the lower fee areas, every dollar we're adding now is adding to the corporate margin. So margin uplift is occurring as a consequence of all of those things, even at lower effective fee rate.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

So as you guys think through the 2029 plan and you budget where you're growing, so there's a lot of emphasis on the alts, there's a lot of emphasis on Canvas, SMAs and ETFs. These are obviously kind of pulling your fee rate in 2 different directions. But curious how stable you think the fee rate could ultimately be? Obviously, you articulated the margin story really well, but curious whether that can still be achieved with relatively stable fee rates amid this kind of barbelling or how we should think about, I guess, the fee rate broadly over the next couple of years?

Yes. I mean you definitely you hit it exactly right, which is obviously alts are on the higher end and Canvas and ETF similar, although active ETFs are a bit higher than some of the big areas of flows. And as long as we maintain -- I think with everything that's happened in the last couple of days, we should not forget that this is great for active management. Volatility is great for active management. And our big equity sales, it's demonstrated with the success of Putnam large-cap value and their U.S. research and even their growth. But is that if you outperform on the equity side, you're going to get flows despite the headwinds there. And so some of it will depend on -- assuming that we continue to maintain that, and we think it's a good sign for active management. I would also say that we think there is opportunity on the fixed income side that probably a bit of the headwind on Western may be carried over a little bit even on the Franklin Templeton fixed income because we have outstanding performance. across the board on our fixed income team. And we expect to see that increase as far as part of our distribution.

I'd just say 2 other things to that. Number 1 is if you look at the fund raising, as Jenny mentioned, possibilities that we have across both Lexington, Remember, we've got another at least half of their Fund II coming up in fiscal '27. And then other funds after that, Plus Stone Shield, Clarion, Benefit Street [indiscernible]. There's actually a lot of growth engines within that group that have the higher fee rate end of our business. So as Jenny mentioned, that's certainly a very important offset. If you exclude catch-up fees, for example, from both 26% and 25%. The effective fee rate was 37.4 basis points in both years, so very stable. And when we look forward to 2027, it's almost the exact same story, As I mentioned in my prepared remarks, we expect it to be 37.5%, 37.6%, something like that. And then when we look a little bit more bravely forward to that, we don't really see anything that changes too much around that just because of the strength of the private market rates combined with a relatively stable nutri-fund business that the fee rates you're familiar with there, plus the higher growth effective fee rates at the very high-growth areas we talked about like Canvas ETFs and multi-asset solutions and so on. So that's how we look at it. So yes, we do look at it as a as an effective fee rate that should all else remaining equal, remains stable over the next several years.

One thing I will add, Alex, is that alternatives, with alternatives in wealth, which is also higher fee. This year, we've had about 22% of private fundraising coming from the wealth channel. But importantly, 34% of that is coming from non-U.S. parts of the world. which really add to a lot of that. We added 62 new distribution outlets in fiscal year '26 only for alternatives in wells and more than half came from EMEA, APAC, Latin America. So clearly, that's going to be another big area of growth that will help us balance the EFR.

Our next question comes from the line of Bill Katz with TD Cowen.

Okay. Great. Just a clarification, and then I'll ask my question. On your '29 margin target, your footnote says flat markets. What is your assumption for performance fees? And if we were to assume markets for to rise, should we assume the same kind of 3:1 leverage ratio between revenues and expenses? And then the broader question I have for you, as you think about the business model over the next sort of align further to where you sort of see the growth of the business. It seems like organic growth is the focal point here, but how should we be thinking about how your capital management strategy may be evolving? And if you were to look at something it still sounds like more targeted deals from your prepared commentary, but how would M&A fit in there as well?

So in the margin question, could you just read that 1 more time? I want to make sure I fully understood your question, Bill, the first part.

Sure. Your 35% margin assumes flat markets, it looks like from your disclosure. So I was just wondering what are you assuming for performance fees? And then if markets were to rise, if I appreciate day-to-day here, we don't know. But if things would arise, you mentioned your comment that your revenues are running at about 3x the pace of expenses. Could we assume a similar 60%, 70% incremental margin on-market action as we look out over the next several years?

