You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I'm Matt Ziggler, and my guest today is the CEO of Franklin Templeton Investments, Jenny Johnson. Welcome to Access Returns.
Ah, thanks for having me.
We're going to get into the horse on the wall behind you in a second because how can I not since it's just me? But I mean before I ask that question, three decades in the industry, 1.7 trillion in assets. I can only imagine that sometimes a Tuesday feels like three decades in your seat. My goal is for this conversation not to feel like three decades for you. But man, tell me there like a day in the life. How much has happened? How much have you been responsible for already today and in the late afternoon here on a Tuesday?
Yeah. Well, here's the good news. Like my what when you become the CEO, I always call it my four Ps that are kind of what you need. People, passion, purpose, and persistence. Like the number one job as a CEO is actually putting together the right team that can work together and accomplish things. So the good news is I got a great team and so, you know, the secret is they do a lot of the work, right? And then passion. You know, I always say like you got to love what you do because you spend a lot of time doing it. I mean, we're a global company. I spend a lot of time traveling all over the world. There isn't a week that goes by that I'm not on the road. And I spend a lot of weekends traveling because when you go to Asia, Middle East, Europe, other places like that, you end up sort of spending your weekend. So, you got to love what you do. And then I say, you know, I think as a CEO, your job is to describe it in a purposeful way so that people can get excited. You want your employees excited to feel good about what they do to come into work and to be fired up. And I think it's really important that you describe that, you know, in a purposeful way. And what do we do? We help people achieve their most important milestones of their lives. And usually it takes a financial component. And honestly, Matt, which I think is often underappreciated is the fact that people's retirement savings are investing in companies that are creating innovations that are ultimately improving all of our lives. Like that mechanism on both sides is really, really important. That's a real purposeful way to think about kind of the business that we're in. And then finally, persistence because you're going to have a lot of bad days and a lot of times it's just about dusting yourself off and getting back on the horse.
Yeah. Okay. Well, fifth P. Is this Phoenix the horse behind you?
This is Phoenix the horse. Yes. Fifth P. There we go.
Fifth P. There we go. And that's important, too, right?
All right. One of my favorite things, one of the reasons I wanted to have this conversation is you truly went intern all the way to CEO.
Yes. So, I could get us lost in this story. I won't for sake of the audience. Yes. Hold on. I'm going to try to get her to do that later, but for sake of this like intern to CEO, what do you tell an intern? What do you tell a young person today? How much of your experiences maps back versus not at all?
You know, I like to me every job that I went into, I did it with full enthusiasm to really understand, you know, what it was. And what's interesting is you pick up things that become important later in life that you don't appreciate when you're in the middle of it. So for example, I started to run a credit card department. Franklin had a bank way back then. We don't any longer. And I ran the credit card department and I learned that data could predict people's behavior. Something that we're all now focused on with AI. But back in the 1990s, you were not focused on that. Obviously with the dot-com and things like Google and showing advertising got a little bit of that but the credit card industry were really leaders in that and I always looked at that experience as hugely valuable to where I am today. So I think every job and I would take different things. I did operations, I did technology, I ran an auto finance division that we had, which we don't have any longer, which by the way is now relevant again because private markets, asset-backed lending is a big sector in the private market space. And so I have tremendous experience there. You never know how those things are going to be relevant. So all I'd say is like my advice to any intern, throw yourself into it. Get to know it. Become a real expert in it. Get your hands dirty. I mean, even a CEO, there's no sitting there at the top. There's a problem. You got to dig down and get in there deep. And you got to know when you pull yourself out. So you have to really be a student of whatever it is you do. And then also, you're responsible for your own career. It's great. We can all tell you know the managers and the bosses you need to develop your people and get but in the end nobody's a better advocate for your career than you and so look for areas that you think are interesting job opportunities that open. I always say read the CEO's letter in the annual report and you'll know what's on the CEO's mind. There's a lot of clues that can be really important I think for people starting out in an industry.
I love the idea of the labels too because you're working in the credit card department going hey you consumption here. It's a big part of GDP. This seems to kind of matter for the company. Like now when somebody calls it alternative data, you're just like, 'This is like I got an idea.'
Yeah. Guess what I did? I literally sat down with our Bloomberg rep and said, 'Show me what data you have on spending and credit card data. I want to understand what Bloomberg has. They have a bunch of different alternative data sources.' And so, I wanted to understand how to do it because you're exactly right. It becomes really important to understand trends. You know, are higher-end, you know, are people increasing the balances? Are they paying off? The percentage of people who pay it off every month, is that changing? Are delinquencies edging up at 30 days? Tremendous amount of how is the US is a 70% consumer-driven market. A lot of that can be read if you can look at the credit card data.
