Franklin Templeton CEO Jenny Johnson on AI, Private Markets and the Firm's Acquisition Strategy

In the opening, O'Shea noted that Johnson's grandfather started the firm in 1947 with about 2.5 million dollars in assets under management, and that it now manages 1.8 trillion dollars. She also said the firm has completed 17 acquisitions over the last six years.

O'Shea also highlighted Johnson's own path, noting that she started in the mail room and is now CEO.

O'Shea raised the Canvas acquisition, and Johnson said the Canvas business was about 2.5 billion dollars when the firm acquired it and is now valued at 30 billion dollars.

The figures come from Johnson's comments in the interview and are presented as her account of the deal's trajectory.

Johnson said the market has strong tailwinds, noting that roughly 70% of companies beat their projected earnings outside the hyperscalers. She identified the main headwind as the Middle East war, which she said looks unlikely to end soon.

She cited the vulnerability of shipping, saying a drone costing about 20,000 dollars could halt a tanker. If that happened, insurance would become hard to obtain and oil flow through the Strait of Hormuz would effectively stop. She added, however, that more oil is getting through than people had expected, and that the US economy has adjusted to current oil prices, which she expects to persist for a while. She also said she does not see a quick resolution to the Russia-Ukraine conflict, so she treats these as close to business as usual.

Johnson said the US and China are much more constructive with each other than in the past, but described the relationship as a frenemy type of arrangement. She said there are areas where neither side will cross the line, pointing to technology, where China is heading in its direction and the US in its own.

She also said the two countries need each other: the US depends on China for rare earths, while China needs the US economy and consumers to sell what it manufactures. She expressed confidence that they will work out ways to cooperate.

Asked about growth levers, Johnson said AI is the biggest one and described it as a massive disruptor. She said she is a student of history and tends to be more optimistic about what AI means. She pointed out that every major new technology has prompted predictions that jobs would disappear, recalling that a 1997 Business Week cover said the internet would eliminate the broker. Today, she said, a financial advisor does more for clients than ever and is no longer only an investment advisor but a true financial planner using the internet and new tools.

Johnson said companies typically first make existing work more efficient, and then once employees have the tools they start to think creatively about new uses. She illustrated this with a personal example: while using Meta glasses on a golf course, she asked her son, who is a programmer, whether he could build an app to help find her golf ball, an idea she said she would never have thought of before.

O'Shea brought up comments by Ken Griffin, who was asked about the AI bubble at a Citadel Securities conference. O'Shea noted that Griffin pointed to uncertainty over supply and demand, especially for chips: when those chips will expire and when they will fail. She also asked when the market would actually be in a bubble, given that people have been saying so for two or three years.

Johnson responded by pointing to a cycle she recalled from her time running the technology group, which Gartner had called an exuberance curve. She described how a new technology is hailed as the greatest thing ever, rises, and then becomes disillusioned before settling where it should be. The open question, she said, is where the market is on that curve, and she acknowledged that some areas feel frothy.

O'Shea said the revenue figures from Anthropic and OpenAI, whatever metric is used, appear to be unseating many incumbents and companies that would normally be considered winners. She noted that their IPOs are getting delayed and asked why, while suggesting the reasons could be that the companies say things they do not mean, or that they do mean them and listeners should pay attention.

Johnson said the firm is headquartered in Silicon Valley and has a growth equity team there. She explained that companies are waiting much longer to go public, so portfolio managers who used to earn IPO gains began asking for late-stage venture exposure. Johnson confirmed that the firm held exposure to SpaceX and to Anthropic, among a number of companies.

She attributed access to these deals to the firm's local connections. Being headquartered in the Silicon Valley area, she said, means dealing with entrepreneurs and the wider venture community, and that personal ties such as children attending the same schools help open doors. The firm has since set up a venture group that invests alongside its traditional portfolio managers who want late-stage venture exposure.

Johnson explained that the firm recently changed its parent company name from Franklin Resources to Franklin Templeton. She said her father told her the original name was chosen in the 1970s, when stocks were performing poorly and gold investing was possible because of high inflation, so having the word resources in the name helped in the stock market.

