Franklin Templeton CEO Jenny Johnson says active management pays off during extreme volatility

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With $ 1.5 trillion in assets, Franklin Templeton is among America’s 10 best asset managers and growing. In recent years, the company has acquired asset manager Legg Mason, specialty index provider O’Shaughnessy Asset Management and secondary private equity investor Lexington Partners, among others. President and CEO Jenny Johnson says it does not end there. She is focused on bolt-on acquisitions in technology and options for filling 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 company’s active management strategy and argued for implementing blockchain technology.

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

Leslie Picker: I want to get started on the macro front, because there are many issues out there. With such a turning point for inflation and for monetary policy for factor-based investments, volatility, what do you see in your large, versatile portfolio right now?

Jenny Johnson: It’s not a question, it’s a difficult time. And I would say that the good news is that active management pays off in times of great volatility. And we are really an active management – 1.5 trillion – really an active management. So it is times like these that you will find value. I think the challenge is that there are many mixed signals. You have the obvious headwind of inflation. The Fed increase of 50 basis points has been the highest in 20 years and we are looking at a couple more in progress. I think they indicated today that we probably are [looking at] two more raises, maybe even three, and then take a break. So you will get this big interest rate increase that you have with the war in Ukraine. I was at the Milken conference last week and the scary part of it was kind of the message that the best case scenario is almost a frozen war, which means you’ll be affecting energy prices for a long period of time. The food supply will be another headwind. And then of course we have China’s lockdown and the zero covid policy that affects the supply chain. So that’s your big type of headwind.

And then there is the tailwind [the] consumers are still quite red, probably more reddened than they were before COVID. So that’s good. You have the big tailwind of demography in Asia, you have technical innovation. And so, to be honest, what I’m telling people is that it’s easier to swim with the tide, how it flows. So, find areas where there are opportunities, things like when people do nearshoring of the supply chain, and try to find out where there are opportunities there. I think the technological innovation, I think things about genomics are really impressive. I think things about precision agriculture, because people are trying to take more control of their food supply chain, as we see it. Now they are not in the immediate term. It will require some investment, but I think you want to get where the opportunities are. I think Web 3.0 is another great opportunity.

Picker: I’m curious about what you’re seeing in terms of flows right now, given all these confusing factors affecting investments right now. Do you see a greater interest in the active products or do you see a greater interest in passive where people just want to get out of the power, pay a lower fee and then kind of return to the market maybe in a couple of years or so and see how it goes ?

Johnson: I think the flows are down across the board. I think what we have seen is that active people are performing more. Part of it is that you are just looking at the transition to it. I mean, NASDAQ is down more than twice as much as the Dow, so, kind of your value growth … but I think overall, people are nervous. And then you see people holding back on the interest rate side. You see people who do bank loans, variable interest rates, short maturities, because they know that interest rates will go up and it is obviously a really difficult time for fixed income. So, as far as they can stay, keep the flexibility. Credit is really important now. Companies that have good balance sheets, good cash flow. Again, this is why I think you do not see Dow downsizing as much as they tend to be more valuable stocks.

Picker: Franklin has also been quite willing to acquire, recently Legg Mason, a large asset manager that bought other alternative asset managers, recently bought a quantum fund. How do you think about making agreements in the current environment versus expanding certain capacities? And are you planning to make more acquisitions in the future?

Johnson: We have been very clear with our acquisition strategy, which is to really find products that fill in specific product niches that we needed to have. Now we are very focused on the alternative markets. They estimate that approximately 15% or 16% of the assets in the coming years in the asset management business will come from alternatives, but still 46% of the income. So it’s an important place for us to be and today we have $ 210 billion, we are a top 10 alternative manager. But the challenge is that you need global products. So, for example, if you have a property manager who is only focused on the United States, it is difficult to sell it in Europe. So if there are product gaps, we will fill in. We have already been very clear that we want to continue to grow our wealth business, trust. And so, since we have bolt-on acquisitions, it will make sense there. And finally, Fintech disrupts our business very much and that is why 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 believe that there is a lot of growth there. And so, we really made that acquisition for that technology platform.

Picker: I want to find out what you’re doing in the alternative space right now because much of Franklin Templeton’s 75-year history has been in the fund area, serving the private investor. And now you have over $ 200 billion in options, which are only largely out to penetrate retail but have not really done so on a large scale yet. Do you see it as the future? Is there something you want to do with alternatives, when you want to grow that part of your business?

Johnson: I say my grandfather started with funds because the average person could not participate in the stock markets. You’re talking in your 20s. And they could not participate in the stock markets, so people got this idea to merge money and let them invest. Well, today we have half the number of public shares we did from 2000 and there are five times as many private equity backed companies. So that number has gone from about 1,700 to 8,500 and the public shares have 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 do not think that that trend is changing. And then I – if you actually look at it, companies wait much longer to be listed on the stock exchange, which means that much of that growth opportunity in the first years is only captured in the private markets.

We actually entered the venture capital industry because our Franklin growth equity team looked at business and saw how companies waited so long to be listed that they can allocate up to 15% of an equity fund in illiquid assets. So they started going into a late stage and finally said, well, actually, we are located in the heart of Silicon Valley, we should actually launch our own venture funds. So, we’re in this space because we believe – and by the way, credit is the same. The banks’ lending is not seen in the same way as there has been more and more regulation of capital linked to their loan portfolio. So you see this huge spread, not just of the type of commercial and corporate loans that are made in the private credit markets, but you actually look at the direct consumer loans. So you have to be able to – we have to think of ourselves as if we find all the investment opportunities and take them responsibly to our customers. In fact, alternative products are good – they are very illiquid, so you need to responsibly figure out how to deliver them to the alternative channel.

Picker: In a recent interview, you said that if you were 20 and could start over in any business, you would build something that leverages the blockchain ecosystem. I thought this was fascinating, and I just want to ask you why it is so. And given that you’re already made your way to the top of one of the world’s largest asset managers, how do you see blockchain working and functioning in the traditional asset management area.

Johnson: I like to say that Bitcoin is the biggest distraction from the biggest disruption happening to financial services and other industries. Because so many of the conversations go down [is this] currency like Bitcoin, will have a place or not? And it is – there is a big discussion to be had there but in fact, the more interesting [question] is what can this technology do? And if you think about what blockchain does, it creates trust. If you think about what financial services are, interpersonal transactions are transactions that require intermediaries to prove trust, a title company that, say, you actually own. Well, blockchain can eliminate many of these intermediaries and bring buyers and sellers together and reduce the cost of a transaction. As soon as you can reduce the cost of the transaction, you can fractionate assets at a much higher level. 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 to you, Leslie, I do not have to go to the title company. Everything is built into the smart contract. So I think blockchain will unleash a lot of that kind of locked in liquidity in different types of assets.

Secondly, I think that this type of ownership – there are people who use it – once you have the token, you can actually create a loyalty program. So you already see sports teams, where they sell off, say, part of the team and what it really does is it creates a loyalty. Imagine, you can have special coach meetings, or in the NFT market, artists who use the token for one, validate that this artwork is actually original and authentic, but they also use it where only those who own the token can then have these individual meetings with artists. So it’s really an interesting way. I think it dramatically reduces some of the costs of the business, but it also unlocks this desire for a kind of social connection.

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