Franklin reported $48.6 billion of long-term net outflows from its Western Asset Management affiliate following news in August that Western co-CIO Ken Leech was the target of an SEC investigation.
Those outflows - following Leech’s decision to step down to respond to an SEC Wells Notice focused on “past trade allocations involving treasury derivatives” – undermined what otherwise would have been a $16 billion rebound in long-term net inflows for the latest fiscal year from net outflows of $5.2 billion the year before, said Franklin CEO Jenny Johnson on a Nov. 4 earnings call.
Despite those heavy outflows from Western – the group’s biggest asset management affiliate by assets under management, with $381 billion around the time the Leech news surfaced - Franklin reported record AUM of $1.68 trillion as of Sept. 30, helped by market gains of $63.5 billion for the final quarter of the year.
After an additional $18 billion in outflows in October, the firm’s investment team – led by Michael Buchanan, who was promoted to sole CIO when Leech stepped down – currently oversees AUM of roughly $330 billion, across 88 strategies, Johnson said.
Matt Nichols, Franklin’s chief financial officer and chief operating office, speaking on the same earnings call, noted that Western is often cited as the group’s biggest affiliate by AUM, but by the “much more important measure” of financial contribution to Franklin’s business, it’s probably the group’s fifth or sixth largest affiliate.
With the heavy outflows from Western strategies since August, the affiliate’s annualized revenues looks set to decline by about 20%, said Nichols. At the group level, though, that decline would come to only 2%, he noted.
Company executives said other segments of the globe-spanning manager's business should prove more than capable of making up for that decline, citing the growth of Franklin’s offerings of investment vehicles such as customized separately managed accounts, exchange traded funds and CITs, as well as private markets.
Private markets is where Johnson said Franklin is targeting $100 billion in fund raising over the coming five years for existing capabilities and potentially additional ones such as infrastructure.
Western under review
Meanwhile, executives noted that the economic arrangements Franklin agreed to when it acquired Western’s prior parent company, Legg Mason, in 2020 – meant to extend for five years – are being reviewed now. That could potentially bring those arrangements more in line with those Franklin has with its other investment specialist affiliates. One observer noted that at present, Franklin has a relatively hands off relationship with its biggest fixed income affiliate.
Johnson, speaking to industry analysts, said Franklin “is working with Western’s management team to explore ways to assist Western Asset, including adjustments to economic arrangements, operational and revenue synergies. This may entail changes that are similar to what we have successfully implemented with our other public market specialist investment managers, while maintaining investment process independence," she said.
With both an internal review ongoing at Franklin and regulatory investigations likewise ongoing, Johnson declined to go into further detail.
Nichols, meanwhile, said Western remains a very important part of Franklin’s business and “we’re working with Western management on providing assistance where possible, in particular, keeping the investment team in a good place while management works through this.”
“The economic arrangements that we had with Western over these five years, that’s going to have to be adjusted to accommodate a decline in the revenue and the operating income, and that’s what we’re working through right now,” said Nichols.
CFTC, SEC and DOJ
Johnson said the U.S. Department of Justice, the Securities and Exchange Commission and the CFTC were conducting ongoing, parallel investigations related to Wamco.
Leech was put on leave in August, after the SEC sent a notification that it may recommend an enforcement action.
“Since the beginning of the investigations, Western Assets’ trading policies have been reviewed by third-party experts,” Johnson told analysts. “Per this review, despite being aligned with industry standards, Western has further enhanced its trading policies and practices.”