Yeah, it's remarkable how these things only stack through those experiences over time and the faster you start to see what rhymes, the faster the advantage you have is.
All right, let's talk about AI for a little bit because obviously that's reshaping both the way you're approaching the business, the way you're thinking about the world. Will AI take all of our jobs and make us so productive that none of it matters anymore? And how's that work for NASA?
I mean, look at every time there's been technological advances, we all there's all everybody's been predicting the death of all jobs, right? Because we don't it's very difficult to see around the corner to see what the next job is. So, you know, I perfect example, we probably remember in the early 1800s the Luddites, the strikes that they put on and the social unrest because suddenly you had these automated looms that were coming in and it was going to put people who were actually fairly well-paid weavers out of business. And honestly, it kind of did put some of them out of business. But it dramatically changed ultimately creating new jobs. Suddenly people could get a bunch of different clothing. Like you didn't have five outfits, 10 outfits. You had a couple outfits, right? And then suddenly it became much less expensive. And now people who couldn't afford those types of outfits before suddenly could afford it. And then suddenly fashion came in. And so these new industries came out of this technology. Now if you had been a weaver, you were disrupted. And so that ability to, you know, recognize that you have to try to train yourself for what the opportunities is going to be very important. You know, the steam engine was one. There was the lamplighters, right? The people who it was a great job where you walked down the street and you lit the lamp on fire and what happened when the electricity came in, right? And so the late 1800s, well suddenly there was a big concern about all the unrest. All these lamplighters were going to be advised. Oh well, by the way, now you had factories that could stay open longer. It created more jobs. You created social environments that actually went into the evening. But those things are hard to see when it's first put in front of you. So I look at it today and say, okay, the obvious, there are obvious jobs that are created with AI. The fact that you're building a bunch of data centers means you're going to need more electricians, more construction, more plumbers. Fine. What we don't see is just like when the internet was going to disrupt so many jobs, you didn't see that Google was going to hire 300,000 people in jobs that we didn't even understand or have visibility that we would need at that time. So I think it's really important to put this in context of history. Somehow human nature seems to be creative about the next thing. And the challenge here is the pace is happening so quickly that the disruption will be fast. I'll tell you the biggest thing that worries me is I hear younger people are very anti-AI because they feel threatened by the jobs. And so they're saying I don't want anything AI. The problem with that is, and I think Ruth Porat said it right, which is you're not going to lose your job to AI. You're going to lose it to a person who's good at using AI. And if you're a younger person, listen, with new technology, you know, it's just like water running down a hill. I don't care how many times you try to stop it, it's going down the hill. And so, it's the same type of thing. AI is here. We have to compete globally against other countries. So, we better make sure that our younger generation is skilled in using it. It's a tough one because it is moving fast, but you want to be one of those people who are leveraging it, leveraging it in your schoolwork, leveraging it in your day-to-day just so that you're comfortable with the tool.
What are you telling people down the scale, especially the age scale, a demographic scale inside of the company as a CEO, how are you saying embrace this tool, don't be scared of it.
Yeah. So, it's funny because I tell sure my son is an analyst, a research analyst in one of our investment teams and he told me four months into his job, so he's out of college, four months into his job, he says, 'Oh, mom, I've been assigned to figure out the AI prompts for the investment team.' And so I said, 'Well, you should go talk to the guy who heads, you know, the Franklin group on the AI stuff because he's not only a really experienced investor. He's a tech guy. He's been passionate about AI and he'll help you out.' Well, that guy calls me back and he goes, 'I got to just tell you, I was really impressed with your son. He had some of the best prompts and we seen him. They were really good. They were better than some of our most experienced analysts.' So I said to my son, so I had to get those AI prompts. He goes, 'I just kept feeding into ChatGPT and asking it to improve on them.' Right? The younger generation who doesn't have and all my nephew is a programmer. He told me he's the most works for an AI company and he says I'm one of the most prolific programmers and he goes the reason why I'm the worst programmer. So I know I need to use AI to help supplement. Right? So I actually think for the younger generation they're more comfortable with these tools and that's going to be their advantage. And so one of the things we're doing is we won't know what the jobs of the future absolutely look like but our out of college program. We're making sure that we're still hiring those people. We don't guarantee them a job after two years, but we know we need people who are comfortable with these tools embedded in our investment teams and our operations needs, in our technology, so that we are assured that we're bringing in kind of that comfort and mentality around the new technology.
