This is Alternative Allocations by Franklin Templeton, a monthly podcast where we share practical, relatable advice and discuss new investment ideas with leaders in the field. Please subscribe on Apple, Spotify, or wherever you get your podcast to make sure you don't miss an episode. Here is your host, Tony Davidau.
Welcome to the latest episode of the Alternative Allocations podcast series. I'm absolutely thrilled to be joined today by Jenny Johnson, president and CEO of Franklin Templeton. Welcome, Jenny.
Thank you. It's great to be here.
And it's such an exciting time for Franklin Templeton. You have really transformed the firm and certainly the way that people think about the firm with these acquisitions of great firms like Clarion, Benefit Street Partners, Lexington, El Centra. Now all of a sudden we're an alternative powerhouse with what, 260 billion in assets under management. Why has that been so important to you and the firm as we think about how we're transforming this business?
Yeah, I mean I'd have to credit it to back in like 2018. We were doing our strategic plan and we're just watching the growth of allocation by really institutions to the private markets. And you know, as you got under the covers it was clear that this was a real secular change in asset management. And so you know, we looked at it and said, all right, we need to be able to have a breadth of capabilities for our clients. And so you know, we essentially our first acquisition was in 2018 of Benefit Street Partners, which you know is a private credit manager, and then it has been a very focused effort to continue to build out those capabilities.
Yeah. And you kind of started where I really wanted to take the discussion. Historically, alternatives has been the domain of big institutions and family offices. All of these managers really started out focused on that institutional segment. And now I think we're so excited about the opportunities in the wealth management sector. But part of the challenge is, you know, we need to educate them. We need to provide thought leadership. We really need to help them think through how to get exposure in the right way. Why has your commitment to educational thought leadership been such an important part of this journey?
Well, so first of all, the reason I think it's really important that these capabilities are responsibly brought to the wealth channel is I think it's akin to, you know, the time where my father or my grandfather got into the mutual fund business. And mutual funds were created because only the wealthy had access to the equity markets, the excess returns of the equity markets at a time where there was tremendous growth and the average person didn't have access there. So somebody came up with the idea, let's consolidate clients' money and charge a very low fee and give them diversification and liquidity. You know, we're at that same inflection point because there's so many assets that are now being and great companies that are now being held privately and only the wealthy right now have access to that. And you know, a pension fund has very predictable cash flows because you know how many pensioners you're going to have to pay this year. And so it's very predictable. So it has been very easy for them to allocate a percentage of their portfolio into these private markets which, you know, can be up to 10 plus years locked up capital. So the challenge though is the average investor hopes that they don't have to tap into their savings. But what if they need to tap into their savings and, you know, too much of their portfolio is allocated there and they can't for whatever the emergency is to do it. So this is where it's really important that one, you explain why there's risk here, particularly from a liquidity standpoint, but there's also a real reward because there are excess returns in these various markets. But, you know, there are also characteristics that can be difficult. And so, you know, our experience is at Franklin Templeton we want to be able to provide capability across the full risk spectrum, right? So it can be anywhere from, you know, a money market fund that's almost no risk all the way up to very, very risky high octane equity or venture capital. But it's really important that our clients understand the risk they're taking on, right? And so that it is appropriate for their portfolio. And that's why we realize as we're bringing this capability, it requires complicated education. Education both of our own sales force, education of financial advisers who bring this to their clients so they can figure out where it's appropriate for clients, and then of course to the end consumer.
And thank you because I think that is so important, right? We want to do it responsibly. I really appreciate that positioning. You talked a little bit about pension plans and again we know big institutions have allocated, you know, we have all seen the Yale endowment with 70, 80% allocation to alternatives and pension plans I think based on Preqin data, it's roughly 30% allocation across the board. The wealth channel has historically been around 5%. I think that data is pretty stubborn. But I think we would argue at least there's this confluence of events, right? We have a market environment that is demanding a different playbook, right? More tools at your disposal. We have product innovation which have made these institutional capabilities more readily available to a broader group of clients, registered funds, interval tender offer funds in particular. But I've argued none of it works unless we have access to world-class managers, which again I think is a really important part here because these are very specialized markets. As we think about the wealth management channel and the opportunities in addition maybe to the commitment that we've made in education, how are we going to get there? And what do we think that looks like over, you know, if it's 5% today, is it going to be 10%, is it going to be 20%, and how do you think we get there?
Well, first let me address the point about world-class managers. The dispersion in returns in this category is huge. You know, if you pick an underperforming global equity manager, you might be out a couple hundred basis points. Up till I think this number was through 2022, that over a 20-year window the top quartile private equity firms outperformed the bottom quartile by 20% a year. The top quartile real estate firms outperformed the bottom quartile by 10% a year and the top quartile private credit firms outperformed the bottom quartile by 5% a year. It's so massive. The choice of manager is so important that part of this process is not only creating the right vehicles but also selecting the right managers. It's really, really important and it also worries me a little bit as some of this is coming into the wealth channel because folks in the wealth channel have been so trained to think it's all fees, fees, fees and the only ones in this industry that are ever going to be on sale are the bottom quartile performing managers and often you're better off being in the public markets than with a bottom performing manager. So that's kind of the first message I feel is really important to get out there because as you know I think like 401k plans are a great place for this but that's where the fiduciary first thing they look to is well let's just look at fees. But then from there, you know, I think the good news is the kind of product innovation with things like interval funds are making it more liquid, right? So there's an element of liquidity in there which is going to make it more accessible to more people in the retail channel. But it is still really important that they're selective. And so, you know, for some people it might be 30% of their savings that they could put in like a pension fund. And some people maybe they just don't feel like they could have any locked up capital. And that's why I'm such a believer in the financial advisor who knows that end client and really understands the spending patterns of the end client to figure out what's appropriate.
Yeah. One of the white papers that I wrote that actually has been republished in multiple magazines has really focused on this creation of an illiquidity bucket. I call it the cost of being too liquid. And, you know, there's a couple messages embedded in there. One of those is something you picked up on which is institutions have been doing this for a long time but they have the wherewithal to have an illiquidity bucket. They can put the money aside. They hold it. They expect to hold it for 10 to 12 years or whatever the duration is. And even though these structures have more liquid features in them, I'm certainly trying to emphasize to the advisor community that we should think of them as long-term. If you want to get that illiquidity premium, you have to hold it all the way. Although they have liquidity features, if you think you're in it today and out of it tomorrow, you're not going to have the same experience. So, I think it's really important we try to condition people to think this is your long-term investment. And oh, by the way, that also helps condition investors to think long term. As you and I know, everyone says they're a long-term investor until you get market volatility.