She also described the firm's early history. Her grandfather had a brokerage business and created a subsidiary named after Ben Franklin, which became Franklin Funds. Her father left the military in his mid-twenties and asked to take over the subsidiary, which in 1955 had about 2.5 million dollars in assets and 10,000 dollars in revenue. Johnson said the firm reached its first billion dollars around 1983 or 1984, and that it acquired a California company, which led to the move there. She recalled that in 1973 Franklin had about 60 million in assets, that the acquired company had about 120 million, and that the market fell the next year, so the firm earned roughly a 5,000 dollar profit for that year. She said her grandfather's original idea was that ordinary people could not access the excess returns of equity markets, so the firm pooled their money to give them expert advice and diversification at a reasonable price.

O'Shea described the Legg Mason deal, a 4.5 billion dollar transaction that she said doubled the firm's assets under management, and asked Johnson to explain her conviction. Johnson said the deal filled gaps the firm had identified. Legg Mason's largest category was core fixed income, where it had a large franchise. The firm also wanted to grow in private markets, and Legg Mason brought Clarion Partners, which Johnson described as an outstanding real estate manager.

Johnson said the firm had never considered backing away from the deal, because it judged the transaction a strong strategic fit. The deal was announced about five days after she became CEO, although it had been in work for roughly a year. Three weeks later, COVID lockdowns began and the market fell sharply, but the deal closed 60 days early.

Johnson said the main reason for the acquisitions was to ensure the firm had the capabilities it needed to compete. She said clients increasingly want to work with fewer managers, so managers must offer a broader range of capabilities, and scale matters for that. Beyond filling the categories the firm had identified, the other acquisitions were aimed at product capability or at improving distribution. She said the firm has the broadest range of capabilities of any asset manager, though infrastructure is one area it does not yet fully cover.

She gave the O'Shaughnessy acquisition as an example. Its quant shop was less important to the firm than its direct indexing technology platform, which allows separately managed accounts to be tax efficient. The firm can now use that technology as an overlay on active strategies, and Johnson said clients who want separately managed accounts rather than ETFs or mutual funds benefit from it.

Johnson said the Canvas business was about 2.5 billion dollars when acquired and is now 30 billion dollars, about four years later. Lexington has more than doubled since acquisition, and Clarion Partners, the real estate manager, has also more than doubled.

On private credit, Johnson said that when the firm bought BSP the business had about 26 billion dollars, and that the firm now has just under 100 billion dollars in private credit after further acquisitions. She said many people doubt that traditional asset managers can culturally fit with private markets teams, which have very different compensation structures, but that this has worked well and that the firm's wealth-channel expertise has helped those teams expand into that channel.

Johnson said the firm has more than 1,000 AI agents used by more than 800 investment professionals. She said the main benefit on the investment side is making analysts better investors by freeing them from administrative work so they can talk to companies, do more research and possibly cover more companies. She said any cost savings are insignificant compared with improving investment performance.

On distribution, Johnson said the goal is growth. The firm partnered with Microsoft, which she said provided free resources because the problem was technically sophisticated. The challenge involves multiple AI agents coordinating with each other and pulling data from several systems, such as product systems, holdings feeds from financial advisors, social media and rating agencies, so that the firm can meet the right clients and have the right conversations. She said the approach has contributed to a 23% uplift in the number of clients visited by one of its market leaders and an 11% increase in sales.

Johnson said cost savings show up mainly in the back office, but that does not mean the firm has much fewer people; she said the firm simply does more. In technology, she said, every CIO she has talked to has more business projects than can be completed, so the issue is prioritization. If AI can push more work through the pipeline, that is valuable, and the goal is not to save money but to get more things done.

Returning to the question about hyperscaler revenue models, Johnson said there are things not yet visible. First, once employees are given AI tools and start building agents, the cost grows over time, raising the question of whether all those agents need to run and how often. Second, many employee queries could probably be handled by free models, so governance will be needed to decide which requests justify paying for top models and which can go to free ones. She said these factors will ultimately affect the revenue of the hyperscalers.

Asked who today's Benjamin Franklin would be, Johnson said she had once asked her team to consider this, since people think the firm's logo looks old, but Franklin was in her view a rockstar as an inventor, politician and philanthropist. She said the figure who comes closest is Elon Musk. She acknowledged that people may argue Musk is not much of a philanthropist, and that there is no perfect match, but said no person has had more significant impact on where technological advances stand today than Musk. She added that Musk has said he will give one SpaceX share to every child in America.

O'Shea agreed with the choice, noting that Franklin also had to make his money before doing philanthropy.