What about the way you think about it in terms of I don't have a better word for this. I'm going to call them the end users, but it's the investors in the funds, the people that engage with the company on the consumer side. How do you think about how their preferences are shifting and how they're using AI and how that relates to the products you serve them with?
Sure. So, it's really kind of an exciting time because this trend of personalization. So, just think about how your old investment and I'll even say kind of pre-internet, right? What you went to your broker at the time and he put together an investment pool or investment portfolio for you and it was based on you could look at and say well here are what the returns are but in the end you really cared about a few different things. You cared about your retirement and so depending on how old you were the duration of that investment pool looked like you know could have been 20 years it could have been 40 years. As you get closer towards retirement, you want to reduce the risk in the portfolios that need to be managed that way. But maybe you cared about sending your kids to college or you were really saving for that second home or that really fancy car. Whatever those goals were, you now are going to have the ability to build investment pools based on individual goals and based on the duration of that goal, the risk tolerance you have, how important that goal is to you. Do you know you're kind of rolling the dice because the ability to get that big fancy car is really going to be dependent on whether you do really really well in your investment portfolio, but you definitely have to have enough to retire. That kind of personalization at scale is something that AI is going to be able to bring. And I think it's a really good thing for the end consumer.
What do you think about that in terms of strategy though? How do you think about how do you design for that strategically to say we're going to be somebody's going to punch it into ChatGPT and say whether they're taking that to the adviser or the adviser is doing it. How do you actually strategically position for it?
Well, so I think we actually have built some tools that actually leverage AI as well as other technology to be able to help advisers do that. We have something called a goals optimization engine which is actually how we got into AI initially. And it was exactly kind of what I described to you like if you sat down with your financial adviser and you said I have three goals. I want to retire with dignity and have that financial freedom. I'd like to help my kids pay for college and if I really really do well, I want to own that second home on the beach. It's a must-have, nice to have, and I'm really just hopeful that maybe aspirationally. Those are very different constructs of a portfolio. And so, it takes an advisor asking those kind of conversations and then you build a portfolio based on duration, risk tolerance, you know, and liquidity. Like, it's really important. I'm a big believer that we have to bring private markets to the wealth channel but we have to do it responsibly because these are illiquid right but if I know I could withstand that the excess returns you get for the liquidity become really important in your portfolio so all those things get built into the individual portfolios that are aligned to your goals.
Broader perspective on asset management, the industry just for a second change like crazy. We're going to dive more into this as this conversation goes on but five years forward. Does it look completely different? Does it look a little bit different?
Um, so I think that it's definitely going to look different in the sense so let's kind of break a few things down. So I think the investment people will leverage more and more AI tools. But in the end you're still going to need the judgment of the individual. Partly one is there's somebody has to be accountable for investment decisions. So, you're going to want to make sure you don't just go send a model off to do it. I was working for a firm called Drexel Burnham in the late 1980s when programmed trading when we had the market crash and the program trading I don't know if you remember these were pre-programmed rules that nobody had envisioned a market responding that way and it just kept selling and exacerbating the problem, right? Then that we put breaks in the market and did some things. Well, the same thing is going to go for any kind of AI tools that you leverage for investments. You're going to want the human to say, 'Hey, I realize something shifted in here. The US has just bombed Iran. Oil prices are differently. I better think about what airlines and what the impact is on airlines. There's not a historical pattern that tells me this. So AI will help me look at certain things. But I need to overlay my human component.' So I think that we have over a thousand agents working right now for our different investment teams and I think we're scratching the surface and I'm not sure all of them are effective and I think more and more of them are going to actually be the orchestration of multiple agents as opposed to individual ones. You'll see that evolve over time. I think on the distribution side I'm a big believer in tokenization. I think we're going to see more and more products that have been tokenized. And then finally as I already talked about is well I'll give two more. Is the personalization. You're going to see the end client is going to have their portfolios delivered to them directly related to individual goals that they're thinking about. And then finally, I think you're going to have this shift to private markets is not going away. The regulators are not going to suddenly change the capital requirements on banks. Banks aren't going to be able to lend like they used to lend. So, the private credit's here to stay. You know rarely does a CEO want to be a public company CEO. They prefer to be a private company CEO. So you're not seeing companies simply rush to the public markets. There becomes a point where you need that liquidity and you do it. But it used to be three years now it's 15 years. So, you know that's not going to change. And I think what's going to happen is you're going to see more and more products that bring together public and private. And again, they're going to try to deal with a liquidity nature, but just take private credit. If you you should expect at least 100 to 150 basis points on investment grade private credit premium over traditional fixed income product.