Yes, I think that's fair. I also think on the performance fees, we estimate -- we discounted it by about 25% or 30% based on the last couple of years of performance fees that we've achieved. So something around the high 200s, 300s, something like that for the year. But even if we didn't have those, that obviously helps our margin a little bit, but there wouldn't be a dramatic difference if we had lower performance fees based on how we're modeling the rest of the business. So I will describe that. In terms of M&A, as I mentioned in prepared remarks, we're very focused on any area where we may have a gap. We don't have that many gaps now relative to where we were several years ago. So the bar is high in terms of where our current valuation is and buying back shares relative to M&A. But on the other side of that, M&A has been a big transformational moment for this company over the last several years, and it's worked for us for the most part. So if there's an area where we think we can't grow fast enough organically and our clients demand it from us. We're going to be very focused on other ways of getting there fast and M&A is 1 of those things we've managed to make work. International is a very interesting example. We're a lot small -- even though we're sizable internationally with $540 billion or whatever is overseas. We're a lot bigger in the United States, and we see lots of opportunities to grow internationally in major markets where there's interesting trends that require professional asset management. So we're -- there are a few of the areas and then some bolt-ons in.

Well. So I would summarize it that if you say what are the priorities, it would be the bolt-ons. The only gap we really have is infrastructure. We have it on the public infrastructure. We have small private infrastructure, but from a scaled infrastructure, that's the only really big gap. And then as Matt said, if you look at what we did within [indiscernible] and Stone Shield, they're both bolt-ons of capabilities to the big category. So if you're looking in fixed income. When you took -- when you talked about -- or sorry, profit, if you talk about fixed income, you would say, "Oh, I have high yield, I have investment grade, I have munis, I have asset-backed, but people talk about private credit like it's 1 big category. But the reality is it has as many categories as traditional fixed income. And so those types of capabilities, fortunately, Benefit Street Partners is very broad in its fixed capabilities, but we do look at bolt-ons like Encino, which gave us that asset back. And then in Stoneshield. So it's bolt-ons to those types of things, particularly in private credit. High net worth, if we find these types of pen trust or Athena deals, we're always interested in those, although there's a lot of private equity money there. And then that's really kind of local asset management. right? 80% of flows in markets tend to go to local products. We're the 1 big multinational that plays a lot in local markets. And so that's an area that can be interesting for us.

And to be clear on StoneShield, it was a really, really interesting opportunity for us because on the face of that, it looks like it is just selling real estate, but it's actually a very interesting entree into more real assets and infrastructure in Europe. So it includes digital infrastructure, industrial storage, innovation. There's a few very key areas that we have no presence in today, that [indiscernible].

And I think it increased Clarion's exposure in Europe by 3x. [indiscernible]

So we're now 13% or 14% or something in Europe.

Our next question comes from the line of Dan Fannon with Jefferies.

So I wanted to follow up on your outlook for the alternatives growth. I mean you've obviously had very strong growth recently, but can you maybe unpack what you expect to be the biggest contributors to growth going forward? And also just clarify in those targets does not include any inorganic contribution that may come going forward?

Yes. That's great. So a couple of things. So this year, the $43.2 billion is across real estate, secondaries, private credit venture and even some of the Franklin Templeton [indiscernible] some CLOs and infrastructure themselves on the fixed income side. So everybody has contributed. Of that, about $11 billion is Lexington's flagship fund, which is Flagship 11, That is right on track from where they would expect to be. It's a little over half and they expect that fund to be about the size of Fund X. And so they'll be continuing to fund raise into 2028. The 37 -- we expect year '27, 2027 to be about mid-30s. And the fluctuation there of going higher is really around what the CLO market looks like. This year, the CLO market had quite a few re-ups and resets that are sort of unique at times. It was a really good year for CLOs. There was a lot of demand. So it will just depend about whether the market will have demand there, and that may swing a bit higher. And then -- so we expect '27' to be around mid-30s, We expect because, obviously, if you do the math, you'll see '28 and '29 are a bit lower, and that's really because you're not -- we're not assuming that we're in the market with any particular flagship funds like Lexington. Now if real estate turns around and there becomes a great demand, there could be something interesting there. I will point out that the $100 billion we have in private credit, 95% of it is floating rate. So for institutions that are -- that want exposure to fixed income are worried about rising rates, private credit with what Benefit Street Partners. And again, they're focused on middle market. So they're not funding the hyperscalers. They're focused on middle market. That's a great place to be. So those are kind of the swing. So the answer, no organic, o inorganic, It's all organic in those numbers.

If we ever have anything inorganic, we'll just update the presentation.

Our next question comes from the line of Craig Siegenthaler with Bank of America.

So I hope you're doing well. Congrats on raising the fundraising targets. I had a question on the [indiscernible] Canvas. I was curious, which products have been the biggest drivers recently between direct indexing, [indiscernible] tax overlays. And I know you launched that new preferred partner program, too. And then also in the last week, a member of the U.S. Senate Finance Committee actually wrote a letter to the U.S. Treasury urging them to take a look at Longshore Taxware products. I'm wondering how you think about the risk of tax law changes to Canvas, especially in light of the blue sweep this week.?