From credit risk before leverage.
Credit risk, one's illiquid, one's more liquid. 100 to 150 basis points. That's investment grade. It gets more as the credit risk increases. If you get a 1% additional return on your retirement portfolio over 20 years, you have 20% more at the end. When at the end of those 20 years, 20% more pool that makes a big difference on your financial freedom and financial independence. And so that kind of premium for the liquidity has to be we have to figure out ways to democratize it. It's still illiquid. You can't just put, you know, a token on the top of it and suddenly think you've now created a liquid vehicle. There have to be buyers and sellers. But they're going to be ways that these things get pulled together. And I think you're going to see more and more of these types of products in the wealth channel.
All right, let's break a few of these down even deeper. I like that example, too, because I think it's an important conversation. I sit in the advisor seat. This is an important part of the conversation. Avoiding the absolutes. Very few always, endeavor never in markets. A lot of details that need to be parsed. So tokenization, you've called it securitization on steroids, I believe. Explain your passion for this word.
Sure. So again, I ran technology and I ran operations. So I kind of know what the I always laugh because I say in asset management companies about 8% of the people manage money and they wonder what the rest of the people do. And there's a lot of work there in the back office and on the technology side. So blockchain let's it's this is just a software programming language right it's this construct around software. So blockchain does three things very well. Number one it has a source of truth. If you've run an operational or spend any time in an operational environment in any kind of financial services firm you will see that there is a huge amount of money spent on reconciling data. Data between systems data because your main system is still a batch system. So it doesn't update the transaction till night and then you have to reconcile with your counterparty whoever you traded with. Huge friction of cost that is overlaid on the end product because you have to go through blockchain it's eliminated. There's one source of truth and it's immediately updated and both parties leverage that source of truth. So that itself creates huge efficiencies. The second thing it is it has the ability to have a smart contract. So if Franklin Templeton does a foreign exchange contract with a third party and if the currency moves in a certain way then collateral has to be paid. You have somebody sitting in your office the system tells you the you go collect the money. Oh, and by the way, you usually use a bank as your counterparty and the bank sells the transaction the other side because Franklin Templeton doesn't want to risk because they might not know who that third party is. And I'll tell you why that bank ultimately gets eliminated. But right there, I don't need people to do that. I can immediately have the smart contract kick off when certain criteria are hit. And the third mechanism is there's an ability to make a payment. And so when that smart contract kicks, I get paid. I don't need a bank to sit in the middle. I don't need to pay them those fees because as long as I know that the counterparty, wherever they are in Thailand, Malaysia, Indonesia, or whatever, that when that contract kicks off, I'm going to receive the money, then I don't need that counterparty. All of those things will reduce the cost of transactions and actually increase the amount of innovation that can happen because there's no delay. You have what we call atomic settlement. So I'm very very very much focused on one as you reduce the cost of transaction everything everybody benefits but more importantly financial inclusion becomes more attainable. So Franklin has the only tokenized natively on-chain tokenized money market fund. And so what does that mean? A lot of them are out there and they shadow they're called digital twins which means they copy it onto the blockchain because we are natively on chain. If you invest in a money market fund today, it accrues your interest every day and it pays you the cash in your account at the end of the month. We accrue the interest every second and we pay it in your account at the end of every day. And if you're a hedge fund and you use it as collateral then and you only own it for partial of the day, you get paid for that 4 hours 22 minutes and 32 seconds that you held that money market fund and it's paid in your account today. That's the kind of financial innovation that you can have. Our traditional money market fund, you need $500 to open an account. You need $500 because anything less than that means that the other people are subsidizing you. With our tokenized money market fund, you can open account with $20. So think about from the financial inclusion, you're going to have much more sophisticated products that are now being available to people that historically have been left out from being able to leverage that kind of expertise.
When you think about this and adoption across the rest of the industry, because for a while it seemed like most things crypto and lots of people I hear you. The people watching this who don't want to talk about crypto, we're not talking about crypto. We're talking about blockchain which is different. We're talking about programming language. We're talking about this source of truth settlement and removing these frictions. Why do you see this? Why do so many other of your peers and companies not see it the way that you do?
Yeah. So I think most people are now acknowledging the benefits of the technology first of all. Okay. And what I would say is the challenge is it's actually very threatening to a lot of business models today. If I don't need that bank to sit between me and the counterparty on a foreign exchange contract, well, if I'm a bank, I don't want this thing moving very quickly. And so, you have to understand there's a lot of threat. Plus, I mean, you know, I know NASDAQ came out with they're doing tokenization and it's T+1. So, they don't do the atomic settlement. Why? Because their major clients all big banks are saying I can't handle atomic settlement today. That requires me to make a bunch of change in my systems. I don't want to do that today. So do T+1. However, there are a you just take the top five crypto exchanges, there are a billion wallets associated to those. There's a huge percentage of the global population that has never invested in a traditional kind of brokerage account. They are sitting there with a wallet infrastructure. Sure, they've been investing in crypto. Quite a few of them have some money now and they're looking for advice. And so to be able to access that billion people or a billion wallets, you know, some people may have two wallets or more, but a billion wallets, you know, we've come out with tokenized ETFs. So you get a traditional fund product and you can now hold it in your wallet because it's now been a tokenized ETF. So it's a little bit like two parallel universes. I actually speak at these crypto conferences. I'm always blown away by the size and scale of these things and how you literally almost have two universes, but they're starting to converge a bit as the crypto token financial providers are offering more traditional products. There's also a desire for those who have traditional brokerage products and clients are saying to them, I'm owning some crypto assets over here. I'd like them to be custodied with you. So, can you build that wallet infrastructure? So, I do think we're beginning down that path, but I also think you have to be realistic. This does threaten some business models which will slow its adoption down.
Explain the mechanics of the on-chain ETF. Explain how that works from your perspective and the end user because this is a really interesting detail that I could see this once it starts to be adopted more widely, it accelerates. Tell us how it works.
Yeah. So, today it's clumsy. I want to be just honest. It's clumsy. It's basically what happens is the exchange will buy a chunk of an ETF and then they will tokenize it and they'll hold the recordkeeping. Whereas what you really want with an ETF is it actually naturally coming in and out. So you get the in-kind kind of benefit. So they're selling within their own group the ETF that's been tokenized. Down the road I think you're going to see tokens of token products. Even let's go back to our Benji money market fund. Even though you can buy it on a Saturday and we're going to pay you interest on Saturday, the reality is we can't buy US treasuries on Saturday. So, we can't really deploy your capital. But what's happening is US treasuries are starting to be tokenized. As that market moves to a 24 by 7 market, we'll be able to match
those two things. But today we're sort of in the halfway in between where the shareholder recordkeeping portion of the product is tokenized but the rest of it exists on all the old, when I say the rest, the books and records of whatever the investments are are still sitting on the old rails.
So how much of this depends on, it sounds like less converting the skeptics and more converting the people who are outright opposed or I would say slow to change because they go, that's a great idea. I can't change overnight to be ready for your T plus no time at all settlement.
Yeah. So, look, we started out thinking, okay, this is great. We're going to bring these tokenized products to the traditional channel. And then you realize, wait, the traditional channel doesn't have wallets. If you don't have a wallet, and by the way, what is a wallet? A wallet is just programming code that is encrypted to be able to hold those assets. It's not really a wallet. It's just something people have called which is just programming code. But if that code doesn't exist in your traditional wirehouse firm, then you can't hold those types of assets. So I think what we ended up doing as we looked at it and as I said there's almost these two parallel universes and I don't know when they come together. Both are talking about the other. We're providing solutions depth for both channels. On the traditional side, they're much more technology solutions because we built a shorter recordkeeping, what they call transfer agency system for the money market fund that could be used for other types of pooled investment products. And then in the case of the crypto world, we're providing traditional type of products that are tokenized so that they can hold those in their wallet. Whereas you can't hold an ETF in your crypto exchange wallet. You have to have it tokenized to be able to hold it there.
I want to go back to this point you brought up of companies staying private for longer. You know, you said it used to be 3 to 5 years. Now we're looking at 15 years. And thinking about it for what it means to bring access to these retail investors and private investments and markets of all stripes.
Yeah. Does it feel important to you just because of the access or does it feel important to you because why?
It's hugely important for a couple reasons. One is first of all 87% of companies in the US with 100 million or more in revenue are private. Now some of them are individual sole proprietor whatever but $100 million in revenue is really significant. If you don't invest in any private markets, you have no exposure to private markets, you're completely cut out of 87% of the companies in the US. So that's the first point. Second point is a lot of the growth that really accelerated growth happens in those first years because if you know it's the law of numbers if you're growing fast the bigger you get the harder it is to stay at that same percentage growth rate. And so that's where you see massive appreciation in the multiples on valuations of companies. And so if you don't have exposure to that early years you're left out of that. Look at SpaceX. What did it go for? 1.7 trillion. What was the number?
